Business Overview and History
Firsthand Technology Value Fund, Inc. (OTCQB:SVVC) is a publicly traded venture capital fund that invests in technology and cleantech companies. The company has a long and storied history, having been founded in 2011 with the goal of providing investors exposure to the high-growth potential of the technology and clean energy sectors.
Firsthand Technology Value Fund was incorporated in Maryland in 2010 and commenced operations on April 18, 2011, after acquiring its initial portfolio of securities through the reorganization of Firsthand Technology Value Fund, a series of Firsthand Funds. The company's investment objective is to seek long-term growth of capital, primarily through investments in equity and equity-related securities of technology and cleantech companies.
Under normal circumstances, the fund invests at least 80% of its assets in technology companies, which it defines as those deriving at least 50% of their revenues from products and services within the information technology or cleantech sectors. The portfolio is primarily composed of equity and equity derivative securities, with investments generally ranging between $1 million and $10 million each.
In 2015, the Company formed a fully owned and controlled subsidiary named Firsthand Venture Investors to hold all of its investment activities. During 2016 and 2017, the Company organized three separate fully owned and controlled Cayman Islands subsidiaries for the purpose of holding one or more of its investments, but these subsidiaries were liquidated in 2018.
Over the years, Firsthand has made investments in a diverse array of technology and cleantech companies, including equipment leasing firm EQX Capital, medical device manufacturer IntraOp Medical, semiconductor equipment maker Revasum, and automotive technology company Wrightspeed. The fund has seen both successes and challenges in its portfolio, navigating the inherent volatility of the venture capital space.
In 2018, the Company faced a significant change in its tax status. It was no longer able to qualify as a regulated investment company under Subchapter M of the Internal Revenue Code due to the increase in value of its investments in Pivotal Systems and Revasum. As a result, the Company has been taxed as a corporation since then.
Challenging Times and Setbacks
In recent years, Firsthand Technology Value Fund has faced significant headwinds, resulting in substantial declines in its net asset value (NAV) and stock price. The fund suffered major setbacks in 2023 involving portfolio companies IntraOp Medical and Wrightspeed, leading to write-downs of most or all of the value of its securities in those issuers.
Further compounding the fund's troubles, Revasum, another key portfolio holding, failed in the second quarter of 2024, with its assets foreclosed upon by its senior creditor and subsequently sold, leaving no proceeds for equity holders such as Firsthand. Between June 30, 2023, and June 30, 2024, the fund's gross assets declined from approximately $21 million to just $6 million due to the terminal failures of these three portfolio companies.
The impact of these losses has been severe, with the fund's NAV falling 91% over the 12-month period ended June 30, 2024, while its stock price declined by 96% during the same timeframe. These setbacks have understandably shaken investor confidence and put significant pressure on the fund's management to navigate a path forward.
Efforts to Enhance Shareholder Value
In the face of these challenges, the Firsthand management team has been actively working with the fund's board of directors to explore options to improve shareholder value and address the significant decline in the fund's performance. This has included efforts to negotiate a potential merger with an operating company in the medical device field, though these discussions were ultimately abandoned by the counterparty in favor of a competing transaction.
Additionally, the fund has entered into fee waiver agreements with its investment adviser, Firsthand Capital Management, to help preserve cash and support the company's ability to continue operating. These agreements have included waiving future accruals of the base management fee and forgiving a portion of previously accrued but unpaid fees.
While these efforts represent positive steps, the road ahead remains uncertain for Firsthand Technology Value Fund. The company's portfolio remains heavily concentrated in a small number of high-risk, high-reward investments, leaving it vulnerable to the types of catastrophic failures it has experienced in recent years.
Financials
As of September 30, 2024, Firsthand Technology Value Fund's net assets stood at approximately $1.5 million, or $0.22 per share. This marked a significant decline from the $1.3 million, or $0.18 per share, reported as of the end of 2023. The fund's portfolio includes public and private securities valued at around $1.4 million, or $0.21 per share, with the remaining $0.01 per share in cash and cash equivalents.
The fund's current ratio, a measure of its ability to meet short-term obligations, stood at just 0.04 as of the end of the third quarter of 2024. This extremely low ratio raises concerns about the fund's liquidity and its capacity to cover its near-term liabilities. Similarly, the fund's quick ratio, which excludes less liquid inventory assets, was also a meager 0.04, further highlighting the strain on its short-term financial position.
The company's solvency, as measured by its debt-to-equity ratio, remains relatively strong, with a figure of 0.0 as of September 30, 2024. This indicates that Firsthand Technology Value Fund is currently free of long-term debt, a positive sign amidst the broader challenges it faces.
However, the fund's reliance on external financing and its inability to generate positive operating cash flow or free cash flow raises doubts about its long-term viability. The company reported negative operating cash flow of $0.01 per share and negative free cash flow of $0.01 per share for the nine-month period ended September 30, 2024.
For the most recent quarter ended September 30, 2024, Firsthand Technology Value Fund reported revenue of $35,792 and net income of $526,227. The company's cash position stood at $2,810 as of the same date. Due to the lack of prior quarter data, year-over-year growth rates cannot be determined.
During the nine months ended September 30, 2024, the company generated $97,790 in investment income, primarily from interest accrued on convertible and term notes in its portfolio. Operating expenses for the same period were $2.18 million, which included a $3.08 million management fee waiver. This resulted in a net investment loss of $2.28 million for the period.
In terms of realized and unrealized gains and losses, Firsthand Technology Value Fund recognized $11.69 million in net realized gains during the nine-month period. However, the company also had a $9.69 million net change in unrealized depreciation on its investments. This led to a net increase in net assets resulting from operations of $283,780 for the nine months ended September 30, 2024.
Liquidity
The fund's liquidity position is a significant area of concern. With a current ratio and quick ratio of just 0.04, Firsthand Technology Value Fund's ability to meet its short-term obligations is severely constrained. This low liquidity level leaves the fund vulnerable to potential cash crunches and may limit its ability to take advantage of new investment opportunities or support existing portfolio companies.
The fund's cash and cash equivalents of $0.01 per share as of September 30, 2024, represent a minimal cushion against potential financial shocks or unexpected expenses. This limited cash position may force the fund to rely more heavily on external financing or potentially liquidate portfolio holdings at inopportune times to meet its financial obligations.
Furthermore, the negative operating cash flow and free cash flow reported for the first nine months of 2024 suggest that the fund is struggling to generate sufficient cash from its operations to sustain itself. This ongoing cash burn puts additional pressure on the fund's already strained liquidity position and may necessitate further capital raises or asset sales in the near future.
Diversification and Risk Concentration Concerns
A key area of concern for Firsthand Technology Value Fund is the high concentration of its portfolio in a small number of investments. As of September 30, 2024, the fund's top three holdings – Hera Systems, IntraOp Medical, and Revasum – accounted for a staggering 92% of its total portfolio value.
This lack of diversification exposes the fund to outsized risks, as the failure or underperformance of a single portfolio company can have a devastating impact on its overall financial position. The fund's investment strategy, which focuses on early-stage, illiquid technology and cleantech companies, further compounds this risk profile.
While the potential for outsized returns exists in this high-risk, high-reward venture capital approach, the recent string of portfolio company failures has underscored the downside risks inherent in Firsthand's investment philosophy. The fund's inability to adequately mitigate these risks has been a significant contributing factor to its recent struggles.
As of September 30, 2024, Firsthand Technology Value Fund's portfolio was valued at approximately $1.43 million. The largest investments in the portfolio were in the Advanced Materials (22.8% of net assets), Equipment Leasing (2.2% of net assets), and Medical Devices (3.1% of net assets) sectors. Some key portfolio companies included UCT Coatings, Inc., EQX Capital, Inc., and IntraOp Medical Corp.
Regulatory Challenges and Delisting
In addition to the financial and operational challenges facing Firsthand Technology Value Fund, the company has also had to navigate a complex regulatory landscape. As a business development company (BDC) registered under the Investment Company Act of 1940, the fund must comply with various rules and regulations that govern its investment activities and reporting requirements.
The company's recent decision to voluntarily delist its shares from the NASDAQ Global Market, with the shares now trading on the OTCQB market, has added further uncertainty and complexity to its operations. The delisting may limit the fund's access to capital markets and make it more difficult for investors to trade its shares, potentially further exacerbating liquidity concerns.
Outlook and Conclusion
Firsthand Technology Value Fund's future remains uncertain as it grapples with the aftermath of its recent portfolio failures and works to enhance shareholder value. The fund's high concentration of risk, liquidity challenges, and regulatory hurdles present significant obstacles that the management team must navigate in the coming years.
While the company's efforts to optimize its fee structure and explore strategic alternatives are positive steps, the underlying fundamentals of its venture capital-focused investment approach continue to pose substantial risks. Investors in Firsthand Technology Value Fund should closely monitor the fund's progress and its ability to successfully execute a turnaround strategy that can restore shareholder confidence and long-term viability.
Firsthand Technology Value Fund's investment strategy remains focused on identifying and investing in private, early-stage technology and cleantech companies that it believes have exceptional growth potential. The company aims to generate long-term capital appreciation, primarily through capital gains on its equity and equity-related investments. However, the performance of SVVC's portfolio, and by extension the company's financial results, are heavily dependent on the valuation and success of its private company investments, which can be inherently volatile and difficult to predict.
As the fund continues to navigate these challenging times, its ability to identify promising new investment opportunities, support existing portfolio companies, and manage its liquidity position will be critical factors in determining its long-term success and viability as a venture capital investment vehicle.