Mount Logan Capital Inc (MLCI) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Harris & Harris Group fourth-quarter shareholder update. (Operator Instructions). As a reminder, this conference is being recorded. I would now like to hand the conference over to Patty Egan, Chief Financial Officer. Please go ahead.

Thank you. I will begin by reading the Safe Harbor statement. This presentation may contain statements of a forward-looking nature relating to future events. Statements contained in this presentation that are forward-looking statements are intended to be made pursuant to the Safe Harbor provisions 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 those 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 discussions of the risks and uncertainties associated with the Company's business, including but not limited to the risk 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, Harris & Harris Group, Inc. undertakes no obligation to update or revise these forward-looking statements to reflect new events or uncertainties.

I will now turn the call over to Doug Jamison, our CEO.

Thank you, Patty. Good morning. This is Doug Jamison. Welcome to our call reporting on year end 2013.

Daniel Wolfe and I will begin by walking you through some slides on events from 2013 and the start of 2014. Patty Egan, our Chief Financial Officer, will then provide a brief summary of our December 31, 2013 financials. Patty will be referencing our recently filed annual report on Form 10-K. We will then answer any questions, and we expect the call to last approximately 45 minutes.

Harris & Harris Group builds transformative companies from disruptive science. On February 24 there was an article written titled Why Facebook is Killing Silicon Valley. The author, a teacher of entrepreneurship at Sanford, noted, quote, the irony is that as good as some of these nascent startups are in material science, medical devices, and life sciences, more and more frequently, VCs whose firms would have looked at and invested in these sectors, are now only interested in whether it runs on a smartphone or tablet. End of quote.

He goes on to lament, quote, the end of an era of venture capital-backed big ideas in science and technology. We can hope that some of the VCs remain contrarian and non-myopic and avoid the herd, but if not, the long-term consequences for our national interests will be less than optimum. End of quote.

He finishes by rewording a quote from JFK from 1962 related to landing a man on the moon. Quote, we choose to invest in ideas, not because they are easy, but because they are hard. Because that goal will serve to organize and measure the best of our energies and skills; because that challenge is one that we are willing to accept; one we are unwilling to postpone; and one which we intend to win. End of quote.

We welcome this type of thinking. Realize, invest, partner, return. Remain laser-focused on this execution plan, we believe 2014 will be an important year in our execution on this plan.

What did we accomplish in 2013 and early 2014?

In 2013 investments from our portfolio returned over $30 million in cash to Harris & Harris Group. In July 2013 our portfolio company, Xradia, was purchased by Carl Zeiss. We will receive $15.2 million in proceeds from this sale, including amounts held in escrow. Our investment cost in Xradia was $4 million.

On January 23, we received the first escrow payment of $1.2 million, bringing the cash we received to date in Xradia to $14 million.

In 2013 we also sold certain assets of SynGlyco, previously Ancora Pharmaceuticals, to CordenPharma. We retained the vaccine business. In January 2014, Kovio was acquired by Thin Film Electronics, but we received no proceeds from this sale.

On February 14, 2014, we announced the signing of definitive documents for the sale of Molecular Imprints' semiconductor business to Canon. We expect to receive $7 million in proceeds from this sale, including amounts to be held in escrow. We could receive an additional $1.7 million on the achievement of certain milestone payments. Our investment cost in Molecular Imprints was $4.6 million.

Interestingly, because of the strategic investment we were able to make in April of 2011, primarily owing to our evergreen status, we will be the only financial investor to realize a return on our investment at the initial closing. Additionally we will hold ownership in a new finance company established to utilize Molecular Imprints' technology for applications in the biomedical and consumer electronics fields without making additional new investment.

2013 revenues and especially commercial revenues of our portfolio companies are continuing to increase each year. We aggregate the revenues of our equity-focused portfolio companies on an annual basis and report these aggregated amounts for the prior three calendar years in our Management's Discussion and Analysis section of our annual report on Form 10-K on pages 49 and 50.

These revenues include contributions solely from those equity-focused portfolio companies that have yet to complete liquidity events, such as initial public offerings, up listings, or merger and acquisition transactions and are not in the process of being shut down as of December 31.

We have 20 of our 24 companies in our equity-focused venture capital portfolio as of both December 31, 2012 and December 31, 2013 that generated revenues. For these 20 companies, the aggregate revenue increased 44% from $186.6 million in 2012 to $268.9 million in 2013.

In our letter to shareholders dated October 8, 2013, we noted our new investment focus on BIOLOGY+, which we define as investments in interdisciplinary life science companies where biology innovation is intersecting with innovations in areas such as electronics, physics, material science, chemistry, information technology, engineering, and mathematics. We focus on this intersection because we believe interdisciplinary innovation will be required in order to address many of the Life Science challenges of the future. To date, all of our BIOLOGY+ companies have also been commercializing or integrating products enabled by nanotechnology.

At this time we are expanding our investment focus within the area of BIOLOGY+ and may make investments that are not enabled at the nano scale or micro scale. We will not make BIOLOGY+ investments that are not also nanotechnology or microsystem investments for 60 days from receipt of our annual report.

Our focus on BIOLOGY+ is not a fundamental policy, and we will not be required to give notice to shareholders [prior to] make a change from this focus.

In 2013 we made two new investments, EchoPixel and ProMuc. EchoPixel is a data visualization company, striving to provide better analytic tools for data analysis and life science and healthcare applications by amplifying human expertise with machine learning. This seed-stage California-based company has been developing a set of algorithms and software tools to visualize and analyze data generated by MRI and computational tomography scanners, x-ray microscopes, and other analytical tools.

The company currently has working prototypes of visualization stations. It is in the process of developing data analysis protocols with several leading hospitals, including Sanford, the Cleveland Clinic, University of California, San Francisco, and Charles River Labs. The approach is broadly applicable to high hospital diagnostic surgery production workflow, as well as training and education.

During the fourth quarter of 2013 Harris & Harris Group established and invested in a new portfolio company, ProMuc Inc., to focus on the research and development of synthetic mucins. Mucins are a special class of glycoproteins which provide many critical functions during gestation and in the maintenance of general health, such as providing lubrication and acting as a protective barrier to external harmful microorganisms. We believe that the development of synthetic mucins could potentially permit us to fabricate better biomagnetic materials for a variety of commercial applications in the health and nutrition industries, including food additives, antimicrobial coatings, and anti-cancer vaccines.

We have partnered with Katharina Ribbeck at MIT and with CordenPharma to begin building this company, which currently is 100% owned by Harris & Harris Group.

We are aware that our net asset value per share has not yet begun to respond to the progress in our portfolio. We believe it will over the coming quarters and years. Our private portfolio is valued at $93.9 million as of December 31, 2013, a 19% discount from our cost basis in this portfolio as of that same date.

From September 30, 2013 to December 31, to December 31, 2013, the value of our equity-focused venture capital portfolio, including our rights to potential future milestone payments from the sales of BioVex Group and Nextreme Thermal Solutions decreased by $13.7 million from $106 million to $92.3 million. This decrease was primarily owing to a net decrease in the value, owing to a net increase in discounts for non-performance risk of approximately $13.3 million.

We define non-performance risk as the risk that the price per share or the implied valuation of a portfolio company does not appropriately represent the risk that a portfolio company that requires or seeks to raise additional capital will be unable to raise capital, will be needed to shut down, or not return our invested capital; or that it will be able to raise additional capital but at a valuation significantly lower than the implied post-money valuation of the most recent round of financing.

In the future, as these companies receive terms for additional financings or if they are unable to receive additional financing and, therefore, proceed with sales or shutdowns of the business, we expect the contribution of the discount for non-performance risk to vary in importance in determining the fair values of our securities of these companies. Changes in discounts for non-performance risk could positively or negatively affect the value of our portfolio of companies in future quarters. A further discussion of the changes in value of our equity-focused venture capital portfolio can be found in the Management's Discussion and Analysis section of our annual report on Form 10-K on pages 66 and 67.

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

For example, Ultora received a $1.1 million financing during the fourth quarter of 2013 at a discount to its previous round of financing. However, for Harris & Harris Group, for the same investment amount that we had previously earmarked for this financing, we increased our ownership from 10% to 15% of the voting ownership of Ultora to over 20% of the voting ownership. Our cost basis in Ultora is $1.1 million as of December 31, 2013. Our value was approximately $240,000 as of the same date. We believe this will be beneficial as Ultora continues to progress with its unique ultracapacitor technology.

With regards to ownership of our portfolio companies, we have historically categorized our ownership in our financial statements in the following three ways: by less than 5%; between 5% and 25%; and greater than 25% on a voting basis.

In response to a number of inquiries from shareholders and prospective shareholders, we include a new table on page 50 of the Management's Discussion and Analysis section of our annual report on Form 10-K that provides our current voting ownership of our portfolio companies in tighter ranges than we have historically disclosed.

We are beginning to be recognized for our leadership role in early-stage innovation. In February of 2014 we were recognized by Forbes as one of the few venture capital investors investing in meaningful technology companies. Additionally, we received recognition by the data firm, GrantIQ as the number one investor in innovation.

As an investor in transformative companies ad enabled by disruptive science, Harris & Harris Group is proud to be on the cutting edge of science and business. More importantly, a national dialog is finally emerging that is focusing on the need for deeper scientific innovation if America is to retain its business leadership position.

Over the coming months we will issue and publicize a series of blogs highlighting what we term as H&H on the cutting edge. Each of these papers will focus on a maturing company in our portfolio while also noting that Harris & Harris Group offers a unique way of participating in these companies' growth while they are still private. We will briefly highlight two examples, D-Wave and Metabolon, below. We suggest our shareholders follow both companies closely over the next 12 months.

Quantum computers, unlike conventional digital machines used since the onset of the computer age, have the potential to crunch through the data and overcome levels of complexity insurmountable for existing computers. Results that currently require existing digital computations longer than the age of the universe to sort out digitally might be found in minutes or even seconds using future quantum computers. In the last eight years, D-Wave has progressed from theoretical models and unproven approaches to having Lockheed Martin, Google, and the US government as customers for its ground-breaking 512-qubit Adiabatic quantum computing machines. The computational power of D-Wave's future generation processors is forecast by it to surpass that of all computers combined on the face of the earth within one decade.

As one would expect for this new paradigm in computing, there is much scientific debate surrounding D-Wave's approach. The cover story in Time Magazine on February 17, 2014 captured both sides of this debate very well.

As with many investments, there is little opportunity if there is not diversity of opinion. This is especially true when you are commercializing the world's first quantum computer. Many more studies are ongoing and we will await their conclusions. But after reading this story in Time and seeing the progress D-Wave is making, it is difficult not to believe the company has a real opportunity to transform the nature of computing.

We believe Metabolon is another company that demonstrates Harris & Harris Group is on the cutting edge of science and business. Metabolon completed a $15 million mezzanine round of financing in December 2013, at an increase in value from the previous Series D financing. We believe this financing demonstrates the leadership position Metabolon has staked in metabolomics.

Metabolomics is a rapidly expanding field of biochemical research and discovery focused on the measurement of small molecules involved in metabolism. It enables the mapping of these small molecules' pathways in order to identify diseases, discover biomarkers, and better understand complex biological processes.

Metabolon has performed more than 3,000 studies with more than 550 companies, including all of the top 10 global pharmaceutical companies. It has established its leadership in metabolomics over the past 12 years by publishing over 300 peer-reviewed articles; by obtaining over 60 issued patents; and by generating over $96 million in cumulative revenue.

In 2013 Metabolon launched three commercial diagnostic tests targeting both obesity-related diseases, such as type II diabetes and cancer. Metabolon's first obesity-related diagnostic test, Quantose IR, detects insulin resistance in the earliest stages of type II diabetes.

Metabolon's cancer diagnostic tests target urological cancers such as prostate cancer, for which it launched two noninvasive urine-based diagnostic tests in September 2013. Its first test, Prostarix, helps determine the likelihood of prostate cancer in patients who are considering whether to have a biopsy. Its second test, Prostarix Plus, helps validate the often incorrect results in men who have had a negative prostate biopsy.

Shareholders will note that two recent announcements further support Metabolon's recent progress. On February 25, Metabolon announced partnerships with the Carlos Slim Institute, Patia and Clinica Ruiz, for Quantose pre-diabetes testing in Mexico.

Under the terms of this agreement, Patia and its affiliates will use Metabolon's Quantose IR technology in unprecedented large-scale studies in Mexico to test for pre-diabetes in up to 3 million overweight or obese adults, and secondary school students who are obese and/or have a family history of diabetes.

The goal of these studies is to detect pre-diabetes early and prescribe treatment to prevent progression to type II diabetes. Testing will be performed over four years beginning with pilot studies in 2014.

On March 5 Metabolon entered into a collaboration agreement with Human Longevity, Inc., Craig Venter's new company. Metabolon will provide biochemical profiling services to assist human longevity in its mission to tackle diseases of aging by building the world's largest and most complete human genotype, micro biome, and phenotype database.

In the initial terms of the agreement, Metabolon will perform small-molecule analysis of 10,000 subjects and collaborate with Human Longevity to map changes in the small molecules to end points of disease and gene mutations.

Craig Venter is on the scientific advisory board of Metabolon, which is how he was aware of Metabolon's leadership position. Metabolon retains the rights to commercialize small molecule diagnostic tests discovered in this collaboration.

To conclude, we are excited to share some of these companies with the investment public at our April 30, 2014 Meet the Portfolio day. This event will be hosted at the Harvard Club in New York City from 8.00 a.m. until 1.00 p.m. Presenting companies include D-Wave Systems, Metabolon, Champions Oncology, HZO, Adesto, EchoPixel, and AgBiome.

Revenue for these seven companies increased over 100% in 2013 and will give our shareholders and the institutional investor universe the opportunity to better understand the future of these companies and to begin to see what impact that may have on Harris & Harris Group.

We will now turn it over to Patty Egan, our CFO.

At December 31, 2013, we had total assets of approximately $125 million on our balance sheet. Included in our total assets is our venture-capital portfolio, which was valued at approximately $94 million versus its cost basis of $160 million at December 31, 2013. Therefore, at year end our venture-capital portfolio was in a depreciated state of $22 million.

We also held $27.5 million of cash and US Treasuries and had no debt outstanding as of December 31, 2013.

Our primary and secondary liquidity was $33.6 million. These amounts do not include an additional $1.2 million in escrow funds related to the sale of Xradia, which were released in January of 2014.

Our net assets at December 31, 2013 were approximately $122.7 million and our net asset value per share was $3.93. This was a decrease from our net asset value per share of $4.13 at December 31, 2012.

Turning to our income statement, for the year ended December 31, 2013, we had investment income of approximately $471,000 compared to approximately $722,000 in investment income in 2012. Our total expenses were approximately $8.5 million for the year compared with approximately $9.5 million during 2012. 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, 2013 were approximately $7.3 million as compared with $6.3 million during the comparable period in 2012. This yielded a net operating loss of $8 million for 2013, which is less than our net operating loss of $8.8 million for 2012.

I will now turn it back over to Doug for his closing remarks.

Thank you, Patty. As we enter 2014 the initial public offering market is robust. We do not know how long it will remain this way. As noted in our annual report on Form 10-K, we have companies that are planning for and/or beginning the process of pursuing potential sales and/or IPOs by hiring bankers and/or advisers to attempt to pursue such liquidity events. We look forward to providing more information to shareholders as the year progresses and as it becomes public.

In closing, we are acutely conscious of the steps we need to take to make Harris & Harris Group competitive in 2014 and beyond: realize, invest, partner, return. We remain laser focused on this execution plan. We believe 2014 will be an important year in our execution on this plan.

Thank you. We will now take questions.

(Operator Instructions) Ed Woo, Ascendiant Capital.

I wanted to know a little bit further about what you see as the outlook for the possibly -- about market valuations, either in IPOs or M&A for this year.

Ed, This is Doug. Can you just repeat that again? What we are looking for as far as the market outlook?

Yes. Right now it seems like the stock market valuations seems pretty strong. The IPO market was strong in 2013 and it seems so far in 2014. Just curious what your outlook is for both of those, which I assume would affect some of your potential valuations for companies that you would potentially have IPOs or to sell them.

Certainly, certainly. So as we said, 2013 IPO market, especially in biotech, and then I will say life sciences generally, but really in the biotech sector, was very strong. I think that institutional investors in the public markets have been seeking growth. We believe that continues into 2014. I think there is starting to be a national debate on whether things are getting expensive or whether one expects to see that continue.

Our take is I mean we're going to watch the market. The market turns on a dime, and we want to make sure that you access the public markets when they are available. But when we see some of the quality of the companies -- clearly there are more and more going out, which means there's going to be some lower quality. But we still see some great quality companies that are potentially going to look to access the public market in 2014.

And personally, we believed that economic growth minus a geopolitical event or something like that is going to continue. What we see in our own portfolio of companies is they are executing. Metabolon had a fantastic 2013. You heard Daniel talk about our revenue numbers.

So it's not that these companies aren't executing and there's an open market. These companies are really executing. They are growing their revenues as well. So we are optimistic about the growth perspective of not only our portfolio of companies, but the US economy.

From a valuation standpoint, I just want to be clear. Yes, the public market now, when you see our values and you see what some of these companies are doing in the public market, there is a great disparity. We don't try to get ahead of ourselves. When these companies are private, we look at all the things they are going to need to do; VC money is still in disarray, so financings are difficult. You saw us take a large amount of nonperformance risk discounts this year.

So this is just looking and saying, in the private realm, companies that are venture capital backed will still -- they require support from their syndicate, et cetera, and that is still in disarray, whereas the public markets, of course, are very vibrant.

So I think you should, one, expect to see us look to access that market this year. I think that is a prudent thing to do for a venture capital firm, especially with companies that are where they are in their development at Harris & Harris Group. And again, our hope -- we can't forecast this, but our hope would be that the public markets find our companies as exciting as they found some of the companies that have gone out to date, as well.

We think there is going to be some vibrancy in the market moving forward. Again, subject to geopolitical events or subject to the market getting too frothy.

Does that answer your question?

Yes. I guess just a little bit more detailed as you can. Obviously, you're not going to be able to provide guidance on specifically how many companies are going to realize liquidity events, but do you think directionally it should be more than it was in 2013?

Well, in 2013 all you saw was, you saw some M&A events. I think that again, many of our portfolio companies are at the stage where they become exciting M&A candidates. I think that hopefully, as we look forward we are going to see both IPO as well as M&A events.

And as we have said historically, if you look at what we have said that we expect that over the next 12 to 24 months, yes, one should start to look for liquidity events in Harris & Harris Group's portfolio. And I mean to be bluntly honest with you, if one doesn't see them, one needs to question why. But I think one should look to see and one should look to see those accelerate as more and more of the companies in our portfolio mature.

Again, I think of a Metabolon. Metabolon, if you are following the events, it has done everything. It set itself up. It did a mezzanine round of financing this previous year.

Clearly D-Wave is -- you see the progress D-Wave has made.

I think people have seen some of the progress Nanosys has made with its adoption into the Kindle Fire and the HDX. So again, these companies are all progressing and seeing what one would expect to see ahead of one being successful as companies; and two, potentially future liquidity events, as well.

Great. Well, thank you, and good luck.

Thank you.

Thank you. And I have no further questions in the queue at this time.

Okay. This is Doug Jamison. We thank you all for being on the call. I hope you realize we try to do as much as we can to communicate our stories to investors. As always, I point you to the MD&A section of our annual report on Form 10-K. I think we provide a tremendous amount of information about the portfolio in there. We try to do the same in our shareholder letters and in our shareholder calls.

So again, we look forward to 2014. We think it's going to be a very exciting year for Harris & Harris Group. And as always, if shareholders have questions, we welcome them. Thank you all very much. Have a great day.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone, have a good day.