MDB Capital Holdings, LLC — Form 10-Q Summary
Business Context and Reporting Period
MDB Capital Holdings, LLC is a Delaware holding company reporting for the three and six months ended June 30, 2023. Its principal activities are conducted through Public Ventures, a registered broker-dealer; PatentVest, an intellectual-property services provider; and Invizyne Technologies, a majority-owned synthetic biology development company. Class A shares trade on Nasdaq under MDBH. The company reported 2,628,966 Class A shares and 5,000,000 Class B shares outstanding; Class B shares carry five votes per share and are convertible one-for-one into Class A shares.
The unaudited financial statements were prepared under U.S. GAAP. MDB is a smaller reporting company and emerging growth company. Management stated that it plans an initial public offering of additional Class A shares, but no exact offering date had been established as of the filing.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2023 |
|---|---|---|
| Total operating income | $5.729 million | $5.846 million |
| Fee income | $4.233 million | $4.233 million |
| Unrealized investment gain | $1.429 million | $1.484 million |
| Total operating costs | $2.200 million | $4.473 million |
| Net operating income | $3.529 million | $1.374 million |
| Net income attributable to MDB | $3.463 million | $1.589 million |
| Basic and diluted EPS — Class A | $0.45 | $0.21 |
| Approximate operating margin | 61.6% | 23.5% |
| Approximate net margin on operating income | 60.4% | 27.2% |
The second-quarter results were driven primarily by $4.233 million of fee income and a $1.429 million unrealized gain on investment securities, including warrants received in an investment banking transaction. The filing does not provide a recurring-revenue or adjusted EBITDA measure.
Liquidity, Cash Flow, Debt, and Balance Sheet
- Cash and cash equivalents were $2.391 million at June 30, 2023, down from $4.953 million at December 31, 2022.
- The company held $14.900 million of U.S. Treasury bills at amortized cost and $5.752 million of broker-dealer investment securities at fair value. Total investment securities were approximately $20.902 million, excluding securities carried at cost less impairment.
- Working capital was $17.813 million at June 30, 2023, according to management.
- Operating activities used $3.721 million of cash during the first six months of 2023. Investing activities provided $1.565 million, while financing activities used $0.405 million, primarily for deferred offering costs. Cash declined by $2.561 million.
- The filing reports no conventional borrowings or debt. Operating lease liabilities were $1.590 million, with total undiscounted future operating lease payments of $2.013 million.
- Total assets were $27.415 million, up 6.7% from December 31, 2022. Total liabilities were $2.768 million and total equity was $24.647 million.
- Public Ventures reported net capital of $3.437 million, exceeding its $250,000 regulatory minimum by $3.187 million. Its aggregate-indebtedness-to-net-capital ratio was 0.03-to-1 versus a maximum permitted ratio of 15-to-1.
Material Changes Versus the Prior Comparable Period
- For the quarter, operating income increased from $12,211 to $5.729 million, and MDB-attributable income improved from a $1.565 million loss to $3.463 million of income. The increase principally reflected new fee income and investment gains.
- For the six-month period, operating income increased from $29,538 to $5.846 million, and MDB-attributable results improved from a $2.700 million loss to $1.589 million of income.
- Total general and administrative costs increased 28.4% in the quarter and 57.7% year to date. Compensation, related-party expenses, information technology, and clearing and other charges increased, reflecting hiring, preparation for self-clearing operations, and the second-quarter investment banking transaction.
- Research and development expense net of grants was $39,159 year to date versus $192,146 in the prior-year period. Gross R&D spending increased, but higher grant funding reduced the net expense.
- Investment securities at fair value increased to $5.752 million from $0.833 million, primarily because common stock and warrants were received as compensation in an investment banking transaction. Warrants included $2.974 million classified as Level 3 and valued using a Black-Scholes model.
- The company recorded a $320,584 income-tax expense and a $225,874 deferred tax liability in 2023; no income-tax expense or deferred tax liability was reported for the comparable 2022 period.
- Grants receivable increased to $1.074 million from $0.810 million, while cash declined as operating expenses exceeded operating cash inflows.
Outlook, Risks, Contingencies, and Unusual Items
- No quantitative earnings or revenue guidance was provided. Management expects grant funding to fluctuate and is pursuing an initial public offering to raise additional capital for partner-company development, new investments, and working capital.
- Public Ventures is preparing to operate as a self-clearing broker-dealer and stated that it expected to commence operations in September 2023. Related technology, staffing, outsourcing, legal, and clearing costs are increasing.
- The company’s technology partners may fail to achieve commercial viability, obtain regulatory approvals, or gain market acceptance, potentially requiring additional funding or discontinuation of projects.
- Investment results include significant unrealized gains and Level 3 warrant valuations. The Level 3 warrants were valued using an assumed volatility of 101.16%, creating sensitivity to market prices, volatility, and other model inputs.
- Invizyne remains loss-making: its six-month net loss was $419,229, of which $163,778 was attributable to non-controlling interests. MDB’s funding agreement permits purchases of Invizyne shares up to $5.000 million; the filing contains differing ownership references that should be reconciled.
- Public Ventures has uncapped contractual indemnification obligations to its clearing brokers for certain customer-account losses, although no material losses or outstanding obligations were reported at June 30, 2023.
- Management reported no pending or threatened material litigation and no material legal proceedings.
- Disclosure controls and procedures were deemed ineffective because of previously identified material weaknesses in internal control over financial reporting. Remediation efforts, including improved segregation of duties, documentation, staffing, access controls, and review procedures, remained ongoing.
- Unrecognized equity compensation was substantial, including approximately $36.750 million for time-based MDB restricted stock units and approximately $16 million for performance-based restricted stock units. The awards generally begin vesting only after specified public-listing or market conditions are met.
Investor Verification Priorities
- Verify the sustainability and recurrence of the $4.233 million investment banking fee income and the related warrants received in the second quarter.
- Assess the valuation sensitivity and liquidity of the $2.974 million Level 3 warrant portfolio and other broker-dealer investments.
- Reconcile the filing’s references to Invizyne ownership, including 60.94%, 58.5%, and related funding-agreement percentages.
- Monitor cash consumption, Treasury-bill maturities, IPO timing, and whether available liquidity can support operating losses and planned expansion.
- Track remediation of the material weaknesses in internal controls and determine when management concludes that controls are operating effectively.
- Evaluate dilution from 5.675 million outstanding or potentially vesting restricted stock units, Invizyne options and RSUs, and other warrants.
- Review Public Ventures’ transition to self-clearing operations, regulatory capital requirements, and related execution and indemnification risks.