Firsthand Technology(SVVC) - 2023 Q4 - Annual Report

Part I: Business and Risk Factors Business Overview Firsthand Technology Value Fund (SVVC) is an externally managed BDC investing in technology and cleantech for long-term capital growth, with a $8.7 million portfolio as of December 31, 2023, and a plan to liquidate - The Company is a BDC focused on long-term capital growth, investing at least 80% of assets in technology and cleantech and 70% in private or micro-cap public companies[15][18] Portfolio Composition as of December 31, 2023 | Investment | Business Description | Fair Value (USD) | | :-------------------------- | :------------------------ | :--------------- | | Hera Systems, Inc. | Aerospace | $4.20 million | | Revasum, Inc. | Semiconductor Equipment | $3.86 million | | UCT Coatings, Inc. | Advanced Materials | $0.30 million | | EQX Capital, Inc. | Equipment Leasing | $0.11 million | | Kyma, Inc. | Advanced Materials | $0.10 million | | IntraOp Medical Corp. | Medical Devices | $0.09 million | | Fidelity Money Market | Investment Company | $0.07 million | | Lyncean Technologies, Inc. | Semiconductor Equipment | $0 | | Wrightspeed, Inc. | Automotive | $0 | - The Investment Adviser, FCM, charges a 2.00% base management fee on gross assets and a 20% incentive fee on cumulative realized capital gains, net of losses and depreciation[99][102] - On October 13, 2023, the Fund announced a plan to seek shareholder approval to withdraw its BDC election and pursue liquidation[312] Risk Factors The company faces significant risks including dependence on key personnel, intense competition, regulatory constraints, and valuation uncertainties from its illiquid, non-diversified, and speculative private and micro-cap portfolio - The Company is highly dependent on FCM's management, particularly Mr. Landis, and the loss of key personnel could significantly impair investment objectives[108][109] - As a non-diversified investment company, the fund's concentration in a small number of issuers increases volatility and susceptibility to specific economic or regulatory events[121] - A large percentage of the portfolio consists of non-publicly traded securities whose fair value, determined by the Board, is inherently uncertain and may differ materially from realized values[123] - The incentive fee structure may induce FCM to make riskier or more speculative investments for higher returns, potentially misaligning with shareholder interests[129] Cybersecurity The Board oversees the cybersecurity risk management program, implemented daily by the Investment Adviser, which has not materially affected the company's business, operations, or financial condition - The Board oversees cybersecurity risk, with the Investment Adviser managing daily implementation of policies covering threat identification, technical safeguards, incident response, and third-party risk[152][153][154] - The Company concluded that cybersecurity threats have not materially affected and are not reasonably likely to materially affect its business strategy, results of operations, or financial condition[155] Part II: Market and Financial Information Market for Common Equity and Shareholder Matters SVVC common stock traded on Nasdaq, with its price declining significantly in 2023, no distributions made, and cumulative total return substantially underperforming major indices since inception 2023 Quarterly Stock Price Range | Quarter Ending | Low | High | | :------------- | :----- | :----- | | March 31 | $0.92 | $1.15 | | June 30 | $0.61 | $0.98 | | September 30 | $0.42 | $0.69 | | December 31 | $0.18 | $0.42 | - No distributions were made to shareholders during 2023[164] - The company's performance since its 2011 inception has significantly underperformed the S&P 500 and NASDAQ Composite indices, attributed to its private company portfolio not appreciating during the public market bull run[166][168] Management's Discussion and Analysis (MD&A) In 2023, the fund's net assets decreased by $29.3 million to $1.3 million ($0.18/share), driven by $22.6 million in net unrealized depreciation and a $7.9 million net realized loss, significantly straining liquidity Results of Operations (2021-2023) | Metric | 2023 (USD) | 2022 (USD) | 2021 (USD) | | :--------------------------------------- | :---------------- | :----------------- | :--------------- | | Total Investment Income | $0.12 million | ($10.01 million) | $6.32 million | | Total Net Expenses | ($0.96 million) | $2.44 million | $3.26 million | | Net Realized and Unrealized Loss | ($30.43 million) | ($51.70 million) | ($10.45 million) | | Net Decrease in Net Assets | ($29.35 million)| ($64.15 million) | ($7.39 million)| | Net Decrease in Net Assets Per Share | ($4.26) | ($9.31) | ($1.07) | - Net unrealized depreciation on investments increased by $22.6 million in 2023, primarily due to decreases in the value of IntraOp Medical and Wrightspeed[203] - The company's financial condition significantly deteriorated, with net assets falling to $1.3 million ($0.18/share) at year-end 2023 from $30.6 million ($4.44/share) at year-end 2022[219] - Since June 2018, the company has been taxed as a C corporation after failing to meet RIC diversification requirements, primarily due to the increased value of its holding in Pivotal Systems Corp at the time[208] Market Risk Disclosures The company's principal market risks are valuation risk from illiquid, privately-held securities and small company investment risk from speculative, immature businesses with high loss potential - The primary market risk is valuation risk, as the portfolio is heavily weighted towards illiquid private company securities whose values, determined by the Board, may differ significantly from realizable values[246][247] - The fund faces significant risk from investments in small, speculative companies, which are often subject to resale restrictions and have a higher risk of loss compared to traditional investments[251] Financial Statements and Supplementary Data Audited financial statements confirm a severe decline in 2023, with net assets plummeting to $1.3 million ($0.18/share), auditor highlighting Level 3 investment valuation as a Critical Audit Matter and the liquidation plan, and subsequent suspension of Revasum, Inc. securities - The independent auditor's report identifies Level 3 investment valuation as a Critical Audit Matter and includes an Emphasis of Matter paragraph highlighting the company's plan to withdraw its BDC election and pursue liquidation[261][264] Consolidated Statement of Assets and Liabilities Highlights | Metric | Dec 31, 2023 (USD) | Dec 31, 2022 (USD) | | :-------------------------- | :----------------- | :----------------- | | Total Investments (Market) | $8.73 million | $40.12 million | | Total Assets | $8.81 million | $40.20 million | | Total Liabilities | $7.55 million | $9.59 million | | Net Assets | $1.26 million | $30.61 million | | Net Asset Value Per Share | $0.18 | $4.44 | - As of December 31, 2023, Level 3 investments were valued at $4.8 million, representing 381% of total net assets of $1.3 million, indicating extreme concentration and valuation risk[261][355] - Subsequent to year-end, in February and March 2024, portfolio company Revasum, Inc. had its securities suspended from quotation on the Australian Securities Exchange (ASX)[420][421] - The company has significant tax loss carryforwards, including $12.4 million in net operating losses and $32.7 million in net capital losses, but has placed a full valuation allowance on its deferred tax assets, indicating unlikelihood of realization[385][390] Controls and Procedures Management, including the CEO and CFO, concluded that disclosure controls and procedures and internal control over financial reporting were effective as of December 31, 2023, with no material changes reported - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of December 31, 2023[422] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2023, based on the COSO framework[424] Part III: Corporate Governance and Compensation Directors, Executive Compensation, and Related Matters Information regarding directors, executive compensation, corporate governance, security ownership, and principal accountant fees is incorporated by reference from the forthcoming 2024 Proxy Statement - Detailed information for Items 10 through 14 is incorporated by reference from the forthcoming 2024 Proxy Statement[429][433][434][435][436]