Dominari Holdings Inc. 10-Q

Item 1. Financial Statements DOMINARI HOLDINGS INC. Condensed Consolidated Balance Sheets ($ in thousands except share and per share amounts) (Unaudited) September 30, December 31, 2023 2022 (Unaudited) ASSETS Current assets Cash and cash equivalents $ 4,388 $ 33,174 Marketable securities 16,274 7,130 Deposits with clearing broker 7,172 - Prepaid expenses and other assets 715 564 Prepaid acquisition cost - 301 Short-term investments at fair value 1 13 Notes receivable, at fair value - current portion 6,336 7,474 Investment in Fieldpoint Securities - 2,000 Total current assets 34,886 50,656 Property and equipment, net 361 - Notes receivable, at fair value - non-current portion 1,372 1,100 Employee forgivable loan receivable 7 - Investments 22,696 23,103 Right-of-use assets 3,426 919 Security deposit 458 458 Total assets $ 63,206 $ 76,236 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities Accounts payable and accrued expenses $ 315 $ 447 Accrued salaries and benefits 632 1,260 Accrued commissions 177 - Lease liability - current 411 82 Other current liability 187 - Total current liabilities 1,722 1,789 Lease liability 3,137 680 Total liabilities 4,859 2,469 Stockholders’ equity Preferred stock, $ .0001 par value, 50,000,000 authorized Series D: 5,000,000 shares designated; 3,825 shares issued and outstanding at September 30, 2023 and December 31, 2022; liquidation value of $ 0.0001 per share - - Series D-1: 5,000,000 shares designated; 834 shares issued and outstanding at September 30, 2023 and December 31, 2022; liquidation value of $ 0.0001 per share - - Common stock, $ 0.0001 par value, 100,000,000 shares authorized; 5,345,312 and 5,485,096 shares issued at September 30, 2023 and December 31, 2022, respectively; 5,285,164 and 5,017,079 shares outstanding at September 30, 2023 and December 31, 2022, respectively - - Additional paid-in capital 260,695 262,970 Treasury stock, at cost, 60,148 and 468,017 shares at September 30, 2023 and December 31, 2022, respectively ( 501 ) ( 3,322 ) Accumulated deficit ( 201,847 ) ( 185,881 ) Total stockholders’ equity 58,347 73,767 Total liabilities and stockholders’ equity $ 63,206 $ 76,236 See accompanying notes to unaudited condensed consolidated financial statements. 1 DOMINARI HOLDINGS INC. Condensed Consolidated Statements of Operations ($ in thousands except share and per share amounts) (Unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Revenues $ 963 $ - $ 1,034 $ - Operating costs and expenses General and administrative $ 4,067 $ 4,515 $ 16,980 $ 8,564 Research and development - 61 3 2,113 Research and development - license acquired 525 - 525 Total operating expenses 4,067 5,101 16,983 11,202 Loss from operations ( 3,104 ) ( 5,101 ) ( 15,949 ) ( 11,202 ) Other income (expenses) Other income - - - 64 Interest income 208 187 505 586 (Loss) gain on marketable securities ( 150 ) ( 1,654 ) 185 ( 4,390 ) Unrealized loss on note receivable - - ( 212 ) - Change in fair value of investments ( 495 ) 329 ( 495 ) 91 Total other (expenses) income ( 437 ) ( 1,138 ) ( 17 ) ( 3,649 ) Net loss $ ( 3,541 ) $ ( 6,239 ) $ ( 15,966 ) $ ( 14,851 ) Deemed dividends related to Series O and Series P Redeemable Convertible Preferred Stock - - - ( 4,109 ) Net Loss Attributable to Common Shareholders $ ( 3,541 ) $ ( 6,239 ) $ ( 15,966 ) $ ( 18,960 ) Net loss per share, basic and diluted Basic and Diluted $ ( 0.66 ) $ ( 1.17 ) $ ( 3.09 ) $ ( 3.59 ) Weighted average number of shares outstanding, basic and diluted Basic and Diluted 5,345,312 5,344,989 5,159,501 5,283,182 See accompanying notes to unaudited condensed consolidated financial statements. 2 DOMINARI HOLDINGS INC. Condensed Consolidated Statements of Changes in Redeemable Convertible Preferred Stock and Stockholders’ Equity ($ in thousands except share and per share amounts) (Unaudited) For the Three Months Ended September 30, 2023 and 2022 Preferred Stock Common Stock Additional Paid-in Treasury Stock Accumulated Total Stockholders’ Shares Amount Shares Amount Capital Shares Amount Deficit Equity Balance at June 30, 2023 4,659 $ - 5,345,312 $ - $ 260,585 60,148 $ ( 501 ) $ ( 198,306 ) $ 61,778 Stock-based compensation - - - - 110 - - - 110 Net loss - - - - - - - ( 3,541 ) ( 3,541 ) Balance at September 30, 2023 4,659 $ - 5,345,312 $ - $ 260,695 60,148 $ ( 501 ) $ ( 201,847 ) $ 58,347 Series O Series P Common Stock Preferred Stock Additional Paid-in Treasury Stock Accumulated Total Stockholders’ Shares Amount Shares Amount Shares Amount Shares Amount Capital Shares Amount Deficit Equity Balance at June 30, 2022 - $ - - $ - 5,246,852 $ - 4,659 $ - $ 261,603 242,902 $ ( 1,750 ) $ ( 172,386 ) $ 87,467 Purchase of treasury stock - - - - - - - - - 102,080 ( 751 ) ( 751 ) Stock-based compensation - - - - 238,244 - - - 1,370 - - - 1,370 Net loss - - - - - - - - - - - ( 6,239 ) ( 6,239 ) Balance at September 30, 2022 - $ - - $ - 5,485,096 $ - 4,659 $ - $ 262,973 344,982 $ ( 2,501 ) $ ( 178,625 ) $ 81,847 3 For the Nine Months Ended September 30, 2023 and 2022 Preferred Stock Common Stock Additional Paid-in Treasury Stock Accumulated Total Stockholders’ Shares Amount Shares Amount Capital Shares Amount Deficit Equity Balance at December 31, 2022 4,659 $ - 5,485,096 $ - $ 262,970 468,017 $ ( 3,322 ) $ ( 185,881 ) $ 73,767 Stock-based compensation - - 529,715 - 1,485 - - - 1,485 Cancellation of common stock - - ( 25,000 ) - - - - - - Purchase of treasury stock - - - - - 236,630 ( 939 ) - ( 939 ) Retirement of treasury stock - - ( 644,499 ) - ( 3,760 ) ( 644,499 ) 3,760 - - Net loss - - - - - - - ( 15,966 ) ( 15,966 ) Balance at September 30, 2023 4,659 $ - 5,345,312 $ - $ 260,695 60,148 $ ( 501 ) $ ( 201,847 ) $ 58,347 Redeemable Convertible Preferred Stock Additional Total Series O Series P Common Stock Preferred Stock Paid-in Treasury Stock Accumulated Stockholders Shares Amount Shares Amount Shares Amount Shares Amount Capital Shares Amount Deficit Equity Balance at December 31, 2021 - $ - - $ - 5,275,329 $ - 4,659 $ - $ 265,633 - $ ( 264 ) $ ( 163,774 ) $ 101,595 Issuance of Series O redeemable convertible preferred stock for cash 11,000 11,000 - - - - - - - - - Issuance of Series P redeemable convertible preferred stock for cash 11,000 11,000 - - - - - - - - - Cost on issuance of Series O and Series P Redeemable Convertible Preferred Stock - ( 1,504 ) - ( 1,505 ) - - - - - - - - - Deemed dividends related to Series O and Series P Redeemable Convertible Preferred Stock - 1,504 - 1,505 - - - - ( 4,109 ) - - - ( 4,109 ) Redemption of Series O Redeemable Convertible Preferred Stock ( 11,000 ) ( 11,000 ) - - - - - - - - - - - Redemption of Series P Redeemable Convertible Preferred Stock - - ( 11,000 ) ( 11,000 ) - - - - - - - - - Purchase of treasury stock - - - - - - - - - 344,982 ( 2,237 ) - ( 2,237 ) Stock-based compensation - - - - 238,244 - - - 1,475 - - - 1,475 Cancellation of common stock related to investment in CBM - - - - ( 22,812 ) - - - - - - - - Fractional shares adjusted for reverse split - - - - ( 5,665 ) - - - ( 26 ) - - - ( 26 ) Net loss - - - - - - - - - - - ( 14,851 ) ( 14,851 ) Balance at September 30, 2022 - $ - - $ - 5,485,096 $ - 4,659 $ - $ 262,973 344,982 $ ( 2,501 ) $ ( 178,625 ) $ 81,847 See accompanying notes to unaudited condensed consolidated financial statements. 4 DOMINARI HOLDINGS INC. Condensed Consolidated Statements of Cash Flows ($ in thousands) (Unaudited) Nine Months Ended September 30, 2023 2022 Cash flows from operating activities Net loss $ ( 15,966 ) $ ( 14,851 ) Adjustments to reconcile net loss to net cash used in operating activities: Amortization of right-of-use assets 268 23 Depreciation 57 - Change in fair value of short-term investment 12 1,517 Change in fair value of long-term investment 482 ( 1,608 ) Research and development-acquired license, expensed - 525 Stock-based compensation 1,485 1,475 Realized loss on marketable securities 1,249 712 Unrealized (gain) loss on marketable securities ( 897 ) 3,889 Unrealized loss on note receivable 212 - Changes in operating assets and liabilities: Prepaid expenses and other assets ( 229 ) ( 344 ) Prepaid acquisition cost 301 - Clearing broker deposits ( 3,622 ) - Accounts payable and accrued expenses ( 345 ) 137 Accrued salaries and benefits ( 628 ) 659 Accrued commissions 152 - Lease liabilities 11 12 Other current liabilities 66 - Notes receivable, at fair value – net interest accrued ( 96 ) ( 521 ) Deposit - ( 295 ) Net cash used in operating activities ( 17,488 ) ( 8,670 ) Cash flows from investing activities Purchase of marketable securities ( 34,068 ) ( 27,479 ) Sale of marketable securities 24,572 28,503 Proceeds from sale of digital currencies - 93 Purchase of fixed assets ( 419 ) - Acquisition of FPS, net of cash acquired and receivable owed from FPS ( 1,112 ) - Collection of principal on note receivable 850 - Funds to employee forgivable loan ( 107 ) - Purchase of research and development licenses ( 525 ) Purchase of short-term and long-term investments ( 75 ) ( 15,016 ) Purchase of short-term and long-term promissory notes - ( 1,600 ) Net cash used in investing activities ( 10,359 ) ( 16,024 ) Cash flows from financing activities Proceeds from issuance of Series O and Series P Redeemable Convertible Preferred Stock, net of discount and offering cost - 17,891 Payment for fractional shares - ( 26 ) Redemption of Series O and Series P Redeemable Convertible Preferred Stock - ( 22,000 ) Purchase of treasury stock ( 939 ) ( 2,237 ) Net cash used in financing activities ( 939 ) ( 6,372 ) Net decrease in cash and cash equivalents and restricted cash ( 28,786 ) ( 31,066 ) Cash and cash equivalents, beginning of period 33,174 65,562 Cash and cash equivalents, end of period $ 4,388 $ 34,496 Non-cash investing and financing activities Transfer from short-term investment to marketable securities $ - $ 1,497 Reclassify from convertible note receivable to notes receivable at fair value $ - $ 2,147 Promissory convertible note receivable conversion into common shares $ - $ 899 On March 27, 2023, the Company acquired all assets and liabilities of FPS as disclosed in Note 4: Net assets acquired, net of cash acquired and receivable owed from FPS $ 3,112 Less - Deposit previously transferred in October 2022 to FPS $ ( 2,000 ) Net cash paid $ 1,112 See accompanying notes to unaudited condensed consolidated financial statements. 5 DOMINARI HOLDINGS INC. Notes to Condensed Consolidated Financial Statements (Unaudited) Note 1. Organization and Description of Business and Recent Developments Organization and Description of Business 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 Financial”), with the intent of shifting the Company’s primary operating focus away from biotechnology to the fintech and financial services industries. Through Dominari Financial, 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. Related to the shift described above, AIkido Labs, LLC (“Aikido Labs”), a wholly owned subsidiary of the Company, is in the process of winding down its historical pipeline of biotechnology assets. Aikido Labs has historically explored opportunities in high growth industries and has equity holdings including 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. Note 2. Liquidity and Capital Resources The Company continues to incur ongoing administrative and other expenses, including public company expenses, in excess of corresponding (non-financing related) revenue. While the Company continues to implement its business strategy, it intends to finance its activities through managing current cash on hand from the Company’s past equity offerings. Based upon projected cash flow requirements, the Company has adequate cash and cash equivalents and marketable securities to fund its operations for at least the next twelve months from the date of the issuance of these unaudited condensed consolidated financial statements. Note 3. Summary of Significant Accounting Policies There have been no material changes in the Company’s significant accounting policies from those previously disclosed in the 2022 Annual Report. Basis of Presentation and Principles of Consolidation The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”), and in conformity with the rules and regulations of the SEC. In the opinion of management, these financial statements contain all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of the results of the interim periods presented. The condensed consolidated balance sheet as of September 30, 2023, condensed consolidated statements of operations for the three and nine months ended September 30, 2023 and 2022, condensed consolidated statements of stockholders’ equity for the three and nine months ended September 30, 2023 and 2022, and the condensed consolidated statements of cash flows for the nine months ended September 30, 2023 and 2022 are unaudited, but include all adjustments, consisting only of normal recurring adjustments, which the Company considers necessary for a fair presentation of the financial position, operating results and cash flows for the periods presented. The results for the three and nine months ended September 30, 2023 are not necessarily indicative of results to be expected for the year ending December 31, 2023 or for any future interim period. The condensed consolidated balance sheet at December 31, 2022 has been derived from audited financial statements; however, it does not include all of the information and notes required by U.S. GAAP for complete financial statements. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2022. 6 The Company’s policy is to consolidate all entities that it controls by ownership of a majority of the membership interest or outstanding voting stock. The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Aikido Labs, Dominari Financial, and Dominari Securities. All significant intercompany balances and transactions have been eliminated in consolidation. Results for interim periods are not necessarily indicative of results to be expected for a full year or any future period. Use of Estimates The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with U.S. GAAP. This requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements, and the reported amounts of revenue and expenses during the period. The Company’s significant estimates and assumptions include stock-based compensation, the valuation of investments, the valuation of notes receivable and the valuation allowance related to the Company’s deferred tax assets. Certain of the Company’s estimates could be affected by external conditions, including those unique to the Company and general economic conditions. It is reasonably possible that these external factors could have an effect on the Company’s estimates and could cause actual results to differ from those estimates and assumptions. Deposits with clearing broker Deposits with Dominari Securities’ clearing broker consisted of approximately $ 7.2 million held in money market funds and liquid insured deposits maintained by the Company with its clearing broker as of September 30, 2023. Leases The Company accounts for its leases under ASC 842, Leases (“ASC 842”). Under this guidance, arrangements meeting the definition of a lease are classified as operating or financing leases and are recorded on the unaudited condensed consolidated balance sheet as both a right-of-use asset and lease liability, calculated by discounting fixed lease payments over the lease term at the rate implicit in the lease or the Company’s incremental borrowing rate. Lease liabilities are increased by interest and reduced by payments each period, and the right-of-use asset is amortized over the lease term. For operating leases, interest on the lease liability and the amortization of the right-of-use asset result in straight-line rent expense over the lease term. For finance leases, interest on the lease liability and the amortization of the right-of-use asset results in front-loaded expense over the lease term. Variable lease expenses are recorded when incurred (see Note 10 - Leases ). Revenue The Company recognizes revenues under ASC 606 - Revenue from Contracts with Customers (“ASC 606”) . Revenues are recognized when control of the promised goods or performance obligations for services is transferred to the Company’s customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for the goods or services. 7 The following provides detailed information on the recognition of the Company’s revenues from contracts with customers: ● Underwriting services include underwriting and placement agent services in both the equity and debt capital markets, including private equity placements, initial public offerings, follow-on offerings, and underwriting and distributing public and private debt. Underwriting and placement agent revenues are recognized at a point in time on trade-date, as the client obtains the control and benefit of the underwriting offering at that point. Costs associated with underwriting transactions are deferred until the related revenue is recognized or the engagement is otherwise concluded and are recorded on a gross basis within the general and administrative line item in the unaudited condensed consolidated statements of operations as the Company is acting as a principal in the arrangement. Any expenses reimbursed by the Company’s clients are recognized as other income. ● Commissions are earned by executing, transactions for clients primarily in equity, equity-related, and debt products. Commission revenues associated with trade execution are recognized at a point in time on trade-date. Commissions revenues are generally paid on settlement date and the Company records receivables to account for timing between trade-date and payment on settlement date. ● Account advisory fees are earned in connection with investment advisory services. Account advisory fees are recognized over time using the time elapsed method as the Company determined that the customer simultaneously receives and consumes the benefits of investment advisory services as they are provided. Account advisory fees are generally paid in advance of a specified service period (e.g. quarterly) and are initially deferred within in our Condensed Consolidated Balance Sheet. 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. Recently adopted accounting standards In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805) Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (“ASU 2021-08”). This update amends Topic 805 to add contract assets and contract liabilities to the list of exceptions to the recognition and measurement principles that apply to business combinations and to require that an entity (acquirer) recognize and measure contract assets and contract liabilities in accordance with ASC 606. The Company adopted ASU 2021-08 on January 1, 2023. There was no material impact to the Company’s unaudited condensed consolidated financial statements from the implementation of ASU 2021-08. Effect of new accounting pronouncements not yet adopted In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions , to clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring the fair value of the equity security. ASU 2022-03 also clarifies that an entity cannot recognize and measure a contractual sale restriction as a separate unit of account. The amendments in ASU 2022-03 may be early adopted and are effective on a prospective basis for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. The Company is currently evaluating the impact of the amendments on the Company’s consolidated financial statements and whether it will early adopt the amendments in ASU 2022-03 . In March 2023, the FASB issued ASU 2023-01, Leases , to require entities to classify and account for leases with related parties on the basis of legally enforceable terms and conditions of the arrangement. The amendments are effective in periods beginning after December 15, 2023, including interim periods within those fiscal years. The Company is currently evaluating the provisions of the amendments and the impact on its future consolidated financial statements and whether it will early adopt the amendments in ASU 2023-01. Effect of new accounting pronouncements to be adopted in future periods The Company reviewed all other recently issued accounting pronouncements and concluded that they were either not applicable or not expected to have a significant impact on these unaudited condensed consolidated financial statements. 8 Note 4. FPS Acquisition On September 9, 2022, Dominari Financial entered into a membership interest purchase agreement, as amended and restated on March 27, 2023 (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 FINRA and an investment adviser registered with the SEC (the “FPS Acquisition”). Pursuant to the terms of the FPS Purchase Agreement, Dominari Financial purchased from the Seller 100 % of the membership interests in FPS (the “FPS Membership Interests”). FPS’s registered broker-dealer and investment adviser businesses were renamed and will operate as Dominari Securities, a wholly owned subsidiary of Dominari Financial. The FPS Purchase Agreement provided for Dominari Financial’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 Financial paid to the Seller $ 2.0 million in consideration for a transfer by the Seller to Dominari Financial 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”). The Rule 1017 Application was approved by FINRA on March 20, 2023. The second closing (the “Second Closing”) occurred on March 27, 2023. Dominari Financial paid to the Seller an additional approximate $ 1.6 million consideration for a transfer by the Seller to Dominari Financial of the remaining 80 % of the FPS Membership Interests. Consideration Transferred The FPS Acquisition was accounted for as a business combination under ASC 805. Under the terms of the FPS Purchase Agreement and subsequent amendments and side letters to the agreement 100 % of the FPS Membership Interests were acquired for cash consideration of approximately $ 3.4 million, which reflected the fair value of net assets acquired, plus a $ 1 purchase price. At March 31, 2023, Dominari Financial had not finalized the purchase accounting related to the fair value of assets acquired in the FPS Acquisition. Pursuant to the Initial Closing and Second Closing, Dominari Financial had wired a total of approximately $ 3.6 million in cash to the Seller. The purchase price allocation identified net assets of approximately $ 3.4 million, resulting in a receivable due from the Seller for approximately $ 0.2 million. The receivable is not included within the consideration transferred as part of the FPS Acquisition but is included within prepaid expenses and other assets within the unaudited condensed consolidated balance sheet as of March 31, 2023. Under the acquisition method of accounting, the assets acquired, and liabilities assumed of FPS were recorded as of the acquisition date, at their respective fair values, and consolidated with those of the Company. Acquisition-related costs are not included as a component of consideration transferred but are expensed in the periods in which costs are incurred. The Company incurred approximately $ 0.3 million of transaction costs associated with the FPS Acquisition. The transaction costs are included in general and administrative expenses in the unaudited condensed consolidated statement of operations. Fair Value of Net Assets Acquired The following table summarizes the fair values of the assets acquired and liabilities assumed of FPS at the date of acquisition ($ in thousands): March 27, 2023 (Unaudited) ASSETS Cash and cash equivalents $ 92 Deposits with Clearing Broker-Dealer 3,550 Other receivables 53 Prepaid and other current assets 89 Total assets acquired 3,784 Liabilities Accrued expenses $ 273 Accrued commissions 25 Wealth management liabilities 62 Total liabilities assumed 360 Total net assets of FPS Acquisition 3,424 9 Note 5. Investments in Marketable Securities The realized gain or loss, unrealized gain or loss, and dividend income related to marketable securities for the three and nine months ended September 30, 2023 and 2022, which are recorded as a component of gains and (losses) on marketable securities on the unaudited condensed consolidated statements of operations, are as follows ($ in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Realized loss $ ( 762 ) $ ( 144 ) $ ( 1,249 ) $ ( 712 ) Unrealized gain (loss) 382 ( 1,589 ) 897 ( 3,889 ) Dividend income 230 79 537 211 Total $ ( 150 ) $ ( 1,654 ) $ 185 $ ( 4,390 ) Note 6. Short-term investments The following table presents the Company’s short-term investments as of September 30, 2023, and December 31, 2022 ($ in thousands): September 30, 2023 December 31, 2022 Investment in Vicinity Motor Corp. 1 13 Total 1 13 There was approximately $ 12,000 reduction in the fair value of the short-term investments for the nine months ended September 30, 2023. The following table provides quantitative information regarding Level 3 fair value measurement inputs at their measurement dates: September 30, 2023 December 31, 2022 Option term (in years) 1.1 1.8 Volatility 67.2 % 76.90 % Risk-free interest rate 5.43 % 4.47 % Expected dividends 0.00 % 0.00 % Stock price $ 0.95 $ 0.96 10 Note 7. Long-Term Investments The Company holds interests in several privately held companies as long-term investments that the Company perceives as potential IPO candidates. The following table presents the Company’s long-term investments as of September 30, 2023, and December 31, 2022 ($ in thousands): Cost Basis September 30, 2023 December 31, 2022 Investment in Kerna Health Inc $ 2,140 $ 4,940 $ 4,940 Investment in Kaya Now 1,500 - - Investment in Tevva Motors 1,972 2,794 2,794 Investment in ASP Isotopes 1,300 - - Investment in Unusual Machines 1,075 1,033 1,000 Investment in Qxpress 1,000 1,000 1,000 Investment in Masterclass 170 170 170 Investment in Kraken 597 597 597 Investment in Epic Games 3,500 3,500 3,500 Investment in Tesspay 1,240 2,500 2,500 Investment in SpaceX 3,500 3,674 3,674 Investment in Databricks 1,200 760 1,200 Investment in Discord 476 476 476 Investment in Thrasio 300 300 300 Investment in Automation Anywhere 476 476 476 Investment in Anduril 476 476 476 Total $ 20,922 $ 22,696 $ 23,103 Investment in Unusual Machines, Inc. On November 22, 2021, the Company entered into an agreement (the “AerocarveUS Agreement”) with AerocarveUS Corporation, (“AerocarveUS”). Under the AerocarveUS Agreement, the Company agreed to purchase 250,000 shares of common stock of AerocarveUS for $ 1.0 million. AerocarveUS changed its name to “Unusual Machines, Inc.” on July 5, 2022. In March of 2023, the Company was issued an additional 64,377 shares at no cost. In June 2023, the Company purchased an additional 150,000 shares of common stock for approximately $ 0.08 million. On July 10, 2023, Unusual Machines, Inc. effected a reverse stock split pursuant to which each two shares of common stock of the Corporation issued and outstanding was combined and reclassified into one share of common stock of the Corporation. The investment in Unusual Machines, Inc. was valued at approximately $ 1.0 million as of September 30, 2023. Note 8. Notes Receivable The following table presents the Company’s notes receivable as of September 30, 2023 ($ in thousands): Maturity Date Stated Interest Rate Principal Amount Interest Receivable Fair Value Notes receivable, at fair value Convergent convertible note - current 01/29/2023 8 % $ 1,000 $ 125 $ 1,125 Convergent convertible note - non-current 01/29/2023 8 % $ 250 $ - $ 250 Raefan Industries LLC Investment 12/31/2023 8 % $ 4,493 $ 717 $ 5,210 American Innovative Robotics Investment 04/01/2027 8 % $ 1,100 $ 22 $ 1,122 Notes receivable, at fair value - current portion $ 6,336 Notes receivable, at fair value - non-current portion $ 1,372 11 Convergent Therapeutics, Inc. Investment The Company’s 8 % convertible promissory note (“Convergent Convertible Note”) issued by Convergent Therapeutics, Inc. (“Convergent”) in the principal amount of approximately $ 1.8 million pursuant to a Note Purchase Agreement matured on January 29, 2023 . Upon maturity, Convergent entered into a contractual repayment schedule with the Company. Pursuant to the schedule, Convergent will make a total of eight payments in the amount of $ 250 thousand and accrued interest, every three months until fully satisfied. The principal balance of the Convergent Convertible Note was approximately $ 1.3 million as of September 30, 2023. The Company recorded principal repayment of $ 0.8 million and interest income of approximately $ 0.2 million on the Convergent Convertible Note for the nine months ended September 30, 2023. Raefan Industries LLC Investment The Company recorded an interest income receivable of approximately $ 0.7 million on the Raefan Industries Promissory Note as of September 30, 2023 and an unrealized loss on the note of approximately $ 0.2 million. American Innovative Robotics, LLC Investment The Company recorded interest income of approximately $ 67,000 on the Robotics Promissory Note for the nine months ended September 30, 2023. Kaya Now Inc. Investment During the fourth quarter of 2022, the Company identified indicators of impairment for the Kaya investment as a result of adverse changes in Kaya’s business operations, including liquidity concerns. As a result, the Company recorded an impairment charge of $ 0.5 million in the fourth quarter of 2022. The impairment charge represents an impairment loss of the total investment held as a promissory note resulting in a $ 0 balance for the Kaya Now Promissory Note as of September 30, 2023. The Company received and recorded interest income related to the Kaya Now Promissory Note of approximately $ 10,000 for the nine months ended September 30, 2023. Note 9. Fair Value of Financial Assets and Liabilities Financial instruments, including cash and cash equivalents, accounts payable and accrued liabilities are carried at cost, which management believes approximates fair value due to the short-term nature of these instruments. The Company measures the fair value of financial assets and liabilities based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. 12 The Company uses three levels of inputs that may be used to measure fair value: Level 1 - quoted prices in active markets for identical assets or liabilities Level 2 - quoted prices for similar assets and liabilities in active markets or inputs that are observable Level 3 - inputs that are unobservable (for example, cash flow modeling inputs based on assumptions) Observable inputs are based on market data obtained from independent sources, while unobservable inputs are based on the Company’s market assumptions. Unobservable inputs require significant management judgment or estimation. In some cases, the inputs used to measure an asset or liability may fall into different levels of the fair value hierarchy. In those instances, the fair value measurement is required to be classified using the lowest level of input that is significant to the fair value measurement. Such determination requires significant management judgment. The following table presents the Company’s assets and liabilities that are measured at fair value as of September 30, 2023, and December 31, 2022 ($ in thousands): Fair value measured as of September 30, 2023 Total at September 30, Quoted prices in active markets Significant other observable inputs Significant unobservable inputs 2023 (Level 1) (Level 2) (Level 3) Assets Marketable securities: Equities $ 16,274 $ 16,274 $ - $ - Total marketable securities $ 16,274 $ 16,274 $ - $ - Short-term investment $ 1 $ - $ - $ 1 Notes receivable at fair value, current portion $ 6,336 $ - $ - $ 6,336 Notes receivable at fair value, non-current portion $ 1,372 $ - $ - $ 1,372 Fair value measured as of December 31, 2022 Total at December 31, Quoted prices in active markets Significant other observable inputs Significant unobservable inputs 2022 (Level 1) (Level 2) (Level 3) Assets Marketable securities: Equities $ 7,130 $ 7,130 $ - $ - Total marketable securities $ 7,130 $ 7,130 $ - $ - Short-term investment $ 13 $ - $ - $ 13 Notes receivable at fair value, current portion $ 7,474 $ - $ - $ 7,474 Notes receivable at fair value, non-current portion $ 1,100 $ - $ - $ 1,100 13 Level 3 Measurement The following table sets forth a summary of the changes in the fair value of the Company’s Level 3 financial assets that are measured at fair value on a recurring basis ($ in thousands): Short-term investment at December 31, 2022 $ 13 Change in fair value of investment ( 12 ) Short-term investment at September 30, 2023 $ 1 Notes receivable at fair value, current portion at December 31, 2022 $ 7,474 Collection of principal outstanding ( 750 ) Note receivable, Convergent Therapeutics, non-current portion ( 250 ) Unrealized loss on note receivable ( 212 ) Accrued interest receivable 74 Notes receivable at fair value, current portion at September 30, 2023 $ 6,336 Notes receivable at fair value, non-current portion at December 31, 2022 $ 1,100 Note receivable, Convergent Therapeutics, non-current portion 250 Accrued interest receivable 22 Notes receivable at fair value, non-current portion at September 30, 2023 $ 1,372 Note Receivable at fair value As of September 30, 2023, the fair value of the notes receivable was measured taking into consideration cost of the investment, market participant inputs, market conditions, liquidity, operating results and other qualitative and quantitative factors. No material change was noted in the fair value of the notes receivable during the three months ended September 30, 2023. Note 10. Leases On December 1, 2021, the Company entered into a Lease Agreement (the “Company’s Lease”) with Trump Tower Commercial LLC, a New York limited liability company. Under the Company’s Lease, the Company rents a portion of the twenty-second floor at 725 Fifth Avenue, New York, New York (the “22 nd Floor Premises”). The Company currently uses the 22 nd Floor Premises to run its day-to-day operations. The initial term of the Company’s Lease is seven ( 7 ) years commencing on July 11, 2022 (“Commencement Date). Under the Company’s Lease, the Company is required to pay monthly rent, commencing on January 11, 2023, equal to $ 12,874 . Effective for the sixth and seventh years of the Company’s Lease, the rent shall increase to $ 13,502 . The Company took possession of the 22 nd Floor Premises on the Commencement Date. 14 On September 23, 2022, Dominari Financial entered into a Lease Agreement (“Dominari Financial’s Lease”) with Trump Tower Commercial LLC, a New York limited liability company. Under Dominari Financial’s Lease, Dominari Financial rents a portion of a floor at 725 Fifth Avenue, New York, New York (the “Premises”). Dominari Financial currently uses the Premises to run its day-to-day operations. The initial term of Dominari Financial’s Lease is seven ( 7 ) years commencing on the date that possession of the Premises is delivered to Dominari Financial. Under Dominari Financial’s Lease, Dominari Financial is required to pay monthly rent equal to $ 49,368 . Effective for the sixth and seventh years of Dominari Financial’s Lease, the rent shall increase to $ 51,868 per month. The Company took possession of the Premises in February 2023. The tables below represent the Company’s lease assets and liabilities as of September 30, 2023: September 30, 2023 Assets: Operating lease right-of-use-assets $ 3,426 Liabilities: Current Operating 411 Long-term Operating 3,137 $ 3,548 The following tables summarize quantitative information about the Company’s operating leases, under the adoption of ASC 842: September 30, 2023 Weighted-average remaining lease term – operating leases (in years) 6.7 Weighted-average discount rate – operating leases 10.0 % During the nine months ended September 30, 2023, the Company recorded approximately $ 0.6 million of lease expense to current period operations. Three Months Ended Nine Months Ended September 30, 2023 September 30, 2023 Operating leases Operating lease cost $ 179 $ 490 Operating lease expense 179 490 Short-term lease rent expense 33 96 Net rent expense $ 212 $ 586 Supplemental cash flow information related to leases were as follows: Nine Months Ended September 30, 2023 Operating cash flows - operating leases $ 209 Right-of-use assets obtained in exchange for operating lease liabilities $ 2,780 15 As of September 30, 2023, future minimum payments during the next five years and thereafter are as follows: Operating Leases Remaining Period Ended December 31, 2023 $ 188 Year Ended December 31, 2024 747 Year Ended December 31, 2025 685 Year Ended December 31, 2026 685 Year Ended December 31, 2027 685 Year Ended December 31, 2028 766 Thereafter 1,160 Total 4,916 Less present value discount ( 1,368 ) Operating lease liabilities $ 3,548 Note 11. Net Loss per Share Basic loss per share of common stock is computed by dividing the net loss allocable to common stockholders by the weighted-average number of shares of common stock or common stock equivalents outstanding. Diluted loss per common share is computed similar to basic loss per share except that it reflects the potential dilution that could occur if dilutive securities or other obligations to issue common stock were exercised or converted into common stock. Securities that could potentially dilute loss per share in the future that were not included in the computation of diluted loss per share for the nine months ended September 30, 2023, and 2022 are as follows: As of September 30, 2023 2022 Convertible preferred stock 34 34 Warrants to purchase common stock 444,796 444,796 Restricted stock awards 96,309 - Options to purchase common stock 134,454 198,574 Total 675,593 643,404 Note 12. Stockholders’ Equity and Convertible Preferred Stock Common Stock On March 6, 2023, the Company cancelled 644,499 shares of common stock as a result of retirement of 644,499 shares of treasury stock. On March 20, 2023, the Company cancelled 25,000 shares of common stock owned by an executive. June 27, 2023, pursuant to Soo Yu’s employment agreement and the Company’s 2022 Equity Incentive Plan, the Company executed a Grant Agreement, through which Soo Yu was granted 1,033,591 shares of the Company’s common stock. Upon issuance, the shares were fully vested and nonforfeitable with a total fair value of approximately $ 2.7 million. Pursuant to the Grant Agreement, the Company withheld 503,876 of the shares granted to satisfy Soo Yu’s tax obligation of approximately $ 1.3 million and recorded as income taxes withheld within the unaudited condensed consolidated balance sheet. See Restricted Stock roll-forward below. 16 Treasury Stock On January 21, 2022, the Company’s board of directors authorized a share buyback program (the “Share Buyback Program”), pursuant to which the Company authorized the Share Buyback Program in an amount of up to three million dollars. During the nine months ended September 30, 2023, the Company repurchased 236,630 shares at a cost of approximately $ 0.9 million or $ 3.97 per share through marketable securities account under the Share Buyback Program. The Company records treasury stock using the cost method. On March 6, 2023, the Company retired 644,499 shares of treasury stock with original cost of approximately $ 3.8 million. Warrants A summary of warrant activity for the nine months ended September 30, 2023, is presented below: Warrants Weighted Average Exercise Price Total Intrinsic Value Weighted Average Remaining Contractual Life (in years) Outstanding as of December 31, 2022 444,796 $ 29.25 - 3.20 Outstanding as of September 30, 2023 444,796 $ 29.25 - 2.45 Restricted Stock Awards A summary of restricted stock awards activity for the nine months ended September 30, 2023, is presented below: Number of Restricted Stock Awards Weighted Average Grant Day Fair Value Nonvested at December 31, 2022 8,068 $ 5.90 Granted 626,024 $ 2.67 Vested ( 537,783 ) 2.63 Nonvested at September 30, 2023 96,309 $ 3.18 Stock-based compensation associated with the amortization of restricted stock awards expense was approximately $ 93,000 and $ 1.4 million for the nine months ended September 30, 2023, and 2022, respectively. All stock compensation was recorded as a component of general and administrative expenses. As of September 30, 2023, there is approximately $ 0.2 million unrecognized stock-based compensation expense related to restricted stock awards. Stock Options A summary of option activity under the Company’s stock option plan for the nine months ended September 30, 2023, is presented below: Number of Shares Weighted Average Exercise Price Total Intrinsic Value Weighted Average Remaining Contractual Life (in years) Outstanding as of December 31, 2022 31,193 $ 302.97 $ - 7.9 Employee options granted 110,000 3.21 - 9.9 Employee options forfeited ( 5,882 ) 5.95 - - Employee options expired ( 857 ) $ 9,719.07 - - Outstanding as of September 30, 2023 134,454 $ 10.70 $ - 9.4 Options vested and exercisable 24,454 $ 44.43 $ - 7.1 Stock-based compensation associated with the amortization of stock option expense was approximately $ 26,000 and $ 40,000 for the nine months ended September 30, 2023, and 2022, respectively. All stock compensation was recorded as a component of general and administrative expenses. Estimated future stock-based compensation expense relating to unvested stock options is approximately $ 0.7 million. 17 Note 13. Revenue The following table presents our total revenues disaggregated by revenue type for the three and nine months ended September 30, 2023 and 2022 (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Underwriting $ 318 $ - $ 361 $ - Commissions 525 - 539 - Advisory fees 72 - 72 - Other 48 - $ 62 - Total $ 963 $ - $ 1,034 $ - Note 14. Commitments and Contingencies Legal Proceedings In the past, in the ordinary course of business, the Company actively pursued legal remedies to enforce its intellectual property rights and to stop unauthorized use of the Company’s technology. Other than ordinary routine litigation incidental to the business, the Company is not aware of any material, active or pending legal proceedings brought against it. Note 15. Regulatory Dominari Securities, the Company’s broker-dealer subsidiary, is registered with the SEC as an introducing broker-dealer and is a member of FINRA. The Company’s broker-dealer subsidiary is subject to SEC Uniform Net Capital Rule (Rule 15c3-1) which requires the maintenance of minimum net capital and requires that the ratio of aggregate indebtedness to net capital, both as defined, shall not exceed 15 to 1. As such, the subsidiary is subject to the minimum net capital requirements promulgated by the SEC and has elected to calculate minimum capital requirements using the basic method permitted by Rule 15c3-1. As of September 30, 2023, Dominari Securities had net capital of approximately $ 6.2 million, which was approximately $ 6.1 million in excess of required minimum net capital of $ 0.1 million. Note 16. Related Party Transaction In 2021, the Company engaged the services of Revere Securities, LLC (“Revere”) to strategically manage and build the Company’s investment processes. Kyle Wool, Board Member, was previously a member of the board of directors of Revere. The Company incurred fees of approximately $ 75,000 and $ 0.8 million during the nine months ending September 30, 2023, and 2022, respectively. These fees were included in general and administrative expenses in the unaudited condensed consolidated statements of operations. 18 Note 17. Segment Reporting The Company operates in two reportable business segments: (1) Dominari Financial and (2) Legacy AIkido. The Dominari Financial reportable business segment represents the Company’s broker-dealer business, which is composed of mostly underwriting and transactional service activities. The Legacy AIkido reportable business segment includes Aikido Labs, which manages the investments holdings of the legacy entity. Prior to the FPS Acquisition, the Company operated as a single operating segment comprised of Legacy AIkido. The chief operating decision-maker (“CODM”) has access to and regularly reviews internal financial reporting for each business and uses that information to make operational decisions and allocate resources. Accounting policies applied by the reportable segments are the same as those used by the Company and described in the “ Summary of Significant Accounting Policies. ” While assets are primarily held within the Legacy AIkido reportable business segment, total assets by segment is not disclosed as the CODM does not assess performance, make strategic decisions, or allocate resources based on assets. The measures of segment profitability that are most relied upon by the CODM are gross revenues and net loss, as presented within the table below and reconciled to the statement of operations. Three Months Ended September 30, 2023 Dominari Financial Legacy AIkido Consolidated Revenue $ 963 $ - $ 963 Operating Costs General and administrative 2,324 1,743 $ 4,067 Research and development - - - Loss from operations $ ( 1,361 ) $ ( 1,743 ) $ ( 3,104 ) Other (expenses) income Other income - - - Interest income 91 117 208 Loss on marketable securities - ( 150 ) ( 150 ) Unrealized loss on note receivable - - - Change in fair value of investments ( 495 ) ( 495 ) Total other (expenses) income $ 91 $ ( 528 ) $ ( 437 ) Net loss $ ( 1,270 ) $ ( 2,271 ) $ ( 3,541 ) Nine Months Ended September 30, 2023 Dominari Financial Legacy AIkido Consolidated Revenue $ 1,034 $ - $ 1,034 Operating Costs General and administrative 10,380 6,600 16,980 Research and development 3 3 Loss from operations $ ( 9,346 ) $ ( 6,603 ) $ ( 15,949 ) Other (expenses) income Other income - - - Interest income 135 370 505 Gain on marketable securities - 185 185 Unrealized loss on note receivable - ( 212 ) ( 212 ) Change in fair value of investments - ( 495 ) ( 495 ) Total other (expenses) income $ 135 $ ( 152 ) $ ( 17 ) Net loss $ ( 9,211 ) $ ( 6,755 ) $ ( 15,966 ) 19