Dominari Holdings Inc. 10-K

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Company’s consolidated financial statements as of and for the years ended December 31, 2024 and 2023 and the related notes included in Part II, Item 8 of this Annual Report. This discussion contains forward-looking statements, within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. The Company’s actual results could differ materially from such forward-looking statements. The Company does not undertake to update, revise or correct any of the forward-looking information unless required to do so under the federal securities laws. Readers are cautioned that such forward-looking statements should be read in conjunction with the Company’s disclosures under the heading “Special Cautionary Notice Regarding Forward Looking Statements” included in this Annual Report. Additionally, the Company’s historical results are not necessarily indicative of the results that may be expected in any future period. Amounts are presented in U.S. dollars. You should not place undue reliance on these forward-looking statements. Should one or more of a number of known and unknown risks and uncertainties materialize, or should any of our assumptions prove incorrect, the Company’s actual results or performance may be materially different from those expressed or implied by these forward-looking statements. Factors that could cause actual results to differ include, but are not limited to, those identified below and those discussed in Part I, Item 1A “Risk Factors” of this Annual Report: Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is provided in addition to the accompanying consolidated financial statements and notes to assist readers in understanding our results of operations, financial condition, and cash flows. The MD&A is organized as follows: ● Overview. Discussion of our business and overall analysis of financial and other highlights affecting the Company in order to provide context for the remainder of the MD&A. ● Critical Accounting Estimate. Accounting estimates we believe are most important to understanding the assumptions and judgments incorporated in our reported financial results and forecasts. ● Recently Issued Accounting Pronouncements. A discussion of recent accounting standards. ● Results of Operations. An analysis of our financial results is presented to compare 2024 to 2023. We also provide a discussion of our Liquidity and Capital Resources position and usage. Overview Dominari is a holding company that, through its various subsidiaries, is primarily engaged in wealth management, investment banking, sales and trading and asset management. In addition to capital investment, Dominari provides management support to the executive teams of its subsidiaries, helping them to operate efficiently and reduce cost under a streamlined infrastructure. Critical Accounting Estimates We prepare our consolidated financial statements in accordance with U.S. generally accepted accounting principles, which require our management to make estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the balance sheet dates, as well as the reported amounts of revenues and expenses during the reporting periods. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations would be affected. We base our estimates on our own historical experience and other assumptions that we believe are reasonable after taking account of our circumstances and expectations for the future based on available information. We evaluate these estimates on an ongoing basis. We consider an accounting estimate to be critical if: (i) the accounting estimate requires us to make assumptions about matters that were highly uncertain at the time the accounting estimate was made, and (ii) changes in the estimate that are reasonably likely to occur from period to period or use of different estimates that we reasonably could have used in the current period, would have a material impact on our financial condition or results of operations. We believe that the following accounting estimates we have identified as critical involve a greater degree of judgment and complexity than our other accounting estimates. Accordingly, these are the estimates we believe are the most critical to understanding and evaluating our consolidated financial condition and results of operations. 25 Fair Value Option - Short-Term Note and Convertible Note The guidance in ASC 825, Financial Instruments , provides a fair value option election that allows entities to make an irrevocable election of fair value as the initial and subsequent measurement attribute for certain eligible financial assets and liabilities. The Company has elected to measure the purchases of its notes using the fair value option at each reporting date. Under the fair value option, bifurcation of an embedded derivative is not necessary, and all related gains and losses on the host contract and derivative due to change in the fair value will be reflected in interest income and other, net in the consolidated statements of operations. Interest accrues on the unpaid principal balance on a quarterly basis and is recognized in interest income in the consolidated statements of operations. The decision to elect the fair value option is determined on an instrument-by-instrument basis and must be applied to an entire instrument and is irrevocable once elected. Pursuant to this guidance, assets and liabilities are measured at fair value based, in part, on general economic and stock market conditions and those characteristics specific to the underlying investments. The carrying value is adjusted to estimated fair value at the end of each quarter, required to be reported separately in our consolidated balance sheets from those instruments using another accounting method. Under this guidance, the Company makes certain assumptions as to the fair value of the underlying notes. The primary critical estimate is the credit risk of the underlying companies. Any future credit risk is not known, as there is uncertainty, and subject to further estimates by the Company. Additionally, any future events are not taken into account, which could result in further estimates of the fair value of any outstanding notes. Long-Term Investments The Company accounts for long-term equity investments under Accounting Standards Codification (“ASC”) 321 “Investments—Equity Securities” (“ASC 321”). In accordance with ASC 321, equity securities with readily determinable fair values are accounted for at fair value based on quoted market prices. Any equity securities with a readily determinable fair value are included within marketable securities on the accompanying consolidated balance sheet. Equity securities without readily determinable fair values are accounted for either at net asset value or using the measurement alternative. Under the measurement alternative, the equity investments are measured at cost, less any impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The Company, throughout the process of determining if there are any changes resulting from observable price changes is faced with the risk of estimating certain aspects of its underlying investments. There are limited observable and orderly transactions that are known to the Company, due to the fact that its investments are primarily private companies. The Company estimates and uses judgments for these underlying investments, that result in uncertainty and estimates which could result in future changes in the carrying value of the investments. Additionally, the Company uses any information which is known to them, which could be from different types of instruments. Any estimates the Company may use, are its best estimate and may be subject to risk of further changes. Effect of new accounting pronouncements not yet adopted 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 the Company’s consolidated financial statements. 26 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, 2024 Compared to Fiscal Year Ended December 31, 2023 During the year ended December 31, 2024, we recognized approximately $18.1 million in revenue from operations, an increase of approximately $16.1 million as of the year ended December 31, 2023, primarily driven by the increase in our activities of Dominari Securities. During the years ended December 31, 2024 and 2023, we incurred a loss from operations of approximately $11.5 million and $21.8 million, respectively. The decrease in loss in operations was primarily attributable to the following: i. An approximate $16.1 million increase in revenue from operations, offset by, ii. An approximate $5.8 million increase in general and administrative expenses – driven by approximately an increase of $8 million of compensation expenses, due to the growing operations of the Company. In addition, the Company also had a decrease of approximately $2.4 million of professional fees (legal, consulting, accounting, etc.), which were largely due to the establishment of Dominari Financial and Dominari Securities during the year ended December 31, 2023. During the years ended December 31, 2024 and 2023, other expenses was approximately $3.2 million and $1.1 million, respectively. The activity for the years ended December 31, 2024 and 2023, 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 note receivable, and long-term investments. Specifically: i. Marketable securities – we recognized a gain of approximately $5.2 million for the year ended December 31, 2024. The increase of approximately $4.6 million in gains over the prior period is a result of additional activities during the year as we expanded. ii. Change in carrying value of long term investments – we recognized a change in carrying value of long term investments of $(7.1) million for the year ended December 31, 2024. During the year ended December 31, 2023, we recognized a change in carrying value of long term investments of $0.8 million. This change of approximately $7.8 million was the direct result of the Company writing down additional investments due to performance during the year ending December 31, 2024. i ii. Note receivable – the changes over the years ended December 31, 2024 and 2023 are a function of observable market transactions which resulted in a decrease in unrealized loss of approximately $0.9 million on the adjusted fair value of the note receivable during the year ended December 31, 2024, as well as a realized loss of $2.1 million on an uncollectible note. 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; and ● seeking additional liquidity through credit facilities or other debt arrangements. 27 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 business plan to support our transition into the financial services industry. Our working capital amounted to approximately $24.4 million as of December 31, 2024. As of December 31, 2024, we had approximately $4 million of cash and cash equivalents and $5.8 million of marketable securities. Additionally, we had approximately $17 million in receivable from clearing brokers. Subsequent to December 31, 2024, we raised approximately $13.5 million. All of such funds are available to fund our operations. We believe our cash and cash equivalents and marketable securities, together with the anticipated cash flow from operations will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months. In the event that cash flow from operations is not sufficient to fund our operations, as expected, or if our plans or assumptions change, including if inflation begins to have a greater impact on our business or if we decide to move forward with any activities that require more outlays of cash than originally planned, we may need to raise additional capital sooner than expected. We may raise this additional capital by obtaining 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. Our ability to obtain capital to implement our growth strategy over the longer term will depend on our future operating performance, financial condition and, more broadly, on the availability of equity and debt financing. Capital availability will be affected by prevailing conditions in our industry, the global economy, the global financial markets, and other factors, many of which are beyond our control. Specifically, 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. In addition, any additional debt service requirements we take on could be based on higher interest rates and shorter maturities and could impose a significant burden on our results of operations and financial condition, and the issuance of additional equity securities could result in significant dilution to stockholders. Cash Flows from Operating Activities For the years ended December 31, 2024 and 2023, net cash used in operations was approximately $15.1 million and $22.2 million, respectively. The cash used in operating activities for the year ending December 31, 2024, is primarily attributable to a net loss of approximately $14.7 million, change in carrying value of long-term investment of approximately $7.1 million, stock-based compensation of approximately $1.6 million, realized gain on marketable securities of approximately $6.4 million, unrealized loss on marketable securities of approximately $1.7 million, realized and unrealized loss on note receivable of approximately $2.3 million and changes in operating assets and liabilities of approximately $7 million. The cash used in operating activities for the year ending December 31, 2023, is primarily attributable to a net loss of approximately $22.9 million, approximately $1.0 million of unrealized gain on marketable securities, change in fair value of long-term investment of approximately $0.8 million and changes in operating assets and liabilities of $5.3 million, partially offset by $3.0 million stock-based compensation expense, approximately $3.2 million in unrealized losses on note receivable and approximately $1.2 million in realized losses on marketable securities. Cash Flows from Investing Activities For the years ended December 31, 2024 and 2023, net cash provided by and (used in) investing activities was approximately $16.3 million and ($7.2) million, respectively. The cash provided by investing activities for the year ended December 31, 2024, primarily resulted from our purchase of marketable securities of approximately $7.8 million, partially offset by our sale of marketable securities of approximately $21.2 million, sale of long-term investments of $4.3 million, loans to employees of $2.4 million and collection of principal on note receivable of approximately $1 million. The cash used in investing activities for the year ended December 31, 2023, primarily resulted from our purchase of marketable securities of approximately $34.1 million and the acquisition of FPS for approximately $1.1 million, partially offset by our sale of marketable securities of approximately $27.6 million and collection of principal on note receivable of approximately $1.1 million. Cash Flows from Financing Activities For the years ended December 31, 2024 and 2023, net cash used in financing activities was $0 and approximately $0.9 million, which reflects the cost for the purchase of treasury stock. Contractual obligations None.