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FIRSTHAND TECHNOLOGY VALUE FUND, INC. - 10-Q/A - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.(Edgar Glimpses Via Acquire Media NewsEdge) FORWARD-LOOKING STATEMENTS The matters discussed in this report, as well as in future oral and written statements by management of the Company, include forward-looking statements based on current management expectations that involve substantial risks and uncertainties which could cause actual results to differ materially from the results expressed in, or implied by, these forward-looking statements. Forward-looking statements related to future events or our future financial performance. We generally identify forward-looking statements by terminology such as "may," "will," "should," "expects," "plans," "anticipates," "could," "intends," "target," "projects," "contemplates," "believes," "estimates," "predicts," "potential," or "continue" or the negative of these terms or other similar words. Important assumptions include our ability to originate new investments and to achieve 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 report should not be regarded as a representation by us that our plans or objectives will be achieved. The forward-looking statements contained in this report include, without limitations, statements as to: • our future operating results; • our business prospects and the prospects of our prospective portfolio companies; • the impact of investments that we expect to make; • the impact of a protracted decline in the liquidity of the credit markets on our business; • our informal relationships with third parties; • the expected market for venture capital investments and our addressable market; • the dependence of our future success on the general economy and its impact on the industries in which we invest; • our ability to access the equity market; • the ability of our portfolio companies to achieve their objectives; • our expected financings and investments; • our regulatory structure and tax status; • our ability to operate as a business development company and a regulated investment company; • the adequacy of our cash resources and working capital; • the timing of cash flows, if any, from the operation of our portfolio companies; • the timing, form, and amount of any dividend distributions; 18 -------------------------------------------------------------------------------- • impact of fluctuation of interest rates on our business; • valuation of any investments in portfolio companies particularly those having no liquid trading market; and • our ability to recover unrealized losses. You should not place undue reliance on these forward-looking statements. The forward-looking statements made in this report relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances occurring after the date of this report. The following discussion should be read in conjunction with our consolidated financial statements and related notes and other financial information appearing elsewhere in this report. OVERVIEW We are an externally managed, closed-end, non-diversified management investment company organized as a Maryland corporation that has elected to be treated as a BDC under the 1940 Act. As such, we are required to comply with certain regulatory requirements. For instance, we generally have to invest at least 70 percent of our total assets in "qualifying assets," including securities of private or micro-cap public U.S. companies, cash, cash equivalents, U.S. government securities and high-quality debt investments that mature in one year or less. In addition, for tax purposes we have elected to be treated as a RIC under Subchapter M of the Code. FCM serves as our investment adviser and manages the investment process on a daily basis. Our investment objective is to seek long-term growth of capital, principally by seeking capital gains on our equity and equity-related investments. There can be no assurance that we will achieve our investment objective. Under normal circumstances, we invest at least 80 percent of our net assets for investment purposes in technology companies. We consider technology companies to be those companies that derive at least 50 percent of their revenues from products and/or services within the information technology sector or in the "cleantech" sector. Information technology companies include, but are not limited to, those focused on computer hardware, software, telecommunications, networking, Internet, and consumer electronics. While there is no standard definition of cleantech, it is generally regarded as including goods and services designed to harness renewable energy and materials, eliminate emissions and waste, and reduce the use of natural resources. In addition, under normal circumstances we invest at least 70 percent of our total assets in privately held companies and public companies with market capitalizations of less than $250 million. Our portfolio is primarily composed of equity and equity derivative securities of technology and cleantech companies (as defined above). These investments generally range between $1 million and $10 million each, although the investment size will vary proportionately with the size of our capital base. We acquire our investments through direct investments in private companies, negotiations with selling shareholders, and in organized secondary marketplaces for private securities. While our primary focus is to invest in illiquid private technology and cleantech companies, we may also invest in micro-cap publicly traded companies. In addition, we may invest up to 30 percent of the portfolio in opportunistic investments that do not constitute the private companies and micro-cap public companies described above. These other investments may include investments in securities of public companies that are actively traded or in actively traded derivative securities such as options on securities or security indices. These other investments may also include investments in high-yield bonds, distressed debt, or securities of public companies that are actively traded and securities of companies located outside of the United States. Our investment activities are managed by FCM. RESULTS OF OPERATIONS The following information is a comparison for the quarter ended March 31, 2013, and the quarter ended March 31, 2012. INVESTMENT INCOME For the quarter ended March 31, 2013, we had interest income of $266,100 primarily attributable to interest accrued on convertible/term note investments with Silicon Genesis Corporation. For the quarter ended March 31, 2012, we had interest income of $139,572 primarily attributable to interest accrued on convertible note investments with Silicon Genesis Corporation. 19 -------------------------------------------------------------------------------- The higher level of interest income in the quarter ended March 31, 2013 was due to a significant increase in the principal amount of the outstanding notes with Silicon Genesis Corporation. OPERATING EXPENSES Operating expenses totaled approximately $1,152,620 during the quarter ended March 31, 2013. Significant components of operating expenses for the quarter ended March 31, 2013, were management fee expense of $979,146 and professional fees (audit, legal, accounting, and consulting) of $101,370. Operating expenses totaled approximately $576,828 during the quarter ended March 31, 2012. Significant components of operating expenses for the period ended March 31, 2012, were management fee expense of $424,994 and professional fees (audit, legal, accounting, and consulting) of $104,378. The higher level of operating expenses for the quarter ended March 31, 2013 is primarily attributable to an increase in our total assets, on which the investment advisory fees are based. NET INVESTMENT LOSS The net investment loss was $886,520 for the quarter ended March 31, 2013. The net investment loss was $437,256 for the quarter ended March 31, 2012. The greater net investment loss in the quarter ended March 31, 2013 is primarily due to the increase in management fees. As noted above, the increase in investment advisory fees is due to the expansion of our total assets, on which the investment advisory fees are based. NET INVESTMENT REALIZED GAINS AND LOSSES AND UNREALIZED APPRECIATION AND DEPRECIATION Realized gains or losses are measured by the difference between the net proceeds from the repayment or sale and the cost basis of the investment without regard to unrealized appreciation or depreciation previously recognized, and includes investments charged off during the period, net of recoveries. Net change in unrealized appreciation or depreciation primarily reflects the change in portfolio investment values during the reporting period, including the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized. During the quarter ended March 31, 2013, we recognized net realized gains of approximately $1,177,436 from the sale of securities. Realized gains were substantially higher than those in the year-ago period due to premiums collected from written options transactions during the quarter. During the quarter ended March 31, 2013, net unrealized depreciation on total investments decreased by $2,787,283. The change in net unrealized appreciation and depreciation of our private investments is based on portfolio asset valuations determined in good faith by our Board of Directors. This change in net unrealized depreciation was primarily composed of an increase in the fair value of our portfolio companies, notably SolarCity and Twitter. During the quarter ended March 31, 2012, there were no recognized net realized gains/(losses) from the sale of securities. During the quarter ended March 31, 2012, net unrealized depreciation on total investments and other assets decreased by $2,673,528. The change in net unrealized appreciation and depreciation of our private investments is based on portfolio asset valuations determined in good faith by our Board of Directors. This change in net unrealized depreciation was primarily composed of an increase in the fair value of our portfolio companies, notably Facebook. 20 -------------------------------------------------------------------------------- A summary of the net realized and unrealized loss on investments for the three-month period ended March 31, 2013, and March 31, 2012, is shown below. Three Months Ended March 31, 2013 Realized gains $ 1,177,436 Net change in unrealized depreciation on investments $ 2,787,283 Net realized and unrealized gain on investments $ 3,964,719 As of March 31, 2013 Gross unrealized appreciation on portfolio investments $ 2,384,708 Gross unrealized depreciation on portfolio investments $ (20,653,339 ) Net unrealized depreciation on portfolio investments $ (18,268,631 ) Three Months Ended March 31, 2012 Realized gains $ - Net change in unrealized depreciation on investments $ 2,673,528 Net realized and unrealized gain on investments $ 2,673,528 As of March 31, 2012 Gross unrealized appreciation on portfolio investments $ 4,335,179 Gross unrealized depreciation on portfolio investments $ (9,764,724 ) Net increase in unrealized depreciation on portfolio investments $ (5,429,545 ) INCOME AND EXCISE TAXES As we intend to continue to qualify as a RIC under Subchapter M of the Code, the Company does not provide for income taxes. The Company recognizes interest and penalties in income tax expense. NET INCREASE/(DECREASE) IN ASSETS RESULTING FROM OPERATIONS AND CHANGE IN NET ASSETS PER SHARE For the quarter ended March 31, 2013, the net increase in net assets resulting from operations totaled $3,078,199. Basic and fully diluted net change in net assets per share for the quarter ended March 31, 2013 was $0.36. For the quarter ended March 31, 2012, the net increase in net assets resulting from operations totaled $2,236,272. Basic and fully diluted net change in net assets per share for the quarter ended March 31, 2012 was $0.64. Despite a larger increase in net assets for the quarter ended March 13, 2013, which is due primarily to an increase in realized gains from written options transactions, the net increase in net assets per share was smaller, due to the larger number of outstanding shares for the quarter ended March 13, 2013. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES At March 31, 2013, we had investments in public and private securities totaling approximately $63.8 million. Also, at March 31, 2013, we had approximately $135.0 million in cash.We primarily invest cash on hand in a money market treasury portfolio. We expect the portion of our portfolio consisting of cash and cash equivalents to decrease as we become fully invested. As of March 31, 2013, net assets totaled approximately $199.0 million, with an NAV per share of $23.26. Our primary use of funds will be investments in portfolio companies and payments of fees and other operating expenses we incur. Additionally, we expect to raise additional capital to support our future growth through future equity offerings. To the extent we determine to raise additional equity through an offering of our common stock at a price below NAV, existing investors will experience dilution. 21 -------------------------------------------------------------------------------- PORTFOLIO INVESTMENTS PRIVATE INVESTMENTS We make investments in securities of both public and private companies. At March 31, 2013, we had investments in the following private companies: Gilt Groupe Holdings, Inc. Gilt Groupe Holdings, Inc. ("Gilt Groupe"), New York, NY, is a leader in online "flash sales" of designer merchandise at discount prices. At March 31, 2013, our investment in Gilt Groupe consisted of 198,841 shares of common stock with an aggregate market value of approximately $1.9 million. INNOViON Corporation INNOViON Corporation ("Innovion"), San Jose, California, provides foundry ion implant services to the microelectronics industry. At March 31, 2013, our investments in INNOViON consisted of 324,948 shares of Series A-1 preferred stock, 168,804 shares of Series A-2 preferred stock, and one share of common stock, with a combined fair value of $236,456. Pivotal Systems Corporation Pivotal Systems, Corporation ("Pivotal Systems") provides monitoring and process control technologies for the semiconductor manufacturing industry. At March 31, 2013, our investment in Pivotal Systems consisted of 4,765,876 shares of Series A preferred stock and warrants to purchase up to 3,176,935 shares of Series A preferred stock with a combined fair value of approximately $4.0 million. QMAT, Inc. QMAT, Inc. ("QMAT") is developing advanced materials technologies for applications in the electronics industry. At March 31, 2013, our investment in QMAT consisted of 6,000,000 shares of Series A preferred stock and warrants to purchase up to 2,000,000 shares of Series A preferred stock with a combined fair value of approximately $6.0 million. Silicon Genesis Corporation Silicon Genesis Corporation ("SiGen"), San Jose, CA, provides engineered substrate process technology for the semiconductor, display, optoelectronics, and solar markets. At March 31, 2013, our investments in SiGen consisted of 82,914 shares of Series 1-C preferred stock, 850,830 shares of Series 1-D preferred stock, 5,704,480 shares of Series 1-E preferred stock, 912,453 shares of Series 1-F preferred stock, 921,892 shares of common stock, warrants for 1,257,859 shares of Series 1-E preferred stock, warrants for 8,037,982 shares of common stock, a $1.25 million par value convertible note, a $500,000 par value convertible note, a $1.0 million par value convertible note, and a $3.0 million term note. The convertible notes each bear annual interest at a rate of 20% and the term note bears an annual interest at a rate of 10%. The convertible notes mature on December 31, 2014, and the term note matures on December 31, 2016. At March 31, 2013, the combined fair value of our SiGen securities was approximately $6.2 million. Skyline Solar, Inc. Skyline Solar, Inc. ("Skyline Solar"), Mountain View, CA, is a supplier of concentrated solar photovoltaic systems for utility-scale solar electricity generation projects. At March 31, 2013, our investment in Skyline Solar consisted of 793,651 shares of Series C preferred stock, with a fair value of $0. 22 -------------------------------------------------------------------------------- SoloPower, Inc. SoloPower, Inc. ("SoloPower"), San Jose, CA, produces low-cost, high-power, flexible thin-film photovoltaic modules that offer a viable alternative to the electricity produced using traditional fossil fuels. At March 31, 2013, our investments in SoloPower consisted of 400,000 shares of Series A preferred stock, 100,205 shares of Series B preferred stock, 100,000 shares of Series D preferred stock, 190,476 shares of Series E-1 preferred stock, and warrants to purchase 400,000 shares of common stock, with a combined fair value of approximately $0. TapAd, Inc. TapAd, Inc. ("TapAd"), New York, NY, is an advertising technology company that enables digital advertisers to deliver targeted advertisements to users across multiple devices (i.e., desktop, mobile, tablet). At March 31, 2013, our investments in TapAd consisted of 140,024 shares of Series B-1 preferred stock, with a fair value of approximately $1.5 million. Twitter, Inc. Twitter, Inc. ("Twitter"), San Francisco, CA, is an online social networking service that lets users send and receive 140-character messages ("tweets"). The service has more than 140 million active users and more than 340 million daily tweets. At March 31, 2013, our investment in Twitter consisted of 812,200 shares of common stock and 194,000 shares of Series B preferred stock, with a fair value of approximately $18.5 million. UCT Coatings, Inc. UCT Coatings, Inc. ("UCT"), Stuart, Florida, is a leader in the development of metal coatings that reduce friction and improve efficiency in mechanical systems. At March 31, 2013, our investments in UCT consisted of 1,500,000 shares of common stock and warrants to purchase 172,270 shares of common stock, with a combined fair value of $336,767. PUBLIC INVESTMENTS At March 31, 2013, we had investments in the following public securities: Facebook, Inc. Facebook, Inc. ("Facebook"), Menlo Park, CA, is an online social networking service with approximately 900 million active users worldwide. Facebook also develops technologies to facilitate information sharing and the digital mapping of social connections. At March 31, 2013, our investment in Facebook consisted of 600,000 shares of common stock with a market value of $15,348,000. Intevac, Inc. Intevac, Inc. ("Intevac"), Santa Clara, CA, is a leading provider of cost-effective, advanced equipment and products to the hard disk drive, solar, semiconductor, and photonics industries. At March 31, 2013, our investment in Intevac consisted of 545,156 shares of common stock with an aggregate market value of approximately $2.6 million. SolarCity Corp. SolarCity Corp. ("SolarCity"), San Mateo, CA, is a leading installer of commercial and residential solar photovoltaic systems. At March 31, 2013, our investment in SolarCity consisted of 426,300 shares of common stock, with a fair value of approximately $7.2 million. Because our holdings in SolarCity were purchased while it was a private company, we are subject to a 180-day "lock-up" period during which we are not allowed to dispose of the security. Due to this resale restriction, our valuation of our SolarCity holdings reflects a discount to SolarCity's closing price on March 31, 2013. 23 -------------------------------------------------------------------------------- SUBSEQUENT EVENTS Subsequent to the close of the fiscal quarter on March 31, 2013, and through the date of the issuance of the financial statements included herein, a material event related to our portfolio of investments occurred. • On April 11, 2013, we acquired 2,267,659 shares of Wrightspeed, Inc. at a cost of approximately $6.0 million. Wrightspeed, Inc. is a supplier of electric drivetrains for medium-duty trucks. |