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TINY > SEC Filings for TINY > Form 10-K on 15-Mar-2013All Recent SEC Filings

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Annual Report

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The information contained in this section should be read in conjunction with the Company's 2012 Consolidated Financial Statements and notes thereto.

Cautionary Statement Regarding Forward-Looking Statements

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

our future operating results;

our business prospects and the prospects of our portfolio companies;

the impact of investments that we expect to make;

our contractual arrangements and relationships with third parties;

the dependence of our future success on the general economy and its impact on the industries in which we invest;

the ability of our portfolio companies to achieve their objectives;

our expected financings and investments;

the adequacy of our cash resources and working capital; and

the timing of cash flows, if any, from the operations and/or monetization of our positions in our portfolio companies.

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

an economic downturn could impair our portfolio companies' ability to continue to operate, which could lead to the loss of some or all of our investments in such portfolio companies;

a contraction of available credit and/or an inability to access the equity markets could impair our investment activities;

interest rate volatility could adversely affect our results, particularly if we elect to use leverage as a material part of our investment strategy;

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

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

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

Background and Overview

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

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

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

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

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

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

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

Industry Sector Overview

Life Sciences

We classify companies in our life sciences portfolio as those that address problems in life sciences-related industries, including biotechnology, agriculture, advanced materials and chemicals, diagnostics, healthcare, bioprocessing, water, industrial biotechnology, food, nutrition and energy. We historically referred to our life sciences portfolio using the term "healthcare." We believe "life sciences" is a more appropriate term to describe this portion of our portfolio owing to the scope of applications for life sciences-related companies and technologies outside of traditional healthcare markets, including agriculture, food and industrial biotechnology.

We are living through an unprecedented rate of change in our understanding of biological systems and the ability to manipulate the fundamental building blocks of nature. Novel, rapidly maturing discovery, characterization, analysis, control and manufacturing techniques can have profound impact on life sciences and related industries that can be addressed through the understanding of biological systems and the ability to manipulate the fundamental building blocks of nature. Trends generating disruptive investment opportunities include:

Healthcare budgets are out of balance globally, with the aging population jeopardizing the financial viability of the leading economies of the world. Life sciences innovations in diagnostics, treatment and monitoring of disease must simultaneously reduce cost and improve the quality of life;

Continuing global growth in population and in improvements in quality of life substantially increase demand for raw materials, water, food and energy. This demand cannot be adequately met with conventional methods of manufacturing, generation, mining or harvesting. Biological pathways are becoming economically viable and ecologically preferable for production, utilization, and disposal/remediation; and

The ubiquity of data and internet access, while stationary and increasingly mobile, enable handheld devices to become a natural access point for communication and data sharing between healthcare service providers and their patients. Soon, they could be acting as diagnostic and treatment companions too.

We continue to believe we are positioned well to take advantage of today's growth markets within life sciences having been early investors in many of these markets. We believe our initial investments in single-cell analysis (Enumeral), three-dimensional biology (Champions Oncology), metabolomics (Metabolon), synthetic carbohydrates (Ancora), oncolytic viruses (BioVex, which was acquired by Amgen in 2011), solid state pH sensors (Senova), positioned us well to capture the growth of commercial interest in personalized medicine, industrial biotechnology, vaccines and molecular diagnostics. We also believe we have an emerging pipeline of companies that are developing solutions for growth markets that exist today or may develop in future years such as long-read genomic analysis (OpGen) and agricultural products from the microbiome (AgBiome, formerly AgInnovation). We discuss these companies in more detail in the section below titled, "New Investments in 2012."

We also have a number of portfolio companies that address life sciences-related sectors as a secondary industry focus of their businesses. These related industries and portfolio companies include environmental remediation (ABSMaterials), chemical and fuel production (Cobalt and Solazyme), nanofabrication for life sciences-related tools (Molecular Imprints) and non-destructive, soft-tissue analysis (Xradia).

Our interest in life sciences will continue to be multi-disciplinary. For example, analytical, modeling and data acquisition techniques accelerated drastically in the first decade of the century, rapidly increasing the development of new diagnostic testing. We believe that this trend will continue owing to successful migration of well-developed semiconductor manufacturing and computational technologies into life sciences applications. There have been numerous examples, such as gene sequencing, metabolomics or bioinformatics, where transition from matter to data resulted in positive shifts in performance of the underlying machinery. Furthermore, as Moore's law scaling in the semiconductor manufacturing industry is expected to continue for at least another two decades, we expect to see continuing migration of the novel techniques and computational capabilities into life-sciences applications.

The rapid development of internet and mobile computing represents another vector of developing innovation for the life sciences market. The move from central lab to hand-held devices changes how diagnostic information is used in decision making for patient care. Real-time information can be shared and analyzed by one or more physicians immediately at the point of care in a single visit rather than requiring multiple, sometimes lengthy delays and follow-up visits.

The next step in this direction will be sensing networks and life sciences functionality embedded into always-on devices. These devices will generate substantial amounts of data that will require significant computing capability and new software algorithms for analyzing and using the data to derive suggestions for clinical diagnosis and, potentially, treatment options for consideration by healthcare providers. The data generated by these devices will need to be transferred at high speed, often wirelessly, to data centers where such analysis could take place. While a number of technologies exist today that can address some of these needs, substantial improvements in speed, cost and capability are required for the realization of all of the capabilities desired by healthcare providers. Such needs present significant opportunity for innovations such as those targeted by us.

Manufacturing techniques are also undergoing rapid changes, and the cross-pollination is bi-directional. Biological- and life-sciences-inspired techniques are penetrating natural resources and mining industries. Water treatment, usage and utilization and fermentation technologies are influencing other unrelated verticals. Synthetic biology promises to impact the oil-derived chemical industry. Membrane science is impacting food production, ore enrichment and waste remediation. As such, our portfolio companies will often produce products and/or services that are applicable to multiple industry sectors. We sometimes address this cross-sector nature by indicating a primary and secondary industry sector focus for some of our portfolio companies, as applicable.

The table below lists the equity-focused companies in our portfolio as of December 31, 2012, and the equity-focused companies that were formerly in our portfolio that target life sciences-related needs as either the primary or secondary focus of those businesses and the year in which we initially invested in each company:

Current Life Sciences Portfolio Companies Past Life Sciences Portfolio Companies

           ABS Materials, Inc.             Alliance Pharmaceutical Corporation
              AgBiome, LLC                          BioVex Group, Inc.
      (formerly AgInnovation, LLC)
       Ancora Pharmaceuticals Inc.                   Chlorogen, Inc.
   Champions Oncology, Inc. (OTC:CSBR)               Crystal IS, Inc.
        Cobalt Technologies, Inc.                     ENDOcare, Inc.
          D-Wave Systems, Inc.             Evolved Nanomaterial Sciences, Inc.
    Ensemble Therapeutics Corporation               Gel Sciences, Inc.
        Enumeral Biomedical Corp.                  Genomica Corporation
                HzO, Inc.                     Guilford Pharmaceuticals, Inc.
       Mersana Therapeutics, Inc.                    Heartware, Inc.
             Metabolon, Inc.                           Kereos, Inc.
        Molecular Imprints, Inc.                   Kriton Medical, Inc.
               OpGen, Inc.                       Magellan Health Services
          Senova Systems, Inc.                 MedLogic Global Corporation
      Solazyme, Inc. (NASDAQ:SZYM)                  MultiTarget, Inc.
              Xradia, Inc.                     NanoGram Devices Corporation
                                                      Nanomix, Inc.
                                                    NeuroMetrix, Inc.
                                              Pharmaceutical Peptides, Inc.
                                                 Phoenix Molecular, Inc.
                                                     PolyRemedy Inc.
                                                      SciQuest, Inc.
                                               TetraVitae Bioscience, Inc.

The percent of life sciences investments in our portfolio has been increasing over the past ten years. Approximately 70 percent of our initial investments since 2007, and all of our investments in 2012, were in companies addressing needs in the life sciences.

Our life sciences companies demonstrate progress and growth through different mechanisms depending on their respective businesses. Businesses that provide services, such as Metabolon, generate revenues from the commercial sale of these services. Businesses that develop and sell products, such as Senova, generate revenues from the sale of those products. Businesses that enter into partnerships for discovery and development of therapeutics, vaccines and diagnostics, such as Ensemble, Enumeral, Mersana and Champions Oncology, may generate revenue from upfront fees, milestone payments and royalties on sales of approved products. Businesses that endeavor to advance a therapeutic, diagnostic or vaccine product through clinical trials may not generate revenue until an approved product is on the market, if ever. Progress for these types of companies can be measured by progress through clinical trials.


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

We are experiencing record levels of demand for energy, chemicals and resources that are crucial components of the global economy. This demand coupled with energy security concerns and volatility of commodity prices, leads to trends that yield disruptive investment opportunities. These trends include:

Identification and extraction of natural resources is becoming more of a science and less of an art. Such a shift in approach is driven, in part, by the need to manage the significant costs associated with energy-related projects, particularly in remote areas, and the availability of new methods of generating, analyzing and using data that was heretofore not available.

o Recovery of resources is occurring in exceedingly remote areas and from increasingly more difficult sources to access as the traditional easy-to-access sources of these resources are being drained of supply. This trend is leading to the need for new extraction technologies.

o New techniques for extraction of natural gas are increasing the supply and lowering the cost of this resource. Natural gas-powered devices can be more efficient and less polluting than petroleum-powered devices. Advances in distribution could enable natural gas to replace petroleum in certain applications.

Governments and industry worldwide are looking for new and cleaner forms of energy. This has increased interest in the ability to produce chemicals and fuels from renewable resources.

Governments, corporations and individuals worldwide seek ways to translate significant amounts of data generated by today's monitoring capabilities into ways to optimize use of energy and resources.

We expect that the foundation of products and services that address the trends above and other energy-related trends will be interdisciplinary. Tools that are commonly used for inspection and certification of electronic devices could find use in analyzing soil and rock samples in oil and gas exploration. Organisms that are used to manufacture therapeutics could find use in the producing of renewable chemicals and fuels. These multidisciplinary products and services will seek to improve performance, productivity and efficiency and to reduce environmental impact, waste, cost, energy consumption or raw materials.

We believe innovations in energy markets include:

New Approaches to Production: The term "production," is defined here to indicate the process of combining one or more individual components into a final product. A final product made using a process can be quite diverse and include a physical device (e.g., a solar panel, battery or solid-state coolers), a chemical (e.g., butanol, ethanol or biodiesel), or even a component that produces light. Although many existing processes are capable of producing these types of products in large quantities and of high quality, they each suffer from various inefficiencies that could be overcome using new approaches and solutions.

New Materials: The physical properties of a product are defined primarily by the materials that comprise it. In some cases, these properties limit the ability of a product to meet the needs of the industry. The semiconductor industry is a classic example of this phenomenon with its efforts to reduce the dimensions of the transistors to allow them to pack more transistors into a device to increase its speed while decreasing the size of the die itself to reduce manufacturing costs. As this reduction in size occurs, the silicon dioxide insulating layer in the transistors begins to leak electrons, which results in a reduction in performance and an increase in energy use. At dimensions of less than approximately 10 nm, the insulating behavior of silicon dioxide degrades in performance, and the transistor cannot function properly. This example of reduced performance as a layer of a traditional material is reduced in thickness is a common problem of traditional materials that limits product development and advancement in a number of industries. This and other inherent limitations in the properties of traditional materials often force companies to use underperforming devices that present difficulties such as environmental hazards, low energy efficiency or incompatible form factors because alternative technology is not available. New advanced materials permit the development of new products that overcome inherent limitations of existing technology and approaches.

We continue to believe we are positioned well to take advantage of today's growth markets within energy. We have been early investors in many of these markets. Our initial investments in renewable chemicals and biofuels (Solazyme), produced water remediation (Produced Water Absorbents), light-emitting diodes (Bridgelux) and alternative sources for high-intensity light (Laser Light Engines) positioned us well to participate in the growth of these respective industries. Additionally, a number of our energy portfolio companies completed recent liquidity events. Solazyme completed a successful IPO in the second quarter of 2011, raising over $200 million. DuPont acquired Innovalight in the third quarter of 2011. Asahi Kasei acquired Crystal IS in the fourth quarter of 2011.

We also have a number of portfolio companies that address energy-related needs as a secondary focus of their respective businesses. These companies are targeting needs such as low-power memory (Nantero and Adesto) and low-power, uncooled infrared image sensors (SiOnyx).

The table below lists the equity-focused companies in our portfolio as of December 31, 2012, and the equity-focused companies that were formerly in our portfolio that target energy-related needs as either the primary or secondary focus of those businesses and the year in which we initially invested in each company:

Current Energy Portfolio Companies Past Energy Portfolio Companies

               ABSMaterials, Inc.             CORDEX Petroleums, Inc.
        Adesto Technologies Corporation          Crystal IS, Inc.
                Bridgelux, Inc.               Dynecology Incorporated
           Cobalt Technologies, Inc.             Innovalight, Inc.
          Contour Energy Systems, Inc.     Molten Metal Technology, Inc.
           Laser Light Engines, Inc.           NanoGram Corporation
                 Nanosys, Inc.             NanoGram Devices Corporation
                 Nantero, Inc.              Siluria Technologies, Inc.
        Nextreme Thermal Solutions, Inc.      Starfire Systems, Inc.
        Produced Water Absorbents, Inc.     TetraVitae Bioscience, Inc.
                  SiOnyx, Inc.
          Solazyme, Inc. (NASDAQ:SZYM)
                  Ultora, Inc.

Many of our Energy portfolio companies are generating commercial revenues and/or have entered into partnerships and joint development agreements with large corporations.


We classify companies in our electronics portfolio as those that address problems in electronics-related industries, including semiconductors, telecommunications and data communications, metrology and test and measurement. We believe macroeconomic and microeconomic trends, including global connectivity, demand for increasing bandwidth owing to pervasiveness of electronics in daily life, the desire to see not just hear, the need for real-time availability of data and demand for more functionality driven by increasing global prosperity, create attractive investment opportunities in electronics. We believe innovations in electronics include:

New Methods of Production: Continuation of Moore's Law allows for exponential increases of the number of integrated circuits in semiconductor devices.

New Materials: New materials enable unique capabilities, performance and form-factors in electronic devices.

New Forms of Computation: New methods of solving equations and other problems that would be difficult or impossible with standard digital computing techniques.

We continue to believe we are positioned well to take advantage of today's growth markets within electronics having been early investors in many of these markets. We believe our initial investments in non-volatile memory (Nantero and Adesto), transparent conductors (Cambrios), image sensors (SiOnyx), integrated photonics (NeoPhotonics), waterproofing (HzO) and metrology (Xradia), positioned us well to capture the growth of commercial interest in smartphones and tablet computers with touchscreens, the exponential increase in demand for bandwidth for data and telecommunications, and the demand for non-destructive imaging capabilities in a variety of industries. We also believe we have an emerging pipeline of companies that are developing solutions for growth markets that exist today or may develop in future years such as high-performance computing enabled by quantum mechanics (D-Wave Systems) and radio-frequency identification and near-field communication devices enabled by printed electronics (Kovio).

We also have a number of portfolio companies that address electronics-related needs as a secondary focus of their respective businesses. These companies are targeting needs such as high-efficiency, high-color-gamut LED displays (Nanosys), high-energy density storage devices (Contour and Ultora) and novel, electrically driven, solid-state sensors (Senova).

The table below lists the equity-focused companies in our portfolio as of December 31, 2012, and the equity-focused companies that were formerly in our portfolio that target electronics-related needs as either the primary or secondary focus of those businesses and the year in which we initially invested in each company:

 Current Electronics Portfolio Companies  Past Electronics Portfolio Companies
     Adesto Technologies Corporation     Agile Materials and Technologies, Inc.
             Bridgelux, Inc.                        CMA Group, Inc.
             Cambrios, Inc.                    Continuum Photonics, Inc.
      Contour Energy Systems, Inc.                Cswitch Corporation
          D-Wave Systems, Inc.                       Informio, Inc
                HzO, Inc.                            Micracor, Inc.
               Kovio, Inc.                        NanoGram Corporation
        Laser Light Engines, Inc.                    Nanomix, Inc.
        Molecular Imprints, Inc.                  NanoOpto Corporation
              Nanosys, Inc.                Nanophase Technologies Corporation
              Nantero, Inc.                      Nanotechnologies, Inc.
  NeoPhotonics Corporation (NYSE:NPTN)*             NBX Corporation
    Nextreme Thermal Solutions, Inc.                nFX Corporation
. . .
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