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 Dominari Holdings Inc., a Delaware corporation and its consolidated subsidiaries unless the context requires otherwise. Overview Dominari Holdings Inc. (the “Company”), formerly 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 2022, 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, the Company acquired Dominari Securities LLC (Dominari Securities), an introducing broker-dealer, registered with the Financial Industry Regulatory Authority (“FINRA”) and an investment adviser registered with the Securities and Exchange Commission (“SEC”). Dominari Securities provides investment advisory services and annuity and insurance products of certain insurance carriers as an insurance agency through independent and affiliated brokers. Additionally, AIkido Labs, LLC (“Aikido Labs”), another wholly owned subsidiary of the Company, has historically 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. Finally, 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. 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 unaudited condensed 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 discussion and analysis of our financial condition and results of operations is based on our unaudited condensed consolidated financial statements. We have identified the accounting policies that we believe require application of management’s most subjective judgments, often requiring the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Our actual results may differ substantially from these estimates under different assumptions or conditions. There have been no significant changes to our critical accounting policies and estimates since December 31, 2022. The following represent those critical accounting policies that we believe most significantly impact the judgments and estimates used in the preparation of our unaudited condensed consolidated financial statements. Long-term investments Effective January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) 2016-01 and related ASU 2018-03 and ASU 2019-04 concerning recognition and measurement of financial assets and financial liabilities. In adopting this guidance, the Company has made an accounting policy election to adopt an adjusted cost method measurement alternative for investments in equity securities without readily determinable fair values. For equity investments that are accounted for using the measurement alternative, the Company initially records equity investments at cost but is required to adjust the carrying value of such equity investments through earnings when there is an observable transaction involving the same or a similar investment with the same issuer or upon an impairment. Refer to Note 3 of the Annual Report for a discussion of all accounting policies. Recently Issued Accounting Pronouncements See Note 3 to the unaudited condensed consolidated financial statements for a discussion of recent accounting standards. 22 Results of Operations Three Months Ended March 31, 2023, compared to the Three Months Ended March 31, 2022 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. During the three months ended March 31, 2023, and 2022, we incurred a loss from operations of approximately $3.8 million and $3.8 million, respectively. The consistent loss in operations year over year was primarily attributable to the following: i. An approximate $2.0 million increase in general and administrative expenses – driven by approximately $0.4 million and $0.7 million of professional fees (legal, consulting, accounting, etc.) incurred to establish and operate Dominari Financial and Dominari Securities, respectively. In addition, the Company also incurred increased compensation expenses of approximately $0.7 million due to growing operations. ii. An approximate $2.0 million decrease in research and development expenses – attributable to the Company’s strategic business decision to transition away from the biotechnology industry and into financial services. The result is a decrease in research and development related expenses by almost 100%. During the three months ended March 31, 2023 and 2022, other income was approximately $0.07 million and $0.3 million, respectively. The activity for the three months ended March 31, 2023 and 2022, 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 $0.07 million for the three months ended March 31, 2023. The decrease of approximately $0.4 million in losses over prior year is a direct result of a decrease in realized and unrealized losses of approximately $0.2 million, offset by an increase in dividend income related of approximately $0.06 million. The decreases were driven by both market improvement and decrease in sale activity resulting in fewer realized losses. ii. Short-term and long-term investments – we did not recognize a change in the fair value of short-term and long-term for the three months ended March 31, 2023. The change over the three months ended March 31, 2022 is a function of observable market transactions which resulted in unrealized gains of approximately $0.5 on the adjusted fair value of the investments during the three months ended March 31, 2022. There were no observable market transactions or impairment indicators identified during the three months ended March 31, 2023. 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 23 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 $43.8 million as of March 31, 2023. 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. Cash Flows from Operating Activities For the three months ended March 31, 2023 and 2022, net cash used in operations was approximately $4.0 million and $3.8 million, respectively. The cash used in operating activities for the three months ended March 31, 2023, is primarily attributable to a net loss of approximately $3.8 million and changes in operating assets and liabilities of $0.5 million, partially offset by approximately $0.1 million in unrealized losses on marketable securities and approximately $0.06 million of realized loss on marketable securities. The cash used in operating activities for the three months ended March 31, 2022 primarily resulted from a net loss of $3.5 million and change in fair value of long-term investment of $1.4 million, and is partially offset by change in fair value of short-term investment of $0.9 million. Cash Flows from Investing Activities For the three months ended March 31, 2023 and 2022, net cash used in investing activities was approximately $18.7 million and $10.1 million, respectively. The cash used in investing activities for the three months ended March 31, 2023, primarily resulted from our purchase of marketable securities of approximately $17.5 million and the acquisition of FPS of approximately $1.1 million. The Company also collected approximately $0.3 million in principal related to its short-term notes. The cash used in investing activities for the three months ended March 31, 2022, primarily resulted from our purchase of marketable securities of $27.1 million and purchase of investments of $7.7 million. The purchases of marketable securities during the prior year was partially offset by our sale of marketable securities of $24.7 million since we invest excess cash into marketable securities until additional cash is needed. Cash Flows from Financing Activities For the three months ended March 31, 2023, cash used in financing activities was approximately $0.9 million, which reflects the cost for purchase of treasury stock of approximately $0.9 million. Cash provided by financing activities for the three months ended March 31, 2022, was approximately $19.0 million, which reflects the net proceeds of approximately $19.0 million from investors in exchange for the issuance of Series O and Series P Redeemable Convertible Preferred Stock. Off-balance sheet arrangements. None. 24 Item 3. Quantitative and Qualitative Disclosures About Market Risk Not required for smaller reporting companies.