Firsthand Technology Value Fund, Inc. - Quarter Report: 2015 September (Form 10-Q)

---

 

U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q  

[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period of September 30, 2015 or

[   ]

TRANSITION QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 333-168195

FIRSTHAND TECHNOLOGY VALUE FUND, INC.

(Exact Name of Registrant as Specified in Charter)  

MARYLAND		27-3008946
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No)
150 Almaden Boulevard, Suite 1250
San Jose, California		95113
(Address of Principal Executive Offices)		(Zip Code)

Registrant's Telephone Number, Including Area Code: (408) 886-7096

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.      [X] Yes                        [   ] No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

 

	[   ]	Large Accelerated Filer	[X]	Accelerated Filer
	[   ]	Non-accelerated Filer	[   ]	Smaller Reporting Company (Do not check if smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   [   ] Yes                   [X] No

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

 

 

TABLE OF CONTENTS

 

		AS OF SEPTEMBER 30, 2015 (UNAUDITED)***				AS OF DECEMBER 31, 2014
ASSETS
Investment securities:
Unaffiliated investments at acquisition cost		$	97,213,290			$	118,567,567
Affiliated investments at acquisition cost			17,034,881				13,375,885
Controlled investments at acquisition cost			68,652,060				60,815,580
Total acquisition cost		$	182,900,231			$	192,759,032
Unaffiliated investments at market value		$	84,323,114			$	118,830,054
Affiliated investments at market value			18,900,352				14,916,840
Controlled investments at market value			68,243,414				57,918,973
Total market value* (Note 6)			171,466,880				191,665,867
Cash**			1,129,375				69,014,110
Receivable for securities sold			2,657,611				—
Receivable from dividends and interest			3,044,940				2,729,276
Other assets			261,218				29,993
Total Assets			178,560,024				263,439,246
LIABILITIES
Payable for securities purchased			—				38,253,718
Incentive fees payable (Note 4)			78,890				13,716,658
Payable to affiliates (Note 4)			936,770				1,294,481
Consulting fee payable			27,000				23,000
Accrued expenses and other payables			220,662				421,318
Total Liabilities			1,263,322				53,709,175
NET ASSETS		$	177,296,702			$	209,730,071
Net Assets consist of:
Common Stock, par value $0.001 per share 100,000,000 shares authorized		$	7,703			$	8,562
Paid-in-capital			184,982,547				204,981,680
Accumulated net investment income			5,549,498				5,832,994
Accumulated net realized loss from security transactions, purchased and written options			(1,809,695	)			—
Net unrealized depreciation on investments and warrants transactions			(11,433,351	)			(1,093,165	)
NET ASSETS		$	177,296,702			$	209,730,071
Shares of Common Stock outstanding			7,702,705				8,562,173
Net asset value per share (Note 2)		$	23.02			$	24.49

		FOR THE THREE MONTHS ENDED								FOR THE NINE MONTHS ENDED
		SEPT 30, 2015*				SEPT 30, 2014				SEPT 30, 2015*				SEPT 30, 2014
INVESTMENT INCOME
Unaffiliated dividend income		$	—			$	—			$	148,000			$	—
Unaffiliated interest			32,723				1,461				47,826				5,033
Affiliated/controlled interest			490,928				523,058				1,438,391				1,365,264
Royalty income			—				351,327				14,261				423,196
TOTAL INVESTMENT INCOME			523,651				875,846				1,648,478				1,793,493
EXPENSES
Investment advisory fees (Note 4)			936,770				1,358,816				2,931,531				3,929,151
Administration fees			43,900				35,287				107,239				105,532
Custody fees			2,251				5,110				10,426				13,782
Transfer agent fees			8,384				9,132				26,399				26,684
Registration and filing fees			5,798				9,725				17,203				21,208
Professional fees			110,614				155,463				957,049				651,689
Printing fees			50,136				136,713				149,946				239,588
Trustees fees			25,000				15,000				75,000				45,000
Settlement fees			—				—				—				838,000
Miscellaneous fees			29,664				13,067				56,495				50,547
TOTAL GROSS EXPENSES			1,212,517				1,738,313				4,331,288				5,921,181
Incentive fee adjustments (Note 4)			(2,753,010	)			5,659,108				(2,399,314	)			4,226,169
TOTAL NET EXPENSES			(1,540,493	)			7,397,421				1,931,974				10,147,350
NET INVESTMENT INCOME (LOSS)			2,064,144				(6,521,575	)			(283,496	)			(8,353,857	)
Net Realized and Unrealized Gains (Losses) on Investments:
Net realized gains (losses) from security transactions
Non-affiliated and other assets			(3,725,521	)			26,779,485				(2,434,689	)			26,779,617
Net realized gains from purchased option transactions(1)			—				15,290,438				—				15,290,438
Net realized gains from written option transactions (1)			—				54,928				624,994				54,928
Net change in unrealized depreciation on investments			(10,093,234	)			(9,092,761	)			(10,388,120	)			(17,423,461	)
Net change in unrealized appreciation (depreciation) on warrants transactions (1)			53,706				4,786				47,934				(2,418,528	)
Net change in unrealized depreciation on purchased options (1)			—				(4,794,453	)			—				(1,470,000	)
Net change in unrealized appreciation on written options (1)			—				45,257				—				70,011
Net Realized and Unrealized Gains (Losses) on Investments			(13,765,049	)			28,287,680				(12,149,881	)			20,883,005
Net Increase (Decrease) In Net Assets Resulting From Operations		$	(11,700,905	)		$	21,766,105			$	(12,433,377	)		$	12,529,148
Net Increase (Decrease) In Net Assets Per Share Resulting From Operations (2)		$	(1.49	)		$	2.40			$	(1.59	)		$	1.38

		FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015 (UNAUDITED)*				FOR THE YEAR ENDED DECEMBER 31, 2014
CASH FLOWS FROM OPERATING ACTIVITIES
Net increase (decrease) in Net Assets resulting from operations		$	(12,433,377	)		$	15,984,110
Adjustments to reconcile net increase (decrease) in Net Assets derived from operations to net cash provided by (used in) operating activities:
Purchases of investments			(38,491,828	)			(181,556,214	)
Proceeds from disposition of investments			47,408,157				181,754,896
Net purchases from short-term investments			(1,500,000	)			(500,000	)
Net proceeds from written options			624,994				1,964,401
Net proceeds from purchased options			—				15,290,438
Proceeds from litigation claim			7,783				18,013
Increase in dividends, interest, and reclaims receivable			(315,664	)			(876,157	)
Increase in receivable for investment sold			(2,657,611	)			—
Increase (decrease) in payable for investment purchased			(38,253,718	)			38,253,718
Increase (decrease) in payable to affiliates			(357,711	)			22,450
Increase (decrease) in incentive fees payable			(13,637,768	)			5,405,459
Decrease (increase) in other assets			(231,225	)			1,945
Decrease in accrued expenses and other payables			(196,656	)			(8,092	)
Net realized (gain) loss from investments			2,434,689				(65,088,456	)
Net realized gain from written options			(624,994	)			(1,964,401	)
Net unrealized depreciation from investments, other assets, and warrants transactions			10,340,186				40,291,286
Net cash provided by (used in) operating activities			(47,884,743	)			48,993,396
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from shares redeemed			(19,999,992	)			(9,999,991	)
Distributions paid from realized capital gains			—				(53,158,463	)
Net cash used by financing activities			(19,999,992	)			(63,158,454	)
Net decrease in cash			(67,884,735	)			(14,165,058	)
Cash - beginning of period			69,014,110				83,179,168
Cash - end of period		$	1,129,375			$	69,014,110

		FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015 (UNAUDITED)*				FOR THE YEAR ENDED DECEMBER 31, 2014
FROM OPERATIONS:
Net investment loss		$	(283,496	)		$	(10,777,461	)
Net realized gains (losses) from security transactions and written options and warrants transactions			(1,809,695	)			67,052,857
Net change in unrealized depreciation on investments and warrants transactions			(10,340,186	)			(40,291,286	)
Net increase (decrease) in net assets from operations			(12,433,377	)			15,984,110
FROM DISTRIBUTIONS:
From realized gains on investments			—				(53,158,463	)
TOTAL DISTRIBUTIONS			—				(53,158,463	)
FROM CAPITAL SHARE TRANSACTIONS:
Value of shares repurchased			(19,999,992	)			(9,999,991	)
Net decrease in net assets from capital share transactions			(19,999,992	)			(9,999,991	)
TOTAL DECREASE IN NET ASSETS			(32,433,369	)			(47,174,344	)
NET ASSETS:
Beginning of period			209,730,071				256,904,415
End of period		$	177,296,702			$	209,730,071
Accumulated Net Investment Income		$	5,549,498			$	5,832,994
COMMON STOCK ACTIVITY:
Shares repurchased			(859,468	)			(509,859	)
Net decrease in shares outstanding			(859,468	)			(509,859	)
Shares outstanding, beginning of period			8,562,173				9,072,032
Shares outstanding, end of period			7,702,705				8,562,173

		FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015 (UNAUDITED)*				FOR THE YEAR ENDED DECEMBER 31, 2014				FOR THE YEAR ENDED DECEMBER 31, 2013				FOR THE YEAR ENDED DECEMBER 31, 2012				FOR THE PERIOD ENDED DECEMBER 31, 2011(1)
Net asset value at beginning of period		$	24.49			$	28.32			$	22.90			$	23.92			$	27.01
Income from investment operations:
Net investment income (loss)			(0.04	)(2)			(1.26	)			(1.42	)			(0.39	)			(0.41	)
Net realized and unrealized gains (losses) on investments			(1.55	)			3.04				7.16				(1.01	)			(2.68	)
Total from investment operations			(1.59	)			1.78				5.74				(1.40	)			(3.09	)
Distributions from:
Realized capital gains			—				(5.86	)			(0.32	)			—				—
Premiums from shares sold in offerings			—				—				—	(3)			0.38				—
Anti-dilutive effect from capital share transactions			0.12				0.25				—				—				—
Net asset value at end of period		$	23.02			$	24.49			$	28.32			$	22.90			$	23.92
Market value at end of period		$	8.51			$	18.65			$	23.17			$	17.44			$	14.33
Total return
Based on Net Asset Value			(6.0	)%(A)			12.54	%			25.30	%			(4.26	)%			(11.44	)%(A)
Based on Market Value			(54.37	)%(A)			4.76	%			34.61	%			21.70	%			(46.95	)%(A)
Net assets at end of period (millions)		$	177.3			$	209.7			$	256.9			$	195.9			$	83.63
Ratio of total expenses to average net assets			1.35	%(B)(4)			5.29	%(4)			6.52	%(4)			2.56	%			2.76	%(B)
Ratio of total expenses to average net assets, excluding incentive fees			3.03	%(B)			3.12	%			2.67	%			2.56	%			2.76	%(B)
Ratio of net investment increase (loss) to average net assets			(0.20	)%(B)			(4.31	)%			(5.96	)%			(2.12	)%			(2.28	)%(B)
Portfolio turnover rate			21	%(A)			95	%			17	%			10	%			18	%(A)

See accompanying notes to financial statements

See accompanying notes to financial statements

See accompanying notes to financial statements

Firsthand Technology Value Fund, Inc.  (the "Company")

Consolidated Notes to Financial Statements

SEPTEMBER 30, 2015 (UNAUDITED)

NOTE 1.  THE COMPANY

Firsthand Technology Value Fund, Inc. (the "Company," "us," "our," and "we") is a Maryland corporation and an externally managed, non-diversified, closed-end management investment company that has elected to be treated as a business development company ("BDC") under the Investment Company Act of 1940, as amended (the "1940 Act").  The Company acquired its initial portfolio of securities through the reorganization of Firsthand Technology Value Fund, a series of Firsthand Funds, into the Company.  The reorganization was completed on April 15, 2011.  The Company commenced operations on April 18th, 2011.  Under normal circumstances, the Company will invest at least 80% of its net assets for investment purposes in technology companies, which are considered to be those companies that derive at least 50% of their revenues from products and/or services within the information technology sector or 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 will invest at least 70% of our total assets in privately held companies and in 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 the Company's capital base. The Company's shares are listed on the NASDAQ Global Market under the symbol "SVVC."

CONSOLIDATION OF SUBSIDIARY- FIRSTHAND VENTURE INVESTORS. On May 8, 2015, the Board of Directors of the Company approved the formation of a fully owned and controlled subsidiary (as defined by the 1940 Act) of the Company named Firsthand Venture Investors ("FVI"), a California general partnership formed on March 30, 2015.  After the closing of business on June 30, 2015, the Company contributed substantially all of its assets to FVI in return for a controlling general partner ownership interest in FVI.  The transaction was completed July 1, 2015.  Under this new structure, we will have all or substantially all of our investment activities conducted through our fully owned subsidiary, FVI.  As a result, the financial statements of the Company and FVI are presented in the report on a consolidated basis. 

NOTE 2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The following is a summary of significant accounting policies followed in the preparation of the Company's financial statements included in this report:

USE OF ESTIMATES.  The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period.  Actual results could differ from those estimates.

INTERIM FINANCIAL STATEMENTS.  Interim financial statements are condensed and should be read in conjunction with the Company's latest annual financial statements. Interim disclosures generally do not repeat those of the annual statements.

PORTFOLIO INVESTMENT VALUATIONS. Investments are stated at "value" as defined in the 1940 Act and in the applicable regulations of the Securities and Exchange Commission and in accordance with GAAP.  Value, as defined in Section 2(a)(41) of the 1940 Act, is (i) the market value of those securities for which a market quotation is readily available and (ii) the fair value as determined in good faith by, or under the direction of, the board of directors for all other securities and assets.  On September 30, 2015, our financial statements include venture capital investments valued at approximately $152.1 million.  The fair values of our venture capital investments were determined in good faith by, or under the direction of, the Board of Directors of the Company (the "Board" or the "Board of Directors").  Upon sale of these investments, the values that are ultimately realized may be different from what is presently estimated.  The difference could be material. Also see Note 6 regarding the fair value of the Company's investments.

Firsthand Technology Value Fund, Inc.

Consolidated Notes to Financial Statements - continued

SEPTEMBER 30, 2015 (UNAUDITED)

CASH AND CASH EQUIVALENTS.  The Company considers liquid assets deposited with a bank, investments in money market funds, and certain short-term debt instruments with maturities of three months or less to be cash equivalents.  These investments represent amounts held with financial institutions that are readily accessible to pay our expenses or purchase investments.  Cash and cash equivalents are valued at cost plus accrued interest, which approximates market value.

RESTRICTED SECURITIES.  At September 30, 2015, the Company held $158,057,618 in restricted securities.

INCOME RECOGNITION.  Dividend income is recorded on the ex-dividend date.  Interest income is accrued as earned.  Discounts and premiums on securities purchased are amortized over the lives of the respective securities.  Other non-cash dividends are recognized as investment income at the fair value of the property received.  When debt securities are determined to be non-income producing and non-collectible, the Company ceases accruing interest and writes off  any previously accrued interest.  These write-offs are recorded as a debit to interest income.

SHARE VALUATION.  The net asset value ("NAV")  per share of the Company is calculated by dividing the sum of the value of the securities held by the Company, plus cash or other assets, minus all liabilities (including estimated accrued expenses), by the total number of shares outstanding of the Company, rounded to the nearest cent.

REALIZED GAIN OR LOSS AND UNREALIZED APPRECIATION OR DEPRECIATION OF PORTFOLIO INVESTMENTS. A realized gain or loss is recognized when an investment is disposed of and is computed as the difference between the Company's cost basis in the investment at the disposition date and the net proceeds received from such disposition.  Unrealized appreciation or depreciation is computed as the difference between the fair value of the investment and the cost basis of such investment.

INCOME TAXES.  As we intend to continue to qualify as a regulated investment company ("RIC") under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), the Company does not provide for income taxes.  The Company recognizes interest and penalties in income tax expense.

FOREIGN CURRENCY TRANSLATION.   The accounting records of the Company are maintained in U.S. dollars.  All assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the rate of exchange of such currencies against U.S. dollars on the date of valuation.

SECURITIES TRANSACTIONS.   Securities transactions are accounted for on the date the transaction for the purchase or sale of the securities is entered into by the Company (i.e., trade date).

CONCENTRATION OF CREDIT RISK.  The Company places its cash and cash equivalents with financial institutions, and, at times, cash held in checking accounts may exceed the Federal Deposit Insurance Corporation insured limit.

OPTIONS. The Company is subject to equity price risk in the normal course of pursuing its investment objectives and may enter into options written to hedge against changes in the value of equities. The Company may purchase put and call options to attempt to provide protection against adverse price effects from anticipated changes in prevailing prices of securities or stock indices.  The Company may also write put and call options. When the Company writes an option, an amount equal to the premium received by the Company is recorded as a liability and is subsequently adjusted to the current fair value of the option written.

Premiums received from writing options that expire unexercised are treated by the Company on the expiration date as realized gains from investments. The difference between the premium and the amount paid on effecting a closing purchase transaction, including brokerage commissions, is also treated as a realized gain, or, if the premium is less than the amount paid for the closing purchase transaction, as a realized loss. If a call option is exercised, the premium is added to the proceeds from the sale of the underlying security or currency in determining whether the Company has realized a gain or loss. The Company as writer of an option bears the market risk of an unfavorable change in the price of the security underlying the written option.

Firsthand Technology Value Fund, Inc.

Consolidated Notes to Financial Statements - continued

SEPTEMBER 30, 2015 (UNAUDITED)  

The Company did not have any written options as of September 30, 2015. The net realized gains/(loss) from written options and the net change in unrealized appreciation (depreciation) on written options for the quarter ended September 30, 2015 can be found on the Statement of Operations.

The number of option contracts written and the premiums received during the nine months ended September 30, 2015 were as follows:

 

 

The average volume of the Fund's derivatives during the nine months ended September 30, 2015 is as follows:

 

NOTE 3.  BUSINESS RISKS AND UNCERTAINTIES

We plan to invest a substantial portion of our assets in privately-held companies, the securities of which are inherently illiquid.  We also seek to invest in small publicly-traded companies that we believe have exceptional growth potential and to make opportunistic investments in publicly-traded companies, both large and small.  In the case of investments in small publicly-traded companies, although these companies are publicly traded, their stock may not trade at high volumes, and prices can be volatile, which may restrict our ability to sell our positions.  These privately held and publicly traded businesses tend to lack management depth, have limited or no history of operations and typically have not attained profitability.  Because of the speculative nature of our investments and the lack of public markets for privately held investments, there is greater risk of loss than is the case with traditional investment securities.

We do not choose investments based on a strategy of diversification.  We also do not rebalance the portfolio should one of our portfolio companies increase in value substantially relative to the rest of the portfolio.  Therefore, the value of our portfolio may be more vulnerable to events affecting a single sector, industry or portfolio company and, therefore, may be subject to greater volatility than a company that follows a diversification strategy.

Because there is typically no public or readily-ascertainable market for our interests in the small privately-held companies in which we invest, the valuation of those securities is determined in good faith by the Valuation Committee, comprised of all members of the Board who are not "interested persons" of the Company, as such term is defined in Section 2(a)(19) of the 1940 Act, in accordance with our Valuation Procedures and is subject to significant estimates and judgments.  The determined value of the securities in our portfolio may differ significantly from the values that would be placed on these securities if a ready market for the securities existed.  Any changes in valuation are recorded in our Statement of Operations as "Net increase (decrease) in unrealized appreciation on investments."  Changes in valuation of any of our investments in privately-held companies from one period to another may be volatile.

Firsthand Technology Value Fund, Inc.

Consolidated Notes to Financial Statements - continued

SEPTEMBER 30, 2015 (UNAUDITED)

 

The Board may, from time to time, engage an independent valuation firm to provide it with valuation assistance with respect to certain of our portfolio investments.  The Company intends to continue to engage an independent valuation firm to provide us with assistance regarding our determination of the fair value of select portfolio investments each quarter unless directed by the Board to cancel such valuation services.  The scope of the services rendered by an independent valuation firm is at the discretion of the Board.  The Board is ultimately and solely responsible for determining the fair value of the Company's investments in good faith.

With respect to investments for which market quotations are not readily available or when such market quotations are deemed not to represent fair value, the Board has approved a multi-step valuation process to be followed each quarter, as described below:

	(1)	each quarter the valuation process begins with each portfolio company or investment being initially valued by the Valuation Committee of the Advisor (as defined below) (the "Adviser Valuation Committee") or the independent valuation firm;
	(2)	the Valuation Committee of the Board on a quarterly basis reviews the preliminary valuation of the Adviser Valuation Committee and that of the independent valuation firms and makes the fair value determination, in good faith, based on the valuation recommendations of the Adviser Valuation Committee and the independent valuation firms; and
	(3)	at each quarterly Board meeting, the Board considers the valuations recommended by the Adviser Valuation Committee and the independent valuation firms that were previously submitted to the Valuation Committee of the Board and ratifies the fair value determinations made by the Valuation Committee of the Board.

 

NOTE 4.  INVESTMENT MANAGEMENT FEE

The Company has entered into an investment management agreement (the "Investment Management Agreement") with Firsthand Capital Management, Inc. ("FCM" or the "Adviser"), pursuant to which the Company will pay FCM a fee for providing investment management services consisting of two components—a base management fee and an incentive fee.

The base management fee will be calculated at an annual rate of 2.00% of our gross assets.  For services rendered under the Investment Management Agreement, the base management fee will be payable quarterly in arrears.  The base management fee will be calculated based on the average of (1) the value of our gross assets at the end of the current calendar quarter and (2) the value of our gross assets at the end of the preceding calendar quarter; and will be appropriately adjusted for any share issuances or repurchases during the current calendar quarter.  Base management fees for any partial quarter will be pro-rated.

Instead of an incentive fee paid by the Company under the Investment Management Agreement with respect to investments held by FVI, FVI allocates 20% of its taxable income annually (or upon termination of the Investment Management Agreement) to a subsidiary of FCM, subject to the achievement of performance benchmarks.  That allocation is limited to the amount FCM would have received if the Company were to pay an incentive fee directly to FCM with respect to assets held by FVI, is based on an inception date of April 15, 2011, and equals 20% of FVI's and the Company's realized capital gains, if any, on a cumulative basis from inception through the end of each calendar year, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid incentive fees, but determined as of December 31, 2015, for a period of shorter than twelve calendar months to take into account any realized gains computed net of all realized capital losses and unrealized capital depreciation from inception.  As of September 30, 2015, the estimated and accrued allocation of taxable income by FVI totaled $78,890.

Firsthand Technology Value Fund, Inc.

Consolidated Notes to Financial Statements - continued

SEPTEMBER 30, 2015 (UNAUDITED)

NOTE 5.  DEBT

On June 29, 2015, the Company entered into a Loan Agreement with FVI, a California general partnership.   FVI is a fully owned subsidiary of the Company.  The Company loaned a principal sum of $10,000 to FVI pursuant to a loan agreement, and the Company holds a promissory note from FVI evidencing that obligation.   As of September 30, 2015, the committed amount, and amount outstanding, under the Loan Agreement was $10,000.  The annualized interest rate of 2.5% will be applied on any unpaid principal balance. The cash received by the Company and the note payable balance on FVI's records has been consolidated and eliminated on the consolidated financial statements presented herein.

NOTE 6. FAIR VALUE

Securities traded on, or quoted by, the NASDAQ Stock Market, Inc. ("NASDAQ") are valued according to the NASDAQ official closing price. Securities traded on other stock exchanges, including the New York Stock Exchange ("NYSE"), are valued at their last reported sale price as of the close of trading of that exchange (normally 4:00 P.M. Eastern Time for the NYSE). If a security is not traded that day, the security will be valued at its most recent bid price.

Securities traded in the over-the-counter market, but not quoted by NASDAQ, are valued at the last sale price (or, if the last sale price is not readily available, at the most recent closing bid price as quoted by brokers that make markets in the securities) at the close of trading on the NYSE.

Securities traded both in the over-the-counter market and on a stock exchange are valued according to the broadest and most representative market.

Securities and other assets that do not have market quotations readily available are valued at their fair value as determined in good faith by the Board in accordance with the Valuation Procedures adopted by the Valuation Committee of the Board.

In pricing illiquid, privately placed securities, the Board of Directors is responsible for (1) determining overall valuation guidelines and (2) ensuring that the investments of the Company are valued within the prescribed guidelines.

The Valuation Committee of the Board is responsible for determining the valuation of the Company's assets within the guidelines established by the Board of Directors.  The Valuation Committee of the Board receives information and recommendations from the Adviser and an independent valuation firm.

The values assigned to these investments are based on available information and do not necessarily represent amounts that might ultimately be realized when that investment is sold, as such amounts depend on future circumstances and cannot reasonably be determined until the individual investments are actually liquidated or become readily marketable.

APPROACHES TO DETERMINING FAIR VALUE.  GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price).  In effect, GAAP applies fair value terminology to all valuations whereas the 1940 Act applies market value terminology to readily marketable assets and fair value terminology to other assets.

The main approaches to measuring fair value utilized are the market approach, the income approach, and the asset-based approach.  The choice of which approach to use in a particular situation depends on the specific facts and circumstances associated with the Company, as well as the purpose for which the valuation analysis is being conducted.  FCM and the independent valuation firm rely primarily on the market and income approaches. We also considered the asset-based approach in our analysis because certain of the portfolio companies do not have substantial operating earnings relative to the value of their underlying assets.

Firsthand Technology Value Fund, Inc.

Consolidated Notes to Financial Statements - continued

SEPTEMBER 30, 2015 (UNAUDITED)

	-	Market Approach (M): The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. For example, the market approach often uses market multiples derived from a set of comparables. Multiples might lie in ranges with a different multiple for each comparable. The selection of where within the range each appropriate multiple falls requires the use of judgment in considering factors specific to the measurement (qualitative and quantitative).
	-	Income Approach (I): The income approach uses valuation techniques to convert future amounts (for example, cash flows or earnings) to a single present value amount (discounted). The measurement is based on the value indicated by current market expectations about those future amounts. Those valuation techniques include present value techniques and the multi-period excess earnings method, which is used to measure the fair value of certain assets.
	-	Asset-Based Approach (A): The asset-based approach examines the value of a company's assets net of its liabilities to derive a value for the equity holders.

 

FAIR VALUE MEASUREMENT. In accordance with the guidance from the Financial Accounting Standards Board on fair value measurements and disclosures under GAAP, the Company discloses the fair value of its investments in a hierarchy that prioritizes the inputs to valuation techniques used to measure the fair value.  The hierarchy gives the highest priority to valuations based upon unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to valuations based upon unobservable inputs that are significant to the valuation (Level 3 measurements).

The guidance establishes three levels of the fair value hierarchy as follows:

	Level 1 -	Unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the date of measurement.
	Level 2 -	Observable inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These inputs may include quoted prices for the identical instrument in an inactive market, prices for similar instruments in an active or inactive market, interest rates, prepayment speeds, credit risks, yield curves, default rates, and similar data.
	Level 3 -	Unobservable inputs for the asset or liability, to the extent relevant observable inputs are not available, representing the Company's own assumptions about the assumptions a market participant would use in valuing the asset or liability based on the best information available.

 

The availability of observable inputs can vary from security to security and is affected by a wide variety of factors, including, for example, the type of security, whether the security is new and not yet established in the marketplace, the liquidity of markets, and other characteristics particular to the security.  To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment.  Accordingly, the degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3.

The inputs used to measure fair value may fall into different levels of the fair value hierarchy.  In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement falls in its entirety is determined based on the lowest level input that is significant to the fair value measurement in its entirety.

The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.  The following is a summary of the inputs used to value the Company's net assets as of September 30, 2015:

*	Asset derivatives include warrants.

At the end of each calendar quarter, management evaluates the Level 2 and Level 3 assets and liabilities for changes in liquidity, including, but not limited to: whether a broker is willing to execute at the quoted price, the depth and consistency of prices from third-party services, and the existence of contemporaneous, observable trades in the market.  Additionally, management evaluates the Level 1 and Level 2 assets and liabilities on a quarterly basis for changes in listings or delistings on national exchanges.  Transfers in and out of the levels are recognized at the value at the end of the quarter.  There were no transfers between Levels 1 and 2 as of September 30, 2015.

Following is a reconciliation of Level 3 assets (at either the beginning or the ending of the period) for which significant unobservable inputs were used to determine fair value.

 

(1)	The net change in unrealized depreciation from Level 3 instruments held as of September 30, 2015 was $1,911,960.

The below chart represents quantitative disclosure about significant unobservable inputs for Level 3 fair value measurements at September 30, 2015: