Business Context and Reporting Period
MDB Capital Holdings, LLC filed an unaudited Form 10-Q for the quarter and nine months ended September 30, 2023. MDB is a holding company with broker-dealer, intellectual-property services, and synthetic-biology technology operations through Public Ventures, PatentVest, and majority-owned Invizyne.
Public Ventures operates as a FINRA-registered broker-dealer and was approved to begin operating as a self-clearing broker-dealer in November 2023. MDB completed an initial public offering on September 20, 2023, issuing 1,666,666 Class A shares at $12.00 per share.
Financial Performance and Position
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Total operating income, net | 2023: $(775,404); 2022: $73,975 | 2023: $5,070,958; 2022: $103,513 |
| Fee income | None reported in either period | 2023: $4,233,120; 2022: none |
| Net operating loss | 2023: $(3,299,055); 2022: $(2,228,295) | 2023: $(1,925,317); 2022: $(5,202,581) |
| Net loss attributable to MDB | 2023: $(3,008,461); 2022: $(2,083,580) | 2023: $(1,419,350); 2022: $(4,783,904) |
| Class A loss per share | $(0.49) vs. $(0.27) | $(0.24) vs. $(1.43) |
| Class B loss per share | $(0.32) vs. $(0.27) | $(0.15) vs. $(0.63) |
- Third-quarter results were adversely affected by a $786,906 unrealized investment-securities loss, compared with a $16,072 unrealized gain in the prior-year quarter.
- Nine-month operating income included $4.233 million of fee income and a $696,965 unrealized investment gain. The filing indicates that a substantial portion of investment-banking consideration was received in equity securities and warrants rather than cash.
- Operating costs increased 9.6% in the third quarter and 31.9% for the nine-month period. Nine-month general and administrative costs rose 38.3% to $6.929 million, including compensation of $3.184 million and professional fees of $1.241 million.
- Research and development costs, net of grants, declined to $67,095 for the nine months from $295,779 in the prior-year period. Gross research and development costs were $2.333 million, offset by $2.265 million of grant funding.
Cash Flow, Liquidity, Debt, and Capitalization
| Balance-sheet metric | September 30, 2023 | December 31, 2022 |
|---|---|---|
| Cash and cash equivalents | $24,445,550 | $4,952,624 |
| Restricted cash | $2,000,000 | None |
| U.S. Treasury bills at amortized cost | $7,495,988 | $16,188,920 |
| Investment securities at fair value | $4,964,725 | $832,577 |
| Total assets | $43,462,770 | $25,701,071 |
| Total liabilities | $4,142,206 | $2,592,063 |
| Total equity | $39,320,564 | $23,109,008 |
- For the first nine months, operating activities used $5.109 million, investing activities provided $8.769 million, and financing activities provided $17.833 million.
- Cash, cash equivalents, and restricted cash increased by $21.493 million to $26.446 million. Management reported working capital of $33.827 million and identified cash plus short-term Treasury bills as available funding resources.
- The company had no outstanding borrowings under its $2.0 million revolving credit facility, which matures July 26, 2024. The facility bears a variable rate initially calculated at 7.75% and is collateralized by approximately $2.0 million in cash.
- Operating lease liabilities were $2.210 million, with undiscounted future lease payments of $2.738 million.
- The IPO generated $19.999 million of gross proceeds and $17.445 million after offering costs. Proceeds are intended for Invizyne development, identifying and developing partner companies, and general working capital.
Material Changes Versus the Prior Comparable Period
- Nine-month fee income increased from zero to $4.233 million, primarily reflecting investment-banking activity.
- Nine-month net loss attributable to MDB improved by $3.365 million, although the company remained unprofitable. The improvement was driven principally by fee income, investment gains, and interest income.
- Third-quarter net loss attributable to MDB worsened by $924,881, primarily because the prior-year quarter had a small unrealized investment gain while 2023 included a $786,906 unrealized loss.
- Total assets increased 69.1%, primarily because of IPO proceeds. Fair-value investment securities increased $4.132 million, largely from equity securities and warrants received in an investment-banking transaction.
- Class A shares outstanding increased from 2,628,966 at December 31, 2022 to 4,295,632 at September 30, 2023. Class B shares remained at 5,000,000 and carry five votes per share.
- The company identified and restated a mathematical error in prior-period Class A weighted-average shares and loss per share for the three and six months ended June 30, 2022.
Outlook, Risks, Contingencies, and Unusual Items
- No quantitative revenue, earnings, or cash-flow guidance was provided. Management stated that grant funding and operating results may fluctuate and that nine-month results are not necessarily indicative of full-year performance.
- MDB expects to use IPO proceeds to fund Invizyne, new partner-company development, and corporate working capital. Invizyne remains a development-stage synthetic-biology business with limited revenue and continuing losses.
- Approximately $2.646 million of income was recognized from warrants received in an investment-banking transaction, and the warrants were carried at $2.553 million as Level 3 assets at September 30, 2023. Their valuation uses the Black-Scholes model and a 99.34% volatility assumption, creating material valuation sensitivity.
- Public Ventures reported net capital of $6.038 million, $5.788 million above its $250,000 regulatory minimum. Its aggregate-indebtedness-to-net-capital ratio was 0.20 to 1 versus a permitted maximum of 15 to 1. Regulatory capital requirements may restrict dividends to MDB.
- Public Ventures has uncapped contractual indemnification obligations to its clearing broker for certain customer-related losses. No material losses or outstanding obligations were reported.
- MDB has funded the full $5.0 million Invizyne funding commitment and owned 60.94% of Invizyne at September 30, 2023. Invizyne grants and government funding are subject to compliance with grant terms.
- The company reported no material pending or threatened legal proceedings. It identified potential recession and capital-markets risks, technology commercialization and regulatory risks, and the possibility that additional funding may be required for partner companies.
- Disclosure controls and procedures were not effective as of September 30, 2023 because of previously identified material weaknesses in internal control over financial reporting. Remediation was ongoing and had not yet been deemed complete.
Most Important Facts for Investors to Verify
- Whether investment-banking fee generation is recurring and cash-based or dependent on volatile equity and warrant consideration.
- The valuation, liquidity, concentration, and subsequent performance of the $4.965 million fair-value investment portfolio, including $2.553 million of Level 3 warrants.
- The cash-burn rate and expected duration of liquidity after the IPO, including the effect of self-clearing operations and ongoing operating losses.
- Progress, cost, and regulatory status of Public Ventures’ transition to self-clearing operations.
- Invizyne’s commercialization milestones, grant renewals, funding requirements, ownership dilution, and ability to generate revenue beyond the reported feasibility study.
- The potential dilution from 3.675 million time-based RSUs, 2.0 million performance-based RSUs, stock options, and outstanding warrants.
- Completion and effectiveness of remediation for the material weaknesses in internal controls, including the cause and impact of the prior-period EPS restatement.