Dominari Holdings Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements You should read this discussion together with the Financial Statements, related Notes and other financial information included elsewhere in this Form 10-Q. The following discussion contains assumptions, estimates and other forward-looking statements that involve a number of risks and uncertainties. These risks could cause our actual results to differ materially from those anticipated in these forward-looking statements. All references to “we,” “us,” “our” and the “Company” refer to Aikido Pharma Inc., a Delaware corporation and its consolidated subsidiaries unless the context requires otherwise. Overview Since 2017, we have operated as a biotechnology company with a diverse portfolio of small-molecule anticancer and antiviral therapeutics in development. Over the past year, in an effort to enhance shareholder value, we have shifted our primary focus away from biotechnology to a new line of business in the fintech and financial services industries. In furtherance of this new focus, in June of this year we formed a wholly owned financial services subsidiary, Dominari Financial Inc. (“Dominari”), with the purpose of making strategic acquisitions across the fintech and financial services industries. Additionally, AIkido Labs, LLC (“Aikido Labs”), another wholly owned subsidiary, has and will continue to explore other opportunities in high growth industries. To date, Aikido Labs has acquired equity positions in Anduril Industries, Inc, Databricks, Inc., Discord, Inc., Epic Games, Inc., Payward, Inc. dba Kraken, Space Exploration Technologies Corp. dba SpaceX, Tevva Motors Ltd., Thrasio, LLC, and Yanka Industries, Inc. dba Masterclass. Finally, we will continue to foster and develop our historical pipeline of biotechnology assets consisting of patented technology from leading universities and researchers, including prospective treatments for pancreatic cancer, acute myeloid leukemia and acute lymphoblastic leukemia. We are also developing a broad-spectrum antiviral platform, in which the lead compounds have activity in cell-based assays against multiple viruses including Influenza virus, Ebolavirus and Marburg virus, SARS-CoV, MERS-CoV, and SARS-CoV-2, the cause of COVID-19. 25 On September 9, 2022, Dominari entered into a membership interest purchase agreement (the “FPS Purchase Agreement”) with Fieldpoint Private Bank & Trust (“Seller”), a Connecticut bank, for the purchase of its wholly owned subsidiary, Fieldpoint Private Securities, LLC, a Connecticut limited liability company (“FPS”) and broker-dealer registered with the Financial Industry Regulatory Authority (“FINRA”). Pursuant to the terms of the FPS Purchase Agreement, Dominari will purchase from the Seller 100% of the membership interests in of FPS (the “Membership Interests”) and, as a result thereof, will, thereafter, operate FPS’s registered broker-dealer business as a wholly owned subsidiary. The FPS Purchase Agreement provides for Dominari’s acquisition of FPS’s Membership Interests in two closings, the first of which occurred on October 4, 2022 (the “Initial Closing”), at which Dominari paid to the Seller $2,000,000 in consideration for a transfer by the Seller to Dominari of 20% of the Membership Interests. Following the Initial Closing, FPS filed a continuing membership application requesting approval for a change of ownership, control, or business operations with FINRA in accordance with FINRA Rule 1017 (the “Rule 1017 Application”). Upon FINRA’s approval of the Rule 1017 Application, the second closing will occur (the “Second Closing”), at which Dominari will pay to the Seller an additional $1.00 in consideration for a transfer by the Seller to Dominari of the remaining 80% of the Membership Interests. The Second Closing is subject to FINRA’s final approval under FINRA Rule 1017 as well as other customary closing conditions, including the accuracy of the representations and warranties of the applicable parties under the FPS Purchase Agreement and compliance therewith. Additionally, on October 17, 2022, we entered into an Amended and Restated Services Agreement with Kyle Wool, pursuant to which he has agreed to serve as Dominari’s Chief Executive Officer, upon the termination of his existing relationship with another registered broker-dealer and lead our transition to a fintech and financial services company. Our anticipated diversified financial platform may be affected by a variety of factors including the continuing impact of the COVID-19 pandemic, higher inflation, the actions by the Federal Reserve to address inflation, the possibility of recession, Russia’s invasion of Ukraine, and rising energy prices. These factors create uncertainty about the future economic environment which will continue to evolve and may impact our business in future periods. These developments and the impact on the financial markets and the overall economy continue to be highly uncertain and cannot be predicted. If the financial markets and/or the overall economy continue to be impacted, our results of operations, financial position, and cash flows may be materially adversely affected. Critical Accounting Policies Our critical accounting policies are disclosed in our annual report on Form 10K for the year ended December 31, 2021 and there have been no material changes to such policy or estimates during the nine months ended September 30, 2022. 26 Critical Accounting Estimates The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts and related disclosures in the financial statements. Management considers an accounting estimate to be critical if: ● it requires assumptions to be made that were uncertain at the time the estimate was made, and ● changes in the estimate or different estimates that could have been selected could have material impact in our results of operations or financial condition. While we base our estimates and judgments on our experience and on various other factors that we believe to be reasonable under the circumstances, actual results could differ from those estimates and the differences could be material. See Note 2 to our unaudited condensed consolidated financial statements for a discussion of our significant accounting policies. Recently Issued Accounting Pronouncements See Note 3 to the unaudited condensed consolidated financial statements for a discussion of recent accounting standards. Results of Operations We had little or no revenue for the past two years. Three months ended September 30, 2022 compared to three months ended September 30, 2021 During the three months ended September 30, 2022, we incurred a loss from operations of approximately $5.1 million, as compared to a loss of approximately $1.8 million for the comparable period of the prior year. The approximate $3.3 million increase in loss year-over-year was primarily attributable to (i) an approximate $2.8 million increase in general and administrative expenses from approximately $1.7 million, during the three months ended September 2021, to approximately $4.5 million, for the same period in 2022, and (ii) an approximate $0.5 million increase in research and development expenses from approximately $0.1 million, during the three months ending September 30, 2021, to approximately $0.6 million, for the same period in 2022. The increase in (i) was a result of approximately $1.4 million in expenses related to fully-vested restricted stock grants issued to the members of the board of directors and executive officers and additional contractual and discretionary bonus expense of approximately $0.6 million. We also incurred approximately $1.0 million in legal and accounting advisory fees related to our transition into a financial services business. The increase in (ii) was primarily due to an additional payment under our license agreement with the University of Maryland (“UM”) pursuant to which the UM granted us an exclusive, worldwide, royalty bearing license to certain intellectual property to, among other things, discover, develop, make, have made, use and sell certain licensed products and sell, use and practice certain licensed services with respect to the treatment of cancer. During the three months ended September 30, 2022, other expense was approximately $1.1 million as compared to other income of approximately $1.7 million for the comparable prior year period. The activity for the three months ended September 30, 2022, as compared to the same period in the prior year, is a result of an overall volatility in equity valuations due to macroeconomic uncertainty (i.e. inflation, global tensions in the Ukraine, etc.) impacting the change in fair value of investments and unrealized losses on marketable securities. Specifically, we recognized $0.3 million in change of fair value of investments for the three months ended September 30, 2022, which is reflective of volatility in equity valuations, as stated above. For the three months ended September 30, 2021, change in fair value of investments increased to $4.4 million primarily as a result of our investment in DatChat, Inc. (“DatChat”) which increased to $4.4 million following DatChat’s initial public offering during July 2021. Unrealized losses on marketable securities for the three months ended September 30, 2022, were $1.6 million, as compared to $3.0 million for the same period during the prior year, which was a result of continued volatility in equity-based exchange traded funds. 27 Nine months ended September 30, 2022 compared to nine months ended September 30, 2021 During the nine months ended September 30, 2022, we incurred a loss from operations of approximately $11.2 million, as compared to approximately $6.9 million during the comparable prior year period. The approximate $4.3 million increase in loss was primarily attributable to (i) an approximate $3.3 million increase in general and administrative expenses from approximately $5.2 million, during the nine months ended September 30, 2021, to approximately $8.5 million, during the same period in 2022, (ii) an approximate $1.6 million increase in research and development expenses from approximately $0.5 million, during the nine months ended September 30, 2021, to approximately $2.1 million, during the same period in 2022, and (iii) an approximate decrease of $0.6 million in research and development – license acquired from approximately $1.1 million, during the nine months ended September 30, 2021, to approximately $0.5 million, during the same period in 2022, The increase in (i) was a result of approximately $1.4 million in expenses related to fully-vested restricted stock grants issued to the members of the board of directors and executive officers and additional contractual and discretionary bonus expense of approximately $0.6 million. We also incurred approximately $1.0 million in legal and accounting advisory fees related to our transition into a financial services business. The increase in (ii) was primarily due to an approximate $1.6 million increase in expense related to our continued development of a broad-spectrum antiviral platform, in which the lead compounds have activity in cell-based assays against multiple viruses including the Influenza virus, Ebolavirus and Marburg virus, SARS-CoV, MERS-CoV, and SARS-CoV-2, the cause of COVID-19. The decrease in (iii) was primarily attributable to an approximate $0.6 million decrease related to a one-time expense for restricted stock units issued in the prior year in relation to use of the license. During the nine months ended September 30, 2022, other expense was approximately $3.6 million as compared to other income of approximately $1.5 million for the comparable prior year period. The activity for the nine months ended September 30, 2022, as compared to the same period in the prior year, is a result of overall volatility in equity valuations due to macroeconomic uncertainty (i.e. inflation, global tensions in the Ukraine, etc.) impacting the change in fair value of investments and unrealized losses on marketable securities. Specifically, we recognized $0.1 million in change of fair value of investments for the nine months ended September 30, 2022, which is reflective of volatility in equity valuations, as stated above. For the nine months ended September 30, 2021, change in fair value of investments increased to $3.8 million primarily as a result of our investment in DatChat which increased to $4.4 million following DatChat’s initial public offering during July 2021. Unrealized losses on marketable securities for the nine months ended September 30, 2022, were $4.3 million, as compared to $2.6 million for the same period during the prior year, which was a result of continued volatility in equity-based exchange traded funds. Liquidity and Capital Resources We continue to incur ongoing administrative and other expenses, including public company expenses, in excess of corresponding (non-financing related) revenue. While we continue to implement our business strategy, we intend to finance our activities through: ● managing current cash and cash equivalents on hand from our past debt and equity offerings; ● monetizing current and future strategic long-term investments; ● seeking additional funds raised through the sale of additional securities in the future; ● seeking additional liquidity through credit facilities or other debt arrangements; and ● increasing revenue from its patent portfolios, license fees and new business ventures. 28 Our ultimate success is dependent on our ability to obtain additional financing, monetize our long-term investments, and generate sufficient cash flow to meet our obligations on a timely basis. Our business will require significant amounts of capital to sustain operations and make the investments it needs to execute its longer-term business plan to transition to a fintech and financial services business . Our working was approximately $54.2 million at September 30, 2022. We may need to obtain additional debt or equity financing, especially if we experience downturns in our business that are more severe or longer than anticipated, or if we experience significant increases in expense levels resulting from being a publicly-traded company or operations. If we attempt to obtain additional debt or equity financing, we cannot assume that such financing will be available to the Company on favorable terms, or at all. As a result of recent volatility and weakness in the public markets, due to, among other factors, uncertainty in the global economy and financial markets, it may be much more difficult to raise additional capital, if and when, it is needed, unless the public markets become less volatile and stronger at such time that we seek to raise additional capital. There are no known trends, demands, commitments, or events that will result in or that are reasonably likely to result in our liquidity increasing or decreasing in any material way. Cash Flows from Operating Activities - For the nine months ended September 30, 2022 and 2021, net cash used in operations was approximately $8.7 million and $4.6 million, respectively. The cash used in operating activities for the nine months ended September 30, 2022 primarily resulted from a net loss of $14.9 million and change in fair value of long-term investment of $1.6 million and is partially offset by change in fair value of short-term investment of $1.5 million and unrealized loss on marketable securities of $3.9 million. The cash used in operating activities for the nine months ended September 30, 2021 primarily resulted from a net loss of $5.4 million and change in fair value of investment of $3.8 million, and partially offset by $4.3 million unrealized loss on marketable securities and $1.1 million research and development expense related with license acquired. Cash Flows from Investing Activities - For the nine months ended September 30, 2022 and 2021, net cash used in investing activities was approximately $16.0 million and $70.3 million, respectively. The cash used in investing activities for the nine months ended September 30, 2022 primarily resulted from our purchase of marketable securities of $27.5 million, purchase of promissory notes of $1.6 million and purchase of investments of $15.0 million, partially offset by our sale of marketable securities of $28.5 million since we invest excess cash into marketable securities until additional cash is needed. The cash used in investing activities for the nine months ended September 30, 2021 primarily resulted from our purchase of marketable securities of $90.5 million, funds to deposit accounts of $4.4 million (net of fee), purchase of investments at fair value of $4.1 million and purchase of convertible note of $2.0 million, partially offset by our sale of marketable securities of $30.4 million since we invest excess cash into marketable securities until additional cash is needed. Cash Flows from Financing Activities - Cash used in financing activities for the nine months ended September 30, 2022 was $6.4 million, which reflects the cost for redemption of Series O and Series P Redeemable Convertible Preferred Stock of $22.0 million and cost for purchase of treasury stock of $2.2 million, partially offset by net proceeds of $17.9 million from investors in exchange of issuance of issuance of Series O and Series P Redeemable Convertible Preferred Stock. Cash provided by financing activities for the nine months ended September 30, 2021 was $78.1 million, which reflects the net proceeds of $78.0 million from investors in exchange of issuance of common stock and warrants and net proceeds of $84,000 from the exercise of common warrants. Off-balance sheet arrangements. None. Item 3. Quantitative and Qualitative Disclosures About Market Risk Not required for smaller reporting companies. 29