Harris & Harris Group, Inc. (NASDAQ:TINY) issued the following
letter to shareholders today that may also be found on its website
at ir.hhvc.com/letters.cfm.
THIRD QUARTER REPORT 2016
Fellow Shareholders:
There is an often quoted Winston Churchill
saying that goes, “success is not final, failure is not fatal: it
is the courage to continue that counts.” We might amend this to say
“it is the courage to change and continue that counts.”
The years from 2003 through 2008 brought success
and growth for Harris & Harris Group. Since the second half of
2011, though, we have experienced successive years of decline in
our share price, in our NAV, and in our ability to interest the
market in the long-term promise of the transformative companies we
build. The facts as they pertain to shareholders are simple.
Our stock price has now depreciated consistently since the second
half of 2011.
We have had successes, but these successes have
not translated into NAV appreciation nor share price appreciation.
First, we have not diluted shareholders by raising additional
capital since 2009 because we have been able to realize more
monetization events over the past five years than we have in
historical periods. In each of the years 2015, 2014, 2013, 2012 and
2011, we had liquidity events that have returned proceeds to the
company of approximately $11.9 million, $14.5 million, $31.8
million, $11.9 million and $16.5 million, respectively. In 2016, we
expect to have liquidity events that return in excess of $15
million to the company. However, we have not had large enough
liquidity events to meaningfully impact NAV.
Second, we continue to have companies in our
portfolio that we believe are performing well. These companies
continue to make progress each quarter, and we believe these
companies have the potential to generate investment returns that
are meaningful, and potentially larger than our historical returns.
As recently reported, in the third quarter of 2016 alone, D-Wave
Systems, Inc., announced details of its most advanced quantum
computing system, featuring a new 2,000 qubit processor. D-Wave
also announced the formation of D-Wave Government Inc., a U.S.
subsidiary formed to provide D-Wave’s quantum computer systems to
the U.S. government. Mersana Therapeutics, Inc., announced that it
has clearance from the FDA to begin a Phase 1 clinical trial for
its antibody-drug conjugate therapy for cancer. In conjunction with
this clearance, the company received a $20 million milestone
payment from Takeda. HZO, Inc., announced a collaboration
with Rakuten Kobo to protect its latest eReader, the Kobo Aura
ONE.
Finally, we have increased our investment income
and decreased our net operating losses. We increased our investment
income by 132 percent and decreased our net operating loss by 46
percent during the third quarter of 2016 as compared with the third
quarter of 2015. In the first nine months of 2016, as compared with
the first nine months of 2015, we increased our investment income
by 97 percent and decreased our net operating loss by 41 percent.
This reduction in net operating loss permits more of the future
value of our portfolio to be realized by shareholders.
While making many changes over the past five
years, we stayed true to our fundamental strategy, investing in
transformative companies enabled by disruptive science. While we
continue to believe the market has become incapable of pricing the
potential of our long-term disruptive investments into existing
market metrics, and while we still believe that our portfolio will
return the type of returns investors have been investing in us for,
it is time to change.
We are five years removed from the last time we
traded at a premium to NAV. It is clear that we can no longer
accept that our stock price reflects only a failure by the market
to price the potential of our portfolio of venture capital
investments. Although we believe the former is true, the market is
also pricing a pessimistic view of our business model.
Over the past 18 months, in our Letters to
Shareholders and in our public documents, we have repeatedly
discussed the difficulties we face with our business model. In
summary, there are three main difficulties: 1) structural changes
in the public markets brought on both by government regulations and
stock trading innovations have reduced many of the incentives for
those that make a market in micro-capitalization stocks; 2) our
structure as a BDC presents significant hurdles to build a firm
focused investing in privately held, non-income producing
securities with our existing capitalization; and, 3) the regulatory
burden of many of the post 2002 regulations, such as Sarbanes-Oxley
and Dodd-Frank, have been indiscriminate to size and to type of
investment fund.
Management and the Board of Directors have been
working on a long-term plan to 1) address these business model
issues without compromising the value in our existing portfolio and
2) create future value for shareholders. While we have already
taken steps to change our business, more fundamental changes will
likely be required as this long-term plan develops. These
modifications will be structural, as well as also likely involving
additional changes.
In early January 2017, we will be organizing a
shareholder call to discuss the proposed changes we will seek to
implement as part of the long-term plan being developed by
management and our Board of Directors. We will articulate why we
believe this long-term plan is the best route to both create and
maximize value for our shareholders. We continue to believe there
is a way to move forward to maximize the value in our portfolio and
to use our structure and resources to create greater value for
shareholders in the future. We also believe this long-term plan
will provide a path to build our precision health and medicine
company in a way structurally that makes sense for
shareholders.
We will be conducting our quarterly shareholder
call tomorrow, Tuesday, November 15, 2016, at 10:00 AM Eastern to
discuss the third quarter of 2016 and the progress of our
portfolio. Shareholders can listen to the call through the
following telephone numbers and/or website:
Live
Call: |
|
(877) 303-9848, domestic(408)
337-0152, international |
|
|
|
Webcast: |
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http://ir.hhvc.com/events.cfm |
Please access the site at least 15 minutes prior
to the scheduled start time in order to download any audio software
that may be required. A replay of the webcast will be accessible
through the Company's website for seven days following the live
event. For those unable to listen to the call via the Internet, a
replay of the call will be available until 1 p.m. Eastern Time on
Tuesday, November 22, 2016, by dialing (404) 537-3406. The
conference ID for the replay is 90921699.
Thank you for your support.
Douglas W. JamisonChairman, Chief Executive
Officer |
|
|
Daniel B. WolfePresident, Chief Operating
Officer |
November 14, 2016
About Harris & Harris
Group
Detailed information about Harris & Harris
Group and its holdings can be found on its website at www.HHVC.com,
on Facebook at www.facebook.com/harrisharrisvc and by following on
Twitter @harrisandharrisgroup.
Forward-Looking StatementsThis letter may
contain statements of a forward-looking nature relating to future
events. These forward-looking statements are subject to the
inherent uncertainties in predicting future results and conditions.
These statements reflect the Company's current beliefs, and a
number of important factors could cause actual results to differ
materially from those expressed in this letter. Please see the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2015, as well as subsequent filings, filed with the
Securities and Exchange Commission for a more detailed discussion
of the risks and uncertainties associated with the Company's
business, including but not limited to, the risks and uncertainties
associated with venture capital investing and other significant
factors that could affect the Company's actual results. Except as
otherwise required by Federal securities laws, the Company
undertakes no obligation to update or revise these forward-looking
statements to reflect new events or uncertainties. The references
to the websites www.HHVC.com, www.facebook.com and have been
provided as a convenience, and the information contained on such
websites is not incorporated by reference into this letter. Harris
& Harris Group is not responsible for the contents of
third-party websites.
Press Contact:
Daniel B. Wolfe
Harris & Harris Group, Inc.
212-582-0900
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