UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
Form 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2012
¨ 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 August 8, 2012 | |
Common Stock, $0.01 par value per share | 31,000,601 shares | |
Harris & Harris Group, Inc.
Form 10-Q, June 30, 2012
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 | 35 |
Financial Highlights | 55 |
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations | 56 |
Background | 56 |
Overview | 56 |
Investment Objective and Strategy | 57 |
Involvement with Portfolio Companies | 58 |
Investments and Current Investment Pace | 58 |
Our Sources of Liquid Capital | 60 |
Potential Pending Liquidity Events from our Portfolio as of June 30, 2012 | 61 |
Strategy for Managing Publicly Traded Positions | 61 |
Maturity of Current Equity-Focused Venture Capital Portfolio | 61 |
Portfolio Company Revenue | 63 |
Current Business Environment | 63 |
Valuation of Investments | 64 |
Results of Operations | 67 |
Financial Condition | 76 |
Liquidity | 77 |
Borrowings | 79 |
Contractual Obligations | 79 |
Critical Accounting Policies | 80 |
Recent Developments – Portfolio Companies | 83 |
Cautionary Statement Regarding Forward-Looking Statements | 84 |
Item 3. Quantitative and Qualitative Disclosures About Market Risk | 86 |
Item 4. Controls and Procedures | 88 |
PART II. OTHER INFORMATION | |
Item 1A. Risk Factors | 89 |
Item 6. Exhibits | 89 |
Signatures | 90 |
Exhibit Index | 91 |
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, 2011.
1 |
HARRIS & HARRIS GROUP, INC. CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES |
June 30, 2012 | December 31, 2011 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Investments, in portfolio securities at value: | ||||||||
Unaffiliated privately held companies | ||||||||
(cost: $24,479,403 and $23,794,145, respectively) | $ | 26,300,391 | $ | 23,748,247 | ||||
Unaffiliated rights to milestone payments | ||||||||
(adjusted cost basis: $3,291,750 and $3,291,750, respectively) | 3,386,224 | 3,362,791 | ||||||
Unaffiliated publicly traded securities | ||||||||
(cost: $12,535,134 and $12,743,787, respectively) | 33,027,782 | 29,484,527 | ||||||
Non-controlled affiliated privately held companies | ||||||||
(cost: $52,751,538 and $48,968,029, respectively) | 53,874,397 | 47,601,785 | ||||||
Non-controlled affiliated publicly traded companies | ||||||||
(cost: $2,000,000 and $2,000,000, respectively) | 1,973,334 | 1,973,334 | ||||||
Controlled affiliated privately held companies | ||||||||
(cost: $14,014,759 and $12,518,936, respectively) | 8,335,716 | 6,877,566 | ||||||
Total, investments in private portfolio companies, rights to | ||||||||
milestone payments and public securities at value | ||||||||
(cost: $109,072,584 and $103,316,647, respectively) | $ | 126,897,844 | $ | 113,048,250 | ||||
Cash | 27,734,326 | 33,841,394 | ||||||
Restricted funds (Note 3) | 2,010,005 | 1,512,031 | ||||||
Funds held in escrow from sales of investments, at value (Note 3) | 587,923 | 1,064,234 | ||||||
Receivable from portfolio company | 26,341 | 37,331 | ||||||
Interest receivable | 7,800 | 14,635 | ||||||
Prepaid expenses | 185,467 | 398,858 | ||||||
Other assets | 414,364 | 426,920 | ||||||
Total assets | $ | 157,864,070 | $ | 150,343,653 | ||||
LIABILITIES & NET ASSETS | ||||||||
Post retirement plan liabilities | $ | 1,766,206 | $ | 1,660,958 | ||||
Revolving loan (Note 5) | 2,000,000 | 1,500,000 | ||||||
Accounts payable and accrued liabilities | 982,657 | 906,910 | ||||||
Deferred rent | 363,276 | 378,980 | ||||||
Written call options payable (premiums received: | ||||||||
$914,245 and $315,000, respectively) (Note 7) | 1,391,092 | 195,000 | ||||||
Debt interest and other payable | 3,049 | 3,398 | ||||||
Total liabilities | 6,506,280 | 4,645,246 | ||||||
Net assets | $ | 151,357,790 | $ | 145,698,407 | ||||
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 | ||||||||
6/30/12 and 12/31/11; 32,829,341 issued at | ||||||||
6/30/12 and 12/31/11 | 328,294 | 328,294 | ||||||
Additional paid in capital (Note 8) | 212,455,488 | 210,470,369 | ||||||
Accumulated net operating and realized loss | (75,381,539 | ) | (71,546,328 | ) | ||||
Accumulated unrealized appreciation of investments | 17,361,078 | 9,851,603 | ||||||
Treasury stock, at cost (1,828,740 shares at 6/30/12 and 12/31/11) | (3,405,531 | ) | (3,405,531 | ) | ||||
Net assets | $ | 151,357,790 | $ | 145,698,407 | ||||
Shares outstanding | 31,000,601 | 31,000,601 | ||||||
Net asset value per outstanding share | $ | 4.88 | $ | 4.70 |
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 June 30, | Six Months Ended June 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Investment (loss) income: | ||||||||||||||||
Interest from: | ||||||||||||||||
Unaffiliated companies | $ | 71,257 | $ | 81,762 | $ | 121,321 | $ | 127,237 | ||||||||
Non-controlled affiliated companies | (193,188 | ) | 42,382 | (150,376 | ) | 70,697 | ||||||||||
Controlled affiliated companies | 39,658 | 40,223 | 67,000 | 75,730 | ||||||||||||
Cash and U.S. Treasury obligations | 6,387 | 9,300 | 12,699 | 21,780 | ||||||||||||
Miscellaneous income | 47,440 | 14,159 | 81,800 | 29,206 | ||||||||||||
Total investment (loss) income | (28,446 | ) | 187,826 | 132,444 | 324,650 | |||||||||||
Expenses: | ||||||||||||||||
Salaries, benefits and stock-based compensation (Note 8) | 2,558,000 | 1,344,781 | 3,947,391 | 2,583,879 | ||||||||||||
Administration and operations | 225,542 | 219,243 | 582,226 | 475,801 | ||||||||||||
Professional fees | 244,296 | 208,713 | 517,639 | 456,561 | ||||||||||||
Rent | 99,254 | 89,500 | 197,697 | 179,000 | ||||||||||||
Directors’ fees and expenses | 81,906 | 85,391 | 177,732 | 184,172 | ||||||||||||
Custody fees | 11,127 | 24,000 | 21,982 | 48,000 | ||||||||||||
Depreciation | 14,645 | 12,602 | 28,598 | 25,166 | ||||||||||||
Interest and other debt expenses | 12,064 | 9,989 | 23,840 | 13,767 | ||||||||||||
Total expenses | 3,246,834 | 1,994,219 | 5,497,105 | 3,966,346 | ||||||||||||
Net operating loss | (3,275,280 | ) | (1,806,393 | ) | (5,364,661 | ) | (3,641,696 | ) | ||||||||
Net realized gain (loss): | ||||||||||||||||
Realized gain (loss) from investments: | ||||||||||||||||
Unaffiliated companies | 0 | (205,597 | ) | 476,887 | 7,328,743 | |||||||||||
Non-Controlled affiliated companies | (16,195 | ) | (1,966,590 | ) | 11,421 | (1,966,590 | ) | |||||||||
Publicly traded companies | 670,879 | 0 | 670,879 | 0 | ||||||||||||
Written call options | 213,338 | 0 | 378,338 | 0 | ||||||||||||
U.S. Treasury obligations/other | 0 | (82 | ) | 0 | (82 | ) | ||||||||||
Realized gain (loss) from investments | 868,022 | (2,172,269 | ) | 1,537,525 | 5,362,071 | |||||||||||
Income tax expense (Note 9) | 0 | 103 | 8,075 | 2,393 | ||||||||||||
Net realized gain (loss) from investments | 868,022 | (2,172,372 | ) | 1,529,450 | 5,359,678 | |||||||||||
Net increase (decrease) in unrealized appreciation on investments: | ||||||||||||||||
Change as a result of investment sales | (670,879 | ) | 2,006,126 | (670,879 | ) | (5,522,992 | ) | |||||||||
Change on investments held | 1,543,565 | 23,194,860 | 8,764,536 | 23,901,072 | ||||||||||||
Change on written call options | (371,347 | ) | 0 | (584,182 | ) | 0 | ||||||||||
Net increase in unrealized appreciation on investments | 501,339 | 25,200,986 | 7,509,475 | 18,378,080 | ||||||||||||
Net realized and unrealized gains on investments | 1,369,361 | 23,028,614 | 9,038,925 | 23,737,758 | ||||||||||||
Net (decrease) increase in net assets resulting from operations: | ||||||||||||||||
Total | $ | (1,905,919 | ) | $ | 21,222,221 | $ | 3,674,264 | $ | 20,096,062 | |||||||
Per average basic and diluted outstanding share | $ | (0.06 | ) | $ | 0.68 | $ | 0.12 | $ | 0.65 | |||||||
Average outstanding shares - basic | 31,000,601 | 30,999,579 | 31,000,601 | 30,959,503 | ||||||||||||
Average outstanding shares - diluted | 31,000,601 | 31,017,329 | 31,000,700 | 30,977,558 |
The accompanying notes are an integral part of these consolidated financial statements.
3 |
HARRIS & HARRIS GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) |
Six Months Ended | Six Months Ended | |||||||
June 30, 2012 | June 30, 2011 | |||||||
(Corrected) | ||||||||
Cash flows used in operating activities: | ||||||||
Net increase in net assets resulting from operations | $ | 3,674,264 | $ | 20,096,062 | ||||
Adjustments to reconcile net increase in net assets resulting from operations to net cash used in operating activities: | ||||||||
Net realized gain and unrealized appreciation on investments | (9,047,000 | ) | (23,740,151 | ) | ||||
Depreciation of fixed assets, amortization of premium or discount on U.S. government securities, and bridge note interest | 103,547 | (158,484 | ) | |||||
Stock-based compensation expense | 1,985,119 | 985,120 | ||||||
Changes in assets and liabilities: | ||||||||
Purchase of U.S. government securities | 0 | (84,283,377 | ) | |||||
Sale of U.S. government securities | 0 | 90,337,925 | ||||||
Investments in affiliated portfolio companies | (5,368,669 | ) | (6,860,821 | ) | ||||
Investments in unaffiliated portfolio companies | (874,530 | ) | (3,795,265 | ) | ||||
Principal payments received on debt investments | 203,962 | 109,763 | ||||||
Proceeds from sale of investments | 1,844,152 | 8,257,334 | ||||||
Proceeds from call option premiums | 2,324,314 | 0 | ||||||
Payments for call option purchases | (1,334,370 | ) | 0 | |||||
Restricted funds | (497,974 | ) | (2,562,023 | ) | ||||
Receivable from portfolio company | 10,990 | (5,879 | ) | |||||
Interest receivable | 6,835 | 4,459 | ||||||
Prepaid expenses | 213,391 | 140,929 | ||||||
Other assets | (525 | ) | 8,698 | |||||
Post retirement plan liabilities | 105,248 | 59,571 | ||||||
Accounts payable and accrued liabilities | 75,398 | (75,261 | ) | |||||
Deferred rent | (15,704 | ) | (11,496 | ) | ||||
Net cash used in operating activities | (6,591,552 | ) | (1,492,896 | ) | ||||
Cash flows from investing activities: | ||||||||
Purchase of fixed assets | (15,516 | ) | (3,746 | ) | ||||
Net cash used in investing activities | (15,516 | ) | (3,746 | ) | ||||
Cash flows from financing activities: | ||||||||
Proceeds from stock option exercises | 0 | 491,058 | ||||||
Proceeds from drawdown of credit facility | 500,000 | 2,550,000 | ||||||
Net cash provided by financing activities | 500,000 | 3,041,058 | ||||||
Net (decrease) increase in cash: | ||||||||
Cash at beginning of the period | 33,841,394 | 3,756,919 | ||||||
Cash at end of the period. | 27,734,326 | 5,301,335 | ||||||
Net (decrease) increase in cash | $ | (6,107,068 | ) | $ | 1,544,416 | |||
Supplemental disclosures of cash flow information: | ||||||||
Income taxes paid | $ | 8,075 | $ | 2,393 | ||||
Interest paid | $ | 13,405 | $ | 0 |
The accompanying notes are an integral part of these consolidated financial statements.
4 |
HARRIS & HARRIS GROUP, INC. CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS |
Six Months Ended | Year Ended | |||||||
June 30, 2012 | December 31, 2011 | |||||||
(Unaudited) | ||||||||
Changes in net assets from operations: | ||||||||
Net operating loss | $ | (5,364,661 | ) | $ | (8,338,365 | ) | ||
Net realized gain on investments | 1,529,450 | 2,449,705 | ||||||
Net (decrease) increase in unrealized appreciation on investments as a result of sales | (670,879 | ) | 74,649 | |||||
Net increase in unrealized appreciation on investments held | 8,764,536 | 2,152,648 | ||||||
Net (decrease) increase in unrealized appreciation on written call options | (584,182 | ) | 120,000 | |||||
Net increase (decrease) in net assets resulting from operations | 3,674,264 | (3,541,363 | ) | |||||
Changes in net assets from capital stock transactions: | ||||||||
Issuance of common stock upon the exercise of stock options | 0 | 1,224 | ||||||
Additional paid in capital on common stock issued net of offering expenses | 0 | 489,834 | ||||||
Stock-based compensation expense | 1,985,119 | 1,894,800 | ||||||
Net increase in net assets resulting from capital stock transactions | 1,985,119 | 2,385,858 | ||||||
Net increase (decrease) in net assets | 5,659,383 | (1,155,505 | ) | |||||
Net Assets: | ||||||||
Beginning of the period | 145,698,407 | 146,853,912 | ||||||
End of the period | $ | 151,357,790 | $ | 145,698,407 |
The accompanying notes are an integral part of these consolidated financial statements.
5 |
HARRIS & HARRIS GROUP, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2012 (Unaudited) |
Method of | Shares/ | |||||||||||||||
Valuation (1) | Industry (2) | Cost | Principal | Value | ||||||||||||
Investments in Unaffiliated Companies (3) – 41.4% of net assets at value | ||||||||||||||||
Private Placement Portfolio (Illiquid) (4) – 17.4% 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 | $ | 2,213,782 | ||||||||||
Series C Convertible Preferred Stock | (M) | 1,352,196 | 2,130,699 | 2,721,847 | ||||||||||||
Series D Convertible Preferred Stock | (M) | 1,371,622 | 999,999 | 1,670,641 | ||||||||||||
Series E Convertible Preferred Stock | (M) | 672,599 | 440,334 | 824,941 | ||||||||||||
Series E-1 Convertible Preferred Stock | (M) | 534,482 | 399,579 | 644,518 | ||||||||||||
Warrants for Series C Convertible Preferred Stock expiring 12/31/14 | ( I ) | 168,270 | 163,900 | 106,875 | ||||||||||||
Warrants for Series D Convertible Preferred Stock expiring 8/26/14 | ( I ) | 88,531 | 124,999 | 69,706 | ||||||||||||
Warrants for Series D Convertible Preferred Stock expiring 3/10/15 | ( I ) | 40,012 | 41,666 | 23,235 | ||||||||||||
Warrants for Series E Convertible Preferred Stock expiring 12/31/17 | ( I ) | 93,969 | 170,823 | 92,518 | ||||||||||||
Warrants for Common Stock expiring 6/1/16 | ( I ) | 72,668 | 132,100 | 337 | ||||||||||||
Warrant for Common Stock expiring 10/21/18 | ( I ) | 18,816 | 84,846 | 216 | ||||||||||||
5,413,165 | 8,368,616 | |||||||||||||||
Cambrios Technologies Corporation (7)(9)(14) | 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) | Energy | |||||||||||||||
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 | 65,595 | ||||||||||||
Secured Convertible Bridge Note, 10%, acquired 5/25/12 | (M) | 45,554 | $ | 45,097 | 45,554 | |||||||||||
917,622 | 546,729 |
The accompanying notes are an integral part of these consolidated financial statements.
6 |
HARRIS & HARRIS GROUP, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2012 (Unaudited) |
Method of | Shares/ | |||||||||||||||
Valuation (1) | Industry (2) | Cost | Principal | Value | ||||||||||||
Investments in Unaffiliated Companies (3) – 41.4% of net assets at value (Cont.) | ||||||||||||||||
Private Placement Portfolio (Illiquid) (4) – 17.4% of net assets at value (Cont.) | ||||||||||||||||
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 | $ | 46,667 | ||||||||||
Secured Convertible Bridge Note, 8%, acquired 9/11/08 | (M) | 326,460 | $ | 250,211 | 1,547,663 | |||||||||||
Secured Convertible Bridge Note, 8%, acquired 12/10/09 | (M) | 58,887 | $ | 48,868 | 297,398 | |||||||||||
Secured Convertible Bridge Note, 8%, acquired 1/25/12 | (M) | 113,222 | $ | 109,400 | 647,170 | |||||||||||
2,498,569 | 2,538,898 | |||||||||||||||
GEO Semiconductor Inc. (12) | 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 7/15/12 | ( I ) | 347,428 | $ | 437,900 | 402,350 | |||||||||||
Warrants for Series A Pref. Stock expiring on 9/17/17 | ( I ) | 66,684 | 100,000 | 67,813 | ||||||||||||
Warrants for Series A-1 Pref. Stock expiring on 6/30/18 | ( I ) | 23,566 | 34,500 | 23,796 | ||||||||||||
Loan and Security Agreement with GEO Semiconductor relating to the following assets: | ||||||||||||||||
Subordinated secured debt, 15.75%, maturing on 7/15/12 | ( I ) | 109,630 | $ | 125,000 | 119,760 | |||||||||||
Warrants for Series A Pref. Stock expiring on 3/1/18 | ( I ) | 7,512 | 10,000 | 6,380 | ||||||||||||
Warrants for Series A-1 Pref. Stock expiring on 6/29/18 | ( I ) | 7,546 | 10,000 | 6,400 | ||||||||||||
562,366 | 626,499 | |||||||||||||||
Molecular Imprints, Inc. (7)(13) | 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 | |||||||||||||||
Nanosys, Inc. (7)(14) | Energy | |||||||||||||||
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 | 0 | ||||||||||||
Series D Convertible Preferred Stock | (M) | 3,000,003 | 1,016,950 | 474,663 | ||||||||||||
Series E Convertible Preferred Stock | (M) | 496,573 | 433,688 | 744,859 | ||||||||||||
4,996,576 | 1,219,522 |
The accompanying notes are an integral part of these consolidated financial statements.
7 |
HARRIS & HARRIS GROUP, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2012 (Unaudited) |
Method of | Shares/ | |||||||||||||||
Valuation (1) | Industry (2) | Cost | Principal | Value | ||||||||||||
Investments in Unaffiliated Companies (3) – 41.4% of net assets at value (Cont.) | ||||||||||||||||
Private Placement Portfolio (Illiquid) (4) – 17.4% of net assets at value (Cont.) | ||||||||||||||||
NanoTerra, Inc. (9) | Energy | |||||||||||||||
Developing surface chemistry and nano-manufacturing solutions | ||||||||||||||||
Senior secured debt, 12.0%, maturing on 2/22/14 | ( I ) | $ | 246,499 | $ | 299,685 | $ | 277,190 | |||||||||
Senior secured debt, 12.0%, maturing on 2/22/13 | ( I ) | 74,066 | $ | 90,048 | 87,210 | |||||||||||
Warrants for Series A-2 Pref. Stock expiring on 2/22/21 | ( I ) | 69,168 | 446,248 | 66,819 | ||||||||||||
389,733 | 431,219 | |||||||||||||||
Nantero, Inc. (7)(9)(14) | Electronics | |||||||||||||||
Developing a high-density, nonvolatile, random access memory chip, enabled by carbon nanotubes | ||||||||||||||||
Series A Convertible Preferred Stock | (M) | 489,999 | 345,070 | 746,422 | ||||||||||||
Series B Convertible Preferred Stock | (M) | 323,000 | 207,051 | 451,501 | ||||||||||||
Series C Convertible Preferred Stock | (M) | 571,329 | 188,315 | 486,884 | ||||||||||||
1,384,328 | 1,684,807 | |||||||||||||||
OHSO Clean, Inc. (15)(16) | Healthcare | |||||||||||||||
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 9/30/14 | ( I ) | 616,526 | $ | 712,640 | 629,900 | |||||||||||
Warrants for Series C Pref. Stock expiring on 3/30/22 | ( I ) | 91,742 | 1,109,333 | 91,076 | ||||||||||||
708,268 | 720,976 | |||||||||||||||
Total Unaffiliated Private Placement Portfolio (cost: $24,479,403) | $ | 26,300,391 |
The accompanying notes are an integral part of these consolidated financial statements.
8 |
HARRIS & HARRIS GROUP, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2012 (Unaudited) |
Method of | Shares/ | |||||||||||||||
Valuation (1) | Industry (2) | Cost | Principal | Value | ||||||||||||
Rights to Milestone Payments (Illiquid) (5) – 2.2% of net assets at value | ||||||||||||||||
Amgen, Inc. (7)(14) | Healthcare | |||||||||||||||
Rights to Milestone Payments from Acquisition of BioVex Group, Inc. | ( I ) | $ | 3,291,750 | $ | 3,291,750 | $ | 3,386,224 | |||||||||
Total Unaffiliated Rights to Milestone Payments (cost: $3,291,750) | $ | 3,386,224 | ||||||||||||||
Publicly Traded Portfolio (6) – 21.8% of net assets at value | ||||||||||||||||
NeoPhotonics Corporation (14)(17) | Electronics | |||||||||||||||
Developing and manufacturing optical devices and components | ||||||||||||||||
Common Stock | (M) | $ | 7,299,590 | 450,907 | $ | 2,227,481 | ||||||||||
Solazyme, Inc. (14)(18) | Energy | |||||||||||||||
Developing algal biodiesel, industrial chemicals and specialty ingredients using synthetic biology | ||||||||||||||||
Common Stock | (M) | 5,235,544 | 2,215,849 | 30,800,301 | ||||||||||||
Total Unaffiliated Publicly Traded Portfolio (cost: $12,535,134) | $ | 33,027,782 | ||||||||||||||
Total Investments in Unaffiliated Companies (cost: $40,306,287) | $ | 62,714,397 |
The accompanying notes are an integral part of these consolidated financial statements.
9 |
HARRIS & HARRIS GROUP, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2012 (Unaudited) |
Method of | Shares/ | |||||||||||||||
Valuation (1) | Industry (2) | Cost | Principal | Value | ||||||||||||
Investments in Non-Controlled Affiliated Companies (3) – 36.9% of net assets at value | ||||||||||||||||
Private Placement Portfolio (Illiquid) (19) – 35.6% of net assets at value | ||||||||||||||||
ABSMaterials, Inc. (7)(9)(14) | Energy | |||||||||||||||
Developing nano-structured absorbent materials for environmental remediation | ||||||||||||||||
Series A Convertible Preferred Stock | (M) | $ | 435,000 | 390,000 | $ | 1,170,000 | ||||||||||
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)(14) | Energy | |||||||||||||||
Developing batteries using nanostructured materials | ||||||||||||||||
Series A Convertible Preferred Stock | (M) | 2,009,995 | 2,565,798 | 2,504,488 | ||||||||||||
Series B Convertible Preferred Stock | (M) | 1,300,000 | 812,500 | 1,340,672 | ||||||||||||
Series C Convertible Preferred Stock | (M) | 1,200,000 | 1,148,325 | 1,271,099 | ||||||||||||
4,509,995 | 5,116,259 | |||||||||||||||
D-Wave Systems, Inc. (7)(9)(20) | Electronics | |||||||||||||||
Developing high-performance quantum computing systems | ||||||||||||||||
Class 1 Series B Convertible Preferred Stock | (M) | 1,002,074 | 1,144,869 | 1,455,815 | ||||||||||||
Class 1 Series C Convertible Preferred Stock | (M) | 487,804 | 450,450 | 572,792 | ||||||||||||
Class 1 Series D Convertible Preferred Stock | (M) | 1,484,492 | 1,533,395 | 1,949,866 | ||||||||||||
Class 1 Series E Convertible Preferred Stock | (M) | 248,049 | 269,280 | 342,416 | ||||||||||||
Class 1 Series F Convertible Preferred Stock | (M) | 238,323 | 258,721 | 328,990 | ||||||||||||
Class 2 Series E Convertible Preferred Stock | (M) | 409,032 | 317,746 | 404,046 | ||||||||||||
Class 2 Series F Convertible Preferred Stock | (M) | 392,993 | 305,286 | 388,201 | ||||||||||||
Warrants for Common Stock expiring 6/30/15 | ( I ) | 98,644 | 153,890 | 46,573 | ||||||||||||
4,361,411 | 5,488,699 | |||||||||||||||
Enumeral Biomedical Corp. (7)(9)(14) | Healthcare | |||||||||||||||
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 |
The accompanying notes are an integral part of these consolidated financial statements.
10 |
HARRIS & HARRIS GROUP, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2012 (Unaudited) |
Method of | Shares/ | |||||||||||||||
Valuation (1) | Industry (2) | Cost | Principal | Value | ||||||||||||
Investments in Non-Controlled Affiliated Companies (3) – 36.9% of net assets at value (Cont.) | ||||||||||||||||
Private Placement Portfolio (Illiquid) (19) – 35.6% of net assets at value (Cont.) | ||||||||||||||||
HzO, Inc. (7)(9)(14) | Electronics | |||||||||||||||
Developing novel industrial coatings that protect electronics against damage from liquids | ||||||||||||||||
Series A Convertible Preferred Stock | (M) | $ | 666,667 | 4,057,294 | $ | 1,130,362 | ||||||||||
Series B Convertible Preferred Stock | (M) | 1,000,000 | 3,947,888 | 1,099,882 | ||||||||||||
1,666,667 | 2,230,244 | |||||||||||||||
Kovio, Inc. (7)(9)(14) | 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 | |||||||||||||||
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 | 6,434 | ||||||||||||
Series B Convertible Preferred Stock | (M) | 1,542,098 | 866,500 | 81,451 | ||||||||||||
Unsecured Convertible Bridge Note, 10%, acquired 8/5/08 | (M) | 219,570 | $ | 200,000 | 19,570 | |||||||||||
Unsecured Convertible Bridge Note, 10%, acquired 2/13/09 | (M) | 216,935 | $ | 200,000 | 16,935 | |||||||||||
Unsecured Convertible Bridge Note, 10%, acquired 7/2/09 | (M) | 268,784 | $ | 250,000 | 18,784 | |||||||||||
Unsecured Convertible Bridge Note, 10%, acquired 1/19/10 | (M) | 92,868 | $ | 87,500 | 5,368 | |||||||||||
Unsecured Convertible Bridge Note, 10%, acquired 2/19/10 | (M) | 89,478 | $ | 84,475 | 5,003 | |||||||||||
Unsecured Convertible Bridge Note, 10%, acquired 4/12/11 | (M) | 308,047 | $ | 298,900 | 9,147 | |||||||||||
Unsecured Convertible Bridge Note, 10%, acquired 10/28/11 | (M) | 25,424 | $ | 25,000 | 424 | |||||||||||
Unsecured Convertible Bridge Note, 10%, acquired 11/17/11 | (M) | 25,389 | $ | 25,000 | 389 | |||||||||||
Unsecured Convertible Bridge Note, 10%, acquired 12/22/11 | (M) | 25,329 | $ | 25,000 | 329 | |||||||||||
Unsecured Convertible Bridge Note, 10%, acquired 4/11/12 | (M) | 125,234 | $ | 124,542 | 692 | |||||||||||
3,639,156 | 164,526 |
The accompanying notes are an integral part of these consolidated financial statements.
11 |
HARRIS & HARRIS GROUP, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2012 (Unaudited) |
Method of | Shares/ | |||||||||||||||
Valuation (1) | Industry (2) | Cost | Principal | Value | ||||||||||||
Investments in Non-Controlled Affiliated Companies (3) – 36.9% of net assets at value (Cont.) | ||||||||||||||||
Private Placement Portfolio (Illiquid) (19) – 35.6% of net assets at value (Cont.) | ||||||||||||||||
Metabolon, Inc. (7)(14) | 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 | 71,232 | ||||||||||||
5,999,999 | 6,098,153 | |||||||||||||||
Nextreme Thermal Solutions, Inc. (7)(9)(14) | Energy | |||||||||||||||
Developing thin-film thermoelectric devices for cooling and energy conversion | ||||||||||||||||
Series A Convertible Preferred Stock | (M) | 2,192,381 | 22,027 | 0 | ||||||||||||
Common Stock | (M) | 2,192,381 | 4,039,985 | 0 | ||||||||||||
4,384,762 | 0 | |||||||||||||||
OpGen, Inc. (7)(14)(15) | Healthcare | |||||||||||||||
Developing tools for genomic sequence assembly and analysis | ||||||||||||||||
Series C Convertible Preferred Stock | (M) | 815,000 | 5,905,797 | 815,000 | ||||||||||||
Produced Water Absorbents, Inc. (7)(9)(14) | 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 | 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 JUNE 30, 2012 (Unaudited) |
Method of | Shares/ | |||||||||||||||
Valuation (1) | Industry (2) | Cost | Principal | Value | ||||||||||||
Investments in Non-Controlled Affiliated Companies (3) – 36.9% of net assets at value (Cont.) | ||||||||||||||||
Private Placement Portfolio (Illiquid) (19) – 35.6% of net assets at value (Cont.) | ||||||||||||||||
Senova Systems, Inc. (7)(9)(14) | Healthcare | |||||||||||||||
Developing next-generation sensors to measure pH | ||||||||||||||||
Series B Convertible Preferred Stock | (M) | $ | 692,308 | 692,308 | $ | 553,846 | ||||||||||
SiOnyx, Inc. (7)(9)(14) | 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 | 128,290 | ||||||||||||
Warrants for Common Stock expiring 3/28/17 | ( I ) | 84,207 | 418,507 | 82,729 | ||||||||||||
6,640,523 | 7,854,152 | |||||||||||||||
Ultora, Inc. (7)(9)(14) | Energy | |||||||||||||||
Developing energy-storage devices enabled by carbon nanotubes | ||||||||||||||||
Series A Convertible Preferred Stock | (M) | 282,821 | 282,821 | 282,821 | ||||||||||||
Xradia, Inc. (7)(14) | 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 | 7,933,834 | ||||||||||||
Total Non-Controlled Private Placement Portfolio (cost: $52,751,538) | $ | 53,874,397 |
The accompanying notes are an integral part of these consolidated financial statements.
13 |
HARRIS & HARRIS GROUP, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2012 (Unaudited) |
Method of | Shares/ | |||||||||||||||
Valuation (1) | Industry (2) | Cost | Principal | Value | ||||||||||||
Investments in Non-Controlled Affiliated Companies (3) – 36.9% of net assets at value (Cont.) | ||||||||||||||||
Publicly Traded Portfolio (Illiquid) (21) – 1.3% of net assets at value | ||||||||||||||||
Champions Oncology, Inc. (14) | Healthcare | |||||||||||||||
Developing its TumorGraftTM platform for personalized medicine and drug development | ||||||||||||||||
Common Stock | (M) | $ | 2,000,000 | 2,666,667 | $ | 1,973,334 | ||||||||||
Total Non-Controlled Affiliated Publicly Traded Portfolio (cost: $2,000,000) | $ | 1,973,334 | ||||||||||||||
Total Investments in Non-Controlled Affiliated Companies (cost: $54,751,538) | $ | 55,847,731 | ||||||||||||||
Investments in Controlled Affiliated Companies (3)(22) – 5.5% of net assets at value | ||||||||||||||||
Private Placement Portfolio (Illiquid) – 5.5% of net assets at value | ||||||||||||||||
Ancora Pharmaceuticals Inc. (7)(9) | Healthcare | |||||||||||||||
Developing synthetic carbohydrates for pharmaceutical applications | ||||||||||||||||
Common Stock | (M) | $ | 2,729,817 | 57,463 | $ | 1,724 | ||||||||||
Series A Convertible Preferred Stock | (M) | 4,855,627 | 4,855,627 | 4,855,627 | ||||||||||||
Senior Secured Debt, 12.00%, maturing on 12/11/12 | ( I ) | 473,598 | $ | 500,000 | 478,780 | |||||||||||
8,059,042 | 5,336,131 |
The accompanying notes are an integral part of these consolidated financial statements.
14 |
HARRIS & HARRIS GROUP, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2012 (Unaudited) |
Method of | Shares/ | |||||||||||||||
Valuation (1) | Industry (2) | Cost | Principal | Value | ||||||||||||
Investments in Controlled Affiliated Companies (3)(22) – 5.5% of net assets at value (Cont.) | ||||||||||||||||
Private Placement Portfolio (Illiquid) – 5.5% 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 | 2,139,670 | ||||||||||||
Secured Convertible Bridge Note, 12%, acquired 10/7/11 | (M) | 217,622 | $ | 200,000 | 217,622 | |||||||||||
Secured Convertible Bridge Note, 12%, acquired 11/17/11 | (M) | 102,791 | $ | 95,652 | 102,791 | |||||||||||
Secured Convertible Bridge Note, 12%, acquired 12/21/11 | (M) | 87,851 | $ | 82,609 | 87,851 | |||||||||||
Secured Convertible Bridge Note, 12%, acquired 3/5/12 | (M) | 451,651 | $ | 434,784 | 451,651 | |||||||||||
5,955,717 | 2,999,585 | |||||||||||||||
Total Controlled Private Placement Portfolio (cost: $14,014,759) | $ | 8,335,716 | ||||||||||||||
Total Investments in Controlled Affiliated Companies (cost: $14,014,759) | $ | 8,335,716 | ||||||||||||||
Total Private Placement and Publicly Traded Portfolio (cost: $109,072,584) | $ | 126,897,844 | ||||||||||||||
Total Investments (cost: $109,072,584) | $ | 126,897,844 |
Method of | Number of | |||||||||
Valuation (1) | Contracts | Value | ||||||||
Written Call Options (15) – (0.9)% of net assets at value | ||||||||||
Solazyme, Inc. — Strike Price $10.00, 9/22/12 | (M) | 117 | $ | (42,160 | ) | |||||
Solazyme, Inc. — Strike Price $12.50, 12/22/12 | (M) | 4,000 | (760,000 | ) | ||||||
Solazyme, Inc. — Strike Price $15.00, 12/22/12 | (M) | 2,750 | (288,750 | ) | ||||||
Solazyme, Inc. — Strike Price $17.50, 3/8/13 | (M) | 4,010 | (298,932 | ) | ||||||
NeoPhotonics Corporation — Strike Price $7.50, 8/18/12 | (M) | 250 | (1,250 | ) | ||||||
Total Written Call Options (Premiums Received $914,245) | $ | (1,391,092 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
15 |
HARRIS & HARRIS GROUP, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2012 (Unaudited) |
Notes to Consolidated Schedule of Investments
(1) | See "Footnote to Consolidated Schedule of Investments" on page 31 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. We classify "Healthcare" companies as those that use nanotechnology to address problems in healthcare-related industries, including biotechnology, pharmaceuticals and medical devices. |
(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 $24,479,403. The gross unrealized appreciation based on the tax cost for these securities is $5,628,127. The gross unrealized depreciation based on the tax cost for these securities is $3,807,139. |
(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 $94,474. 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 $12,535,134. The gross unrealized appreciation based on the tax cost for these securities is $25,564,757. The gross unrealized depreciation based on the tax cost for these securities is $5,072,109. |
(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. Should the company complete a sale or an IPO prior to the end of 2012, the warrant will become void. This warrant is, therefore, a contingent asset as of June 30, 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. |
(10) | Cobalt Technologies, Inc., also does business as Cobalt Biofuels. |
The accompanying notes are an integral part of this consolidated schedule.
16 |
HARRIS & HARRIS GROUP, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2012 (Unaudited) |
(11) | 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 $149,539.57 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. |
(12) | The maturity dates of the senior secured debt and the subordinated secured debt are expected to be extended to the end of 2012 or 2013. As such, the notes were not repaid on July 15, 2012. |
(13) | 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 June 30, 2012. |
(14) | 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. |
(15) | Initial investment was made during 2012. |
(16) | OHSO Clean, Inc. also does business as CleanWell Company. |
(17) | A portion of this security is held in connection with written call option contracts: 25,000 shares have been pledged to brokers. |
(18) | A portion of this security is held in connection with written call option contracts: 1,087,700 shares have been pledged to brokers. |
(19) | The aggregate cost for federal income tax purposes of investments in non-controlled affiliated companies is $52,751,538. The gross unrealized appreciation based on the tax cost for these securities is $12,926,423. The gross unrealized depreciation based on the tax cost for these securities is $11,803,564. |
(20) | 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." |
(21) | 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 $26,666. |
(22) | The aggregate cost for federal income tax purposes of investments in controlled affiliated companies is $14,014,759. 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 $5,679,043. |
The accompanying notes are an integral part of this consolidated schedule.
17 |
HARRIS & HARRIS GROUP, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2011 |
Method of | Shares/ | |||||||||||||||
Valuation (1) | Industry (2) | Cost | Principal | Value | ||||||||||||
Investments in Unaffiliated Companies (3)(4)(5)(6) – 38.8% of net assets at value | ||||||||||||||||
Private Placement Portfolio (Illiquid) – 16.3% 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 | $ | 2,245,039 | ||||||||||
Series C Convertible Preferred Stock | (M) | 1,352,196 | 2,130,699 | 2,757,625 | ||||||||||||
Series D Convertible Preferred Stock | (M) | 1,371,622 | 999,999 | 1,687,433 | ||||||||||||
Series E Convertible Preferred Stock | (M) | 730,369 | 440,334 | 832,335 | ||||||||||||
Warrants for Series C Convertible Preferred Stock expiring 12/31/14 | ( I ) | 168,270 | 163,900 | 123,541 | ||||||||||||
Warrants for Series D Convertible Preferred Stock expiring 8/26/14 | ( I ) | 88,531 | 124,999 | 93,385 | ||||||||||||
Warrants for Series D Convertible Preferred Stock expiring 3/10/15 | ( I ) | 40,012 | 41,666 | 31,128 | ||||||||||||
Warrants for Series E Convertible Preferred Stock expiring 12/31/17 | ( I ) | 108,867 | 170,823 | 130,872 | ||||||||||||
Secured Convertible Bridge Note (including interest) | (M) | 529,697 | $ | 538,945 | 548,513 | |||||||||||
Warrant for Common Stock expiring 10/21/18 | ( I ) | 18,816 | 56,564 | 2,581 | ||||||||||||
5,408,380 | 8,452,452 | |||||||||||||||
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 | 720,672 | ||||||||||||
Series C Convertible Preferred Stock | (M) | 1,300,000 | 1,300,000 | 724,000 | ||||||||||||
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 | ||||||||||||
3,202,181 | 2,401,635 | |||||||||||||||
Cobalt Technologies, Inc. (7)(9)(10) | Energy | |||||||||||||||
Developing processes for making bio- butanol through biomass fermentation | ||||||||||||||||
Series C-1 Convertible Preferred Stock | (M) | 749,998 | 352,112 | 216,651 | ||||||||||||
Series D-1 Convertible Preferred Stock | (M) | 122,070 | 48,828 | 33,937 | ||||||||||||
872,068 | 250,588 | |||||||||||||||
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 | 0 | ||||||||||||
Secured Convertible Bridge Notes (including interest) | (M) | 373,439 | $ | 299,169 | 1,298,436 | |||||||||||
2,373,439 | 1,298,436 |
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, 2011 |
Method of | Shares/ | |||||||||||||||
Valuation (1) | Industry (2) | Cost | Principal | Value | ||||||||||||
Investments in Unaffiliated Companies (3)(4)(5)(6) – 38.8% of net assets at value (Cont.) | ||||||||||||||||
Private Placement Portfolio (Illiquid) – 16.3% 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 6/30/12 | ( I ) | $ | 403,732 | $ | 500,000 | $ | 476,700 | |||||||||
Warrants for Series A Pref. Stock expiring on 9/17/17 | ( I ) | 66,684 | 100,000 | 61,814 | ||||||||||||
Warrants for Series A-1 Pref. Stock expiring on 6/30/18 | ( I ) | 23,566 | 34,500 | 21,686 | ||||||||||||
Loan and Security Agreement with GEO Semiconductor relating to the following assets: | ||||||||||||||||
Subordinated secured debt, 15.75%, maturing on 1/1/12 | ( I ) | 109,942 | $ | 125,000 | 121,880 | |||||||||||
Warrants for Series A Pref. Stock expiring on 3/1/18 | ( I ) | 7,512 | 10,000 | 5,819 | ||||||||||||
Warrants for Series A-1 Pref. Stock expiring on 6/29/18 | ( I ) | 7,546 | 10,000 | 5,836 | ||||||||||||
618,982 | 693,735 | |||||||||||||||
Molecular Imprints, Inc. (7)(12) | 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 | |||||||||||||||
Nanosys, Inc. (7)(13) | Energy | |||||||||||||||
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 | |||||||||||||||
NanoTerra, Inc. (9)(14) | Energy | |||||||||||||||
Developing surface chemistry and nano- manufacturing solutions | ||||||||||||||||
Senior secured debt, 12.0%, maturing on 2/22/14 | ( I ) | 329,307 | $ | 378,564 | 342,650 | |||||||||||
Senior secured debt, 12.0%, maturing on 2/22/13 | ( I ) | 133,121 | $ | 153,032 | 144,855 | |||||||||||
Warrants for Series A-2 Pref. Stock expiring on 2/22/21 | ( I ) | 69,168 | 446,248 | 67,659 | ||||||||||||
531,596 | 555,164 |
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, 2011 |
Method of | Shares/ | |||||||||||||||
Valuation (1) | Industry (2) | Cost | Principal | Value | ||||||||||||
Investments in Unaffiliated Companies (3)(4)(5)(6) – 38.8% of net assets at value (Cont.) | ||||||||||||||||
Private Placement Portfolio (Illiquid) – 16.3% of net assets at value (Cont.) | ||||||||||||||||
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 | $ | 746,548 | ||||||||||
Series B Convertible Preferred Stock | (M) | 323,000 | 207,051 | 451,499 | ||||||||||||
Series C Convertible Preferred Stock | (M) | 571,329 | 188,315 | 486,760 | ||||||||||||
1,384,328 | 1,684,807 | |||||||||||||||
Total Unaffiliated Private Placement Portfolio (cost: $23,794,145) | $ | 23,748,247 | ||||||||||||||
Rights to Milestone Payments (Illiquid) – 2.3% 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 | $ | 3,362,791 | |||||||||
Total Unaffiliated Rights to Milestone Payments (cost: $3,291,750) | $ | 3,362,791 | ||||||||||||||
Publicly Traded Portfolio – 20.2% of net assets at value | ||||||||||||||||
NeoPhotonics Corporation (13) | Electronics | |||||||||||||||
Developing and manufacturing optical devices and components | ||||||||||||||||
Common Stock | (M) | $ | 7,299,590 | 450,907 | $ | 2,065,154 |
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, 2011 |
Method of | Shares/ | |||||||||||||||
Valuation (1) | Industry (2) | Cost | Principal | Value | ||||||||||||
Solazyme, Inc. (13)(15)(16) | Energy | |||||||||||||||
Developing algal biodiesel, industrial chemicals and specialty ingredients using synthetic biology | ||||||||||||||||
Common Stock | (M) | $ | 5,444,197 | 2,304,149 | $ | 27,419,373 | ||||||||||
Total Unaffiliated Publicly Traded Portfolio (cost: $12,743,787) | $ | 29,484,527 | ||||||||||||||
Total Investments in Unaffiliated Companies (cost: $39,829,682) | $ | 56,595,565 |
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, 2011 |
Method of | Shares/ | |||||||||||||||
Valuation (1) | Industry (2) | Cost | Principal | Value | ||||||||||||
Investments in Non-Controlled Affiliated Companies (3)(17)(18) – 34.1% of net assets at value | ||||||||||||||||
Private Placement Portfolio (Illiquid) – 32.7% of net assets at value | ||||||||||||||||
ABSMaterials, Inc. (7)(9)(13) | Energy | |||||||||||||||
Developing nano-structured absorbent materials for environmental remediation | ||||||||||||||||
Series A Convertible Preferred Stock | (M) | $ | 435,000 | 390,000 | $ | 1,560,000 | ||||||||||
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 | 3,328,635 | ||||||||||||
Series B Convertible Preferred Stock | (M) | 2,200,000 | 5,952,381 | 3,076,031 | ||||||||||||
Series C Convertible Preferred Stock | (M) | 1,485,531 | 2,122,187 | 1,271,982 | ||||||||||||
5,885,531 | 7,676,648 | |||||||||||||||
Contour Energy Systems, Inc. (7)(9)(13) | Energy | |||||||||||||||
Developing batteries using nanostructured materials | ||||||||||||||||
Series A Convertible Preferred Stock | (M) | 2,009,995 | 2,565,798 | 2,520,935 | ||||||||||||
Series B Convertible Preferred Stock | (M) | 1,300,000 | 812,500 | 1,348,249 | ||||||||||||
Series C Convertible Preferred Stock | (M) | 720,000 | 688,995 | 767,076 | ||||||||||||
4,029,995 | 4,636,260 | |||||||||||||||
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 | 1,311,562 | ||||||||||||
Series C Convertible Preferred Stock | (M) | 487,804 | 450,450 | 516,036 | ||||||||||||
Series D Convertible Preferred Stock | (M) | 1,484,492 | 1,533,395 | 1,756,657 | ||||||||||||
Series E Convertible Preferred Stock | (M) | 248,049 | 269,280 | 308,487 | ||||||||||||
Series F Convertible Preferred Stock | (M) | 238,323 | 258,721 | 296,391 | ||||||||||||
Warrants for Common Stock expiring 6/30/15 | ( I ) | 98,644 | 153,890 | 64,272 | ||||||||||||
Secured Convertible Bridge Note (including interest) | (M) | 341,047 | $ | 337,579 | 332,058 | |||||||||||
3,900,433 | 4,585,463 | |||||||||||||||
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 |
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, 2011 |
Method of | Shares/ | |||||||||||||||
Valuation (1) | Industry (2) | Cost | Principal | Value | ||||||||||||
Investments in Non-Controlled Affiliated Companies (3)(17)(18) – 34.1% of net assets at value (Cont.) | ||||||||||||||||
Private Placement Portfolio (Illiquid) – 32.7% of net assets at value (Cont.) | ||||||||||||||||
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 | $ | 1,130,362 | ||||||||||
Series B Convertible Preferred Stock | (M) | 1,000,000 | 3,947,888 | 1,099,882 | ||||||||||||
1,666,667 | 2,230,244 | |||||||||||||||
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 | |||||||||||||||
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) | 1,442,871 | $ | 1,195,875 | 1,442,871 | |||||||||||
3,684,969 | 1,442,871 | |||||||||||||||
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 | 71,142 | ||||||||||||
5,999,999 | 6,098,063 |
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, 2011 |
Method of | Shares/ | |||||||||||||||
Valuation (1) | Industry (2) | Cost | Principal | Value | ||||||||||||
Investments in Non-Controlled Affiliated Companies (3)(17)(18) – 34.1% of net assets at value (Cont.) | ||||||||||||||||
Private Placement Portfolio (Illiquid) – 32.7% of net assets at value (Cont.) | ||||||||||||||||
Nextreme Thermal Solutions, Inc. (7)(9)(13) | Energy | |||||||||||||||
Developing thin-film thermoelectric devices for cooling and energy conversion | ||||||||||||||||
Series A Convertible Preferred Stock | (M) | $ | 4,384,762 | 44,053 | $ | 0 | ||||||||||
Produced Water Absorbents, Inc. (7)(9)(13)(14) | 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 | 1,000,000 | ||||||||||||
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 | 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 | ||||||||||||
Warrants for Series B-1 Convertible Preferred Stock expiring 2/23/17 | ( I ) | 130,439 | 247,350 | 132,552 | ||||||||||||
5,385,000 | 6,520,162 | |||||||||||||||
Ultora, Inc. (7)(9)(13) | Energy | |||||||||||||||
Developing energy-storage devices enabled by carbon nanotubes | ||||||||||||||||
Series A Convertible Preferred Stock | (M) | 215,000 | 215,000 | 215,000 |
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, 2011 |
Method of | Shares/ | |||||||||||||||
Valuation (1) | Industry (2) | Cost | Principal | Value | ||||||||||||
Investments in Non-Controlled Affiliated Companies (3)(17)(18) – 34.1% of net assets at value (Cont.) | ||||||||||||||||
Private Placement Portfolio (Illiquid) – 32.7% of net assets at value (Cont.) | ||||||||||||||||
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 | $ | 6,978,777 | ||||||||||
Total Non-Controlled Private Placement Portfolio (cost: $48,968,029) | $ | 47,601,785 | ||||||||||||||
Publicly Traded Portfolio (Illiquid) – 1.4% of net assets at value | ||||||||||||||||
Champions Oncology, Inc. (13)(14)(20) | Healthcare | |||||||||||||||
Developing its TumorGraftTM platform for personalized medicine and drug development | ||||||||||||||||
Common Stock | (M) | $ | 2,000,000 | 2,666,667 | $ | 1,973,334 | ||||||||||
Total Non-Controlled Affiliated Publicly Traded Portfolio (cost: $2,000,000) | $ | 1,973,334 | ||||||||||||||
Total Investments in Non-Controlled Affiliated Companies (cost: $50,968,029) | $ | 49,575,119 |
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, 2011 |
Method of | Shares/ | |||||||||||||||
Valuation (1) | Industry (2) | Cost | Principal | Value | ||||||||||||
Investments in Controlled Affiliated Companies (3)(21) – 4.7% of net assets at value | ||||||||||||||||
Private Placement Portfolio (Illiquid) – 4.7% of net assets at value | ||||||||||||||||
Ancora Pharmaceuticals Inc. (7)(9) | Healthcare | |||||||||||||||
Developing synthetic carbohydrates for pharmaceutical applications | ||||||||||||||||
Common Stock | (M) | $ | 2,729,817 | 57,463 | $ | 0 | ||||||||||
Series A Convertible Preferred Stock | (M) | 3,855,627 | 3,855,627 | 3,855,627 | ||||||||||||
Senior Secured Debt, 12.00%, maturing on 12/11/12 | ( I ) | 452,060 | $ | 500,000 | 455,190 | |||||||||||
7,037,504 | 4,310,817 | |||||||||||||||
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 | 2,181,119 | ||||||||||||
Secured Convertible Bridge Note (including interest) | (M) | 385,630 | $ | 378,261 | 385,630 | |||||||||||
5,481,432 | 2,566,749 | |||||||||||||||
Total Controlled Private Placement Portfolio (cost: $12,518,936) | $ | 6,877,566 | ||||||||||||||
Total Investments in Controlled Affiliated Companies (cost: $12,518,936) | $ | 6,877,566 | ||||||||||||||
Total Private Placement and Publicly Traded Portfolio (cost: $103,316,647) | $ | 113,048,250 | ||||||||||||||
Total Investments (cost: $103,316,647) | $ | 113,048,250 |
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, 2011 |
Method of | Number of | |||||||||||
Valuation (1) | Contracts | Value | ||||||||||
Written Call Options (15) – (0.1)% of net assets at value | ||||||||||||
Solazyme, Inc. — Strike Price $15.00, 3/17/12 | (M) | 3,000 | $ | (195,000 | ) | |||||||
Total Written Call Options (Premiums Received $315,000) | $ | (195,000 | ) |
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, 2011 |
Notes to Consolidated Schedule of Investments
(1) | See "Footnote to Consolidated Schedule of Investments" on page 31 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. We classify "Healthcare" companies as those that use nanotechnology to address problems in healthcare-related industries, including biotechnology, pharmaceuticals and medical devices. We use the term "Other" for companies that operate primarily in industries other than those within "Energy," "Electronics" and "Healthcare." We do not have any portfolio companies classified as "Other" as of December 31, 2011. In the first quarter of 2011, we renamed the sector classification "Electronics/Semiconductors" to "Electronics" and reclassified three companies, NeoPhotonics Corporation, Polatis, Inc., and Xradia, Inc., from a sector classification of "Other" to "Electronics" to reflect a broader definition of electronics to include photonics, metrology, and test and measurement. We also renamed the sector classification "Healthcare/Biotech" to "Healthcare." In the fourth quarter of 2011, we renamed the sector classification, "Cleantech" to "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 $23,794,145. The gross unrealized appreciation based on the tax cost for these securities is $5,997,220. The gross unrealized depreciation based on the tax cost for these securities is $6,043,118. |
(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 $71,041. 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 $12,743,787. The gross unrealized appreciation based on the tax cost for these securities is $21,975,176. The gross unrealized depreciation based on the tax cost for these securities is $5,234,436. |
(7) | We are subject to legal restrictions on the sale of our investment(s) in this company. |
The accompanying notes are an integral part of this consolidated schedule.
28 |
HARRIS & HARRIS GROUP, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2011 |
(8) | With our investment in the Series E round of financing, we received a warrant to purchase shares of common stock of up to 30 percent of the amount invested in the Series E round of financing of Bridgelux, Inc., depending on certain financial performance metrics of the company as of December 31, 2011, at a price per share of $1.9056. The number of shares able to be purchased and beginning of the period for when this warrant is exercisable will be set upon receipt of the audited financial statements of the company for the 2011 fiscal year or upon the completion of an IPO or sale of the company, whichever comes first. Bridgelux did not complete an IPO or sale of the company as of December 31, 2011. Also as of that date, the audited financials for the company’s 2011 fiscal year were not available. This warrant is, therefore, a contingent asset as of December 31, 2011. With our investment in the bridge note financing in the fourth quarter of 2011, we received a warrant for the purchase of common stock that is exercisable at the date of issuance, but the number of shares for which it can be exercised increases monthly from the date of issuance through the close of the next round of equity financing of the company up to 50 percent of the principal amount invested in the note divided by $1.9056. The warrant for common stock is exercisable for 56,564 shares of common stock of Bridgelux as of December 31, 2011. |
(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) | Cobalt Technologies, Inc., also does business as Cobalt Biofuels. |
(11) | 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 $149,539.57 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. |
(12) | 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, 2011. |
(13) | 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. |
(14) | Initial investment was made during 2011. |
(15) | A portion of this security is held in connection with written call option contracts: 300,000 shares have been pledged to brokers. |
(16) | The lock-up period on our 2,304,149 shares of Solazyme, Inc., expired on November 25, 2011. |
The accompanying notes are an integral part of this consolidated schedule.
29 |
HARRIS & HARRIS GROUP, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2011 |
(17) | The aggregate cost for federal income tax purposes of investments in non-controlled affiliated companies is $48,968,029. The gross unrealized appreciation based on the tax cost for these securities is $9,066,325. The gross unrealized depreciation based on the tax cost for these securities is $10,432,569. |
(18) | 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 $26,666. |
(19) | 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." |
(20) | Our 2,666,667 shares of Champions Oncology, Inc., became freely tradable on October 1, 2011, pursuant to Rule 144. |
(21) | The aggregate cost for federal income tax purposes of investments in controlled affiliated companies is $12,518,936. 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 $5,641,370. |
The accompanying notes are an integral part of this consolidated schedule.
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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 also 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 fair values assigned to these investments are based on available information and do not necessarily represent amounts that might ultimately be realized when that investment is sold, as such amounts depend on future circumstances and cannot reasonably be determined until the individual investments are actually liquidated or become readily marketable.
II. | Approaches to Determining Fair Value |
Accounting principles generally accepted in the United States of America ("GAAP") define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). In effect, GAAP applies fair value terminology to all valuations whereas the 1940 Act applies market value terminology to readily marketable assets and fair value terminology to other assets.
The main approaches to measuring fair value utilized are the market approach and the income approach.
· | Market Approach (M): The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. For example, the market approach often uses market multiples derived from a set of comparables. Multiples might lie in ranges with a different multiple for each comparable. The selection of where within the range each appropriate multiple falls requires judgment considering factors specific to the measurement (qualitative and quantitative). |
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· | 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 - inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets; |
• | Level 2 - inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs 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:
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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. |
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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 or research and development in technology or product development or offers by responsible third parties; |
· | The results of research and development; |
· | Product development and milestone progress; |
· | 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
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 companies commercializing and integrating products enabled by nanotechnology and microsystems. We operate as an internally managed company whereby our officers and employees, under the general supervision of our Board of Directors, conduct our operations.
H&H Ventures Management, Inc.SM ("Ventures"), formerly Harris & Harris Enterprises, Inc., is a 100 percent wholly owned subsidiary of the Company. Ventures is taxed under Subchapter C of the Internal Revenue Code of 1986 (the "Code") (a "C Corporation"). Harris Partners I, L.P, is a limited partnership and, from time to time, may be used to hold certain interests in portfolio companies. The partners of Harris Partners I, L.P., are Ventures (sole general partner) and the Company (sole limited partner). Ventures pays taxes on any non-passive investment income generated by Harris Partners I, L.P. For the period ended June 30, 2012, 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 presentation of our financial position, results of operations and cash flows in conformity with GAAP. In the opinion of management, these financial statements reflect all adjustments, consisting of valuation adjustments and normal recurring accruals, necessary for a fair 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, 2011.
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:
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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 which provides services to us and is, therefore, consolidated. All significant inter-company accounts and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the current period presentation.
Revision of Previously Reported Consolidated Financial Statements During the First Quarter of 2012. During the period ended March 31, 2012, the Company concluded the Consolidated Statements of Cash Flows erroneously classified cash flow items within operating and investing activities. Specifically, the Company's purchases and sales of various debt, equity and other securities were previously classified within investing activities when such purchases and sales activities should have been classified within operating activities. Following is a list of purchases and sales activities that have now been included in operating activities, rather than investing activities, in the Consolidated Statements of Cash Flows:
Purchase of U.S. government securities
Sale of U.S. government securities
Investment in affiliated portfolio companies
Investment in unaffiliated portfolio companies
Proceeds from sale of investments
Proceeds from call option premiums
Payments for call option purchases
Principal payments received on debt investments
The net impact of these revisions was to increase the total cash used in operating activities and decrease the total cash used in investing activities by $4,475,222, $3,765,559 and $23,780,399 for the three months ended March 31, 2011, the six months ended June 30, 2011, and the nine months ended September 30, 2011, respectively. For the years ended December 31, 2011, and 2010, the net impact was to increase total operating activities and decrease total investing activities by $35,665,311 and $8,058,322, respectively. For the year ended December 31, 2009, the net impact was to decrease total operating activities and increase total investing activities by $15,432,513. The Company assessed the impact of the error on its prior period financial statements and concluded that the error was not material to any of those financial statements.
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 June 30, 2012, our financial statements include privately held investments and one illiquid publicly traded venture capital investment, Champions Oncology, Inc., fair valued at $93,870,062. The fair values of our privately held and illiquid publicly traded venture capital investments were determined in good faith by, or under the direction of, the Board of Directors. Upon sale of investments, the values that are ultimately realized may be different from what is presently estimated. The difference could be material.
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Cash. Cash includes demand deposits. Cash is carried at cost, which approximates fair value.
Restricted Funds. At June 30, 2012, and December 31, 2011, we held $2,010,005 and $1,512,031, respectively, in "Restricted funds." At June 30, 2012, and December 31, 2011, we held $2,000,000 and $1,500,000, respectively, in a collateral account for our credit facility discussed in "Note 5. Debt." At June 30, 2012, and December 31, 2011, we also held $0 and $12,031, respectively, in security deposits for sublessors.
Unaffiliated Rights to Milestone Payments. At June 30, 2012, the outstanding milestone payments from Amgen, Inc.’s acquisition of Biovex Group, Inc., were valued at $3,386,224. The milestone payments are derivatives and valued using the present value of estimated proceeds from future payments that may be achieved. If all remaining milestones are met, we would receive $9,526,393. There can be no assurances as to how much of this amount we will ultimately realize or when it will be realized, if at all.
Funds Held in Escrow from Sales of Investments. At June 30, 2012, there were funds held in escrow fair valued at $587,923 relating to the sales of Innovalight, Inc., and Crystal IS, Inc. Funds held in escrow are valued using certain discounts applied to the amounts withheld. Funds held in escrow from the Innovalight transaction will be released in January 2013 upon settlement of any indemnity claims and expenses related to the transaction. A portion of the funds held in escrow from the Crystal IS transaction was released on April 30, 2012. The balance of the Crystal IS funds in escrow will be released in March 2013 upon settlement of any remaining indemnity claims and expenses related to the transaction. If the funds held in escrow for these transactions are released in full, we would receive $1,201,074. On March 16, 2012, the Company received payment of its portion of the proceeds held in escrow since the closing of the transaction on March 4, 2011, from Amgen, Inc.’s acquisition of BioVex Group, Inc., totaling $953,480.
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 credit facilities and are capitalized at the time of payment. Deferred financing charges are amortized over the term of the credit 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 $317,925 and $331,006 at June 30, 2012, and December 31, 2011, respectively, representing cost, less accumulated depreciation. Depreciation is provided using the straight-line method over the estimated useful lives of the premises and equipment. We estimate the useful lives to be five to ten years for furniture and fixtures, three years for computer equipment, and ten years for leasehold improvements.
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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, interest on the accumulated postretirement benefit obligation and amortization of the transition obligation (asset) less previously accrued expenses over the average remaining service period of employees expected to receive plan benefits. Unrecognized actuarial gains and losses are recognized as net periodic benefit cost pursuant to the Company's historical accounting policy for amortizing such amounts. Actuarial gains and losses that arise that are not recognized as net periodic benefit cost in the same periods are recognized as a component of net assets.
Interest Income Recognition. Interest income, adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis. When securities are determined to be non-income producing, the Company ceases accruing interest and writes off any previously accrued interest. These write-offs are recorded as a debit to interest income. During the three months and six months ended June 30, 2012, the Company earned $79,117 and $135,326, respectively, in interest on senior secured debt, participation agreements, subordinated secured debt and interest-bearing accounts. During the three months and six months ended June 30, 2012, the Company wrote off, on a net basis, $(155,003) and $(84,682), respectively, of bridge note interest.
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 or offset against the proceeds or amount paid on the transaction to determine the realized gain or loss.
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 "Amended 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 June 30, 2012, and December 31, 2011, 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 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 stock-based 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 8. 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 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 provide 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 9. 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 six months ended June 30, 2012, included in the net increase in unrealized appreciation on investments was unrealized depreciation of $16,317 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 money market accounts may exceed the Federal Deposit Insurance Corporation insured limit.
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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 and some of our publicly traded investments, there is greater risk of loss than is the case with traditional investment securities.
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 June 30, 2012, our largest ten investments by value accounted for approximately 77 percent of the value of our equity-focused venture capital portfolio. Our largest two investments, by value, Solazyme, Inc., a publicly traded company, and Adesto Technologies Corporation, a privately held company, accounted for approximately 25 percent and 8 percent, respectively, of our equity-focused venture capital portfolio at June 30, 2012.
Approximately 71 percent of our equity-focused venture capital portfolio by value was comprised of securities of 25 privately held companies. 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, comprised of all of the independent members of our Board of Directors, in accordance with our Valuation Procedures and is subject to significant estimates and judgments. The determined value of 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 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 volatile.
NOTE 5. DEBT
On February 24, 2011, the Company established a $10 million three-year revolving credit facility (the “credit facility”) with TD Bank, N.A. to be used in conjunction with its investments in venture debt.
The credit facility matures on February 24, 2014, and generally bears interest, at the Company’s option, based on (i) LIBOR plus 1.25 percent or (2) the higher of the federal funds rate plus fifty basis points (0.50 percent) or the U.S. prime rate as published in the Wall Street Journal. The credit facility generally requires payment of interest on a monthly basis and requires the payment of a non-use fee of 0.15 percent annually. All outstanding principal is due upon maturity. The credit facility is secured by cash collateral held in a non-interest bearing account at TD Bank. The credit facility contains affirmative and restrictive covenants, including: (a) periodic financial reporting requirements, (b) maintaining our status as a BDC (c) maintaining unencumbered, liquid assets of not less than $7,500,000, (d) limitations on the incurrence of additional indebtedness, (e) limitations on liens, and (f) limitations on mergers and dissolutions. The credit facility is used to supplement our capital to make additional venture debt investments.
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The Company’s outstanding debt balance was $2,000,000 and $1,500,000, at June 30, 2012, and December 31, 2011, respectively. At June 30, 2012, and December 31, 2011, $2,000,000 and $1,500,000, respectively, was held in a collateral account at T.D. Bank as security for the loan. The weighted average annual interest cost for the six months ended June 30, 2012, was 1.6 percent. The weighted average annual interest rate for the twelve months ended December 31, 2011, was 1.5 percent, exclusive of amortization of closing fees and other expenses related to establishing the credit facility. The remaining capacity under the credit facility was $8,000,000 at June 30, 2012. At June 30, 2012, the Company was in compliance with all financial covenants required by the credit facility.
NOTE 6. FAIR VALUE OF INVESTMENTS
At June 30, 2012, our financial assets were categorized as follows in the fair value hierarchy:
Fair Value Measurement at Reporting Date Using: | ||||||||||||||||
Description | June 30, 2012 | Unadjusted Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
Privately Held Portfolio Companies: | ||||||||||||||||
Preferred Stock | $ | 79,123,640 | $ | 0 | $ | 0 | $ | 79,123,640 | ||||||||
Bridge Notes | $ | 3,474,341 | $ | 0 | $ | 0 | $ | 3,474,341 | ||||||||
Warrants | $ | 701,310 | $ | 0 | $ | 0 | $ | 701,310 | ||||||||
Rights to Milestone Payments | $ | 3,386,224 | $ | 0 | $ | 0 | $ | 3,386,224 | ||||||||
Senior Secured Debt | $ | 843,180 | $ | 0 | $ | 0 | $ | 843,180 | ||||||||
Participation Agreements | $ | 1,214,935 | $ | 0 | $ | 0 | $ | 1,214,935 | ||||||||
Subordinated Secured Debt | $ | 119,760 | $ | 0 | $ | 0 | $ | 119,760 | ||||||||
Non-Convertible Promissory Note | $ | 3,033,338 | $ | 0 | $ | 0 | $ | 3,033,338 | ||||||||
Publicly Traded Portfolio Companies: | ||||||||||||||||
Common Stock | $ | 35,001,116 | $ | 33,027,782 | $ | 0 | $ | 1,973,334 | ||||||||
Total Investments | $ | 126,897,844 | $ | 33,027,782 | $ | 0 | $ | 93,870,062 | ||||||||
Liabilities: | ||||||||||||||||
Written Call Options | $ | 1,391,092 | $ | 1,391,092 | $ | 0 | $ | 0 | ||||||||
Total | $ | 1,391,092 | $ | 1,391,092 | $ | 0 | $ | 0 |
Significant Unobservable Inputs
The table below presents the valuation technique and quantitative information about the significant unobservable inputs utilized by the Company in the fair value measurements of Level 3 assets. Unobservable inputs are those inputs for which little or no market data exists and, therefore, require an entity to develop its own assumptions.
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Fair Value at June 30, 2012 | Valuation Techniques(s) | Unobservable Input | Range | |||||||||
Private Offering Price | $0.14 - $3.03 | |||||||||||
Non-Performance Risk | 0% - 100% | |||||||||||
Revenue Multiple | 1.3 - 2.6 | |||||||||||
Discount for Lack of Marketability | 20% | |||||||||||
Preferred Stock | $ | 79,123,640 | Market Approach | Probability of Exit Outcomes | 0% - 100% | |||||||
Private Offering Price | $1.00 | |||||||||||
Bridge Notes | 3,474,341 | Market Approach | Non-Performance Risk | 0% | ||||||||
Private Offering Price | $0.54 | |||||||||||
Common Stock | 0 | Market Approach | Non-Performance Risk | 100% | ||||||||
Stock Price | $.09 - $1.87 | |||||||||||
Black-Sholes-Merton | Volatility | 107% | ||||||||||
Warrants | 701,310 | Model | Expected Term | 0.50 – 9.75 Years | ||||||||
Probability Weighted | Probability of Achieving Independent Milestones | 0% - 75% | ||||||||||
Rights to Milestone Payments | 3,386,224 | Discounted Cash Flow | Probability of Achieving Dependent Milestones | 0.44% - 28.125% | ||||||||
Warrant Adjusted Effective Yield | 23.1% - 29.7% | |||||||||||
Effective Yield | 23.1% - 37.2% | |||||||||||
Non-Performance Risk | 0% - 25% | |||||||||||
Participation Payment Risk | 0% | |||||||||||
Participation Agreements | 1,214,935 | Income Approach | Discount for Comparable Prices of High-Yield Debt | 0% | ||||||||
Warrant Adjusted Effective Yield | 32.4% | |||||||||||
Effective Yield | 40.5% | |||||||||||
Subordinated Secured Debt | 119,760 | Income Approach | Non-Performance Risk | 25% | ||||||||
Effective Yield | 24.4% | |||||||||||
Senior Secured Debt | 843,180 | Income Approach | Non-Performance Risk | 0% | ||||||||
Probability of Exit Outcomes | 25% - 75% | |||||||||||
Private Offering Price | $1.50 | |||||||||||
Non-Convertible Promissory Note | 3,033,338 | Income Approach | Non-Performance Risk | 50% | ||||||||
Publicly Traded Common Stock | 1,973,334 | Market Approach | Volume Weighted Average Price per Share | $0.63 - $0.88 | ||||||||
Total | $ | 93,870,062 |
Valuation Methodologies and Inputs for Level 3 Assets
The following sections describe the valuation techniques and significant unobservable inputs used to measure Level 3 assets.
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Preferred Stock, Bridge Notes and Common Stock
Preferred stock, bridge notes and common stock are valued by a market approach using internal models with inputs, most of which are not market observable. Common inputs for valuing Level 3 preferred stock, bridge note and private common stock investments include: prices from recently executed private transactions in a company’s securities or unconditional firm offers, revenue multiples of comparable publicly traded companies, discounts for lack of marketability, rights and preferences of the class of securities we own as compared with other classes of securities the portfolio company has issued, particularly related to potential liquidity scenarios of an IPO or an acquisition transaction, and management’s best estimate of risk attributable to non-performance risk. We define non-performance as the risk that the price per share (or implied valuation of a portfolio company) or the effective yield of a debt security of a portfolio company, as applicable, does not appropriately represent the risk that a portfolio company with negative cash flow will be: (a) unable to raise capital, will need to be shut down and will not return our invested capital; or (b) able to raise capital, but at a valuation significantly lower than the implied post-money valuation of the last round of financing. The assessment of non-performance risk typically includes an evaluation of the financial condition and operating results of the company, the company's progress towards milestones, and the long-term potential of the business and technology of the company and how this potential may or may not affect the value of the shares owned by us. An increase to the non-performance risk or a decrease in the private offering price of a future round of financing from that of the most recent round would result in a lower fair value measurement and/or a change in the distribution of value among the classes of securities we own.
Bridge notes commonly contain terms that provide for the conversion of the full amount of principal, and sometimes interest, into shares of preferred stock at a defined price per share and/or the price per share of the next round of financing. The use of a discount for non-performance risk in the valuation of bridge notes would indicate the potential for conversion of only a portion of the principal, plus interest when applicable, into shares of preferred stock or the potential that a conversion event will not occur and that the likely outcome of a liquidation of assets would result in payment of less than the remaining principal outstanding of the note. An increase in non-performance risk would result in a lower fair value measurement.
Warrants
We use the Black-Scholes-Merton option-pricing model to determine the fair value of warrants held in our portfolio. Option pricing models, including the Black-Scholes-Merton model, require the use of subjective input assumptions, including expected volatility, expected life, expected dividend rate, and expected risk-free rate of return. In the Black-Scholes-Merton model, variations in the expected volatility or expected term assumptions have a significant impact on fair value. Because the securities underlying the warrants in our portfolio are not publicly traded, many of the required input assumptions are more difficult to estimate than they would be if a public market for the underlying securities existed.
An input to the Black-Scholes-Merton option-pricing model is the value per share of the type of stock for which the warrant is exercisable as of the date of valuation. This input is derived according to the methodologies discussed in “Preferred Stock, Bridge Notes and Common Stock.”
Rights to Milestone Payments
Rights to Milestone Payments are valued using a probability weighted discounted cash flow model. As part of Amgen Inc.’s acquisition of our former portfolio company, BioVex Group, Inc., we are entitled to potential future milestone payments based upon the achievement of certain regulatory and sales milestones. We assign probabilities to the achievements of the various milestones. Milestones identified as independent milestones can be achieved irrespective of the achievement of other contractual milestones. Dependent milestones are those that can only be achieved after another, or series of other, milestones are achieved. The interest rates used in these models are observable inputs from sources such as the Federal Reserve published interest rates.
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Participation Agreements, Subordinated Secured Debt and Senior Secured Debt
We invest in venture debt investments through participation agreements, subordinated secured debt and senior secured debt. We value these securities using an income approach. The income approach uses valuation techniques to convert future amounts (for example, cash flows or earnings) to a single present value amount (discounted). The measurement is based on the value indicated by current market expectations about those future amounts. Common inputs for valuing Level 3 debt investments include: the effective yield of the debt investment or, in the case where we have received warrant coverage, the warrant-adjusted effective yield of the security, adjustments for changes in the yields of comparable publicly traded high-yield debt funds and risk-free interest rates and an assessment of non-performance risk. For those debt investments made through participation agreements, we include discounts for the risk of breach of the participation agreements. For venture debt investments, an increase in yields would result in a lower fair value measurement. Furthermore, yields would decrease, and value would increase, if the company is exceeding targets and risk has been substantially reduced from the level of risk that existed at the time of investment. Yields would increase, and values would decrease, if the company is failing to meet its targets and risk has been increased from the level of risk that existed at the time of investment.
Non-Convertible Promissory Note
We have one non-convertible promissory note, which we value using an income approach that uses a valuation technique to convert future amounts to a single present value. This security has a liquidation preference payable upon a sale of the company equal to three times the principal of the loan. While the loan has since been repaid, this liquidation preference remains outstanding as of June 30, 2012. Inputs include the preferred stock price of the portfolio company, an assessment of non-performance risk, the probability of exit outcomes between an IPO and an acquisition and the resulting impact on rights and preferences of the class of securities we own as compared with other classes of securities the portfolio company has issued.
Publicly Traded Common Stock
Common stock that is thinly traded is valued using internal models with inputs that are not market observable. Common inputs for stock include the volume-weighted average of recent prices per share of privately negotiated financing transactions and the volume-weighted price per share of the stock over a period of time and an assessment of non-performance risk.
The following chart shows the components of change in the financial assets categorized as Level 3 for the three months ended June 30, 2012.
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Beginning Balance 4/1/2012 | Total Realized Gains (Losses) Included in Changes in Net Assets | Transfers | Total Unrealized Appreciation (Depreciation) Included in Changes in Net Assets | Investments in Portfolio Companies, Interest on Bridge Notes, and Amortization of Loan Fees, Net | Disposals | Ending Balance 6/30/2012 | Amount of Total Appreciation (Depreciation) for the Period Included in Changes in Net Assets Attributable to the Change in Unrealized Gains or Losses Relating to Assets Still Held at the Reporting Date | |||||||||||||||||||||||||
Preferred Stock | $ | 72,524,423 | $ | 0 | $ | 352,036 | $ | 3,988,360 | $ | 2,258,821 | $ | 0 | $ | 79,123,640 | $ | 3,988,360 | ||||||||||||||||
Bridge Notes | 4,345,180 | 0 | (352,036 | ) | (528,184 | ) | 9,381 | 0 | 3,474,341 | (528,184 | ) | |||||||||||||||||||||
Warrants | 723,302 | 0 | 0 | (21,992 | ) | 0 | 0 | 701,310 | (21,992 | ) | ||||||||||||||||||||||
Rights to Milestone Payments | 3,352,886 | 0 | 0 | 33,338 | 0 | 0 | 3,386,224 | 33,338 | ||||||||||||||||||||||||
Participation Agreements | 1,239,671 | 0 | 0 | 3,868 | 2,446 | (31,050 | ) | 1,214,935 | 3,868 | |||||||||||||||||||||||
Subordinated Secured Debt | 124,665 | 0 | 0 | (5,184 | ) | 279 | 0 | 119,760 | (5,184 | ) | ||||||||||||||||||||||
Senior Secured Debt | 894,345 | 0 | 0 | 8,533 | 12,292 | (71,990 | ) | 843,180 | 8,533 | |||||||||||||||||||||||
Non-Convertible Promissory Note | 3,033,338 | 0 | 0 | 0 | 0 | 0 | 3,033,338 | 0 | ||||||||||||||||||||||||
Publicly Traded Common Stock | 1,973,334 | 0 | 0 | 0 | 0 | 0 | 1,973,334 | 0 | ||||||||||||||||||||||||
Total | $ | 88,211,144 | $ | 0 | $ | 0 | $ | 3,478,739 | $ | 2,283,219 | $ | (103,040 | ) | $ | 93,870,062 | $ | 3,478,739 |
There were no transfers in or out of Level 3 during the three months ended June 30, 2012.
The following chart shows the components of change in the financial assets categorized as Level 3 for the six months ended June 30, 2012.
Beginning Balance 1/1/2012 | Total Realized Gains (Losses) Included in Changes in Net Assets | Transfers | Total Unrealized Appreciation (Depreciation) Included in Changes in Net Assets | Investments in Portfolio Companies, Interest on Bridge Notes, and Amortization of Loan Fees, Net | Disposals | Ending Balance 6/30/2012 | Amount of Total Appreciation (Depreciation) for the Period Included in Changes in Net Assets Attributable to the Change in Unrealized Gains or Losses Relating to Assets Still Held at the Reporting Date | |||||||||||||||||||||||||
Preferred Stock | $ | 68,833,189 | $ | 0 | $ | 905,333 | $ | 4,659,980 | $ | 4,725,138 | $ | 0 | $ | 79,123,640 | $ | 4,659,980 | ||||||||||||||||
Bridge Notes | 4,007,509 | 0 | (905,333 | ) | (251,752 | ) | 623,917 | 0 | 3,474,341 | (251,752 | ) | |||||||||||||||||||||
Warrants | 728,787 | 0 | 0 | (111,684 | ) | 84,207 | 0 | 701,310 | (111,684 | ) | ||||||||||||||||||||||
Rights to Milestone Payments | 3,362,791 | 0 | 0 | 23,433 | 0 | 0 | 3,386,224 | 23,433 | ||||||||||||||||||||||||
Participation Agreements | 560,200 | 0 | 0 | 2,770 | 714,064 | (62,099 | ) | 1,214,935 | 2,770 | |||||||||||||||||||||||
Subordinated Secured Debt | 121,880 | 0 | 0 | (1,808 | ) | (312 | ) | 0 | 119,760 | (1,808 | ) | |||||||||||||||||||||
Senior Secured Debt | 942,695 | 0 | 0 | 20,810 | 21,538 | (141,863 | ) | 843,180 | 20,810 | |||||||||||||||||||||||
Non-Convertible Promissory Note | 3,033,338 | 0 | 0 | 0 | 0 | 0 | 3,033,338 | 0 | ||||||||||||||||||||||||
Publicly Traded Common Stock | 1,973,334 | 0 | 0 | 0 | 0 | 0 | 1,973,334 | 0 | ||||||||||||||||||||||||
Total | $ | 83,563,723 | $ | 0 | $ | 0 | $ | 4,341,749 | $ | 6,168,552 | $ | (203,962 | ) | $ | 93,870,062 | $ | 4,341,749 |
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There were no transfers in or out of Level 3 during the six months ended June 30, 2012.
At December 31, 2011, our financial assets were categorized as follows in the fair value hierarchy:
Fair Value Measurement at Reporting Date Using: | ||||||||||||||||
Description | December 31, 2011 | Unadjusted Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
U.S. Government Securities | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||
Privately Held Portfolio Companies: | ||||||||||||||||
Preferred Stock | $ | 68,833,189 | $ | 0 | $ | 0 | $ | 68,833,189 | ||||||||
Bridge Notes | $ | 4,007,509 | $ | 0 | $ | 0 | $ | 4,007,509 | ||||||||
Warrants | $ | 728,787 | $ | 0 | $ | 0 | $ | 728,787 | ||||||||
Rights to Milestone Payments | $ | 3,362,791 | $ | 0 | $ | 0 | $ | 3,362,791 | ||||||||
Senior Secured Debt | $ | 942,695 | $ | 0 | $ | 0 | $ | 942,695 | ||||||||
Participation Agreement | $ | 560,200 | $ | 0 | $ | 0 | $ | 560,200 | ||||||||
Subordinated Secured Debt | $ | 121,880 | $ | 0 | $ | 0 | $ | 121,880 | ||||||||
Non-Convertible Promissory Note | $ | 3,033,338 | $ | 0 | $ | 0 | $ | 3,033,338 | ||||||||
Publicly Traded Portfolio Companies: | ||||||||||||||||
Common Stock | $ | 31,457,861 | $ | 29,484,527 | $ | 0 | $ | 1,973,334 | ||||||||
Total Investments | $ | 113,048,250 | $ | 29,484,527 | $ | 0 | $ | 83,563,723 | ||||||||
Liabilities: | ||||||||||||||||
Written Call Options | $ | 195,000 | $ | 195,000 | $ | 0 | $ | 0 | ||||||||
Total | $ | 195,000 | $ | 195,000 | $ | 0 | $ | 0 |
The following chart shows the components of change in the financial assets categorized as Level 3 for the three months ended June 30, 2011.
Beginning Balance 4/1/2011 | Total Realized Losses Included in Changes in Net Assets | Transfers Between Asset Classes | Total Unrealized Gains (Losses) Included in Changes in Net Assets | Investments in Portfolio Companies, Interest on Bridge Notes, and Amortization of Loan Fees, Net | Disposals | Ending Balance 6/30/2011 | Amount of Total Gains for the Period Included in Changes in Net Assets Attributable to the Change in Unrealized Gains or Losses Relating to Assets Still Held at the Reporting Date | |||||||||||||||||||||||||
Preferred Stock | $ | 86,112,915 | $ | (204,206 | ) | $ | (25,294,647 | ) | $ | 597,547 | $ | 3,425,561 | $ | 3,129,750 | $ | 67,766,920 | $ | 285,234 | ||||||||||||||
Bridge Notes | 4,815,775 | 0 | (1,331,792 | ) | 278,041 | 1,446,616 | 0 | 5,208,640 | 278,041 | |||||||||||||||||||||||
Common Stock | 436,642 | (1,966,591 | ) | 0 | 1,693,813 | 0 | (163,864 | ) | 0 | 0 | ||||||||||||||||||||||
Warrants | 655,692 | 0 | 108,867 | (34,138 | ) | 6,979 | 0 | 737,400 | (34,138 | ) | ||||||||||||||||||||||
Rights to Milestone Payments | 0 | 0 | 3,291,750 | 24,831 | 0 | 0 | 3,316,581 | 24,831 | ||||||||||||||||||||||||
Participation Agreement | 483,100 | 0 | 0 | 35,547 | 1,206 | 0 | 519,853 | 35,547 | ||||||||||||||||||||||||
Subordinated Secured Debt | 144,490 | 0 | 0 | 3,565 | (30,905 | ) | 0 | 117,150 | 3,565 | |||||||||||||||||||||||
Senior Secured Debt | 662,532 | 0 | 0 | (1,335 | ) | (63,887 | ) | 0 | 597,310 | (1,335 | ) | |||||||||||||||||||||
Non-Convertible Promissory Note | 0 | 0 | 0 | 3,033,338 | 1,348,150 | 0 | 4,381,488 | 3,033,338 | ||||||||||||||||||||||||
Publicly Traded Common Stock | 4,447,843 | 0 | 23,225,822 | 19,568,275 | 2,000,000 | 0 | 49,241,940 | 19,568,275 | ||||||||||||||||||||||||
Total | $ | 97,758,989 | $ | (2,170,797 | ) | $ | 0 | $ | 25,199,484 | $ | 8,133,720 | $ | 2,965,886 | $ | 131,887,282 | $ | 23,193,358 |
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The following chart shows the components of change in the financial assets categorized as Level 3 for the six months ended June 30, 2011.
Beginning Balance 1/1/2011 | Total Realized Gains (Losses) Included in Changes in Net Assets | Transfers Between Asset Classes | Total Unrealized Gains (Losses) Included in Changes in Net Assets | Investments in Portfolio Companies, Interest on Bridge Notes, and Amortization of Loan Fees, Net | Disposals | Ending Balance 6/30/2011 | Amount of Total Gains for the Period Included in Changes in Net Assets Attributable to the Change in Unrealized Gains or Losses Relating to Assets Still Held at the Reporting Date | |||||||||||||||||||||||||