10-Q 1 v393705_10q.htm FORM 10-Q

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

 

Form 10-Q

 

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

 

For the quarterly period ended September 30, 2014

 

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

 

For the transition period from ____________ to _____________

 

Commission file number: 0-11576

 

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

 

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

 

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

 

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

 

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

Yes     x     No     ¨

 

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

Yes     ¨     No     ¨

 

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

 

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

 

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

Yes     ¨     No     x

 

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

 

Class   Outstanding at November 10, 2014
Common Stock, $0.01 par value per share   31,245,664 shares

 

 
 

 

Harris & Harris Group, Inc.

Form 10-Q, September 30, 2014

 

  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 37
 
Financial Highlights 61
   
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations 62
   
Cautionary Statement Regarding Forward-Looking Statements 62
   
Background 63
   
Overview 63
   
Realize 64
   
Invest 69
   
Partner 72
   
Return 73
   
Current Business Environment 73
   
Valuation of Investments 74
   
Results of Operations 76
   
Financial Condition 86
   
Cash Flow 87
   
Liquidity and Capital Resources 88
   
Borrowings 89
   
Contractual Obligations 90
   
Critical Accounting Policies 90
   
Recent Developments – Portfolio Companies 94
   
Item 3.  Quantitative and Qualitative Disclosures About Market Risk 94
   
Item 4.  Controls and Procedures 96
   
PART II.  OTHER INFORMATION  
   
Item 1A. Risk Factors 97
   
Item 6. Exhibits 97
   
Signatures 98
   
Exhibit Index 99

 

 
 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Consolidated Financial Statements

 

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.

 

Harris & Harris Group, Inc.® (the "Company," "us," "our" and "we"), is an internally managed, non-diversified management investment 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, 2013.

 

1
 

 

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

(Unaudited)

 

   September 30, 2014   December 31, 2013 
ASSETS
Investments, in portfolio securities at value:          
Unaffiliated privately held companies          
(cost: $22,530,919 and $29,277,213, respectively)  $12,986,116   $29,199,564 
Unaffiliated rights to milestone payments          
(adjusted cost basis: $2,387,278 and $3,291,750, respectively)   3,180,287    3,489,433 
Unaffiliated publicly traded securities          
(cost: $1,741,128 and $2,451,410, respectively)   2,253,701    5,570,796 
Non-controlled affiliated privately held companies          
(cost: $68,332,012 and $71,843,448, respectively)   64,927,112    54,287,040 
Non-controlled affiliated publicly traded securities          
(cost: $5,591,299 and $0, respectively)   10,389,092    0 
Controlled affiliated privately held companies          
(cost: $10,078,252 and $9,065,972, respectively)   2,935,127    1,352,626 
Total, investments in private portfolio companies, rights to          
milestone payments and public securities at value          
(cost: $110,660,888 and $115,929,793, respectively)  $96,671,435   $93,899,459 
Investments, in U.S. Treasury securities at value          
(cost: $0 and $18,999,765, respectively)   0    18,999,810 
Cash   22,450,225    8,538,548 
Receivable from rights to milestone payments (Note 3)   2,070,955    0 
Receivable from sales of investments (Note 3)   21,420    448,886 
Funds held in escrow from sales of investments at value (Note 3)   305,965    1,786,390 
Receivable from portfolio company   0    54,160 
Interest receivable   20,076    22,804 
Prepaid expenses (Note 3)   622,767    991,409 
Other assets   288,763    322,480 
Total assets  $122,451,606   $125,063,946 
           
LIABILITIES & NET ASSETS
           
Post retirement plan liabilities (Note 8)  $1,169,038   $1,120,262 
Accounts payable and accrued liabilities   781,364    785,608 
Deferred rent   342,230    353,001 
Written call options payable (premiums received:          
$0 and $112,382, respectively) (Note 7)   0    103,500 
Total liabilities   2,292,632    2,362,371 
           
Commitments and contingencies (Note 12)          
           
Net assets  $120,158,974   $122,701,575 
           
Net assets are comprised of:          
Preferred stock, $0.10 par value,          
2,000,000 shares authorized; none issued  $0   $0 
Common stock, $0.01 par value, 45,000,000 shares authorized at          
9/30/14 and 12/31/13; 33,074,404 and 33,026,178 issued at          
9/30/14 and 12/31/13, respectively   330,744    330,262 
Additional paid in capital (Note 9)   214,992,370    214,320,241 
Accumulated net operating and realized loss   (78,539,604)   (67,449,176)
Accumulated unrealized depreciation of investments   (13,989,453)   (22,021,407)
Accumulated other comprehensive income (Note 8)   770,448    927,186 
Treasury stock, at cost (1,828,740 shares at 9/30/14 and 12/31/13)   (3,405,531)   (3,405,531)
           
Net assets  $120,158,974   $122,701,575 
           
Shares outstanding   31,245,664    31,197,438 
           
Net asset value per outstanding share  $3.85   $3.93 

 

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

 

2
 

 

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

   Three Months Ended Sept. 30,   Nine Months Ended Sept. 30, 
   2014   2013   2014   2013 
Investment income:                    
Interest from:                    
Unaffiliated companies  $21,555   $58,363   $108,237   $190,209 
Non-controlled affiliated companies   (27,703)   9,187    55,668    111,957 
Controlled affiliated companies   40,382    28,441    111,715    72,377 
Cash and U.S. Treasury securities and other   1,796    3,115    8,274    12,148 
Fees for providing managerial assistance to                    
portfolio companies   37,500    0    37,500    0 
Yield-enhancing fees on debt securities   19,843    15,919    52,105    43,387 
Rental income from sublease   0    20,000    0    80,000 
Total investment income   93,373    135,025    373,499    510,078 
                     
Expenses:                    
Salaries, benefits and stock-based                    
compensation (Note 9)   1,127,028    1,305,405    3,786,814    4,065,804 
Administration and operations   108,908    125,003    446,348    429,045 
Professional fees   365,557    311,428    962,780    974,296 
Interest and other debt expense   94,831    9,885    282,827    21,590 
Directors’ fees and expenses   91,875    53,687    278,283    184,563 
Rent   69,389    98,539    217,480    301,240 
Insurance expense   84,006    96,179    251,946    268,482 
Custody fees   16,200    13,919    45,219    41,693 
Depreciation   13,182    13,774    39,632    41,670 
Total expenses   1,970,976    2,027,819    6,311,329    6,328,383 
                     
Net operating loss   (1,877,603)   (1,892,794)   (5,937,830)   (5,818,305)
                     
Net realized (loss) gain:                    
Realized (loss) gain from investments:                    
Unaffiliated companies   15,475    0    3,962,313    105,313 
Unaffiliated rights to milestone payments   536,813    0    536,813    0 
Non-Controlled affiliated companies   (4,488,575)   10,006,915    (11,199,638)   5,770,882 
Publicly traded companies   0    2,845,191    1,333,497    11,389,252 
Written call options   145,426    42,049    232,079    (84,713)
Purchased put options   0    0    0    (72,209)
Realized (loss) gain from investments   (3,790,861)   12,894,155    (5,134,936)   17,108,525 
                     
Income tax expense (Note 10)   1,676    3,343    17,662    25,514 
Net realized (loss) gain from investments   (3,792,537)   12,890,812    (5,152,598)   17,083,011 
                     
Net decrease (increase) in unrealized                    
depreciation on investments:                    
Investments   4,857,214    (13,424,568)   8,040,836    (11,371,863)
Written call options   (97,926)   330,388    (8,882)   55,564 
Net decrease (increase) in unrealized                    
depreciation on investments   4,759,288    (13,094,180)   8,031,954    (11,316,299)
                     
Net realized and unrealized                    
gain (loss) on investments   966,751    (203,368)   2,879,356    5,766,712 
                     
Net decrease in net assets                    
resulting from operations:                    
                     
Total  $(910,852)  $(2,096,162)  $(3,058,474)  $(51,593)
                     
Per average basic and diluted outstanding share  $(0.03)  $(0.07)  $(0.10)  $(0.00)
                     
Average outstanding shares – basic and diluted   31,245,664    31,159,256    31,215,069    31,131,654 

 

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

 

3
 

  

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

  

   Three Months Ended Sept. 30,   Nine Months Ended Sept. 30, 
   2014   2013   2014   2013 
                 
Net decrease resulting from operations  $(910,852)  $(2,096,162)  $(3,058,474)  $(51,593)
                     
Other comprehensive income (loss):                    
                     
Prior service cost  (Note 8)   0    0    0    1,101,338 
Amortization of prior service cost   (52,246)   (43,538)   (156,738)   (130,614)
                     
Other comprehensive (loss) income   (52,246)   (43,538)   (156,738)   970,724 
                     
Comprehensive (loss) income  $(963,098)  $(2,139,700)  $(3,215,212)  $919,131 

 

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

 

4
 

  

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   Nine Months Ended   Nine Months Ended 
   September 30, 2014   September 30, 2013 
         
Cash flows provided by (used in) operating activities:          
Net decrease in net assets resulting from operations  $(3,058,474)  $(51,593)
Adjustments to reconcile net decrease in net assets resulting from          
operations to net cash provided by (used in) operating activities:          
Net realized gain (loss) and change in unrealized          
depreciation on investments   (2,897,018)   (5,792,226)
Depreciation of fixed assets, amortization of premium or          
discount on U.S. government securities and prepaid assets          
and accretion of bridge note interest   (145,502)   (172,361)
Stock-based compensation expense   741,483    939,979 
Amortization of prior service cost   (156,738)   970,724 
Purchase of U.S. government securities   (19,999,044)   (115,598,392)
Sale of U.S. government securities   38,998,052    129,599,974 
Purchase of affiliated portfolio companies   (12,056,559)   (10,200,939)
Purchase of unaffiliated portfolio companies   (240,500)   (818,880)
Payments received on debt investments   865,071    726,059 
Proceeds from sale of investments and conversion of bridge notes   10,929,061    29,290,630 
Proceeds from call option premiums   338,229    1,027,127 
Payments for put and call option purchases   (218,352)   (403,863)
           
Changes in assets and liabilities:          
Restricted funds   0    (13)
Receivable from funds held in escrow from sales of investments   0    (116,326)
Receivable from portfolio company   54,160    19,670 
Receivable from sales of investments   427,466    (22,799,975)
Interest receivable   2,728    33,944 
Prepaid expenses   368,642    (729,606)
Other assets   (621)   1,337 
Post retirement plan liabilities   48,776    (937,494)
Accounts payable and accrued liabilities   (4,244)   233,728 
Deferred rent   (10,771)   (6,321)
           
Net cash provided by operating activities   13,985,845    5,215,183 
           
Cash flows from investing activities:          
Purchase of fixed assets   (5,296)   (3,909)
           
Net cash used in investing activities   (5,296)   (3,909)
           
Cash flows from financing activities:          
Payment of withholdings related to net settlement of restricted stock   (68,872)   (61,917)
           
Net cash used in financing activities   (68,872)   (61,917)
           
Net increase in cash  $13,911,677   $5,149,357 
           
Cash at beginning of the period   8,538,548    8,379,111 
Cash at end of the period  $22,450,225   $13,528,468 
           
Supplemental disclosures of cash flow information:          
Income taxes paid  $17,662   $25,514 
           
Supplemental schedule of non-cash activities:          
Impact of plan amendment on post-retirement plan liabilities  $(156,738)  $970,724 

 

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

 

5
 

 

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(Unaudited)

 

   Nine Months Ended   Year Ended 
   September 30, 2014   December 31, 2013 
         
Changes in net assets from operations:          
           
Net operating loss  $(5,937,830)  $(8,022,206)
Net realized (loss) gain on investments   (5,152,598)   18,516,268 
Net decrease (increase) in unrealized          
depreciation on investments   8,040,836    (18,284,402)
Net (decrease) increase in unrealized          
appreciation on written call options   (8,882)   1,382 
           
Net decrease in net assets          
resulting from operations   (3,058,474)   (7,788,958)
           
Changes in net assets from          
capital stock transactions:          
           
Acquisition of vested restricted stock awards          
to pay required employee withholding tax   (68,872)   (123,183)
Stock-based compensation expense   741,483    1,249,756 
           
Net increase in net assets resulting          
from capital stock transactions   672,611    1,126,573 
           
Changes in net assets from          
accumulated other comprehensive income:          
           
Other comprehensive (loss) income   (156,738)   927,186 
           
Net (decrease) increase in net assets resulting from          
accumulated other comprehensive income   (156,738)   927,186 
           
Net decrease in net assets   (2,542,601)   (5,735,199)
           
Net Assets:          
           
Beginning of the period   122,701,575    128,436,774 
           
End of the period  $120,158,974   $122,701,575 

 

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

 

6
 

  

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF SEPTEMBER 30, 2014

(Unaudited)

 

   Method of  Primary      Shares/     
   Valuation (1)  Industry (2)  Cost   Principal   Value 
                      
Investments in Unaffiliated Companies (3) –                
15.3% of net assets at value                     
                      
Private Placement Portfolio (Illiquid) (4) –                     
10.8% of net assets at value                     
                      
Bridgelux, Inc. (5)(8)(9)     Energy               
Manufacturing high-power light emitting                     
diodes (LEDs) and arrays                     
Series B Convertible Preferred Stock  (M)     $1,000,000    1,861,504   $516,056 
Series C Convertible Preferred Stock  (M)      1,352,196    2,130,699    716,290 
Series D Convertible Preferred Stock  (M)      1,371,622    999,999    731,122 
Series E Convertible Preferred Stock  (M)      672,599    440,334    715,524 
Series E-1 Convertible Preferred Stock  (M)      386,073    399,579    489,682 
Warrants for Series C Convertible Preferred                     
Stock expiring 8/31/15  ( I )      168,270    163,900    26,430 
Warrants for Series D Convertible Preferred                     
Stock expiring 8/31/15  ( I )      128,543    166,665    28,444 
Warrants for Series E Convertible Preferred                     
Stock expiring 12/31/17  ( I )      93,969    170,823    29,487 
Warrants for Common Stock expiring 6/1/16  ( I )      72,668    132,100    4,131 
Warrants for Common Stock expiring 8/9/18  ( I )      148,409    171,183    21,987 
Warrants for Common Stock expiring 10/21/18  ( I )      18,816    84,846    2,654 
          5,413,165         3,281,807 
                      
Cambrios Technologies Corporation (5)(8)(9)     Electronics               
Developing nanowire-enabled electronic                     
materials for the display industry                     
Series B Convertible Preferred Stock  ( I )      1,294,025    1,294,025    69,839 
Series C Convertible Preferred Stock  ( I )      1,300,000    1,300,000    70,161 
Series D Convertible Preferred Stock  ( I )      515,756    515,756    356,316 
Series D-2 Convertible Preferred Stock  ( I )      92,400    92,400    32,535 
Series D-4 Convertible Preferred Stock  ( I )      216,168    216,168    76,114 
          3,418,349         604,965 
                      
Cobalt Technologies, Inc. (5)(8)(9)(10)     Energy               
Developing processes for making bio-                     
butanol through biomass fermentation                     
Series C-1 Convertible Preferred Stock  (M)      749,998    352,112    0 
Series D-1 Convertible Preferred Stock  (M)      122,070    48,828    0 
Series E-1 Convertible Preferred Stock  (M)      114,938    46,089    0 
Warrants for Series E-1 Pref. Stock expiring on 10/9/22  ( I )      2,781    1,407    0 
Warrants for Series E-1 Pref. Stock expiring on 3/11/23  ( I )      5,355    2,707    0 
          995,142         0 

  

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

 

7
 

 

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF SEPTEMBER 30, 2014

(Unaudited)

 

   Method of  Primary      Shares/     
   Valuation (1)  Industry (2)  Cost   Principal   Value 
                      
Investments in Unaffiliated Companies (3) –                
15.3% of net assets at value (Cont.)                     
                      
Private Placement Portfolio (Illiquid) (4) –                     
10.8% of net assets at value (Cont.)                     
                      
GEO Semiconductor Inc. (5)     Electronics               
Developing programmable, high-performance                     
video and geometry processing solutions                     
Participation Agreement with Montage                     
Capital relating to the following assets:                     
Warrants for Series A Pref. Stock expiring on 9/17/17  ( I )     $66,684    100,000   $109,768 
Warrants for Series A-1 Pref. Stock expiring on 6/30/18  ( I )      23,566    34,500    41,657 
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    10,180 
Warrants for Series A-1 Pref. Stock expiring on 6/29/18  ( I )      7,546    10,000    11,198 
          105,308         172,803 
                      
Mersana Therapeutics, Inc. (5)(8)(9)(11)     Life Sciences               
Developing antibody drug conjugates                     
for cancer therapy                     
Series A-1 Convertible Preferred Stock  ( I )      683,538    635,081    699,669 
Common Stock  ( I )      3,875,395    350,539    219,683 
          4,558,933         919,352 
                      
Molecular Imprints, Inc. (5)(8)(9)(12)     Electronics               
Manufacturing nanoimprint lithography                     
capital equipment for non-semiconductor                     
manufacturing markets                     
Series A Convertible Preferred Stock  (M)      928,884    928,884    928,884 
                      
Nanosys, Inc. (5)(8)     Energy               
Developing inorganic nanowires and                     
quantum dots for use in LED-backlit devices                     
Series C Convertible Preferred Stock  (M)      1,500,000    803,428    790,222 
Series D Convertible Preferred Stock  (M)      3,000,003    1,016,950    2,263,901 
Series E Convertible Preferred Stock  (M)      496,573    433,688    793,274 
Unsecured Convertible Bridge Note, 4%, acquired 7/16/12  (M)      47,696   $43,821    74,793 
          5,044,272         3,922,190 

 

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

 

8
 

  

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF SEPTEMBER 30, 2014

(Unaudited)

 

   Method of  Primary     Shares/     
   Valuation (1)  Industry (2)  Cost   Principal   Value 
                      
Investments in Unaffiliated Companies (3) –                
15.3% of net assets at value (Cont.)                     
                      
Private Placement Portfolio (Illiquid) (4) –                     
10.8% of net assets at value (Cont.)                     
                      
Nano Terra, Inc. (5)     Energy               
Developing surface chemistry and nano-                     
manufacturing solutions                     
Senior secured debt, 12.0%, maturing on 12/1/15  ( I )     $438,892   $474,295   $470,390 
Warrants for Series A-2 Pref. Stock expiring on 2/22/21  ( I )      69,168    446,248    17 
Warrants for Series C Pref. Stock expiring on 11/15/22  ( I )      35,403    241,662    68,574 
          543,463         538,981 
                      
Nantero, Inc. (5)(8)(9)     Electronics               
Developing a high-density, nonvolatile,                     
random access memory chip, enabled                     
by carbon nanotubes                     
Series A Convertible Preferred Stock  ( I )      489,999    345,070    1,066,459 
Series B Convertible Preferred Stock  ( I )      323,000    207,051    647,834 
Series C Convertible Preferred Stock  ( I )      571,329    188,315    757,819 
Series D Convertible Preferred Stock  ( I )      139,075    35,569    145,022 
          1,523,403         2,617,134 
                      
Total Unaffiliated Private Placement Portfolio (cost: $22,530,919)                  $12,986,116 
                      
Rights to Milestone Payments (Illiquid) (6) –                     
2.6% of net assets at value                     
                      
Amgen, Inc. (8)(9)     Life Sciences               
Rights to Milestone Payments from                     
Acquisition of BioVex Group, Inc.  ( I )     $1,757,608   $1,757,608   $2,552,477 
                      
Laird Technologies, Inc. (8)(9)     Energy               
Rights to Milestone Payments from Merger &                     
Acquisition of Nextreme Thermal Solutions, Inc.  ( I )      0    0    0 
                      
Canon, Inc. (8)(9)     Electronics               
Rights to Milestone Payments from                     
Acquisition of Molecular Imprints, Inc.  ( I )      629,670   $629,670    627,810 
                      
Total Unaffiliated Rights to Milestone Payments (cost: $2,387,278)                  $3,180,287 

 

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

 

9
 

  

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF SEPTEMBER 30, 2014

(Unaudited)

  

   Method of  Primary     Shares/     
   Valuation (1)  Industry (2)  Cost   Principal   Value 
                      
Publicly Traded Portfolio (7) –           
1.9% of net assets at value                     
                      
Solazyme, Inc. (5)(9)     Energy               
Developing algal biodiesel, industrial                     
chemicals and specialty ingredients using                     
synthetic biology                     
Common Stock  (M)     $118,099    50,000   $373,000 
                      
Champions Oncology, Inc. (5)(9)     Life Sciences               
Developing its TumorGraftTM platform for                     
personalized medicine and drug development                     
Common Stock  (M)      1,622,629    2,523,895    1,867,682 
Warrants for Common Stock expiring 1/29/18  ( I )      400    40,000    13,019 
          1,623,029         1,880,701 
                      
Total Unaffiliated Publicly Traded Portfolio (cost: $1,741,128)                  $2,253,701 
                      
Total Investments in Unaffiliated Companies (cost: $26,659,325)                  $18,420,104 

 

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

 

10
 

 

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF SEPTEMBER 30, 2014

(Unaudited)

 

   Method of  Primary      Shares/     
   Valuation (1)  Industry (2)  Cost   Principal   Value 
                      
Investments in Non-Controlled   
Affiliated Companies (3) –                     
62.7% of net assets at value                     
                      
Private Placement Portfolio (Illiquid) (13) –                     
54.0% of net assets at value                     
                      
ABSMaterials, Inc. (5)(8)(9)     Energy               
Developing nano-structured absorbent                     
materials for environmental remediation                     
Series A Convertible Preferred Stock  ( I )     $435,000    390,000   $291,345 
Series B Convertible Preferred Stock  ( I )      1,217,644    1,037,751    1,252,869 
          1,652,644         1,544,214 
                      
Accelerator IV-New York Corporation (5)(8)(9)(14)(15)     Life Sciences               
Identifying and managing emerging                     
biotechnology companies                     
Series A Common Stock  ( I )      216,012    216,012    216,012 
                      
Adesto Technologies Corporation (5)(8)(9)(16)     Electronics               
Developing low-power, high-performance                     
memory devices                     
Series A Convertible Preferred Stock  (M)      2,200,000    6,547,619    1,036,361 
Series B Convertible Preferred Stock  (M)      2,200,000    5,952,381    1,362,517 
Series C Convertible Preferred Stock  (M)      1,485,531    2,122,187    652,739 
Series D Convertible Preferred Stock  (M)      1,393,147    1,466,470    914,887 
Series D-1 Convertible Preferred Stock  (M)      703,740    987,706    463,438 
Series E Convertible Preferred Stock  (M)      2,499,999    3,508,771    12,739,974 
          10,482,417         17,169,916 
                      
AgBiome, LLC (5)(8)(9)     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  ( I )      2,000,000    2,000,000    2,360,000 
Series A-2 Convertible Preferred Stock  ( I )      521,740    417,392    567,654 
          2,521,740         2,927,654 

 

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

 

11
 

  

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF SEPTEMBER 30, 2014

(Unaudited)

 

   Method of  Primary        Shares/     
   Valuation (1)  Industry (2)   Cost    Principal    Value 
Investments in Non-Controlled       
Affiliated Companies (3) –                     
62.7% of net assets at value (Cont.)                     
                      
Private Placement Portfolio (Illiquid) (13) –                     
54.0% of net assets at value (Cont.)                     
                      
D-Wave Systems, Inc. (8)(17)     Electronics               
Developing high-performance                     
quantum computing systems                     
Series 1 Class B Convertible Preferred Stock  (H)     $1,002,074    1,144,869   $1,765,295 
Series 1 Class C Convertible Preferred Stock  (H)      487,804    450,450    697,974 
Series 1 Class D Convertible Preferred Stock  (H)      748,473    855,131    1,325,030 
Series 1 Class E Convertible Preferred Stock  (H)      248,049    269,280    441,979 
Series 1 Class F Convertible Preferred Stock  (H)      238,323    258,721    424,648 
Series 1 Class H Convertible Preferred Stock  (H)      909,088    460,866    893,434 
Series 2 Class D Convertible Preferred Stock  (H)      736,019    678,264    1,050,973 
Series 2 Class E Convertible Preferred Stock  (H)      659,493    513,900    853,097 
Series 2 Class F Convertible Preferred Stock  (H)      633,631    493,747    819,643 
Warrants for Common Stock expiring 6/30/15  ( I )      98,644    153,890    114,922 
Warrants for Common Stock expiring 5/12/19  ( I )      26,357    20,415    6,592 
          5,787,955         8,393,587 
                      
EchoPixel, Inc. (5)(8)(9)     Life Sciences               
Developing algorithms and software to improve                     
visualization of data for life science and                     
healthcare applications                     
Series Seed Convertible Preferred Stock  ( I )      1,250,000    4,194,630    1,258,389 
                      
Ensemble Therapeutics Corporation (5)(8)     Life Sciences               
Developing DNA-Programmed ChemistryTM                     
for the discovery of new classes of therapeutics                     
Series B Convertible Preferred Stock  ( I )      2,000,000    1,449,275    1,194,742 
Series B-1 Convertible Preferred Stock  ( I )      679,754    492,575    1,476,905 
          2,679,754         2,671,647 
                      
HZO, Inc. (5)(8)(9)     Electronics               
Developing novel industrial coatings that                     
protect electronics against damage from liquids                     
Common Stock  (H)      666,667    405,729    908,852 
Series I Convertible Preferred Stock  (H)      5,709,835    2,266,894    6,303,795 
Series II Convertible Preferred Stock  (H)      2,000,003    539,710    2,020,980 
          8,376,505         9,233,627 

 

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

 

12
 

 

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF SEPTEMBER 30, 2014

(Unaudited)

 

   Method of  Primary      Shares/     
   Valuation (1)  Industry (2)  Cost   Principal   Value 
                   
Investments in Non-Controlled                
Affiliated Companies (3) –                     
62.7% of net assets at value (Cont.)                     
                      
Private Placement Portfolio (Illiquid) (13) –                     
54.0% of net assets at value (Cont.)                     
                      
Laser Light Engines, Inc. (5)(8)     Energy               
Manufactured 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)      200,000   $200,000    0 
Secured Convertible Bridge Note, 12%, acquired 11/17/11  (M)      95,652   $95,652    0 
Secured Convertible Bridge Note, 12%, acquired 12/21/11  (M)      82,609   $82,609    0 
Secured Convertible Bridge Note, 12%, acquired 3/5/12  (M)      434,784   $434,784    0 
Secured Convertible Bridge Note, 12%, acquired 7/26/12  (M)      186,955   $186,955    0 
Secured Convertible Bridge Note, 20%, acquired 4/29/13  (M)      166,667   $166,667    0 
Secured Convertible Bridge Note, 20%, acquired 7/22/13  (M)      166,667   $166,667    0 
Secured Convertible Bridge Note, 10%, acquired 10/30/13  (M)      80,669   $80,669    0 
Secured Convertible Bridge Note, 10%, acquired 2/5/14  (M)      19,331   $19,331    0 
Secured Convertible Bridge Note, 10%, acquired 6/24/14  (M)      13,745   $13,745    0 
          6,542,881         0 
                      
Metabolon, Inc. (5)(8)(9)     Life Sciences               
Developing service and diagnostic products                     
through the use of a metabolomics, or                     
biochemical, profiling platform                     
Series B Convertible Preferred Stock  (H)      2,500,000    371,739    2,793,965 
Series B-1 Convertible Preferred Stock  (H)      706,214    148,696    1,141,884 
Series C Convertible Preferred Stock  (H)      1,000,000    1,000,000    2,569,929 
Series D Convertible Preferred Stock  (H)      1,499,999    835,882    2,175,430 
Series E Convertible Preferred Stock  (H)      1,225,000    444,404    1,549,169 
Warrants for Series B-1 Convertible Preferred                     
Stock expiring 3/25/15  ( I )      293,786    74,348    129,063 
          7,224,999         10,359,440 
                      
OpGen, Inc. (8)     Life Sciences               
Developing tools for genomic sequence                     
assembly and analysis                     
Series A Convertible Preferred Stock  (H)      610,017    610,017    608,056 
Common Stock  (H)      3,260,000    29,883    22,872 
Secured Convertible Bridge Note, 8%, acquired 7/11/14  (H)      212,777   $209,020    321,425 
          4,082,794         952,353 

 

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

 

13
 

 

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF SEPTEMBER 30, 2014

(Unaudited)

 

   Method of  Primary     Shares/     
   Valuation (1)  Industry (2)  Cost   Principal   Value 
                   
Investments in Non-Controlled                
Affiliated Companies (3) –                     
62.7% of net assets at value (Cont.)                     
                      
Private Placement Portfolio (Illiquid) (13) –                     
54.0% of net assets at value (Cont.)                     
                      
Produced Water Absorbents, Inc. (5)(8)     Energy               
Developing nano-structured absorbent materials                     
for environmental remediation of contaminated                     
water in the oil and gas industries                     
Series A Convertible Preferred Stock  ( I )     $1,000,000    1,000,000   $540,000 
Series B Convertible Preferred Stock  ( I )      1,496,865    5,987,460    2,873,981 
Series B-2 Convertible Preferred Stock  ( I )      1,015,427    4,322,709    2,074,900 
Series B-3 Convertible Preferred Stock  ( I )      978,641    3,914,564    1,878,991 
Series C Convertible Preferred Stock  ( I )      1,000,268    2,667,380    1,000,268 
Warrants for Series B-2 Preferred Stock expiring                     
upon liquidation event  ( I )      65,250    300,000    69,000 
          5,556,451         8,437,140 
                      
Senova Systems, Inc. (5)(8)     Life Sciences               
Developing next-generation sensors to measure pH                     
Series B Convertible Preferred Stock  ( I )      1,218,462    1,350,000    430,944 
Series B-1 Convertible Preferred Stock  ( I )      1,083,960    2,759,902    892,478 
Secured Convertible Bridge Note, 10%, acquired 6/25/14  ( I )      256,712   $250,000    256,712 
Warrants for Series B Preferred Stock expiring 10/15/17  ( I )      131,538    164,423    52,486 
Warrants for Series B Preferred Stock expiring 4/24/18  ( I )      20,000    25,000    7,980 
          2,710,672         1,640,600 
                      
SiOnyx, Inc. (5)(8)     Electronics               
Developing silicon-based optoelectronic                     
products enabled by its proprietary Black Silicon                     
Series A Convertible Preferred Stock  (M)      750,000    233,499    0 
Series A-1 Convertible Preferred Stock  (M)      890,000    2,966,667    0 
Series A-2 Convertible Preferred Stock  (M)      2,445,000    4,207,537    0 
Series B-1 Convertible Preferred Stock  (M)      1,169,561    1,892,836    0 
Series C Convertible Preferred Stock  (M)      1,171,316    1,674,030    0 
Secured Convertible Bridge Note, 8%, acquired 1/31/14  (M)      1,281,125   $1,281,125    0 
Secured Convertible Bridge Note, 8%, acquired 5/9/14  (M)      79,994   $93,976    72,721 
Warrants for Series B-1 Convertible Preferred                     
Stock expiring 2/23/17  ( I )      130,439    247,350    0 
Warrants for Common Stock expiring 3/28/17  ( I )      84,207    418,507    0 
Warrants for Common Stock expiring 5/9/19  ( I )      17,010    3,208    0 
          8,018,652         72,721 

 

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

 

14
 

  

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF SEPTEMBER 30, 2014

(Unaudited)

 

   Method of  Primary      Shares/     
   Valuation (1)  Industry (2)  Cost   Principal   Value 
                   
Investments in Non-Controlled     
Affiliated Companies (3) –                     
62.7% of net assets at value (Cont.)                     
                      
Private Placement Portfolio (Illiquid) (13) –                     
54.0% of net assets at value (Cont.)                     
                      
Ultora, Inc. (5)(8)    Energy               
Developing energy-storage devices                     
enabled by carbon nanotubes                     
Series A Convertible Preferred Stock  (M)     $886,830    17,736   $0 
Series B Convertible Preferred Stock  (M)      236,603    2,347,254    0 
Secured Convertible Bridge Note, 5%, acquired 5/7/14  (M)      87,795   $86,039    41,609 
Secured Convertible Bridge Note, 5%, acquired 8/20/14  (M)      17,308   $17,208    8,203 
          1,228,536         49,812 
                      
Total Non-Controlled Private Placement Portfolio (cost: $68,332,012)                  $64,927,112 
                      
Publicly Traded Portfolio (18) –                     
8.7% of net assets at value                     
                      
Enumeral Biomedical Holdings, Inc. (5)(8)(19)    Life Sciences               
Developing therapeutics and diagnostics                     
through functional assaying of single cells                     
Common Stock  (M)     $4,993,357    7,966,368   $8,857,444 
Warrants for Common Stock expiring 7/30/19  ( I )      540,375    1,500,000    1,204,908 
Warrants for Common Stock expiring 2/2/24  ( I )      57,567    255,120    263,795 
Options to Purchase Common Stock at $1.00                     
expiring 8/4/24  ( I )      0    56,667    62,945 
          5,591,299         10,389,092 
                      
Total Non-Controlled Publicly Traded Portfolio (cost: $5,591,299)                  $10,389,092 
                      
Total Investments in Non-Controlled Affiliated Companies (cost: $73,923,311)                  $75,316,204 

 

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

 

15
 

 

 

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF SEPTEMBER 30, 2014

(Unaudited)

 

   Method of  Primary      Shares/     
   Valuation (1)  Industry (2)  Cost   Principal   Value 
                   
Investments in Controlled          
Affiliated Companies (3) –                     
2.4% of net assets at value                     
                      
Private Placement Portfolio (Illiquid) (20) –                     
2.4% of net assets at value                     
                      
ProMuc, Inc. (5)(8)     Life Sciences               
Developing synthetic mucins for the                     
nutritional, food and healthcare markets                     
Common Stock  (M)     $1    1,000   $1 
Secured Convertible Bridge Note, 8%, acquired 12/18/13  (M)      372,016   $350,000    372,016 
Secured Convertible Bridge Note, 8%, acquired 8/13/14  (M)      101,074   $100,000    101,074 
          473,091         473,091 
                      
SynGlyco, Inc. (5)(8)     Life Sciences               
Developed 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    228,554 
Senior Secured Debt, 12.00%, maturing on 12/11/14  ( I )      482,849   $500,000    691,352 
Secured Convertible Bridge Note, 8%, acquired 1/23/13  ( I )      398,795   $350,000    395,277 
Secured Convertible Bridge Note, 8%, acquired 4/25/13  ( I )      335,291   $300,000    338,809 
          8,802,379         1,653,992 
                      
TARA Biosystems, Inc. (5)(8)(14)     Life Sciences               
Developing human tissue models for toxicology                     
and drug discovery applications                     
Common Stock  (M)     $20    2,000,000   $20 
Secured Convertible Bridge Note, 8%, acquired 8/20/14  (M)      302,762   $300,000    302,762 
          302,782         302,782 
                      
UberSeq, Inc. (5)(8)(9)(14)     Life Sciences               
Developing translational genomics solutions                     
Series Seed Convertible Preferred Stock  ( I )      500,000    500,000    505,262 
                      
Total Controlled Private Placement Portfolio (cost: $10,078,252)                  $2,935,127 
                      
Total Investments in Controlled Affiliated Companies (cost: $10,078,252)                  $2,935,127 
                      
Total Private Placement and Publicly Traded Portfolio (cost: $110,660,888)                  $96,671,435 
                      
Total Investments (cost: $110,660,888)                  $96,671,435 

 

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

 

16
 

 

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF SEPTEMBER 30, 2014

(Unaudited)

 

Notes to Consolidated Schedule of Investments

 

(1)See "Footnote to Consolidated Schedule of Investments" on page 31for a description of the "Valuation Procedures."

 

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

 

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

 

(4)The aggregate cost for federal income tax purposes of investments in unaffiliated privately held companies is $22,530,919. The gross unrealized appreciation based on the tax cost for these securities is $1,161,225. The gross unrealized depreciation based on the tax cost for these securities is $10,706,028.

 

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

 

(6)The aggregate cost for federal income tax purposes of investments in unaffiliated rights to milestone payments is $2,387,278. The gross unrealized appreciation based on the tax cost for these securities is $794,869. The gross unrealized depreciation based on the tax cost for these securities is $1,860.

 

(7)The aggregate cost for federal income tax purposes of investments in unaffiliated publicly traded companies is $1,741,128. The gross unrealized appreciation based on the tax cost for these securities is $512,573. The gross unrealized depreciation based on the tax cost for these securities is $0.

 

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

 

(9)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.

 

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

 

(11)With our investment in the Mersana Therapeutics, Inc., Series A-1 financing, we received a warrant to purchase 277,760 shares of Series A-2 Convertible Preferred Stock. The ability to exercise the warrant is contingent upon Mersana's achievement of certain milestones. Mersana has not achieved those milestones as of September 30, 2014, and, therefore, this warrant is a contingent asset as of that date. The warrant will expire on July 27, 2022.

 

(12)Upon the closing of Canon, Inc.'s acquisition of Molecular Imprints, Inc.'s semiconductor lithography equipment business, a new spin-out company, which retained the name Molecular Imprints, Inc., was formed. These shares represent our investment in the new company.

 

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

 

17
 

  

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF SEPTEMBER 30, 2014

(Unaudited)

 

(13)The aggregate cost for federal income tax purposes of investments in non-controlled affiliated privately held companies is $68,332,012. The gross unrealized appreciation based on the tax cost for these securities is $8,633,756. The gross unrealized depreciation based on the tax cost for these securities is $12,038,656.

 

(14)Initial investment was made in 2014.

 

(15)As part of our initial investment in Accelerator IV-New York Corporation, the Company made an additional operating and investment commitment. See "Note 12. Commitments and Contingencies."

 

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

 

(17)D-Wave Systems, Inc., is located and is doing business primarily in Canada. We invested in D-Wave 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." D-Wave is not a qualifying asset under Section 55(a) of the 1940 Act. Under the 1940 Act, we may not acquire non-qualifying assets unless, at the time the acquisition is made, qualifying assets are at least 70 percent of our total assets.

 

(18)The aggregate cost for federal income tax purposes of investments in non-controlled affiliated publicly traded companies is $5,591,299. The gross unrealized appreciation based on the tax cost for these securities is $4,797,793. The gross unrealized depreciation based on the tax cost for these securities is $0.

 

(19)The Company's shares of Enumeral Biomedical Holdings, Inc., are subject to restrictions on transfer, and we are also subject to a lock-up agreement that restricts our ability to trade these shares, exclusive of the general restriction on the transfer of unregistered securities. The lock-up period on our 7,966,368 shares of Enumeral Biomedical Holdings expires on January 31, 2016.

 

(20)The aggregate cost for federal income tax purposes of investments in controlled affiliated companies is $10,078,252. The gross unrealized appreciation based on the tax cost for these securities is $5,263. The gross unrealized depreciation based on the tax cost for these securities is $7,148,388.

 

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

 

18
 

  

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2013

(Unaudited)

 

   Method of  Primary      Shares/     
   Valuation (1)  Industry (2)  Cost   Principal   Value 
                      
Investments in Unaffiliated Companies (3) –                
31.2% of net assets at value                     
                      
Private Placement Portfolio (Illiquid) (4) –                     
23.8% of net assets at value                     
                      
Bridgelux, Inc. (5)(8)(10)     Energy               
Manufacturing high-power light emitting                     
diodes (LEDs) and arrays                     
Series B Convertible Preferred Stock  (M)     $1,000,000    1,861,504   $318,898 
Series C Convertible Preferred Stock  (M)      1,352,196    2,130,699    365,014 
Series D Convertible Preferred Stock  (M)      1,371,622    999,999    1,070,897 
Series E Convertible Preferred Stock  (M)      672,599    440,334    704,760 
Series E-1 Convertible Preferred Stock  (M)      386,073    399,579    468,606 
Warrants for Series C Convertible Preferred                     
Stock expiring 12/31/14  ( I )      168,270    163,900    2,762 
Warrants for Series D Convertible Preferred                     
Stock expiring 8/26/14  ( I )      88,531    124,999    40,686 
Warrants for Series D Convertible Preferred                     
Stock expiring 3/10/15  ( I )      40,012    41,666    19,466 
Warrants for Series E Convertible Preferred                     
Stock expiring 12/31/17  ( I )      93,969    170,823    190,679 
Warrants for Common Stock expiring 6/1/16  ( I )      72,668    132,100    1,656 
Warrants for Common Stock expiring 8/9/18  ( I )      148,409    171,183    13,538 
Warrants for Common Stock expiring 10/21/18  ( I )      18,816    84,846    3,680 
          5,413,165         3,200,642 
                      
Cambrios Technologies Corporation (5)(8)(10)     Electronics               
Developing nanowire-enabled electronic                     
materials for the display industry                     
Series B Convertible Preferred Stock  (M)      1,294,025    1,294,025    1,165,383 
Series C Convertible Preferred Stock  (M)      1,300,000    1,300,000    1,170,764 
Series D Convertible Preferred Stock  (M)      515,756    515,756    773,634 
Series D-2 Convertible Preferred Stock  (M)      92,400    92,400    92,400 
Series D-4 Convertible Preferred Stock  (M)      216,168    216,168    216,168 
          3,418,349         3,418,349 
                      
Cobalt Technologies, Inc. (5)(8)(9)(11)     Energy               
Developing processes for making bio-                     
butanol through biomass fermentation                     
Series C-1 Convertible Preferred Stock  (M)      749,998    352,112    704,400 
Series D-1 Convertible Preferred Stock  (M)      122,070    48,828    106,152 
Series E-1 Convertible Preferred Stock  (M)      114,938    46,089    84,634 
Warrants for Series E-1 Pref. Stock expiring on 10/9/22  ( I )      2,781    1,407    2,163 
Warrants for Series E-1 Pref. Stock expiring on 3/11/23  ( I )      5,355    2,707    4,209 
          995,142         901,558 

 

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

 

19
 

  

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2013

(Unaudited)

 

   Method of  Primary     Shares/     
   Valuation (1)  Industry (2)  Cost   Principal   Value 
                   
Investments in Unaffiliated Companies (3) –     
31.2% of net assets at value (Cont.)                     
                      
Private Placement Portfolio (Illiquid) (4) –                     
23.8% of net assets at value (Cont.)                     
                      
Ensemble Therapeutics Corporation (5)(8)(9)(12)     Life Sciences               
Developing DNA-Programmed ChemistryTM                     
for the discovery of new classes of therapeutics                     
Series B Convertible Preferred Stock  (H)     $2,000,000    1,449,275   $1,419,855 
Secured Convertible Bridge Note, 8%, acquired 9/11/08  (H)      356,567   $250,211    1,321,657 
Secured Convertible Bridge Note, 8%, acquired 12/10/09  (H)      64,767   $48,868    253,257 
Secured Convertible Bridge Note, 8%, acquired 1/25/12  (H)      126,386   $109,400    548,354 
Secured Convertible Bridge Note, 8%, acquired 3/28/13  (H)      78,121   $73,598    361,996 
Secured Convertible Bridge Note, 8%, acquired 6/24/13  (H)      26,845   $25,759    126,201 
Secured Convertible Bridge Note, 8%, acquired 7/8/13  (H)      14,530   $13,983    68,467 
          2,667,216         4,099,787 
                      
GEO Semiconductor Inc. (5)     Electronics               
Developing programmable, high-performance                     
video and geometry processing solutions                     
Participation Agreement with Montage                     
Capital relating to the following assets:                     
Warrants for Series A Pref. Stock expiring on 9/17/17  ( I )      66,684    100,000    82,270 
Warrants for Series A-1 Pref. Stock expiring on 6/30/18  ( I )      23,566    34,500    32,132 
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    8,007 
Warrants for Series A-1 Pref. Stock expiring on 6/29/18  ( I )      7,546    10,000    8,478 
          105,308         130,887 
                      
Mersana Therapeutics, Inc. (5)(8)(9)(10)(13)     Life Sciences               
Developing antibody drug conjugates                     
for cancer therapy                     
Series A-1 Convertible Preferred Stock  (M)      443,038    411,630    443,038 
Common Stock  (M)      3,875,395    350,539    108,667 
          4,318,433         551,705 
                      
Molecular Imprints, Inc. (5)(8)(10)(14)(15)     Electronics               
Manufacturing nanoimprint                     
lithography capital equipment                     
Series B Convertible Preferred Stock  ( I )      2,000,000    1,333,333    1,876,501 
Series C Convertible Preferred Stock  ( I )      2,406,595    1,285,071    2,359,061 
Non-Convertible Bridge Note  ( I )      0   $0    4,043,381 
          4,406,595         8,278,943 

 

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


20
 

 

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2013

(Unaudited)

 

   Method of  Primary      Shares/     
   Valuation (1)  Industry (2)  Cost   Principal   Value 
                      
Investments in Unaffiliated Companies (3) –
31.2% of net assets at value (Cont.)
                
                      
Private Placement Portfolio (Illiquid) (4) –
23.8% of net assets at value (Cont.)
                     
                      
                      
Nanosys, Inc. (5)(8)     Energy               
Developing inorganic nanowires and
quantum dots for use in LED-backlit devices
                     
Series C Convertible Preferred Stock  (M)     $1,500,000    803,428   $1,098,762 
Series D Convertible Preferred Stock  (M)      3,000,003    1,016,950    2,196,781 
Series E Convertible Preferred Stock  (M)      496,573    433,688    705,827 
Unsecured Convertible Bridge Note, 4%, acquired 7/16/12  (M)      46,385   $43,821    127,016 
          5,042,961         4,128,386 
                      
Nano Terra, Inc. (5)(9)     Energy               
Developing surface chemistry and nano- manufacturing solutions                     
Senior secured debt, 12.0%, maturing on 12/1/15  ( I )      663,322   $698,725    680,000 
Warrants for Series A-2 Pref. Stock expiring on 2/22/21  ( I )      69,168    446,248    21,858 
Warrants for Series C Pref. Stock expiring on 11/15/22  ( I )      35,403    241,662    90,476 
          767,893         792,334 
                      
Nantero, Inc. (5)(8)(9)(10)     Electronics               
Developing a high-density, nonvolatile,
random access memory chip, enabled
by carbon nanotubes
                     
Series A Convertible Preferred Stock  (M)      489,999    345,070    1,349,224 
Series B Convertible Preferred Stock  (M)      323,000    207,051    809,569 
Series C Convertible Preferred Stock  (M)      571,329    188,315    736,312 
Series D Convertible Preferred Stock  (M)      139,075    35,569    139,075 
          1,523,403         3,034,180 
                      
OHSO Clean, Inc. (5)(16)     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 )      527,006   $624,640    592,100 
Warrants for Series C Pref. Stock expiring on 3/30/22  ( I )      91,742    1,109,333    70,693 
          618,748         662,793 
                      
Total Unaffiliated Private Placement Portfolio (cost: $29,277,213)                  $29,199,564 

 

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

 

21
 

 

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2013

(Unaudited)

 

   Method of  Primary      Shares/     
   Valuation (1)  Industry (2)  Cost   Principal   Value 
                   
Rights to Milestone Payments (Illiquid) (6) –  
2.9% of net assets at value
                
                      
Amgen, Inc. (8)(10)     Life Sciences               
Rights to Milestone Payments from                     
Acquisition of BioVex Group, Inc.  ( I )     $3,291,750   $3,291,750   $3,489,433 
                      
Laird Technologies, Inc. (8)(10)     Energy               
Rights to Milestone Payments from Merger &                     
Acquisition of Nextreme Thermal Solutions, Inc.  ( I )      0    0    0 
                      
Total Unaffiliated Rights to Milestone Payments (cost: $3,291,750)                  $3,489,433 
                      
Publicly Traded Portfolio (7) –  
4.5% of net assets at value
                     
                      
Solazyme, Inc. (5)(10)(17)     Energy               
Developing algal biodiesel, industrial
chemicals and specialty ingredients using  
synthetic biology
                     
Common Stock  (M)     $396,564    167,834   $1,827,712 
                      
Champions Oncology, Inc. (5)(10)     Life Sciences               
Developing its TumorGraftTM platform for
personalized medicine and drug development
                     
Common Stock  (M)      2,054,446    3,099,651    3,719,582 
Warrants for Common Stock expiring 1/29/18  ( I )      400    40,000    23,502 
          2,054,846         3,743,084 
                      
Total Unaffiliated Publicly Traded Portfolio (cost: $2,451,410)                  $5,570,796 
                      
Total Investments in Unaffiliated Companies (cost: $35,020,373)                  $38,259,793 

 

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

 

22
 

 

 

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2013

(Unaudited)

 

   Method of  Primary     Shares/     
   Valuation (1)  Industry (2)  Cost   Principal   Value 
                   
Investments in Non-Controlled  
Affiliated Companies (3)
– 44.2% of net assets at value
                
                      
Private Placement Portfolio (Illiquid) (18) –
 44.2% of net assets at value
                     
                      
ABSMaterials, Inc. (5)(8)(9)     Energy               
Developing nano-structured absorbent
materials for environmental remediation
                     
Series A Convertible Preferred Stock  (M)     $435,000    390,000   $471,900 
Series B Convertible Preferred Stock  (M)      717,644    624,528    755,679 
          1,152,644         1,227,579 
                      
Adesto Technologies Corporation (5)(8)(19)     Electronics               
Developing low-power, high-performance
memory devices
                     
Series A Convertible Preferred Stock  (M)      2,200,000    6,547,619    1,388,276 
Series B Convertible Preferred Stock  (M)      2,200,000    5,952,381    1,262,070 
Series C Convertible Preferred Stock  (M)      1,485,531    2,122,187    449,963 
Series D Convertible Preferred Stock  (M)      1,393,147    1,466,470    1,070,067 
Series D-1 Convertible Preferred Stock  (M)      703,740    987,706    561,291 
Series E Convertible Preferred Stock  (M)      2,499,999    3,508,771    9,969,781 
          10,482,417         14,701,448 
                      
AgBiome, LLC (formerly AgInnovation, LLC) (5)(8)(9)(10)(20)     Life Sciences               
Providing early stage research and discovery for
agriculture and utilizing the crop microbiome to
identify products that reduce risk and improve yield
                     
Series A-1 Convertible Preferred Stock  (M)      2,000,000    2,000,000    2,456,834 
Series A-2 Convertible Preferred Stock  (M)      521,740    417,392    564,906 
          2,521,740         3,021,740 
                      
Contour Energy Systems, Inc. (5)(8)(9)(10)(21)     Energy               
Developing batteries using
nano-structured materials
                     
Series A Convertible Preferred Stock  (M)      2,009,995    2,565,798    0 
Series B Convertible Preferred Stock  (M)      1,300,000    812,500    0 
Series C Convertible Preferred Stock  (M)      1,200,000    1,148,325    90,844 
          4,509,995         90,844 

 

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

 

23
 

 

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2013

(Unaudited)

 

   Method of  Primary      Shares/     
   Valuation (1)  Industry (2)  Cost   Principal   Value 
                   
Investments in Non-Controlled  
Affiliated Companies (3)
– 44.2% of net assets at value (Cont.)
                
                      
Private Placement Portfolio (Illiquid) (18) –  
44.2% of net assets at value (Cont.)
                     
                      
D-Wave Systems, Inc. (8)(9)(10)(22)     Electronics               
Developing high-performance
quantum computing systems
                     
Series 1 Class B Convertible Preferred Stock  (M)     $1,002,074    1,144,869   $1,399,831 
Series 1 Class C Convertible Preferred Stock  (M)      487,804    450,450    550,765 
Series 1 Class D Convertible Preferred Stock  (M)      748,473    855,131    1,045,569 
Series 1 Class E Convertible Preferred Stock  (M)      248,049    269,280    329,249 
Series 1 Class F Convertible Preferred Stock  (M)      238,323    258,721    316,338 
Series 2 Class D Convertible Preferred Stock  (M)      736,019    678,264    829,313 
Series 2 Class E Convertible Preferred Stock  (M)      659,493    513,900    628,345 
Series 2 Class F Convertible Preferred Stock  (M)      633,631    493,747    603,704 
Warrants for Common Stock expiring 6/30/15  ( I )      98,644    153,890    37,617 
          4,852,510         5,740,731 
                      
EchoPixel, Inc. (5)(8)(9)(10)(23)     Life Sciences               
Developing algorithms and software to improve
visualization of data for life science and
healthcare applications
                     
Series Seed Convertible Preferred Stock  (M)      750,000    2,516,778    750,000 
                      
Enumeral Biomedical Corp. (5)(8)(9)(10)     Life Sciences               
Developing therapeutics and diagnostics
through functional assaying of single cells
                     
Series A Convertible Preferred Stock  (M)      1,026,832    957,038    690,538 
Series A-1 Convertible Preferred Stock  (M)      750,000    576,923    425,939 
Series A-2 Convertible Preferred Stock  (M)      1,050,001    724,138    566,027 
          2,826,833         1,682,504 
                      
HZO, Inc. (5)(8)(9)     Electronics               
Developing novel industrial coatings that  
protect electronics against damage from liquids
                     
Series A Convertible Preferred Stock  (M)      666,667    4,057,294    1,130,362 
Series B Convertible Preferred Stock  (M)      5,502,838    21,879,365    6,095,592 
          6,169,505         7,225,954 

 

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

 

24
 

 

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2013

(Unaudited)

 

   Method of  Primary      Shares/     
   Valuation (1)  Industry (2)  Cost   Principal   Value 
Investments in Non-Controlled
Affiliated Companies (3) –
44.2% of net assets at value (Cont.)
                
                      
Private Placement Portfolio (Illiquid) (18) –
44.2% of net assets at value (Cont.)
                     
                      
Kovio, Inc. (5)(8)(9)(24)     Electronics               
Developing semiconductor products using
printed electronics and thin-film technologies
                     
Series A' Convertible Preferred Stock  (M)     $5,242,993    2,160,000   $0 
Series B' Convertible Preferred Stock  (M)      2,006,540    3,015,493    0 
Secured Subordinated Convertible Bridge Note, 7%,
acquired 6/7/13
  (M)      50,000   $50,000    0 
          7,299,533         0 
                      
Laser Light Engines, Inc. (5)(8)(9)     Energy               
Manufacturing solid-state light sources for
digital cinema and large-venue projection displays
                     
Series A Convertible Preferred Stock  ( I )      2,000,000    7,499,062    0 
Series B Convertible Preferred Stock  ( I )      3,095,802    13,571,848    0 
Secured Convertible Bridge Note, 12%, acquired 10/7/11  ( I )      200,000   $200,000    0 
Secured Convertible Bridge Note, 12%, acquired 11/17/11  ( I )      95,652   $95,652    0 
Secured Convertible Bridge Note, 12%, acquired 12/21/11  ( I )      82,609   $82,609    0 
Secured Convertible Bridge Note, 12%, acquired 3/5/12  ( I )      434,784   $434,784    0 
Secured Convertible Bridge Note, 12%, acquired 7/26/12  ( I )      186,955   $186,955    0 
Secured Convertible Bridge Note, 20%, acquired 4/29/13  ( I )      166,667   $166,667    0 
Secured Convertible Bridge Note, 20%, acquired 7/22/13  ( I )      166,667   $166,667    0 
Secured Convertible Bridge Note, 10%, acquired 10/30/13  ( I )      82,061   $80,669    164,122 
         6,511,197        164,122 
                      
Metabolon, Inc. (5)(8)(10)     Life Sciences               
Developing service and diagnostic products
through the use of a metabolomics, or
biochemical, profiling platform
                     
Series B Convertible Preferred Stock  (M)      2,500,000    371,739    2,997,991 
Series B-1 Convertible Preferred Stock  (M)      706,214    148,696    1,199,196 
Series C Convertible Preferred Stock  (M)      1,000,000    1,000,000    2,756,500 
Series D Convertible Preferred Stock  (M)      1,499,999    835,882    2,304,109 
Series E Convertible Preferred Stock  (M)      1,225,000    444,404    1,225,000 
Warrants for Series B-1 Convertible Preferred
Stock expiring 3/25/15
  ( I )      293,786    74,348    216,408 
          7,224,999         10,699,204 
                      
OpGen, Inc. (8)     Life Sciences               
Developing tools for genomic sequence
assembly and analysis
                     
Series A Convertible Preferred Stock  (M)      245,000    245,000    245,000 
Common Stock  (M)      3,260,000    29,883    0 
          3,505,000         245,000 

 

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

25
 

 

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2013

(Unaudited)

 

   Method of  Primary      Shares/     
   Valuation (1)  Industry (2)  Cost   Principal   Value 
                   
Investments in Non-Controlled  
Affiliated Companies (3) –
44.2% of net assets at value (Cont.)
                
                      
Private Placement Portfolio (Illiquid) (18) –  
44.2% of net assets at value (Cont.)
                     
                      
Produced Water Absorbents, Inc. (5)(8)(9)     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   $125,000 
Series B Convertible Preferred Stock  (M)      1,626,641    6,506,564    1,751,641 
Secured Convertible Bridge Note, 8%, acquired 11/14/13  (M)      832,789   $824,119    832,789 
          3,459,430         2,709,430 
                      
Senova Systems, Inc. (5)(8)(9)     Life Sciences               
Developing next-generation sensors to measure pH                     
Series B Convertible Preferred Stock  (M)      1,218,462    1,350,000    540,000 
Series B-1 Convertible Preferred Stock  (M)      583,960    1,509,902    603,960 
Warrants for Series B Preferred Stock expiring 10/15/17  ( I )      131,538    164,423    65,753 
Warrants for Series B Preferred Stock expiring 4/24/18  ( I )      20,000    25,000    9,997 
          1,953,960         1,219,710 
                      
SiOnyx, Inc. (5)(8)(9)     Electronics               
Developing silicon-based optoelectronic
products enabled by its proprietary Black Silicon
                     
Series A Convertible Preferred Stock  (M)      750,000    233,499    43,781 
Series A-1 Convertible Preferred Stock  (M)      890,000    2,966,667    556,250 
Series A-2 Convertible Preferred Stock  (M)      2,445,000    4,207,537    788,913 
Series B-1 Convertible Preferred Stock  (M)      1,169,561    1,892,836    451,903 
Series C Convertible Preferred Stock  (M)      1,171,316    1,674,030    970,526 
Secured Convertible Bridge Note, 8%, acquired 7/22/13  (M)      433,209   $418,066    859,729 
Secured Convertible Bridge Note, 8%, acquired 10/2/13  (M)      426,520   $418,066    859,729 
Warrants for Series B-1 Convertible Preferred
Stock expiring 2/23/17
  ( I )      130,439    247,350    18,165 
Warrants for Common Stock expiring 3/28/17  ( I )      84,207    418,507    21,387 
          7,500,252         4,570,383 
                      
Ultora, Inc. (5)(8)(9)     Energy               
Developing energy-storage devices
enabled by carbon nanotubes
                     
Series A Convertible Preferred Stock  (M)      886,830    17,736    1,788 
Series B Convertible Preferred Stock  (M)      236,603    2,347,254    236,603 
          1,123,433         238,391 
                      
Total Non-Controlled Private Placement Portfolio (cost: $71,843,448)                  $54,287,040 
                      
Total Investments in Non-Controlled Affiliated Companies (cost: $71,843,448)                  $54,287,040 

 

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

 

26
 

 

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2013

(Unaudited)

 

   Method of  Primary      Shares/     
   Valuation (1)  Industry (2)  Cost   Principal   Value 
                   
Investments in Controlled
Affiliated Companies (3) –
1.1% of net assets at value
                
                      
Private Placement Portfolio (Illiquid) (25) –
1.1% of net assets at value
                     
                      
SynGlyco, Inc. (5)(8)(9)(26)     Life Sciences               
Developing synthetic carbohydrates for
pharmaceutical applications
                     
Common Stock  ( I )     $2,729,817    57,463   $0 
Series A' Convertible Preferred Stock  ( I )      4,855,627    4,855,627    0 
Senior Secured Debt, 12.00%, maturing on 12/11/14  ( I )      436,637   $500,000    831,828 
Secured Convertible Bridge Note, 8%, acquired 1/23/13  ( I )      376,312   $350,000    91,389 
Secured Convertible Bridge Note, 8%, acquired 4/25/13  ( I )      316,504   $300,000    78,334 
          8,714,897         1,001,551 
                      
ProMuc, Inc. (5)(8)(9)(22)     Life Sciences               
Developing synthetic mucins for the
nutritional, food and healthcare markets
                     
Common Stock  (M)      1    1,000    1 
Secured Convertible Bridge Note, 8%, acquired 12/18/13  (M)      351,074   $350,000    351,074 
          351,075         351,075 
                      
Total Controlled Private Placement Portfolio (cost: $9,065,972)                  $1,352,626 
                      
Total Investments in Controlled Affiliated Companies (cost: $9,065,972)                  $1,352,626 
                      
Total Private Placement and Publicly Traded Portfolio (cost: $115,929,793)                  $93,899,459 

 

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

 

27
 

 

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2013

(Unaudited)

 

   Method of      Shares/     
   Valuation (1)  Cost   Principal   Value 
                
U.S. Government Securities (27) –
15.5% of net assets at value
              
                   
U.S. Treasury Bill — due date 01/23/14  (M)  $18,999,765   $19,000,000   $18,999,810 
                   
Total Investments in U.S. Government Securities (cost: $18,999,765)               $18,999,810 
                   
Total Investments (cost: $134,929,558)             $112,899,269 

 

   Method of  Number of     
   Valuation (1)  Contracts   Value 
            
Written Call Options (22) –  
(0.1)% of net assets at value
          
              
Solazyme, Inc. — Strike Price $12.50, March 22, 2014  (M)   1,500   $103,500 
              
Total Written Call Options (Premiums Received $112,382)          $(103,500)

 

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

 

28
 

 

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2013

(Unaudited)

 

Notes to Consolidated Schedule of Investments

 

(1)See "Footnote to Consolidated Schedule of Investments" on page 31 for a description of the "Valuation Procedures."

 

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

 

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

 

(4)The aggregate cost for federal income tax purposes of investments in unaffiliated privately held companies is $29,277,213. The gross unrealized appreciation based on the tax cost for these securities is $6,909,761. The gross unrealized depreciation based on the tax cost for these securities is $6,987,410.

 

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

 

(6)The aggregate cost for federal income tax purposes of investments in unaffiliated rights to milestone payments is $3,291,750. The gross unrealized appreciation based on the tax cost for these securities is $197,683. The gross unrealized depreciation based on the tax cost for these securities is $0.

 

(7)The aggregate cost for federal income tax purposes of investments in unaffiliated publicly traded companies is $2,451,410. The gross unrealized appreciation based on the tax cost for these securities is $3,119,386. The gross unrealized depreciation based on the tax cost for these securities is $0.

 

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

 

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

 

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

 

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

 

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

 

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

 

29
 

 

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2013

(Unaudited)

 

(13)With our investment in the Mersana Therapeutics, Inc., Series A-1 financing, we received a warrant to purchase 277,760 shares of Series A-2 Convertible Preferred Stock. The ability to exercise the warrant is contingent upon Mersana's achievement of certain milestones. Mersana has not achieved those milestones as of December 31, 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 December 31, 2013.

 

(15)On February 13, 2014, Molecular Imprints, Inc., announced that it had signed an agreement to sell its semiconductor lithography equipment business to Canon, Inc. See "Note 13. Subsequent Events" in the 2013 Annual Report on Form 10-K.

 

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

 

(17)A portion of this security is held in connection with written call option contracts: 150,000 shares, having a fair value of $1,633,500, have been pledged to brokers.

 

(18)The aggregate cost for federal income tax purposes of investments in non-controlled affiliated privately held companies is $71,843,448. The gross unrealized appreciation based on the tax cost for these securities is $10,212,841. The gross unrealized depreciation based on the tax cost for these securities is $27,769,249.

 

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

 

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

 

(21)On February 27, 2014, the board of directors of Contour Energy Systems, Inc., adopted a plan of complete liquidation and dissolution. See "Note 13. Subsequent Events" in the 2013 Annual Report on Form 10-K.

 

(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" in the 2013 Annual Report on Form 10-K.

 

(23)Initial investment was made in 2013.

 

(24)On January 21, 2014, substantially all of Kovio's assets were sold to Thin Film Electronics ASA. See "Note 13. Subsequent Events" in the 2013 Annual Report on Form 10-K.

 

(25)The aggregate cost for federal income tax purposes of investments in controlled affiliated companies is $9,065,972. The gross unrealized appreciation based on the tax cost for these securities is $0. The gross unrealized depreciation based on the tax cost for these securities is $7,713,346.

 

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

 

(27)The aggregate cost for federal income tax purposes of our U.S. government securities is $18,999,765. The gross unrealized appreciation on the tax cost for these securities is $45. The gross unrealized depreciation on the tax cost of these securities is $0.

 

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

 

30
 

 

HARRIS & HARRIS GROUP, INC.

FOOTNOTE TO CONSOLIDATED SCHEDULE OF INVESTMENTS

 

VALUATION PROCEDURES

 

I.Determination of Net Asset Value

 

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

 

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

 

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

 

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

 

The deal team meets at the end of each quarter to discuss portfolio companies and propose fair valuations for all privately held securities, restricted publicly traded securities and publicly traded securities without reliable market quotations. The Valuation Committee book is prepared with the use of data from primary sources whenever reasonably practicable. Proposed valuations for each portfolio company are communicated to the Valuation Committee in the Valuation Committee book and at the Valuation Committee meeting after the end of each quarter. The Valuation Committee determines the fair value of each private security and publicly traded securities without reliable market quotations. All valuations are then reported to the full Board of Directors along with the Chief Financial Officer’s calculation of net asset value.

 

 

II.Approaches to Determining Fair Value

 

Accounting Standards Codification Topic 820, "Fair Value Measurements and Disclosures," ("ASC 820") 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). It 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.

 

31
 

 

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

 

·Market Approach (M): The market approach may use quantitative inputs such as prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities and the values of market multiples derived from a set of comparable companies. The market approach may also use qualitative inputs such as progress toward milestones, the long-term potential of the business, current and future financing requirements and the rights and preferences of certain securities versus those of other securities. The selection of the relevant inputs used to derive value under the market approach requires judgment considering factors specific to the significance and relevance of each input to deriving value.

 

·Income Approach (I): The income approach uses valuation techniques to convert future amounts (for example, revenue, 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.

 

·Hybrid Approach (H): The hybrid approach uses elements of both the market approach and the income approach. The hybrid approach calculates values using the market and income approach, individually. The resulting values are then distributed among the share classes based on probability of exit outcomes.

 

Effective September 30, 2014, the Company refined its valuation methodologies to include the option pricing model. While the Company's valuation procedures had always included the option pricing model as a possible valuation technique, it had not previously been utilized. The use of the option pricing model is emerging as a preferred industry practice. This change in valuation methodology is applied on a prospective basis.

 

ASC Topic 820 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

 

32
 

 

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

 

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

 

III.Investment Categories

 

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

 

·Equity-related securities;

 

·Long-term fixed-income securities;

 

·Short-term fixed-income securities;

 

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

 

·All other securities.

 

 

 

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

 

A.EQUITY-RELATED SECURITIES

 

Equity-related securities, including options or warrants, are fair valued using the market, income or hybrid approaches. The following factors may be considered 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;

 

33
 

 

§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;

 

§Estimated time to exit;

 

§Volatility of similar securities in similar businesses;

 

§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.

 

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.

 

34
 

  

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

 

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

 

·The cost of the Company’s investment;

 

·Investments in the same or substantially similar intellectual property or patents or research and development in technology or product development or offers by responsible third parties;

 

·The results of research and development;

 

·Product development and milestone progress;

 

·Commercial prospects;

 

·Term of patent;

 

·Projected markets; and

 

·Other subjective factors.

 

E.ALL OTHER SECURITIES

 

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

 

For all other securities, the reported values shall reflect the Valuation Committee's judgment of fair values as of the valuation date using the outlined basic approaches of valuation discussed in Section II. 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.

 

IV.Frequency of Valuation

 

The Valuation Committee shall value the Company’s investment assets (i) as of the end of each calendar quarter at the time sufficiently far in advance of filing of the Company’s reports on Form 10-Q and Form 10-K to enable preparation thereof, (ii) as of within 48 hours of pricing any common stock of the Company by the Company (exclusive of Sundays and holidays) unless the proposed sale price is at least 200 percent of any reasonable net asset value of such shares, and (iii) as of any other time requested by the Board of Directors.

 

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V.Regular Review

 

The Chief Operating Officer and Chief Financial Officer shall review these Valuation Procedures on an annual basis to determine the continued appropriateness and accuracy of the methodologies used in valuing the Company’s investment assets, and will report any proposed modifications to these Valuation Procedures to the Board of Directors for consideration and approval.

 

The Chief Executive Officer, the Chief Operating Officer, the Chief Financial Officer and the individuals responsible for preparing the Valuation Committee book shall meet quarterly before each Valuation Committee meeting to review the methodologies for the valuation of each security, and will highlight any changes to the Valuation Committee.

 

VI.Other Assets

 

Non-investment assets, such as fixtures and equipment, shall be valued using the cost approach less accumulated depreciation at rates determined by management and reviewed by the Audit Committee. Valuation of such assets is not the responsibility of the Valuation Committee.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1. THE COMPANY

 

Harris & Harris Group, Inc. (the "Company," "us," "our" and "we"), is a non-diversified management investment 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 disruptive technologies predominantly in the life sciences. 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") is a 100 percent wholly owned subsidiary of the Company. Ventures is taxed under Subchapter C (a "C Corporation") of the Internal Revenue Code of 1986 (the "Code"). Harris Partners I, L.P, is a limited partnership and, from time to time, may be used to hold certain interests in portfolio companies. The partners of Harris Partners I, L.P., are Ventures (sole general partner) and the Company (sole limited partner). Ventures pays taxes on income generated by its operations as well as on any non-passive investment income generated by Harris Partners I, L.P. For the period ended September 30, 2014, 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. for financial reporting purposes. 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, the information presented on our interim financial statements does 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 for annual financial statements. 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, 2013.

 

NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

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

 

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Principles of Consolidation. The consolidated financial statements have been prepared in accordance with GAAP and include the accounts of the Company and its wholly owned subsidiary. The Company is an investment company following accounting and reporting guidance in Accounting Standards Codification 946. 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. Certain prior period amounts have been reclassified to conform to the current period presentation.

 

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

 

Portfolio Investment Valuations. Investments are stated at "value" as defined in the 1940 Act and in the applicable regulations of the Securities and Exchange Commission ("SEC") and in accordance with GAAP. Value, as defined in Section 2(a)(41) of the 1940 Act, is (i) the market price for those securities for which a market quotation is readily available and (ii) the fair value as determined in good faith by, or under the direction of, the Board of Directors for all other assets. (See "Valuation Procedures" in the "Footnote to Consolidated Schedule of Investments.") As of September 30, 2014, our financial statements include venture capital investments valued at $94,430,753, the fair values of which were determined in good faith by, or under the direction of, the Board of Directors. This amount includes the fair values of our privately held investments as well as the warrants of Champions Oncology, Inc., and securities of Enumeral Biomedical Holdings, Inc., which are publicly traded companies. Upon sale of investments, the values that are ultimately realized may be different from what is presently estimated. The difference could be material.

 

Effective September 30, 2014, the Company refined its valuation methodologies to include the option pricing model. While the Company's valuation procedures had always included the option pricing model as a possible valuation technique, it had not previously been utilized. The use of the option pricing model is emerging as a preferred industry practice. This change in valuation methodology is applied on a prospective basis.

 

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

 

Unaffiliated Rights to Milestone Payments. At September 30, 2014, and December 31, 2013, the outstanding potential milestone payments from Amgen, Inc.’s acquisition of BioVex Group, Inc., were valued at $2,552,477 and $3,489,433, 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. At September 30, 2014, we had a receivable totaling $2,070,955 from rights to milestone payments resulting from confirmation of the definitive achievement of the first milestone, during the third quarter of 2014, associated with Amgen's acquisition of BioVex, which is expected to be paid in November of 2014. At December 31, 2013, the value related to this milestone payment was classified as a right to milestone payments as it had not yet been achieved. If all remaining milestones are met, we would receive $7,455,438. There can be no assurance as to how much of this amount we will ultimately realize or when it will be realized, if at all. At September 30, 2014, the outstanding potential milestone payments from Canon, Inc.'s acquisition of Molecular Imprints, Inc., were valued at $627,810. If all remaining milestones are met, we would receive $1,735,582. There can be no assurance as to how much of this amount we will ultimately realize or when it will be realized, if at all. At September 30, 2014, and December 31, 2013, the outstanding potential milestone payments from Laird Technologies, Inc.’s acquisition of Nextreme Thermal Solutions, Inc., were valued at $0.

 

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Receivable from Sales of Investments. At September 30, 2014, we had a receivable totaling $21,420 from the liquidation and dissolution of Contour Energy Systems, Inc. We received these funds on October 29, 2014. At December 31, 2013, we had a receivable totaling $448,886 from the sales of 43,073 shares of Solazyme, Inc., which settled on January 2 and January 6, 2014, and 2,075 shares of Champions Oncology, Inc., which settled on January 3, 2014.

 

Funds Held in Escrow from Sale of Investment. At September 30, 2014, there were funds held in escrow fair valued at $305,965 relating to the sale of Molecular Imprints, Inc., to Canon, Inc. At December 31, 2013, there were funds held in escrow fair valued at $1,786,390 relating to the sale of Xradia, Inc., to Carl Zeiss AG. Funds held in escrow are valued using certain discounts applied to the amounts withheld. Funds held in escrow totaling $1,235,312 and $1,139,515 from the Xradia transaction were released in January and July of 2014, respectively. Funds held in escrow valued at $305,965 from the Molecular Imprints transaction are expected to be released in April of 2016 and April of 2017, net of any settlement of any indemnity claims and expenses related to the transaction. If the funds held in escrow for this transaction are released in full, we would receive $625,000 and realize a gain of $319,035.

 

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 and are included in "Insurance expense" in the Consolidated Statements of Operations. Deferred financing charges consist of fees and expenses paid in connection with the closing of loan facilities and are capitalized at the time of payment. Deferred financing charges are amortized over the term of the loan facility discussed in "Note 5. Debt." Amortization of the financing charges is included in "Interest and other debt expense" in the Consolidated Statements of Operations.

 

Property and Equipment. Property and equipment are included in "Other assets" and are carried at $211,803 and $246,138 at September 30, 2014, and December 31, 2013, respectively, representing cost, less accumulated depreciation of $385,656 and $375,600, respectively. Depreciation is provided using the straight-line method over the estimated useful lives of the property and equipment. We estimate the useful lives to be five to ten years for furniture and fixtures, three years for computer equipment, and the lesser of ten years or the remaining life of the lease for leasehold improvements. All of our fixed assets are pledged as collateral under the Company's four-year $20,000,000 Multi-Draw Term Loan Facility Credit Agreement, by and among the Company, as borrower, Orix Corporate Capital, Inc., as administrative agent and lender and the other lenders party thereto from time to time (the "Loan Facility").

 

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 includes 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 is amortized over the employee's average service period as a reduction of net periodic benefit cost. Unamortized plan amendments are included in "Accumulated other comprehensive income" in the Consolidated Statements of Assets and Liabilities.

 

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Interest Income Recognition. Interest income, including amortization of premium and accretion of discount, is recorded on an accrual basis. When accrued interest is determined not to be recoverable, the Company ceases accruing interest and writes off any previously accrued interest. Securities are deemed to be non-income producing if, on their last interest or dividend date, no cash was paid or no cash or in-kind dividends were declared. These write-offs are reversed through interest income. During the three months and nine months ended September 30, 2014, the Company earned $58,087 and $202,679, respectively, in interest on U.S. government securities, senior secured debt, participation agreements, subordinated secured debt, non-convertible promissory notes and interest-bearing accounts. During the three months and nine months ended September 30, 2013, the Company earned $81,787 and $257,604, respectively, in interest on U.S. government securities, senior secured debt, participation agreements, subordinated secured debt, non-convertible promissory notes and interest-bearing accounts. During the three months and nine months ended September 30, 2014, the Company recorded, on a net basis, $(2,214) and $133,320, respectively, of bridge note interest. The total for the three months and nine months ended September 30, 2014, includes a partial write-off of previously accrued bridge note interest of $69,554 and $70,946, respectively. During the three months and nine months ended September 30, 2013, the Company recorded $33,238 and $172,474, respectively, of bridge note interest.

 

Yield-Enhancing Fees on Debt Securities. Yield-enhancing 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. Total yield-enhancing fees accreted into investment income were $19,843 and $52,105 for the three months and nine months ended September 30, 2014, respectively. Total yield-enhancing fees accreted into investment income were $15,919 and $43,387 for the three months and nine months ended September 30, 2013, respectively.

 

Call Options. The Company writes covered call options on publicly traded securities with the intention of earning option premiums. Option premiums may increase the Company’s realized gains and, therefore, may help increase distributable income, but may limit the realized gains on the security. When a company writes (sells) an option, an amount equal to the premium received by the Company is recorded in the Consolidated Statements of Assets and Liabilities as a liability. The amount of the liability is subsequently marked-to-market to reflect the current market value of the option written. When an option expires, the Company realizes a gain on the option to the extent of the premiums received. Premiums received from writing options that are exercised or closed are added to the proceeds or offset against the amount paid on the transaction to determine the realized gain or loss. At September 30, 2014, and December 31, 2013, the Company had 0 and 150,000 shares, respectively, of Solazyme, Inc., covered by call option contracts. In the event these contracts are exercised, the Company would be required to deliver those shares to the counterparty.

 

Stock-Based Compensation. The Company has a stock-based employee compensation plan. The Company accounts for the Amended and Restated Harris & Harris Group, Inc. 2012 Equity Incentive Plan (the "Stock Plan") by determining the fair value of all share-based payments to employees, including the fair value of grants of employee stock options and restricted stock awards, and records these amounts as an expense in the Consolidated Statements of Operations over the vesting period with a corresponding increase to our additional paid-in capital. At September 30, 2014, and December 31, 2013, the increase to our operating expenses was offset by the increase to our additional paid-in capital, resulting in no net impact to our net asset value. Additionally, the Company does not record the potential tax benefits associated with the expensing of stock options or restricted stock because the Company currently intends to qualify as a regulated investment company ("RIC") under Subchapter M of the Code, and the deduction attributable to such expensing, therefore, is unlikely to provide any additional tax savings. The amount of non-cash, stock-based compensation expense recognized in the Consolidated Statements of Operations is based on the fair value of the awards the Company expects to vest, recognized over the vesting period on a straight-line basis for each award, and adjusted for actual awards vested and pre-vesting forfeitures. The forfeiture rate is estimated at the time of grant and revised, if necessary, in subsequent periods if the actual forfeiture rate differs from the estimated rate and is accounted for in the current period and prospectively. See "Note 9. Stock-Based Compensation" for further discussion.

 

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

 

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

 

Income Taxes. As we intend to qualify as a RIC under Subchapter M of the Code, the Company does not accrue for income taxes. The Company has capital loss carryforwards that can be used to offset net realized capital gains. The Company recognizes interest and penalties in income tax expense. We pay federal, state and local income taxes on behalf of our wholly owned subsidiary, Ventures, which is a C corporation. See "Note 10. Income Taxes" for further discussion.

 

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. The Company does not isolate the portion of the results of operations that arises from changes in foreign currency rates on investments held on its Consolidated Statements of Operations. For the three months ended September 30, 2014, included in the net decrease in unrealized depreciation on investments was an unrealized loss of $502,044 resulting from foreign currency translation. For the nine months ended September 30, 2014, included in the net decrease in unrealized depreciation on investments was an unrealized loss of $511,206 resulting from foreign currency translation. For the three months ended September 30, 2013, included in the net increase in unrealized depreciation on investments was an unrealized gain of $132,582 resulting from foreign currency translation. For the nine months ended September 30, 2013, included in the net increase in unrealized depreciation on investments was an unrealized loss of $177,465 resulting from foreign currency translation.

 

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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.

 

Recent Accounting Pronouncements. In May 2014, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") No. 2014-09, "Revenue from Contracts with Customers (Topic 606)," which is the new comprehensive revenue recognition standard that will supersede all existing revenue recognition guidance under GAAP. The standard's core principle is that a company will recognize revenue when it transfers promised goods or services to a customer in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This ASU is effective for annual and interim periods beginning on or after December 15, 2016, and early adoption is not permitted. Entities will have the option of using either a full retrospective approach or a modified approach to adopt the guidance in the ASU. The Company is currently evaluating the impact of adopting this standard.

 

In June 2014, the FASB issued ASU No. 2014-12, "Compensation - Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could be Achieved after the Requisite Service Period." This ASU provides more explicit guidance for treating share-based payment awards that require a specific performance target that affects vesting and that could be achieved after the requisite service period as a performance condition. The new guidance is effective for annual and interim reporting periods beginning after December 15, 2015. The Company does not expect that the adoption of this standard will have a material impact on its consolidated financial statements.

 

In August 2014, the FASB issued ASU No. 2014-15, "Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern." This ASU requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued and provides guidance on determining when and how to disclose going concern uncertainties in the financial statements. Certain disclosures will be required if conditions give rise to substantial doubt about an entity’s ability to continue as a going concern. The new guidance applies to all entities and is effective for annual and interim reporting periods ending after December 15, 2016, with early adoption permitted. The Company does not expect that the adoption of this standard will have a material impact on its consolidated financial statements.

 

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. We may also be subject to restrictions on transfer and/or other lock-up provisions after these companies initially go public. These privately held and publicly traded businesses tend to not have attained profitability, and many of these businesses also lack management depth and have limited or no history of operations. Because of the speculative nature of our investments and the lack of a liquid market for and restrictions on transfers of privately held investments, there is greater risk of loss relative to traditional marketable investment securities.

 

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We do not choose investments based on a strategy of diversification. We also do not rebalance the portfolio should one of our portfolio companies increase in value substantially relative to the rest of the portfolio.  Therefore, the value of our portfolio may be more vulnerable to microeconomic events affecting a single sector, industry or portfolio company and to general macroeconomic events that may be unrelated to our portfolio companies. These factors may subject the value of our portfolio to greater volatility than a company that follows a diversification strategy. As of September 30, 2014, and December 31, 2013, our largest 10 investments by value accounted for approximately 83 percent and 75 percent, respectively, of the value of our equity-focused venture capital portfolio, excluding the rights to milestone payments. Our largest three investments, by value, Adesto Technologies Corporation, Enumeral Biomedical Holdings, Inc., and Metabolon, Inc., accounted for approximately 19 percent, 11 percent and 11 percent, respectively, of our equity-focused venture capital portfolio as of September 30, 2014. Adesto Technologies and Metabolon are privately held portfolio companies. Enumeral Biomedical is a publicly traded portfolio company. As of December 31, 2013, our largest three investments, by value, Adesto Technologies Corporation, Metabolon, Inc., and Molecular Imprints, Inc., accounted for approximately 17 percent, 12 percent and 9 percent, respectively, of our equity-focused venture capital portfolio.

 

Approximately 98 percent of the portion of our equity-focused venture capital portfolio that was fair valued was comprised of securities of 26 privately held companies, the warrants of publicly traded Champions Oncology, Inc., and securities of Enumeral Biomedical Holdings, 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 depreciation on investments." Changes in valuation of any of our investments in privately held companies from one period to another may be significant.

 

NOTE 5. DEBT

 

On September 30, 2013, the Company terminated the $10,000,000 Revolving Loan Agreement by and between the Company and TD Bank, N.A., dated February 24, 2011. At the date of termination, there was no principal outstanding under this credit facility, and no termination fees were incurred in connection with ending this credit facility.

 

On September 30, 2013, the Company entered into a four-year $20,000,000 Multi-Draw Term Loan Facility Credit Agreement, by and among the Company, as borrower, Orix Corporate Capital, Inc., as administrative agent and lender and the other lenders party thereto from time to time (the "Loan Facility") that may be used by the Company to fund investments in portfolio companies. The Loan Facility replaces the Company’s prior credit facility with TD Bank, NA. The Loan Facility, among other things, matures on September 30, 2017, and bears interest at 10 percent per annum in cash. The Company has the option to have interest accrue at a rate of 13.5 percent per annum if the Company decides not to pay interest in cash monthly. The Company currently plans to pay interest in cash if and when any borrowings are outstanding. The Loan Facility also requires payment of a draw fee on each borrowing equal to 1.0 percent of such borrowing and an unused commitment fee of 1.0 percent per annum. Fee payments under the Loan Facility are made quarterly in arrears. The Company may prepay the loans or reduce the aggregate commitments under the Loan Facility at any time prior to the maturity date, as long as certain conditions are met, including payment of required prepayment or termination fees. The Loan Facility is secured by all of the assets of the Company and its wholly owned subsidiaries, subject to certain customary exclusions. The Loan Facility contains certain affirmative and negative covenants, including without limitation: (a) maintenance of certain minimum liquidity requirements; (b) maintenance of an eligible asset leverage ratio of not less than 4.0:1.0; (c) limitations on liens; (d) limitations on the incurrence of additional indebtedness; and (e) limitations on structural changes, mergers and disposition of assets (other than in the normal course of our business activities).

 

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At September 30, 2014, and December 31, 2013, the Company had no outstanding debt. The weighted average annual interest rate for the three months and nine months ended September 30, 2014, was zero percent, exclusive of amortization of closing fees and other expenses. The weighted average debt outstanding for the three months and nine months ended September 30, 2014, was $0. The remaining capacity under the Loan Facility was $20,000,000 at September 30, 2014. Unamortized fees and expenses of $524,641 related to establishing the Loan Facility are included as "Prepaid expenses" in the Consolidated Statements of Assets and Liabilities as of September 30, 2014. These amounts are amortized over the term of the Loan Facility, and $131,160 was amortized in the nine months ended September 30, 2014. At September 30, 2014, the Company was in compliance with all covenants required by the Loan Facility.

 

NOTE 6. FAIR VALUE OF INVESTMENTS

 

At September 30, 2014, our financial assets were categorized as follows in the fair value hierarchy:

 

   Fair Value Measurement at Reporting Date Using: 
Description 

 

 

September 30, 2014

   Unadjusted Quoted
Prices in Active Markets
for Identical Assets

(Level 1)
  

 

Significant Other
Observable Inputs
(Level 2)

  

 

Significant
Unobservable Inputs
(Level 3)

 
                 
Privately Held Portfolio Companies:                    
Preferred Stock  $75,299,202   $0   $0   $75,299,202 
Bridge Notes   2,285,400    0    0    2,285,400 
Warrants   2,064,868    0    0    2,064,868 
Rights to Milestone Payments   3,180,287    0    0    3,180,287 
Common Stock   1,367,440    0    0    1,367,440 
Senior Secured Debt   1,161,742    0    0    1,161,742 
Participation Agreement   151,425    0    0    151,425 
Options   62,945              62,945 
                     
Publicly Traded Portfolio
Companies:
                    
Common Stock  $11,098,126   $2,240,682   $0   $8,857,444 
                     
Total Investments:  $96,671,435   $2,240,682   $0   $

94,430,753

 
                     
Funds Held in Escrow From                    
Sales of Investments:  $305,965   $0   $0   $305,965 
                     
Total Financial Assets:  $96,977,400   $2,240,682   $0   $94,736,718 

 

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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.

 

   Fair Value at
September 30,
2014
   Valuation
Technique(s)
  Unobservable Input  Range (Weighted
Average(a))
              
Preferred Stock  $27,435,281   Hybrid Approach  Private Offering Price
Volatility
Time to Exit
  $1.00 - 3.71 ($2.76)
50.1% - 59.7% (54.0%)
0.50 - 3 Years (1.99)
               
Preferred Stock   22,749,050   Income Approach  Private Offering Price
Non-Performance Risk
Volatility
Time to Exit
  $0.30 - $3.91 ($1.13)
0% - 50% (1.33%)
31.1% - 104.2% (47.0%)
2 - 4.75 Years (2.29)
               
Preferred Stock   25,114,871   Market Approach  Private Offering Price
Non-Performance Risk
Volatility
Revenue Multiples
Time to Exit
Discount for Lack of Marketability
  $0.10 - $2.67 ($0.97)
0% (0%)
46.6% - 60.2% (47.5%)
2.4 (2.4)
2 Years (2)
0% - 20% (16.1%)
               
Bridge Notes   321,425   Hybrid Approach  Private Offering Price
Non-Performance Risk
Volatility
Time to Exit
  $1.00 ($1.00)
0% (0%)
57.2% (57.2%)
0.50 Years (0.50)
               
Bridge Notes   990,798   Income Approach  Private Offering Price
Non-Performance Risk
Volatility
Time to Exit
  $0.75 - $1.00 ($0.94)
0% (0%)
0% - 51.3% (13.3%)
0 - 2 Years (0.52)
               
Bridge Notes   973,177   Market Approach  Private Offering Price
Non-Performance Risk
Volatility
Discount for Lack of Marketability
Time to Exit
  $1.00 - $1.83 ($1.06)
0% (0%)
52.2% (52.2%)
17.3% (17.3%)
2 Years (2)
               
Common Stock   931,724   Hybrid Approach  Private Offering Price
Non-Performance Risk
Volatility
Time to Exit
  $1.00 - $3.71 ($3.64)
0% (0%)
57.2% - 59.7% (59.7%)
0.50 - 3 Years (2.94)
               
Common Stock   435,695   Income Approach  Private Offering Price
Non-Performance Risk
Volatility
Time to Exit
  $1.00 - $1.08 ($1.04)
0% (0%)
104% (104%)
3 Years (3)
Common Stock   21   Market Approach  Private Offering Price
Non-Performance Risk
   
$0.0001 - $0.001 ($0.001)
0% (0%)
               
Warrants   2,064,868   Income Approach  Private Offering Price
Volatility
Expected Term
  $0.32 - 2.62 ($1.46)
28.4% - 107% (80.1%)
0.92 - 9.35 Years (4.7)
               
Rights to Milestone Payments   3,180,287   Probability Weighted Discounted Cash Flow  Probability of Achieving Independent Milestones
Probability of Achieving Dependent Milestones
 

0% - 80% (b)

0% - 75% (b)

               
Participation Agreements(c)   151,425   Income Approach  Stock Price
Volatility
Expected Term
  $0.50 ($0.50)
107% (107%)
2.97 - 3.75 Years (3.18)

 

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   Fair Value at
September 30, 2014
   Valuation
Technique(s)
  Unobservable Input  Range (Weighted
Average(a))
              
Senior Secured Debt   1,161,742   Income Approach  Effective Yield
Non-Performance Risk
  0 - 15.8% (6.4%)
0% (0%)
               
Funds Held in Escrow From
Sales of Investments
   305,965   Market Approach  Escrow Discounts  50% (50%)
               
Options   62,945   Income Approach  Stock Price
Volatility
Expected Term
  $1.45 ($1.45)
90.6% (90.6%)
9.85 Years (9.85)
               
OTC Traded
Common Stock
   8,857,444   Market Approach  Volatility of Public Comparables
Discount for Lack of Marketability
Escrow Discounts
  89.5% - 96.6% (90.3%)
13.2% - 24.8% (22.3%)
0% - 50% (0.4%)
               
Total  $94,736,718 

 

(a)Weighted average based on fair value at September 30, 2014.
(b)Weighted average has not been disclosed owing to the wide range of possible values.
(c)In connection with our investment in a participation agreement in GEO Semiconductor, Inc., we received warrants to purchase stock. See "Warrants" for a discussion of the valuation methodology used.

 

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.

 

Preferred Stock, Bridge Notes and Common Stock

 

Preferred stock, bridge notes and common stock are valued by either a market, income or hybrid 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, merger and acquisition ("M&A") transactions consummated by comparable 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 initial public offering ("IPO") or an acquisition transaction, estimated time to exit, volatilities of comparable publicly traded companies 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. An increase in the volatility assumption generally increases the enterprise value calculated in an option pricing model. An increase in the time to exit assumption also generally increases the enterprise value calculated in an option pricing model. Variations in the expected time to exit or expected volatility assumptions have a significant impact on fair value.

 

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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 certain securities underlying the warrants in our portfolio are not publicly traded, many of the required input assumptions are more difficult to estimate than they would be if a public market for the underlying securities existed.

 

An input to the Black-Scholes-Merton option-pricing model is the value per share of the type of stock for which the warrant is exercisable as of the date of valuation. This input is derived according to the methodologies discussed in "Preferred Stock, Bridge Notes and Common Stock."

 

Rights to Milestone Payments

 

Rights to milestone payments are valued using a probability-weighted discounted cash flow model. As part of Amgen Inc.’s acquisition of our former portfolio company, BioVex Group, Inc., we are entitled to potential future milestone payments based upon the achievement of certain regulatory and sales milestones. We are also entitled to future milestone payments from Laird Technologies Inc.'s acquisition of our former portfolio company, Nextreme Thermal Solutions, Inc., and from Canon, Inc.'s acquisition of Molecular Imprints, 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 published interest rates for corporate bonds of the acquiring or comparable companies.

 

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Participation Agreements and Senior Secured Debt

 

We invest in venture debt investments through 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 pub