Dominari Holdings Inc.: Form 10-Q for the period ended Jun 30, 2024

You should read this discussion together with the Financial Statements, related Notes and other financial information included elsewhere in this Form 10-Q. 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.

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q (“Quarterly Report”) contains statements that the Company believes are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, without limitation, statements relating to expectations for future financial performance, business strategies or expectations for the Company’s business. These statements are based on the beliefs and assumptions of the management of the Company. Although the Company believes that its plans, intentions and expectations reflected in or suggested by these forward-looking statements are reasonable, it cannot provide assurance that it will achieve or realize these plans, intentions or expectations. These statements constitute projections, forecasts and forward-looking statements, and are not guarantees of performance. Such statements can be identified by the fact that they do not relate strictly to historical or current facts. When used in this Quarterly Report, words such as “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “forecast,” “intend,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “seek,” “should,” “strive,” “target,” “will,” “would” and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. All subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are qualified in their entirety by this paragraph. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. 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.

Overview

Dominari Holdings Inc. (“Dominari”) is a holding company that, through its various subsidiaries, is engaged in wealth management, investment banking, sales and trading, asset management and insurance. 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. Dominari and its subsidiaries are collectively referred to herein as “Company,” “we,” “our” or “us.”

Dominari Financial Inc. (“Dominari Financial”), a wholly-owned subsidiary of Dominari Holdings Inc., executes the Company’s growth strategy in the financial services industry. In addition to organic growth, Dominari Financial seeks partnership opportunities and acquisitions of third-party financial assets such as registered investment advisors and businesses, broker dealers, asset management and fintech firms, and insurance brokers. Our first transaction in furtherance of our growth in the financial services industry, the acquisition of 100% of a dually-registered broker dealer and investment advisor from Fieldpoint Private Bank & Trust (“Fieldpoint”), was consummated on March 27, 2023. The newly acquired dually registered broker-dealer and investment adviser was renamed Dominari Securities LLC (“Dominari Securities”) and is a wholly-owned subsidiary of Dominari Financial.

On May 21, 2024, Dominari Financial and Heritage Strategies LLC (“HS”) entered into a Limited Liability Company Operating Agreement (the “JV Agreement”) of Dominari Financial Heritage Strategies LLC (“DFHS”). The JV Agreement governs the operation of DFHS, including the distributions to the members of DFHS upon the offer, sale and renewal of various insurance products and services, including life insurance, private placement insurance, group medical plans, qualified plans, business insurance, and family office and estate planning services. Pursuant to the terms of the JV Agreement, Dominari Financial and HS are the co-managing members (the “Co-Managing Members”), each with fifty percent (50%) ownership interests in DFHS. Revenues from the sale of the various insurance products and services after deducting general and administrative costs are distributed to the Co-Managing Members as set forth in the JV Agreement.

The Company is in the process of winding down its historical pipeline of biotechnology assets held by Aikido Labs, LLC. These biotechnology assets consist of patented technology from leading universities and researchers, including prospective treatments for pancreatic cancer, acute myeloid leukemia, SARS-CoV-2 and acute lymphoblastic leukemia.

Critical Accounting Estimates

We prepare our condensed consolidated financial statements in accordance with GAAP. The preparation of these condensed consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. We base our estimates on historical experience and other assumptions that we believe are reasonable under the circumstances. Our actual results could differ significantly from these estimates under different assumptions and conditions.

There have been no material changes to our critical accounting estimates as compared to the critical accounting estimates discussed in the Form 10-K.

Refer to Note 3 of the Annual Report for a discussion of our significant accounting policies.

Recently Issued Accounting Pronouncements

See Note 3 to the unaudited condensed consolidated financial statements for a discussion of recent accounting standards.

Results of Operations

Three Months Ended June 30, 2024, compared to the Three Months Ended June 30, 2023

During the three months ended June 30, 2024 and 2023, we recognized approximately $6.2 million and $71,000 in revenue from operations, respectively, primarily driven by the commissions and underwriting revenue earned by Dominari Securities and Dominari Manager LLC (“Manager”). During the three months ended June 30, 2024 and 2023, we incurred a loss from operations of approximately $2.7 million and $9.0 million, respectively.

During the three months ended June 30, 2024 and 2023, other (expenses) income was approximately $(3.4) million and $0.3 million, respectively.

The activity described above for the three months ended June 30, 2024 and 2023, is primarily a result of the Company’s entrance into the financial services industry, overall volatility in investment valuations due to macroeconomic uncertainty impacting marketable securities and the change in fair value of long-term equity investments. Specifically:

i. Marketable securities - we recognized a gain of approximately $0.1 million for the three months ended June 30, 2024. The decrease of approximately $0.3 million in gains from the three months June 2023 is driven by both market improvement and an increase in sale activity resulting in more realized gains.

ii. Notes receivable - the changes over the three months ended June 30, 2024 and 2023 are a function of observable market transactions which resulted in an increase in unrealized loss of approximately $0.7 million on the adjusted fair value of our notes receivable during the three months ended June 30, 2024.

iii. Long-term equity investments -the changes over the three months ended June 30, 2024 and 2023 are a function of observable market transactions which resulted in an increase in unrealized loss of approximately $3.0 million on the adjusted fair value of the investments during the three months ended June 30, 2024.

Six Months Ended June 30, 2024, compared to the Six Months Ended June 30, 2023

During the six months ended June 30, 2024, we recognized approximately $7.5 million and $71,000 in revenue from operations, respectively, primarily driven by the commissions and underwriting revenue earned by Dominari Securities and Dominari Manager. During the six months ended June 30, 2024 and 2023, we incurred a loss from operations of approximately $5.5 million and $12.8 million, respectively.

During the six months ended June 30, 2024 and 2023, other (expenses) income was approximately $(6.0) million and $0.4 million, respectively.

The activity described above for the six months ended June 30, 2024 and 2023, is primarily a result of the Company’s entrance into the financial services industry, overall volatility in investment valuations due to macroeconomic uncertainty impacting marketable securities and the change in fair value of long-term equity investments. Specifically:

i. Marketable securities - we recognized a gain of approximately $0.7 million for the six months ended June 30, 2024. The increase of approximately $0.3 million in gains over the six months ended June 2023 is driven by both market improvement and an increase in sale activity resulting in more realized gains.

ii. Notes receivable - the changes over the six months ended June 30, 2024 and 2023 are a function of observable market transactions which resulted in an increase in unrealized loss of approximately $1.7 million on the adjusted fair value of our notes receivable during the six months ended June 30, 2024.

iii. Long-term equity investments -the changes over the six months ended June 30, 2024 and 2023 are a function of observable market transactions which resulted in an increase in unrealized loss of approximately $5.5 million on the adjusted fair value of the investments during the six months ended June 30, 2024.

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.

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 $24.9 million as of June 30, 2024. 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 six months ended June 30, 2024 and 2023, net cash used in operations was approximately $7.2 million and $13.9 million, respectively. The cash used in operating activities for the six months ended June 30, 2024, is primarily attributable to a net loss of approximately $11.6 million, $3.3 million realized gain on marketable securities and changes in operating assets and liabilities of $3.5 million, partially offset by approximately $5.5 million of change in fair value of long-term equity investment, $2.9 million unrealized loss on marketable securities and $1.7 million unrealized and realized loss on note receivable. The cash used in operating activities for the six months ended June 30, 2023, is primarily attributable to a net loss of approximately $12.4 million, approximately $0.5 million of realized gain on marketable securities and changes in operating assets and liabilities of $4.6 million, partially offset by $2.7 million stock-based compensation expense and approximately $0.5 million in unrealized losses on marketable securities.

Cash Flows from Investing Activities

For the six months ended June 30, 2024 and 2023, net cash provided by (used in) investing activities was approximately $10.2 million and $(14.7) million, respectively. The cash provided by investing activities for the six months ended June 30, 2024, primarily resulted from our sales of marketable securities of approximately $11.6 million and the sale of a long-term investment of $3.5 million, partially offset by purchase of marketable securities of $4.0 million and funds to employee forgivable loan of $1.3 million. The cash used in investing activities for the six months ended June 30, 2023, primarily resulted from our purchase of marketable securities of approximately $34.0 million and the acquisition of FPS of approximately $1.1 million, partially offset by our sale of marketable securities approximately of $20.5 million. The Company also collected approximately $0.5 million in principal related to its short-term notes.

Cash Flows from Financing Activities

For the six months ended June 30, 2024, there is no cash flows from financing activities. For the six months ended June 30, 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.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that material information required to be disclosed in our periodic reports filed or submitted under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Our disclosure controls and procedures are also designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act are accumulated and communicated to our management, including our principal executive officer and principal financial officer as appropriate, to allow timely decisions regarding required disclosure.

During the quarter ended June 30, 2024, we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective due to the material weakness in our internal controls.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonably possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.

Material Weaknesses in Internal Controls

The Company’s management has concluded that our control around the accounting for certain notes receivable accounted for at fair value and certain long-term investments accounted for at fair value or with the equity security measurement alternative was not effectively designed or maintained, and therefore initially were not accounted for correctly. As a result, our management performed additional analysis as deemed necessary to ensure that our financial statements were prepared in accordance with accounting principles generally accepted in the United States of America. Management understands that the accounting standards applicable to our financial statements are complex and will seek to enhance controls over its experienced third-party professionals with whom management can consult with respect to accounting issues and remediate this material weakness.

Changes in Internal Control Over Financial Reporting

We have not made any changes to our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended June 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on Effectiveness of Controls

Our management does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected.

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide information required by this Item. Our current risk factors are set forth in our Annual Report on Form 10-K, which was filed with the SEC on April 1, 2024. Any of our previously disclosed risk factors could result in a significant or material adverse effect on our results of operations or financial condition. Additional risk factors not presently known to us or that we currently deem immaterial may also impair our business or results of operations. We may disclose changes to such risk factors or disclose additional risk factors from time to time in our future filings with the SEC.