UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2024
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-41751
MDB CAPITAL HOLDINGS, LLC
(Exact name of registrant as specified in its charter)
| Delaware | 87-4366624 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
14135 Midway Road, Suite G-150 Addison, TX 75001 | 75001 | |
| (Address of principal executive offices) | (Zip code) |
(945) 262-9010
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
None
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| Class A Common Shares, representing Limited Liability Interests | MDBH | Nasdaq Capital Markets |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 last 90 days. YES ☒ NO ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES ☒ NO ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large Accelerated Filer | ☐ | Accelerated Filer | ☐ |
| Non-accelerated Filer | ☐ | Smaller Reporting Company | ☒ |
| Emerging Growth Company | ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒
As of May 13, 2024, the number of outstanding shares of Class A Common Shares, representing limited liability interests, of the registrant was .
TABLE OF CONTENTS
| 1 |
PART I – FINANCIAL INFORMATION
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2024 (Unaudited) | December 31, 2023 | |||||||
| Assets | ||||||||
| Cash and cash equivalents | $ | 5,492,612 | $ | 6,109,806 | ||||
| Cash segregated in compliance with regulations | 2,959,994 | 1,247,881 | ||||||
| Grants receivable, includes unbilled receivables of $503,777 and $783,520 | 1,111,611 | 882,319 | ||||||
| Clearing deposits | 703,740 | 260,000 | ||||||
| Prepaid expenses and other current assets | 494,463 | 523,788 | ||||||
| Investment securities, at amortized cost (U.S. Treasury Bills) | 21,381,362 | 24,658,611 | ||||||
| Investment securities, at fair value (held by our licensed broker dealer) (Note 2) | 4,999,237 | 5,771,634 | ||||||
| Investment securities, at cost less impairment | 200,000 | 200,000 | ||||||
| Deferred offering cost | 266,945 | 69,303 | ||||||
| Deferred costs related to deferred revenue | 147,503 | 75,328 | ||||||
| Property and equipment, net | 946,850 | 866,490 | ||||||
| Operating lease right-of-use assets, net | 2,235,559 | 2,320,119 | ||||||
| Total assets | $ | 40,939,876 | $ | 42,985,279 | ||||
| LIABILITIES AND EQUITY | ||||||||
| Accounts payable | $ | 916,782 | $ | 578,214 | ||||
| Accrued expenses | 515,853 | 1,105,078 | ||||||
| Payables to non-customers | 2,374,132 | 1,405,293 | ||||||
| Payables to customers | 1,115,663 | - | ||||||
| Deferred grant reimbursement | 133,909 | 140,703 | ||||||
| Deferred revenue | 20,000 | 20,000 | ||||||
| Operating lease liabilities | 2,339,955 | 2,415,889 | ||||||
| Total liabilities | 7,416,294 | 5,665,177 | ||||||
| Commitments and Contingencies (Note 9) | - | - | ||||||
| Equity: | ||||||||
| Preferred shares, authorized shares at no par value; issued and outstanding | - | - | ||||||
| Class A common shares, authorized shares at no par value; and shares issued and outstanding as of March 31, 2024 and December 31, 2023, respectively | - | - | ||||||
| Class B common shares, authorized shares at no par value; shares issued and outstanding | - | - | ||||||
| Common stock, value | - | - | ||||||
| Paid-in-capital | 53,075,777 | 49,405,779 | ||||||
| Accumulated deficit | (19,308,352 | ) | (12,092,927 | ) | ||||
| Total MDB Capital Holdings, LLC Members’ equity | 33,767,425 | 37,312,852 | ||||||
| Non-controlling interest | (243,843 | ) | 7,250 | |||||
| Total equity | 33,523,582 | 37,320,102 | ||||||
| Total liabilities and equity | $ | 40,939,876 | $ | 42,985,279 | ||||
See accompanying notes to the unaudited condensed consolidated financial statements.
| 2 |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
| 2024 | 2023 | |||||||
| Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Operating income (loss): | ||||||||
| Unrealized gain (loss) on investment securities, net (from our licensed broker dealer) (Notes 1 and 2) | $ | (747,268 | ) | $ | 54,779 | |||
| Other operating income | 86,879 | 62,212 | ||||||
| Total operating income (loss), net | (660,389 | ) | 116,991 | |||||
| Operating costs: | ||||||||
| General and administrative costs: | ||||||||
| Compensation | 4,892,675 | 872,027 | ||||||
| Operating expense, related party | 320,292 | 301,702 | ||||||
| Professional fees | 919,089 | 604,662 | ||||||
| Information technology | 205,991 | 147,407 | ||||||
| Clearing and other charges | 2,036 | 10,754 | ||||||
| General and administrative-other | 669,126 | 304,079 | ||||||
| Total general and administrative costs | 7,009,209 | 2,240,631 | ||||||
| Research and development costs, net of grants amounting to $708,700 and $793,540 | 277,582 | 31,592 | ||||||
| Total operating costs | 7,286,791 | 2,272,223 | ||||||
| Net operating loss | (7,947,180 | ) | (2,155,232 | ) | ||||
| Other income: | ||||||||
| Interest income | 337,852 | 187,291 | ||||||
| Net loss before income taxes | (7,609,328 | ) | (1,967,941 | ) | ||||
| Income taxes | - | - | ||||||
| Net loss | (7,609,328 | ) | (1,967,941 | ) | ||||
| Less net loss attributable to non-controlling interests | (393,903 | ) | (94,193 | ) | ||||
| Net loss attributable to MDB Capital Holdings, LLC | $ | (7,215,425 | ) | $ | (1,873,748 | ) | ||
| Loss per share attributable to MDB Capital Holdings, LLC: | ||||||||
| Loss per Class A common share – basic and diluted | $ | ) | $ | ) | ||||
| Weighted average of Class A common shares outstanding – basic and diluted | ||||||||
| Loss per Class B common share – basic and diluted | $ | ) | $ | ) | ||||
| Weighted average of Class B common shares outstanding – basic and diluted | ||||||||
See accompanying notes to the unaudited condensed consolidated financial statements.
| 3 |
MDB CAPITAL HOLDINGS, LLC
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Unaudited)
Three Months Ended March 31, 2024 and 2023
| Shares | Amount | Shares | Amount | Capital | Deficit | Interest | Equity | |||||||||||||||||||||||||
Class A Common Shares | Class B Common Shares | Paid-In | Accumulated | Noncontrolling | Total | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Interest | Equity | |||||||||||||||||||||||||
| Balance, December 31, 2023 | 4,295,632 | $ | - | 5,000,000 | $ | - | $ | 49,405,779 | $ | (12,092,927 | ) | $ | 7,250 | $ | 37,320,102 | |||||||||||||||||
| Stock-based compensation | - | - | - | - | 3,699,998 | - | 142,810 | 3,812,808 | ||||||||||||||||||||||||
| Net loss | - | - | - | - | - | (7,215,425 | ) | (393,903 | ) | (7,609,328 | ) | |||||||||||||||||||||
| Balance, March 31, 2024 | 4,295,632 | $ | - | 5,000,000 | $ | - | $ | 53,075,777 | $ | (19,308,352 | ) | $ | (243,843 | ) | $ | 33,523,582 | ||||||||||||||||
Class A Common Shares | Class B Common Shares | Paid-In | Accumulated | Noncontrolling | Total | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Interest | Equity | |||||||||||||||||||||||||
| Balance, December 31, 2022 | 2,628,966 | $ | - | 5,000,000 | $ | - | $ | 27,764,453 | $ | (5,124,110 | ) | $ | 468,665 | $ | 23,109,008 | |||||||||||||||||
| Balance | 2,628,966 | $ | - | 5,000,000 | $ | - | $ | 27,764,453 | $ | (5,124,110 | ) | $ | 468,665 | $ | 23,109,008 | |||||||||||||||||
| Stock-based compensation | - | - | - | - | - | - | 54,126 | 54,126 | ||||||||||||||||||||||||
| Net loss | - | - | - | - | - | (1,873,748 | ) | (94,193 | ) | (1,967,941 | ) | |||||||||||||||||||||
| Balance, March 31, 2023 | 2,628,966 | $ | - | 5,000,000 | $ | - | $ | 27,764,453 | $ | (6,997,858 | ) | $ | 428,598 | $ | 21,195,193 | |||||||||||||||||
| Balance | 2,628,966 | $ | - | 5,000,000 | $ | - | $ | 27,764,453 | $ | (6,997,858 | ) | $ | 428,598 | $ | 21,195,193 | |||||||||||||||||
See accompanying notes to the unaudited condensed consolidated financial statements.
| 4 |
MDB CAPITAL HOLDINGS, LLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
| 2024 | 2023 | |||||||
| Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (7,609,328 | ) | $ | (1,967,941 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Unrealized (gain) loss on investment securities, net | 747,268 | (54,779 | ) | |||||
| Stock-based compensation | 3,812,809 | 54,126 | ||||||
| Accretion of investments at amortized cost (U.S Treasury Bills) | (305,047 | ) | (187,291 | ) | ||||
| Proceeds from sale of investment securities, at fair value (made by our licensed broker dealer) | 25,129 | 776,281 | ||||||
| Depreciation of property and equipment | 62,792 | 44,124 | ||||||
| Deferred costs related to revenue | (72,175 | ) | ||||||
| Accretion of deferred grant reimbursement | (13,173 | ) | 12,960 | |||||
| Deferred revenue | - | - | ||||||
| Change in ROU Asset | 84,560 | 57,070 | ||||||
| Change in lease liability | (75,934 | ) | (19,286 | ) | ||||
| Changes in operating assets and liabilities: | ||||||||
| (Increase) decrease in - | ||||||||
| Grants receivable | (229,292 | ) | (203,122 | ) | ||||
| Prepaid expenses and other current assets | (76,810 | ) | 39,788 | |||||
| Clearing deposits | (443,740 | ) | - | |||||
| Increase (decrease) in - | ||||||||
| Accounts payable | 338,567 | 399,405 | ||||||
| Payables to non-customers | 1,212,595 | - | ||||||
| Payables to customers | 871,907 | |||||||
| Accrued expenses | (589,225 | ) | (105,527 | ) | ||||
| Net cash used in operating activities | (2,259,097 | ) | (1,154,192 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Proceeds of investments securities, at amortized cost (U.S Treasury Bills) | 12,066,207 | - | ||||||
| Purchases of investments securities, at amortized cost (U.S Treasury Bills) | (8,483,911 | ) | - | |||||
| Deferred grant reimbursement | 6,379 | (48,375 | ) | |||||
| Purchases of property and equipment | (143,152 | ) | (6,942 | ) | ||||
| Net cash provided by (used in) investing activities | 3,445,523 | (55,317 | ) | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Deferred costs of initial public offering | (91,507 | ) | (272,322 | ) | ||||
| Net cash used in financing activities | (91,507 | ) | (272,322 | ) | ||||
| NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH | 1,094,919 | (1,481,831 | ) | |||||
| CASH, CASH EQUIVALENTS, AND RESTRICTED CASH - BEGINNING OF PERIOD | 7,357,687 | 4,952,624 | ||||||
| CASH, CASH EQUIVALENTS, AND RESTRICTED CASH - END OF PERIOD | $ | 8,452,606 | $ | 3,470,793 | ||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid for - | ||||||||
| Interest | $ | - | $ | - | ||||
| Income taxes | $ | - | $ | - | ||||
| Non-cash investing and financing activities: | ||||||||
| Ownership change of non-controlling interest | $ | - | $ | 153,044 | ||||
| Deferred costs of initial public offering | $ | 106,135 | $ | - | ||||
The following table provides a reconciliation of the amount of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheets to the total of the same such amounts shown in the unaudited condensed consolidated statements of cash flows:
March 31, 2024 | December 31, 2023 | |||||||
| Cash and cash equivalents | $ | 5,492,612 | $ | 6,109,806 | ||||
| Cash segregated in compliance with regulations | 2,959,994 | 1,247,881 | ||||||
| Total cash, cash equivalents, and restricted cash shown in the unaudited condensed consolidated statements of cash flows | $ | 8,452,606 | $ | 7,357,687 | ||||
See accompanying notes to the unaudited condensed consolidated financial statements.
| 5 |
MDB CAPITAL HOLDINGS, LLC
(Formerly Public Ventures, LLC and Subsidiaries)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 2024 and 2023
1. Organization and Description of Business
MDB Capital Holdings, LLC (“the Company” or “MDB”), a Delaware limited liability company, is a holding company that has three wholly-owned subsidiaries: MDB CG Management Company (“MDB Management”); Public Ventures, LLC (“Public Ventures”); and PatentVest, Inc. (“PatentVest”), and has a majority-owned partner company, Invizyne Technologies, Inc. (“Invizyne”).
MDB Management is an “administrative” entity whose purpose is to conduct, and to consolidate wherever possible, to consolidate shared services and other resources, for our US-based operations.
Public Ventures is a U.S. registered broker-dealer under the Securities Exchange Act of 1934 and is a member of the Financial Industry Regulatory Authority (“FINRA”), the Depository Trust Company (“DTC”), and the National Securities Clearing Corporation (“NSCC”). Public Ventures is dual clearing, operating as a self-clearing firm and carrying accounts for its customers, and on a fully disclosed basis with a nonrelated FINRA member firm, Interactive Brokers, LLC (“Interactive Brokers”). Interactive Brokers serves as custodian of certain investments maintained by Public Ventures.
PatentVest is a wholly-owned subsidiary that performs intellectual property validation services for Public Ventures’, due diligence functions on the intellectual property of clients and prospective client companies, creates an intellectual property roadmap for client companies, and is also a law firm specializing in patent matters,
Invizyne was formed with the business objective of taking nature’s building blocks to make molecules of interest, effectively simplifying nature. Invizyne is a biology technology development company that is a majority-owned subsidiary. Invizyne’s technology is a differentiated and unique synthetic biology platform which is designed to enable the scalable exploration of a large number of molecules and properties found in nature.
Prior to January 14, 2022, Public Ventures owned the majority of interests in PatentVest and Invizyne. On January 14, 2022, Public Ventures distributed 100% of its equity interests in PatentVest and Invizyne to its members in proportion to their respective interests. On January 15, 2022, Public Ventures filed with the Internal Revenue Service to be treated as a corporation for federal income tax purposes. On January 16, 2022, the members of Public Ventures contributed their entire interests in the equity of Public Ventures, Invizyne and PatentVest to MDB, as result of which MDB became the new parent holding company. There was no effective change in the beneficial ownership of Public Ventures as a result of this transaction. On the same day as part of the reorganization, MDB established a management company subsidiary, MDB Management. These reorganization steps are collectively referred to as the “reorganization”. In connection with the reorganization, Class B common shares were issued in exchange for the members’ equity.
The reorganization was completed between entities that were under common control, and the assets contributed and liabilities assumed are recorded based on their historical carrying values. These unaudited condensed consolidated financial statements retroactively reflect the financial statements of the Company and Public Ventures on an unaudited condensed consolidated basis for the periods presented.
On January 16, 2022, the Company issued shares of Class A common shares for all the then non-controlling interests in PatentVest. PatentVest is now wholly owned by the Company.
On July 1, 2022, the Company made a cash distribution for $2,723,700 to the former members of Public Ventures in accordance with its private offering memorandum. This cash distribution was declared on January 16, 2022.
| 6 |
On June 8, 2022, MDB completed the first closing of a private placement, consisting of the sale of shares of Class A common shares at $per share, for gross proceeds of $25,179,660. On June 15, 2022, the Company completed the second closing of the private placement, consisting of the sale of an additional shares of Class A common shares, for gross proceeds of $110,000. Accordingly, the Company received total gross proceeds of $25,289,660 from the sale of shares of Class A common shares, or $24,746,142 net of $543,518 of offering expenses in conjunction with the private placement, the Company issued warrants to the placement agent to purchase 18,477 shares of Class A common shares, exercisable upon issuance for a period of 10 years at $13.00 per share, for a cash consideration of $/share. The placement agent’s warrants had a fair value of $106,940, as calculated pursuant to the Black-Scholes option-pricing model and were accounted for as issuance costs that were recorded against paid in capital. The warrants issued are accounted for as equity and recorded under paid in capital.
On September 20, 2023, MDB completed an initial public offering (IPO), consisting of the sale of shares of Class A common shares at $ per share, for gross proceeds of $19,999,992. Accordingly, the Company received total gross proceeds of $19,999,992 from the sale of shares of Class A common shares, or $17,444,659 net of $2,555,333 of offering expenses. In conjunction with the IPO, the Company issued warrants to the placement agent to purchase 16,667 shares of Class A common shares, exercisable upon issuance for a period of 5 years at $15.00 per share, for a cash consideration of $/share. The placement agent’s warrants had a fair value of $65,411, as calculated pursuant to the Black-Scholes option-pricing model and accounted for as issuance costs that were accounted for as equity instruments and recorded against paid in capital.
2. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and wholly-owned and majority owned subsidiaries. The accompanying unaudited condensed consolidated financial statements and related notes have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X. The consolidated balance sheet as of December 31, 2023, and related notes were derived from the audited consolidated financial statements but does not include all disclosures required by U.S. GAAP. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These unaudited condensed consolidated financial statements reflect, in the opinion of management, all material adjustments (which include normal recurring adjustments) necessary to fairly state, in all material respects, the Company’s financial position as of March 31, 2024, the results of operations for the three months ended March 31, 2024 and 2023 and its cash flows for the three months ended March 31, 2024 and 2023. The results of operations for the three months ended March 31, 2024 are not necessarily indicative of the operating results for the full year or any future period. The unaudited condensed consolidated financial information should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2023. All intercompany accounts and transactions have been eliminated in consolidation. Non-controlling interests at March 31, 2024 and 2023, relate to the interests of third parties in the majority owned subsidiaries.
The managing members of the Company have a controlling interest in PatentVest, S.A., a company organized and based in Nicaragua (which was renamed MDB Capital, S.A in 2022). As the Company does not have a controlling financial interest in this entity, and management has determined PatentVest, S.A. is not a variable interest entity and as such should not be consolidated as it has no ownership interests nor is a variable interest, so has excluded this entity from the Company’s unaudited condensed consolidated financial statements. It is the Company’s policy to reevaluate this conclusion on an annual basis or if there are significant changes in ownership.
Income Taxes
The Company is a limited liability company treated as a partnership for federal and state income tax purposes, with the exception of the state of Texas, in which income tax liabilities and/or benefits of the Company are passed through to its unitholders. Limited liability companies are subject to Texas margin tax. Additionally, the Company’s subsidiaries Public Ventures, MDB Management, PatentVest and Invizyne are Subchapter C-corporations subject to federal and state income taxes. As such, with the exception of the state of Texas and certain subsidiaries, the Company is not a taxable entity, it does not directly pay federal and state income taxes and recognition has not been given to federal and state income taxes for the operations of the Company.
| 7 |
Use of Estimates
The preparation of financial statements in conformity with 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 revenues and expenses during the reporting period, as well as the disclosure of contingent assets and liabilities. Some of those judgments can be subjective and complex, and therefore, actual results could differ materially from those estimates under different assumptions or conditions. Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable in relation to the financial statements taken as a whole under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Management regularly evaluates the key factors and assumptions used to develop the estimates utilizing currently available information, changes in facts and circumstances, historical experience and reasonable assumptions. After such evaluations, if deemed appropriate, those estimates are adjusted accordingly. Actual results could differ from those estimates. Significant estimates include those related to assumptions used in the valuation of investment securities, valuing equity instruments issued for services, stock-based compensation and the realization of any deferred tax assets.
Emerging Growth Company
The Company is an “emerging growth company,” or “EGC” as defined in Section 2(a) of the Securities Act of 1933, as amended, or the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and it may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies.
Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Securities Exchange Act of 1934, as amended, or the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. The Company has elected to opt out of the extended transition periods.
Cash and Cash Equivalents
The Company considers highly liquid investments with original maturities or remaining maturities upon purchase of three months or less to be cash equivalents.
The Company’s policy is to maintain its cash balances with financial institutions with high credit ratings and in accounts insured by the Federal Deposit Insurance Corporation (the “FDIC”) and/or by the Securities Investor Protection Corporation (the “SIPC”). The Company may periodically have cash balances in financial institutions in excess of the FDIC and SIPC insurance limits of $250,000 and $500,000, respectively.
The Company periodically reviews the financial condition of the financial institutions and assesses the credit risk of such investments. The Company did not experience any credit risk losses during the three-months ended March 31, 2024 and 2023.
Segregated Cash and Deposits
From time to time the Company provides deposits or enters into agreements that would require funds to be held in a segregated cash account. At March 31, 2024, the Company had $2,959,994 of segregated cash consisting of funds held in reserve for non-customers and customers. At December 31, 2023, the Company had $1,247,881 of segregated cash consisting of funds held in reserve for non-customers.
Clearing Deposits
The Company is obligated to maintain security deposits with the DTC and NSCC. At March 31, 2024, these deposits totaled $703,740.
| 8 |
Prepaid Expenses and Other Current Assets
The Company has prepaid and other expenses totaling $494,463 at March 31, 2024 consisting of acquired intangible assets totaling $43,500, prepaid professional fees totaling $50,000, security deposits totaling $47,380, various prepaid expense of $312,531, and other current assets of $41,052. Prepaid expenses and other assets totaling $523,788 at December 31, 2023 consisting of acquired intangible assets totaling $43,500, prepaid professional fees totaling $95,000, security deposits totaling $47,380, various prepaid expense of $325,777, and other assets of $12,131.
Leases
Leases of the Company consist primarily of contracts for the right to use and direct use of an individual property. Leases were analyzed for evidence of significant additional components and to determine if these components were separately identifiable within the context of the contract. As an accounting policy, to account for these components, the Company has elected the practical expedient for property leases that have both lease and non-lease components for them to be combined into a single component and account for as a lease. This policy is effective for all current and future property operating leases and applied uniformly and will be disclosed as such within the financial statements. Operating lease assets are included within right-of-use assets and the corresponding operating lease liabilities are included within liabilities on the Company’s unaudited condensed consolidated balance sheet as of March 31, 2024 and December 31, 2023.
The Company has elected not to present short-term leases on the consolidated balance sheet as these leases have a lease term of 12 months or less at lease inception and do not contain purchase options or renewal terms that the Company is reasonably certain to exercise. All other right-of-use assets and lease liabilities are recognized based on the present value of lease payments over the lease term at the lease commencement date. Because the Company’s leases do not provide an implicit rate of return, the Company used the Company’s incremental borrowing rate based on the information available at lease commencement date in determining the present value of lease payments.
Stock-based compensation primarily consists of restricted stock units with service or market/performance conditions and stock options. The MDB and Invizyne issues restricted stock units are measured at the fair market value of the underlying stock at the grant date. The Company recognize stock compensation expense using the straight-line attribution method over the requisite service period for the restricted stock units. The Company’s subsidiary issued stock-option and the fair value is determined utilizing Black-Scholes options-pricing model. The Company account for forfeitures as they occur, rather than applying an estimated forfeiture rate. For performance-based restricted stock units, the compensation cost is recognized based on the number of units expected to vest upon the achievement of the performance conditions. Shares are issued on the vesting dates net of the applicable statutory tax withholding to be paid by us on behalf of our employees. As a result, fewer shares are issued to the employee than the number of awards outstanding. The Company record a liability for the tax withholding to be paid by us as a reduction to additional paid-in capital.
Investment Securities
The Company strategically invests funds in U.S. Treasury Bills, early-stage technology companies, and equity securities and options of publicly traded and privately held companies. The Company classifies investment securities as investment securities, at amortized cost, investment securities, at fair value, or investment securities, at cost less impairment.
Investment securities, at amortized cost – This is comprised of debt securities held by MDB and are classified as investment securities held-to-maturity and carried at amortized cost if management has the positive intent and ability to hold the securities to maturity. These securities were originally recorded at fair value and are subsequently measured at amortized cost, adjusted for unamortized purchase premiums and discounts, and an allowance for credit losses. Premiums and discounts are amortized or accreted over the life of the related security as an adjustment to yield using the effective-interest method. Such amortization and accretion are included in the interest income in the statements of operations. Interest income is recognized when earned. The Company recognizes estimated expected credit losses over the life of the investment security through the allowance for credit losses account. The allowance for credit losses is a valuation account that is deducted from, or added to, the amortized cost basis of the investment security to present the net amount expected to be collected. In determining expected credit losses, the Company considers relevant qualitative factors including, but not limited to, term and structure of the instrument, credit rating by rating agencies and historic credit losses adjusted for current conditions and reasonable and supportable forecasts. The Company currently only holds investments securities, at amortized cost in U.S. Treasury Bills, so there are no expected credit losses. Declines in fair value of these securities is due to changes in market interest rates, and because we expect to hold these securities until maturity, we do not expect to realize any losses.
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Investment securities, at fair value – This is comprised of equity investments held by the broker dealer subsidiary and are reported at fair value with changes in fair value recognized in the statements of operations. Purchases and sales of equity securities, consisting of common stock and warrants to purchase common stock, are recorded based on the respective market price quotations on the trade date. Realized gains and losses on investments represent the net gains and losses on investments sold during the period based on the average cost method. Changes in fair value of investments are recorded on the unaudited condensed consolidated statements of operations as unrealized gains and losses.
Investment securities, at cost less impairment – This is comprised of equity securities and a simple agreement on future equities without a readily determinable fair value held by the broker dealer subsidiary, the Company has elected to apply the measurement alternative of cost minus impairment, if any, plus or minus changes resulting from observable price changes. The Company will reassess whether such an investment qualifies for the measurement alternative at each reporting period. In evaluating an investment for impairment or observable price changes, we will use inputs including recent financing events, as well as other available information regarding the investee’s historical and forecasted performance. The Company has assessed this investment and no impairment is warranted.
Investment securities are as follows:
Schedule of Investment Securities
March 31, 2024 | December 31, 2023 | |||||||
| Investment securities, at amortized cost: | ||||||||
| U.S Treasury Bills | $ | 21,381,362 | $ | 24,658,611 | ||||
| Investment securities, at amortized cost | $ | 21,381,362 | $ | 24,658,611 | ||||
Broker/Dealer Securities
Schedule of Investment Securities Broker Dealer
March 31, 2024 | December 31, 2023 | |||||||
| Investment securities, at fair value: | ||||||||
| Common stock of publicly traded companies | $ | 2,389,011 | $ | 2,603,579 | ||||
| Warrants of publicly traded companies | 2,610,226 | 3,168,055 | ||||||
| Investment securities, at fair value | $ | 4,999,237 | $ | 5,771,634 | ||||
Non-Broker/Dealer Securities
Schedule of Investment Securities Non Broker Dealer
March 31, 2024 | December 31, 2023 | |||||||
| Investment securities, at cost less impairment | ||||||||
| Simple agreement on future equities (not market listed) | $ | 200,000 | $ | 200,000 | ||||
| Investment securities, at cost less impairment | $ | 200,000 | $ | 200,000 | ||||
For investment securities at fair value, net unrealized loss of $747,268 and net unrealized gain of $54,779 were recognized in the statements of operations for three-months ended March 31, 2024 and 2023, respectively.
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The amortized cost, excluding gross unrealized holding loss and fair value of held to maturity securities on March 31, 2024 and December 31, 2023 are as follows:
Schedule of Amortized Cost, Unrealized Holding Loss and Fair Value of Held to Maturity Securities
Amortized Cost as of March 31, 2024 | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value (Level 1) as of March 31, 2024 | |||||||||||||
| U.S Treasury Bills maturing 04/04/24, 04/18/24, 04/23/24 and 6/11/24 | $ | 21,381,362 | $ | 1,035 | $ | - | $ | 21,382,397 | ||||||||
| Total assets | $ | 21,381,362 | $ | 1,035 | $ | - | $ | 21,382,397 | ||||||||
Amortized Cost as of December 31, 2023 | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value (Level 1) as of December 31, 2023 | |||||||||||||
| U.S Treasury Bills maturing 02/13/24, 04/04/24, 04/18/24 and 04/23/24 | $ | 24,658,611 | $ | 6,031 | $ | - | $ | 24,664,642 | ||||||||
| Total assets | $ | 24,658,611 | $ | 6,031 | $ | - | $ | 24,664,642 | ||||||||
Fair Value of Financial Instruments
Fair value is defined 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. Assets and liabilities measured at fair value are categorized based on whether the inputs are observable in the market and the degree that the inputs are observable. The categorization of financial assets and liabilities within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. There is no significant concentration of credit risk, due to the majority of assets being invested in U.S. Treasury Bills.
The Company determines the fair value of its financial instruments based on a fair value hierarchy that prioritizes inputs to valuation techniques used to measure fair value into three levels:
Level 1–- Observable inputs such as quoted prices in active markets for an identical asset or liability that the Company has the ability to access as of the measurement date.
Level 2–- Inputs, other than quoted prices included within Level 1, which are directly observable for the asset or liability or indirectly observable through corroboration with observable market data.
Level 3–- Unobservable inputs in which there is little or no market data for the asset or liability which requires the reporting entity to develop its own assumptions.
The Company’s financial instruments primarily consist of cash and investment securities. As of the unaudited condensed consolidated balance sheets date, certain investment securities are required to be recorded at fair value with the change in fair value during the period being recorded as an unrealized gain or loss. As of March 31, 2024 and December 31, 2023, the estimated fair values of investment securities, at amortized cost were not materially different from their carrying values as presented on the unaudited condensed consolidated balance sheets. This is primarily attributed to the short-term maturities of these instruments.
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Investment securities, at amortized cost: The fair value of U.S. Treasury Bills classified as held-to-maturity investment securities is based on the market price and is classified as level 1 of the fair value hierarchy.
A description of the valuation techniques applied to the Company’s major categories of assets and liabilities measured at fair value on a recurring basis is as follows:
Investment securities: Public equity securities are assessed for valuation at the close of each month. Warrants are valued using the Black-Scholes model, which considers the stock price at the date of the valuation, the warrants strike price, the term to expiry, the risk-free rate of return, and the expected volatility of the underlying stock.
Investment securities, at cost less impairment: Non-public equity securities and simple agreements for future equity are valued based on the initial investment, less impairment. The Company determined that no impairment was warranted. Since these securities are not actively traded, we will apply valuation adjustments when they become available, and they are categorized in level 3 of the fair value hierarchy.
The following table sets forth the fair value of the Company’s financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2024 except for the Level 3 investment that is recorded at cost:
Schedule of Fair Value of Financial Assets and Liabilities Measured at Fair Value On a Recurring Basis
| Assets | Classification | Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Investment Securities (held by our licensed broker dealer) | Equity securities–- common stock | $ | 2,389,011 | $ | - | $ | - | $ | 2,389,011 | |||||||||
| Investment Securities (held by our licensed broker dealer) | Warrants | - | 17,680 | 2,592,546 | 2,610,226 | |||||||||||||
| Total assets measured at fair value (held by our licensed broker dealer) | $ | 2,389,011 | $ | 17,680 | $ | 2,592,546 | $ | 4,999,237 | ||||||||||
During the three months ended March 31, 2024, the Company did not have any transfers between Level 1, Level 2, or Level 3 of the fair value hierarchy.
Reconciliation of fair value measurements categorized within Level 3 of the fair value hierarchy:
Schedule of Reconciliation of Fair Value Measurements Within Level 3 of Fair Value Hierarchy
| December 31, 2023 | $ | 3,133,458 | ||
| Receipt from investment banking fees | - | |||
| Realized gains | - | |||
| Unrealized losses | (540,912 | ) | ||
| Sales or distribution | ||||
| Purchases | - | |||
| March 31, 2024 | $ | 2,592,546 | ||
| Ending Balance | $ | 2,592,546 |
The following table presents information about significant unobservable inputs related to material components of Level 3 warrants as of March 31, 2024.
Schedule of Significant Unobservable Inputs Related to Material Components of Level 3 Warrants
| Assets | Fair Value | Valuation Techniques | Significant Unobservable Inputs | Range of Inputs | Weighted-Average | |||||||||||
| Warrants | $ | 2,592,546 | Black Scholes | Volatility | 96.26 -106.28 | % | 99.60 | % | ||||||||
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The following table sets forth the fair value of the Company’s financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2023, except for the Level 3 investment that is recorded at cost:
| Assets | Classification | Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Investment Securities (held by our licensed broker dealer) | Equity securities - common stock | $ | 2,603,579 | $ | - | $ | - | $ | 2,603,579 | |||||||||
| Investment Securities (held by our licensed broker dealer) | Warrants | - | 34,597 | 3,133,458 | 3,168,055 | |||||||||||||
| Total assets measured at fair value (held by our licensed broker dealer) | $ | 2,603,579 | $ | 34,597 | $ | 3,133,458 | $ | 5,771,634 | ||||||||||
Reconciliation of fair value measurements categorized within Level 3 of the fair value hierarchy:
| December 31, 2022 | $ | - | ||
| Beginning Balance | $ | - | ||
| Receipt from investment banking fees | 2,645,620 | |||
| Realized gains | - | |||
| Unrealized gains | 652,925 | |||
| Sales or distribution | (165,087 | ) | ||
| Purchases | - | |||
| December 31, 2023 | $ | 3,133,458 | ||
| Ending Balance | $ | 3,133,458 |
During the year ended December 31, 2023, the Company did not have any transfers between Level 1, Level 2, or Level 3 of the fair value hierarchy.
Secured Debt–- Revolving Credit Facility
The Company entered into a revolving credit facility with a bank, (the “Lender”) on July 26, 2023 for a commitment of up to $2,000,000 and which matures July 26, 2024. The loan has a variable interest rate equal to a defined index, currently the Lender’s rate on the sale of Federal Funds, plus 2.25%. The loan commenced with a calculated interest rate of 7.75%. If the Lender determines, in its sole discretion, that the index becomes unavailable or unreliable, either temporary, indefinitely, or permanently, during the term of this loan, the Lender may amend this loan by designating a substantially similar substitute index. The agreement provides for a quarterly payment of the greater of accrued interest or a non-usage fee of $5,000. The Company has not made any draw downs on the credit facility.
The Company granted the Lender a security interest in a cash checking account held at the bank as collateral. The Lender has a right of setoff available from this cash account when the line of credit is accessed. As of March 31, 2024, there is $2,037,845 deposited in this account.
The Company is responsible for the payment of all of the Lender’s legal and other fees incurred in connection with administering the loan. The Company has incurred no such costs or debt issue costs.
As of March 31, 2024, there is no outstanding indebtedness under the credit facility and interest expense totaled $0. The Company is in compliance with all covenants under the agreement.
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Property and Equipment
Property and equipment are recorded at cost. Major improvements are capitalized, while maintenance and repairs are charged to expense as incurred. Gains and losses from disposition of property and equipment are included in the statements of operations when realized. Depreciation is provided using the straight-line method over the following estimated useful lives:
Schedule of Estimated Useful Lives of Property and Equipment
| Laboratory equipment | 5 years | |
| Furniture and fixtures | 7 years | |
| Leasehold improvements | Lesser of the lease duration or the life of the improvements |
Property and equipment consist of the following as of March 31, 2024 and December 31, 2023, respectively:
Schedule of Property And Equipment
March 31, 2024 | December 31, 2023 | |||||||
| Laboratory equipment | $ | 1,030,004 | $ | 885,696 | ||||
| Furniture and fixtures | 54,338 | 49,838 | ||||||
| Developed software | 107,458 | 113,114 | ||||||
| Leasehold improvements | 279,161 | 279,161 | ||||||
| Total property and equipment | 1,470,961 | 1,327,809 | ||||||
| Less: Accumulated depreciation | (524,111 | ) | (461,319 | ) | ||||
| Property and equipment, net | $ | 946,850 | $ | 866,490 | ||||
Revenue
The Company generates revenue primarily from providing brokerage services and investment banking services through Public Ventures. PatentVest and Invizyne have had limited financial activity during the three-months ended March 31, 2024 and 2023, respectively.
Brokerage revenues consist of (a) trade-based commission income from executed trade orders, (ii) net realized gains and losses from proprietary trades, and (iii) other income consisting primarily of stock loan income earned on customer accounts. Public Ventures recognizes revenue from trade-based commissions and other income when performance obligations are satisfied through the transfer of control, as specified in the contract, of promised services to the customers of Public Ventures. Commissions are recognized on a trade date basis. Public Ventures believes that each executed trade order represents a single performance obligation that is fulfilled on the trade date because that is when the underlying financial instrument is identified, the pricing is agreed upon, and the risks and rewards of ownership have been transferred to/from the customer. When another party is involved in transferring a good or service to a customer, Public Ventures assesses whether revenue is presented based on the gross consideration received from customers (principal) or net of amounts paid to a third party (agent). Public Ventures has determined that it is acting as the principal as the provider of the brokerage services and therefore records this revenue on a gross basis. Clearing, custody and trade administration fees incurred are recorded effective as of the trade date. The costs are treated as fulfillment costs and are recorded in operating expenses in the unaudited condensed consolidated statements of operations.
Brokerage revenue is measured by the transaction price, which is defined as the amount of consideration that Public Ventures expects to receive in exchange for services to customers. The transaction price is adjusted for estimates of known or expected variable consideration based upon the individual contract terms. Variable consideration is recorded as a reduction to revenue based on amounts that Public Ventures expects to refund back to the customer. There were no variable considerations for the three-months ended March 31, 2024, and 2023, respectively.
Investment banking revenues consist of private placement fees. Public Ventures does not incur costs to obtain contracts with customers that are eligible for deferral or receive fees prior to recognizing revenue related to investment banking transactions, and therefore, as of March 31, 2024, the Company did not have any contract assets or liabilities related to these revenues on its unaudited condensed consolidated balance sheets.
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Private placement fees are related to non-underwritten transactions such as private placements of equity securities, private investments in public equity, and Rule 144A private offerings and are recorded on the closing date of the transaction. Client reimbursements for costs associated for private placement fees are recorded gross within investment banking and various expense captions, excluding compensation. The Company typically receives payments on private placements transactions at the completion of the contract. The Company views the majority of placement fees as a single performance obligation that is satisfied when the transaction is complete, and the revenue is recognized at that point in time.
Taxes and regulatory fees assessed by a government authority or agency that are both imposed on and concurrent with a specified revenue-producing transaction, which are collected by Public Ventures from a customer, are excluded from revenue and recorded against general and administrative expenses.
PatentVest recognize revenue when performance obligations are satisfied by transferring promised goods and services to customers in an amount the Company expects to receive in exchange for those goods or services. PatentVest enters into contracts that can include various combinations of its offerings which are generally capable of being distinct and accounted for as a separate performance obligation for the entre contract or a portion of the contract. When performance obligations are combined into a single contract, PatentVest utilize stand-alone selling price to allocate the transaction price among the performance obligations.
Certain contracts or portions of contracts are duration-based which, in the event of customer cancellation, provide PatentVest with an enforceable right to a proportional payment for the portion of the services provided. Accordingly, revenue from duration-based is recognized using a time-based measure of progress, which PatentVest believes best depicts how it satisfies its performance obligations in these arrangements as control is continuously transferred throughout the contract period. Revenue from certain contracts is recognized over the expected period of performance using a single measure of progress, typically based on hours incurred. Payments received in advance of services being rendered are recorded as a component of contract liabilities.
Patent Vest’s contract liabilities which is presented as deferred revenue, consist of advance payments. The table below shows changes in deferred revenue:
Schedule of Changes in Deferred Revenue
| Balance as of December 31, 2022 | $ | - | ||
| Amounts billed but not recognized | - | |||
| Revenue recognized | - | |||
| Balance as of March 31, 2023 | - | |||
| Amounts billed but not recognized | 100,000 | |||
| Revenue recognized | 80,000 | |||
| Balance as of December 31, 2023 | 20,000 | |||
| Amounts billed but not recognized | - | |||
| Revenue recognized | - | |||
| Balance as of March 31, 2024 | $ | 20,000 |
During the three-months ended March 31, 2023, the Company’s technology development segment revenue, which was derived from a single feasibility study, which is not a typical service offered by the Company. The revenue generated from this study represents a direct reimbursement of costs incurred in completing the study.
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Research Grants
Invizyne receives grant reimbursements, which are offset against research and development expenses in the unaudited condensed consolidated statements of operations. In addition to actual reimbursements, Invizyne also receives indirect expense grants (which are not reimbursement-based) and fees (typically of minor significance). It is important to note that there may be instances where the grants received for indirect costs exceed the actual costs, resulting in a negative impact. For capitalized assets, grant reimbursements are recognized over the useful life of the assets. Any portion of the grant not yet recognized is recorded as deferred grant reimbursements and included as a liability in the unaudited condensed consolidated balance sheet.
Grants that operate on a reimbursement basis are recognized on the accrual basis and are offsets to expenses to the extent of disbursements and commitments that are reimbursable for allowable expenses incurred as of March 31, 2024 and 2023, and respectively, expected to be received from funding sources in the subsequent year. Management considers such receivables at March 31, 2024 and 2023, respectively, to be fully collectable due to the historical experience with the Federal Government of the United States of America. Accordingly, no allowance for credit losses on the grants receivable was recorded in the accompanying unaudited condensed consolidated financial statements.
Summary of grants receivable activity for the three-months ended March 31, 2024 and 2023, is presented below:
Summary of Grants Receivable Activity
| 2024 | 2023 | |||||||
| Balance at beginning of period | $ | 882,319 | $ | 809,532 | ||||
| Grant costs expensed | 674,158 | 766,867 | ||||||
| Grants for equipment purchased | 6,379 | - | ||||||
| Grant fees | 28,163 | 26,673 | ||||||
| Grant funds received | (479,408 | ) | (590,418 | ) | ||||
| Balance at end of period | $ | 1,111,611 | $ | 1,012,654 | ||||
Invizyne has received five grants provided by National Institute of Health and the Department of Energy. The first grant was awarded on October 1, 2019 and the latest grant is set to expire on August 31, 2024, however grants can be extended or new phases can be granted, extending the expiration of the grant. None of the grants has commitments made by the parties, provisions for recapture, or any other contingencies, beyond the complying with the normal terms of each research and development grant. Research grants received from organizations are subject to the contract agreement as to how Invizyne conducts its research activities, and Invizyne is required to comply with the agreement terms relating to those grants. Amounts received under research grants are nonrefundable, regardless of the success of the underlying research project, to the extent that such amounts are expended in accordance with the approved grant project. Invizyne is permitted to draw down the research grants after incurring the related expenses. Amounts received under research grants are offset against the related research and development costs in the unaudited condensed consolidated statements of operations. For the three-months ended March 31, 2024 and 2023, respectively, grants amounting to $674,158 and $766,867 were offset against the research and development costs. Grant drawdowns, which includes grants costs expensed, grants for equipment purchased, and grant fees, for the three-months ended March 31, 2024 and 2023, respectively, totaled $708,700 and $793,540.
Research and Development Costs
Research and development costs are expensed as incurred. Research and development costs consist primarily of compensation costs, fees paid to consultants, and other expenses relating to the development of Invizyne’s technology. For the three-months ended March 31, 2024 and 2023, research and development costs prior to offset of the grants amounted to $986,282, and $825,132, respectively, which includes grant costs expensed, grants fees, and research and development costs, net of the grant received.
Patent and Licensing Legal and Filing Fees and Costs
Due to the significant uncertainty associated with the successful development of one or more commercially viable products based on the research efforts and related patent applications, all patent and licensing legal and filing fees and costs related to the development and protection of its intellectual property are charged to operations as incurred.
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Patent and licensing legal and filing fees and costs were $73,297 and $34,420 for the three-months ended March 31, 2024 and 2023, respectively. Patent and licensing legal and filing fees and costs are included in general and administrative costs in the unaudited condensed consolidated statements of operations.
3. Segment Reporting
In its operation of the business, management, including the Company’s chief operating decision maker, who is also the Company’s Chief Executive Officer, reviews certain financial information, including segmented statements of operations and the balance sheets.
The Company currently operates in two reportable segments: in the broker dealer and intellectual property service segment as well as in the technology development segment.
The broker dealer and intellectual property service segment currently has two subsidiaries, Public Ventures and PatentVest. Public Ventures is a full-service broker dealer firm focusing on conducting private and public securities offerings. PatentVest offers in-depth patent research used for investment banking due diligence.
The technology development segment currently has one subsidiary, Invizyne. Invizyne is a research and development stage company synthetic biology company.
Non-income generating subsidiaries for management of the business, including MDB CG Management Company, Inc. are reported as other.
The segments are based on the discrete financial information reviewed by the Chief Executive Officer to make resource allocation decisions and to evaluate performance. The reportable segments are each managed separately because they will provide a distinct product or provide services with different processes. All reported segment revenues are derived from external customers.
The accounting policies of the Company’s reportable segments are in consideration of ASC 280 and the same as those described in the summary of significant accounting policies (see Note 2).
The following sets forth the long-lived assets and total assets by segment at March 31, 2024:
Schedule of Long-lived Assets and Total Assets by Segment
| ASSETS | Broker Dealer & Intellectual Property Service | Technology Development | Other | Eliminations | Consolidated | |||||||||||||||
| Long-lived assets | $ | 107,458 | $ | 2,367,496 | $ | 707,455 | $ | - | $ | 3,182,409 | ||||||||||
| Total assets | $ | 16,301,072 | $ | 4,005,204 | $ | 20,633,600 | $ | - | $ | 40,939,876 | ||||||||||
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The following sets forth statements of operations by segment for the three-months March 31, 2024:
Schedule of Statement of Operation by Segment
| Broker Dealer & Intellectual Property Service | Technology Development | Other | Eliminations | Consolidated | ||||||||||||||||
| Operating income: | ||||||||||||||||||||
| Unrealized gain on investment securities, net (from our licensed broker dealer) | $ | (747,268) | $ | - | $ | - | $ | - | $ | (747,268) | ||||||||||
| Other operating income | 86,879 | - | - | - | 86,879 | |||||||||||||||
| Total operating income, net | (660,389) | - | - | - | (660,389) | |||||||||||||||
| Operating costs: | ||||||||||||||||||||
| General and administrative costs: | ||||||||||||||||||||
| Compensation | 679,907 | 390,043 | 3,822,725 | - | 4,892,675 | |||||||||||||||
| Operating expense, related party | 243,876 | - | 76,416 | - | 320,292 | |||||||||||||||
| Professional fees | 145,907 | 256,563 | 516,619 | - | 919,089 | |||||||||||||||
| Information technology | 180,914 | 3,891 | 21,186 | - | 205,991 | |||||||||||||||
| Clearing and other charges | 2,036 | - | - | - | 2,036 | |||||||||||||||
| General and administrative-other | 218,936 | 80,378 | 369,812 | - | 669,126 | |||||||||||||||
General and administrative costs | 1,471,576 | 730,875 | 4,806,758 | - | 7,009,209 | |||||||||||||||
| Research and development costs | - | 277,582 | - | - | 277,582 | |||||||||||||||
| Total operating costs | 1,471,576 | 1,008,457 | 4,806,758 | - | 7,286,791 | |||||||||||||||
| Net operating income (loss) | (2,131,965 | ) | (1,008,457 | ) | (4,806,758 | ) | - | (7,947,180 | ) | |||||||||||
| Other income and expense: | ||||||||||||||||||||
| Less: interest expense | 110,625 | - | - | 110,625 | - | |||||||||||||||
| Interest income | 52,459 | - | 285,393 | - | 337,852 | |||||||||||||||
Income (loss) before income taxes | (2,190,131 | ) | (1,008,457 | ) | (4,521,365 | ) | 110,625 | (7,609,328 | ) | |||||||||||
Income tax expense | - | - | - | - | - | |||||||||||||||
Net income (loss) | (2,190,131 | ) | (1,008,457 | ) | (4,521,365 | ) | 110,625 | (7,609,328 | ) | |||||||||||
| Less net loss attributable to non-controlling interests | - | (393,903 | ) | - | - | (393,903 | ) | |||||||||||||
| Net loss attributable to MDB Capital Holdings, LLC | $ | (2,190,131 | ) | $ | (614,554 | ) | $ | (4,521,365 | ) | $ | 110,625 | $ | (7,215,425 | ) | ||||||
The following sets forth the long-lived assets and total assets by segment at December 31, 2023:
| ASSETS | Broker Dealer & Intellectual Property Service | Technology Development | Other | Consolidated | ||||||||||||
| Long-lived assets | $ | 113,114 | $ | 2,344,895 | $ | 728,600 | $ | 3,186,609 | ||||||||
| Total assets | $ | 15,038,602 | $ | 3,558,509 | $ | 24,388,168 | $ | 42,985,279 | ||||||||
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The following sets forth statements of operations by segment for the three-months ended March 31, 2023:
| Broker Dealer & Intellectual Property Service | Technology Development | Other | Consolidated | |||||||||||||
| Operating income: | ||||||||||||||||
| Unrealized gain on investment securities, net (from our licensed broker dealer) (Notes 1 and 2) | $ | 54,779 | $ | - | $ | - | $ | 54,779 | ||||||||
| Other operating income | 3,053 | 59,159 | - | 62,212 | ||||||||||||
| Total operating income, net | 57,832 | 59,159 | - | 116,991 | ||||||||||||
| Operating costs: | ||||||||||||||||
| General and administrative costs: | ||||||||||||||||
| Compensation | 546,801 | 31,536 | 293,690 | 872,027 | ||||||||||||
| Operating expense, related party | 258,453 | - | 43,249 | 301,702 | ||||||||||||
| Professional fees | 165,812 | 181,707 | 257,143 | 604,662 | ||||||||||||
| Information technology | 121,876 | 9,826 | 15,705 | 147,407 | ||||||||||||
| Clearing and other charges | 10,754 | - | - | 10,754 | ||||||||||||
| General and administrative-other | 108,993 | 45,734 | 149,352 | 304,079 | ||||||||||||
| General and administrative costs | 1,212,689 | 268,803 | 759,139 | 2,240,631 | ||||||||||||
| Research and development costs | - | 31,592 | - | 31,592 | ||||||||||||
| Total operating costs | 1,212,689 | 300,395 | 759,139 | 2,272,223 | ||||||||||||
| Net operating loss | (1,154,857 | ) | (241,236 | ) | (759,139 | ) | (2,155,232 | ) | ||||||||
| Other income: | ||||||||||||||||
| Interest income | 28,362 | 86 | 158,843 | 187,291 | ||||||||||||
| Loss before income taxes | (1,126,495 | ) | (241,150 | ) | (600,296 | ) | (1,967,941 | ) | ||||||||
| Income (loss) before income taxes | (1,126,495 | ) | (241,150 | ) | (600,296 | ) | (1,967,941 | ) | ||||||||
| Income tax expense | - | - | - | - | ||||||||||||
| Net loss | (1,126,495 | ) | (241,150 | ) | (600,296 | ) | (1,967,941 | ) | ||||||||
| Less net loss attributable to non-controlling interests | - | (94,193 | ) | - | (94,193 | ) | ||||||||||
| Net loss attributable to MDB Capital Holdings, LLC | $ | (1,126,495 | ) | $ | (146,957 | ) | $ | (600,296 | ) | $ | (1,873,748 | ) | ||||
4. Equity and Non-Controlling Interests
Equity
Preferred shares – shares authorized, shares issued and outstanding. The board of directors may designate preferred shares to be issued, and may rank preferred shares as junior to, on parity with or senior to other preferred shares (in each case, with respect to distributions or other payments in respect of shares). Since the board of directors may set all the terms of any class of preferred shares, these are considered “blank check” preferred shares. Currently the board has not defined dividend and liquidation preference, participation rights, call prices and dates, sinking-fund requirements, or terms that may change the conversion or exercise price.
Class A common shares – shares authorized, shares issued and outstanding. These shares are common shares and have one vote per share. Currently there is not a defined dividend or liquidation preference.
Class B common shares – shares authorized, issued and outstanding. These shares are common shares and have five votes per share. Currently there is not a defined dividend or liquidation preference. These shares may be converted one to one for a Class A common shares at any time and from time to time, at the election of the holder.
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Non-Controlling Interests
During the three-months ended March 31, 2024, the ownership interest in Invizyne was 60.94% and the non-controlling interest was 39.06%. During the three-months ended March 31, 2023, the ownership interest in Invizyne was 60.94%, the non-controlling interest was 39.06%. Invizyne is accounted for the three-months ended March 31, 2024 and 2023, respectively, under the consolidation method.
The NCI ownership will be equal to the NCI percentage as of the reporting period. Therefore, there will be a redistribution of equity between MDB and the Non-controlling interest owner. As of March 31, 2024 and 2023, the Company’s equity interest in Invizyne was 60.94% and 60.94% respectively, and the remaining equity interest was owned by the non-controlling interests as presented below:
Schedule of Equity and Non-Controlling Interests
For the Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Invizyne net loss | $ | (1,008,457 | ) | $ | (241,150 | ) | ||
| Weighted average non-controlling percentage | 39.06 | % | 39.06 | % | ||||
| Net loss non-controlling interest | $ | (393,903 | ) | $ | (94,193 | ) | ||
| Prior period balance | 7,250 | 468,665 | ||||||
| Stock-based compensation | 142,810 | 54,126 | ||||||
| Ending period balance | $ | (243,843 | ) | $ | 428,598 | |||
If a change in the parent ownership in a subsidiary from an additional investment or from the issuance of stock-based compensation, a change of the non-controlling ownership is recognized based on the amount invested and the carrying amount of the non-controlling interest is adjusted to reflect the change in the non-controlling ownership in the subsidiary’s net assets.
MDB stock-based compensation
Between April 19, 2022 and September 21, 2022, the Company granted restricted stock units (“RSUs”). As these RSUs do not begin to vest until the completion of an initial public offering by the Company, which occurred on September 20, 2023, $ of stock-based compensation expense related to these RSUs was recorded for the three-months ended March 31, 2024. The total unrecognized compensation expense based on the shares price sold in the private placement is $.
On April 19, 2022 the Company granted restricted stock units (“RSUs”). As these RSUs do not begin to vest until the completion of an initial public offering by the Company, which occurred on September 20, 2023, $ of stock-based compensation expense related to these RSUs was recorded for the three-months ended March 31, 2024. The estimated unrecognized compensation expense for performance/market vesting RSUs is $.
Summary of Restricted Stock Unit, Time-Based and Performance-Based Activity
| Time-Based | Performance-Based | |||||||||||||||
| Number of Restricted Stock Units | Weighted Average Grant Date Fair Value | Number of Restricted Stock Units | Weighted Average Grant Date Fair Value | |||||||||||||
| Restricted stock units outstanding at March 31, 2023 | 3,675,000 | $ | 10.00 | 2,000,000 | $ | 7.91 | ||||||||||
| Granted | - | - | - | - | ||||||||||||
| Exercised | - | - | - | - | ||||||||||||
| Expired | - | - | - | - | ||||||||||||
| Restricted stock units outstanding at December 31, 2023 | 3,675,000 | $ | 10.00 | 2,000,000 | $ | 7.91 | ||||||||||
| Granted | - | - | - | - | ||||||||||||
| Exercised | - | - | - | - | ||||||||||||
| Expired | - | - | - | - | ||||||||||||
| Restricted stock units outstanding at March 31, 2024 | 3,675,000 | $ | 10.00 | 2,000,000 | $ | 7.91 | ||||||||||
| Restricted stock units at March 31, 2023 | - | $ | - | - | $ | - | ||||||||||
| Restricted stock units at March 31, 2024 | - | $ | - | - | $ | - | ||||||||||
Invizyne stock-based compensation
Invizyne’s 2020 Equity Incentive Plan (the “2020 Plan”), which was approved by the Invizyne shareholders, permits grants to its officers, directors, and employees for up to shares of Invizyne’s Common Stock. On May 1st, 2023 the board approved an increase of . The 2020 Plan authorizes the use of stock options, shares of restricted stock, and restricted stock units, among other forms of equity based awards.
On May 1, 2023, stock options to purchase shares of Common Stock were granted at an exercise price of $ per share, which was equal to the fair value of the Common Stock on the date of grant and are exercisable for a period of years. The stock options vest ratably over a period of years. The inputs used to determine the fair value was Common Stock price of $, option exercise price of $, expected life in years of years, with a contract life of years, risk-free rate of %, expected annual volatility of %, and annual rate of dividends of $.
On November 1, 2023, stock options to purchase shares of Common Stock were granted at an exercise price of $ per share, which was equal to the fair value of the Common Stock on the date of grant and are exercisable for a period of years. The stock options vest ratably over a period of years. The inputs used to determine the fair value was Common Stock price of $, option exercise price of $, expected life in years of years, with a contract life of years, risk-free rate of %, expected annual volatility of %, and annual rate of dividends of $.
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On February 1, 2024, stock options to purchase shares of Common Stock were granted at an exercise price of $per share, which was equal to the fair value of the Common Stock on the date of grant and are exercisable for a period of years. The stock options vest ratably over a period of years. The inputs used to determine the fair value was Common Stock price of $, option exercise price of $, expected life in years of years, with a contract life of years, risk-free rate of %, expected annual volatility of %, and annual rate of dividends of $.
As of March 31, 2024 stock options to purchase shares of Common Stock were vested, the weighted average exercise price is $, the aggregate intrinsic value is $, and the weighted average remaining contractual term is years. Invizyne stock-based compensation were $ and $ for the years ended March 31, 2024 and 2023. As of March 31, 2024, the unrecognized stock-based compensation is $.
Schedule of Stock Option Activity
| Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (in Years) | ||||||||||
| Stock options outstanding at January 1, 2023 | 1,067,356 | $ | 1.22 | |||||||||
| Granted | - | - | - | |||||||||
| Exercised | - | - | - | |||||||||
| Expired | - | - | - | |||||||||
| Stock options outstanding at March 31, 2023 | 1,067,356 | $ | 1.22 | |||||||||
| Granted | 1,018,012 | 1.66 | ||||||||||
| Exercised | - | - | - | |||||||||
| Expired | - | - | - | |||||||||
| Stock options outstanding at December 31, 2023 | 2,085,368 | $ | 1.43 | |||||||||
| Granted | 311,636 | 1.66 | ||||||||||
| Exercised | - | - | - | |||||||||
| Expired | - | - | - | |||||||||
| Stock options outstanding at March 31, 2024 | 2,397,004 | 1.46 | ||||||||||
| Stock options exercisable at March 31, 2023 | 462,518 | $ | 1.22 | |||||||||
| Stock options exercisable at March 31, 2024 | 695,035 | $ | 1.46 | |||||||||
On March 28, 2022, Invizyne granted restricted stock units (“RSUs”) at a value of $ per share. These RSUs were issued in 2021 in lieu of cash bonuses. As these RSUs do not vest until the expiration of any lock up subsequent to an initial public offering of the Company, or upon the change of control of the Company by Invizyne, which is outside of the control of the Company, no compensation expense related to these RSUs has been recorded. These RSUs fully vest upon the expiration of any lockup period subsequent to an initial public offering, or upon the change of control of Invizyne. The Company will record stock-based compensation for these RSUs when the RSUs begin to vest, and the unrecognized stock-based compensation is $.
On May 1, 2023, Invizyne granted restricted stock units (“RSUs”) at a value of $per share. These RSUs were issued in 2023 in lieu of cash bonuses. As these RSUs do not vest until the expiration of any lock up subsequent to an initial public offering of the Company, or upon the change of control of the Company by Invizyne, which is outside of the control of the Company, no compensation expense related to these RSUs has been recorded. These RSUs fully vest upon the expiration of any lockup period subsequent to an initial public offering, or upon the change of control of Invizyne. The Company will record stock-based compensation for these RSUs when the RSUs begin to vest, and the unrecognized stock-based compensation is $.
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The Company’s computation of earnings (loss) per share (“EPS”) includes basic and diluted EPS. Basic EPS is measured as the income (loss) attributable to common stockholders divided by the weighted average common shares outstanding for the period. Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., preferred shares, warrants and stock options) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS.
Loss per common share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the respective periods. Basic and diluted loss per common share was the same for all periods presented because warrants outstanding were anti-dilutive, for a total of shares.
Earnings (loss) per share is presented below for the three months ended March 31, 2024 and 2023, respectively.
Schedule of Basic and Fully Diluted
| For the Three Months Ended | ||||||||||||||||
| March 31, 2024 | March 31, 2023 | |||||||||||||||
| Class A common shares | Class B common shares | Class A common shares | Class B common shares | |||||||||||||
| Net loss attributable to MDB Capital Holdings, LLC | $ | (3,334,431 | ) | $ | (3,881,084 | ) | $ | (645,700 | ) | $ | (1,228,048 | ) | ||||
| Weighted average shares outstanding – basic and diluted | ||||||||||||||||
| Net loss per share – basic and diluted | $ | ) | $ | ) | $ | ) | $ | ) | ||||||||
Class A common shares and Class B common stock are equal for ownership, Class B shares have five times the voting rights of Class A shares and Class B shares can be exchanged on a one-to-one basis for purposes of sale.
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7. Related Party Transactions
The principal members of the Company have a controlling interest in MDB Capital, S.A., a company organized and based in Nicaragua that provides outsourced services to the Company and other non-related entities. During the three months ended March 31, 2024 and 2023, the Company paid $320,792 and $301,702, respectively, which is inclusive of expenses and fees, for contracted labor, recorded against general and administrative expenses.
During the three-months ended March 31, 2024, PatentVest, a 100% entity owned by MDB Capital Holdings, LLC, engaged in transactions with ENDRA Life Sciences Inc, a company for which two of our executive officers serve as board members, being Anthony DiGiandomenico, our Chief of Transactions, and Lou Basenese, President of Public Ventures. For the year ended December 31, 2023, there were no revenue recognized between MDB Capital entities and ENDRA. However, costs incurred amounting to $80,995 related to transactions with ENDRA have been deferred.
8. Commitments and Contingencies
Legal Claims
The Company may be subject to legal claims and actions from time to time as part of its business activities. As of March 31, 2024 and 2023, the Company was not subject to any pending or threatened legal claims or actions.
External Risks Associated with the Company’s Business Activities
Net Capital Requirement (Public Ventures)
Public Ventures is subject to the uniform net capital rule (SEC Rule 15c3-1) of the Securities and Exchange Commission (the “SEC”), which requires both the maintenance of minimum net capital and the maintenance of maximum ratio of aggregate indebtedness to net capital. At March 31, 2024 and 2023, Public Ventures had net capital of $6,285,959 and $2,534,695, respectively, which was $6,035,959 and $2,284,695 in excess of the minimum $250,000, as required by the Securities and Exchange Commission Rule 15c3-1.
At March 31, 2024, the Company’s ratio of aggregate indebtedness of $6,175,623 to net capital was 0.98 to 1, as compared to the maximum of a 15 to 1 allowable ratio of a broker dealer. Minimum net capital is based upon the greater of the statutory minimum net capital of $250,000 or 2% of customer debts, which was calculated as $0 at March 31, 2024.
The requirement to comply with the Uniform Net Capital Rule 15c3-1 may limit Public Ventures’ ability to issue dividends to its parent company.
Indemnification Provisions
Public Ventures has agreed to indemnify its clearing broker for losses that the clearing broker may sustain from the accounts of customers. Should a customer not fulfill its obligation on a transaction, Public Ventures may be required to buy or sell securities at prevailing market prices in the future on behalf of its customer. The indemnification obligations of Public Ventures to its clearing broker have no maximum amount. All unsettled trades at March 31, 2024 and 2023 have subsequently settled with no resulting material liability to Public Ventures, LLC. For the three-months ended March 31, 2024 and 2023, Public Ventures had no material loss due to counterparty failure and had no obligations outstanding under the indemnification arrangement as of March 31, 2024 and 2023.
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Invizyne Funding Requirements
The Company entered into a funding agreement (the “Funding Agreement”) on April 17, 2019 to purchase shares in Invizyne up to a maximum of $5,000,000 at a pre-determined purchase price, subject to continuing financial covenants being met. The Funding Agreement was completed in July 2022. Under the Funding Agreement the Company was issued warrants to purchase 197,628 shares of Invizyne common stock, which are fully vested These warrants are eliminated in consolidation.
9. Employee Benefit Plans
MDB Management and Invizyne both sponsored individual 401(k) defined contribution plans for the benefit of each company’s eligible employees. The plans allow eligible employees to contribute a portion of their annual compensation, not to exceed annual limits established by the Department of Treasury. Invizyne makes matching contributions for participating employees up to a certain percentage of the employee contributions; matching contributions were funded for the three-months ended March 31, 2024 and 2023. Benefits under the Invizyne plan were available to all employees, and employees become fully vested in the employer contribution upon receipt. For the three-months ended March 31, 2024 and 2023, a total of $189,365 and $163,027, respectively, was contributed to the plans. The majority of the expense was included in general and administrative cost, however for any research and development employees their portion of the expense is recorded in research and development costs.
MDB Management and Invizyne also provide health and related benefit plans for eligible employees.
10. Exclusive License Agreement (Invizyne)
On April 19, 2019, Invizyne entered into a license agreement (the “License Agreement”) with The Regents of the University of California (“The Regents”) for patent rights and associated technology relating to the biosynthetic platform being developed by the Company. Certain individuals named as inventors of the Patent are also the founding stockholders of Invizyne. One of the founders of Invizyne was the head of the laboratory which was used in the research development of the patents and associated technology subject to the agreement with The Regents.
Under the License Agreement, Invizyne holds an exclusive license of the patent rights and a non-exclusive license for the associated technology to make, have made, use, have used, sell, have sold, offer for sale, and import licensed products in the field of use. Under the License Agreement, Invizyne paid an initial license fee and is to pay an annual license fee and royalties on net sales, a minimum annual royalty that is credited against the royalties on net sales, and a percentage of any sublicensing income. The net income royalty commences after the first commercial sale of a licensed product. At March 31, 2024 and 2023, there were no accrued royalties recorded.
Under the License Agreement, Invizyne is required to achieve certain development milestones. Invizyne is obligated to make payments upon achievement of certain sales thresholds, as defined in the License Agreement.
As of March 31, 2024 and 2023, the development milestones have been met.
The following net sales milestone payments have not yet been incurred. The net sales milestones do not have a deadline and are listed below as of March 31, 2024.
| ● | A payment of $250,000 when a licensed product reaches $1,000,000 in cumulative net sales. | |
| ● | A payment of $350,000 when a second licensed product reaches $ 2,000,000 in cumulative net sales. |
If Invizyne breaches the terms of the License Agreement, The Regents may terminate the License Agreement.
Invizyne may terminate the License Agreement, in whole or in part as to a particular patent right, at any time by providing notice of termination to The Regents as defined in the License Agreement.
Under the License Agreement, the Company issued shares of common stock equity representing four percent of its shares as initial consideration. The Company agreed to issue additional shares of common stock to The Regents so that The Regents own no less than four percent of all outstanding common shares of the Company until the Company has received an aggregate amount of $5,000,000 from the sale of equity securities. The Company received equity funding of $5,000,000 as of June 2022. As such, the non-dilution provision of the License Agreement was fulfilled and no additional common shares will be issued.
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11. Leases
For operating leases, the Company records a right-of-use assets and corresponding lease liabilities in the unaudited condensed consolidated balance sheets for all leases with terms longer than twelve months. The Company has three operating leases, with no variable lease costs, and no finance leases as of March 31, 2024. The Company has three operating leases, with no variable lease costs, and no finance leases and December 31, 2023.
In October 2023, Invizyne made changes to an existing lease agreement that was originally entered into in August 2021, which resulted in an extension of the lease term by an additional 14 months. The revised lease maintained the same escalation rate for lease payments as the previous arrangement. To account for this modification, the Company reevaluated the remaining lease term at the time of execution. As the Company was actively utilizing the premises, adjustments were made to reflect the revaluation of both the right-to-use asset and the corresponding lease liability in line with the updated lease term. This was originally entered into in August 2021, with a term of 60 months beginning on August 24, 2021 and ending on September 30, 2026, with an option to extend for 60 additional months and was further modified on April 3, 2023 for an additional 21 months with the lease ending date of April 30, 2028. At the time the lease commenced, it was not probable the Company would exercise the one five-year option to extend the facility lease; therefore, this extension option is not included in the lease analysis. The initial base rent is $14,371 per month. The lease provides for annual increases. The base rent for the lease in the final year is $16,747 per month. Additionally, Invizyne is responsible for annual operating cost increases of 2.5%, which are included in the rent.
Furthermore, in October 2023, Invizyne made changes to a second existing lease agreement that was originally entered into in April 2023, which resulted in an extension of the lease term by an additional 12 months. The revised lease maintained the same escalation rate for lease payments as the previous arrangement. To account for this modification, the Company reevaluated the remaining lease term at the time of execution. As the Company was actively utilizing the premises, adjustments were made to reflect the revaluation of both the right-to-use asset and the corresponding lease liability in line with the updated lease term. This was originally entered into in April 2023, with a term of 60 months beginning on July 1, 2023 and ending on June 30, 2028, with an option to extend for 60 additional months. At the time the lease commenced, it was not probable the Company would exercise the one five-year option to extend the facility lease; therefore, this extension option is not included in the lease analysis. The initial base rent is $13,277per month. The lease provides for annual increases. The base rent for the lease in the final year is $15,391per month. Additionally, Invizyne is responsible for annual operating cost increases of 3.0%, which are included in the rent.
On July 1, 2022 the Company executed a lease for new office space in the Dallas, Texas metropolitan area, the expected occupancy of the space is December 20, 2022. The lease with a term of 91 months set to begin once we take control of the space, which is estimated for December 16, 2022 and ending on July 20, 2030, without an option to extend. The initial base rent was $12,556 per month, after 7 months of free rent. The lease provides for annual increases. The base rent for the lease in the final year is $13,937 per month.
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ROU assets represent the Company’s right to use an underlying asset for the lease term, and lease liabilities represent the Company’s obligation to make lease payments. Operating lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. The Company’s uses the implicit rate in its lease calculations when it is readily determinable. Since the Company’s leases do not provide implicit rates, to determine the present value of lease payments, management uses the Company’s estimated incremental borrowing rate for a fully collateralized loan with a similar term of the lease that is based on the information available at the inception of the lease.
Schedule of Operating Lease Cost
March 31, 2024 | December 31, 2023 | |||||||
| Operating leases: | ||||||||
| Right-of-use assets | $ | 2,235,559 | $ | 2,320,119 | ||||
| Operating lease liabilities | $ | 2,339,955 | $ | 2,415,889 | ||||
| Weighted average remaining lease term in years | 5.27 | 5.33 | ||||||
| Weighted average discount rate | 7.66 | % | 7.40 | % | ||||
| Cash paid for amounts included in the measurement of lease liabilities | $ | 121,688 | $ | 206,837 | ||||
| Right-of-use assets obtained in exchange for lease liabilities | $ | - | $ | 1,018,002 | ||||
| Operating lease cost | $ | 45,754 | $ | 146,836 | ||||
| Short-term lease costs | 84,560 | 275,589 | ||||||
| Total operating lease costs | $ | 130,314 | $ | 422,425 | ||||
Future payments due under operating leases as of March 31, 2024 are as follows:
Schedule of Future payments Due Under Operating Lease
| Year | Amount | |||
| Remainder of 2024 | $ | 369,936 | ||
| 2025 | 503,684 | |||
| 2026 | 516,001 | |||
| 2027 | 528,586 | |||
| 2028 | 541,674 | |||
| Thereafter | 451,600 | |||
| Total | $ | 2,911,481 | ||
| Less effects of discounting | (571,526 | ) | ||
| Total operating lease liabilities | $ | 2,339,955 | ||
12. Income Taxes
The Company is a limited liability company treated as a partnership for federal and state income tax purposes, with the exception of the state of Texas, in which income tax liabilities and/or benefits of the Company are passed through to its unitholders. Limited liability companies are subject to Texas margin tax. Additionally, the Company’s subsidiaries Public Ventures, MDB Management, PatentVest, and Invizyne are Subchapter C-corporations subject to federal and state income taxes.
Amounts recognized as income taxes are included in “income tax expense” on the statements of operations. The Company recognized no income tax expense for the three months ended March 31, 2024, and March 31, 2023, because of a full valuation allowance recorded against the Company’s net deferred tax assets.
The Company’s federal and state statutory tax rate net of the federal tax benefit was approximately 27% for the three months ended March 31, 2024, and March 31 2023.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. At the end of 2023, the Company’s corporate earnings were in a cumulative loss position. Based on the cumulative losses and projections of future taxable income for the periods in which the deferred tax assets are deductible, the Company recorded a valuation allowance against all its net deferred tax assets as of March 31, 2024, and March 31, 2023. The Company intends to maintain a full valuation allowance on its net deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances. The amount of deferred tax assets considered realizable could materially increase in the future, and the amount of valuation allowance recorded could materially decrease if estimates of future taxable income are increased.
13. Subsequent Events
There were no subsequent events for the three months ended March 31, 2024
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
MDB Capital Holdings, LLC (the “Company” or “MDB”), a Delaware limited liability company, is a holding company that has three wholly-owned subsidiaries: MDB CG Management Company (“MDB Management”); Public Ventures, LLC (“Public Ventures”); and PatentVest, Inc. (“PatentVest”), and has a majority-owned partner company, Invizyne Technologies, Inc. (“Invizyne”).
MDB Management is principally an “administrative” entity whose purpose is to conduct, and wherever possible, to consolidate shared services/resources, for our US-based operations.
Public Ventures is a U.S. registered broker-dealer under the Securities Exchange Act of 1934 and is a member of the Financial Industry Regulatory Authority (“FINRA”), the Depository Trust Company (“DTC”), and the National Securities Clearing Corporation (“NSCC”). Public Ventures is dual clearing, operating as a self-clearing firm and carrying accounts for its customers, and on a fully disclosed basis with a nonrelated FINRA member firm, Interactive Brokers, LLC (“Interactive Brokers”). Interactive Brokers serves as custodian of certain investments maintained by Public Ventures.
PatentVest is a wholly-owned subsidiary that performs intellectual property validation services for Public Ventures’ due diligence functions on the intellectual property of partner and prospective partner companies and creates an intellectual property roadmap for such partner companies.
Invizyne was formed with the objective of taking nature’s building blocks to make molecules of interest, effectively simplifying nature. Invizyne is a biology technology development company that is a majority-owned subsidiary. Invizyne’s technology is a differentiated and unique synthetic biology platform which is designed to enable the scalable exploration of a large number of molecules and properties found in nature.
Prior to January 14, 2022, Public Ventures owned majority interests in PatentVest and Invizyne. On January 14, 2022, Public Ventures distributed 100% of its equity interests in PatentVest and Invizyne to its members in proportion to their respective interests. On January 15, 2022, Public Ventures filed with the Internal Revenue Service to be treated as a corporation for federal income tax purposes. On January 16, 2022, the members of Public Ventures contributed their entire interests in the equity of Public Ventures, Invizyne and PatentVest to MDB, as result of which MDB became the new parent holding company. There was no effective change in the beneficial ownership of Public Ventures as a result of this transaction. On the same day as part of the reorganization, MDB established a management company subsidiary, MDB Management. These reorganization steps are collectively referred to as the “reorganization. In connection with the reorganization, 5,000,000 Class B Common Shares were issued in exchange for the members’ equity.
The reorganization was completed between entities that were under common control, and the assets contributed and liabilities assumed are recorded based on their historical carrying values. These financial statements retroactively reflect the financial statements of the Company and Public Ventures on an unaudited condensed consolidated basis for the periods presented.
On June 8, 2022, MDB completed the first closing of a private placement, consisting of the sale of 2,517,966 shares of Class A Common Shares at $10.00 per share, for gross proceeds of $25,179,660. On June 15, 2022, the Company completed the second closing of the private placement, consisting of the sale of an additional 11,000 shares of Class A Common Shares, for gross proceeds of $110,000. Accordingly, the Company received total gross proceeds of $25,289,660 from the sale of 2,528,966 shares of Class A Common Shares, or $24,746,142 net of $343,518 of offering expenses, which will be used for development of the current partner companies, identifying and developing new partner companies, and general corporate and working capital requirements. In conjunction with the private placement, the Company issued warrants to the placement agent to purchase 18,477 shares of Class A Common Shares, exercisable upon issuance for a period of 10 years at $13.00 per share, for a cash consideration of $0.001/share. The placement agent’s warrants had a fair value of $106,940, as calculated pursuant to the Black-Scholes option-pricing model and were accounted for as issuance costs that were recorded against paid in capital and paid in capital for the warrants issued.
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Results of Operations
The Company has determined its reporting units in accordance with ASC (Accounting Standards Codification) 280, Segment Reporting. The Company currently operates in two reportable segments: (i) the broker dealer and intellectual property service segment and (ii) the technology development segment.
The Company’s unaudited condensed consolidated statements of operations as discussed herein are presented below.
Unaudited Condensed Consolidated Results of Operations for the Three Months Ended March 31, 2024 and 2023
| 2024 | 2023 | $ Change | % Change | |||||||||||||
| Operating income (loss): | ||||||||||||||||
| Unrealized gain (loss) on investment securities, net (from our licensed broker dealer) | $ | (747,268 | ) | $ | 54,779 | $ | (802,047 | ) | (1,464.2 | )% | ||||||
| Other operating income | 86,879 | 62,212 | 24,667 | 39.6 | % | |||||||||||
| Total operating income (loss), net | (660,389 | ) | 116,991 | (777,380 | ) | (664.5 | )% | |||||||||
| Operating costs: | ||||||||||||||||
| General and administrative costs: | ||||||||||||||||
| Compensation | 4,892,675 | 872,027 | 4,020,648 | 461.1 | % | |||||||||||
| Operating expense, related party | 320,292 | 301,702 | 18,590 | 6.2 | % | |||||||||||
| Professional fees | 919,089 | 604,662 | 314,427 | 52.0 | % | |||||||||||
| Information technology | 205,991 | 147,407 | 58,854 | 39.7 | % | |||||||||||
| Clearing and other charges | 2,036 | 10,754 | (8,718 | ) | (81.1 | )% | ||||||||||
| General and administrative-other | 669,126 | 304,079 | 365,047 | 120.1 | % | |||||||||||
| Total general and administrative costs | 7,009,209 | 2,240,631 | 4,768,578 | 212.8 | % | |||||||||||
| Research and development costs, net of grants amounting to $708,700 and $793,540 | 277,582 | 31,592 | 245,990 | 778.6 | % | |||||||||||
| Total operating costs | 7,286,791 | 2,272,223 | 5,014,568 | 220.7 | % | |||||||||||
| Net operating loss | (7,947,180 | ) | (2,155,232 | ) | (5,791,948 | ) | 268.7 | % | ||||||||
| Other income: | ||||||||||||||||
| Interest income | 337,852 | 187,291 | 150,561, | 80.4 | % | |||||||||||
| Loss before income taxes | (7,609,328 | ) | (1,967,941 | ) | (5,641,387 | ) | (268.7 | )% | ||||||||
| Income taxes | - | - | - | 0.0 | % | |||||||||||
| Net loss | (7,609,328 | ) | (1,967,941 | ) | (5,641,387 | ) | (286.7 | )% | ||||||||
| Less net loss attributable to non-controlling interests | (393,903 | ) | (94,193 | ) | (299,710 | ) | (318.2 | )% | ||||||||
| Net loss attributable to MDB Capital Holdings, LLC | $ | (7,215,425 | ) | $ | (1,873,748 | ) | $ | (5,341,677 | ) | (285.1 | )% | |||||
Operating Income. For the three-month periods ending March 31, 2024, and 2023, the Company incurred operating losses primarily due to unrealized losses in the broker-dealer and intellectual property service segments. These losses were partially offset by other income generated from operational fees within the same segments.
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General and Administrative Costs. During the three-month period ended March 31, 2024, and 2023, respectively, several factors contributed to changes in various expense categories:
| ● | Compensation Expense: The majority of the increase in compensation expense was due to the recognition of restricted stock options, as well as the ongoing recruitment of additional employees in the latter half of 2023, specifically within the technology segment, to support expected operational growth. | |
| ● | Related Party Operating Expenses: There was a slight rise in related party operating expenses due to outsourcing support services in anticipation of upcoming self-clearing operations within the broker-dealer and intellectual property service segments for 2024. | |
| ● | Professional Fees: For the three-month period ending March 31, 2024, professional fees saw an increase from previous periods, driven by higher costs in legal, tax, audit, and consulting services. This rise in expenses was primarily linked to the audit fees, tax return preparations, and K-1s associated with fiscal year 2023 reporting, along with initiation of the self-clearing operations. | |
| ● | Information Technology Costs: For the three-month period ending March 31, 2024, information technology costs saw an increase from previous periods, driven by higher costs in with initiation of the self-clearing operations. | |
| ● | Clearing and Other Charges: The reduction in costs for the three-month period ending March 31, 2024, was negligible compared to the same period in the previous year. | |
| ● | Other General and Administrative Costs: The primary driver of the increase in other general and administrative costs were the issuance of restricted stock options to the board of directors, as well as higher rent expenses in the technology segment compared to the previous period. |
Research and Development Costs. The research and development costs were derived from the Company’s technology development segment. For the three-month period ended March 31, 2024 there was an increase in research and development costs that was due to a decrease of grant funding. It is important to note that the upswing in grant funding was not linked to any specific event and is expected to fluctuate throughout the year.
Other Income. For the three-month period ended March 31, 2024, the increase in other income was the result of interest generated on U.S. Treasury Bill interest from capital raised from the initial public offering.
Broker Dealer and Intellectual Property Service Segment (Public Ventures and PatentVest) Results of Operations for the Three Months Ended March 31, 2024 and 2023
| 2024 | 2023 | $ Change | % Change | |||||||||||||
| Operating income (loss): | ||||||||||||||||
| Unrealized gain (loss) on investment securities, net (from our licensed broker dealer) | $ | (747,268 | ) | $ | 54,779 | $ | (802,047 | ) | (1,464.2 | )% | ||||||
| Other operating income | 86,879 | 3,053 | 83,826 | 2,745.7 | % | |||||||||||
| Total operating income (loss), net | (660,389 | ) | 57,832 | (718,221 | ) | (1,241.9 | )% | |||||||||
| Operating costs: | ||||||||||||||||
| General and administrative costs: | ||||||||||||||||
| Compensation | 679,907 | 546,801 | 133,106 | 24.3 | % | |||||||||||
| Operating expense, related party | 243,876 | 258,453 | (14,577 | ) | (5.6 | )% | ||||||||||
| Professional fees | 145,907 | 165,812 | (19,905 | ) | (12.0 | )% | ||||||||||
| Information technology | 180,914 | 121,876 | 59,038 | 48.4 | % | |||||||||||
| Clearing and other charges | 2,036 | 10,754 | (8,718 | ) | (81.1 | )% | ||||||||||
| General and administrative-other | 218,936 | 108,993 | 109,943 | 100.9 | % | |||||||||||
| Total General and administrative costs | 1,471,576 | 1,212,689 | 258,887 | 21.3 | % | |||||||||||
| Research and development costs | - | - | - | - | ||||||||||||
| Total operating costs | 1,471,576 | 1,212,689 | 258,887 | 21.3 | % | |||||||||||
| Net operating loss | (2,131,965 | ) | (1,154,857 | ) | (977,108 | ) | (84.6 | )% | ||||||||
| Other income: | ||||||||||||||||
| Less: interest expense | 110,625 | - | 110,625 | 100.0 | % | |||||||||||
| Interest income | 52,459 | 28,362 | 24,097 | 85.0 | % | |||||||||||
| Loss before income taxes | (2,190,131 | ) | (1,126,495 | ) | (1,063,636 | ) | (94.4 | )% | ||||||||
| Income taxes | - | - | - | 0.0 | % | |||||||||||
| Net income (loss) | $ | (22,190,131 | ) | $ | (1,126,495 | ) | $ | (1,063,636 | ) | (94.4 | )% | |||||
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Operating Income. For the three-month periods ending March 31, 2024, and 2023, the Company incurred operating losses primarily due to unrealized losses in the broker-dealer and intellectual property service segments. These losses were partially offset by other income generated from operational fees within the same segments.
General and Administrative Costs. During the three-month periods ended March 31, 2024, and 2023, respectively, several factors contributed to changes in various expense categories:
| ● | Compensation Expense: The increase in compensation expense was driven by an increase in salaries in the in the latter half of 2023. | |
| ● | Related Party Operating Expenses: There was a decrease in related party operating expenses as outsourcing support was reallocated to other areas within the broker-dealer and intellectual property service segment. | |
| ● | Professional Fees: For the three-month period ending March 31, 2024, there was a decrease in professional fees compared to the previous period, primarily due to reduced legal, tax, and audit fees. However, this reduction was offset by an increase in consulting fees associated with the implementation of self-clearing operations. | |
| ● | Information Technology Costs: For the three-month period ending March 31, 2024, information technology costs saw an increase from previous periods, driven by higher costs with the initiation of the self-clearing operations. | |
| ● | Clearing and Other Charges: The reduction in costs for the three-month period ending March 31, 2024, was negligible compared to the same period in the previous year. | |
| ● | Other General and Administrative Costs: The rise in other general and administrative costs was due to higher expenses in advertising and promotions, along with increased spending on travel and conferences. |
Other Income. The rise in other income for the three-month periods ending March 31, 2024, can be attributed to the growth in bank interest income, stemming from an increase in the cash balance.
Technology Development Segment (Invizyne) Results of Operations for the Three Months Ended March 31, 2024 and 2023
| 2024 | 2023 | $ Change | % Change | |||||||||||||
| Total operating income | $ | - | $ | 59,159 | $ | (59,159 | ) | (100.0 | )% | |||||||
| Operating costs: | ||||||||||||||||
| General and administrative costs: | ||||||||||||||||
| Compensation | 390,043 | 31,536 | 358,507 | 1,136.8 | % | |||||||||||
| Professional fees | 256,563 | 181,707 | 74,856 | 41.2 | % | |||||||||||
| Information technology | 3,891 | 9,826 | (5,935 | ) | (60.4 | )% | ||||||||||
| General and administrative-other | 80,378 | 45,734 | 34,644 | 75.8 | % | |||||||||||
| Total general and administrative costs | 730,875 | 268,803 | 462,072 | 171.9 | % | |||||||||||
| Research and development costs, net of grants amounting to $708,700 and $793,540 | 277,582 | 31,592 | 245,990 | 778.6 | % | |||||||||||
| Total operating costs | 1,008,457 | 300,395 | 708,062 | 235.7 | % | |||||||||||
| Net operating loss | (1,008,457 | ) | (241,236 | ) | (767,211 | ) | (318.0 | )% | ||||||||
| Other income: | ||||||||||||||||
| Interest income | - | 86 | (86 | ) | (100.0 | )% | ||||||||||
| Loss before income taxes | (1,008,457 | ) | (241,150 | ) | (767,307 | ) | (318.2 | )% | ||||||||
| Income taxes | - | - | - | - | ||||||||||||
| Net loss | (1,008,457 | ) | (241,150 | ) | (767,307 | ) | (318.2 | )% | ||||||||
| Less net loss attributable to non-controlling interests | (393,903 | ) | (94,193 | ) | (299,710 | ) | (318.2 | )% | ||||||||
| Net loss attributable to controlling interests | $ | (614,554 | ) | $ | (146,957 | ) | $ | (467,597 | ) | (318.2 | )% | |||||
Operating Income. For the three-month period ending March 31, 2024, the decline in operating income was primarily due to a feasibility study conducted in the previous period.
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General and Administrative Costs. During the three-month periods ended March 31, 2024, and 2023, respectively, several factors contributed to changes in various expense categories:
| ● | Compensation Expense: The increase in compensation expense during the three-month period ending March 31, 2024, stemmed from the recruitment of additional administrative staff, who are not covered by grants, in the latter half of 2023. | |
| ● | Professional Fees: The increase in professional fees compared to previous periods was due to higher legal, tax, audit, and consulting costs associated with completing year-end financial audits and preparing for the initial public offering. | |
| ● | Information Technology Costs: The reduction in costs for the three-month period ending March 31, 2024, was negligible compared to the same period in the previous year. | |
| ● | Other General and Administrative Costs: The increase in other general and administrative costs was due to the acquisition of new leased laboratory space in the third quarter of 2023. |
Research and Development Costs. The research and development costs were derived from the Company’s technology development segment. For the three-month period ended March 31, 2024 there was an increase in research and development costs that was due to a decrease of grant funding. It is important to note that the upswing in grant funding was not linked to any specific event and is expected to fluctuate throughout the year.
Condensed Consolidated Balance Sheets March 31, 2024 and December 31, 2023
March 31, (unaudited) | December 31, 2023 | $ Change | % Change | |||||||||||||
| ASSETS | ||||||||||||||||
| Cash and cash equivalents | $ | 5,492,612 | $ | 6,109,806 | $ | (617,194 | ) | (10.1 | )% | |||||||
| Cash segregated in compliance with regulations | 2,959,994 | 1,247,881 | 1,712,113 | 137.2 | % | |||||||||||
| Grants receivable | 1,111,611 | 882,319 | 229,292 | 26.0 | % | |||||||||||
| Clearing deposits | 703,740 | 260,000 | 443,740 | 170.7 | % | |||||||||||
| Prepaid expenses and other current assets | 494,463 | 523,788 | (29,325 | ) | (5.6 | )% | ||||||||||
| Investment securities, at amortized cost (U.S. Treasury Bills) | 21,381,362 | 24,658,611 | (3,277,249 | ) | (13.3 | )% | ||||||||||
| Investment securities, at fair value (held by our licensed broker dealer) | 4,999,237 | 5,771,634 | (772,397 | ) | (13.4 | )% | ||||||||||
| Investment securities, at cost less impairment | 200,000 | 200,000 | - | 0.0 | % | |||||||||||
| Deferred offering cost | 266,945 | 69,303 | 197,642 | 285.2 | % | |||||||||||
| Deferred costs related to deferred revenue | 147,503 | 75,328 | 72,175 | 95.8 | % | |||||||||||
| Property and equipment, net | 946,850 | 866,490 | 80,360 | 9.3 | % | |||||||||||
| Operating lease right-of-use assets, net | 2,235,559 | 2,320,119 | (84,560 | ) | (3.6 | )% | ||||||||||
| Total assets | $ | 40,939,876 | $ | 42,985,279 | $ | (2,045,403 | ) | (4.8 | )% | |||||||
| LIABILITIES AND EQUITY | ||||||||||||||||
| Accounts payable | $ | 916,782 | $ | 578,214 | $ | 338,568 | 58.6 | % | ||||||||
| Accrued expenses | 515,853 | 1,105,078 | (589,225 | ) | (53.3 | )% | ||||||||||
| Payables to non-customers | 2,277,200 | 1,405,293 | 871,907 | 62.0 | % | |||||||||||
| Payables to customers | 1,212,595 | - | 1,212,595 | 100.0 | % | |||||||||||
| Deferred grant reimbursement | 133,909 | 140,703 | (6,794 | ) | (4.8 | )% | ||||||||||
| Deferred revenue | 20,000 | 20,000 | - | 0.0 | % | |||||||||||
| Operating lease liabilities | 2,339,955 | 2,415,889 | (75,934 | ) | (3.1 | )% | ||||||||||
| Total liabilities | 7,416,294 | 5,665,177 | 1,751,117 | 30.9 | % | |||||||||||
| Equity: | ||||||||||||||||
| Paid-in-capital | 53,075,777 | 49,405,779 | 3,669,998 | 7.4 | % | |||||||||||
| Accumulated deficit | (19,308,352 | ) | (12,092,927 | ) | (7,215,425 | ) | (59.7 | )% | ||||||||
| Total MDB Capital Holdings, LLC Members’ equity | 33,767,425 | 37,312,852 | (3,545,427 | ) | (9.5 | )% | ||||||||||
| Non-controlling interest | (243,843 | ) | 7,250 | (251,093 | ) | (3,463.4 | )% | |||||||||
| Total equity | 33,523,582 | 37,320,102 | (3,796,520 | ) | (10.2 | )% | ||||||||||
| Total liabilities and equity | $ | 40,939,876 | $ | 42,985,279 | $ | (2,045,403 | ) | (4.8 | )% | |||||||
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Financial Condition: Overall, the reduction in assets was primarily attributed to their utilization for operational activities during the period. The rise in cash segregated in compliance with regulations stemmed from customer deposits. The decline in investment securities at amortized cost occurred because U.S. Treasury bills were sold to provide liquidity for operating expenses. Similarly, the drop in investment securities at fair value was due to a decrease in the value of common stock and warrants over the period. Prepaid expenses remained stable compared to the previous period. There was an increase in grants receivable, which was influenced by the timing of the collection of grant funds from the previous period. The growth in deferred offering costs was associated with expenses related to Invizyne’s IPO. Finally, the reduction in the right-of-use asset was due to its regular utilization.
The increase in accounts payable was primarily driven by payments for audit and legal services associated with audits and legal matters related to the IPO of Invizyne. The decrease in accrued expenses resulted from the settlement of bonus liabilities that were accrued in the fourth quarter of 2023. Additionally, the rise in payables to customers and non-customers stemmed from increased activity in the self-clearing operations of the broker-dealer. Deferred grant reimbursements remained consistent with the previous period. Finally, the reduction in lease liability was due to its routine utilization.
The increase in equity was primarily due to the Company’s IPO, which closed on September 20, 2023. This increase was partly offset by net losses from previous periods.
The decrease in non-controlling interest resulted from the net loss experienced by Invizyne.
Liquidity and Capital Resources – March 31, 2024 and 2023
The Company’s unaudited condensed consolidated statements of cash flows as discussed herein are presented below.
| Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Net cash used in operating activities | $ | (2,259,097 | ) | $ | (1,154,192 | ) | ||
| Net cash provided by (used in) investing activities | 3,445,523 | (55,317 | ) | |||||
| Net cash provided by financing activities | (91,507 | ) | (272,322 | ) | ||||
| Net increase in cash and cash equivalents | $ | 1,094,919 | $ | (1,481,831 | ) | |||
At March 31, 2024, the Company had $27,284,367 of working capital. This is an increase of $7,511,642, from the working capital of $19,772,725 that the Company had at March 31, 2023. The increase in working capital is primarily attributed to the funds received from the initial public offering in 2023, which was offset by the use of cash to fund operations for the three months ended on March 31, 2024. Additionally, as of March 31, 2024 and 2023, respectively, the Company had $21,381,362 of cash and $16,347,720 of short-term U.S. Treasury bills available to fund its operations.
Operating Activities. For the three months ending on March 31, 2024, there was an increase in the net loss compared to Q1 2023. Additionally, there was accretion of investments at amortized costs (U.S. Treasury Bills) and the acquisition of investment securities. However, this decrease in cash was partly offset by an increase in accounts payable, grants receivable for the technology segment. Furthermore, clearing deposits, payables to customers, and payables were non-customers all increased due to the implementation of the self-clearing operations. There was a decrease in the accrued expenses due to bonuses being paid in Q1 of 2024.
For the three months ended March 31, 2023, operating activities use of cash represented a combination of increased activity in Invizyne, increased professional and consulting fees related to year end audits and issuance of the tax preparation fees related to the publicly traded partnership.
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Investing Activities. For the three months ended March 31, 2024, investing activities consisted of the proceeds from the sale and the maturing of U.S. Treasury Bills and purchases of investment securities, which was offset by the reinvestment of the proceeds into new U.S. Treasury Bills and the transfer of cash for operating activities.
For three months ended March 31, 2023 investing activities was minimal during this period.
Financing Activities. For the three months ended March 31, 2024, financing activities consisted of costs related to the deferred costs of the IPO of Invizyne.
For the three months ended March 31, 2023 financing costs were for the preparation of the initial public offering incurred during the period.
Recently Issued Accounting Pronouncements
See Note 2 in the unaudited condensed consolidated financial statements for the discussion on recently accounting pronouncements.
Critical Accounting Estimates
The preparation of financial statements in conformity with general accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We have identified certain accounting policies as being critical because they require us to make difficult, subjective, or complex judgments about matters that are uncertain. We believe that the judgment, estimates, and assumptions used in the preparation of our unaudited condensed consolidated financial statements and unaudited condensed consolidated financial statements are appropriate given the factual circumstances at the time. However, actual results could differ, and the use of other assumptions or estimates could result in material differences in our results of operations or financial condition. Our critical accounting estimates are:
Revenue recognition – Investment Banking and Warrants Valuation
The Company receives income from equity underwriting fees. As an underwriter, the Company helps clients raise capital via the private placement of various types of equity instruments. Underwriting fees are primarily based on the issuance price and quantity of the underlying instruments and are recognized as revenue typically upon execution of the client’s transaction. The Company generally does not incur costs to obtain contracts with customers that are eligible for deferral or receive fees prior to recognizing revenue related to investment banking transactions. If the Company did have any contract assets or liabilities related to these revenues it would be recorded on the unaudited condensed consolidated balance sheets.
Revenue recognition may involve the bundling of investment banking services with other financial instruments. In such cases, we estimate the fair value of the services provided and allocate the revenue accordingly. This estimation process involves significant judgment and sensitivity to market conditions. Additionally, our investment banking activities may include the compensation for our services in warrants granted to us. The valuation of these warrants requires significant estimates, including the use of option pricing models like the Black-Scholes model. The key assumptions in this valuation process include the stock price on the date of valuation, the exercise price of the warrant, the term to expiry, risk-free interest rate, and the expected volatility of the underlying stock.
Fair Value of Financial Instruments
Fair value is defined 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. To increase the comparability of fair value measures, the following hierarchy prioritizes the inputs to valuation methodologies used to measure fair value:
Level 1 — Valuations based on quoted prices for identical assets and liabilities in active markets.
Level 2 — Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3 — Valuations based on unobservable inputs reflecting our own assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.
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Fair value is defined 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. Assets and liabilities measured at fair value are categorized based on whether the inputs are observable in the market and the degree that the inputs are observable. The categorization of financial assets and liabilities within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
The fair value of U.S. Treasury Bills and public equity securities are based on quoted market prices and are classified as level 1 of the fair value hierarchy. The fair value of public equity securities that are not actively traded is based on quoted market prices of similar instruments and other significant inputs derived from or corroborated by observable market data and are classified as level 2 of the fair value hierarchy. The fair value of warrants is based on a Black-Scholes model, which considers the stock price at the date of the valuation, the warrant strike price, the term to expiry, the risk-free rate of return, and the expected volatility of the underlying stock. The level in the fair value hierarchy for warrants depends primarily on whether the stock price is determinable from active trades, and whether the expected volatility of the underlying stock is observable and are either classified as level 2 or level 3. The fair value of non-public equity securities and simple agreements for future equity is based on the initial investment, less impairment, and they are classified as level 3 in the fair value hierarchy. For the significant unobservable inputs and assumptions used in level 3 fair value measurements, see Fair Value of Financial Instruments section of Note 2: Summary of Significant Accounting Policies.
Accounting for Research Grants
Invizyne receives grant reimbursements, which are netted against research and development expenses in the unaudited condensed consolidated statement of operations. Grant reimbursements for capitalized assets are recognized over the useful life of the assets, with the unrecognized portion considered a deferred liability and are included in accounts payable and accrued expenses in the unaudited condensed consolidated balance sheet.
Grants that operate on a reimbursement basis are recognized on the accrual basis are revenues to extent of disbursements and commitments that are allowable for reimbursement of allowable expenses incurred as of March 31, 2024 and 2023 and expected to be received from funding sources in the subsequent year. Management considers such receivables at March 31, 2024 and 2023 to be fully collectable, due to the historical experience with the Federal Government of the United States of America. Accordingly, no allowance for grants receivable was recorded in the accompanying unaudited condensed consolidated financial statements.
Research grants received from organizations are subject to the contract agreement as to how Invizyne conducts its research activities, and Invizyne is required to comply with the agreement terms relating to those grants. Amounts received under research grants are nonrefundable, regardless of the success of the underlying research project, to the extent that such amounts are expended in accordance with the approved grant project. Invizyne is permitted to draw down (a process of submitting expenses for reimbursement) the research grants after incurring the related expenses. Amounts received under research grants are offset against the related research and development costs in the Company’s unaudited condensed consolidated statement of operations.
Summary of Business Activities and Plans
On September 20, 2023, the Company completed an initial public offering (IPO), which consisted of the sale of 1,666,666 shares of Class A common shares at $12.00 per share, for gross proceeds of $19,999,992 that will be used for the development of Invizyne, identifying and developing new partner companies, and general corporate and working capital requirements.
On June 15, 2022, the Company completed the first closing of a private placement, consisting of total gross proceeds of $25,289,660 from the sale of 2,528,966 shares of Class A common shares, which have been and will continue to be used for the development of Invizyne, identifying and developing new partner companies, and general corporate and working capital requirements.
| 34 |
External Risks Associated with the Company’s Business Activities
Inflation Risk. The Company does not believe that inflation has had a material effect on its operations to date, other than its impact on the general economy.
Supply Chain Issues. The Company does not currently expect that supply chain issues will have a significant impact on its business activities.
Potential Recession. There are various indications that the United States economy may be entering a recessionary period. Although unclear at this time an economic recession would likely impact the general business environment and the capital markets, which could, in turn, if there is a recession, such an event could affect the Company.
The Company is continuing to monitor these matters and will adjust its current business and financing plans as more information and guidance become available.
Technology. Our partner companies’ endeavors to create and bring new technologies to the market may never come to fruition or might not reach a level of development sufficient for commercial viability. Even if they do achieve a commercial level of development, the acceptance of these technologies within the marketplace is uncertain. There’s a possibility that the technologies they develop may not gain widespread or timely acceptance, leading to the necessity for further funding to support the partner companies, or potentially even prompting the difficult choice of discontinuing the business at a financial loss. Moreover, technologies from our partner companies that undergo regulatory scrutiny, testing, and approval may ultimately fail to receive the necessary approvals from relevant regulatory bodies.
Principal Commitments
Net Capital Requirement (Public Ventures)
Public Ventures is subject to the uniform net capital rule (SEC Rule 15c3-1) of the Securities and Exchange Commission (the “SEC”), which requires both the maintenance of minimum net capital and the maintenance of maximum ratio of aggregate indebtedness to net capital. At March 31, 2024 and 2023, Public Ventures had net capital of $6,285,959 and $2,534,695, respectively, which was $6,035,959 and $2,284,695 in excess of the minimum $250,000, as required by the Securities and Exchange Commission Rule 15c3-1.
At March 31, 2024, the Company’s ratio of aggregate indebtedness of $6,175,623 to net capital was 0.98 to 1, as compared to the maximum of a 15 to 1 allowable ratio of a broker dealer. Minimum net capital is based upon the greater of the statutory minimum net capital of $250,000 or 2% of customer debits, which was calculated as $0 at March 31, 2024.
The requirement to comply with the Uniform Net Capital Rule 15c3-1 may limit Public Ventures’ ability to issue dividends to its parent company.
Indemnification Provisions
Public Ventures has agreed to indemnify its clearing broker for losses that the clearing broker may sustain from the accounts of customers. Should a customer not fulfill its obligation on a transaction, Public Ventures may be required to buy or sell securities at prevailing market prices in the future on behalf of its customer. The indemnification obligations of Public Ventures to its clearing broker have no maximum amount. All unsettled trades at March 31, 2024 and 2023 have subsequently settled with no resulting material liability to Public Ventures. For the three months ended March 31, 2024 and 2023 Public Ventures, had no material loss due to counterparty failure and had no obligations outstanding under the indemnification arrangement as of March 31, 2024 and 2023.
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Trends, Events and Uncertainties
Other than as discussed above, we are not currently aware of any trends, events or uncertainties that are likely to have a material effect on our financial condition in the near term, although it is possible that new trends or events may develop in the future that could have a material effect on our financial condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company, we are not required to provide this information.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company, with the participation of the Chief Executive Officer and Chief Accounting Officer, evaluated, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness of the disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act). Based on that evaluation, and as a result of the material weaknesses in internal control over financial reporting described below, the Chief Executive Officer and Chief Accounting Officer concluded that, as of March 31, 2024, the disclosure controls and procedures were not effective at the reasonable assurance level. In light of this fact, the Company has performed additional analyses, reconciliations, and other post-closing procedures and has concluded that, notwithstanding the material weaknesses in the internal control over financial reporting, the unaudited condensed consolidated financial statements for the periods covered by and included in this Quarterly Report on Form 10-Q fairly state, in all material respects, the financial position, results of operations and cash flows for the periods presented in conformity with GAAP.
Ongoing Remediation of Previously Identified Material Weakness
The Company is implementing measures designed to ensure that control deficiencies contributing to the previously disclosed material weakness are remediated, such that these controls are designed, implemented, and operating effectively. These remediation actions are ongoing, and they include our expansion of our controls or control designs based on updated enhanced risk assessments. We have redesigned the financial reporting process, to remediate the previously identified material weakness. We expect these changes to materially improve our internal controls.
The weaknesses will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
Changes in Internal Control Over Financial Reporting
Other than the material weakness remediation efforts underway, there were no changes in the internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the three months ended March 31, 2024, that have materially affected, or are reasonably likely to materially affect, the internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls and Procedures
The Company’s management, including the Chief Executive Officer and Chief Accounting Officer, believes that disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at the reasonable assurance level. However, management does not expect that the disclosure controls and procedures or the internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
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PART II — OTHER INFORMATION
Item 1. Legal Proceedings
We are not currently a party to any material legal proceedings, and we are not aware of any pending or threatened litigation that would have a material adverse effect on our business, operating results, cash flows, or financial condition should such litigation be resolved unfavorably. We believe that from time to time we will have commercial disputes arising in the ordinary course of our business.
Item 1A. Risk Factors
In addition to the information set forth in this Form 10-Q, you should also carefully review and consider the risk factors contained in our other registration statements, reports and periodic filings with the SEC that could materially and adversely affect our business, financial condition, and results of operations. The risk factors we have identified and discussed, however, do not identify all risks that we face because our business operations could also be affected by additional factors that are not known to us or that we currently consider to be immaterial to our operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits
The documents listed in the Exhibit Index of this Form 10-Q are incorporated by reference or are filed with this Form 10-Q, in each case as indicated therein (numbered in accordance with Item 601 of Regulation S-K).
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| MDB CAPITAL HOLDINGS, LLC | ||
| (the “Registrant”) | ||
| Dated: May 13, 2024 | By: | /s/ Christopher A. Marlett |
| Christopher A. Marlett | ||
| Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| Dated: May 13, 2024 | By: | /s/ Jeremy W. James |
| Jeremy W. James | ||
| Chief Accounting Officer | ||
| (Principal Financial and Accounting Officer) | ||
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EXHIBIT INDEX
| * | Filed herewith. |
| ** | Furnished herewith. |
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