10-Q: Firsthand Tech Fund Reports Steep Asset Decline

Firsthand Technology Value Fund, Inc. reported a significant decline in net assets and substantial realized losses for the six months ended June 30, 2025, alongside ongoing legal challenges.

Summary

• Net assets decreased to $747,259 as of June 30, 2025, from $1,060,679 at December 31, 2024.
• Net asset value per share declined to $0.11 at June 30, 2025, from $0.15 at December 31, 2024.
• The company incurred net realized losses of $24,169,015 for the six months ended June 30, 2025, primarily due to the maturity of Wrightspeed notes.
• Net investment income shifted to a loss of $(176,392) for the six months ended June 30, 2025, compared to income of $2,636,661 in the prior year, largely due to the absence of management fee waivers.
• The ratio of total expenses to average net assets was an annualized 81.86% for the six months ended June 30, 2025.
• The company holds $218,026 (29.2% of net assets) in restricted securities as of June 30, 2025.
• Gross assets declined from approximately $21 million to $6 million between June 30, 2023, and June 30, 2024, due to the failure of three portfolio companies.
• Two significant legal proceedings are ongoing, alleging federal securities law violations, breach of fiduciary duties, and fraud, with potential for significant defense costs.

Sentiment

Score: 1

Explanation: The company's financial performance is severely distressed, marked by a substantial decline in net assets and net asset value per share, significant realized losses from portfolio company failures, and an exceptionally high expense ratio. The shift to a net investment loss, exacerbated by the absence of prior fee waivers, highlights fundamental operational challenges. Furthermore, the ongoing legal proceedings introduce significant uncertainty and potential for substantial defense costs. The company's inability to qualify as a RIC and the full valuation allowance on deferred tax assets indicate a challenging tax and financial outlook.

Positives

• Investment income increased to $176,826 for the six months ended June 30, 2025, compared to $62,001 in the prior year, primarily due to an adjustment to interest accrued on convertible/term note investments with Hera Systems.
• The net change in unrealized appreciation (depreciation) on investments showed a positive shift of $24,031,987 for the six months ended June 30, 2025, compared to a depreciation of $(2,879,112) in the prior year, indicating a recovery in the valuation of some private investments.
• Management's disclosure controls and procedures were evaluated as effective.
• The company has no significant outstanding debt obligations, other than normal operating expense accruals.
• The company has substantial net operating loss carryforwards of $11,593,301 (indefinite carryforward) and net capital loss carryforwards of $30,197,957 for tax purposes.

Negatives

• Net assets significantly decreased to $747,259 at June 30, 2025, from $1,060,679 at December 31, 2024.
• Net asset value per share declined to $0.11 at June 30, 2025, from $0.15 at December 31, 2024.
• The company experienced substantial realized losses of $(24,169,015) for the six months ended June 30, 2025, primarily from the maturity of Wrightspeed notes.
• Net investment income shifted to a net investment loss of $(176,392) for the six months ended June 30, 2025, largely due to the absence of management fee waivers in 2025.
• The ratio of total expenses to average net assets is extremely high at 81.86% (annualized) for the six months ended June 30, 2025.
• The company continues to be taxed as a corporation, not a Regulated Investment Company (RIC), impacting its tax efficiency.
• A full valuation allowance has been placed on net deferred tax assets, indicating management's doubt about future realization.
• The company's gross assets declined significantly from approximately $21 million to $6 million between June 30, 2023, and June 30, 2024, due to the terminal failures of three portfolio companies.
• Two ongoing legal proceedings allege violations of federal securities laws, breach of fiduciary duties, and fraud, with potential for significant defense costs.

Risks

• Investments in privately-held companies and small publicly-traded companies are inherently illiquid, and their fair value is determined by the Board of Directors, which involves significant estimates and judgments, potentially differing materially from realized values.
• Investments in small, immature, privately-held companies are speculative, volatile, and subject to legal/contractual resale restrictions, leading to greater risk of loss.
• The company does not diversify investments and does not rebalance the portfolio, making it vulnerable to events affecting a single sector, industry, or portfolio company.
• A portion of assets held in cash and cash equivalents earns low yields, and management fees/operating expenses may exceed interest income, leading to losses.
• Global economic interconnectivity, inflation, elevated interest rates, trade disputes, supply chain disruptions, natural disasters, pandemics, terrorism, and military conflicts can adversely impact portfolio companies and overall market value.
• The company is taxed as a corporation, not a RIC, which affects its tax efficiency; changes in tax law or estimates could materially impact Net Asset Value (NAV).
• Ongoing lawsuits could result in significant defense costs and potential adverse financial impact, despite liability insurance.
• Serving as a director or officer of portfolio companies may cause conflicts of interest for management.

Future Outlook

The company's forward-looking statements include expectations regarding future operating results, business prospects of portfolio companies, impact of investments, global economic conditions, liquidity, access to equity markets, and the ability of portfolio companies to achieve their objectives. It also addresses the adequacy of cash resources, timing of cash flows and dividend distributions, impact of interest rate fluctuations, and risks from market disruptions, terrorism, war, natural disasters, pandemics, and cybersecurity incidents. No specific quantitative guidance or forecasts are provided.

Management Comments

• Kevin Landis, Chief Executive Officer and Chief Financial Officer, certified that the report does not contain any untrue statement or omit a material fact, and that the financial statements fairly present the financial condition, results of operations, and cash flows.
• The Board of Directors noted that the Adviser (Firsthand Capital Management, Inc.) has not collected its accrued management fees for a number of years and has been paying for certain company expenses to further help the company preserve cash.
• The Board considered the Adviser's attempts to improve shareholder value and explore the practicality of liquidation versus alternatives, noting that a proposed merger transaction with an operating company in the medical device field was abandoned by the counterparty.

Industry Context

The company operates as a Business Development Company (BDC) specializing in illiquid equity and equity derivatives of venture capital stage technology and cleantech companies. The current financial results, marked by significant losses from portfolio company failures and an exceptionally high expense ratio, indicate severe challenges within this high-risk investment segment. The company's inability to qualify as a Regulated Investment Company (RIC) for tax purposes, a common structure for BDCs, further exacerbates its financial difficulties compared to more tax-efficient peers. The 'terminal failures' of portfolio companies underscore the inherent volatility and high failure rates associated with early-stage technology and cleantech investments.

Comparison to Industry Standards

• The company's Net Asset Value (NAV) performance (down 91% for the 12 months ended June 30, 2024) and stock price performance (down 96% for the same period) are significantly worse than typical BDC performance, especially considering the broader market's recovery in technology.
• The annualized ratio of total expenses to average net assets at 81.86% is extraordinarily high compared to industry standards for BDCs, which typically maintain expense ratios in the low to mid-single digits, indicating severe operational inefficiency relative to its asset base.
• The company's non-RIC tax status since 2018 places it at a tax disadvantage compared to most BDCs that operate as RICs to avoid corporate-level taxation.
• A 0% portfolio turnover rate suggests a highly illiquid portfolio with minimal active trading, which is characteristic of venture capital funds but contrasts with more actively managed public BDCs.
• The company's investment focus on privately held and micro-cap public companies aligns with its BDC mandate, but its stated lack of a diversification strategy deviates from standard risk management practices for investment funds.

Corporate Governance

Legal Proceedings

• Star Equity Fund, LP filed a putative class action complaint on February 28, 2025, against Firsthand Capital Management, Inc., Scalar, LLC, current and former board members, and an officer, alleging violations of federal securities laws for false or misleading statements regarding asset valuation, and derivative claims for breaches of fiduciary duties and breach of contract. The Fund is named as a nominal defendant and intends to vigorously defend, with potential significant defense costs.
• VestedCap, LLC filed a complaint on September 5, 2023, amended on January 22, 2025, adding the Fund as a co-defendant. The amended complaint asserts claims for wire fraud, violations of the RICO Act, fraud and deceit, conversion, and declaratory relief, and alleges the Fund is the alter ego of co-defendants IntraOp Medical Corporation and Kevin Landis. The Fund intends to vigorously defend, with potential significant defense costs.

Related Party Transactions

• Firsthand Capital Management, Inc. (FCM or the Advisor) serves as the investment adviser, receiving a base management fee (2.00% of gross assets annually) and an incentive fee (20% of realized capital gains, net of losses/depreciation).
• FCM waived future accruals of the base management fee from October 1, 2023, through December 31, 2024.
• FCM waived $2.5 million of accrued but unpaid base management fees as of September 30, 2023, and an additional $3.0 million as of March 31, 2024, with these waived fees potentially recoupable within ten years.
• Kevin Landis, the company's Chief Executive Officer and Chief Financial Officer, also serves as Chairman, President, and CEO of the company, and sits on the boards of EQX Capital, Inc., IntraOp Medical Corp., Revasum, Inc., and Wrightspeed, Inc. He also serves as interim CEO at IntraOp Medical Corp. and Wrightspeed, Inc., which may cause conflicts of interest.

Stakeholder Impact

• Shareholders face significant negative impact due to the substantial decrease in net asset value per share, large realized losses, and an exceptionally high expense ratio, which erodes returns.
• Management and the Advisor (FCM) are affected by the company's poor performance and declining asset base, despite fee waivers, which impacts their long-term revenue potential.
• Portfolio companies have experienced 'terminal failures,' indicating severe challenges for the underlying investments and potential negative impacts on their employees and other stakeholders.
• Creditors are not significantly impacted by outstanding debt, but the declining asset base could become a concern if liabilities were to increase.

Next Steps

• The Board of Directors will determine the timing and amount of any future distributions.
• Management will continue to evaluate the impact of subsequent events on the company.
• The Investment Management Agreement with Firsthand Capital Management, Inc. is approved for continuation through August 31, 2025.
• The company intends to vigorously defend against the ongoing legal proceedings.

Key Dates

Recommendation

The company's financial performance is severely distressed, marked by a substantial decline in net assets and net asset value per share, significant realized losses from portfolio company failures, and an exceptionally high expense ratio. The shift to a net investment loss, exacerbated by the absence of prior fee waivers, highlights fundamental operational challenges. Furthermore, the ongoing legal proceedings introduce significant uncertainty and potential for substantial defense costs. The company's inability to qualify as a RIC and the full valuation allowance on deferred tax assets indicate a challenging tax and financial outlook. Given these compounding negative factors and the high-risk, illiquid nature of its investments, the stock presents a very poor investment prospect.

Keywords

Firsthand Technology Value Fund, SVVC, Quarterly Report, Business Development Company, BDC, Technology Investments, Cleantech, Venture Capital, Private Equity, Illiquid Assets, Portfolio Valuation, Investment Management, Financial Performance, SEC Filing, Investment Fund, Small-cap, Unlisted Securities, Convertible Notes, Realized Losses, Unrealized Depreciation, Legal Proceedings, Corporate Governance, Investment Advisory Fees