Dominari Holdings Inc. 10-K

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements You should read this discussion together with the Consolidated Financial Statements, related Notes and other financial information included elsewhere in this Form 10-K. 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. Overview Dominari Holdings Inc. (the “Company”), formerly known as AIkido Pharma, Inc., was founded in 1967 as Spherix Incorporated. Since 2017, the Company has operated as a biotechnology company with a diverse portfolio of small-molecule anticancer and antiviral therapeutics and their related patent technology. In an effort to enhance shareholder value, in June of this year, the Company formed a wholly owned financial services subsidiary, Dominari Financial Inc. (“Dominari”), with the intent of shifting the Company’s primary operating focus away from biotechnology to the fintech and financial services industries. Through Dominari Holdings, the Company plans to make strategic acquisitions across the fintech and financial services industries. 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”), that is a broker-dealer registered with the Financial Industry Regulatory Authority (“FINRA”) and an investment adviser registered with the Securities and Exchange Commission (“SEC”). Pursuant to the terms of the FPS Purchase Agreement, Dominari purchased from the Seller 100% of the membership interests in FPS (the “Membership Interests”). FPS’s registered broker-dealer and investment adviser businesses will be operated as a wholly owned subsidiary of Dominari. 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 FPS 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”) which was approved on March 20, 2023. The second closing “Second Closing”), occurred on March 27, 2023. Dominari paid the Seller an additional $1.00 in consideration for the transfer by the Seller to Dominari of the remaining 80% of the Membership Interests. The Second Closing is subject to customary closing conditions, including the accuracy of the representations and warranties of the applicable parties under the FPS Purchase Agreement and compliance therewith. 19 Additionally, AIkido Labs, LLC (“Aikido Labs”), another wholly owned subsidiary of the Company, has explored opportunities in high growth industries. To date, Aikido Labs has made equity investments 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. The Company is in the process of winding down its historical pipeline of biotechnology assets consisting of patented technologies from leading universities and researchers, including prospective treatments for pancreatic cancer, acute myeloid leukemia, and acute lymphoblastic leukemia. The Company is 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, the Marburg virus, SARS-CoV, MERS-CoV, and SARS-CoV-2, the cause of COVID-19. Reverse Stock Split On June 7, 2022, the Company effected a seventeen-for-one (17-for-1) reverse stock split of its class of common stock (the “Reverse Stock Split”). The Reverse Stock Split, which was approved by stockholders at an annual stockholder meeting on May 20, 2022, was consummated pursuant to a Certificate of Amendment filed with the Secretary of State of Delaware on June 2, 2022. The Reverse Stock Split was effective on June 7, 2022. All references to common stock, convertible preferred stock, warrants to purchase common stock, options to purchase common stock, restricted stock units, restricted stock awards, share data, per share data and related information contained in the consolidated financial statements have been retrospectively adjusted to reflect the effect of the Reverse Stock Split for all periods presented. Payment for fractional shares resulting from the reverse stock split amounted to $26,000. Critical Accounting Policies Our critical accounting policies are disclosed in Note 3 to the consolidated financial statements. Recently Issued Accounting Pronouncements See Note 3 to the consolidated financial statements for a discussion of recent accounting standards. Results of Operations Fiscal Year Ended December 31, 2022, Compared to Fiscal Year Ended December 31, 2021 The Company did not recognize revenue from operations, nor do we expect to recognize any revenue until our operational transition into the financial services industry is complete. 20 During the years ended December 31, 2022, and 2021, we incurred a loss from operations of approximately $14.4 million and $9.4 million, respectively. The approximate $5.0 million increase in loss was primarily attributable to the following: i. An approximate $4.0 million increase in general and administrative expenses – driven by approximately $1.5 million of fully-vested restricted stock grants issued to the members of the board of directors and approximately $1.5 million of discretionary bonus expense for employees. We also incurred approximately $1.6 million in legal and accounting advisory fees related to our transition into a financial services business. ii. An approximate $0.3 million increase in research and development expenses – attributable to an approximate $0.3 million increase in expense related to our previous 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; and, iii. An approximate increase of $0.7 million in research and development - license acquired – attributable to an approximate $1.2 million 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. The additional license payment was partially offset by a decrease, year-over-year, of $0.5 million related to a one-time recognition of restricted stock expense in 2021 in relation to the license arrangements. During the year ended December 31, 2022, and 2021, other (expense) income was approximately $(7.8) million and $2.3 million, respectively. The activity for the years ended December 31, 2022, and 2021, is primarily a result of overall volatility in investment valuations due to macroeconomic uncertainty (i.e. inflation, global tensions in the Ukraine, etc.) impacting marketable securities and the change in fair value of short and long-term investments. Specifically: i. Marketable securities – we recognized a loss of approximately $6.0 million for the year ending December 31, 2022. The increase in losses over prior year is a direct result of an increase in both realized and unrealized losses on marketable securities of $1.3 million and $1.8 million, respectively, and a $1.1 million decrease in related dividend income. ii. Short-term and long-term investments – we recognized a loss on change in fair value of investments for the year ending December 31, 2022, of approximately $2.6 million. The change over prior year is a function of unrealized losses of approximately $3.8 million on our investments of Kaya Holding Corp. and Nano Innovations Inc. for the year ending December 31, 2022, as compared to approximately $3.6 million in unrecognized gains on our investments in Kaya Holding Corp. and Kerna Health, Inc. recorded for the year ending December 31, 2021. Further, we also recognized approximately $0.5 million in net realized losses on our investments in DatChat, Inc., Hoth Therapeutics Inc., and Vicinity Motor Corp and an approximate $0.9 million realized loss on our conversion of the Slinger Bag, Inc. convertible promissory note into common stock of Connexa Sports Technologies Inc. (formerly Slinger Bag Inc.). The aforementioned losses were driven by increased volatility in the market. Liquidity and Capital Resources We continue to incur ongoing administrative and other expenses, including public company expenses. 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; ● seeking additional funds raised through the sale of additional securities in the future; ● seeking additional liquidity through credit facilities or other debt arrangements; and Our ultimate success is dependent on our ability to generate sufficient cash flow to meet our obligations on a timely basis. Our business may require significant amounts of capital to sustain operations that we need to execute our longer-term business plan to support our transition into the financial services industry. Our working capital amounted to approximately $48.9 million as of December 31, 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 from continuing 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. 21 Cash Flows from Operating Activities For the years ended December 31, 2022, and 2021, net cash used in operations was approximately $10.6 million and $6.6 million, respectively. The cash used in operating activities for the year ending December 31, 2022, is primarily attributable to a net loss of approximately $22.1 million. The net loss was slightly offset by approximately $4.9 million in unrealized losses on marketable securities, approximately $2.6 million relating to the change in fair value of short-term investments, approximately $1.8 million in research and development expense related to acquired licenses, approximately $1.5 million related to stock-based compensation, and approximately $1.4 million of realized loss on marketable securities. The cash used in operating activities for the year ended December 31, 2021, is primarily attributable to a net loss of approximately $7.2 million, further increased by approximately $3.6 million for a change in fair value of short-term investments, and slightly offset by approximately $3.1 million in unrealized losses on marketable securities and approximately $1.1 million in research and development expense related to acquired licenses. Cash Flows from Investing Activities For the years ended December 31, 2022, and 2021, net cash used in investing activities was approximately $14.6 million and $8.9 million, respectively. The cash used in investing activities for the year ended December 31, 2022, primarily resulted from our purchase of marketable securities of approximately $26.8 million, purchase of investments of approximately $15.0 million, purchase of research and development licenses of approximately $1.8 million, and the purchase of promissory notes of approximately $1.6 million, partially offset by our sale of marketable securities of approximately $28.7 million since we invest excess cash into marketable securities until additional cash is needed. The cash used in investing activities for the year ended December 31, 2021, primarily resulted from our purchase of marketable securities of approximately $93.4 million, the purchase of promissory notes of approximately $6.9 million, purchase of short-term and long-term investments of approximately $5.7 million, deposits of approximately $4.2 million and the purchase of convertible notes of approximately $2.0 million, partially offset by our sale of marketable securities of approximately $103.0 million. Cash Flows from Financing Activities For the year ended December 31, 2022, cash used in financing activities was approximately $7.2 million, which reflects the cost for redemption of Series O and Series P Redeemable Convertible Preferred Stock of approximately $22.0 million and cost for purchase of treasury stock of approximately $3.1 million, partially offset by net proceeds of approximately $17.9 million from investors in exchange of issuance of issuance of Series O and Series P Redeemable Convertible Preferred Stock. For the year ended December 31, 2021, cash provided by financing activities was approximately $78.2 million, which is primarily attributable to the approximate $78.2 million from investors in exchange of issuance of common stock and warrants. Contractual obligations None.