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Edited Transcript of TINY earnings conference call or presentation 17-Mar-17 1:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Harris and Harris Group Inc Earnings Call

NEW YORK Mar 17, 2017 (Thomson StreetEvents) -- Edited Transcript of Harris and Harris Group Inc earnings conference call or presentation Friday, March 17, 2017 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alicia Gift

Harris & Harris Group, Inc. - Senior Controller

* Doug Jamison

Harris & Harris Group, Inc. - Chairman & CEO

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Conference Call Participants

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* Sam Rebotsky

SER Asset Management - Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Harris & Harris fourth-quarter 2016 financial results conference call. (Operator Instructions) As a reminder, this call may be recorded.

I would now like to introduce your host for today's conference, Alicia Gift. Please go ahead.

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Alicia Gift, Harris & Harris Group, Inc. - Senior Controller [2]

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I will now read the Safe Harbor statement. This shareholder call may contain statements of a forward-looking nature relating to future events. Statements made during this call that are forward-looking statements are intended to be made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995.

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 these expressed herein. Please see the Company's annual report on Form 10-K 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 law, Harris & Harris Group, Inc. undertakes no obligation to update or revise these forward-looking statements to reflect new events or uncertainties.

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Doug Jamison, Harris & Harris Group, Inc. - Chairman & CEO [3]

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Thank you, Alicia. Thank you all for joining us this morning. We will walk you through a few of the key events from the end of 2016 and the beginning of 2017. Alicia Gift will also provide a review of a few key financial items.

I hope everyone had a chance to read our recently posted letter to shareholders for Q4 2016 and to also read our press release that accompanies the release of our year-end financials. There are no slides accompanying our call this morning.

Let me start with a strategic discussion. We ended 2016 and began 2017 preparing for change at Harris & Harris Group. On December 20, 2016, we released a letter to shareholders documenting these impending changes. We followed that letter with a shareholder call on January 10, 2017, further explaining our plans. Since then, we have spoken or met in person with many shareholders to discuss and to receive feedback on these plans.

Overall, we would say the reception has been very positive. We remain on schedule to complete the changes we have detailed by March 31, 2017.

In all of our communications we have humbly noted that the work to change our course remains ahead for the Company. These changes are not a cure-all; the hard work is ahead of us. That said, we believe we now have a more focused, lower-cost strategy for increasing value for our shareholders. We have proven new leadership coming in to execute on this strategy. We believe we have not sacrificed value at our maturing existing portfolio of investment either.

Ahead of our announcement we did take steps in 2016 to reduce expenses and decrease our net operating loss. As reported in the annual report on Form 10-K we increased our investment income by 95% and decreased our net operating loss by 37% during 2016 as compared with 2015. We decreased our operating expenses for the third consecutive year and steps we are taking now will continue to decrease these operating expenses.

Also in 2016 we continued to monetize investment in our publicly-traded and privately-held portfolio of companies. Our ability to monetize portions of our portfolio since 2011 and realized gains permitted us to manage the Company without raising capital and diluting shareholders whilst our stock traded below net asset value per share.

But the change we have proposed offers more than just reducing expenditures and monetizing assets. Going forward, we will focus on investing in and providing value-add systems through constructive activism to what management believes are substantially undervalued, small, publicly-traded companies that have the potential for significant turnaround. This approach is a change in how we think, how we invest, how we manage the Company into the future.

Rather than making new investments in early-stage private companies that often now take seven to 15 years to provide returns on invested capital, we believe the new strategy will enable us to generate income and grow NAV over shorter, more predictable time frames than those we have experienced over the past several years. Our goal is that the result of our constructive activism leads to a reversal in direction for the share prices of these investee companies, thereby creating value for our shareholders.

This change also comes with new leadership. Kevin Rendino will be assuming the roles of Chairman and Chief Executive of the Company. Mr. Rendino's distinguished investment career and his extensive domain knowledge in the area where 180 Degree Capital will be focused provides demonstrated leadership for the firm.

For over 20 years, Kevin led the basic value funds that Merrill Lynch and BlackRock. The funds under his management had approximately $13 [billion] in total assets. Mr. Rendino is also a member of BlackRock's leadership committee.

Since 2012, Kevin has served as Chairman and Chief Executive Officer of RGJ Capital. Daniel Wolf, our President, Chief Financial Officer, and Chief Compliance Officer, will assist Mr. Rendino in executing the new strategy and shepherding our existing portfolio to monetization events over the coming years. Daniel has served Harris & Harris Group since 2004 with successive increases in roles and responsibilities.

We also believe we have a maturing portfolio with some investments that may provide outsized returns to our shareholders without much, if any further, investment from us. We will also remain actively involved in the emerging area of precision health and medicine through investments such as Essential Health Solutions, TARA Biosystems, ORIG3N, and HALE.life, where we have larger investment ownership positions that are more historic investments, where we believe the business models require less capital to get to cash flow breakeven, and unlike nanotechnology, where markets are going to be transformed. We believe this creates an opportunity for our shareholders to be rewarded for holding our stock into the future.

Our NAV was $2.34 as of December 31, 2016. Since year-end our holdings in Adesto Technologies Corporation have increased in value. As noted on page 46 of our annual report on Form 10-K, the change in the price per share of Adesto between December 30 of 2016 and March 14, 2017, equals an increase of approximately $0.13 in NAV. We hope that this small, but positive, change in valuation, paralleling the changes we believe will consummated by the end of the first quarter of 2017, may be the first positive steps for the new direction of the Company. We would like it to be a jump start on our future.

Alicia, would you walk us through the year-end financials?

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Alicia Gift, Harris & Harris Group, Inc. - Senior Controller [4]

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Yes. At December 31, 2016, we had total assets of approximately $74.6 million on our balance sheet. Included in our total assets is our investment portfolio, which was valued at approximately $58.3 million versus its cost base of $101.9 million at December 31, 2016. Therefore, at year-end our portfolio was in a depreciated state of $43.6 million.

We also held $15.4 million in cash and had no debt outstanding at year-end. At December 31, 2016, our primary and secondary liquidity was $20.0 million. Our net assets at December 31, 2016, were approximately $72.3 million and our net asset value per share was $2.34. This was a decrease from our net asset value per share of $2.88 at December 31, 2015.

Turning to our income statement. For 2016 we had investment income of approximately $1.8 million compared to approximately $917,000 in investment income in 2015. Our total expenses were approximately $6.3 million for the year compared with approximately $8.1 million during 2015.

These total expense figures include both cash and non-cash-based operating expenses such as stock-based compensation. Stock-based compensation expense has no impact to NAV.

Our total cash base and accrued operating expenses for the year ended December 31, 2016, were approximately $6.3 million as compared with $7.5 million during the comparable period in 2015. This yielded a net operating loss of $4.5 million for 2016, which is a decrease compared to our net operating loss of $7.2 million for 2015.

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Doug Jamison, Harris & Harris Group, Inc. - Chairman & CEO [5]

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Thank you, Alicia. Before opening up to questions, I will just provide a few details from 2016, most of which we covered in the press release.

First, some of the positive events for 2016. We paid off all of our outstanding obligations associated with the loan facility with ORIX as of December 31 and as of today the Company does not have any outstanding debt. We executed an agreement whereby Metabolon repurchased all our securities of Metabolon for proceeds of $10.8 million versus our cost basis of $7.2 million.

We did sell our shares of Magic Leap to two undisclosed buyers for aggregate proceeds of $640,000. D-Wave Systems announced details of its most advanced quantum computing system, the D-Wave 2000Q. During the first quarter of 2017, D-Wave also announced the sale of its first D-Wave 2000Q to Temporal Defense Systems, a cyber security firm.

AgBiome announced the award of a multiyear grant from the Bill & Melinda Gates foundation for the evaluation and development of lead proprietary biological fungicides. Mersana Therapeutics expanded its partnership with Takeda Pharmaceutical Company, providing Mersana with an upfront payment of $40 million and an additional payment of $20 million upon clearance of the IND by the FDA. IND is investigational new drug application.

Subject to the success of XMT-1522 and antibody drug conjugate programs, Mersana is also eligible to receive milestone payments of more than $750 million as well as royalties. Takeda also agreed to invest up to $20 million in Mersana.

We also faced challenges during the year. Our share price decreased again in 2016. The values of our public equities, particularly those of micro-capitalization companies, remain highly volatile. The price per share and market capitalization of Adesto decreased in value from $7.71 as of December 31, 2015, to $1.85 as of December 30, 2016.

Enumeral Biomedical Holdings also decreased in value from $0.23 as of December 31, 2015, to $0.13 as of December 30, 2016. However, the change in price per share of Adesto Technologies, as alluded to earlier, between December 31, the last day of trading for the year, and March 14 equals an increase of approximately $0.13 in net asset value per share for Harris & Harris Group.

Finally, even though financings of some of our portfolio companies may have occurred at increases in price per share from prior rounds of financing, such increases in value may not reflect in full in our values owing to other rights and preferences afforded to investors in those rounds of financing. This challenge in part led to a decrease in our net asset value per share during 2016. It's also something we fought in 2015 and towards the end of 2014 as well.

So I think with that what we would do is we would like to open it up for any questions we may have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Sam Rebotsky, SER Asset Management.

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Sam Rebotsky, SER Asset Management - Analyst [2]

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Yes, good morning. Dan, I have a question on the data wave. The valuation at the end of September was $7.837 million. No, it was on -- Data Wave was $11.498 million and now it's $9.714 million. Was that attributable to the raise at a lower price than the previous --? What is the reduction in the valuation of Data Wave?

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Doug Jamison, Harris & Harris Group, Inc. - Chairman & CEO [3]

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Sorry, D-Wave. Unfortunately, I can't go into too much detail on the basis of valuation. What I can tell you is that there is some movement because of change in the exchange rate of the Canadian dollar to US dollar and there's some impact on our valuations from that. And there are other factors in there that we included in that calculation of value.

Again, there's a lot of things that are going on at these companies. D-Wave is -- they are moving forward on a lot of efforts. You saw some announcements of sales of computers during the quarter. You saw some announcements of additional partnerships that they have been putting together and that Volkswagen is going to be using their system. So there's a lot of really good things going on.

And as we have talked about in the past, the option pricing model, which includes -- which is a part of this valuation methodology, has some vagaries to it that cause movements in valuation that may be independent of what actually is -- how the Company is executing. The Company has not announced a new financing nor has there been a financing completed yet and so we are still working on and taking subscriptions for the co-investment vehicle.

And so I think that the way I would look at the change in value of D-Wave at this point in time is it's not -- it doesn't reflect really what's going on in the Company as vagaries of just how our valuations are calculated.

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Sam Rebotsky, SER Asset Management - Analyst [4]

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Okay, thank you. Now as far as the HALE.life and Interome, we contributed $1.5 million which we carried at the $1.5 million valuation and we expect to contribute an additional $2 million. How will our valuation going forward of this $3.5 million subsequently?

I think at this point we own 100% and would we have to write that down based on spending money or reduction or how would we value that going forward?

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Doug Jamison, Harris & Harris Group, Inc. - Chairman & CEO [5]

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I think probably the way to think about HALE is similar to TARA. We seeded TARA with capital; at the beginning of TARA we owned 100% of the Company. These are not subsidiaries and we have to be very careful and very clear that as an investment company, you do not consolidate or value by the equity method anything that is -- any company that is separate from something that provides services to the investment company.

So it is its own portfolio company; it is an investment that's made. The capital that is invested is -- you are looking to build value with that and you're getting equity for it. And that's why we put this capital into the entity so that we are, hopefully, getting credit for the work that was put in as the entity was being built.

And so, I can't tell you what the valuation will be next quarter when we put this additional capital in and everything. We haven't won all of those metrics at the moment and things always change, so I can't tell you what it will be valued today.

But what I can tell you is look at TARA. TARA, we invested capital. They spent that capital to build their business, but we got credit for that investment. And in fact, as the company executes and as it works to close its round of financing, we will get credit for that investment in the form of appreciation of our initial investment, at least on a valuation basis. Does that help?

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Sam Rebotsky, SER Asset Management - Analyst [6]

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Yes, very helpful, thank you. Good luck in the approval of the transactions going forward and good luck. Hopefully, we all make some money in the future.

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Doug Jamison, Harris & Harris Group, Inc. - Chairman & CEO [7]

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Thank you, Sam.

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Operator [8]

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Thank you. I am not showing any further questions. I would like to turn the call back over to management for any further remarks.

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Doug Jamison, Harris & Harris Group, Inc. - Chairman & CEO [9]

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Great. So thank you very much. This is Doug; in closing, I would like to say two things. First of all, Harris & Harris Group has been blessed with wonderful employees, wonderful Board members to the Company, to the shareholders, and our mission both past and present. It certainly, from my perspective, has been an honor to serve with these people. They have served the Company well and with great integrity, so I want to thank them.

I also want to say, as a shareholder of Harris & Harris Group, I am excited for this new path forward. Our portfolio is strong at this point in time and it will yield returns into the future. Kevin has been a great Board member. He has been very involved. He is very sharp. He is direct and when we look forward, I think we have a great future going forward.

Daniel Wolfe, he has operated this firm with very small staff unbelievably effectively. We probably run one of the smallest public companies reporting in operations out there and he has served it well, so we are in good hands with the strategy for the future. I certainly look forward to it and we look forward to years of turning this around and growing for the future.

Thank you very much for listening and we look forward to talking to you in the future. Thank you.

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Operator [10]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program and you may all disconnect. Everyone, have a great day.