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, 2013

 

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

 

For the transition period from ____________ to _____________

 

Commission file number: 0-11576

 

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

 

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

 

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

 

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

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes      x          No      ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes      ¨           No      ¨

 

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

 

Large accelerated filer   ¨ Accelerated filer   x
Non-accelerated filer   ¨ Smaller reporting company   ¨
(Do not check if a smaller reporting company)  

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes      ¨           No      x

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

 

Class   Outstanding at August 8, 2013
Common Stock, $0.01 par value per share   31,159,256 shares

 

 
 

 

Harris & Harris Group, Inc.

Form 10-Q, June 30, 2013

 

    Page Number
PART I. FINANCIAL INFORMATION    
     
Item 1. Consolidated Financial Statements   1
     
Consolidated Statements of Assets and Liabilities   2
     
Consolidated Statements of Operations   3
     
Consolidated Statements of Comprehensive Income (Loss)   4
     
Consolidated Statements of Cash Flows   5
     
Consolidated Statements of Changes in Net Assets   6
     
Consolidated Schedule of Investments   7
     
Notes to Consolidated Financial Statements   38
     
Financial Highlights   61
     
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations   62
     
Background   62
     
Overview   62
     
Maturity of Current Equity-Focused Venture Capital Portfolio   64
     
Investment Objective and Strategy   65
     
Involvement with Portfolio Companies   66
     
Investments and Current Investment Pace   67
     
Our Sources of Liquid Capital   68
     
Potential Pending Liquidity Events from our Portfolio as of June 30, 2013   69
     
Strategy for Managing Publicly Traded Positions   70
     
Portfolio Company Revenue   71
     
Current Business Environment   71
     
Valuation of Investments   72
     
Results of Operations   75
     
Financial Condition   84
     
Liquidity   85
     
Borrowings   87
     
Contractual Obligations   87
     
Critical Accounting Policies   87
     
Recent Developments – Portfolio Companies   91
     
Cautionary Statement Regarding Forward-Looking Statements   92
     
Item 3.  Quantitative and Qualitative Disclosures About Market Risk   93
     
Item 4.  Controls and Procedures   94
     
PART II.  OTHER INFORMATION    
     
Item 1A.  Risk Factors   95
     
Item 6.   Exhibits   96
     
Signatures   97
     
Exhibit Index   98

 

 
 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Consolidated Financial Statements

 

The information furnished in the accompanying consolidated financial statements reflects all adjustments that are, in the opinion of management, necessary for a fair statement of the results for the interim period presented.

 

Harris & Harris Group, Inc.® (the "Company," "us," "our" and "we"), is an internally managed venture capital company that has elected to operate as a business development company ("BDC") under the Investment Company Act of 1940 (the "1940 Act"). Certain information and disclosures normally included in the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted as permitted by Regulation S-X and Regulation S-K. Accordingly, they do not include all information and disclosures necessary for a fair presentation of our financial position, results of operations and cash flows in conformity with GAAP. The results of operations for any interim period are not necessarily indicative of the results for the full year. The accompanying consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2012.

 

1
 

 

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

 

 

   June 30, 2013   December 31, 2012 
   (Unaudited)     
         
ASSETS          
           
Investments, in portfolio securities at value:          
Unaffiliated privately held companies (cost: $29,344,862 and $29,365,558, respectively)  $29,448,686   $24,949,756 
Unaffiliated rights to milestone payments (adjusted cost basis: $3,291,750 and $3,291,750, respectively)   3,383,720    3,400,734 
Unaffiliated publicly traded securities (cost: $3,570,595 and $5,070,447, respectively)   10,416,633    14,422,261 
Non-controlled affiliated privately held companies (cost: $59,055,188 and $57,789,263, respectively)   61,485,282    60,792,397 
Non-controlled affiliated publicly traded companies (cost: $0 and $2,000,000, respectively)   0    1,348,227 
Controlled affiliated privately held companies (cost: $15,156,205 and $14,233,804, respectively)   3,991,102    3,088,816 
Total, investments in private portfolio companies, rights to milestone payments and public securities at value (cost: $110,418,600 and $111,750,822, respectively)  $108,725,423   $108,002,191 
Investments, in U.S. Treasury obligations at value (cost: $13,999,865 and $13,996,136, respectively)   13,999,860    13,998,880 
Cash   8,194,919    8,379,111 
Receivable from sales of investments (Note 3)   3,783,586    0 
Restricted funds (Note 3)   10,025    10,015 
Funds held in escrow from sales of investments at value   0    1,052,345 
Receivable from portfolio company   4,160    23,830 
Interest receivable   16,126    49,068 
Prepaid expenses   241,333    97,410 
Other assets   353,413    377,400 
Total assets  $135,328,845   $131,990,250 
           
LIABILITIES & NET ASSETS          
           
Accounts payable and accrued liabilities  $1,339,064   $1,262,202 
Post retirement plan liabilities (Note 8)   826,082    1,876,447 
Deferred rent   350,018    368,977 
Written call options payable (premiums received:          
$478,676 and $50,000, respectively) (Note 7)   746,000    42,500 
Debt interest and other payable   3,792    3,350 
Total liabilities   3,264,956    3,553,476 
           
Net assets  $132,063,889   $128,436,774 
           
Net assets are comprised of:          
Preferred stock, $0.10 par value, 2,000,000 shares authorized; none issued  $0   $0 
Common stock, $0.01 par value, 45,000,000 shares authorized at 6/30/13 and 12/31/12; 32,987,996 issued at 6/30/13 and 32,945,621 issued at 12/31/12   329,880    329,456 
Additional paid in capital (Note 9)   213,762,334    213,194,474 
Accumulated net operating and realized loss   (77,676,550)   (77,943,238)
Accumulated unrealized depreciation of investments   (1,960,506)   (3,738,387)
Accumulated other comprehensive income (Note 8)   1,014,262    0 
Treasury stock, at cost (1,828,740 shares at 6/30/13 and 12/31/12)   (3,405,531)   (3,405,531)
           
Net assets  $132,063,889   $128,436,774 
           
Shares outstanding   31,159,256    31,116,881 
Net asset value per outstanding share  $4.24   $4.13 

 

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, 
   2013   2012   2013   2012 
                 
Investment income (loss):                    
Interest from:                    
Unaffiliated companies  $56,851   $71,257   $131,846   $121,321 
Non-controlled affiliated companies   22,207    (193,188)   37,512    (150,376)
Controlled affiliated companies   62,390    39,658    109,194    67,000 
Cash and U.S. Treasury obligations and other   3,374    6,387    9,033    12,699 
Miscellaneous income   45,141    47,440    87,468    81,800 
Total investment income (loss)   189,963    (28,446)   375,053    132,444 
                     
Expenses:                    
Salaries, benefits and stock-based compensation (Note 9)   1,442,714    2,558,000    2,760,399    3,947,391 
Administration and operations   266,130    225,542    476,345    582,226 
Professional fees   277,138    244,296    662,868    517,639 
Rent (Note 3)   101,486    99,254    202,701    197,697 
Directors’ fees and expenses   58,406    81,906    130,876    177,732 
Custody fees   13,981    11,127    27,774    21,982 
Depreciation   14,172    14,645    27,896    28,598 
Interest and other debt expenses   5,874    12,064    11,705    23,840 
Total expenses   2,179,901    3,246,834    4,300,564    5,497,105 
                     
Net operating loss   (1,989,938)   (3,275,280)   (3,925,511)   (5,364,661)
                     
Net realized gain (loss):                    
Realized gain (loss) from investments:                    
Unaffiliated companies   105,313    0    105,313    476,887 
Non-Controlled affiliated companies   0    (16,195)   (4,236,033)   11,421 
Publicly traded companies   7,651,057    670,879    8,544,061    670,879 
Written call options   (150,710)   213,338    (126,762)   378,338 
Purchased put options   (15,127)   0    (72,209)   0 
Realized gain from investments   7,590,533    868,022    4,214,370    1,537,525 
                     
Income tax expense (Note 10)   161    0    22,171    8,075 
Net realized gain from investments   7,590,372    868,022    4,192,199    1,529,450 
                     
Net increase (decrease) in unrealized appreciation on investments:                    
Change as a result of investment sales   (5,417,562)   (670,879)   (1,883,212)   (670,879)
Change on investments held   4,322,073    1,543,565    3,935,917    8,764,536 
Change on written call options   (400,184)   (371,347)   (274,824)   (584,182)
Net (decrease) increase in unrealized appreciation on investments   (1,495,673)   501,339    1,777,881    7,509,475 
                     
Net realized and unrealized gains on investments   6,094,699    1,369,361    5,970,080    9,038,925 
                     
Net increase (decrease) in net assets resulting from operations:                    
                     
Total  $4,104,761   $(1,905,919)  $2,044,569   $3,674,264 
                     
Per average basic and diluted outstanding share  $0.13   $(0.06)  $0.07   $0.12 
                     
Average outstanding shares – basic and diluted   31,118,358    31,000,601    31,117,624    31,000,601 

 

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

 

3
 

 

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2013   2012   2013   2012 
Net increase (decrease) resulting from operations  $4,104,761   $(1,905,919)  $2,044,569   $3,674,264 
                     
Other comprehensive income:                    
                     
Prior service cost  (Note 8)   0    0    1,101,338    0 
Amortization of prior service cost   (43,538)   0    (87,076)   0 
                     
Other comprehensive (loss) income   (43,538)   0    1,014,262    0 
                     
Comprehensive income (loss)  $4,061,223   $(1,905,919)  $3,058,831   $3,674,264 

  

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

 

4
 

 

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   Six Months Ended   Six Months Ended 
   June 30, 2013   June 30, 2012 
         
Cash flows used in operating activities:          
Net increase in net assets resulting from operations  $2,044,569   $3,674,264 
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   (5,992,251)   (9,047,000)
Depreciation of fixed assets, amortization of premium or discount on U.S. government securities, and bridge note interest   (138,475)   103,547 
Stock-based compensation expense   630,201    1,985,119 
Purchase of U.S. government securities   (55,998,943)   0 
Sale of U.S. government securities   56,000,000    0 
Purchase of affiliated portfolio companies   (6,429,843)   (5,368,669)
Purchase of unaffiliated portfolio companies   (678,307)   (874,530)
Principal payments received on debt investments   627,773    203,962 
Proceeds from sale of investments   13,161,839    1,844,152 
Proceeds from call option premiums   844,498    2,324,314 
Payments for put and call option purchases   (309,578)   (1,334,370)
           
Changes in assets and liabilities:          
Restricted funds   (10)   (497,974)
Receivable from sales of investments   (3,783,586)   0 
Receivable from portfolio company   19,670    10,990 
Interest receivable   32,942    6,835 
Prepaid expenses   (143,923)   213,391 
Other assets   0    (525)
Post retirement plan liabilities   (36,103)   105,248 
Accounts payable and accrued liabilities   50,120    75,398 
Deferred rent   (18,959)   (15,704)
           
Net cash used in operating activities   (118,366)   (6,591,552)
           
Cash flows from investing activities:          
Purchase of fixed assets   (3,909)   (15,516)
Net cash used in investing activities   (3,909)   (15,516)
           
Cash flows from financing activities:          
Payment of withholdings related to net settlement of restricted stock   (61,917)   0 
Proceeds from drawdown of credit facility   0    500,000 
           
Net cash (used in) provided by financing activities   (61,917)   500,000 
           
Net decrease in cash  $(184,192)  $(6,107,068)
           
Cash at beginning of the period   8,379,111    33,841,394 
Cash at end of the period  $8,194,919   $27,734,326 
           
Supplemental disclosures of cash flow information:          
Income taxes paid  $22,171   $8,075 
Interest paid  $0   $13,405 

 

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

 

5
 

 

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

 

   Six Months Ended   Year Ended 
   June 30, 2013   December 31, 2012 
   (Unaudited)     
         
Changes in net assets from operations:          
           
Net operating loss  $(3,925,511)  $(8,803,343)
Net realized gain on investments   4,192,199    2,406,433 
Net decrease in unrealized appreciation on investments as a result of sales   (1,883,212)   (1,427,730)
Net increase (decrease) in unrealized appreciation on investments held   3,935,917    (12,049,760)
Net decrease in unrealized appreciation on written call options   (274,824)   (112,500)
           
Net increase (decrease) in net assets resulting from operations   2,044,569    (19,986,900)
           
Changes in net assets from capital stock transactions:          
           
Acquisition of vested restricted stock awards to pay required employee withholding   (61,917)   (203,676)
Stock-based compensation expense   630,201    2,928,943 
           
Net increase in net assets resulting  from capital stock transactions   568,284    2,725,267 
           
Changes in net assets from accumulated other comprehensive income:          
           
Other comprehensive income   1,014,262    0 
           
Net increase in net assets resulting from accumulated other comprehensive income   1,014,262    0 
           
Net increase (decrease) in net assets   3,627,115    (17,261,633)
           
Net Assets:          
           
Beginning of the period   128,436,774    145,698,407 
           
End of the period  $132,063,889   $128,436,774 

 

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, 2013
(Unaudited)

 

   Method of  Primary      Shares/     
   Valuation (1)  Industry (2)  Cost   Principal   Value 
                   
Investments in Unaffiliated Companies (3) –
32.7% of net assets at value
                     
                      
Private Placement Portfolio (Illiquid) (4) –
22.3% of net assets at value
                     
                      
Bridgelux, Inc. (7)(8)(10)     Energy               
Manufacturing high-power light emitting diodes (LEDs) and arrays                     
Series B Convertible Preferred Stock  (M)     $1,000,000    1,861,504   $1,494,464 
Series C Convertible Preferred Stock  (M)      1,352,196    2,130,699    1,898,508 
Series D Convertible Preferred Stock  (M)      1,371,622    999,999    1,284,225 
Series E Convertible Preferred Stock  (M)      672,599    440,334    654,788 
Series E-1 Convertible Preferred Stock  (M)      534,482    399,579    480,234 
Warrants for Series C Convertible Preferred Stock expiring 12/31/14  ( I )      168,270    163,900    79,600 
Warrants for Series D Convertible Preferred Stock expiring 8/26/14  ( I )      88,531    124,999    63,010 
Warrants for Series D Convertible Preferred Stock expiring 3/10/15  ( I )      40,012    41,666    25,498 
Warrants for Series E Convertible Preferred Stock expiring 12/31/17  ( I )      93,969    170,823    182,578 
Warrants for Common Stock expiring 6/1/16  ( I )      72,668    132,100    4,095 
Warrants for Common Stock expiring 10/21/18  ( I )      18,816    84,846    5,051 
          5,413,165         6,172,051 
                      
Cambrios Technologies Corporation (7)(9)(10)     Electronics               
Developing nanowire-enabled electronic materials for the display industry                     
Series B Convertible Preferred Stock  (M)      1,294,025    1,294,025    700,454 
Series C Convertible Preferred Stock  (M)      1,300,000    1,300,000    703,688 
Series D Convertible Preferred Stock  (M)      515,756    515,756    870,338 
Series D-2 Convertible Preferred Stock  (M)      92,400    92,400    86,625 
Series D-4 Convertible Preferred Stock  (M)      216,168    216,168    202,658 
          3,418,349         2,563,763 
                      
Cobalt Technologies, Inc. (7)(9)(11)     Energy               
Developing processes for making bio-butanol through biomass fermentation                     
Series C-1 Convertible Preferred Stock  (M)      749,998    352,112    939,188 
Series D-1 Convertible Preferred Stock  (M)      122,070    48,828    141,538 
Series E-1 Convertible Preferred Stock  (M)      114,938    46,089    112,843 
Warrants for Series E-1 Pref. Stock expiring on 10/9/22  ( I )      2,781    1,407    3,112 
Warrants for Series E-1 Pref. Stock expiring on 3/11/23  ( I )      5,355    2,707    6,040 
          995,142         1,202,721 

 

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, 2013
(Unaudited)

 

   Method of  Primary  Shares/         
   Valuation (1)  Industry (2)  Cost   Principal   Value 
                   
Investments in Unaffiliated Companies (3) –
32.7% of net assets at value (Cont.)
                     
                      
Private Placement Portfolio (Illiquid) (4) –
22.3% of net assets at value (Cont.)
                     
                      
Ensemble Therapeutics Corporation (7)(9)(12)     Life Sciences               
Developing DNA-Programmed ChemistryTM  for the discovery of new classes of therapeutics                     
Series B Convertible Preferred Stock  (M)     $2,000,000    1,449,275   $192,899 
Secured Convertible Bridge Note, 8%, acquired 9/11/08  (M)      346,477   $250,211    1,592,052 
Secured Convertible Bridge Note, 8%, acquired 12/10/09  (M)      62,796   $48,868    306,067 
Secured Convertible Bridge Note, 8%, acquired 1/25/12  (M)      121,974   $109,400    666,579 
Secured Convertible Bridge Note, 8%, acquired 3/28/13  (M)      75,152   $73,598    441,530 
Secured Convertible Bridge Note, 8%, acquired 6/24/13  (M)      25,807   $25,759    154,039 
          2,632,206         3,353,166 
                      
GEO Semiconductor Inc.     Electronics               
Developing programmable, high-performance video and geometry processing solutions                     
Participation Agreement with Montage Capital relating to the following assets:                     
Warrants for Series A Pref. Stock expiring on 9/17/17  ( I )      66,684    100,000    85,257 
Warrants for Series A-1 Pref. Stock expiring on 6/30/18  ( I )      23,566    34,500    29,979 
Loan and Security Agreement with GEO Semiconductor relating to the following assets:                     
Warrants for Series A Pref. Stock expiring on 3/1/18  ( I )      7,512    10,000    8,239 
Warrants for Series A-1 Pref. Stock expiring on 6/29/18  ( I )      7,546    10,000    8,268 
          105,308         131,743 
                      
Mersana Therapeutics, Inc. (7)(9)(13)     Life Sciences               
Developing treatments for cancer based on novel drug delivery polymers                     
Series A-1 Convertible Preferred Stock  (M)      316,453    294,019    316,453 
Common Stock  (M)      3,875,395    350,539    108,667 
          4,191,848         425,120 
                      
Molecular Imprints, Inc. (7)(10)(14)     Electronics               
Manufacturing nanoimprint lithography capital equipment                     
Series B Convertible Preferred Stock  (M)      2,000,000    1,333,333    1,789,108 
Series C Convertible Preferred Stock  (M)      2,406,595    1,285,071    2,138,498 
Non-Convertible Bridge Note  ( I )      0   $0    3,033,338 
          4,406,595         6,960,944 

 

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

 

8
 

 

HARRIS & HARRIS GROUP, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2013
(Unaudited)

 

   Method of  Primary  Shares/         
   Valuation (1)  Industry (2)  Cost   Principal   Value 
                   
Investments in Unaffiliated Companies (3) –
32.7% of net assets at value (Cont.)
                     
                      
Private Placement Portfolio (Illiquid) (4) –
22.3% of net assets at value (Cont.)
                     
                      
Nanosys, Inc. (7)     Energy               
Developing inorganic nanowires and quantum dots for use in LED-backlit devices                     
Series C Convertible Preferred Stock  (M)     $1,500,000    803,428   $185,701 
Series D Convertible Preferred Stock  (M)      3,000,003    1,016,950    2,815,752 
Series E Convertible Preferred Stock  (M)      496,573    433,688    699,113 
Unsecured Convertible Bridge Note, 4%, acquired 7/16/12  (M)      45,502   $43,821    249,595 
          5,042,078         3,950,161 
                      
Nano Terra, Inc. (9)     Energy               
Developing surface chemistry and nano-manufacturing solutions                     
Senior secured debt, 12.0%, maturing on 12/1/15  ( I )      844,991   $880,394    861,700 
Warrants for Series A-2 Pref. Stock expiring on 2/22/21  ( I )      69,168    446,248    65,351 
Warrants for Series C Pref. Stock expiring on 11/15/22  ( I )      35,403    241,662    34,909 
          949,562         961,960 
                      
Nantero, Inc. (7)(9)(10)     Electronics               
Developing a high-density, nonvolatile,random access memory chip, enabled by carbon nanotubes                     
Series A Convertible Preferred Stock  (M)      489,999    345,070    1,349,224 
Series B Convertible Preferred Stock  (M)      323,000    207,051    809,569 
Series C Convertible Preferred Stock  (M)      571,329    188,315    736,312 
Series D Convertible Preferred Stock  (M)      139,075    35,569    139,075 
          1,523,403         3,034,180 
                      
OHSO Clean, Inc. (15)     Life Sciences               
Developing natural, hypoallergenic household cleaning products enabled by nanotechnology-enabled formulations of thyme oil                     
Participation Agreement with Montage Capital relating to the following assets:                     
Senior secured debt, 13.00%, maturing on 3/31/15  ( I )      575,464   $675,840    624,200 
Warrants for Series C Pref. Stock expiring on 3/30/22  ( I )      91,742    1,109,333    68,677 
          667,206         692,877 
Total Unaffiliated Private Placement Portfolio (cost: $29,344,862)                  $29,448,686 

 

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, 2013
(Unaudited)

 

   Method of  Primary  Shares/         
   Valuation (1)  Industry (2)  Cost   Principal   Value 
                   
Rights to Milestone Payments (Illiquid) (5) –
2.6% of net assets at value
                     
                      
Amgen, Inc. (7)(10)     Life Sciences               
Rights to Milestone Payments from                     
Acquisition of BioVex Group, Inc.  ( I )     $3,291,750   $3,291,750   $3,383,720 
                      
Laird Technologies, Inc. (7)(10)     Energy               
Rights to Milestone Payments from Merger &                     
Acquisition of Nextreme Thermal Solutions, Inc.  ( I )      0    0    0 
                      
Total Unaffiliated Rights to Milestone Payments (cost: $3,291,750)                  $3,383,720 
                      
Publicly Traded Portfolio (6) –
7.9% of net assets at value
                     
                      
Solazyme, Inc. (10)(16)     Energy               
Developing algal biodiesel, industrial chemicals and specialty ingredients using synthetic biology                     
Common Stock  (M)     $1,370,595    580,000   $6,797,600 
                      
Champions Oncology, Inc. (10)(17)     Life Sciences               
Developing its TumorGraftTM platform for personalized medicine and drug development                     
Common Stock  (M)      2,199,600    3,293,190    3,601,207 
Warrants for Common Stock expiring 1/29/18  ( I )      400    40,000    17,826 
          2,200,000         3,619,033 
                      
Total Unaffiliated Publicly Traded Portfolio (cost: $3,570,595)                  $10,416,633 
                      
Total Investments in Unaffiliated Companies (cost: $36,207,207)                  $43,249,039 

 

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, 2013

(Unaudited)

 

     Method of     Primary       Shares/     
     Valuation (1)     Industry (2)   Cost   Principal   Value 
                     
Investments in Non-Controlled Affiliated Companies (3) –
46.6% of net assets at value
               
                          
Private Placement Portfolio (Illiquid) (18) –
46.6% of net assets at value
                         
                          
ABSMaterials, Inc. (7)(9)        Energy                
Developing nano-structured absorbent materials for environmental remediation                         
Series A Convertible Preferred Stock   (M)        $435,000    390,000   $143,364 
Unsecured Convertible Bridge Note, 8%, acquired 10/1/12   (M)         211,967   $200,000    235,470 
              646,967         378,834 
                          
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    4,474,625 
Series B Convertible Preferred Stock   (M)         2,200,000    5,952,381    4,117,841 
Series C Convertible Preferred Stock   (M)         1,485,531    2,122,187    1,643,416 
Series D Convertible Preferred Stock   (M)         1,393,147    1,466,470    1,227,285 
Subordinated Convertible Bridge Note, 8%, acquired 1/17/13   (M)         696,375   $672,070    696,375 
              7,975,053         12,159,542 
                          
AgBiome, LLC (formerly AgInnovation, LLC) (7)(9)(10)(19)        Life Sciences                
Providing early stage research and discovery for agriculture and utilizing the crop microbiome to identify products that reduce risk and improve yield                         
Series A-1 Convertible Preferred Stock   (M)         2,000,000    2,000,000    2,500,000 
Series A-2 Convertible Preferred Stock   (M)         260,870    208,696    260,870 
              2,260,870         2,760,870 
Contour Energy Systems, Inc. (7)(9)(10)        Energy                
Developing batteries using nano-structured materials                         
Series A Convertible Preferred Stock   (M)         2,009,995    2,565,798    41,895 
Series B Convertible Preferred Stock   (M)         1,300,000    812,500    19,297 
Series C Convertible Preferred Stock   (M)         1,200,000    1,148,325    578,342 
              4,509,995         639,534 

 

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, 2013

(Unaudited)

 

   Method of   Primary      Shares/     
   Valuation (1)   Industry (2)  Cost   Principal   Value 
                        
Investments in Non-Controlled Affiliated Companies (3) –
46.6% of net assets at value (Cont.)
                       
                        
Private Placement Portfolio (Illiquid) (18) –
46.6% of net assets at value (Cont.)
                       
                        
                        
D-Wave Systems, Inc. (7)(9)(10)(20)       Electronics               
Developing high-performance quantum computing systems                       
Series 1 Class B Convertible Preferred Stock   (M)      $1,002,074    1,144,869   $1,414,829 
Series 1 Class C Convertible Preferred Stock   (M)       487,804    450,450    556,666 
Series 1 Class D Convertible Preferred Stock   (M)       748,473    855,131    1,056,771 
Series 1 Class E Convertible Preferred Stock   (M)       248,049    269,280    332,776 
Series 1 Class F Convertible Preferred Stock   (M)       238,323    258,721    319,727 
Series 2 Class D Convertible Preferred Stock   (M)       736,019    678,264    838,199 
Series 2 Class E Convertible Preferred Stock   (M)       659,493    513,900    635,078 
Series 2 Class F Convertible Preferred Stock   (M)       633,631    493,747    610,172 
Warrants for Common Stock expiring 6/30/15   ( I )       98,644    153,890    45,794 
            4,852,510         5,810,012 
                        
EchoPixel, Inc. (7)(9)(10)(21)       Life Sciences               
Developing algorithms and software to improve visualization of data for life science and healthcare applications                       
Series Seed Convertible Preferred Stock   (M)       750,000    2,516,778    750,000 
                        
Enumeral Biomedical Corp. (7)(9)(10)       Life Sciences               
Developing therapeutics and diagnostics through functional assaying of single cells                       
Series A Convertible Preferred Stock   (M)       1,026,832    957,038    1,478,450 
Series A-1 Convertible Preferred Stock   (M)       750,000    576,923    836,538 
Series A-2 Convertible Preferred Stock   (M)       750,000    517,241    750,000 
            2,526,832         3,064,988 
                        
HzO, Inc. (7)(9)       Electronics               
Developing novel industrial coatings that protect electronics against damage from liquids                       
Series A Convertible Preferred Stock   (M)       666,667    4,057,294    1,027,713 
Series B Convertible Preferred Stock   (M)       3,565,338    14,230,331    3,604,543 
            4,232,005         4,632,256 

 

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

 

12
 

 

 

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2013

(Unaudited)

 

 

   Method of   Primary      Shares/     
   Valuation (1)   Industry (2)  Cost   Principal   Value 
Investments in Non-Controlled Affiliated Companies (3) –
46.6% of net assets at value (Cont.)
                  
                        
Private Placement Portfolio (Illiquid) (18) –
46.6% of net assets at value (Cont.)
                       
                        
Kovio, Inc. (7)(9)       Electronics               
Developing semiconductor products using                       
printed electronics and thin-film technologies                       
Series A' Convertible Preferred Stock   (M)      $5,242,993    2,160,000   $89,830 
Series B' Convertible Preferred Stock   (M)       2,006,540    3,015,493    183,417 
Secured Subordinated Convertible Bridge Note, 7%,                       
acquired 6/7/13   (M)       50,230   $50,000    162,730 
            7,299,763         435,977 
                        
Metabolon, Inc. (7)(10)       Life Sciences               
Developing service and diagnostic products                       
through the use of a metabolomics, or                       
biochemical, profiling platform                       
Series B Convertible Preferred Stock   (M)       2,500,000    371,739    1,951,723 
Series B-1 Convertible Preferred Stock   (M)       706,214    148,696    780,689 
Series C Convertible Preferred Stock   (M)       1,000,000    1,000,000    1,794,510 
Series D Convertible Preferred Stock   (M)       1,499,999    835,882    1,499,999 
Warrants for Series B-1 Convertible Preferred                       
Stock expiring 3/25/15   ( I )       293,786    74,348    71,217 
            5,999,999         6,098,138 
                        
OpGen, Inc. (7)(10)       Life Sciences               
Developing tools for genomic sequence assembly and analysis                       
Series C Convertible Preferred Stock   (M)       3,260,000    23,623,188    407,500 
                        
Produced Water Absorbents, Inc. (7)(9)(10)       Energy               
Developing nano-structured absorbent materials                       
for environmental remediation of contaminated                       
water in the oil and gas industries                       
Series A Convertible Preferred Stock   (M)       1,000,000    1,000,000    132,738 
Series B Convertible Preferred Stock   (M)       648,000    2,592,000    765,262 
            1,648,000         898,000 
                        
Senova Systems, Inc. (7)(9)       Life Sciences               
Developing next-generation sensors to measure pH                       
Series B Convertible Preferred Stock   (M)       1,218,462    1,350,000    540,000 
Secured Convertible Bridge Note, 10%, acquired 4/24/13   (M)       81,863   $80,000    101,863 
Secured Convertible Bridge Note, 10%, acquired 6/20/13   (M)       113,978   $113,636    113,978 
Warrants for Series B Preferred Stock expiring 10/15/17   ( I )       131,538    164,423    65,753 
Warrants for Series B Preferred Stock expiring 4/24/18   ( I )       20,000    25,000    9,997 
            1,565,841         831,591 

 

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, 2013

(Unaudited)

 

 

   Method of  Primary      Shares/     
   Valuation (1)  Industry (2)  Cost   Principal   Value 
                   
Investments in Non-Controlled Affiliated Companies (3) –
46.6% of net assets at value (Cont.)
                     
                      
Private Placement Portfolio (Illiquid) (18) –
46.6% of net assets at value (Cont.)
                     
                      
SiOnyx, Inc. (7)(9)(10)     Electronics               
Developing silicon-based optoelectronic                     
products enabled by its proprietary Black Silicon                     
Series A Convertible Preferred Stock  (M)     $750,000    233,499   $160,367 
Series A-1 Convertible Preferred Stock  (M)      890,000    2,966,667    2,037,507 
Series A-2 Convertible Preferred Stock  (M)      2,445,000    4,207,537    2,889,736 
Series B-1 Convertible Preferred Stock  (M)      1,169,561    1,892,836    1,300,000 
Series C Convertible Preferred Stock  (M)      1,171,316    1,674,030    1,255,523 
Warrants for Series B-1 Convertible Preferred                     
Stock expiring 2/23/17  ( I )      130,439    247,350    50,110 
Warrants for Common Stock expiring 3/28/17  ( I )      84,207    418,507    32,096 
          6,640,523         7,725,339 
                      
Ultora, Inc. (7)(9)     Energy               
Developing energy-storage devices                     
enabled by carbon nanotubes                     
Series A Convertible Preferred Stock  (M)      886,830    886,830    886,830 
                      
Xradia, Inc. (7)(10)(22)     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    14,005,871 
                      
Total Non-Controlled Private Placement Portfolio (cost: $59,055,188)                  $61,485,282 
                      
Total Investments in Non-Controlled Affiliated Companies (cost: $59,055,188)                  $61,485,282 

 

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, 2013

(Unaudited)

 

   Method of  Primary      Shares/     
   Valuation (1)  Industry (2)  Cost   Principal   Value 
                   
Investments in Controlled Affiliated Companies (3) –
3.0% of net assets at value
                     
                      
Private Placement Portfolio (Illiquid) (23) –
3.0% of net assets at value
                     
                      
Ancora Pharmaceuticals Inc. (7)(9)     Life Sciences               
Developing synthetic carbohydrates for pharmaceutical applications                     
Common Stock  ( I )     $2,729,817    57,463   $0 
Series A' Convertible Preferred Stock  ( I )      4,855,627    4,855,627    1,321.993 
Senior Secured Debt, 12.00%, maturing on 12/11/13  ( I )      470,604   $500,000    583,554 
Secured Convertible Bridge Note, 8%, acquired 1/23/13  (M)      362,197   $350,000    406,265 
Secured Convertible Bridge Note, 8%, acquired 4/25/13  (M)      304,405   $300,000    341,537 
          8,722,650         2,653,349 
                      
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    0 
Secured Convertible Bridge Note, 12%, acquired 10/7/11  (M)      241,622   $200,000    241,622 
Secured Convertible Bridge Note, 12%, acquired 11/17/11  (M)      114,269   $95,652    114,269 
Secured Convertible Bridge Note, 12%, acquired 12/21/11  (M)      97,764   $82,609    97,764 
Secured Convertible Bridge Note, 12%, acquired 3/5/12  (M)      503,825   $434,784    503,825 
Secured Convertible Bridge Note, 12%, acquired 7/26/12  (M)      207,853   $186,955    207,853 
Secured Convertible Bridge Note, 20%, acquired 4/29/13  (M)      172,420   $166,667    172,420 
          6,433,555         1,337,753 
Total Controlled Private Placement Portfolio (cost: $15,156,205)             $3,991,102 
                      
Total Investments in Controlled Affiliated Companies (cost: $15,156,205)                  $3,991,102 
                      
Total Private Placement and Publicly Traded Portfolio (cost: $110,418,600)                  $108,725,423 

 

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, 2013

(Unaudited)

 

     Method of       Shares/     
     Valuation (1)   Cost   Principal   Value 
                 
U.S. Government Securities (24) –
10.6% of net assets at value
                    
                     
U.S. Treasury Bill — due date 07/18/13   (M)   $13,999,865   $14,000,000   $13,999,860 
                     
Total Investments in U.S. Government Securities (cost: $13,999,865)                 $13,999,860 
                     
Total Investments (cost: $124,418,465)                 $122,725,283 

 

     Method of   Number of     
     Valuation (1)   Contracts   Value 
             
Written Call Options (21) –
(0.06)% of net assets at value
               
                
Solazyme, Inc. — Strike Price $10.00, September 21, 2013   (M)    3,300   $(627,000)
Solazyme, Inc. — Strike Price $12.50, September 21, 2013   (M)    1,500    (99,000)
Solazyme, Inc. — Strike Price $15.00, September 21, 2013   (M)    1,000    (20,000)
                
Total Written Call Options (Premiums Received $478,676)            $(746,000)

 

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

 

16
 

 

 

 

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2013

(Unaudited)

 

Notes to Consolidated Schedule of Investments

 

(1)See "Footnote to Consolidated Schedule of Investments" on page 34 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 "Life Sciences" companies as those that address problems in life sciences-related industries, including biotechnology, agriculture, advanced materials and chemicals, healthcare, bioprocessing, water, industrial biotechnology, food, nutrition and energy.

 

(3)Investments in unaffiliated companies consist of investments in which we own less than five percent of the voting shares of the portfolio company. Investments in non-controlled affiliated companies consist of investments in which we own five percent or more, but less than 25 percent, of the voting shares of the portfolio company, or where we hold one or more seats on the portfolio company’s Board of Directors but do not control the company. Investments in controlled affiliated companies consist of investments in which we own 25 percent or more of the voting shares of the portfolio company or otherwise control the company.

 

(4)The aggregate cost for federal income tax purposes of investments in unaffiliated privately held companies is $29,344,862. The gross unrealized appreciation based on the tax cost for these securities is $5,817,055. The gross unrealized depreciation based on the tax cost for these securities is $5,713,231.

 

(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 $91,970. 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 $3,570,595. The gross unrealized appreciation based on the tax cost for these securities is $6,846,038. The gross unrealized depreciation based on the tax cost for these securities is $0.

 

(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. While the audited financial statements have been issued, there is a 30-day notice period before the warrants can be issued. The notice period expired on August 7, 2013. Therefore, the warrant remained contingent as of June 30, 2013.

 

(9)These investments are development-stage companies. A development-stage company is defined as a company that is devoting substantially all of its efforts to establishing a new business, and either it has not yet commenced its planned principal operations, or it has commenced such operations but has not realized significant revenue from them.

 

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

 

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

 

17
 

 

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2013

(Unaudited)

 

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

 

(12)With our investments in convertible bridge notes issued by Ensemble Therapeutics Corporation, we received warrants to purchase a number of shares of the class of stock sold in the next financing of Ensemble Therapeutics Corporation equal to $128,813 divided by the price per share of the class of stock sold in the next financing of Ensemble Therapeutics Corporation. The ability to exercise these warrants is, therefore, contingent on Ensemble Therapeutics Corporation completing successfully a subsequent round of financing. These warrants shall expire and no longer be exercisable on dates ranging from September 10, 2015, through June 24, 2020. The cost basis of these warrants is $152.59.

 

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

 

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

 

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

 

(16)A portion of this security is held in connection with written call option contracts: 580,000 shares, having a fair value of $6,675,000, have been pledged to brokers.

 

(17)As of June 30, 2013, we owned a total of 3,293,190 shares of Champions Oncology, Inc.; 626,523 of these shares are subject to legal restrictions on their sale. Our remaining 2,666,667 shares of common stock of Champions are not subject to legal restrictions on their sale.

 

(18)The aggregate cost for federal income tax purposes of investments in non-controlled affiliated privately held companies is $59,055,188. The gross unrealized appreciation based on the tax cost for these securities is $17,769,224. The gross unrealized depreciation based on the tax cost for these securities is $15,339,130.

 

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

 

(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)Initial investment was made in 2013.

 

(22)On July 12, 2013, Xradia was acquired by Carl Zeiss AG, and on July 19, 2013, we received an initial payment of $12,838,244 from this sale. Additional proceeds of $2,374,827 are held in escrow to be released in whole, or in part, in January and July of 2014. The amounts held in escrow would be reduced by any claims submitted during the escrow period. See "Note 13. Subsequent Events."

 

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

 

18
 

 

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2013

(Unaudited)

 

(23)The aggregate cost for federal income tax purposes of investments in controlled affiliated companies is $15,156,205. The gross unrealized appreciation based on the tax cost for these securities is $0. The gross unrealized depreciation based on the tax cost for these securities is $11,165,103.

 

(24)The aggregate cost for federal income tax purposes of our U.S. government securities is $13,999,865. The gross unrealized appreciation on the tax cost for these securities is $0. The gross unrealized depreciation on the tax cost of these securities is $5.

 

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

 

19
 

 

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2012

 

 

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

 

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

 

20
 

 

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2012

 

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

 

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

 

21
 

 

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2012

 

 

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

 

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

 

22
 

 

 

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2012

 

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

 

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

 

23
 

 

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2012

 

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

 

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

 

24
 

 

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2012

 

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

 

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

 

25
 

 

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2012

 

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

 

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

 

26
 

 

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2012

 

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

 

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

 

27
 

 

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2012

 

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

 

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

 

28
 

 

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2012

 

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

 

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

 

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

 

29
 

 

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2012

 

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

 

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

 

30
 

 

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2012

 

Notes to Consolidated Schedule of Investments

 

(1)See "Footnote to Consolidated Schedule of Investments" on page 34 for a description of the "Valuation Procedures."

 

(2)We classify "Energy" companies as those that seek to improve performance, productivity or efficiency, and to reduce environmental impact, waste, cost, energy consumption or raw materials using nanotechnology-enabled solutions. We classify "Electronics" companies as those that use nanotechnology to address problems in electronics-related industries, including semiconductors. In the fourth quarter of 2012, we renamed the industry classification "Healthcare" to "Life Sciences." We classify "Life Sciences" companies as those that address problems in life sciences-related industries, including biotechnology, agriculture, advanced materials and chemicals, healthcare, bioprocessing, water, industrial biotechnology, food, nutrition and energy.

 

(3)Investments in unaffiliated companies consist of investments in which we own less than five percent of the voting shares of the portfolio company. Investments in non-controlled affiliated companies consist of investments in which we own five percent or more, but less than 25 percent, of the voting shares of the portfolio company, or where we hold one or more seats on the portfolio company’s Board of Directors but do not control the company. Investments in controlled affiliated companies consist of investments in which we own 25 percent or more of the voting shares of the portfolio company or otherwise control the company.

 

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

 

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

 

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

 

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

 

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

 

(9)These investments are development-stage companies. A development-stage company is defined as a company that is devoting substantially all of its efforts to establishing a new business, and either it has not yet commenced its planned principal operations, or it has commenced such operations but has not realized significant revenue from them.

 

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

 

31
 

 

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2012

 

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

 

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

 

(12)With our investment in a convertible bridge note issued by Ensemble Therapeutics Corporation, we received a warrant to purchase a number of shares of the class of stock sold in the next financing of Ensemble Therapeutics Corporation equal to $149,540 divided by the price per share of the class of stock sold in the next financing of Ensemble Therapeutics Corporation. The ability to exercise this warrant is, therefore, contingent on Ensemble Therapeutics Corporation completing successfully a subsequent round of financing. This warrant shall expire and no longer be exercisable on September 10, 2015. The cost basis of this warrant is $89.86.

 

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

 

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

 

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

 

(16)Initial investment was made during 2012.

 

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

 

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

 

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

 

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

 

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

 

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

 

32
 

 

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2012

 

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

 

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

 

(24)The aggregate cost for federal income tax purposes of investments in non-controlled affiliated publicly traded companies is $2,000,000. The gross unrealized appreciation based on the tax cost for these securities is $0. The gross unrealized depreciation based on the tax cost for these securities is $651,773.

 

(25)The aggregate cost for federal income tax purposes of investments in controlled affiliated companies is $14,233,804. The gross unrealized appreciation based on the tax cost for these securities is $0. The gross unrealized depreciation based on the tax cost for these securities is $11,144,988.

 

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

 

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

 

33
 

 

HARRIS & HARRIS GROUP, INC.

FOOTNOTE TO CONSOLIDATED SCHEDULE OF INVESTMENTS

 

VALUATION PROCEDURES

 

I.Determination of Net Asset Value

 

The 1940 Act requires periodic valuation of each investment in the portfolio of the Company to determine its net asset value. Under the 1940 Act, unrestricted securities with readily available market quotations are to be valued at the current market value; all other assets must be valued at "fair value" as determined in good faith by or under the direction of the Board of Directors.

 

The Board of Directors is responsible for (1) determining overall valuation guidelines and (2) ensuring that the investments of the Company are valued within the prescribed guidelines.

 

The Valuation Committee, comprised of all of the independent board members, is responsible for determining the valuation of the Company’s assets within the guidelines established by the Board of Directors. The Valuation Committee receives information and recommendations from management. An independent valuation firm also reviews select portfolio company valuations. The independent valuation firm does not provide proposed valuations.

 

The values assigned to these investments are based on available information and do not necessarily represent amounts that might ultimately be realized when that investment is sold, as such amounts depend on future circumstances and cannot reasonably be determined until the individual investments are actually liquidated or become readily marketable.

 

II.Approaches to Determining Fair Value

 

GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). In effect, GAAP applies fair value terminology to all valuations whereas the 1940 Act applies market value terminology to readily marketable assets and fair value terminology to other assets.

 

The main approaches to measuring fair value utilized are the market approach and the income approach.

 

·Market Approach (M): The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. For example, the market approach often uses market multiples derived from a set of comparables. Multiples might lie in ranges with a different multiple for each comparable. The selection of where within the range each appropriate multiple falls requires judgment considering factors specific to the measurement (qualitative and quantitative).

 

·Income Approach (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.

 

34
 

 

 

GAAP classifies the inputs used to measure fair value by these approaches into the following hierarchy:

 

·Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities.

 

·Level 2: Quoted prices in active markets for similar assets or liabilities, or quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Level 2 inputs are in those markets for which there are few transactions, the prices are not current, little public information exists or instances where prices vary substantially over time or among brokered market makers; and

 

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

 

Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement and are not necessarily an indication of risks associated with the investment.

 

III.Investment Categories

 

The Company’s investments can be classified into five broad categories for valuation purposes:

 

·Equity-related securities;

 

·Long-term fixed-income securities;

 

·Short-term fixed-income securities;

 

·Investments in intellectual property, patents, research and development in technology or product development; and

 

·All other securities.

 

35
 

 

The Company applies the methods for determining fair value discussed above to the valuation of investments in each of these five broad categories as follows:

 

A.EQUITY-RELATED SECURITIES

 

Equity-related securities, including 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.

 

36
 

  

C.SHORT-TERM FIXED-INCOME SECURITIES

 

Short-term fixed-income securities are valued in the same manner as long-term fixed-income securities until the remaining maturity is 60 days or less, after which time such securities may be valued at amortized cost if there is no concern over payment at maturity.

 

D.INVESTMENTS IN INTELLECTUAL PROPERTY, PATENTS, RESEARCH AND DEVELOPMENT IN TECHNOLOGY OR PRODUCT DEVELOPMENT

 

Such investments are fair valued using the market approach. The Company may consider factors specific to these types of investments when using the market approach including:

 

·The cost of the Company’s investment;
·Investments in the same or substantially similar intellectual property or patents, research and development in technology or product development, or offers by responsible third parties;
·The results of research and development;
·Product development and milestone progress;
·Commercial prospects;
·Term of patent;
·Projected markets; and
·Other subjective factors.

 

E.ALL OTHER SECURITIES

 

All other securities are reported at fair value as determined in good faith by the Valuation Committee using the approaches for determining valuation as described above.

 

For all other securities, the reported values shall reflect the Valuation Committee's judgment of fair values as of the valuation date using the outlined basic approaches of valuation discussed in Section III. They do not necessarily represent an amount of money that would be realized if we had to sell such assets in an immediate liquidation. Thus, valuations as of any particular date are not necessarily indicative of amounts that we may ultimately realize as a result of future sales or other dispositions of investments we hold.

 

37
 

  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1. THE COMPANY

 

Harris & Harris Group, Inc. (the "Company," "us," "our" and "we"), is a venture capital company operating as a business development company ("BDC") under the Investment Company Act of 1940 (the "1940 Act") that specializes in making investments in companies commercializing and integrating products enabled by nanotechnology and microsystems. We operate as an internally managed investment company whereby our officers and employees, under the general supervision of our Board of Directors, conduct our operations.

 

H&H Ventures Management, Inc.SM ("Ventures"), formerly Harris & Harris Enterprises, Inc.SM, is a 100 percent wholly owned subsidiary of the Company. Ventures is taxed under Subchapter C (a "C Corporation") of the Internal Revenue Code of 1986 (the "Code"). Harris Partners I, L.P, is a limited partnership and, from time to time, may be used to hold certain interests in portfolio companies. The partners of Harris Partners I, L.P., are Ventures (sole general partner) and the Company (sole limited partner). Ventures pays taxes on income generated by its operations as well as on any non-passive investment income generated by Harris Partners I, L.P. For the period ended June 30, 2013, there was no non-passive investment income generated by Harris Partners I, L.P. Ventures, as the sole general partner, consolidates Harris Partners I, L.P. The Company consolidates its wholly owned subsidiary, Ventures, for financial reporting purposes.

 

NOTE 2. INTERIM FINANCIAL STATEMENTS

 

Our interim financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X and in conformity with accounting principles generally accepted in the United States of America ("GAAP") applicable to interim financial information. Accordingly, they do not include all information and disclosures necessary for a fair statement of our financial position, results of operations and cash flows in conformity with GAAP. In the opinion of management, these financial statements reflect all adjustments, consisting of valuation adjustments and normal recurring accruals, necessary for a fair statement of our financial position, results of operations and cash flows for such periods. The results of operations for any interim period are not necessarily indicative of the results for the full year. These financial statements should be read in conjunction with the financial statements and notes thereto contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012.

 

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NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The following is a summary of significant accounting policies followed in the preparation of the consolidated financial statements:

  

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

 

Use of Estimates. The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and contingent assets and liabilities and the reported amounts of revenues and expenses. Actual results could differ from these estimates, and the differences could be material. The most significant estimates relate to the fair valuations of our investments.

 

Portfolio Investment Valuations. Investments are stated at "value" as defined in the 1940 Act and in the applicable regulations of the Securities and Exchange Commission ("SEC") and in accordance with GAAP. Value, as defined in Section 2(a)(41) of the 1940 Act, is (i) the market price for those securities for which a market quotation is readily available and (ii) the fair value as determined in good faith by, or under the direction of, the Board of Directors for all other assets. (See "Valuation Procedures" in the "Footnote to Consolidated Schedule of Investments.") As of June 30, 2013, our financial statements include privately held investments and the restricted portion of our publicly traded venture capital investment, Champions Oncology, Inc., collectively fair valued at $98,994,489. The fair values of our privately held and restricted portion and warrants of our 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.

 

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

 

Restricted Funds. At June 30, 2013, and December 31, 2012, we held $10,025 and $10,015, respectively, in "Restricted funds," which were held in security deposits for sublessors.

 

Unaffiliated Rights to Milestone Payments. At June 30, 2013, and December 31, 2012, the outstanding milestone payments from Amgen, Inc.’s acquisition of Biovex Group, Inc., were valued at $3,383,720 and $3,400,734, respectively. The milestone payments are derivatives and valued using the probability-adjusted, present value of proceeds from future payments that would be due upon successful completion of certain regulatory and sales milestones. If all remaining milestones are met, we would receive $9,526,393. There can be no assurance as to how much of this amount we will ultimately realize or when it will be realized, if at all. At June 30, 2013, the outstanding milestone payments from Laird Technologies, Inc.’s acquisition of Nextreme Thermal Solutions, Inc., were valued at $0.

 

Receivable from Sales of Investments. At June 30, 2013, we had a receivable totaling $3,783,586 relating to unsettled trades from the sale of Solazyme shares. On June 26 and 27, 2013, we sold a total of 363,694 shares of Solazyme for proceeds of $3,783,586. These transactions settled on July 1 and 2, 2013, at which time we received the cash for these sales.

 

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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 $264,135 and $288,122 at June 30, 2013, and December 31, 2012, respectively, representing cost, less accumulated depreciation. Depreciation is provided using the straight-line method over the estimated useful lives of the premises and equipment. We estimate the useful lives to be five to ten years for furniture and fixtures, three years for computer equipment, and ten years for leasehold improvements.

 

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

 

Interest Income Recognition. Interest income, 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. Securities are deemed to be non-income producing if, on their last interest or dividend date, no cash was paid or no cash or in-kind dividends were declared. These write-offs are recorded as a debit to interest income. During the three months and six months ended June 30, 2013, the Company earned $80,608 and $175,817, respectively, in interest on U.S. government securities, senior secured debt, participation agreements, subordinated secured debt, non-convertible promissory notes and interest-bearing accounts. During the three months and six months ended June 30, 2013, the Company recorded $79,355 and $139,236, 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 the proceeds or offset against the amount paid on the transaction to determine the realized gain or loss. At June 30, 2013, the Company had 580,000 shares of Solazyme, Inc., covered by call option contracts. In the event these contracts are exercised, the Company would be required to deliver those shares to the counterparty.

 

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

 

Stock-Based Compensation. The Company has a stock-based employee compensation plan. The Company accounts for the Amended and Restated Harris & Harris Group, Inc. 2012 Equity Incentive Plan (the "Stock Plan") by determining the fair value of all share-based payments to employees, including the fair value of grants of employee stock options and restricted stock awards, and records these amounts as an expense in the Consolidated Statements of Operations over the vesting period with a corresponding increase to our additional paid-in capital. At June 30, 2013, and December 31, 2012, the increase to our operating expenses was offset by the increase to our additional paid-in capital, resulting in no net impact to our net asset value. Additionally, the Company does not record the potential tax benefits associated with the expensing of stock options or restricted stock because the Company currently intends to qualify as a regulated investment company ("RIC") under Subchapter M of the Code, and the deduction attributable to such expensing, therefore, is unlikely to provide any additional tax savings. The amount of non-cash, stock-based compensation expense recognized in the Consolidated Statements of Operations is based on the fair value of the awards the Company expects to vest, recognized over the vesting period on a straight-line basis for each award, and adjusted for actual awards vested and pre-vesting forfeitures. The forfeiture rate is estimated at the time of grant and revised, if necessary, in subsequent periods if the actual forfeiture rate differs from the estimated rate and is accounted for in the current period and prospectively. See "Note 9. Stock-Based Compensation" for further discussion.

 

Rent expense. Our lease at 1450 Broadway, New York, New York, commenced on January 21, 2010. The lease expires on December 31, 2019. The base rent is $36 per square foot with a 2.5 percent increase per year over the 10 years of the lease, subject to a full abatement of rent for four months and a rent credit for six months throughout the lease term. Certain leasehold improvements were also paid for on our behalf by the landlord, the cost of which is accounted for as property and equipment and "Deferred rent" in the accompanying Consolidated Statements of Assets and Liabilities. These leasehold improvements are depreciated over the lease term. We also lease office space in California and North Carolina. We apply these rent abatements, credits, escalations and landlord payments on a straight-line basis in the determination of rent expense over the lease term.

 

Realized Gain or Loss and Unrealized Appreciation or Depreciation of Portfolio Investments. Realized gain or loss is recognized when an investment is disposed of and is computed as the difference between the Company's cost basis in the investment at the disposition date and the net proceeds received from such disposition. Realized gains and losses on investment transactions are determined by specific identification. Unrealized appreciation or depreciation is computed as the difference between the fair value of the investment and the cost basis of such investment.

 

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Income Taxes. As we intend to qualify as a RIC under Subchapter M of the Code, the Company does not accrue for income taxes. The Company has capital loss carryforwards that can be used to offset net realized capital gains. The Company recognizes interest and penalties in income tax expense.

 

We pay federal, state and local income taxes on behalf of our wholly owned subsidiary, Ventures, which is a C corporation. See "Note 10. Income Taxes."

 

Foreign Currency Translation. The accounting records of the Company are maintained in U.S. dollars. All assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the rate of exchange of such currencies against U.S. dollars on the date of valuation. For the six months ended June 30, 2013, included in the net decrease in unrealized depreciation on investments was an unrealized loss of $310,047 resulting from foreign currency translation.

 

Securities Transactions. Securities transactions are accounted for on the date the transaction for the purchase or sale of the securities is entered into by the Company (i.e., trade date).

 

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

 

NOTE 4. BUSINESS RISKS AND UNCERTAINTIES

 

We invest primarily in privately held companies, the securities of which are inherently illiquid. We also have investments in small publicly traded companies. Although these companies are publicly traded, their stock may not trade at high volumes and prices can be volatile, which may restrict our ability to sell our positions. These privately held and publicly traded businesses tend to not have attained profitability, and many of these businesses also lack management depth and have limited or no history of operations. Because of the speculative nature of our investments and the lack of a liquid market for and restrictions on transfers of privately held investments 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, 2013, our largest 10 investments by value accounted for approximately 72 percent of the value of our equity-focused venture capital portfolio. Our largest three investments, by value, Xradia, Inc., Adesto Technologies Corporation and SiOnyx, Inc., accounted for approximately 14 percent, 12 percent and 7 percent, respectively, of our equity-focused venture capital portfolio at June 30, 2013. Xradia, Adesto Technologies and SiOnyx are privately held portfolio companies. On July 12, 2013, Xradia was acquired by Carl Zeiss AG. See "Note 13. Subsequent Events."

 

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Approximately 91 percent of the portion of our equity-focused venture capital portfolio that was fair valued was comprised of securities of 26 privately held companies and the restricted portion of our publicly traded venture capital investment in Champions Oncology, Inc. Because there is typically no public or readily ascertainable market for our interests in the small privately held companies in which we invest, the valuation of the securities in that portion of our portfolio is determined in good faith by our Valuation Committee, which is comprised of all of the independent members of our Board of Directors. The values are determined in accordance with our Valuation Procedures and are subject to significant estimates and judgments. The fair value of the securities in our portfolio may differ significantly from the values that would be placed on these securities if a ready market for the securities existed. Any changes in valuation are recorded in our Consolidated Statements of Operations as "Net (decrease) increase in unrealized appreciation on investments." Changes in valuation of any of our investments in privately held companies from one period to another may be significant.

 

NOTE 5. DEBT

 

On 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, N.A. 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.

 

At June 30, 2013, and December 31, 2012, the Company had no outstanding debt. At June 30, 2013, and December 31, 2012, $0 was held in a collateral account at TD Bank, N.A. as security for the loan. The weighted average annual interest rate for the six months ended June 30, 2013, was zero percent, exclusive of amortization of closing fees and other expenses related to establishing the credit facility. The remaining capacity under the credit facility was $10,000,000 at June 30, 2013. At June 30, 2013, the Company was in compliance with all financial covenants required by the credit facility.

 

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NOTE 6. FAIR VALUE OF INVESTMENTS

 

At June 30, 2013, our financial assets were categorized as follows in the fair value hierarchy:

 

   Fair Value Measurement at Reporting Date Using: 
       Unadjusted Quoted         
       Prices in Active Markets   Significant Other   Significant 
       for Identical Assets   Observable Inputs   Unobservable Inputs 
Description  June 30, 2013   (Level 1)   (Level 2)   (Level 3) 
U.S. Government Securities  $13,999,860   $13,999,860   $0   $0 
                     
Privately Held Portfolio Companies:                    
Preferred Stock  $81,963,148   $0   $0   $81,963,148 
Bridge Notes  $6,805,833   $0   $0   $6,805,833 
Warrants  $778,543   $0   $0   $778,543 
Rights to Milestone Payments  $3,383,720   $0   $0   $3,383,720 
Common Stock  $108,667   $0   $0   $108,667 
Senior Secured Debt  $1,445,254   $0   $0   $1,445,254 
Participation Agreement  $808,113   $0   $0   $808,113 
Subordinated  Secured  Debt  $0   $0   $0   $0 
Non-Convertible Promissory Note  $3,033,338   $0   $0   $3,033,338 
                     
Publicly Traded Portfolio Companies:                    
Common Stock  $10,398,807   $9,730,934   $0   $ 667,873 
                    
Total Investments  $122,725,283   $23,730,794   $0   $98,994,489 
                     
Liabilities:                    
Written Call Options  $746,000   $746,000   $0   $0 
                     
Total Liabilities  $746,000   $746,000   $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, 2013
   Valuation
Techniques(s)
  Unobservable Input  Range (Weighted
Average(1))
 
                 
Preferred Stock  $81,963,148   Income Approach
Market Approach
Probability of Achieving Milestones
Private Offering Price
Non-Performance Risk
Probability of Exit Outcomes
   

25% - 100% (N/A)

$0.14 - $4.00 ($1.31)

0% - 100% (8%)

0% - 100% (50%)

 
                 
Bridge Notes   6,805,833   Market Approach  Private Offering Price
Non-Performance Risk
   

$1.00 ($1.00)

0% (0%)

 
                 
Common Stock   108,667   Market Approach  Private Offering Price
Non-Performance Risk
   

$9.98 - $47.51 ($11.06)

0% (0%)

 
                 
Warrants   778,543   Black-Sholes-Merton
Model
  Stock Price
Volatility
Expected Term
   

$0.16 - $2.45 ($0.96)

10% - 107% (105%)

0.50 - 9.78 Years (3.42)

 
                 
Rights to Milestone
Payments
   3,383,720   Probability Weighted
Discounted Cash Flow
  Probability of Achieving Independent Milestones
Probability of Achieving Dependent Milestones
   

0% - 75% (N/A)

0.07% - 28.125% (N/A)

 
                 
Participation
Agreements
   808,113   Income Approach  Warrant Adjusted Effective Yield
Effective Yield
Non-Performance Risk
Participation Payment Risk
   

21.5% (21.5%)

21.5% (21.5%)

0% (0%)

0% (0%)

 
                 
Senior Secured Debt   1,445,254   Income Approach  Effective Yield
Non-Performance Risk
   

15.8% - 21.9% (18%)

0% (0%)

 
                 
Non-Convertible
Promissory Note
   3,033,338   Income Approach  Probability of Exit Outcomes
Private Offering Price
Non-Performance Risk
   

25% - 75% (50%)

$3.00 ($3.00)

50% (50%)

 
                 
Restricted
OTC Traded
Common Stock
  $667,873   Market Approach  Illiquidity Discount
Non-Performance Risk
   

3.1% (3.1%)

0% (0%)

 
                 
 Total  $98,994,489            

 

(1) Weighted average based on fair value at June 30, 2013.

 

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 either a market or income 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. Certain securities are valued using the present value of future cash flows. We define non-performance risk 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.  We assess non-performance risk for each private portfolio company quarterly. Our 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."

 

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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 are also entitled to future milestone payments from Laird Technologies Inc.'s acquisition of our former portfolio company, Nextreme Thermal Solutions, Inc. 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.

 

Participation Agreements and Senior Secured Debt

 

We invest in venture debt investments through participation agreements 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, 2013. 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.

 

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OTC Traded Common Stock

 

Publicly traded common stock that is restricted is valued using internal models with inputs that are not market observable. Common inputs include the price per share as of the balance sheet date and illiquidity discounts for restricted shares.

 

The following chart shows the components of change in the financial assets categorized as Level 3 for the three months ended June 30, 2013.

 

  

Beginning

Balance

4/1/2013

  

Total

Realized

Gains

(Losses)

Included in

Changes in

Net Assets

   Transfers  

Total

Unrealized

(Depreciation)

Appreciation

Included in

Changes in

Net Assets

  

Investments in

Portfolio

Companies,

Interest on

Bridge Notes,

and

Amortization

of Loan

Fees, Net

   Disposals  

Ending

Balance

6/30/2013

  

Amount of Total

(Depreciation)

Appreciation 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  $79,279,756   $0   $352,8381  $(1,505,819)  $3,836,373   $0   $81,963,148   $(1,505,819)
                                         
Bridge Notes   5,213,314    0    (352,838)1   1,129,927    815,430    0    6,805,833    1,129,927 
                                         
Common Stock   108,667    0    0    0    0    0    108,667    0 
                                         
Warrants   544,844    0    0    213,699    20,000    0    778,543    213,699 
                                         
Rights to Milestone Payments   3,404,812    0    0    (21,092)   0    0    3,383,720    (21,092)
                                         
Participation Agreements   1,146,618    90,255    0    (78,070)   1,427    (352,117)   808,113    5,900 
                                         
Subordinated  Secured Debt   129,500    15,058    0    (19,558)   0    (125,000)   0    0 
                                         
Senior Secured Debt   1,388,150    0    0    117,299    13,710    (73,905)   1,445,254    117,299 
                                         
Non-Convertible Promissory Note   3,033,338    0    0    0    0    0    3,033,338    0 
                                         
Publicly Traded Common Stock   1,551,880    0    (1,348,227)   464,220    0    0    667,873    464,220 
                                         
Total  $95,800,879   $105,313   $(1,348,227)  $300,606   $4,686,940   $(551,022)  $98,994,489   $404,134 

 

1Transfers among asset classes are owing to conversions at financing events. These do not represent transfers in or out of Level 3.

 

We elected to use the beginning of period values to recognize transfers in and out of Level 3 investments. For the three months ended June 30, 2013, there were transfers out of Level 3 totaling $1,348,227. Our unrestricted shares of Champions Oncology, Inc., transferred from a Level 3 investment to a Level 1 investment owing to the market for the shares becoming active with increased and sustained trading volume.

 

48
 

 

The following chart shows the components of change in the financial assets categorized as Level 3 for the six months ended June 30, 2013.

 

  

Beginning

Balance

1/1/2013

  

Total

Realized

Gains

(Losses)

Included in

Changes in

Net Assets

   Transfers  

Total

Unrealized

(Depreciation)

Appreciation

Included in

Changes in

Net Assets

  

Investments

in Portfolio

Companies,

Interest on

Bridge

Notes, and

Amortization

of Loan

Fees, Net

   Disposals  

Ending

Balance

6/30/2013

  

Amount of Total

(Depreciation)

Appreciation 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  $78,615,582   $0   $425,4481  $(1,405,355)  $4,327,473   $0   $81,963,148   $(1,405,355)
                                         
Bridge Notes   4,152,634    0    (430,803)1   734,086    2,349,916    0    6,805,833    734,086 
                                         
Common Stock   108,667    (4,384,762)   0    4,384,762    0    0    108,667    0 
                                         
Warrants   586,320    0    5,3551   166,468    20,400    0    778,543    166,468 
                                         
Rights to Milestone Payments   3,400,734    0    0    (17,014)   0    0    3,383,720    (17,014)
                                         
Participation Agreements   1,138,148    90,255    0    (40,347)   3,224    (383,167)   808,113    22,356 
                                         
Subordinated  Secured Debt   120,410    15,058    0    (10,836)   368    (125,000)   0    0 
                                         
Senior Secured Debt   1,075,870    0    0    115,117    373,873    (119,606)   1,445,254    115,117 
                                         
Non-Convertible Promissory Note   3,033,338    0    0    0    0    0    3,033,338    0 
                                         
Publicly Traded Common Stock   1,348,227    0    (1,348,227)   468,273    199,600    0    667,873    468,273 
                                         
Total  $93,579,930   $(4,279,449)  $(1,348,227)  $4,395,154   $7,274,854   $(627,773)  $98,994,489   $83,931 

 

1Transfers among asset classes are owing to conversions at financing events. These do not represent transfers in or out of Level 3.

 

For the six months ended June 30, 2013, there were transfers out of Level 3 totaling $1,348,227. Our unrestricted shares of Champions Oncology, Inc., transferred from a Level 3 investment to a Level 1 investment owing to the market for the shares becoming active with increased and sustained trading volume.

 

49
 

 

At December 31, 2012, our financial assets were categorized as follows in the fair value hierarchy:

 

   Fair Value Measurement at Reporting Date Using: 
     
Description  December 31, 2012   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  $13,998,880   $13,998,880   $0   $0 
                     
Privately Held Portfolio Companies:                    
Preferred Stock  $78,615,582   $0   $0   $78,615,582 
Bridge Notes  $4,152,634   $0   $0   $4,152,634 
Warrants  $586,320   $0   $0   $586,320 
Rights to Milestone Payments  $3,400,734   $0   $0   $3,400,734 
Common Stock  $108,667   $0   $0   $108,667 
Senior Secured Debt  $1,075,870   $0   $0   $1,075,870 
Participation Agreement  $1,138,148   $0   $0   $1,138,148 
Subordinated Secured Debt  $120,410   $0   $0   $120,410 
Non-Convertible Promissory Note  $3,033,338   $0   $0   $3,033,338 
                     
Publicly Traded Portfolio Companies:                    
Common Stock  $15,770,488   $14,422,261   $0   $1,348,227 
                     
Total Investments  $122,001,071   $28,421,141   $0   $93,579,930 
                     
Liabilities:                    
Written Call Options  $42,500   $37,500   $5,000   $0 
                     
Total  $42,500   $37,500   $5,000   $0 

 

At December 31, 2012, certain written call option contracts were classified as Level 2 investments because there was no active market for the options as of that date. These options were valued using a midpoint pricing convention.

 

50
 

 

The following chart shows the components of change in the financial assets categorized as Level 3 for the twelve months ended December 31, 2012.

 

  

Beginning

Balance

1/1/2012

  

Total

Realized

Gains

(Losses)

Included in

Changes in

Net Assets

   Transfers  

Total

Unrealized

(Depreciation)

Appreciation

Included in

Changes in

Net Assets

  

Investments in

Portfolio

Companies,

Interest on

Bridge Notes,

and

Amortization

of Loan

Fees, Net

   Disposals  

Ending

Balance

12/31/2012

  

Amount of Total

(Depreciation)

Appreciation 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   $1,091,6771  $(4,903,413)  $13,594,129   $0   $78,615,582   $(4,903,413)
                                         
Bridge Notes   4,007,509    0    (2,727,754)1   1,310,272    1,562,607    0    4,152,634    1,310,272 
                                         
Common Stock   0    0    1,633,2961   (1,524,629)   0    0    108,667    (1,524,629)
                                         
Warrants   728,787    0    2,7811   (396,396)   251,148    0    586,320    (396,396)
                                         
Rights to Milestone Payments   3,362,791    0    0    37,943    0    0    3,400,734    37,943 
                                         
Participation Agreements   560,200    0    0    24,790    714,157    (160,999)   1,138,148    24,790 
                                         
Subordinated  Secured Debt   121,880    0    0    (1,103)   (367)   0    120,410    (1,103)
                                         
Senior Secured Debt   942,695    0    0    (13,663)   609,267    (462,429)   1,075,870    (13,663)
                                         
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    (625,107)   0    0    1,348,227    (625,107)
                                         
Total  $83,563,723   $0   $0   $(6,091,306)  $16,730,941   $(623,428)  $93,579,930   $(6,091,306)

 

1Transfers among asset classes are owing to conversions at financing events. These do not represent transfers in or out of Level 3.

 

For the year ended December 31, 2012, there were no transfers out of Level 3.

 

The following chart shows the components of change in the financial assets categorized as Level 3 for the three months ended June 30, 2012.

 

51
 

 

  

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   $352,0361  $3,988,360   $2,258,821   $0   $79,123,640   $3,988,360 
                                         
Bridge Notes   4,345,180    0    (352,036)1   (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 

 

1Transfers among asset classes are owing to conversions at financing events. These do not represent transfers in or out of Level 3.

 

There were no transfers in or out of Level 3 during the three months ended June 30, 2012.

 

52
 

 

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   $905,3331  $4,659,980   $4,725,138   $0   $79,123,640   $4,659,980 
                                         
Bridge Notes   4,007,509    0    (905,333)1   (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 

 

1Transfers among asset classes are owing to conversions at financing events. These do not represent transfers in or out of Level 3.

 

There were no transfers in or out of Level 3 during the six months ended June 30, 2012.

 

NOTE 7. DERIVATIVES

 

The Company has written covered call options on its holdings of one of its publicly traded portfolio companies in exchange for the receipt of a premium. The option provides the holder the right, but not the obligation, to purchase the shares on which the option is held at a specified price over a specified future period. The call options were sold at a strike price above the market price on the date of the sale allowing the Company to receive potential appreciation in addition to the premium.

 

53
 

 

Transactions in written call options during the six months ended June 30, 2013, were as follows:

 

   Number of
Contracts
   Premium 
Call options outstanding at December 31, 2012   2,000   $50,000 
Call options written   15,321    888,675 
Call options expired   (1,565)   (39,065)
Call options terminated in closing transactions   (9,956)   (420,934)
Call options outstanding at June 30, 2013   5,800   $478,676 

 

We have also purchased put options as a method of limiting the downside risk that the price per share of this company may decrease substantially from current levels. A put option gives its holder the right to sell a specified number of shares of a specific security at a specific price (known as the exercise strike price) by a certain date.

 

Transactions in put options during the six months ended June 30, 2013, were as follows:

 

   Number of
Contracts
   Premium 
Put options outstanding at December 31, 2012   0   $0 
Put options purchased   (2,013)   (65,354)
Put options expired   2,013    65,354 
Put options terminated in closing transactions   0    0 
Put options outstanding at June 30, 2013   0   $0 

 

At June 30, 2013, and December 31, 2012, we had rights to milestone payments from Amgen, Inc.’s acquisition of our former portfolio company, BioVex. These milestone payments were fair valued at $3,383,720 and $3,400,734, respectively, and are contingent upon certain milestones being achieved in the future. As of June 30, 2013, we also had rights to milestone payments from Laird Technologies, Inc.'s acquisition of our former portfolio company, Nextreme Thermal Solutions, Inc. These milestone payments were fair valued at $0 as of June 30, 2013.

 

The following tables present the value of derivatives held at June 30, 2013, and the effect of derivatives held during the three months ended June 30, 2013, along with the respective location in the financial statements.

 

    Assets   Liabilities  
Derivatives   Location   Fair Value     Location     Fair Value  
                       
Equity Contracts               Written call options payable     $ 746,000  
                             
Amgen, Inc. Rights to Milestone Payments from Acquisition of BioVex Group, Inc.   Investments   $ 3,383,720            
                             
Laird Technologies, Inc. Rights to Milestone Payments from Acquisition of Nextreme Thermal Solutions, Inc.   Investments   $ 0            

 

54
 

 

Statement of Operations

 

Derivatives  Location 

Realized

(Loss)/Gain

  

Change in unrealized

(Depreciation)/

Appreciation

 
            
Equity Contracts  Net Realized and Unrealized (Loss) Gain  $(198,971)  $(274,824)
              
Amgen, Inc. Rights to Milestone Payments from Acquisition of BioVex Group, Inc.  Net Realized and Unrealized (Loss) Gain  $0   $(17,014)
              
Laird Technologies, Inc. Rights to Milestone Payments from Acquisition of Nextreme Thermal Solutions, Inc.  Net Realized and Unrealized (Loss) Gain  $0   $0 

 

NOTE 8. EMPLOYEE BENEFITS

 

We administer a plan to provide medical and dental insurance for retirees and their spouses who, at the time of their retirement, have 10 years of service with us and have attained 50 years of age or have attained 45 years of age and have 15 years of service with us. On March 7, 2013, the Board of Directors amended this Medical Benefit Retirement Plan. The amendment limits the medical benefit to $10,000 per year for a period of ten years. The amendment does not affect benefits accrued by former employees or one current employee who is grandfathered under the former terms of the plan.

 

Our accumulated postretirement benefit obligation was remeasured as of the plan amendment date, which resulted in a $1,101,338 decrease in our liability. A deferred gain of $1,101,338 owing to this amendment was included in "Accumulated other comprehensive income." This amount will be amortized over a service period of 5.27 years. During the three months and six months ended June 30, 2013, a total of $43,538 and $87,076 was amortized and included as a reduction of "Salaries, benefits and stock-based compensation" on our Consolidated Statements of Operations.

 

NOTE 9. STOCK-BASED COMPENSATION

 

The Company maintains the Stock Plan, which provides for the grant of equity-based awards of stock options to our officers and employees and restricted stock to our officers, employees and non-employee directors subject to compliance with the 1940 Act and an exemptive order granted by the SEC permitting us to award shares of restricted stock on April 3, 2012 (the "Exemptive Order").

 

Under the Stock Plan, a maximum of 20 percent (6,200,120 shares) of our total shares of common stock issued and outstanding as of the 2012 Annual Meeting date, calculated on a fully diluted basis (31,000,601 shares), are available for awards under the Stock Plan. Under the Stock Plan, no more than 50 percent of the shares of stock reserved for the grant of the awards under the Stock Plan (up to an aggregate of 3,100,060 shares) may be restricted stock awards at any time during the term of the Stock Plan. If any shares of restricted stock are awarded, such awards will reduce on a percentage basis the total number of shares of stock for which options may be awarded. No more than 1,000,000 shares of our common stock may be made subject to awards under the Stock Plan to any individual in any year. Although the Stock Plan permits us to continue to grant stock options, our Board of Directors currently plans to discontinue further grants of stock options.

 

55
 

 

The Stock Plan will expire on June 7, 2022. The expiration of the Stock Plan will not by itself adversely affect the rights of plan participants under awards that are outstanding at the time the Stock Plan expires. Our Board of Directors may terminate, modify or suspend the plan at any time, provided that no modification of the plan will be effective unless and until any required shareholder approval has been obtained. The Board of Directors may terminate, modify or amend any outstanding award under the Stock Plan at any time, provided that in such event, the award holder may exercise any vested options prior to such termination of the Stock Plan or award.

 

Stock Option Awards

 

During the six months ended June 30, 2013, and the year ended December 31, 2012, the Compensation Committee of the Board of Directors of the Company did not grant any stock options. On May 11, 2012, certain executive officers voluntarily cancelled 1,963,745 outstanding stock options for no consideration. Upon cancellation, we recognized $1,365,242 in compensation expense related to these previously granted options. The Compensation Committee currently does not plan to grant new stock options to employees.

 

For the three months and six months ended June 30, 2013, the Company recognized $58,401 and $118,420, respectively, of compensation expense in the Consolidated Statements of Operations related to stock options. As of June 30, 2013, there was approximately $147,034 of unrecognized compensation cost related to unvested stock option awards. This cost is expected to be recognized over a weighted-average period of approximately seven months. For the three months and six months ended June 30, 2012, the Company recognized $1,443,467 and $1,891,291, respectively, of compensation expense in the Consolidated Statements of Operations related to stock options.

 

For the six months ended June 30, 2013, and June 30, 2012, no options were exercised.

 

A summary of the changes in outstanding stock options for the six months ended June 30, 2013, is as follows:

 

           Weighted   Weighted Average     
       Weighted   Average   Remaining   Aggregate 
       Average   Grant Date   Contractual   Intrinsic 
   Shares   Exercise Price   Fair Value   Term (Years)   Value 
Options Outstanding at January 1, 2013   1,425,372   $9.77   $6.27    3.68   $0 
                          
Granted   0   $0   $0    0      
                          
Exercised   0   $0   $0    0      
                          
Forfeited or Expired   0   $0   $0    0      
                          
Options Outstanding at June 30, 2013   1,425,372   $9.77   $6.27    3.18   $0 
                          
Options Exercisable at June 30, 2013   1,399,927   $9.76   $6.25    3.19   $0 
                          
Options Exercisable and Expected to be Exercisable at June 30, 2013   1,424,736   $9.77   $6.27    3.18   $0 

 

56
 

 

The aggregate intrinsic value in the table above with respect to options outstanding, exercisable and expected to be exercisable, is calculated as the difference between the Company's closing stock price of $3.04 on June 28, 2013, the last trading day of the second quarter of 2013, and the exercise price, multiplied by the number of in-the-money options. This amount represents the total pre-tax intrinsic value that would have been received by the option holders had all options been fully vested and all option holders exercised their awards on June 30, 2013.

 

Restricted Stock

 

On June 11, 2012, the Committee granted the employees a total of 1,780,000 shares of restricted stock. A total of 1,068,000 awards (60 percent) vest when the volume-weighted stock price is at or above pre-determined stock price targets over a 30-day period. These pre-determined stock price targets range from $5.00 per share to $9.00 per share. The remaining 712,000 of these shares (40 percent) have vesting dates ranging from December 31, 2012, through June 30, 2017, based on the named executive officer's continued service to the Company. After this initial employee grant, the Compensation Committee does not plan to grant additional restricted stock to existing employees until at least June 11, 2015. Pursuant to the Exemptive Order, non-employee directors receive up to 2,000 shares of restricted stock annually. On June 7, 2012, the non-employee directors received a grant of 14,000 shares of restricted stock. On May 2, 2013, an additional 12,000 shares of restricted stock were granted to the non-employee directors.

 

For the three months and six months ended June 30, 2013, we recognized $257,079 and $511,781, respectively, of compensation expense related to restricted stock awards. As of June 30, 2013, there was unrecognized compensation cost of $3,726,117 related to restricted stock awards. This cost is expected to be recognized over a weighted average period of approximately two years.

 

Non-vested restricted stock awards as of June 30, 2013, and changes during the six months ended June 30, 2013, were as follows:

 

   Shares  

Weighted-Average Grant

Date Fair Value Per Share

 
         
Outstanding at January 1, 2013   1,616,000   $2.82 
           
Granted   12,000    3.15 
           
Vested based on service   (42,375)   3.40 
           
Shares withheld  related to net share settlement of restricted stock   (20,367)   3.38 
           
Forfeited   (2,000)   3.55 
           
Outstanding at June 30, 2013   1,563,258   $2.80 

 

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Under net settlement procedures currently applicable to our outstanding restricted stock awards for current employees, upon each settlement date, restricted stock awards are withheld to cover the required withholding tax, which is based on the value of the restricted stock award on the settlement date as determined by the closing price of our common stock on the vesting date. The remaining amounts are delivered to the recipient as shares of our common stock. On June 30, 2013, 58,740 restricted stock awards were net settled by withholding 20,367 shares, which represented the employees' minimum statutory obligation for each such employee's applicable income and other employment taxes and remitted cash totaling of $61,917 to the appropriate tax authorities. The amount remitted to the tax authorities for the employees' tax obligation was reflected as a financing activity within our Consolidated Statements of Cash Flows. The shares withheld by us as a result of the net settlement of restricted stock awards are not considered issued and outstanding, thereby reducing our shares outstanding used to calculate net asset value per share.

 

NOTE 10. INCOME TAXES

 

We have elected to be treated as a RIC under the Code and operate in a manner so as to qualify for the tax treatment applicable to RICs.

 

In order to qualify as a RIC, we must, in general, (1) annually, derive at least 90 percent of our gross income from dividends, interest, gains from the sale of securities and similar sources; (2) quarterly, meet certain investment diversification requirements; and (3) annually, distribute at least 90 percent of our investment company taxable income as a dividend. We may either distribute or retain our net capital gain from investments, but any net capital gain not distributed will be subject to corporate income tax and the excise tax described below to the extent not offset by the capital loss carryforward. We currently intend to retain and designate any net capital gain as "designated undistributed capital gains" under the rules of the Code. We will be subject to a four percent excise tax to the extent we fail to distribute at least 98 percent of our annual net ordinary income and 98.2 percent of our capital gain net income and would be subject to income tax to the extent we fail to distribute 100 percent of our investment company taxable income. As of January 1, 2013, we had capital loss carryforwards of $20,146,763, which we intend to use to offset current year capital gains.

 

Because of the specialized nature of our investment portfolio, we generally can satisfy the diversification requirements under the Code if we receive a certification from the SEC pursuant to Section 851(e) of the Code that we are "principally engaged in the furnishing of capital to other corporations which are principally engaged in the development or exploitation of inventions, technological improvements, new processes, or products not previously generally available."

 

We have received SEC certification since 1999, including for 2012, pursuant to Section 851(e) of the Code. There can be no assurance that we will qualify for or receive certification for 2013 or subsequent years (to the extent we need additional certification) or that we will actually qualify for Subchapter M treatment in subsequent years. In addition, under certain circumstances, even if we qualified for Subchapter M treatment in a given year, we might take action in a subsequent year to ensure that we would be taxed in that subsequent year as a C Corporation, rather than as a RIC. Because Subchapter M does not permit deduction of operating expenses against net capital gain, it is not clear that the Company and its shareholders have paid less in taxes since 1999 than they would have paid had the Company remained a C Corporation.

 

For the three months ended June 30, 2013, and 2012, we paid $161 and $0, respectively, in federal, state and local taxes. For the six months ended June 30, 2013, and 2012, we paid $22,171 and $8,075, respectively, in federal, state and local taxes. At June 30, 2013, and 2012, we had $0 accrued for federal, state and local taxes payable by the Company.

 

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We pay federal, state and local taxes primarily related to sublease income generated by Ventures, which is taxed as a C Corporation. For the three months ended June 30, 2013, and 2012, our income tax expense for Ventures was $161 and $0, respectively. For the six months ended June 30, 2013, and 2012, our income tax expense for Ventures was $21,241 and $7,170, respectively.

 

NOTE 11. CHANGE IN NET ASSETS PER SHARE

 

The following table sets forth the computation of basic and diluted per share net increases (decreases) in net assets resulting from operations for the three months and six months ended June 30, 2013, and June 30, 2012.

  

   For the Three Months Ended
June 30
   For the Six Months Ended
June 30
 
   2013   2012   2013   2012 
Numerator for increase (decrease) in net assets  per share  $4,104,761   $(1,905,919)  $2,044,569   $3,674,264 
Denominator for basic weighted average shares   31,118,358    31,000,601    31,117,624    31,000,601 
Basic net increase (decrease) in net assets per share resulting from operations  $0.13   $(0.06)  $0.07   $0.12 
Denominator for diluted weighted average shares   31,118,358    31,000,601    31,117,624    31,000,700 
Diluted net increase (decrease) in net assets per share resulting from operations1  $0.13   $(0.06)  $0.07   $0.12 
Anti-dilutive shares by type:                    
Stock Options   1,425,372    1,425,372    1,425,372    1,425,372 
Restricted Stock   491,125    188,630    487,191    188,630 
Total anti-dilutive shares   1,916,497    1,614,002    1,912,563    1,614,002 

 

1A total of 1,068,000 performance-based shares of restricted stock were outstanding during the first half of 2013. These shares vest when the volume-weighted stock price is at or above pre-determined stock price targets over a 30-day period. These pre-determined stock price targets range from $5.00 per share to $9.00 per share. These shares were not included in the computation of diluted net asset value per share because as of the end of the reporting period none of the pre-determined stock price targets were met.

 

For the three months and six months ended June 30, 2013, the calculation of net increase in net assets resulting from operations per diluted share does not include any stock options or restricted stock awards because such stock options and restricted stock awards were anti-dilutive. Stock options and restricted stock awards may be dilutive in future periods in which there are both a net increase in net assets resulting from operations and either significant increases in our average stock price or significant decreases in the amount of unrecognized compensation cost during the period.

 

NOTE 12. COMMITMENTS AND CONTINGENCIES

 

On December 28, 2011, the Asahi Kasei Group completed its acquisition of Crystal IS, Inc. If claims are made related to certain intellectual property and patents included in the transaction that exceed the escrow amounts withheld, additional claims could be made seeking funds from the former stockholders, including the Company. This special indemnity provision was capped, in aggregate, across all former stockholders at $5 million through December 28, 2013, when the claim period expires. Our pro rata exposure to potential claims is up to $238,000 through December 31, 2013. As of June 30, 2013, no such claims had been made.

 

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NOTE 13. SUBSEQUENT EVENTS

 

On July 8, 2013, the Company made a $13,988 follow-on investment in a privately held portfolio company.

 

On July 12, 2013, Xradia was acquired by Carl Zeiss AG, and on July 19, 2013, we received an initial payment of $12,838,244 from this sale. This amount will add to our primary liquidity during the third quarter of 2013. Additional proceeds of $2,374,827 are held in escrow to be released in whole, or in part, in January and July of 2014. The amounts held in escrow would be reduced by any claims submitted during the escrow period.

 

On July 22, 2013, the Company made a $166,667 follow-on investment in a privately held portfolio company.

 

On July 22, 2013, the Company made a $418,066 follow-on investment in a privately held portfolio company.

 

On August 1, 2013, the Company made a $386,363 follow-on investment in a privately held portfolio company.

 

On August 7, 2013, we closed 1,000 written call option contracts on Solazyme, Inc., with a strike price of $12.50, expiring on September 21, 2013, for a payment of $40,783. We also sold 1,000 written call option contracts on Solazyme, with a strike price of $12.50, expiring in March 2014. We received premiums of approximately $95,630 for these contracts.

 

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HARRIS & HARRIS GROUP, INC.

FINANCIAL HIGHLIGHTS

(Unaudited)

 

   Three Months Ended June 30   Six Months Ended June 30 
   2013   2012   2013   2012 
                     
Per Share Operating Performance                    
                     
Net asset value per share, beginning of period  $4.11   $4.89   $4.13   $4.70 
                     
Net operating loss*   (0.06)   (0.11)   (0.12)   (0.17)
Net realized gain on investments*   0.24    0.03    0.13    0.05 
Net decrease in unrealized appreciation as a result of sales*   (0.17)   (0.02)   (0.06)   (0.02)
Net increase in unrealized appreciation on investments held and written call options*(1)   0.12    0.04    0.12    0.26 
Total from investment operations*   0.13    (0.06)   0.07    0.12 
                     
Net increase as a result of stock- based compensation expense*   0.01    0.05    0.02    0.06 
                     
Net decrease as a result of acquisition  of vested restricted stock awards related to employee withholding   (0.01)   0.00    (0.01)   0.00 
                     
Total increase from capital stock transactions   0.00    0.05    0.01    0.06 
                     
Net increase as a result of other comprehensive income   0.00    0.00    0.03    0.00 
                     
Net increase (decrease) in net asset value   0.13    (0.01)   0.11    0.18 
                     
Net asset value per share, end of period  $4.24   $4.88   $4.24   $4.88 
Stock price per share, end of period  $3.04   $3.80   $3.04   $3.80 
Total return based on stock price   (15.56)%   (8.43)%   (7.88)%   9.83%
                     
Supplemental Data:                    
                     
Net assets, end of period  $132,063,889   $151,357,790   $132,063,889   $151,357,790 
                     
Ratio of expenses to average net assets   1.7%   2.1%   3.3%   3.7%
                     
Ratio of net operating (loss) to average net assets   (1.5)%   (2.2)%   (3.0)%   (3.6)%
                     
Average debt outstanding  $0.00   $1,959,341   $0.00   $1,729,670 
                     
Average debt per share  $0.00   $0.06   $0.00   $0.06 
                     
Number of shares outstanding, end of period   31,159,256    31,000,601    31,159,256    31,000,601 

 

* Based on Average Shares Outstanding

(1) Net unrealized gains (losses) includes rounding adjustments to reconcile change in net asset value per share. See "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" for a description of unrealized losses on investments.

 

The accompanying notes are an integral part of this schedule.

 

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Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations

 

The information contained in this section should be read in conjunction with the Company's unaudited June 30, 2013, Consolidated Financial Statements and the Company's audited 2012 Consolidated Financial Statements and notes thereto.

 

Background

 

We incorporated under the laws of the state of New York in August 1981. In 1983, we completed an initial public offering ("IPO"). In 1984, we divested all of our assets except Otisville BioTech, Inc., and became a financial services company with the investment in Otisville as the initial focus of our business activity.

 

In 1992, we registered as an investment company under the 1940 Act, commencing operations as a closed-end, non-diversified investment company. In 1995, we elected to become a BDC subject to the provisions of Sections 55 through 65 of the 1940 Act.

 

Overview

 

We believe we provide five core benefits to our shareholders. First, we are an established firm with a positive track record of investing in venture capital-backed companies as further discussed in "Investments and Current Investment Pace" on page 67. Second, we provide shareholders with access to disruptive science-enabled companies, particularly ones that are enabled by nanotechnology, that would otherwise be difficult to access or inaccessible for most current and potential shareholders. Third, we have an existing portfolio of companies at varying stages of maturity that provide for a potential pipeline of investment returns over time. Fourth, we are able to invest opportunistically in a range of types of securities to take advantage of market inefficiencies. Fifth, we provide access to venture capital investments in a vehicle that, unlike private venture capital firms, has permanent capital, is transparent and is liquid.

 

We are an early-stage, active investor in transformative companies. We make venture capital investments in companies enabled by multi-disciplinary, scientific innovations, particularly those enabled by nanotechnology and microsystems. We define venture capital investments as the money and resources made available to privately held and publicly traded small businesses with exceptional growth potential. Nanotechnology and microsystems are technologies that allow for the characterization, design, manipulation and manufacture of materials and systems on the molecular and micro levels, respectively.

 

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We believe companies that leverage scientific innovations, particularly those at the nanoscale, are emerging as leaders in their respective industry sectors. These industry sectors include life sciences, energy and electronics. Innovations within each sector often have very different, sometimes unexpected, origins. The knowledge of core domains within each of these industry sectors can be augmented by exposure to the adjacent or even entirely "white-field" multi-disciplinary technology domains including: nanoscale materials, novel analytical instrumentation and manufacturing tools, ultrafast computational and modeling capabilities, high-function mobile devices, high-speed wireless data transfer and high-density, long-lasting and renewable sources of energy. Our investment team has the ability to identify and invest in such domains.

 

  

 

We believe that as the impact of scientific innovation, particularly scientific innovation at the nanoscale, occurs, our portfolio companies are well positioned to profit and that we will see investment returns as a result.

 

We consider a company to fit our investment thesis if the company employs, or intends to employ, science-enabled technologies, particularly those that we consider to be at the microscale or smaller, and if the employment of that technology is material to its business plan. By making these investments, we seek to provide our shareholders with a portfolio of venture capital investments that address a variety of industries, markets and products leveraging science-related innovations, particularly in nanotechnology and microsystems.

 

Industry Sectors of Investment

 

We generally classify our investments in one of three industry sectors: Life Sciences, Energy and Electronics. We classify companies in our life sciences portfolio as those that address problems in life sciences-related industries, including biotechnology, agriculture, advanced materials and chemicals, diagnostics, healthcare, bioprocessing, water, industrial biotechnology, food, nutrition and energy. We may refer to interdisciplinary approaches to addressing life science-related needs as "BIOLOGY+."

 

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We classify companies in our energy portfolio as those that seek to improve performance, productivity or efficiency, and to reduce environmental impact, waste, cost, energy consumption or raw materials. Energy is a term used commonly to describe products and processes that solve global problems related to resource constraints. The term, "cleantech," is also used commonly in a similar manner.

 

We classify companies in our electronics portfolio as those that address problems in electronics-related industries, including semiconductors, telecommunications and data communications, metrology and test and measurement.

 

We discuss in detail our assessment of the trends, technologies and interdisciplinary approaches to solving needs within each of these industry sectors on page 43 of the Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") section of our Annual Report on Form 10-K for the year ended December 31, 2012.

 

Maturity of Current Equity-Focused Venture Capital Portfolio

 

Our equity-focused venture capital portfolio is comprised of companies at varying maturities facing different types of risks. We have defined these levels of maturity and sources of risk as: 1) Early Stage/Technology Risk, 2) Mid Stage/Market Risk and 3) Late Stage/Execution Risk. Early-stage companies have a high degree of technical, market and execution risk, which is typical of initial investments by venture capital firms, including us. Mid-stage companies are those that have overcome most of the technical risk associated with their products and are now focused on addressing the market acceptance for their products. Late-stage companies are those that have determined there is a market for their products, and they are now focused on sales execution and scale. Late-stage, life sciences companies are typically generating revenue from the commercial sale of one or more products or, in the case of therapeutic or medical devise-focused life sciences companies, are in Phase III Clinical Trials, which are the pivotal trials before a possible FDA approval and commercial launch of a product.

 

Our current portfolio is comprised of companies at varying stages of maturity in a diverse set of industries within three sectors. As our portfolio companies mature, we seek to invest in new early- and mid-stage companies that may mature into mid- and late-stage companies. This continuous progression creates a pipeline of investment maturities that may lead to future sources of positive contributions to net asset value per share as these companies mature and potentially experience liquidity and exit events. This diversity of industries and our pipeline of investment maturities are demonstrated by the distribution of our current early- and mid-stage portfolio companies that primarily address needs in the sectors shown in the table below.

 

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The interdisciplinary nature of science-based inventions enables our portfolio companies to address needs in multiple sectors rather than being confined to addressing needs in one sector. As such, many of our companies can adjust their business foci to address needs in a secondary sector should opportunities in the company’s primary sector decrease in number or magnitude.

 

We expect some of our portfolio companies to transition between stages of maturity over time. This transition may be forward if the company is maturing and is successfully executing its business plan or may be backward if the company is not successfully executing its business plan or decides to change its business plan substantially from its original plan. Transitions backward are commonly accompanied by an increase in non-performance risk, which reduces valuation. We discuss non-performance risk and its implications on value below in the section titled "Valuation of Investments."

 

During the second quarter of 2013, we transitioned Contour Energy Systems, Inc., and Mersana Therapeutics, Inc., from mid-stage companies to early-stage companies. We also transitioned Champions Oncology, Inc., and Nanosys, Inc., from mid-stage companies to late-stage companies.

 

Investment Objective and Strategy

 

Our principal investment objective is to achieve long-term capital appreciation by making equity-focused venture capital investments in companies that we believe have exceptional growth potential. Therefore, a significant portion of our current venture capital investment portfolio provides little or no income in the form of dividends or interest. Current income is a secondary investment objective. We seek to reach the point where future growth is financed through reinvestment of our capital gains from our venture capital investments and where current income offsets significant portions of our annual expenses during periods of time between realizations of capital gains on our investments. We also plan to implement a strategy to grow assets under management and generate current income by raising one or more third-party funds to manage. It is possible that we will invest our capital alongside or through these funds in portfolio companies. These funds may be focused on specific sectors such as life sciences, energy and electronics that are enabled by scientific breakthroughs, including nanotechnology. It is also possible these funds will invest in companies in each of these sectors that are not directly enabled by nanotechnology. There is no assurance when and if we will be able to raise such fund(s) or, if raised, whether they will be successful.

 

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We have discretion in the investment of our capital to achieve our objectives. Our venture capital investments are made primarily in equity-related securities of companies that can range in stage from pre-revenue to generating positive cash flow. These businesses tend to be thinly capitalized, unproven, small companies that lack management depth, have little or no history of operations and are developing unproven technologies. These businesses may be privately held or publicly traded. We historically have invested in equity securities of these companies that are generally illiquid due to restrictions on resale and to the lack of an established trading market. We refer to our portfolio of investments in equity and equity-related securities in later sections of the MD&A as our "equity-focused" portfolio of investments. We have historically, from time to time, taken advantage of opportunities to generate near-term cash flow by investing in non-convertible debt securities of small businesses. These businesses tend to be generating cash or have near-term visibility to reaching positive cash flow. We refer to our portfolio of investments in non-convertible debt in later sections of the MD&A as our "venture debt" portfolio of investments.

 

We are both early-stage and long-term investors. We seek to identify investment opportunities in industries and markets that will be growth opportunities three to seven years from the date of our initial investment. We expect to invest capital in these companies at multiple points in time subsequent to our initial investment. We refer to such investments as "follow-on" investments. Our efforts to identify and predict future growth industries and markets rely on patient and deep due diligence in nanotechnology-enabled innovations developed at universities and corporate and government research laboratories, and the examination of macroeconomic and microeconomic trends and industry dynamics. We believe it is the early identification of and investments in these growth opportunities that will lead to investment returns for our shareholders, growth of our net assets, and capital for us to invest in tomorrow’s growth opportunities.

 

We believe our ability to bring early-stage financing and strong corporate partnering early in the development process could be perceived as valuable by potential portfolio companies and may be of particular benefit in investment opportunities that become competitive. We also believe that corporate involvement is evolving to become more critical for the success of early-stage companies in the years ahead. We discuss both of these topics in detail on pages 52 and 53, respectively, of the MD&A section of our Annual Report on Form 10-K for the year ended December 31, 2012.

 

Involvement with Portfolio Companies

 

The 1940 Act requires that BDCs offer to "make available significant managerial assistance" to portfolio companies. We are actively involved with our portfolio companies through membership on boards of directors, as observers to the boards of directors and/or through frequent communication with management. As of June 30, 2013, we held at least one board seat or observer rights on 24 of our 28 equity-focused portfolio companies (86 percent).

 

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We may be involved actively in the formation and development of business strategies of our earliest stage portfolio companies. This involvement may include hiring management, licensing intellectual property, securing space and raising additional capital. We also provide managerial assistance to late-stage companies looking for potential exit opportunities by leveraging our relationships with the banking and investment community and our knowledge and experience in running a micro-capitalization publicly traded business.

 

Investments and Current Investment Pace

 

Since our investment in Otisville in 1983 through June 30, 2013, we have made a total of 96 equity-focused venture capital investments. We have completely exited 68 of these 96 investments and partially exited through the sale of shares and/or the sale of call options covered by shares of one of these 96 investments, recognizing aggregate net realized gains of $74,530,413 on invested capital of $107,648,175. For the securities of the 28 companies in our equity-focused portfolio held at June 30, 2013, we have net unrealized depreciation of $1,849,651 on invested capital of $105,404,774. We have aggregate net realized gains and unrealized depreciation for our 96 equity-focused investments of $72,680,762 on invested capital of $213,052,949.

 

The amount of net realized gains includes:

 

·$16,180,401 in payments received from the sale of BioVex Group, Inc., to Amgen, Inc., the sale of Innovalight, Inc., to DuPont and the sale of Crystal IS, Inc., to Asahi Kasei Group. We had invested a total of $11,383,299 in these three portfolio companies;

 

·$13,185,840 from the sale of shares of Solazyme, Inc., on invested capital of $4,073,602. In addition, we generated $1,399,050 in realized gains on our sale and/or purchase of written call option and put option contracts covered by our shares of Solazyme, Inc.; and

 

·A realized loss of $4,839,811, including call options, on our investment in NeoPhotonics Corporation on invested capital of $7,299,590.

 

The aggregate net realized gains and the cumulative invested capital do not reflect the cost or value of our shares of Solazyme, Inc., that we owned as of June 30, 2013, or the premiums received on open option contracts of $478,676. The aggregate net realized gains do not include gains on our initial payment from the sale of Xradia, which closed in July 2013. The aggregate net realized gains also do not include potential milestone payments that could occur as part of the acquisition of BioVex Group, Inc., by Amgen, Inc., or the acquisition of Nextreme Thermal Solutions, Inc., by Laird Technologies, Inc., at points in time in the future as of June 30, 2013. If these amounts were included as of June 30, 2013, our aggregate net realized gains and cumulative invested capital would be $93,549,977 and $113,018,771, respectively.

 

From August 2001 through June 30, 2013, all 54 of our initial equity-focused investments have been in science-enabled companies commercializing or integrating products enabled by nanotechnology or microsystems. From August 2001 through June 30, 2013, we have invested a total (before any subsequent write-ups, write-downs or dispositions) of $165,898,475 in these companies. We currently have 27 equity-focused companies in our portfolio that have yet to complete liquidity events (e.g., IPOs or merger and acquisition ("M&A") transactions). At June 30, 2013, from first dollar in, the average and median holding periods for these 27 investments were 5.5 years and 6.1 years, respectively. Historically, as measured from first dollar in to last dollar out, the average and median holding periods for the 68 investments we have exited were 4.3 years and 3.4 years, respectively.

 

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The following is a summary of our initial and follow-on equity-focused investments in nanotechnology companies from January 1, 2009, to June 30, 2013. We consider a "round led" to be a round where we were the new investor or the leader of a group of investors in an investee company. Typically, but not always, the lead investor negotiates the price and terms of the deal with the investee company.

 

Investments in Our Equity-Focused Portfolio of Investments
in Privately Held and Publicly Traded Companies
   2009   2010   2011   2012   Six Months Ended
June 30, 2013
 
                     
Total Incremental Investments  $12,334,051   $9,560,721   $17,688,903   $15,141,941   $6,758,150 
No. of New Investments   2    3    4    2    1 
No. of Follow-On Investment Rounds   29    27    31    26    18 
No. of Rounds Led   5    5    4    3    6 
Average Dollar Amount – Initial  $174,812   $117,069   $1,339,744   $1,407,500   $750,000 
Average Dollar Amount – Follow-On  $413,256   $341,093   $397,740   $474,113   $333,786 

 

Our Sources of Liquid Capital

 

The sources of liquidity that we use to make our investments are classified as primary and secondary liquidity. As of June 30, 2013, and December 31, 2012, our total primary and secondary liquidity was $36,407,772 and $38,231,691, respectively. We do not include funds available from our credit facility as primary or secondary liquidity. We believe it is important to examine both our primary and secondary liquidity when assessing the strength of our balance sheet and our future investment capabilities.

 

Primary liquidity is comprised of cash, U.S. Treasury securities and certain receivables. As of June 30, 2013, we held $13,999,860 in U.S. government obligations, $8,194,919 in cash, and $3,783,586 in receivables from the sale of certain Solazyme shares. These receivables were settled for cash in July of 2013. As of December 31, 2012, we held $13,998,880 in U.S. government obligations, and we had an additional $8,379,111 in cash.

 

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On January 24, 2013, the Company received payment of its portion of the proceeds held in escrow from DuPont’s acquisition of Innovalight, Inc., totaling $949,469. On April 4, 2013, the Company received payment of its portion of the proceeds held in escrow from Asahi Kasei's acquisition of Crystal IS, Inc., totaling $273,361. These payments immediately added to our primary liquidity. Payments upon achieving milestones of the BioVex Group, Inc., sale would also add to our primary liquidity in future quarters if these milestones are achieved successfully. The probability-adjusted value of the future milestone payments for the sale of BioVex, as determined at the end of each fiscal quarter, is included as an asset on our Consolidated Statements of Assets and Liabilities and will be included in primary liquidity only if and when payment is received for achievement of the milestones. During the six months ended June 30, 2013, we sold 1,217,790 shares of our investment in Solazyme, Inc., under written call option contracts and open market sales. We received $11,727,993 in gross proceeds from these transactions, which added to our primary liquidity. During the six months ended June 30, 2013, we sold the remaining 50,807 shares of our investment in NeoPhotonics Corporation under written call option contracts and open market sales. We received $254,039 in gross proceeds from these transactions, which also added to our primary liquidity.

 

On July 12, 2013, Xradia was acquired by Carl Zeiss AG, and on July 19, 2013, we received an initial payment of $12,838,244 from this sale. This amount will add to our primary liquidity during the third quarter of 2013. Additional proceeds of $2,374,827 are held in escrow to be released in whole, or in part, in January and July of 2014. If and when these amounts held in escrow are released, those funds would add to our primarily liquidity.

 

Our secondary liquidity is comprised of the stock of publicly traded companies. Although these companies are publicly traded, their stock may not trade at high volumes and prices may be volatile, which may restrict our ability to sell our positions at any given time. As of June 30, 2013, our secondary liquidity was $10,398,807. Solazyme, Inc., accounts for $6,797,600 of this amount based on its closing price as of June 30, 2013. If our in-the-money option contracts were called at June 30, 2013, and the remaining shares were sold at the closing price on that date, we would receive proceeds of $6,230,000. The fair value of our shares of Champions Oncology, Inc., accounts for $3,601,207 of the total amount of secondary liquidity. As of December 31, 2012, our secondary liquidity was $15,770,488. NeoPhotonics and Solazyme accounted for $14,422,261 of this amount based on the closing price of each company as of December 31, 2012. Champions Oncology accounted for $1,348,227 of the total amount of secondary liquidity. As of June 30, 2013, a total of 626,523 shares of Champions Oncology were subject to restrictions that limit our ability to sell those securities. The remainder of our public securities were freely tradable. A decision to sell our shares would result in the cash received from the sale of these assets being included in primary liquidity. Until that time, we will continue to include the value of our shares of our publicly traded portfolio companies in secondary liquidity unless the average trading volume of each company reaches sufficient levels for us to monetize our stock in such companies over a short period of time.

 

Potential Pending Liquidity Events from Our Portfolio as of June 30, 2013

 

Our companies often plan for and/or begin the process of pursuing potential sales and/or IPOs of those companies by hiring bankers and/or advisors to attempt to pursue such liquidity events. We consider these efforts to be in the ordinary course of business for those companies until the potential and timing of a transaction become tangible through events such as receipt of letters of intent to acquire a company and/or drafting of registration documents to pursue an IPO. As of June 30, 2013, we did not have any companies for which the potential and timing of a transaction are tangible.

 

On July 12, 2013, Xradia was acquired by Carl Zeiss AG, and on July 19, 2013, we received an initial payment of $12,838,244 from this sale. Additional proceeds of $2,374,827 are held in escrow to be released in whole, or in part, in January and July 2014.

 

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As of June 30, 2013, we valued potential milestone payments from the sale of BioVex Group, Inc., at $3,383,720. If all the remaining milestone payments were to be paid by Amgen, Inc., we would receive $9,526,393. We have not received any milestone payments as of June 30, 2013, and there can be no assurance as to the timing and how much of this amount we will ultimately realize in the future, if any. As of June 30, 2013, we valued potential milestone payments from the sale of Nextreme Thermal Solutions, Inc., to Laird Technologies, Inc., at $0.

 

Strategy for Managing Publicly Traded Positions

 

We discuss our assessment of the benefits of selling covered call options on our publicly traded portfolio companies in detail in our Annual Report on Form 10-K for the year ended December 31, 2012.

 

During the six months ended June 30, 2013, our strategy for managing our publicly traded positions has generated approximately $510,458 in net cash proceeds from premiums on call options sold and put options purchased of Solazyme, Inc. We added approximately $4,886,764 in proceeds, net of commission, to our primary liquidity resulting from options called that were covered by a portion of our shares of Solazyme. We also sold shares in open market transactions for proceeds, net of commission, of $6,800,203. The net increase in our primary liquidity from these transactions was $12,197,426. Through June 30, 2013, we have generated $2,255,292 in net cash premiums on call options sold and put options purchased of Solazyme since the company completed an IPO in May 2011. We have sold a total of 1,724,149 shares of Solazyme since its IPO for net proceeds, after commission, of $16,867,016 or an average sale price of $9.78 per share. Including premiums from call and put options, the average sale price for these shares was $11.09 per share. Our cost basis in Solazyme is $2.36 per share. This increase in primary liquidity is important for our efforts to continue to fund existing and new portfolio companies that could generate future investment returns.

 

As of June 30, 2013, we had all of our remaining 580,000 shares of Solazyme under the following option contracts:

 

No. of Shares   Expiration Date  Strike Price 
 330,000   September 21, 2013  $10.00 
 150,000   September 21, 2013  $12.50 
 100,000   September 21, 2013  $15.00 

 

During the six months ended June 30, 2013, we sold the remaining 50,807 shares of our position in NeoPhotonics Corporation. We no longer own any shares of NeoPhotonics. For the six months ended June 30, 2013, we received $252,042 in proceeds, net of commission, from the sale of NeoPhotonics shares. We also received proceeds of $24,146 from call option premiums on shares of NeoPhotonics. Since its IPO, the sale of our 450,907 shares of NeoPhotonics generated net proceeds of $2,239,809, or an average sale price, net of commission, of $4.97 per share. Including premiums from call options, the average sale price for these shares was $5.45 per share. Our cost basis in NeoPhotonics was $16.19 per share.

 

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Portfolio Company Revenue

 

We currently have 22 companies in our equity-focused venture capital portfolio as of June 30, 2013, that generate revenues ranging from nominal to significant from commercial sales of products and/or services, from commercial partnerships and/or from government grants.

 

In aggregate, our portfolio companies had approximately $532 million in revenue as of the end of 2012, a 25.5 percent increase from aggregate 2011 revenue of approximately $424 million, a 39.9 percent increase from aggregate 2010 revenue of approximately $380 million and a 99.1 percent increase from aggregate 2009 revenue of $267 million.

 

Current Business Environment

 

The second quarter of 2013 ended with increases in value in the public market indices. However, these increases coincided with an increase in the number and value of IPOs and M&A transactions. The fundraising environment continues to be difficult for venture capital firms and for venture-backed companies that focus on the sectors in which we invest, particularly those in the middle stages of development.

 

Twenty-one U.S. venture-backed companies raised $2.1 billion through IPOs in the second quarter of 2013, which is a dramatic increase from the first quarter of 2013 (eight IPOs raising $717 million), according to Dow Jones VentureSource, Thomson Reuters and the NVCA. It is also a 50 percent increase in venture-backed IPOs as compared with the second quarter of 2012. For the second quarter of 2013, 84 venture-backed M&A transactions were reported, which is about the same as the first quarter of 2013 (86 reported), but a decrease from the second quarter of 2012 (122 reported).

 

Forty-four U.S. venture capital funds raised $2.9 billion in the second quarter of 2013, according to Thomson Reuters and the National Venture Capital Association (NVCA). This is a similar number of funds as compared with the first quarter of 2013, but a 33 percent decrease in the amount of capital raised (down from $4.3 billion). It is also a significant (54 percent) decline from the amount raised in the second quarter of 2012 and marks the lowest amount raised by venture capital since the third quarter of 2011. The trend of few funds raising more money has continued with the top five venture capital funds accounting for 55 percent of the total fundraising in the second quarter, which is comparable to the first quarter of 2013. Of the forty-four funds that were raised, 15 were new funds, and they represented 11 percent of the dollar value. Historically (five years), first-time funds have raised an average of nine percent of the committed capital. This represents an uptick in fundraising by new funds as compared with the average and especially as compared with the first quarter of 2013, when only five new funds were raised.

 

The current business environment is also complicated by global economic uncertainty and regional unrest. It remains unclear if and how the debt crisis in Europe will develop and whether it will result in a slowing of worldwide economic growth. It is unclear if the rising budget deficits and partisan politics in the United States will result in further downgrades in its credit rating. Any outcome could be heightened potentially should an alternative to U.S. Treasury securities emerge as the global safe-haven for invested capital or should large holders of these securities, such as China, decide to divest of them in large quantities or in full. Further, many of our portfolio companies receive non-dilutive funding through government contracts and grants. Sequestration has and could continue to have a direct and significant reduction in our portfolio companies' contract or grant awards. Sequestration will also likely result in reduced budgets at research facilities, which has and could continue to reduce the volume of products they could potentially purchase from our portfolio companies. All of this uncertainty could lead to a further broad reduction in risk taken by investors and corporations, which could reduce further the capital available to our portfolio companies, could affect the ability of our portfolio companies to build and grow their respective businesses, and could decrease the liquidity options available to our portfolio companies.

 

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Historically, difficult venture environments have resulted in a higher than normal number of companies not receiving financing and being subsequently closed down with a loss to venture investors, and other companies receiving financing but at significantly lower valuations than the preceding financing rounds. This issue is compounded by the fact that many existing venture capital firms have few remaining years of investment and available capital owing to the finite lifetime of the funds managed by these firms. Additionally, even if a firm was able to raise a new fund, commonly venture capital firms are not permitted to invest new funds in existing investments. This limitation of available capital can lead to fractured syndicates of investors. A fractured syndicate can result in a portfolio company being unable to raise additional capital to fund operations; this issue is especially acute in capital-intensive sectors that are enabled by science-related innovations, such as life sciences, energy and electronics, which are generally not in favor among venture capital firms. The result of these difficulties is that the portfolio company may be forced to sell before reaching its full potential or be shut down entirely if the remaining investors cannot financially support the company. As such, improvements in the exit environment for venture-backed companies through IPOs and M&A transactions may not translate to an increase in the available capital to venture-backed companies, particularly those that have investments from funds that are in the latter stage of life unless the markets improve for some time into the future.

 

Our overall goal remains unchanged. We want to maintain our leadership position in investing in science-enabled companies, particularly those enabled by nanotechnology and microsystems and to increase our net asset value. The current environment for venture capital financings continues to favor those firms that have capital to invest regardless of the stage of the investee company. We continue to finance our new and follow-on equity and convertible debt investments from our cash reserves held in bank accounts. We may in the future invest borrowed capital to take advantage of opportunities that we believe will return greater than the cost of such borrowed capital. We have historically held, and may in the future again hold, our cash in U.S. Treasury securities. We believe the current status of the venture capital industry and the current economic climate provide opportunities to invest this capital at historically low valuations and under favorable terms in equity and convertible debt of new and existing privately held and publicly traded companies.

 

Valuation of Investments

 

We value our privately held venture capital investments each quarter as determined in good faith by our Valuation Committee, a committee of all the independent directors, within guidelines established by our Board of Directors in accordance with the 1940 Act. (See "Footnote to Consolidated Schedule of Investments" contained in "Consolidated Financial Statements.")

 

The values of privately held, venture capital-backed companies are inherently more difficult than publicly traded companies to assess at any single point in time because securities of these types of companies are not actively traded. We believe, perhaps even more than in the past, that illiquidity, and the perception of illiquidity, can affect value. Management believes further that the long-term effects of the difficult venture capital market and difficult exit environments will continue to affect negatively the fundraising ability of weak companies regardless of near-term improvements in the overall global economy and public markets, and that these factors can also affect value.

 

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We note that while the valuations of our privately held, venture capital-backed companies may decrease, sometimes substantially, such decrease may facilitate an increase in our ownership of the overall company in conjunction with a follow-on investment in such company. In these cases, the ultimate return on our overall invested capital could be greater than it would have been without such interim decrease in valuation.

 

In each of the years in the period 2009 through 2012, and for the six months ended June 30, 2013, the Company recorded the following gross write-ups in privately held securities as a percentage of net assets at the beginning of the year ("BOY"), gross write-downs in privately held securities as a percentage of net assets at the beginning of the year, and change in value of private portfolio securities as a percentage of net assets at the beginning of the year.

 

Gross Write-Ups and Write-Downs of the Privately Held Portfolio
   2009   2010   2011   2012  

Six Months Ended
June 30, 2013

 
                     
Net Asset Value, BOY  $109,531,113   $134,158,258   $146,853,912   $145,698,407   $128,436,774 
                          
Gross Write-Downs During Year  $(12,845,574)  $(11,391,367)  $(11,375,661)  $(19,604,046)  $(9,083,268)
                         
Gross Write-Ups During Year  $21,631,864   $30,051,847   $11,997,991   $14,099,904   $8,624,382 
                          
Gross Write-Downs as a Percentage of Net Asset Value, BOY   (11.7)%   (8.5)%   (7.8)%   (13.5)%   (7.1)%
                          
Gross Write-Ups as a Percentage of Net  Asset Value, BOY   19.7%   22.4%   8.2%   9.7%   6.7%
                          
Net Change as a Percentage of Net Asset Value, BOY   8.0%   13.9%   0.4%   (3.8)%   (0.4)%

 

From March 31, 2013, to June 30, 2013, the value of our equity-focused venture capital portfolio, including our rights to potential future milestone payments from the sales of BioVex Group, Inc., and Nextreme Thermal Solutions, Inc., increased by $1,400,317, from $105,538,526 to $106,938,843.

 

Not including our rights to potential future milestone payments from the sale of BioVex Group, Inc, and Nextreme Thermal Solutions, Inc., our equity-focused portfolio companies increased in value by $1,421,709. This increase was primarily owing to 1) new and follow-on investments of $4,592,440, 2) a net increase in value owing to the terms and pricing of new rounds of financing and indications of value from potential acquirers of $5,627,188, and 3) a net increase owing to public markets of $2,049,328.  These changes were offset by 1) a net decrease in the valuation of Solazyme, Inc., and sales of a portion of our shares of this company of $5,265,022, offset by net cash proceeds to us of $9,810,558 that are not included in the valuation of Solazyme as of June 30, 2013 and 2) a net decrease in value owing to a net increase in discounts for non-performance risk of $5,693,574. The remaining component of the change in the value of our equity-focused portfolio companies of $111,049 was primarily owing to net increases in the value of warrants, currency fluctuations and interest on convertible bridge notes.

 

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We note that our Valuation Committee and ultimately our Board of Directors take into account multiple sources of quantitative and qualitative inputs to determine the value of our privately held portfolio companies and our publicly traded portfolio companies whose values are not derived solely from the closing price on the last day of the quarter.

 

We also note that our Valuation Committee does not set the value of Solazyme, Inc., our freely tradable publicly traded portfolio company, and the unrestricted portion of our position in Champions Oncology, Inc., which trades on an OTC exchange. As of June 30, 2013, a portion of our shares of Champions Oncology is subject to restrictions on the sale of those shares and subjective inputs are also included in the determination of value. Therefore, our Valuation Committee sets the value of this portion of our position.

 

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 that requires or seeks to raise additional capital will be  (a) unable to raise capital, will need to be shut down and will not return our invested capital; or (b) able to raise capital, but at a valuation significantly lower than the implied post-money valuation.  Our best estimates of non-performance risk of our portfolio companies during the second quarter of 2013 are included in the valuation of the companies as of June 30, 2013. Changes in non-performance risk led to a net decrease in value of $5,693,574. In the future, as these companies receive terms for additional financings or if they are unable to receive additional financing and, therefore, proceed with sales or shutdowns of the business, we expect the contribution of the discount for non-performance risk to vary in importance in determining the fair values of our securities of these companies. Changes in discounts for non-performance risk could positively or negatively affect the value of our portfolio companies in future quarters. As of June 30, 2013, non-performance risk was a significant factor in determining the values of nine of our 26 equity-focused portfolio companies that are fair valued by our Board of Directors. These nine companies accounted for approximately $28.2 million, or 27.3 percent, of the total value of our equity-focused venture capital portfolio, not including our rights to milestone payments from the sale of BioVex Group, Inc., to Amgen, Inc. As of December 31, 2012, non-performance risk was a significant factor in determining the values of nine of our 27 equity-focused portfolio companies that are fair valued by our Board of Directors. These nine companies accounted for approximately $34.6 million, or 33.7 percent, of the total value of our equity-focused venture capital portfolio, not including our rights to milestone payments from the sale of BioVex Group, Inc., to Amgen, Inc., or our rights to milestone payments from the sale of Nextreme Thermal Solutions, Inc., to Laird Technologies, Inc.

 

We also note that our valuation of our securities of Molecular Imprints, Inc., includes $3,033,338 that is ascribed to a non-convertible bridge note. The principal plus interest of this note was repaid in full in the third quarter of 2011. The remaining value results from a liquidation preference that survived the repayment of the note and, as currently written, would pay the Company $4,044,450 should the company be sold for more than its outstanding debt and a contractual payment to management of Molecular Imprints. This amount assumes that the total non-convertible bridge note preferences of $10.5 million are paid in full. Our value of this portion of our securities of Molecular Imprints as of June 30, 2013, reflects a probability-weighted discount applied to the total amount of the preference.

 

As of June 30, 2013, our top ten investments by value accounted for approximately 72 percent of the value of our equity-focused venture capital portfolio.

 

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Results of Operations

 

We present the financial results of our operations utilizing GAAP for investment companies. On this basis, the principal measure of our financial performance during any period is the net increase (decrease) in our net assets resulting from our operating activities, which is the sum of the following three elements:

 

Net Operating Income (Loss) - the difference between our income from interest, dividends, and fees and our operating expenses.

 

Net Realized Gain (Loss) on Investments - the difference between the net proceeds of sales of portfolio securities and their stated cost, plus income from interests in limited liability companies.

 

Net Increase (Decrease) in Unrealized Appreciation or Depreciation on Investments - the net unrealized change in the value of our investment portfolio.

 

Owing to the structure and objectives of our business, we generally expect to experience net operating losses and seek to generate increases in our net assets from operations through the long-term appreciation and monetization of our venture capital investments. We have relied, and continue to rely, primarily on proceeds from sales of investments, rather than on investment income, to defray a significant portion of our operating expenses. Because such sales are unpredictable, we attempt to maintain adequate working capital to provide for fiscal periods when there are no such sales.

 

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The potential for, or occurrence of, inflation could result in rising interest rates for government-backed debt.  This trend would have two effects on our business.  First, the spread between the interest rates we can obtain from investing in low-risk government debt versus high-risk venture debt will compress, which would result in a reduction of the risk premium associated with investments in venture debt.  We may reduce the number and amount invested in venture debt should this risk premium decrease substantially as to not compensate us adequately for the risk associated with such investments. Second, funds drawn from our line of credit will accrue interest at a rate that fluctuates with either the London Interbank Offered Rate (LIBOR) or the prime rate. LIBOR and the prime rate are expected to increase in times of inflation.  Our venture debt investments may include both fixed and floating interest rates.  Our net interest income would decrease if the spread between the interest rate on funds from our line of credit and our venture debt investments decrease.

 

Three months ended June 30, 2013, as compared with the three months ended June 30, 2012

 

In the three months ended June 30, 2013, we had a net increase in net assets resulting from operations of $4,104,761. In the three months ended June 30, 2012, we had a net decrease in net assets resulting from operations of $1,905,919.

 

Investment Income and Expenses:

 

We had net operating losses of $1,989,938 and $3,275,280 for the three months ended June 30, 2013, and June 30, 2012, respectively. The variation in these results is primarily owing to the changes in investment income and operating expenses, including non-cash expense of $315,480 in 2013 primarily associated with the compensation cost for restricted stock as compared with $1,537,295 for the same period in 2012 associated with granting of stock options in years prior to 2012. During the three months ended June 30, 2013, and 2012, total investment income (loss) was $189,963 and $(28,446), respectively. During the three months ended June 30, 2013, and 2012, total operating expenses were $2,179,901 and $3,246,834, respectively.

 

During the three months ended June 30, 2013, as compared with the same period in 2012, investment income increased, reflecting an increase in interest income from convertible bridge notes, non-convertible promissory notes, subordinated and senior secured debt, and an increase in our average holdings of U.S. government securities, offset by a decrease in interest income from senior secured debt through a participation agreement. During the three months ended June 30, 2013, our average holdings of U.S. government securities were $13,999,790. As of June 30, 2012, we had no holdings of U.S. government securities, primarily owing to the decrease in yield available over the durations of maturities in which we were willing to invest and the availability of fully FDIC insured demand deposit bank accounts.

 

Operating expenses, including non-cash, stock-based compensation expense, were $2,179,901 and $3,246,834 for the three months ended June 30, 2013, and June 30, 2012, respectively. The decrease in operating expenses for the three months ended June 30, 2013, as compared with the three months ended June 30, 2012, was primarily owing to decreases in salaries, benefits and stock-based compensation expense and directors' fees and expenses, offset by increases in administration and operations expense, professional fees, rent expense and custody fees. Salaries, benefits and stock-based compensation expense decreased by $1,115,286, or 43.6 percent, for the three months ended June 30, 2013, as compared with June 30, 2012, primarily as a result of a decrease in non-cash stock-based compensation expense of $1,221,815 associated with the Stock Plan and a decrease of $70,830 in the projected benefit obligation expense accrual for medical retirement benefits, offset by increases in bonus accruals, increases in salaries of employees owing to cost of living adjustments and costs associated with increases in salary for three of our employees who were promoted in 2013 from their positions in 2012. While the non-cash, stock-based compensation expense for the Stock Plan increased our operating expenses by $315,480, this increase was offset by a corresponding increase to our additional paid-in capital, resulting in no net impact to our net asset value. Directors' fees and expenses decreased by $23,500, or 28.7 percent, through June 30, 2013, as compared with June 30, 2012, primarily owing to a smaller Board of Directors in 2013.

 

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Administration and operations expense increased by $40,588, or 18.0 percent, through June 30, 2013, as compared with June 30, 2012, primarily as a result of timing differences related to certain accrued expenses. Professional fees increased by $32,842, or 13.4 percent, through June 30, 2013, as compared with June 30, 2012, primarily as a result of an increase in certain legal and accounting fees. Rent expense increased by $2,232, or 2.2 percent, for the period ended June 30, 2013, as compared with the three months ended June 30, 2012. Our rent expense of $101,486 for the three months ended June 30, 2013, includes $111,141 of rent paid in cash, net of $9,655 non-cash rent expense, credits and abatements that we recognize on a straight-line basis over the lease term. Custody fees increased by $2,854, or 25.6 percent, for the three months ended June 30, 2013, as compared with June 30, 2012.

 

Realized Income and Losses from Investments:

 

During the three months ended June 30, 2013, and June 30, 2012, we realized net gains on investments of $7,590,533 and $868,022, respectively.

 

During the three months ended June 30, 2013, we realized net gains of $7,590,533, consisting primarily of a realized gain of $7,651,058 on the sale of 966,490 shares of Solazyme, Inc., of which 303,500 shares were called subject to the terms of written call option contracts and a realized gain of $105,313 on the early repayments of the senior secured and subordinated secured debt by GEO Semiconductor, Inc., offset by a realized loss of $150,711 on the repurchase and expiration of certain Solazyme written call option contracts and a realized loss of $15,127 on the expiration of certain Solazyme purchased put option contracts. At June 30, 2013, we still owned 580,000 shares of Solazyme.

 

During the three months ended June 30, 2012, we realized net gains of $868,022, consisting primarily of a realized gain of $670,879 on the sale of 88,300 shares of Solazyme, Inc., which were called subject to the terms of call option contracts. We also had a realized gain of $213,338 on the repurchase of certain Solazyme written call option contracts.

 

Net Unrealized Appreciation and Depreciation of Portfolio Securities:

 

During the three months ended June 30, 2013, net unrealized depreciation on total investments increased by $1,495,673, or 321.8 percent, from accumulated net unrealized depreciation of $464,833 at March 31, 2013, to accumulated net unrealized depreciation of $1,960,506 at June 30, 2013. During the three months ended June 30, 2012, net unrealized appreciation on total investments increased by $872,686, or 5.1 percent, from net unrealized appreciation of $16,952,574 at March 31, 2012, to net unrealized appreciation of $17,825,260 at June 30, 2012.

 

During the three months ended June 30, 2013, net unrealized depreciation on our venture capital investments increased by $1,095,295, from net unrealized depreciation of $597,882 at March 31, 2013, to net unrealized depreciation of $1,693,177 at June 30, 2013, owing primarily to write-downs in the valuations of the following investments held:

 

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Investment  Amount of Write-Down 
     
OpGen, Inc.  $2,037,500 
Contour Energy Systems, Inc.   1,918,598 
Kovio, Inc.   1,336,165 
Laser Light Engines, Inc.   1,288,502 
GEO Semiconductor, Inc.   106,022 
Cobalt Technologies, Inc.   20 

 

The write-downs for the three months ended June 30, 2013, were offset by write-ups in the valuations of the following investments held:

 

Investment  Amount of Write-Up 
     
Bridgelux, Inc.  $2,759,246 
Solazyme, Inc.   2,331,589 
Champions Oncology, Inc.   2,066,982 
Ancora Pharmaceuticals Inc.   1,834,999 
Xradia, Inc.   865,108 
Ensemble Therapeutics Corporation   811,352 
Senova Systems, Inc.   312,882 
Adesto Technologies Corporation   75,114 
SiOnyx, Inc.   23,406 
Metabolon, Inc.   16,345 
D-Wave Systems, Inc.   12,326 
OHSO Clean, Inc.   8,804 
Nano Terra, Inc.   3,103 
Nanosys, Inc.   726 
HzO, Inc.   265 

 

We had a decrease in unrealized appreciation of $21,092 on the rights to milestone payments from Amgen, Inc.’s acquisition of BioVex Group, Inc.

 

We had a decrease in unrealized appreciation of $197,041 on our investment in D-Wave Systems, Inc., owing to foreign currency translation.

 

We had a decrease in unrealized appreciation of $5,312,602 on our investment in Solazyme, Inc., owing to realized gains on the sale of its securities.

 

Unrealized appreciation on our U.S. government securities portfolio decreased from unrealized appreciation of $189 at March 31, 2013, to unrealized depreciation of $5 at June 30, 2013.

 

During the three months ended June 30, 2012, net unrealized appreciation on our venture capital investments increased by $872,686, from net unrealized appreciation of $16,952,574 at March 31, 2012, to net unrealized appreciation of $17,825,260 at June 30, 2012, owing primarily to write-ups in the valuations of the following investments held:

 

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Investment  Amount of Write-Up 
      
Adesto Technologies Corporation  $2,558,883 
Ensemble Therapeutics Corporation   847,043 
Cambrios Technologies Corporation   800,546 
Nantero, Inc.   561,603 
Cobalt Technologies, Inc.   501,175 
Enumeral Biomedical Corp.   215,343 
Ultora, Inc.   107,500 
NeoPhotonics Corporation   94,691 
Senova Systems, Inc.   34,615 
Metabolon, Inc.   16,314 
D-Wave Systems, Inc.   12,113 
OHSO Clean, Inc.   8,225 
NanoTerra, Inc.   8,199 
Ancora Pharmaceuticals Inc.   1,482 

 

The write-ups for the three months ended June 30, 2012, were offset by write-downs in the valuations of the following investments held:

 

Investment  Amount of Write-Down 
      
Solazyme, Inc.  $2,700,746 
Mersana Therapeutics, Inc.   1,232,532 
ABSMaterials, Inc.   390,000 
Nanosys, Inc.   230,964 
Xradia, Inc.   159,176 
Bridgelux, Inc.   45,681 
Laser Light Engines, Inc.   26,709 
GEO Semiconductor, Inc.   8,906 
SiOnyx, Inc.   3,909 

 

We had an increase in unrealized appreciation of $33,338 on the rights to milestone payments from Amgen, Inc.’s acquisition of BioVex Group, Inc.

 

We had a decrease in unrealized appreciation owing to foreign currency translation of $129,761 on our investment in D-Wave Systems, Inc.

 

Six months ended June 30, 2013, as compared with the six months ended June 30, 2012

 

In the six months ended June 30, 2013, and June 30, 2012, we had net increases in net assets resulting from operations of $2,044,569 and $3,674,264, respectively.

 

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Investment Income and Expenses:

 

We had net operating losses of $3,925,511 and $5,364,661 for the six months ended June 30, 2013, and June 30, 2012, respectively. The variation in these results is primarily owing to the changes in investment income and operating expenses, including non-cash expense of $630,201 in 2013 primarily associated with the compensation cost for restricted stock as compared with $1,985,119 for the same period in 2012 associated with the prior years' granting of stock options. During the six months ended June 30, 2013, and 2012, total investment income was $375,053 and $132,444, respectively. During the six months ended June 30, 2013, and 2012, total operating expenses were $4,300,564 and $5,497,105, respectively.

 

During the six months ended June 30, 2013, as compared with the same period in 2012, investment income increased, reflecting an increase in interest income from convertible bridge notes, non-convertible promissory notes, subordinated and senior secured debt, and an increase in our average holdings of U.S. government securities, offset by a decrease in interest income from senior secured debt through a participation agreement. During the six months ended June 30, 2013, our average holdings of U.S. government securities were $13,999,480. As of June 30, 2012, we had no holdings of U.S. government securities, primarily owing to the decrease in yield available over the durations of maturities in which we were willing to invest and the availability of fully FDIC insured demand deposit bank accounts.

 

Operating expenses, including non-cash, stock-based compensation expense, were $4,300,564 and $5,497,105 for the six months ended June 30, 2013, and June 30, 2012, respectively. The decrease in operating expenses for the six months ended June 30, 2013, as compared with the six months ended June 30, 2012, was primarily owing to decreases in salaries, benefits and stock-based compensation expense, administration and operations expense and directors' fees and expenses, offset by increases in professional fees, rent expense and custody fees. Salaries, benefits and stock-based compensation expense decreased by $1,186,992, or 30 percent, for the six months ended June 30, 2013, as compared with June 30, 2012, primarily as a result of a decrease in non-cash stock-based compensation expense of $1,354,918 associated with the Stock Plan and a decrease of $141,660 in the projected benefit obligation expense accrual for medical retirement benefits, offset by increases in bonus accruals and salaries of employees owing to cost of living adjustments and costs associated with increases in salary for three of our employees who were promoted in 2013 from their positions in 2012. While the non-cash, stock-based compensation expense for the Stock Plan increased our operating expenses by $630,201, this increase was offset by a corresponding increase to our additional paid-in capital, resulting in no net impact to our net asset value. Administration and operations expense decreased by $105,881, or 18.2 percent, for the six months ended June 30, 2013, as compared with June 30, 2012, primarily as a result of decreases in costs associated with investor outreach expenses, general office and administration expenses, and timing differences related to certain accrued expenses. We did not hold a Meet the Portfolio Day during the six months ended June 30, 2013, as compared with costs of approximately $37,668 associated with such an event in the comparable period in 2012. Directors' fees and expenses decreased by $46,856, or 26.4 percent, for the six months ended June 30, 2013, as compared with June 30, 2012, primarily owing to a smaller Board of Directors in 2013.

 

Professional fees increased by $145,229, or 28.1 percent, for the six months ended June 30, 2013, as compared with June 30, 2012, primarily as a result of an increase in certain legal fees, offset by a decrease in consulting fees associated with investor outreach and marketing efforts. Rent expense increased by $5,004, or 2.5 percent, for the six months ended June 30, 2013, as compared with June 30, 2012. Our rent expense of $202,701 for the six months ended June 30, 2013, includes $221,660 of rent paid in cash, net of $18,959 non-cash rent expense, credits and abatements that we recognize on a straight-line basis over the lease term. Custody fees increased by $5,792 or 26.3 percent, for the six months ended June 30, 2013, as compared with June 30, 2012.

 

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Realized Income and Losses from Investments:

 

During the six months ended June 30, 2013, and June 30, 2012, we realized net gains on investments of $4,214,370 and $1,537,525, respectively.

 

During the six months ended June 30, 2013, we realized net gains of $4,214,370, consisting primarily of a realized gain of $9,084,167 on the sale of 1,217,790 shares of Solazyme, Inc., of which 554,800 shares were called subject to the terms of written call option contracts, a realized gain of $148,729 on our escrow payment from the sale of Crystal IS, Inc., and a realized gain of $105,313 on the early repayments of the senior secured and subordinated secured debt by GEO Semiconductor, Inc., offset by a realized loss on our investment in Nextreme Thermal Solutions, Inc., of $4,384,762, a realized loss of $540,106 on the sale of 50,807 shares of NeoPhotonics Corporation, of which 50,800 shares were called subject to the terms of written call option contracts, a realized loss of $126,762 on the repurchase and expiration of certain Solazyme and NeoPhotonics written call option contracts, and a realized loss of $72,209 on the expiration of certain Solazyme purchased put option contracts. At June 30, 2013, we still owned 580,000 shares of Solazyme. At June 30, 2013, we did not hold any shares of NeoPhotonics.

 

During the six months ended June 30, 2012, we realized net gains of $1,537,525, consisting primarily of realized gains on our escrow payments from the sales of BioVex Group, Inc., and Crystal IS, Inc., a realized gain of $378,338 on the repurchase of certain Solazyme, Inc., written call option contracts and a realized gain of $670,879 on the sale of 88,300 shares of Solazyme. At June 30, 2012, we still owned 2,215,849 shares of Solazyme.

 

Net Unrealized Appreciation and Depreciation of Portfolio Securities:

 

During the six months ended June 30, 2013, net unrealized depreciation on total investments decreased by $1,777,881, or 47.6 percent, from accumulated net unrealized depreciation of $3,738,387 at December 31, 2012, to accumulated net unrealized depreciation of $1,960,506 at June 30, 2013. During the six months ended June 30, 2012, net unrealized appreciation on total investments increased by $8,093,657, or 83.2 percent, from net unrealized appreciation of $9,731,603 at December 31, 2011, to net unrealized appreciation of $17,825,260 at June 30, 2012.

 

During the six months ended June 30, 2013, net unrealized depreciation on our venture capital investments decreased by $2,055,454, from net unrealized depreciation of $3,748,631 at December 31, 2012, to net unrealized depreciation of $1,693,177 at June 30, 2013, resulting primarily from an increase in unrealized appreciation of $4,384,762 on our investment in Nextreme Thermal Solutions, Inc., owing to a realized loss on the sale of its securities and increases in the valuations of the following investments held:

 

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Investment  Amount of Write-Up 
      
Bridgelux, Inc.  $3,836,471 
Solazyme, Inc.   2,238,800 
Champions Oncology, Inc.   2,070,806 
Xradia, Inc.   1,702,187 
Ancora Pharmaceuticals Inc.   988,110 
Ensemble Therapeutics Corporation   718,169 
HzO, Inc.   569,325 
AgBiome, LLC   500,000 
Enumeral Biomedical Corp.   239,481 
ABSMaterials, Inc.   40,949 
OHSO Clean, Inc.   14,928 
Nano Terra, Inc.   7,692 
D-Wave Systems, Inc.   7,041 
Cobalt Technologies, Inc.   6,031 
Nanosys, Inc.   986 
Metabolon, Inc.   53 

 

The write-ups for the six months ended June 30, 2013, were offset by write-downs in the valuations of the following investments held:

 

Investment  Amount of Write-Down 
      
Contour Energy Systems, Inc.  $3,197,662 
OpGen, Inc.   2,852,500 
Kovio, Inc.   1,336,165 
Laser Light Engines, Inc.   1,008,222 
Senova Systems, Inc.   292,887 
GEO Semiconductor, Inc.   64,651 
Produced Water Absorbents, Inc.   28,170 
SiOnyx, Inc.   5 

 

We had a decrease in unrealized appreciation of $17,014 on the rights to milestone payments from Amgen, Inc.’s acquisition of BioVex Group, Inc.

 

We had a decrease in unrealized appreciation of $310,047 on our investment in D-Wave Systems, Inc., owing to foreign currency translation.

 

We had an increase in unrealized appreciation of $530,934 on our investment in NeoPhotonics Corporation owing to realized losses on the sale of its securities.

 

We had a decrease in unrealized appreciation of $6,693,948 on our investment in Solazyme, Inc., owing to realized gains on the sale of its securities.

 

Unrealized appreciation on our U.S. government securities portfolio decreased from unrealized appreciation of $2,744 at December 31, 2012, to unrealized depreciation of $5 at June 30, 2013.

 

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During the six months ended June 30, 2012, net unrealized appreciation on our venture capital investments increased by $8,093,657, from net unrealized appreciation of $9,731,603 at December 31, 2011, to net unrealized appreciation of $17,825,260 at June 30, 2012, owing primarily to increases in the valuations of the following investments held:

 

Investment  Amount of Write-Up 
      
Solazyme, Inc.  $3,589,581 
Adesto Technologies Corporation   2,558,883 
Ensemble Therapeutics Corporation   1,115,332 
Xradia, Inc.   955,057 
Cambrios Technologies Corporation   800,546 
D-Wave Systems, Inc.   458,573 
Cobalt Technologies, Inc.   250,588 
Enumeral Biomedical Corp.   215,343 
NeoPhotonics Corporation   162,327 
SiOnyx, Inc.   78,466 
OHSO Clean, Inc.   12,708 
NanoTerra, Inc.   17,918 
Ancora Pharmaceuticals Inc.   3,776 
Metabolon, Inc.   90 

 

The write-ups for the six months ended June 30, 2012, were offset by write-downs in the valuations of the following investments held:

 

Investment  Amount of Write-Down 
      
Mersana Therapeutics, Inc.  $1,232,532 
ABSMaterials, Inc.   390,000 
Nanosys, Inc.   230,964 
Senova Systems, Inc.   138,462 
Bridgelux, Inc.   88,620 
Laser Light Engines, Inc.   41,449 
GEO Semiconductor, Inc.   10,620 

 

We had an increase in unrealized appreciation of $23,433 on the rights to milestone payments from Amgen, Inc.’s acquisition of BioVex Group, Inc.

 

We had a decrease in unrealized appreciation owing to foreign currency translation of $16,317 on our investment in D-Wave Systems, Inc.

 

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Financial Condition

 

June 30, 2013

 

At June 30, 2013, our total assets and net assets were $135,328,845 and $132,063,889, respectively. At December 31, 2012, they were $131,990,250 and $128,436,774, respectively.

 

At June 30, 2013, our net asset value per share was $4.24, as compared with $4.13 at December 31, 2012. At June 30, 2013, and December 31, 2012, our shares outstanding were 31,159,256 and 31,116,881, respectively.

 

Significant developments in the six months ended June 30, 2013, included an increase in the holdings of our venture capital investments of $723,232 and a decrease in our cash and treasury holdings of $183,212. The increase in the value of our venture capital investments from $108,002,191 at December 31, 2012, to $108,725,423 at June 30, 2013, resulted primarily from an increase in the net value of our venture capital investments of $2,055,454 and an increase owing to one new and 19 follow-on investments of $7,108,150, offset by a net decrease of $11,939,009 owing to the sale of certain of our shares of Solazyme, Inc., and NeoPhotonics Corporation. The decrease in our cash and treasury holdings from $22,377,991 at December 31, 2012, to $22,194,779 at June 30, 2013, is primarily owing to the payment of cash for operating expenses of $3,675,767 and to new and follow-on venture capital investments totaling $7,108,150, offset by net proceeds of $11,939,009 received from the sale of certain of our shares of Solazyme and NeoPhotonics, net premium proceeds of $534,605 received from certain Solazyme and NeoPhotonics written call options and purchased put option contracts and $1,222,830 received from the portion of our payments held in escrow from the sale of Innovalight, Inc., and Crystal IS, Inc.

 

The following table is a summary of additions to our portfolio of venture capital investments made during the six months ended June 30, 2013:

 

New Investments  Amount of Investment 
      
EchoPixel, Inc.  $750,000 

 

Follow-On Investments  Amount of Investment 
      
HzO, Inc.  $1,212,500 
Enumeral Biomedical Corp.   750,000 
Adesto Technologies Corporation   672,070 
Produced Water Absorbents, Inc.   648,000 
D-Wave Systems, Inc.   491,100 
Ancora Pharmaceuticals Inc.   350,000 
HzO, Inc.   350,000 
Nano Terra, Inc.   350,000 
Ancora Pharmaceuticals, Inc.   300,000 
AgBiome, LLC   260,870 
Ultora, Inc.   215,000 
Champions Oncology, Inc.   200,000 
Laser Light Engines, Inc.   166,667 
Senova Systems, Inc.   113,636 
Senova Systems, Inc.   100,000 
Ensemble Therapeutics Corporation   73,620 
Kovio, Inc.   50,000 
Cobalt Technologies, Inc.   28,920 
Ensemble Therapeutics Corporation   25,767 
      
Total  $7,108,150 

 

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The following tables summarize the values of our portfolios of venture capital investments and U.S. government obligations, as compared with their cost, at June 30, 2013, and December 31, 2012:

 

   June 30, 2013   December 31, 2012 
           
Venture capital investments, at cost  $110,418,600   $111,750,822 
Net unrealized (depreciation) (1)   (1,693,177)   (3,748,631)
Venture capital investments, at value  $108,725,423   $108,002,191 

 

   June 30, 2013   December 31, 2012 
           
U.S. government obligations, at cost  $13,999,865   $13,996,136 
Net unrealized (depreciation) appreciation(1)   (5)   2,744 
U.S. government obligations, at value  $13,999,860   $13,998,880 

 

(1)At June 30, 2013, and December 31, 2012, the net accumulated unrealized depreciation on investments, including written call options, was $1,960,506 and $3,738,387, respectively.

 

Liquidity

 

Our liquidity and capital resources are generated and are generally available through our cash holdings, interest earned on our investments on U.S. government securities, cash flows from the sales of U.S. government securities and payments received on our venture debt investments, proceeds from periodic follow-on equity offerings and realized capital gains retained for reinvestment.

 

We fund our day-to-day operations using interest earned and proceeds from our cash holdings, the sales of our investments in U.S. government securities, when applicable, and interest earned from our venture debt securities. We believe the increase or decrease in the value of our venture capital investments does not materially affect the day-to-day operations of the Company or our daily liquidity. As of June 30, 2013, and December 31, 2012, we had no investments in money market mutual funds.

 

We have a $10 million three-year revolving credit facility with TD Bank, N.A. This credit facility is used to fund our venture debt investments and not for the payment of day-to-day operating expenses. As of June 30, 2013, we had no debt outstanding. We have not issued any debt securities, and, therefore, are not subject to credit agency downgrades.

 

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As a venture capital company, it is critical that we have capital available to support our best companies until we have an opportunity for liquidity in our investments. As such, we will continue to maintain a substantial amount of liquid capital on our balance sheet.

 

At June 30, 2013, and December 31, 2012, our total net primary liquidity was $26,008,965 and $22,461,202, respectively. Our primary liquidity is principally comprised of our cash, U.S. government securities, when applicable, and certain receivables. The increase in our primary liquidity from December 31, 2012, to June 30, 2013, is primarily owing to the receipt of $1,222,830 from the portion of our upfront payments held in escrow from the sale of Innovalight, Inc., and Crystal IS, Inc., and net proceeds of $11,939,009 received from the sales of certain of our shares of Solazyme, Inc., and NeoPhotonics Corporation, offset by the use of funds for investments and payment of net operating expenses. During the six months ended June 30, 2013, we also purchased and sold call option and put option contracts on our publicly traded positions generating net proceeds of $534,605.

 

At June 30, 2013, and December 31, 2012, our secondary liquidity was $10,398,807 and $15,770,488, respectively. Our secondary liquidity consists of our publicly traded securities. Although these companies are publicly traded, their stock may not trade at high volumes and prices can be volatile, which may restrict our ability to sell our positions at any given time. We may also be restricted for a period of time in selling our positions in these companies due to our shares being unregistered.

 

We do not include funds held in escrow from the sale of investments in primary or secondary liquidity. These funds become primary liquidity if and when they are received at the expiration of the escrow period.

 

On July 12, 2013, Xradia was acquired by Carl Zeiss AG, and on July 19, 2013, we received an initial payment of $12,838,244 from this sale. This amount will add to our primary liquidity during the third quarter of 2013. Additional proceeds of $2,374,827 are held in escrow to be released in whole, or in part, in January and July of 2014. If and when these amounts held in escrow are released, those funds would add to our primarily liquidity.

 

We believe that the current and future venture capital environment may adversely affect the valuation of investment portfolios, lead to tighter lending standards and result in reduced access to capital. These conditions may lead to a decline in net asset value and/or decline in valuations of our portfolio companies in future quarters. Although we cannot predict future market conditions, we continue to believe that our current cash and U.S. government security holdings and our ability to adjust our investment pace will provide us with adequate liquidity to execute our current business strategy.

 

Except for a rights offering, we are generally not able to issue and sell our common stock at a price below our net asset value per share, exclusive of any distributing commission or discount, without shareholder approval. As of June 30, 2013, our net asset value per share was $4.24 per share and our closing market price was $3.04 per share. We do not currently have shareholder approval to issue or sell shares below our net asset value per share.

 

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Borrowings

 

On February 24, 2011, we established a $10 million three-year revolving credit facility with TD Bank, N.A., to be used in conjunction with our venture debt investments.

 

The credit facility, among other things, 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 to be held in a non-interest bearing account at TD Bank, N.A. 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 was historically used to supplement our capital to make additional venture debt investments.

 

The Company’s outstanding debt balance at June 30, 2013, and December 31, 2012, was $0. The annual weighted average interest cost for the six months ended June 30, 2013, was zero percent, exclusive of amortization of closing fees and other expenses related to establishing the credit facility. The remaining capacity under the credit facility was $10,000,000 at June 30, 2013. At June 30, 2013, the Company was in compliance with all financial covenants required by the credit facility.

 

Contractual Obligations

 

A summary of our significant contractual payment obligations is as follows:

 

Payments Due by Period

   Total   Less than
1 Year
   1-3 Years   3-5 Years   More Than
5 Years
 
Revolving credit facility(1)  $0   $0   $0   $0   $0 
                          
Operating leases  $1,902,513   $311,021   $539,320   $590,629   $461,543 

 

(1) As of June 30, 2013, we had $10,000,000 of unused borrowing capacity under our credit facility.

 

Critical Accounting Policies

 

The Company's significant accounting policies are described in Note 3 to the Consolidated Financial Statements and in the Footnote to the Consolidated Schedule of Investments. Critical accounting policies are those that are both important to the presentation of our financial condition and results of operations and those that require management’s most difficult, complex or subjective judgments. The Company considers the following accounting policies and related estimates to be critical:

 

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Valuation of Portfolio Investments

 

The most significant estimate inherent in the preparation of our consolidated financial statements is the valuation of investments and the related amounts of unrealized appreciation and depreciation of investments recorded. As a BDC, we invest in primarily illiquid securities that generally have no established trading market.

 

Investments are stated at "value" as defined in the 1940 Act and in the applicable regulations of the SEC and U.S. GAAP. ASC 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about assets and liabilities measured at fair value. ASC 820 provides a consistent definition of fair value that focuses on exit price in the principal, or most advantageous, market and prioritizes, within a measurement of fair value, the use of market-based inputs over entity-specific inputs. ASC 820 also establishes the following three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date.

 

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.

 

See "Note 6. Fair Value of Investments" in the accompanying notes to our consolidated financial statements for additional information regarding fair value measurements.

 

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, 2013, our financial statements include venture capital investments valued at $98,994,489, the fair values of which were determined in good faith by, or under the direction of, the Board of Directors. As of June 30, 2013, approximately 75 percent of our net assets represent investments in portfolio companies at fair value by the Board of Directors.

 

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Determining fair value requires that judgment be applied to the specific facts and circumstances of each portfolio investment, although our valuation policy is intended to provide a consistent basis for determining fair value of the portfolio investments. Factors that may be considered include, but are not limited to, the cost of the Company’s investment; transactions in the portfolio company’s securities or unconditional firm offers by responsible parties; the financial condition and operating results of the company; the long-term potential of the business and technology of the company; the values of similar securities issued by companies in similar businesses; multiples to revenues, net income or EBITDA that similar securities issued by companies in similar businesses receive; the proportion of the company’s securities we own and the nature of any rights to require the company to register restricted securities under the applicable securities laws; management's assessment of non-performance risk; the achievement of milestones; discounts for restrictions on transfers of publicly traded securities; and the rights and preferences of the class of securities we own as compared with other classes of securities the portfolio has issued.

 

In addition, with respect to our debt investments for which no readily available market quotations are available, we will generally consider the financial condition and current and expected future cash flows of the portfolio company; the creditworthiness of the portfolio company and its ability to meet its current debt obligations; the relative seniority of our debt investment within the portfolio company’s capital structure; the availability and value of any available collateral; and changes in market interest rates and credit spreads for similar debt investments.

 

Historically, difficult venture capital environments have resulted in companies not receiving financing and being subsequently closed down with a loss of investment to venture investors, and other companies receiving financing but at significantly lower valuations than the preceding rounds, leading to very deep dilution for those who do not participate in the new rounds of investment. Our best estimate of this non-performance risk has been quantified and included in the valuation of our portfolio companies as of June 30, 2013.

 

All investments recorded at fair value are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels related to the amount of subjectivity associated with the inputs to fair valuation of these assets, are as follows:

 

·Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities.

 

·Level 2: Quoted prices in active markets for similar assets or liabilities, or quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability.

 

·Level 3: Unobservable inputs for the asset or liability.

 

As of June 30, 2013, approximately 91 percent of our portfolio company investments were classified as Level 3 in the hierarchy, indicating a high level of judgment required in their valuation.

 

The values assigned to our assets are based on available information and do not necessarily represent amounts that might ultimately be realized, as these amounts depend on future circumstances and cannot be reasonably determined until the individual investments are actually liquidated or become readily marketable. Upon sale of investments, the values that are ultimately realized may be materially different from what is presently estimated.

 

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Stock-Based Compensation

 

Determining the appropriate fair-value model and calculating the fair value of share-based awards on the date of grant requires judgment. Historically, we have used the Black-Scholes-Merton option pricing model to estimate the fair value of employee stock options.

 

Management uses the Black-Scholes-Merton option pricing model in instances where we lack historical data necessary for more complex models and when the share award terms can be valued within the model. Other models may yield fair values that are significantly different from those calculated by the Black-Scholes-Merton option pricing model.

 

Management uses a binomial lattice option pricing model in instances where it is necessary to include a broader array of assumptions. We used the binomial lattice model for the 10-year NQSOs granted on March 18, 2009, and for performance-based restricted stock awards. These awards included accelerated vesting provisions or target stock prices that were based on market conditions.

 

Option pricing models require the use of subjective input assumptions, including expected volatility, expected life, expected dividend rate, and expected risk-free rate of return. Variations in the expected volatility or expected term assumptions have a significant impact on fair value. As the volatility or expected term assumptions increase, the fair value of the stock option increases. The expected dividend rate and expected risk-free rate of return are not as significant to the calculation of fair value. A higher assumed dividend rate yields a lower fair value, whereas higher assumed interest rates yield higher fair values for stock options.

 

In the Black-Scholes-Merton model, we use the simplified calculation of expected term as described in the SEC’s Staff Accounting Bulletin 107 because of the lack of historical information about option exercise patterns. In the binomial lattice model, we use an expected term that assumes the options will be exercised at two-times the strike price because of the lack of option exercise patterns. Future exercise behavior could be materially different than that which is assumed by the model.

 

Expected volatility is based on the historical fluctuations in the Company's stock. The Company's stock has historically been volatile, which increases the fair value of the underlying share-based awards.

 

GAAP requires us to develop an estimate of the number of share-based awards that will be forfeited owing to employee turnover. Quarterly changes in the estimated forfeiture rate can have a significant effect on reported share-based compensation, as the effect of adjusting the rate for all expense amortization after the grant date is recognized in the period the forfeiture estimate is changed. If the actual forfeiture rate proves to be higher than the estimated forfeiture rate, then an adjustment will be made to increase the estimated forfeiture rate, which would result in a decrease to the expense recognized in the financial statements. If the actual forfeiture rate proves to be lower than the estimated forfeiture rate, then an adjustment will be made to decrease the estimated forfeiture rate, which would result in an increase to the expense recognized in the financial statements. Such adjustments would affect our operating expenses and additional paid-in capital, but would have no effect on our net asset value.

 

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Pension and Post-Retirement Benefit Plan Assumptions

 

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. Our former President accrued benefits under this plan prior to his retirement, and the termination of the plan has no impact on his accrued benefits. Several statistical and other factors that attempt to anticipate future events are used in calculating the expense and liability values related to our post-retirement benefit plans. These factors include assumptions we make about the discount rate, the rate of increase in healthcare costs, and mortality, among others.

 

The discount rate reflects the current rate at which the post-retirement medical benefit and pension liabilities could be effectively settled considering the timing of expected payments for plan participants. In estimating this rate, we consider the Citigroup Pension Liability Index in the determination of the appropriate discount rate assumptions. The weighted average rate we utilized to measure our post retirement medical benefit obligation as of December 31, 2012, and to calculate our 2013 expense was 4.25 percent. The plan amendment was measured at March 1, 2013, using a discount rate of 4.41 percent. We used a discount rate of 2.75 percent to calculate our pension obligation for the Executive Mandatory Retirement Benefit Plan.

 

Recent Developments - Portfolio Companies

 

On July 8, 2013, the Company made a $13,988 follow-on investment in a privately held portfolio company.

 

On July 12, 2013, Xradia was acquired by Carl Zeiss AG, and on July 19, 2013, we received an initial payment of $12,838,244 from this sale. This amount will add to our primary liquidity during the third quarter of 2013. Additional proceeds of $2,374,827 are held in escrow to be released in whole, or in part, in January and July of 2014. The amounts held in escrow would be reduced by any claims submitted during the escrow period.

 

On July 22, 2013, the Company made a $166,667 follow-on investment in a privately held portfolio company.

 

On July 22, 2013, the Company made a $418,066 follow-on investment in a privately held portfolio company.

 

On August 1, 2013, the Company made a $386,363 follow-on investment in a privately held portfolio company.

 

On August 7, 2013, we closed 1,000 written call option contracts on Solazyme, Inc., with a strike price of $12.50, expiring on September 21, 2013, for a payment of $40,783. We also sold 1,000 written call option contracts on Solazyme, with a strike price of $12.50, expiring in March 2014. We received premiums of approximately $95,630 for these contracts.

 

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Cautionary Statement Regarding Forward-Looking Statements

 

This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates and projections about the Company, our current and prospective portfolio investments, our industry, our beliefs, and our assumptions. Words such as "anticipates," "expects," "intends," "plans," "will," "may," "continue," "believes," "seeks," "estimates," "would," "could," "should," "targets," "projects," and variations of these words and similar expressions are intended to identify forward-looking statements. The forward-looking statements contained in this Quarterly Report involve risks and uncertainties, including statements as to:

 

our future operating results;

 

our business prospects and the prospects of our portfolio companies;
  
the impact of investments that we expect to make;
  
our contractual arrangements and relationships with third parties;
  
the dependence of our future success on the general economy and its impact on the industries in which we invest;
  
the ability of our portfolio companies to achieve their objectives;
  
our expected financings and investments;
  
the adequacy of our cash resources and working capital; and
  
the timing of cash flows, if any, from the operations and/or monetization of our positions in our portfolio companies.

 

These statements are not guarantees of future performance and are subject to risks, uncertainties, and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements, including without limitation:

 

an economic downturn could impair our portfolio companies’ ability to continue to operate, which could lead to the loss of some or all of our investments in such portfolio companies;
  
a contraction of available credit and/or an inability to access the equity markets could impair our investment activities;
  
interest rate volatility could adversely affect our results, particularly if we elect to use leverage as material part of our investment strategy;

 

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currency fluctuations could adversely affect the results of our investments in foreign companies, particularly to the extent that we receive payments denominated in foreign currency rather than U.S. dollars; and

 

the risks, uncertainties and other factors we identify in "Risk Factors" and elsewhere in this Quarterly Report on Form 10-Q and in our other filings with the SEC.

 

Although we believe that the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and, as a result, the forward-looking statements based on those assumptions also could be inaccurate. Important assumptions include our ability to originate new investments, certain margins and levels of profitability and the availability of additional capital. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this Quarterly Report on Form 10-Q should not be regarded as a representation by us that our plans and objectives will be achieved. These risks and uncertainties include those described or identified in "Risk Factors" and elsewhere in this Quarterly Report on Form 10-Q. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

Our business activities contain elements of risk. We consider the principal types of market risk to be interest rate risk and foreign currency risk. Although we are risk-seeking rather than risk-averse in our investments, we consider the management of risk to be essential to our business.

 

Interest Rate Risk 

 

Interest rate sensitivity refers to the change in earnings that may result from changes in the level of interest rates. Because we have historically funded a portion of our venture debt investments with borrowings, our net investment income will be affected by the difference between the rate at which we invest and the rate at which we borrow. Our borrowings under our credit facility bear interest, at our option, based on either (a) LIBOR plus 1.25 percent or (2) the higher of the federal funds rate plus 50 basis points or the U.S. prime rate. The interest rates are fixed for the interest period selected. However, these interest periods renew approximately every three months. Therefore, variations in interest rates affect the rates at which we can borrow and may increase our interest expense during any given period. Additionally, in the future, we may fund a portion of our equity investments with borrowings. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income in future quarters. At June 30, 2013, we had no debt outstanding.

 

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We may also invest in both short- and long-term U.S. government and agency securities. To the extent that we invest in short- and long-term U.S. government and agency securities, changes in interest rates result in changes in the value of these obligations that result in an increase or decrease of our net asset value. The level of interest rate risk exposure at any given point in time depends on the market environment, the expectations of future price and market movements, and the quantity and duration of long-term U.S. government and agency securities held by the Company, and it will vary from period to period. If the average interest rate on U.S. government securities at June 30, 2013, were to increase by 25, 75 and 150 basis points, the average value of these securities held by us at June 30, 2013, would decrease by approximately $35,000, $105,000 and $210,000, respectively, and the portion of our net asset value attributable to such securities would decrease correspondingly.

 

In addition, market interest rates for high-yield corporate debt are an input in determining value of our investments in debt securities of privately held and publicly traded companies. Significant changes in these market rates could affect the value of our debt securities as of the date of measurement of value. Our investment income could be adversely affected should such debt securities include floating interest rates. We do not currently have any investments in debt securities with floating interest rates.

 

Foreign Currency Risk

 

Most of our investments are denominated in U.S. dollars. We currently have one investment denominated in Canadian dollars. We are exposed to foreign currency risk related to potential changes in foreign currency exchange rates. The potential loss in fair value on this investment resulting from a 10 percent adverse change in quoted foreign currency exchange rates is $489,547 at June 30, 2013.

 

Item 4. Controls and Procedures

 

(a) Disclosure Controls and Procedures. As of the end of the period covered by this report, the Company’s management, under the supervision and with the participation of our chief executive officer and chief financial officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as required by Rules 13a-15 of the 1934 Act). Disclosure controls and procedures means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the 1934 Act is recorded, processed, summarized and reported, within time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the issuer's management, as appropriate, to allow timely decisions regarding required disclosures. As of June 30, 2013, based upon this evaluation of our disclosure controls and procedures, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective.

 

(b) Changes in Internal Control Over Financial Reporting. There have not been any changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the 1934 Act) during the second quarter of 2013 to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 1A.  Risk Factors

 

Investing in our common stock involves significant risks relating to our business and investment objective. You should carefully consider the risks and uncertainties described in our Annual Report on Form 10-K for the year ended December 31, 2012, before you purchase any of our common stock.

 

The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Unknown additional risks and uncertainties, or ones that we currently consider immaterial, may also impair our business. If any of these risks or uncertainties materialize, our business, financial condition or results of operations could be materially adversely affected. In this event, the trading price of our common stock could decline, and you could lose all or part of your investment.

 

Changes in valuations of early-stage small businesses tend to be more volatile than changes in prices of established, more mature securities.

 

Investments in early- and mid-stage small businesses may be inherently more volatile than investments in more mature businesses. Such immature businesses are inherently fragile and easily affected by both internal and external forces. Our investee companies can lose much or all of their value suddenly in response to an internal or external adverse event. Conversely, these immature small businesses can gain suddenly in value in response to an internal or external positive development. Moreover, because of the lack of daily pricing mechanisms of our privately held companies, our ownership interests in such investments are generally valued only at quarterly intervals by our Valuation Committee. Thus, changes in valuations from one valuation point to another may be larger than changes in valuations of marketable securities that are revalued in the marketplace much more frequently, in some highly liquid cases, virtually continuously. Although we carefully monitor each of our portfolio companies, information pertinent to our portfolio companies is not always known immediately by us, and, therefore, its availability for use in determining value may not always coincide with the timeframe of our valuations required by the federal securities laws.

 

As of June 30, 2013, the unrestricted portion of our shares of Champions Oncology, Inc., which trades on an OTC exchange, was valued using the closing price at the end of the quarter as required by the 1940 Act. In prior quarters, these shares were fair valued by our Board of Directors owing to our determination that there was not an active market as of the dates of valuation. If in future quarters, shares of Champions Oncology do not continue to trade in an active market as of the dates of valuation, the value of our shares could be materially different.

 

Additionally, we may price or invest in rounds at lower valuations than prior rounds of financing and/or previously reported valuations in order to receive more favorable terms, such as increased ownership percentages or liquidation preferences, which may result in decreased valuations in the interim. These decreases could be material.

 

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Item 6. Exhibits

 

31.01*   Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.02*   Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32*   Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

*filed herewith

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  Harris & Harris Group, Inc.
     
  /s/ Douglas W. Jamison
  By: Douglas W. Jamison
    Chief Executive Officer
     
  /s/ Patricia N. Egan
  By: Patricia N. Egan
    Chief Financial Officer

 

Date: August 8, 2013

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EXHIBIT INDEX

 

Exhibit No.   Description
     
31.01   Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.02   Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32   Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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