UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark one)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2023

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________ to __________

 

Commission file number 001-41845

 

DOMINARI HOLDINGS INC.

(Exact name of registrant as specified in its charter)

 

Delaware   52-0849320
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

 

725 5th Avenue, 22nd Floor

New York, NY 10022

(Address of principal executive offices)

 

(212) 393-4540

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Stock ($0.0001 par value per share)   DOMH   The Nasdaq Capital Market

 

Securities registered pursuant to Section 12(g) of the Act: None.

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes ☐ No ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes ☐ No ☒

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
Emerging growth company    

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

 

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.

 

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No

 

The aggregate market value of the voting stock held by non-affiliates of the registrant as of the last business day of the registrant’s most recently completed second fiscal quarter ended June 30, 2023: $12,149,343 based upon the closing sale price of our common stock of $2.91 on that date. Common stock held by each officer and director and by each person known to own in excess of 5% of outstanding shares of our common stock has been excluded in that such persons may be deemed to be affiliates. The determination of affiliate status is not necessarily a conclusive determination for other purposes.

 

There were 5,934,917 shares of the registrant’s common stock outstanding as of March 26, 2024.

 

 

 

 

 

 

DOMINARI HOLDINGS INC.

TABLE OF CONTENTS 

 

    Page
Special Cautionary Notice Regarding Forward Looking Statements   ii
Part I    
  Item 1. Business   1
  Item 1A. Risk Factors   6
  Item 1B. Unresolved Staff Comments   19
  Item 1C. Cybersecurity   20
  Item 2. Properties   20
  Item 3. Legal Proceedings   20
  Item 4. Mine Safety Disclosures   20
Part II    
  Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities   21
  Item 6. [Reserved]   22
  Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations   22
  Item 7A. Quantitative and Qualitative Disclosures about Market Risk   26
  Item 8. Consolidated Financial Statements and Supplementary Data Index to Financial Statements   F-1
  Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure   27
  Item 9A. Controls and Procedures   27
  Item 9B. Other Information   27
  Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections   27
Part III      
  Item 10. Directors, Executive Officers and Corporate Governance   28
  Item 11. Executive Compensation   32
  Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   40
  Item 13. Certain Relationships and Related Transactions and Director Independence   42
  Item 14. Principal Accountant Fees and Services   43
Part IV    
  Item 15. Exhibits and Consolidated Financial Statement Schedules   44
  Item 16. Form 10-K Summary   46
  Signatures   47

 

i

 

 

EXPLANATORY NOTE

 

All references in this Annual Report on Form 10-K (“Annual Report”) to “we,” “us,” “our” and the “Company” refer to Dominari Holdings Inc., a Delaware corporation, and its consolidated subsidiaries unless the context requires otherwise.

 

SPECIAL CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENTS AND
RISK FACTOR SUMMARY

 

This Annual 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 in this Annual 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.

 

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. Some factors that could cause actual results to differ are described in greater detail in Item 1A of Part I, “Risk Factors.”

 

ii

 

 

PART I

 

Item 1. BUSINESS

 

Overview

 

Dominari Holdings Inc. (“Dominari”) is a holding company that, through its various subsidiaries, is 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. 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.

 

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.  

 

History

 

The Company was founded in 1967 as Spherix Incorporated. In 2017, the Company changed its name to AIkido Pharma Inc. From 2017 to 2022, the Company operated as a biotechnology company with a diverse portfolio of small-molecule anticancer and antiviral therapeutics in development. During the second half of 2022, in an effort to enhance stockholder value, the Company shifted its primary focus away from biotechnology to a new line of business in the financial services industry.  In furtherance of this new focus, in June of 2022, the Company formed Dominari Financial Inc., with the purpose of making strategic acquisitions across the financial services industry. On December 22, 2022, the Company changed its name to Dominari Holdings Inc. 

 

On September 9, 2022, we entered into a membership interest purchase agreement (the “FPS Purchase Agreement”) with Fieldpoint, a Connecticut bank, for the purchase of its wholly owned subsidiary, Fieldpoint Private Securities, LLC, a Connecticut limited liability company (“FPS”) and dually-registered broker-dealer and investment advisor registered with the Financial Industry Regulatory Authority (“FINRA”) and the Securities and Exchange Commission (“SEC”). Pursuant to the terms of the FPS Purchase Agreement, we purchased from Fieldpoint 100% of the membership interests in FPS (the “Membership Interests”) and, as a result thereof, operate the newly acquired dual registered broker-dealer and investment adviser as a wholly owned subsidiary of Dominari Financial Inc.  The FPS Purchase Agreement provided for Dominari’s acquisition of FPS’s Membership Interests in two closings, the first of which occurred on October 4, 2022, at which Dominari paid Fieldpoint $2,000,000 in consideration for a transfer by Fieldpoint to Dominari of 20% of the Membership Interests.   Following FINRA’s approval of the Continuing Membership Application pursuant to FINRA Rule 1017 (the “Rule 1017 Application”) on March 20, 2023, the second closing occurred on March 27, 2023, at which time Dominari paid Fieldpoint an additional $1.4 million in consideration for a transfer by Fieldpoint to Dominari of the remaining 80% of the Membership Interests.

 

Dominari Securities

 

Dominari Securities offers, and plans to offer, a broad range of broker-dealer and registered investment adviser services. Those services are discussed below and include wealth management, investment banking, sales and trading, asset management and insurance products.

  

1

 

 

Wealth Management Services

 

Dominari Securities provides a comprehensive array of financial services to high-net-worth individuals and families, corporate executives, and public and private businesses. Clients are able to choose a variety of ways to establish a relationship and conduct business, including by establishing brokerage accounts with transaction-based pricing and/or investment advisory accounts with asset-based fee pricing. Dominari Securities also provides the following private client services:

 

Full-Service Brokerage.  Dominari Securities offers full-service brokerage services covering investment alternatives, including exchange-traded and over-the-counter corporate equity and debt securities, money market instruments, exchange-traded options, municipal bonds, mutual funds, exchange-traded funds, and unit investment trusts.

 

Wealth Planning. Dominari Securities offers financial and wealth planning services, which include asset management, individual and corporate retirement solutions, insurance and annuity products, IRAs and 401(k) plans, U.S. stock plan services to corporate executives and businesses, education savings programs, and trust and fiduciary services to individual and corporate clients through third-party trust companies.

 

Margin Lending. Dominari Securities, through its clearing partnerships, extends credit to its customers, collateralized by securities and cash in the customer’s account, for a portion of the purchase price, and receives income from interest on such extensions of credit at interest rates derived from Dominari Securities’ posted rate as adjusted, from time to time.

   

Investment Banking

 

Dominari Securities’ investment banking division provides strategic advisory services and capital markets products to emerging growth and middle market businesses. The investment banking groups focus on the consumer and retail, energy, financial institutions, healthcare, rental services, technology, education, and transportation and logistics sectors. Investment banking services include:

 

Financial Advisory. Dominari Securities advises buyers and sellers on sales, divestitures, mergers, acquisitions, tender offers, privatizations, spin-offs, joint ventures, restructurings and liability management.

 

Equities Capital Markets. Dominari Securities provides capital raising solutions for corporate clients through initial public offerings, follow-on offerings, confidentially marketed public offerings, registered directs, private investments in public equity, private placements, at-the-market offerings, and equity-linked offerings.

 

Debt Capital Markets. Dominari Securities plans to offer debt capital markets solutions for emerging growth and middle market companies. Dominari Securities will focus on structuring and distributing public and private debt through financing transactions, including leveraged buyouts, acquisitions, growth capital financings, recapitalizations and Chapter 11 exit financings. Dominari Securities expects to also participate in high yield debt and fixed and floating-rate senior and subordinated debt offerings in the future.

 

Fund Placement. Dominari Securities expects to provide alternative investment firms with a broad and deep portfolio of value-added services. Services may include bespoke strategic and tactical advisory as well as primary fundraises, co-investments and direct transactions.

 

Debt Advisory & Restructuring. Dominari Securities expects to offer creative solutions to leveraged corporate issuers and credit investors. We will evaluate a full range of strategic alternatives, identify the appropriate structure and source of funds to provide our clients the ability to pursue an optimal and value maximizing outcome.

 

2

 

 

Sales and Trading

 

Dominari Securities provides a broad range of sales and trading services to our clients. Sales and trading services include:

 

Institutional Equity Sales and Trading. Dominari Securities acts as an agent in the execution of its customers’ orders through our strategic clearing partners.

 

Equity Derivatives and Index Options. Dominari Securities offers listed equity and index options strategies for investors seeking to manage risk and optimize returns within the equities market.

 

Institutional Fixed Income Sales and Trading. Dominari Securities offers trading in public and private debt (including sovereign debt) securities, including investment and non-investment grade, distressed and convertible corporate securities through our clearing partners.

 

Securities Lending. In connection with both its trading and brokerage activities, Dominari Securities, through its clearing relationships, expects to borrow securities to cover short sales and to complete transactions in which customers have failed to deliver securities by the required settlement date and lend securities to other brokers and dealers for similar purposes. Dominari Securities expects to earn interest on its cash collateral provided and pay interest on the cash collateral received less a rebate earned for lending securities.

 

Asset Management

 

Dominari Securities offers discretionary and non-discretionary fee-based programs to provide tailored investment management solutions and services to high-net-worth private clients, institutions and corporations and/or plans sponsored by them. These include, but are not limited to, portfolio management, manager research and due diligence through third party partners, asset allocation advice and financial planning. Dominari Securities offers portfolio management strategies and third-party investment management capabilities through separately managed accounts, alternative investments and discretionary and non-discretionary portfolio management programs as well as managed portfolios of mutual funds. Platform support functions can include sales and marketing along with administrative services such as trade execution, client services, records management and client reporting and performance monitoring. Dominari Securities generates revenues through the receipt of investment advisory and transactional fees for advisory services and from fees earned through sharing arrangements with registered and private alternative investment vehicles. Dominari Securities also earns investment advisory fees on assets held in discretionary and non-discretionary asset-based programs. These fees are billed monthly in advance and are calculated based on all fee-based assets under management balances at the end of the prior month. Dominari Securities also earns income from revenue-sharing arrangements that are derived from management and incentive fees on alternative investments and calculates these on a pre-determined basis with registered and private investment companies. The Company’s asset management services include:

 

Separately Managed Accounts. Dominari Securities provides clients with fee-based programs: (i) a unified managed account which allows multiple investment managers, mutual funds and exchange-traded funds to be combined in a single custodial account; and (ii) an asset review dual contract program designed for clients seeking a direct contractual relationship with investment managers.

 

Discretionary Advisory Accounts.  Dominari Securities offers client-focused discretionary fee-based investment programs managed by Dominari Securities advisors.

 

Non-Discretionary Advisory Accounts. Dominari Securities provides fee-based non-discretionary investment advisory services and consultation to clients.

 

Alternative Investments. Dominari Securities offers high net worth and institutional investors the opportunity to participate in a wide range of non-traditional investment strategies. Strategies include single manager hedge funds, fund of funds, diversified private equity funds and single investment late stage private equity funds.

 

Private Market Platform. Through a collaborative effort among the Company’s business units, Dominari’s private market platform focuses on sourcing private investments across various sectors. Transactions are expected to cover the full spectrum of private investments, including early stage, late stage, direct, co-investments, funds and secondary market transactions in debt, equity and hybrid securities.

 

3

 

 

Regulation

 

Regulation in the United States

 

The financial services industry in which we operate is subject to extensive regulation. In the U.S., the SEC is the federal agency responsible for the administration of federal securities laws. In addition, the Financial Industry Regulatory Authority, Inc. (“FINRA”) is a self-regulatory organization (“SRO”) that is actively involved in the regulation of securities businesses. In addition to federal regulation, we are subject to state securities regulations in each state and U.S. territory in which we conduct securities or investment advisory activities. The SEC, FINRA, and state securities regulators conduct periodic examinations of broker-dealers and investment advisors. The designated examining authority under the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”) for Dominari Securities’ activities as a broker-dealer is FINRA. Financial services businesses are also subject to regulation and examination by state securities regulators and attorneys general in those states in which they do business. In addition, broker-dealers and investment advisors must also comply with the rules and regulation of clearing houses, exchanges, and trading platforms of which they are a member.

 

Broker-dealers are subject to SEC, FINRA, and state securities regulations that cover all aspects of the securities business, including sales and trading methods, trade practices among broker-dealers, use and safekeeping of customers’ funds and securities, capital structure and requirements, anti-money laundering efforts, recordkeeping and the conduct of broker-dealer personnel including officers and employees (although state securities regulations are, in a number of cases, more limited). Registered investment advisors are subject to, among other requirements, SEC regulations concerning marketing, transactions with affiliates, custody of client assets, disclosures to clients, conflict of interest, insider trading and recordkeeping. Additional legislation, changes in rules promulgated by the SEC, FINRA, and other SROs of which the broker-dealer is a member, and state securities regulators, or changes in the interpretation or enforcement of existing laws or rules may directly affect the operations and profitability of broker-dealers and investment advisors. The SEC, FINRA, and state securities regulators and state attorneys general may conduct administrative proceedings or initiate civil litigation that can result in adverse consequences for Dominari Securities, its affiliates, including affiliated investment advisors, as well as its and their officers and employees (including, without limitation, injunctions, censures, fines, suspensions, directives that impact business operations (including proposed expansions), membership expulsions, or revocations of licenses and registrations).

 

SEC Regulation Best Interest (“Reg BI”) requires that a broker-dealer and its associated persons act in a retail customer’s best interest and not place their own financial or other interests ahead of a retail customer’s interests when recommending securities transactions or investment strategies, including recommendations of types of accounts. To meet this best interest standard, a broker-dealer must satisfy four component obligations including a disclosure obligation, a care obligation, a conflict of interest obligation, and a compliance obligation and both broker-dealers and investment advisors are required to provide disclosures about their standard of conduct and conflicts of interest.

 

In addition, certain states, have proposed or adopted measures that would make broker-dealers, sales agents and investment advisors and their representatives subject to a fiduciary duty when providing products and services to customers. The SEC did not indicate an intent to pre-empt state regulation in this area, and some of the state proposals would allow for a private right of action. In the event our wealth management division makes recommendations to retail customers, it will be required to comply with the obligations imposed under Reg BI and applicable state laws.

 

Regulatory Capital Requirements 

 

Dominari Securities is subject to financial capital requirements that are set by regulation. Dominari Securities is a registered broker-dealer and is required to maintain net capital in an amount equal to SEC minimum financial requirements. As a broker-dealer, Dominari Securities is subject to the SEC’s Uniform Net Capital Rule 15c3-1 (the “Net Capital Rule”). Compliance with the Net Capital Rule could limit Dominari Securities’ operations, such as underwriting and trading activities and financing customers’ prime brokerage or other margin activities, in each case, that could require the use of significant amounts of capital, limit its ability to engage in certain financing transactions, such as repurchase agreements, and may also restrict its ability (i) to make payments of dividends, withdrawals or similar distributions or payments to a stockholder/parent or other affiliate, (ii) to make a redemption or repurchase of shares of stock, or (iii) to make an unsecured loan or advance to such stockholders or affiliates.

 

4

 

 

Under the Exchange Act, state securities regulators are not permitted to impose capital, margin, custody, financial responsibility, making and keeping records, bonding, or financial or operational reporting requirements on registered broker-dealers that differ from, or are in addition to, the requirements in those areas established under the Exchange Act, including the rules and regulations promulgated thereunder.

 

Regulation outside the United States

 

In the event Dominari Securities provides financial services internationally, it will be subject to extensive regulations proposed, promulgated and enforced by, among other regulatory bodies, the European Commission and European Supervisory Authorities (including the European Banking Authority and European Securities and Market Authority), U.K. Financial Conduct Authority, German Federal Financial Supervisory Authority (“BaFin”), Investment Industry Regulatory Organization of Canada, Hong Kong Securities and Futures Commission, the Japan Financial Services Agency, the Monetary Authority of Singapore, and the Australian Securities and Investments Commission. Every country in which we may do business will impose upon us laws, rules and regulations similar to those in the U.S., including with respect to some form of capital adequacy rules, customer protection rules, data protection regulations, anti-money laundering and anti-bribery rules, compliance with other applicable trading and investment banking regulations and similar regulatory reform.

 

Competition

 

All aspects of our business are, and are expected to be, intensely competitive. We compete primarily with small to mid-size bank holding companies that engage in wealth management, investment banking and capital markets activities as one of their lines of business and that have greater capital and resources than we do. We will also compete against other broker-dealers, asset managers and boutique firms. We believe the principal factors that will drive our competitiveness in the future will include our ability to: provide differentiated insights to our clients that lead to better business outcomes; attract, retain and develop skilled professionals; deliver a competitive breadth of high-quality service offerings; and to maintain a flat, nimble and entrepreneurial culture built on immediacy and client service.

 

Employees

 

As of December 31, 2023, we had 26 full-time employees and 2 part-time employees, none of which are represented by a labor union or covered by a collective bargaining agreement. The Company offers health insurance benefits to eligible employees. Additional benefits offered by the Company depend on the employee position and title, but may include a 401(k) retirement plan, short-term disability, Workers’ Compensation for qualifying illness or injury, sick leave and paid vacation. The Company also provides certain training for employees, such as New York State Harassment Prevention Training, Cyber Security Awareness Training and some continuing education training. 

 

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Item 1A. RISK FACTORS

 

The Company’s business and operations are subject to numerous risks. The material risks and uncertainties that management believes affect the Company are described below. The risks and uncertainties described below are not the only ones facing the Company. Additional risks and uncertainties that are presently unknown, management is not aware of or focused on or that management currently deems immaterial may also impair the Company’s business operations. If any of the following risks actually occur, the Company’s financial condition and results of operations may be materially and adversely affected. We may amend or supplement these risk factors from time to time in other reports we file with the SEC.

 

Business Risks

 

Because we have a limited operating history to evaluate our company, the likelihood of our success must be considered in light of the problems, expenses, difficulties, complications and delays frequently encountered by an early-stage financial services company.

 

Since we have a limited operating history in our current financial services business, it will make it difficult for investors and securities analysts to evaluate our business and prospects. You must consider our prospects in light of the risks, expenses, and difficulties we face as an early-stage financial services company with a limited operating history. Investors should evaluate an investment in our securities in light of the uncertainties encountered by early-stage companies in an intensely competitive industry. There can be no assurance that our efforts will be successful or that we will be able to become profitable.

 

Accordingly, you should consider the Company’s prospects in light of the costs, uncertainties, delays and difficulties frequently encountered by companies in their start-up stages, particularly those in the financial services industry. Stockholders should carefully consider the risks and uncertainties that a business with no operating history will face. In particular, stockholders should consider that there is a significant risk that we will not be able to:

 

  implement or execute our current business plan, or that our current business plan is sound;

 

  raise sufficient funds in the capital markets or otherwise to fully effectuate our business plan;

 

  maintain our management team; and/or

 

  attract clients.

 

Any of the foregoing risks may adversely affect the Company and result in the failure of our business. In addition, we expect to encounter unforeseen expenses, difficulties, complications, delays and other known and unknown factors.

 

We continue to incur operating losses and may not achieve profitability.

 

Our net loss for the year ended December 31, 2023 was $22.9 million. Our accumulated deficit was $208.8 million as of December 31, 2023. Our ability to become profitable depends upon our ability to generate revenue from our financial products and services. We do not know when, or if, we will generate significant revenue from such financial services and products. Even though our revenue may increase, we expect to incur significant additional losses while we grow and expand our business. We cannot predict if and when we will achieve profitability. Our failure to achieve and sustain profitability could negatively impact the market price of our common stock.

 

If we cannot meet our future capital requirements, we may be unable to develop and enhance our services, take advantage of business opportunities and respond to competitive pressures.

 

We may need to raise additional funds in the future to grow our business internally, invest in new businesses, expand through acquisitions, enhance our current services or respond to changes in our target markets. If we raise additional capital through the sale of equity or equity derivative securities, the issuance of these securities could result in dilution to our existing stockholders. If additional funds are raised through the issuance of debt securities, the terms of that debt could impose additional restrictions on our operations or harm our financial condition. Additional financing may be unavailable on acceptable terms.

 

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If we fail to maintain an effective system of internal controls over financial reporting, we may not be able to accurately report our financial results or prevent fraud and our business may be harmed and our stock price may be adversely impacted.

 

Effective internal controls over financial reporting are necessary for us to provide reliable financial reports and to effectively prevent fraud. Any inability to provide reliable financial reports or to prevent fraud could harm our business. The Sarbanes-Oxley Act of 2002 requires management to evaluate and assess the effectiveness of our internal control over financial reporting. In order to continue to comply with the requirements of the Sarbanes-Oxley Act, we are required to continuously evaluate and, where appropriate, enhance our policies, procedures and internal controls. If we fail to maintain the adequacy of our internal controls over financial reporting, we could be subject to litigation or regulatory scrutiny and investors could lose confidence in the accuracy and completeness of our financial reports. We cannot assure you that in the future we will be able to fully comply with the requirements of the Sarbanes-Oxley Act or that management will conclude that our internal control over financial reporting is effective. If we fail to fully comply with the requirements of the Sarbanes-Oxley Act, our business may be harmed and our stock price may decline.

  

Our assessment, testing and evaluation of the design and operating effectiveness of our internal control over financial reporting resulted in our conclusion that, as of December 31, 2023, our internal control over financial reporting was not effective, due to the design and maintenance of fair value reporting relating to certain notes receivable. We can provide no assurance as to conclusions of management with respect to the effectiveness of our internal control over financial reporting in the future.

 

Developments in market and economic conditions may adversely affect the Company’s business and profitability.

 

Performance in the financial services industry is heavily influenced by the overall strength of economic conditions and financial market activity, which generally have a direct and material impact on the Company’s results of operations and financial condition. These conditions are a product of many factors, which are mostly unpredictable and beyond the Company’s control, and may affect the decisions made by financial market participants.

 

Changes in economic and political conditions, including economic output levels, interest and inflation rates, employment levels, prices of commodities including oil and gas, exogenous market events, consumer confidence levels, and fiscal and monetary policy can affect market conditions. For example, the Federal Reserve’s policies determine, in large part, the cost of funds for lending and investing and the return earned on those loans and investments. Changes in the Federal Reserve’s policies are beyond our control and, consequently, the impact of these changes on our activities and results of our operations are difficult to predict. While global financial markets have shown signs of improvement in recent years, uncertainty remains. A period of sustained downturns and/or volatility in the securities markets, and/or prolonged levels of increasing interest rates, could lead to a return to increased credit market dislocations, reductions in the value of real estate, and other negative market factors which could significantly impair our revenues and profitability.

 

U.S. markets may also be impacted by political and civil unrest occurring in the Middle East, Eastern Europe, Russia, Venezuela and Asia. Continued uncertainties loom over the outcome of the EU’s financial support programs. It is possible that other EU member states may choose to follow Britain’s lead and leave the EU. Any negative impact on economic conditions and global markets from these developments could adversely affect our business, financial condition and liquidity.

 

Uncertain or unfavorable market or economic conditions could result in reduced transaction volumes, reduced revenue and reduced profitability in any or all of the Company’s principal businesses. For example: 

  

  A portion of the Company’s revenues will be derived from fees generated from its asset management business segment. Asset management fees often are primarily comprised of base management and performance (or incentive) fees. Management fees are primarily based on assets under management. Assets under management balances are impacted by net inflow/outflow of client assets and changes in market values. Poor investment performance by the Company’s portfolio managers could result in a loss of managed accounts and could result in reputational damage that might make it more difficult to attract new investors, and, thus further impact the Company’s business and financial condition. If the Company experiences losses of managed accounts, fee revenue will decline. In addition, in periods of declining market values, the values of assets under management may ultimately decline, which would negatively impact fee revenues.

 

7

 

 

  In the past decade, passively managed index funds have seen greater investor interest, and this trend has become more prevalent in recent years. A continued lessening of investor interest in active investing and continued increase in passive investing may lead to a continued decline in the revenue the Company generates from commissions on the execution of trading transactions and, in respect of its market-making activities, a reduction in the value of its trading positions and commissions and spreads.

 

  The Company expects its investment banking revenue, in the form of underwriting, placement and financial advisory fees, to be directly related to the volume and value of transactions as well as the Company’s role in these transactions and will typically only be earned upon the successful completion of a transaction. In an environment of uncertain or unfavorable market or economic conditions, the volume and size of capital-raising transactions and acquisitions and dispositions typically decreases, thereby reducing the demand for the Company’s investment banking services and increasing price competition among financial services companies seeking such engagements.  Accordingly, the Company’s business will be highly dependent on market conditions, the decisions and actions of its clients, and interested third parties. The number of engagements the Company has at any given time will be subject to change and may not necessarily result in future revenues.

   

The Company may make strategic acquisitions of businesses, engage in joint ventures or divest or exit existing businesses, which could result in unforeseen expenses or disruptive effects on its business.

 

From time to time, the Company may consider acquisitions of other businesses or joint ventures with other businesses. Any acquisition or joint venture that the Company determines to pursue will be accompanied by a number of risks. After the announcement or completion of an acquisition or joint venture, the Company’s stock price could decline if investors view the transaction as too costly or unlikely to improve the Company’s competitive position.

 

Costs or difficulties relating to such a transaction, including integration of products, employees, offices, technology systems, accounting systems and management controls, may be difficult to predict accurately and be greater than expected causing the Company’s estimates to differ from actual results. The Company may be unable to retain key personnel after the transaction, and the transaction may impair relationships with customers and business partners. In addition, the Company may be unable to achieve anticipated benefits and synergies from the transaction as fully as expected or within the expected time frame. Divestitures or elimination of existing businesses or products could have similar effects, including the loss of earnings of the divested business or operation. These difficulties could disrupt the Company’s ongoing business, increase its expenses, and adversely affect its operating results and financial condition. As the costs of doing business increase, the Company may not be able to continue to grow its revenues through “organic” growth (the growth attendant to hiring one employee at a time or through expanding into a new business line through a limited investment in technology and employment). In lieu of organic growth, it becomes increasingly necessary to grow through the acquisition of a business or businesses that fulfill the Company’s strategic decisions for growth. However, due to competition or the cost of such acquisitions, such expansion may not be available on a profitable basis and may threaten the Company’s ongoing ability to expand its business.

 

The ability to attract, develop and retain highly skilled and productive employees, particularly qualified financial advisors is critical to the success of the Company’s business.

 

The Company faces intense competition for qualified employees from other businesses in the financial services industry, and the performance of its business may suffer to the extent it is unable to attract and retain employees effectively, particularly given the relatively small size of the Company and its employee base compared to some of its competitors. The primary sources of revenue in each of the Company’s business lines are commissions and fees earned on advisory and underwriting transactions and customer accounts managed by its employees, who are regularly recruited by other firms and in certain cases are able to take their client relationships with them when they change firms. Experienced employees are regularly offered financial inducements by larger competitors to change employers, and thus competitors can de-stabilize the Company’s relationship with valued employees. Some specialized areas of the Company’s business are operated by a relatively small number of employees, the loss of any of whom could jeopardize the continuation of that business following the employee’s departure.

 

8

 

  

Turnover in the financial services industry is high. The cost of retaining skilled professionals in the financial services industry has escalated considerably. Financial industry employers are increasingly offering guaranteed contracts, upfront payments, and increased compensation. These can be important factors in a current employee’s decision to leave us as well as in a prospective employee’s decision to join us. As competition for skilled professionals in the industry remains intense, we may have to devote significant resources to attracting and retaining qualified personnel. To the extent we have compensation targets, we may not be able to retain our employees, which could result in increased recruiting expenses or result in our recruiting additional employees at compensation levels that are not within our target range. In particular, our financial results may be adversely affected by the costs we incur in connection with any upfront loans or other incentives we may offer to newly recruited financial advisors and other key personnel. If we were to lose the services of any of our investment bankers, sales and trading professionals, asset managers, or executive officers to a competitor or otherwise, we may not be able to retain valuable relationships and some of our clients could choose to use the services of a competitor instead of our services. If we are unable to retain our senior professionals or recruit additional professionals, our reputation, business, results of operations and financial condition could be adversely affected. Further, new business initiatives and efforts to expand existing businesses generally require that we incur compensation and benefits expense before generating additional revenues.

 

Moreover, companies in our industry whose employees accept positions with competitors frequently claim that those competitors have engaged in unfair hiring practices. We may be subject to claims in the future as we seek to hire qualified personnel, some of whom may work for our competitors. Some of these claims may result in material litigation.

  

We could incur substantial costs in defending against these claims, regardless of their merits. Such claims could also discourage potential employees who work for our competitors from joining us. Recent actions by some larger competitors to reject the “Recruiting Protocol”, an industry adopted set of practices permitting financial advisors to port their client relationships to a new firm under strict rules, is likely to increase the likelihood of litigation among competitors surrounding the employment of new advisors and their solicitation of their clients and may act as a new barrier to recruitment of financial advisors.

 

If we fail to manage our anticipated growth effectively, our business, financial condition and operating results could be harmed.

 

To manage our growth effectively, we must continue to implement our operational plans and strategies, improve, and expand our infrastructure of people and information systems and expand, train and manage our employee base. To support continued growth, we must effectively integrate, develop and motivate new employees. We face significant competition for personnel. Failure to manage our hiring needs effectively or successfully integrate our new hires may have a material adverse effect on our business, financial condition and operating results. Additionally, the growth of our business places significant demands on our operations, as well as our management and other employees. The growth of our business may require significant additional resources to meet these daily requirements, which may not scale in a cost-effective manner or may negatively affect the quality of our services and client experience. We are also required to manage relationships with a growing number of partners, institutions, clients and other third parties. Our information technology systems and our internal controls and procedures may not be adequate to support future growth of our operations and employee base. If we are unable to manage the growth of our operations effectively, our business, financial condition and operating results may be materially adversely affected.

 

The Company depends on its senior employees and the loss of their services could harm its business.

 

The Company’s success is dependent in large part upon the services of its senior executives and employees. Any loss of services of the chief executive officer and other senior executive officers may adversely affect the business and operations of the Company. If the Company’s senior executives or employees terminate their employment and the Company is unable to find suitable replacements in relatively short periods of time, its operations may be materially and adversely affected.

 

9

 

 

The precautions the Company takes to prevent and detect employee misconduct may not be effective and the Company could be exposed to unknown and unmanaged risks or losses.

 

The Company runs the risk that employee misconduct could occur. Misconduct by employees could include, employees binding the Company to transactions that exceed authorized limits or present unacceptable risks to the Company (rogue trading); employee theft and improper use of Company or client property; employees conspiring with other employees or third parties to defraud the Company; employees hiding unauthorized or unsuccessful activities from the Company, including outside business activities that are undisclosed and may result in liability to the Company; employees steering or soliciting their clients into investments which have not been sponsored by the Company and without the proper diligence; the improper use of confidential information; employee conduct outside of acceptable norms including harassment; or employees engaging in “hacking” or breaching our cybersecurity safeguards.

 

These types of misconduct could result in unknown and unmanaged risks or losses to the Company including regulatory sanctions and serious harm to its reputation. The precautions the Company takes to prevent and detect these activities may not be effective. If employee misconduct does occur, the Company’s business operations could be materially adversely affected.

 

There have been a number of highly-publicized cases involving fraud or other misconduct by employees in the financial services industry and there is a risk that our employees could engage in misconduct in the future that adversely affects our business. We are subject to a number of obligations and standards arising from our asset management business and our authority over the assets managed by our asset management business. In addition, our financial advisors may act in a fiduciary capacity, providing financial planning, investment advice and discretionary asset management. The violation of these obligations and standards by any of our employees could adversely affect our clients and us. It is not always possible to deter employee misconduct, and the precautions we take to detect and prevent this activity may not be effective in all cases. If our employees engage in misconduct, our business could be materially adversely affected, including our cash position.

 

Employee misconduct, including harassment in the workplace, has come under increasing scrutiny in the national media. While the Company has adopted a Code of Conduct and instituted training for its employees, it is difficult to predict when an employee may deviate from acceptable practices and open the Company to liability either from actions taken by other employees or by authorities. The Company could also become liable for its actions in enforcing its rules of conduct on former employees who disagree with the Company’s actions.

 

Our failure to deal appropriately with conflicts of interest could damage our reputation and adversely affect our business.

 

Appropriately dealing with conflicts of interest is complex and difficult and our reputation could be damaged if we fail, or appear to fail, to deal appropriately with one or more potential or actual conflicts of interest. It is possible that potential or perceived conflicts could give rise to investor dissatisfaction or litigation or regulatory enforcement actions. In addition, regulatory scrutiny of, or litigation in connection with, conflicts of interest would have a material adverse effect on our reputation, which could materially and adversely affect our business in a number of ways, including an inability to raise additional funds, a reluctance of counterparties to do business with us and the costs of defending litigation.

 

Our results of operations may be materially affected by market fluctuations and by global and economic conditions and other factors, including changes in asset values.

 

Our results of operations may be materially affected by market fluctuations due to global financial markets, economic conditions, changes to global trade policies and tariffs and other factors, including the level and volatility of equity, fixed income and commodity prices, the level and term structure of interest rates, inflation and currency values, and the level of other market indices. The results of our Capital Markets business segment, particularly results relating to our involvement in primary and secondary markets for all types of financial products, are subject to substantial market fluctuations due to a variety of factors that we cannot control or predict with great certainty. These fluctuations impact results by causing variations in business flows and activity and in the fair value of securities and other financial products. Fluctuations also occur due to the level of global market activity, which, among other things, affects the size, number and timing of investment banking client assignments and transactions and the realization of returns from our principal investments.

 

10

 

  

During periods of unfavorable market or economic conditions, the level of individual investor participation in the global markets, as well as the level of client assets, may also decrease, which would negatively impact the results of our Private Client and Asset Management business segments. Substantial market fluctuations could also cause variations in the value of our investments in our funds, the flow of investment capital into or from Assets Under Management, and the way customers allocate capital among money market, equity, fixed income or other investment alternatives, which could negatively impact our Private Client and Asset Management business segments.

 

The Company may incur losses and be subject to reputational harm to the extent that, for any reason, it is unable to sell securities it purchased as an underwriter at anticipated price levels. As an underwriter, the Company is subject to heightened standards regarding liability for material misstatements or omissions in prospectuses and other offering documents relating to offerings it underwrites. Any such misstatement or omission could subject the Company to enforcement action by the SEC and claims of investors, either of which could have a material adverse impact on the Company’s results of operations, financial condition and reputation. As a market maker and dealer, the Company may own large positions in specific securities, and these undiversified holdings concentrate the risk of market fluctuations and may result in greater losses than would be the case if the Company’s holdings were more diversified.

 

The value of our financial instruments may be materially affected by market fluctuations. Market volatility, illiquid market conditions and disruptions in the credit markets may make it extremely difficult to value and monetize certain of our financial instruments, particularly during periods of market displacement. Subsequent valuations in future periods, in light of factors then prevailing, may result in significant changes in the values of these instruments and may adversely impact historical or prospective fees and performance-based fees (also known as incentive fees, which include carried interest) in respect of certain businesses. In addition, at the time of any sales and settlements of these financial instruments, the price we ultimately realize will depend on the demand and liquidity in the market at that time and may be materially lower than their current fair value. Any of these factors could cause a decline in the value of our financial instruments, which may have an adverse effect on our results of operations in future periods. In addition, financial markets are susceptible to severe events evidenced by rapid depreciation in asset values accompanied by a reduction in asset liquidity. Under these extreme conditions, hedging and other risk management strategies may not be as effective at mitigating trading losses as they would be under more normal market conditions. Moreover, under these conditions, market participants are particularly exposed to trading strategies employed by many market participants simultaneously and on a large scale. Our risk management and monitoring processes seek to quantify and mitigate risk to more extreme market moves. However, severe market events have historically been difficult to predict and we could realize significant losses if extreme market events were to occur.

 

Holding large and concentrated positions may expose us to losses. Concentration of risk may reduce revenues or result in losses in our market-making, investing, underwriting, including block trading, and lending businesses in the event of unfavorable market movements, or when market conditions are more favorable for our competitors. Changes in interest rates (especially if such changes are rapid), sustained low or high interest rates or uncertainty regarding the future direction of interest rates, may create a less favorable environment for certain of the Company’s businesses, particularly its fixed income business, resulting in reduced business volume and reduced revenue. If interest rates remain at low levels, the Company’s profitability will be negatively impacted.

 

The Company is exposed to the risk that third parties that owe it money, securities or other assets will not perform their obligations.

 

The Company is exposed to credit risk related to third parties such as trading counterparties, customers, clearing agents, exchanges, clearing houses, and other financial intermediaries as well as issuers whose securities we hold. These parties may default on their obligations owed to the Company due to bankruptcy, lack of liquidity, operational failure or other reasons. This default risk may arise, for example, from holding securities of third parties, executing securities trades that fail to settle at the required time due to non-delivery by the counterparty or systems failure by clearing agents, exchanges, clearing houses or other financial intermediaries, and extending credit to clients through bridge or margin loans or other arrangements. Significant failures by third parties to perform their obligations owed to the Company could adversely affect the Company’s revenue and its ability to borrow in the credit markets.

 

11

 

 

Liquidity is essential to our businesses and we rely on external sources to finance a significant portion of our operations.

 

Our liquidity could be negatively affected by our inability to raise funding in the long-term or short-term debt capital markets, our inability to access the secured lending markets, or unanticipated outflows of cash or collateral by customers or clients. Factors that we cannot control, such as disruption of the financial markets or negative views about the financial services industry generally, including concerns regarding fiscal matters in the U.S. and other geographic areas, could impair our ability to raise funding. In addition, our ability to raise funding could be impaired if investors or lenders develop a negative perception of our long-term or short-term financial prospects due to factors such as an incurrence of large trading losses, a downgrade by the rating agencies, a decline in the level of our business activity, if regulatory authorities take significant action against us or our industry, or we discover significant employee misconduct or illegal activity. If we are unable to raise funding using the methods described above, we would likely need to finance or liquidate unencumbered assets, such as our investment portfolios or trading assets, to meet maturing liabilities or other obligations. We may be unable to sell some of our assets or we may have to sell assets at a discount to market value, either of which could adversely affect our results of operations, cash flows and financial condition.

 

From time to time we may invest in securities that are illiquid or subject to restrictions.

 

From time to time we may invest in securities that are subject to restrictions which prohibit us from selling the securities for a period of time. Such agreements may limit our ability to generate liquidity quickly through the disposition of the underlying investment while the agreement is effective. 

 

We are subject to operational risks, including a failure, breach or other disruption of our operations or security systems or those of our third parties (or third parties thereof), as well as human error or malfeasance, which could adversely affect our businesses or reputation.

 

Our businesses are highly dependent on our ability to process and report, on a daily basis, a large number of transactions across numerous markets. We may introduce new products or services or change processes or reporting, including in connection with new regulatory requirements, resulting in new operational risk that we may not fully appreciate or identify. The trend toward direct access to automated, electronic markets and the move to more automated trading platforms has resulted in the use of increasingly complex technology that relies on the continued effectiveness of the programming code and integrity of the data to process the trades. We rely on the ability of our employees, consultants, and internal systems to operate our different businesses and process a high volume of transactions. Additionally, we are subject to complex and evolving laws and regulations governing cybersecurity, privacy and data protection, which may differ and potentially conflict, in various jurisdictions. As a participant in the global capital markets, we face the risk of incorrect valuation or risk management of our trading positions due to flaws in data, models, electronic trading systems or processes or due to fraud or cyber-attack.

 

We also face the risk of operational failure or disruption of any of the clearing agents, exchanges, clearing houses or other financial intermediaries we use to facilitate our lending and securities transactions. In the event of a breakdown or improper operation of our or a direct or indirect third party’s systems (or third parties thereof) or processes or improper or unauthorized action by third parties, including consultants and subcontractors or our employees, we could suffer financial loss, an impairment to our liquidity position, a disruption of our businesses, regulatory sanctions or damage to our reputation. In addition, the interconnectivity of multiple financial institutions with central agents, exchanges and clearing houses, and the increased importance of these entities, increases the risk that an operational failure at one institution or entity may cause an industry-wide operational failure that could materially impact our ability to conduct business. Furthermore, the concentration of Company and personal information held by a handful of third parties increases the risk that a breach at a key third party may cause an industry-wide data breach that could significantly increase the cost and risk of conducting business. There can be no assurance that our business contingency and security response plans fully mitigate all potential risks to us. Our ability to conduct business may be adversely affected by a disruption in the infrastructure that supports our businesses and the communities where we are located. This may include a disruption involving physical site access; cybersecurity incidents; terrorist activities; political unrest; disease pandemics; catastrophic events; climate-related incidents and natural disasters (such as earthquakes, tornadoes, hurricanes and wildfires); electrical outages; environmental hazards; computer servers; communications or other services we use; and our employees or third parties with whom we conduct business. Although we employ backup systems for our data, those backup systems may be unavailable following a disruption, the affected data may not have been backed up or may not be recoverable from the backup, or the backup data may be costly to recover, which could adversely affect our business.

 

12

 

  

Notwithstanding evolving technology and technology-based risk and control systems, our businesses ultimately rely on people, including our employees and those of third parties with which we conduct business. As a result of human error or engagement in violations of applicable policies, laws, rules or procedures, certain errors or violations are not always discovered immediately by our technological processes or by our controls and other procedures, which are intended to prevent and detect such errors or violations. These can include calculation errors, mistakes in addressing emails or other communications, errors in software or model development or implementation, or errors in judgment, as well as intentional efforts to disregard or circumvent applicable policies, laws, rules or procedures. Human errors and malfeasance, even if promptly discovered and remediated, can result in material losses and liabilities for us. Any theft of data, technology or intellectual property may negatively impact our operations and reputation, including disrupting the business activities of our subsidiaries, affiliates, joint ventures or clients conducting business in those jurisdictions.

  

The Company’s information systems may experience an interruption or breach in security.

 

The Company relies heavily on communications and information systems to conduct its business. Any failure, interruption or breach in security of these systems could result in failures or disruptions in the Company’s customer relationship management, regulatory or other reporting, general ledger, and other systems. While the Company has policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of its information systems, there can be no assurance that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately addressed. Recent disclosures of such incursions by foreign and domestic unauthorized agents aimed at large financial institutions reflect higher risks for all such institutions. The occurrence of any failures, interruptions or security breaches of the Company’s information systems could damage the Company’s reputation, result in a loss of customer business, subject the Company to additional regulatory scrutiny, or expose the Company to civil litigation and possible financial liability, any of which could have a material adverse effect on the Company’s financial condition and results of operations.

 

Our businesses rely extensively on data processing and communications systems. In addition to better serving clients, the effective use of technology increases efficiency and enables us to reduce costs. Adapting or developing our technology systems to meet new regulatory requirements, client needs, and competitive demands is critical for our business. Introduction of new technology presents challenges on a regular basis. There are significant technical and financial costs and risks in the development of new or enhanced applications, including the risk that we might be unable to effectively use new technologies or adapt our applications to emerging industry standards. Our continued success depends, in part, upon our ability to: (i) successfully maintain and upgrade the capability of our technology systems; (ii) address the needs of our clients by using technology to provide products and services that satisfy their demands; and (iii) retain skilled information technology employees. Failure of our technology systems, which could result from events beyond our control, or an inability to effectively upgrade those systems or implement new technology-driven products or services, could result in financial losses, liability to clients, and violations of applicable privacy and other applicable laws and regulatory sanctions.

 

Cybersecurity and security breaches of our technology systems, or those of our clients or other third-party vendors we rely on, could subject us to significant liability and harm our reputation.

 

Our operational systems and infrastructure must continue to be safeguarded and monitored for potential failures, disruptions, cyber-attacks and breakdowns. Our operations rely on the secure processing, storage and transmission of confidential and other information in our computer systems and networks. Although cybersecurity incidents among financial services firms are on the rise, we have not experienced any material losses relating to cyber-attacks or other information security breaches. However, there can be no assurance that we will not suffer such losses in the future.

 

13

 

  

Despite our implementation of protective measures and endeavoring to modify them as circumstances warrant, our computer systems, software and networks may be vulnerable to human error, natural disasters, power loss, spam attacks, unauthorized access, distributed denial of service attacks, computer viruses and other malicious code and other events that could have an impact on the security and stability of our operations. Notwithstanding the precautions we take, if one or more of these events were to occur, this could jeopardize the information we confidentially maintain, including that of our clients and counterparties, which is processed, stored in and transmitted through our computer systems and networks, or otherwise cause interruptions or malfunctions in our operations or the operations of our clients and counterparties. We may be required to expend significant additional resources to modify our protective measures, to investigate and remediate vulnerabilities or other exposures or to make required notifications or disclosures. We may also be subject to litigation and financial losses that are neither insured nor covered under any of our current insurance policies.

 

A technological breakdown could also interfere with our ability to comply with financial reporting and other regulatory requirements, exposing us to potential disciplinary action by regulators. Our regulators have introduced programs to review our protections against such incidents which, if they determined that our systems do not reasonably protect our clients’ assets and their data, could result in enforcement activity and sanctions.

 

In providing services to clients, we may manage, utilize and store sensitive or confidential client or employee data, including personal data. As a result, we may be subject to numerous laws and regulations designed to protect this information, such as U.S. federal and state and international laws governing the protection of personally identifiable information. These laws and regulations are increasing in complexity and number. If any person, including any of our associates, negligently disregards or intentionally breaches our established controls with respect to client or employee data, or otherwise mismanages or misappropriates such data, we could be subject to significant monetary damages, regulatory enforcement actions, fines and/or criminal prosecution. In addition, unauthorized disclosure of sensitive or confidential client or employee data, whether through system failure, employee negligence, fraud or misappropriation, could damage our reputation and cause us to lose clients and related revenue.

  

Potential liability in the event of a security breach of client data could be significant. Depending on the circumstances giving rise to the breach, this liability may not be subject to a contractual limit or an exclusion of consequential or indirect damages. The federally mandated Consolidated Audit Trail (“CAT”) program which requires that client personally identifiable information be submitted to a database not controlled by us may expose us to liability for breaches of that database not under our control.

 

As a result of the foregoing, the Company has and is likely to incur significant costs in preparing its infrastructure and maintaining it to resist any such attacks. In addition to personnel dedicated to overseeing the infrastructure and systems to defend against cybersecurity incidents, senior management is regularly briefed on issues, preparedness and any incidents requiring response. At its regularly scheduled meetings, the Board of Directors is briefed and brought up to date on cybersecurity matters.

 

The Company continually encounters technological change.

 

The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services, driven by the emergence of the Fintech industry. The effective use of technology increases efficiency and enables financial institutions to better serve customers and reduce costs. The Company’s future success depends, in part, upon its ability to address the needs of its customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in the Company’s operations. Many of the Company’s competitors have substantially greater resources to invest in technological improvements. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on the Company’s business and, in turn, the Company’s financial condition and results of operations.

 

There is risk associated with the sufficiency of coverage under the Company’s insurance policies.

 

The Company’s operations and financial results are subject to risks and uncertainties related to the use of a combination of insurance, self-insured retention and self-insurance for a number of risks, including most significantly property and casualty, general liability, cyber-crime, workers’ compensation, and the portion of employee-related health care benefits plans funded by the Company, and certain errors and omissions liability, among others.

 

14

 

 

While the Company endeavors to purchase insurance coverage that is appropriate to its assessment of risk, it is unable to predict with certainty the frequency, nature or magnitude of claims for direct or consequential damages. The Company’s business may be negatively affected if in the future its insurance proves to be inadequate or unavailable. In addition, insurance claims may divert management resources away from operating the business.

 

Climate change concerns could disrupt our businesses, adversely affect client activity levels, adversely affect the creditworthiness of our counterparties and damage our reputation.

 

Climate change may cause extreme weather events that, among other things, could damage our facilities and equipment, injure our employees, disrupt operations at one or more of our primary locations, negatively affect our ability to service and interact with our clients, and adversely affect the value of our investments. Any of these events may increase our costs including our costs to insure against these events.

 

Climate change may also have a negative impact on the financial condition of our clients, which may decrease revenues from those clients and increase the credit exposures to those clients. Additionally, our reputation and client relationships may be damaged as a result of our involvement, or our clients’ involvement, in certain industries associated with causing or exacerbating, or alleged to cause or exacerbate, climate change. We also may be negatively impacted by any decisions we make to continue to conduct or change our activities in response to considerations relating to climate change. New regulations or guidance relating to climate change, as well as the perspectives of stockholders, employees and other stakeholders regarding climate change, may affect whether and on what terms and conditions we engage in certain activities or offer certain products.

 

The Company is subject to extensive securities regulation and the failure to comply with these regulations could subject it to monetary penalties or sanctions.

 

The securities industry and the Company’s businesses are subject to extensive regulation by the SEC, state securities regulators, other governmental regulatory authorities and industry self-regulatory organizations. The Company may be adversely affected by new or revised legislation or regulations or changes in the interpretation or enforcement of existing laws and rules by these governmental authorities and self-regulatory organizations.

 

Dominari Securities is a broker-dealer and investment adviser registered with the SEC and is primarily regulated by FINRA. Broker-dealers are subject to regulations which cover all aspects of the securities business, including, without limitation sales methods and supervision, underwriting, trading practices among broker-dealers, emerging standards concerning fees and charges imposed on clients for fee-based programs, use and safekeeping of customers’ funds and securities, anti-money laundering and the USA Patriot Act (the “Patriot Act”) compliance, capital structure of securities firms, trade and regulatory reporting, cybersecurity, pricing of services, compliance with Department of Labor rules and regulations for retirement accounts, compliance with lending practices (Regulation T), record keeping, and the conduct of directors, officers and employees.

 

Compliance with many of the regulations applicable to the Company involves a number of risks, particularly in areas where applicable regulations may be subject to varying interpretation. The requirements imposed by these regulations are designed to ensure the integrity of the financial markets and to protect customers and other third parties who deal with the Company. New regulations may result in enhanced standards of duty on broker-dealers in their dealings with their clients (fiduciary standards). Consequently, these regulations often serve to limit the Company’s activities, including through net capital, customer protection and market conduct requirements, including those relating to principal trading. Much of the regulation of broker-dealers has been delegated to self-regulatory organizations, principally FINRA. FINRA adopts rules, subject to approval by the SEC, which govern its members and conducts periodic examinations of member firms’ operations.

 

If the Company is found to have violated any applicable laws, rules or regulations, formal administrative or judicial proceedings may be initiated against it that may result in censure, fine, civil or criminal penalties, including treble damages in the case of insider trading violations, the issuance of cease-and-desist orders, the suspension or termination of our broker-dealer or investment advisory activities, the suspension or disqualification of our officers or employees; or other adverse consequences.

 

The imposition of any of the above or other penalties could have a material adverse effect on our operating results and financial condition.

 

15

 

 

Financial services firms have been subject to increased regulatory scrutiny increasing the risk of financial liability and reputational harm resulting from adverse regulatory actions.

 

Firms in the financial services industry have been operating in an onerous regulatory environment. The industry has experienced increased scrutiny from a variety of regulators, including the SEC, FINRA, and state regulators. Penalties and fines sought by regulatory authorities have increased substantially. We may be adversely affected by changes in the interpretation or enforcement of existing laws and rules by these governmental authorities and SROs. Each of the regulatory bodies with jurisdiction over us has regulatory powers dealing with many different aspects of financial services, including, but not limited to, the authority to fine us and to grant, cancel, restrict or otherwise impose conditions on the right to continue operating particular businesses. For example, the failure to comply with the obligations imposed by the Exchange Act on broker-dealers and the Advisers Act on investment advisers, including recordkeeping, registration, advertising and operating requirements, disclosure obligations and prohibitions on fraudulent activities, or by the Investment Company Act of 1940, as amended (the “1940 Act”), could result in investigations, sanctions and reputational damage. Increasingly, regulators have instituted a practice of “regulation by enforcement” where new interpretations of existing regulations are introduced by bringing enforcement actions against securities firms for activities that occurred in the past but were not then thought to be problematic. We also may be adversely affected as a result of new or revised legislation or regulations imposed by the SEC, other U.S. or foreign governmental regulatory authorities or SROs (e.g., FINRA) that supervise the financial markets. Substantial legal liability or significant regulatory action taken against us could have a material adverse effect on our business prospects including our cash position.

 

Numerous regulatory changes and enhanced regulatory and enforcement activity relating to the asset management business may increase our compliance and legal costs and otherwise adversely affect our business.

 

U.S. and foreign governments have taken regulatory actions impacting the investment management industry, and may continue to take further actions, including expanding current (or enacting new) standards, requirements and rules that may be applicable to us and our subsidiaries, particularly those subsidiaries that are SEC registered investment advisers. For example, the SEC and several states and municipalities in the United States have adopted “pay-to-play” rules, which could limit our ability to charge advisory fees. Such “pay-to-play” rules could affect the profitability of that portion of our business. Additionally, the use of “soft dollars,” where a portion of commissions paid to broker-dealers in connection with the execution of trades also pays for research and other services provided to advisors has been mostly prohibited in Europe and, is periodically reexamined in the U.S. and may be limited or modified in the future. Furthermore, new regulations regarding the management of hedge funds and the use of certain investment products may impact our investment management business and result in increased costs. For example, many regulators around the world adopted disclosure and reporting requirements relating to the hedge fund business.

 

On June 5, 2019, the SEC adopted Regulation Best Interest (“Reg BI”) as Rule 15l-1 under the Exchange Act. Reg BI imposes a new federal standard of conduct on registered broker-dealers and their associated persons when dealing with retail clients and requires that a broker-dealer and its representatives act in the best interest of such client and not place its own interests ahead of the customer’s interests. Reg BI requires enhanced documentation for recommendations of securities transactions to broker-dealer retail clients. The new rules and processes related thereto will likely limit revenue and most likely involve increased costs, including, but not limited to, compliance costs associated with new or enhanced technology as well as increased litigation costs.

 

It is not possible to determine the extent of the impact of any new laws, regulations or initiatives that may be imposed, or whether any existing proposals will become law. Conformance with any new laws or regulations could make compliance more difficult and expensive and affect the manner in which we conduct business.

 

16

 

 

If the Company violates the securities laws or is involved in litigation in connection with a violation, the Company’s reputation and results of operations may be adversely affected.

 

Many aspects of the Company’s business involve substantial risks of liability. An underwriter is exposed to substantial liability under federal and state securities laws, other federal and state laws, and court decisions, including decisions with respect to underwriters’ liability and limitations on indemnification of underwriters by issuers. For example, a firm that acts as an underwriter may be held liable for material misstatements or omissions of fact in a prospectus used in connection with the securities being offered or for statements made by its securities analysts or other personnel. The Company’s underwriting activities will usually involve offerings of the securities of smaller companies, which often involve a higher degree of risk and are more volatile than the securities of more established companies. In comparison with more established companies, smaller companies are also more likely to be the subject of securities class actions, to carry directors and officers liability insurance policies with lower limits or not at all, and to become insolvent. In addition, in market downturns, claims tend to increase. Each of these factors increases the likelihood that an underwriter may be required to contribute to an adverse judgment or settlement of a securities lawsuit.

 

The Company’s risk management policies and procedures may leave it exposed to unidentified risks or an unanticipated level of risk.

 

The policies and procedures the Company employs to identify, monitor and manage risks may not be fully effective. Some methods of risk management are based on the use of observed historical market behavior. As a result, these methods may not predict future risk exposures, which could be significantly greater than historical measures indicate. Other risk management methods depend on evaluation of information regarding markets, clients or other matters that are publicly available or otherwise accessible. This information may not be accurate, complete, up-to-date or properly evaluated. Management of operational, legal and regulatory risk requires, among other things, policies and procedures to properly record and verify a large number of transactions and events. The Company cannot give assurances that its policies and procedures will effectively and accurately record and verify this information.

 

The Company seeks to monitor and control its risk exposure through a variety of separate but complementary financial, credit, operational, compliance and legal reporting systems. The Company believes that it effectively evaluates and manages the market, credit and other risks to which it is exposed. Nonetheless, the effectiveness of the Company’s ability to manage risk exposure can never be completely or accurately predicted or fully assured, and there can be no guarantee that the Company’s risk management will be successful. For example, unexpectedly large or rapid movements or disruptions in one or more markets or other unforeseen developments can have a material adverse effect on the Company’s financial condition and results of operations. The consequences of these developments can include losses due to adverse changes in securities values, decreases in the liquidity of trading positions, higher volatility in earnings, and increases in general systemic risk. Certain of the Company’s risk management systems are subject to regulatory review and may be found to be insufficient by the Company’s regulators potentially leading to regulatory sanctions. There can be no guarantee that the operation of these systems will allow the Company to prevent or mitigate the various risks faced by its businesses. Various regulators periodically review companies’ risk control practices, and, if found inadequate, bring enforcement actions and sanctions against such firms.

  

Risks Associated with the Company’s Common Stock

 

Our common stock may be delisted from The Nasdaq Capital Market if we fail to comply with continued listing standards.

 

Our common stock is currently traded on The Nasdaq Capital Market (“Nasdaq”), under the symbol “DOMH.” If we fail to meet any of the continued listing standards of Nasdaq, our common stock could be delisted from Nasdaq. These continued listing standards include specifically enumerated criteria, such as:

 

  a $1.00 minimum closing bid price;

 

  stockholders’ equity of $2.5 million;

 

  500,000 shares of publicly held common stock with a market value of at least $1 million;

 

  300 public stockholders; and

 

  compliance with Nasdaq’s corporate governance requirements, as well as additional or more stringent criteria that may be applied in the exercise of Nasdaq’s discretionary authority.

 

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If we fail to comply with Nasdaq’s continued listing standards, we may be delisted and our common stock will trade, if at all, only on the over-the-counter market, such as the OTC Bulletin Board or OTCQX market, and then only if one or more registered broker-dealer market makers comply with quotation requirements. In addition, the delisting of our common stock could depress our stock price, substantially limit liquidity of our common stock and materially adversely affect our ability to raise capital on terms acceptable to us, or at all. Further, delisting of our common stock would likely result in our common stock becoming a “penny stock” under the Exchange Act.

 

Our share price may be volatile and there may not be an active trading market for our common stock.

 

There can be no assurance that the market price of our common stock will not decline below its present market price or that there will be an active trading market for our common stock. The market prices of upstart financial services companies have been and are likely to continue to be highly volatile. Fluctuations in our operating results and general market conditions for upstart financial services stocks could have a significant impact on the volatility of our common stock price. We have experienced significant volatility in the price of our common stock. From January 1, 2023 through December 31, 2023, the closing share price of our common stock (on a split-adjusted basis) ranged from a high of $4.45 to a low of $1.85. The reason for the volatility in our common stock is not well understood and may continue. Factors that may have contributed to such volatility include, but are not limited to:

 

developments regarding regulatory filings;

 

our funding requirements and the terms of our financing arrangements;

 

introduction of new technologies by us or our competitors;

 

government regulations and laws;

 

public sentiment relating to our industry;

 

the number of shares issued and outstanding;

 

the number of shares trading on an average trading day;

 

block sales of our shares by stockholders to whom we have sold stock in private placements, or the cessation of transfer restrictions with respect to those shares; and

 

market speculation regarding any of the foregoing.

   

Our shares of common stock are thinly traded and, as a result, stockholders may be unable to sell at or near ask prices, or at all, if they need to sell shares to raise money or otherwise desire to liquidate their shares.

 

Our common stock has been “thinly-traded” meaning that the number of persons interested in purchasing our common stock at or near ask prices at any given time may be relatively small or non-existent. This situation is attributable to a number of factors, including the fact that we are a small company that is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk-averse and would be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our shares until such time as we become more seasoned and viable. Our trading volumes may have been further adversely affected by the 17-for-1 reverse stock split that was effective as of June 7, 2022. In addition, we believe that due to the limited number of shares of our common stock outstanding, an options market has not been established for our common stock, limiting the ability of market participants to hedge or otherwise undertake trading strategies available for larger companies with broader stockholder bases which prevents institutions and others from acquiring or trading in our securities. Consequently, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. We cannot give stockholders any assurance that a broader or more active public trading market for our common shares will develop or be sustained, or that current trading levels will be sustained.

 

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Our stock price and trading volume could decline as a result of inaccurate or unfavorable research, or the cessation of research cover, about our business published by securities or industry analysts.

 

The trading market for our common stock may be affected by the research and reports that securities or industry analysts publish about us or our business. If one or more of the analysts who covers us downgrades our common stock or publishes inaccurate or unfavorable research about our business, our stock price could decline. In addition, the analysts’ projections may have little or no relationship to the results we actually achieve and could cause our stock price to decline if we fail to meet their projections. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, our stock price or trading volume could decline.

 

Because of the “anti-takeover” provisions in our Amended and Restated Certificate of Incorporation, Amended and Restated Bylaws and Delaware General Corporation Law, a third party may be discouraged from making a takeover offer that could be beneficial to our stockholders.

 

The effect of certain provisions of our Amended and Restated Certificate of Incorporation, Amended and Restated Bylaws and the anti-takeover provisions of the Delaware General Corporation Law (the “DGCL”), could delay or prevent a third party from acquiring us or replacing members of our Board of Directors, or make more costly any attempt to acquire control of the Company, even if the acquisition or the Board designees would be beneficial to our stockholders. These factors could also reduce the price that certain investors might be willing to pay for shares of the common stock and result in the market price being lower than it would be without these provisions.

 

We incur increased costs as a result of being a public company.

 

As a public company, we incur significant levels of legal, accounting, regulatory and other expenses. Sarbanes-Oxley and related rules of the SEC, together with the listing requirements of Nasdaq, impose significant requirements relating to disclosure controls and procedures and internal control over financial reporting. We have incurred costs as a result of compliance with these public company requirements, and we may need to hire additional qualified personnel in order to continue to satisfy these public company requirements. We are required to expend considerable time and resources complying with public company regulations. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our common stock, fines, sanctions and other regulatory action.

 

Because of their significant stock ownership, some of our executive officers and directors will be able to exert control over us and our significant corporate decisions.

 

Our executive officers, directors and their affiliates own or control, in the aggregate, beneficially own approximately 32.93% of our outstanding common stock as of December 31, 2023. These stockholders may be able to exercise influence over matters requiring stockholder approval, such as the election of directors and the approval of significant corporate transactions, including transactions involving an actual or potential change of control of the company or other transactions that non-controlling stockholders may not deem to be in their best interests. This concentration of ownership may harm the market price of our common stock by, among other things: delaying, deferring, or preventing a change in control of our company; impeding a merger, consolidation, takeover, or other business combination involving our company; causing us to enter into transactions or agreements that are not in the best interests of all stockholders; or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of our company.

 

Dividends on our common stock are not likely.

 

During the last five years, we have not paid cash dividends on our common stock, and we do not anticipate paying cash dividends on our common stock in the foreseeable future. Investors must look solely to the potential for appreciation in the market price of the shares of our common stock to obtain a return on their investment.

 

Item 1B. UNRESOLVED STAFF COMMENTS

 

As a smaller reporting company, we are not required to provide the information required by this item.

 

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Item 1C. CYBERSECURITY

 

We maintain a comprehensive process for identifying, assessing, and managing material risks from cybersecurity threats (as such term is defined in Item 106(a) of Regulation S-K) as part of our broader risk management system and processes. The cybersecurity risk management system involves risk assessments, implementation of security measures, and ongoing monitoring of systems and networks, including networks on which we rely. We actively monitor the current threat landscape in an effort to identify material risks arising from new and evolving cybersecurity threats. We obtain input, as appropriate, for our cybersecurity risk management program on the security industry and threat trends from consultants, cybersecurity assessors, auditors and other third parties to gather certain insights designed to identify and assess material cybersecurity threat risks, their severity and potential mitigations. We depend on and engage various third parties, including suppliers, vendors, and service providers. Our risk management, legal, information technology, and compliance personnel identify and oversee risks from cybersecurity threats associated with our use of such entities. Any incident assessed as potentially being or potentially becoming material is immediately escalated for further assessment, and then reported to Mr. Blattner, our designated member of our Board of Directors.

 

Mr. Blattner has oversight responsibility for risks and incidents relating to cybersecurity threats, including compliance with disclosure requirements, cooperation with law enforcement, and related effects on financial and other risks, and report any findings and recommendations, as appropriate, to the full Board of Directors for consideration. Senior management regularly discusses cyber risks and trends and, should they arise, any material incidents with the designated member of the Board of Directors.

 

Our business strategy, results of operations and financial condition have not been materially affected by risks from cybersecurity threats, but we cannot provide assurance that they will not be materially affected in the future by such risks or any future material incidents. Further, a cyber incident impacting our systems or a third-party’s systems could subject us to business, regulatory, litigation and reputational risk, which could have a negative effect on our business, results of operations and financial condition. For more information on our cybersecurity related risks, see Item 1A Risk Factors of this Annual Report.

 

Item 2. PROPERTIES

 

We lease offices located in New York, New York and we believe that the New York offices are sufficient to meet our current needs.

 

Item 3. LEGAL PROCEEDINGS

 

Many aspects of the Company’s business involve substantial risks of liability. In the ordinary course of business, the Company may be named as defendant or co-defendant in various legal actions, including arbitrations, class actions and other litigation, which could create substantial exposure and periodic expenses. The Company may also be involved, from time to time, in other reviews, investigations and proceedings (both formal and informal) by governmental and self-regulatory agencies regarding the Company’s business, which may result in expenses, adverse judgments, settlements, fines, penalties, injunctions or other relief. In the past in the ordinary course of business, we actively pursued legal remedies to enforce our intellectual property rights and to stop unauthorized use of our technology. In March 2024, the Company received a notice of petition of a filed action seeking relief related to the March 2024 affiliates of new registered representatives. This notice was filed against the Company’s subsidiary Dominari Securities. The Company does not agree with the claim of the plaintiff and will defend itself accordingly. While the Company intends to defend itself vigorously from this claim, it is unable to predict the outcome of such legal proceeding. Any potential loss as a result of this legal proceeding cannot be reasonably estimated. As a result, the Company has not recorded a loss contingency for the aforementioned claim.

 

Item 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

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PART II

 

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market Information

 

Our common stock is traded on the Nasdaq Capital Market under the symbol “DOMH”. On March 26, 2024, the closing price of our common stock, as reported by the Nasdaq Capital Market, was $2.35.

 

Holders

 

As of March 26, 2024, we had approximately 136 holders of record of our common stock.

 

Dividend Policy

 

We have never declared or paid cash dividends on our common stock. We currently do not anticipate paying any cash dividends in the foreseeable future. Any future determination to declare cash dividends will be made at the discretion of our Board of Directors, subject to applicable laws, and will depend on our financial condition, results of operations, capital requirements, general business conditions and other factors that our Board of Directors may deem relevant.

 

Share Repurchases

 

We did not purchase any of our registered equity securities during the quarterly period covered by this Annual Report. 

   

Equity Compensation Plan Information

 

The following table provides information about our common stock that may be issued upon the exercise of options, warrants and rights under all of our existing equity compensation plans as of December 31, 2023. 

 

Plan Category  Number of
securities
to be
issued upon exercise of
outstanding
options,
warrants
and
rights (1)
   Weighted
average
exercise
price of
outstanding
options,
warrants and
rights
   Number of
securities
remaining available for
future
issuance
under
equity
compensation
plans
(excluding
securities
reflected in
column (1)) (2)
 
Equity compensation plans approved by security holder   556,477   $4.94    839,686 
Equity compensation plans not approved by security holder   -    -    - 
    556,477         839,686 

 

(1)Consists of options to acquire 24,454 shares of common stock under the 2014 Equity Incentive Plan and 395,714 shares of common stock under the 2022 Equity Incentive Plan, and restricted stock awards to acquire 136,309 shares of common stock under the 2022 Equity Incentive Plan.

 

(2)Consists of shares of common stock available for future issuance under our equity incentive plans.

 

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Item 6. [RESERVED]

 

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, 2023 and 2022 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 and Risk Factor Summary” included in this 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 2023 to 2022. 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 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. 

 

Dominari Financial, a wholly-owned subsidiary of Dominari, 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 was consummated on March 27, 2023. The newly acquired dually registered broker-dealer and investment adviser was renamed Dominari Securities and is a wholly-owned subsidiary of Dominari Financial.

 

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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.  

 

Reverse Stock Split

 

On June 7, 2022, the Company effected a seventeen-for-one (17-for-1) reverse stock split of its class of common stock (the “Reverse Stock Split”). The Reverse Stock Split, which was approved by stockholders at an annual stockholder meeting on May 20, 2022, was consummated pursuant to a Certificate of Amendment filed with the Secretary of State of Delaware on June 2, 2022. The Reverse Stock Split was effective on June 7, 2022. All references to common stock, convertible preferred stock, warrants to purchase common stock, options to purchase common stock, restricted stock units, restricted stock awards, share data, per share data and related information contained in the consolidated financial statements have been retrospectively adjusted to reflect the effect of the Reverse Stock Split for all periods presented. Payment for fractional shares resulting from the reverse stock split amounted to $26,000.

 

Critical Accounting Estimates

 

Stock-Based Compensation

 

The Company accounts for share-based payment awards exchanged for services at the estimated grant date fair value of the award. Stock options issued under the Company’s long-term incentive plans are granted with an exercise price equal to no less than the market price of the Company’s stock at the date of grant and expire up to ten years from the date of grant. These options generally vest over a one- to five-year period.

 

The Company estimates the fair value of stock option grants using the Black-Scholes (“Black-Scholes”) option pricing model. The determination of fair value within Black-Scholes involves a number of significant estimates, judgements and assumptions that may affect the value of employee stock options used in the model. These include the expected volatility of our stock and employee exercise behavior which are based on historical data as well as uncertain expectations of future developments over the term of the option. The assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. The uncertainty of these judgments and assumption could result in significant change in our stock-based compensation expense amounts in the future.

 

Expected Term - The expected term of options represents the period that the Company’s stock-based awards are expected to be outstanding based on the simplified method, which is the half-life from vesting to the end of its contractual term.

 

Expected Volatility - The Company computes stock price volatility over expected terms based on its historical common stock trading prices.

 

Risk-Free Interest Rate - The Company bases the risk-free interest rate on the implied yield available on U. S. Treasury zero-coupon issues with an equivalent remaining term.

 

Expected Dividend - The Company has never declared or paid any cash dividends on its shares of common stock and does not plan to pay cash dividends in the foreseeable future, and, therefore, uses an expected dividend yield of zero in its valuation models.

 

The Company accounts for forfeitures as they occur. 

 

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.

 

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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.

 

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. Our investments are valued at $24 million as of December 31, 2023.  In valuing these investments there are judgements and assumptions that may affect the values derived for each security including the determination of a change in value and whether or not there are indicators of an impairment of value. These judgments could impact the estimation uncertainty and the impact of these estimates could have an effect on the financial condition and results of operations. Management’s estimates and assumptions include considerations of industry and market conditions and well as uncertain factors identified specific to each investment that could impact the carrying values.

 

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

 

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, 2023 Compared to Fiscal Year Ended December 31, 2022

 

During the year ended December 31, 2023, we recognized approximately $2.0 million in revenue from operations, primarily driven by the underwriting revenue earned by Dominari Securities. During the years ended December 31, 2023 and 2022, we incurred a loss from operations of approximately $21.8 million and $14.3 million, respectively. The increase in loss in operations was primarily attributable to the following:

 

  i. An approximate $12.2 million increase in general and administrative expenses – driven by approximately $0.1 million and $1.9 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 $9.5 million due to growing operations.

 

  ii. An approximate $2.7 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 years ended December 31, 2023 and 2022, other expenses was approximately $(1.1) million and $(7.8) million, respectively. The activity for the years ended December 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 note receivable, and short and long-term investments. Specifically:

 

  i. Marketable securities – we recognized a gain of approximately $0.6 million for the year ended December 31, 2023. The decrease of approximately $6.6 million in losses over the prior period is a direct result of a decrease in unrealized losses of approximately $6.0 million, an increase in dividend income of approximately $0.4 million and a decrease in realized loss of approximately $0.2 million. The decreases were driven by both market improvement and a decrease in sale activity resulting in fewer realized losses.

 

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  ii. Note receivable – the changes over the years ended December 31, 2023 and 2022 are a function of observable market transactions which resulted in an increase in unrealized loss of approximately $3.2 million on the adjusted fair value of the note receivable during the year ended December 31, 2023.
     
  iii. Short-term and long-term investments – the changes over the years ended December 31, 2023 and 2022 are a function of observable market transactions which resulted in an increase in unrealized gain of approximately $3.3 million on the adjusted fair value of the investments during the year ended December 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; 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 business plan to support our transition into the financial services industry. Our working capital amounted to approximately $26.5 million as of December 31, 2023. 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.

 

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Cash Flows from Operating Activities

 

For the years ended December 31, 2023 and 2022, net cash used in operations was approximately $22.2 million and $10.6 million, respectively. 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. The cash used in operating activities for the year ending December 31, 2022, is primarily attributable to a net loss of approximately $22.1 million. The net loss was slightly offset by approximately $4.9 million in unrealized losses on marketable securities, approximately $2.6 million relating to the change in fair value of short-term investments, approximately $1.8 million in research and development expense related to acquired licenses, approximately $1.5 million related to stock-based compensation, and approximately $1.4 million of realized loss on marketable securities.

 

Cash Flows from Investing Activities

 

For the years ended December 31, 2023 and 2022, net cash used in investing activities was approximately $7.2 million and $14.6 million, respectively. 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. The cash used in investing activities for the year ended December 31, 2022, primarily resulted from our purchase of marketable securities of approximately $26.8 million, purchase of investments of approximately $15.0 million, purchase of research and development licenses of approximately $1.8 million, and the purchase of promissory notes of approximately $1.6 million, partially offset by our sale of marketable securities of approximately $28.7 million since we invest excess cash into marketable securities until additional cash is needed.

 

Cash Flows from Financing Activities

 

For the year ended December 31, 2023, cash used in financing activities was approximately $0.9 million, which reflects the cost for the purchase of treasury stock of approximately $0.9 million. For the year ended December 31, 2022, cash used in financing activities was approximately $7.2 million, which reflects the cost for redemption of Series O and Series P Redeemable Convertible Preferred Stock of approximately $22.0 million and cost for purchase of treasury stock of approximately $3.1 million, partially offset by net proceeds of approximately $17.9 million from investors in exchange of issuance of issuance of Series O and Series P Redeemable Convertible Preferred Stock. For the year ended December 31, 2021, cash provided by financing activities was approximately $78.2 million, which is primarily attributable to the approximate $78.2 million from investors in exchange of issuance of common stock and warrants.

 

Contractual obligations

 

None.

 

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

As a smaller reporting company, we are not required to provide the information required by this item.

 

26

 

 

Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Consolidated financial statements and supplementary data required by this Item 8 follow.

 

Index to Consolidated Financial Statements

 

    Page
     
Report of Independent Registered Public Accounting Firms (PCAOB ID Number 688)   F-2
Consolidated Balance Sheets as of December 31, 2023 and 2022   F-3
Consolidated Statements of Operations for the Years Ended December 31, 2023 and 2022   F-4
Consolidated Statements of Changes in Redeemable Convertible Preferred Stock and Stockholder’s Equity for the Years Ended December 31, 2023 and 2022   F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 2023 and 2022   F-6
Notes to the Consolidated Financial Statements   F-7

 

F-1

 

Report of Independent Registered Public Accounting Firm

 

To the Shareholders and Board of Directors of

Dominari Holdings Inc.

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Dominari Holdings Inc. and Subsidiaries (the “Company”) as of December 31, 2023 and 2022, the related consolidated statements of operations, changes in redeemable convertible preferred stock and stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2023, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

Critical Audit Matter

 

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which they relate.

 

Valuation of Long-term Investments

 

As of December 31, 2023, the Company had $24.15 million of investments in companies without readily determinable fair values. The Company typically measures these investments at cost less any impairment, adjusted for observable price changes in orderly transactions for an identical or similar investment. We identified the valuation of these investments as a critical audit matter because of the significant judgement management uses to estimate the investment value. This is a challenging audit area due to the subjectivity in assessing whether observable price changes have occurred for investments that are identical or similar to the investment the Company holds, and in assessing whether an investment is impaired.

 

The following are the primary procedures we performed to address this critical audit matter. We obtained an understanding of management’s process for accounting for their investments that do not have readily determinable fair values. We considered the appropriateness of the Company’s application of accounting policy by obtaining and reviewing the Company’s analysis and confirming its compliance with accounting principles generally accepted in the United States. We tested the mathematical accuracy of the Company’s carrying value calculations. We evaluated the accounting conclusions reached by the Company as to whether any observable transactions had occurred that were identical or similar in nature through reading the Company’s available financial and other information regarding the investee and through public searches for corroborating or contradictory information. Further, we evaluated the appropriateness of the Company’s impairment conclusions considering this internal and external information. For certain investments, we utilized our internal valuation group specialists to assess the appropriateness of the valuation methodologies and recompute the valuations derived. We also evaluated the adequacy of the Company’s disclosures in the notes to the consolidated financial statements in relation to this matter.

 

/s/ Marcum llp

 

Marcum llp

 

We have served as the Company’s auditor since 2022.

 

New York, NY

April 1, 2024

F-2

 

 

DOMINARI HOLDINGS INC.

Consolidated Balance Sheets

($ in thousands except share and per share amounts)

 

   December 31,   December 31, 
   2023   2022 
         
ASSETS        
Current assets        
Cash and cash equivalents  $2,833   $33,174 
Marketable securities   13,547    7,130 
Deposits with clearing broker   7,687    - 
Prepaid expenses and other assets   898    564 
Prepaid acquisition cost   -    301 
Short-term investments at fair value   -    13 
Notes receivable, at fair value - current portion   3,177    7,474 
Investment in Fieldpoint Securities   -    2,000 
Total current assets   28,142    50,656 
           
Property and equipment, net   344    - 
Notes receivable, at fair value - non-current portion   1,129    1,100 
Investments   24,150    23,103 
Right-of-use assets   3,335    919 
Security deposit   458    458 
Total assets  $57,558   $76,236 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities          
Accounts payable and accrued expenses  $1,036   $447 
Accrued salaries and benefits   51    1,260 
Accrued commissions   77    - 
Lease liability - current   421    82 
Other current liability   22    - 
Total current liabilities   1,607    1,789 
           
Lease liability   3,028    680 
Total liabilities   4,635    2,469 
           
Stockholders’ equity          
Preferred stock, $0.0001 par value, 50,000,000 authorized   
 
    
 
 
Series D: 5,000,000 shares designated; 3,825 shares issued and outstanding at December 31, 2023 and 2022; liquidation value of $0.0001 per share   -    - 
Series D-1: 5,000,000 shares designated; 834 shares issued and outstanding at December 31, 2023 and 2022; liquidation value of $0.0001 per share   -    - 
Common stock, $0.0001 par value, 100,000,000 shares authorized; 5,995,065 and 5,485,096 shares issued at December 31, 2023 and 2022, respectively; 5,934,917 and 5,017,079 shares outstanding at December 31, 2023 and 2022, respectively   -    - 
Additional paid-in capital   262,187    262,970 
Treasury stock, at cost, 60,148 and 468,017 shares at December 30, 2023 and December 31, 2022, respectively   (501)   (3,322)
Accumulated deficit   (208,763)   (185,881)
Total stockholders’ equity   52,923    73,767 
Total liabilities and stockholders’ equity  $57,558   $76,236 

 

See accompanying notes to consolidated financial statements.

 

F-3

 

 

DOMINARI HOLDINGS INC.

Consolidated Statements of Operations

($ in thousands except share and per share amounts)

 

   Years Ended December 31, 
   2023   2022 
Revenues  $2,039   $- 
           
Operating costs and expenses          
General and administrative  $23,838   $11,683 
Research and development   3    830 
Research and development - license acquired   (6)   1,833 
Total operating expenses   23,835    14,346 
Loss from operations   (21,796)   (14,346)
           
Other income (expenses)          
Other income   36    64 
Interest income   716    687 
Gain (loss) on marketable securities   630    (5,952)
Unrealized loss on note receivable   (3,248)   - 
Change in fair value of investments   780    (2,560)
Total other expenses   (1,086)   (7,761)
Net loss  $(22,882)  $(22,107)
Deemed dividends related to Series O and Series P Redeemable Convertible Preferred Stock   -    (4,109)
Net Loss Attributable to Common Shareholders  $(22,882)  $(26,216)
           
Net loss per share, basic and diluted          
Basic and Diluted  $(4.38)  $(4.91)
           
Weighted average number of shares outstanding, basic and diluted          
Basic and Diluted   5,229,477    5,334,075 

 

See accompanying notes to consolidated financial statements. 

 

F-4

 

 

DOMINARI HOLDINGS INC.

Consolidated Statements of Changes in Redeemable Convertible Preferred Stock and Stockholders’ Equity

($ in thousands except share and per share amounts)

 

   Redeemable Convertible Preferred Stock                   Additional               Total 
   Series O   Series P   Preferred Stock   Common 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       -   $     -        -   $     -    4,659   $     -    5,275,329   $     -   $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   -    -    -    -    -    -    -    -    -    468,017    (3,058)   -    (3,058)
Stock-based compensation   -    -    -    -    -    -    238,244    -    1,472    -    -    -    1,472 
Cancellation of common stock related to investment in CBM   -    -    -    -    -    -    (22,812)   -    -    -    -    -    - 
Fractional shares adjusted for reverse split   -    -    -    -    -    -    (5,665)   -    (26)   -    -    -    (26)
Net loss   -    -    -    -    -    -    -    -    -    -    -    (22,107)   (22,107)
Balance at December 31, 2022   -   $-    -   $-    4,659   $-    5,485,096   $-   $262,970    468,017   $(3,322)  $(185,881)  $73,767 
Stock-based compensation   -    -    -    -    -    -    1,179,468    -    2,977    -    -    -    2,977 
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   -    -    -    -    -    -    -    -    -    -    -    (22,882)   (22,882)
Balance at December 31, 2023   -   $-    -   $-    4,659   $-    5,995,065   $-   $262,187    60,148   $(501)  $(208,763)  $52,923 

 

See accompanying notes to consolidated financial statements. 

 

F-5

 

 

DOMINARI HOLDINGS INC.

Consolidated Statements of Cash Flows

($ in thousands)

 

   Years Ended December 31, 
   2023   2022 
Cash flows from operating activities        
Net loss  $(22,882)  $(22,107)
Adjustments to reconcile net loss to net cash used in operating activities:          
Amortization of right-of-use assets   359    (188)
Depreciation   83    
-
 
Change in fair value of short-term investment   13    2,621 
Change in fair value of long-term investment   (793)   (61)
Research and development-acquired license, expensed   
-
    1,833 
Stock-based compensation   2,977    1,472 
Realized loss on marketable securities   1,180    1,405 
Unrealized (gain) loss on marketable securities   (1,049)   4,867 
Unrealized loss on note receivable   3,248    
-
 
Realized gain on receiving shares in exchange of note receivable extension   (36)     
Changes in operating assets and liabilities:          
Prepaid expenses and other assets   (406)   (215)
Prepaid acquisition cost   301    (301)
Clearing broker deposits   (4,137)   
-
 
Accounts payable and accrued expenses   376    66 
Accrued salaries and benefits   (1,209)   580 
Accrued commissions   52    
-
 
Lease liabilities   (88)   31 
Other current liabilities   (99)   
-
 
Notes receivable, at fair value – net interest accrued   (122)   (600)
Net cash used in operating activities   (22,232)   (10,597)
           
Cash flows from investing activities          
Purchase of membership interest in FPS   
-
    (2,000)
Purchase of marketable securities   (34,125)   (26,798)
Sale of marketable securities   27,574    28,658 
Proceeds from sale of digital currencies   
-
    93 
Purchase of fixed assets   (427)   
-
 
Acquisition of FPS, net of cash acquired and receivable owed from FPS   (1,112)   
-
 
Return of deposit (funding of deposit) into a managed account, net   
-
    3,898 
Collection of principal on note receivable   1,102    
-
 
Funds to employee forgivable loan   (107)   
-
 
Purchase of research and development licenses   
-
    (1,833)
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   (7,170)   (14,598)
           
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)   (3,058)
Net cash used in financing activities   (939)   (7,193)
           
Net decrease in cash and cash equivalents and restricted cash   (30,341)   (32,388)
Cash and cash equivalents, beginning of period   33,174    65,562 
           
Cash and cash equivalents, end of period  $2,833   $33,174 
           
Cash paid for interest and taxes  $686   $
-
 
           
Non-cash investing and financing activities          
Receiving shares in exchange of note receivable extension  $179   $
-
 
Note receivable principal and interest receivable reduced due to receiving shares  $143      
Transfer from short-term investment to marketable securities  $
-
   $1,497 
Reclassify from convertible note receivable to notes receivable at fair value  $
-
   $2,147 
Transfer from long-term investment to marketable securities  $
-
   $1,439 
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 consolidated financial statements. 

 

F-6

 

 

DOMINARI HOLDINGS INC.

(Formerly AIkido Pharma, Inc.)

 

Notes to Consolidated Financial Statements

 

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. 

 

On September 9, 2022, Dominari 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 the Financial Industry Regulatory Authority (“FINRA”) and an investment adviser registered with the Securities and Exchange Commission (“SEC”).   Pursuant to the terms of the FPS Purchase Agreement, Dominari purchased from the Seller 100% of the membership interests in FPS (the “Membership Interests”). FPS’s registered broker-dealer and investment adviser businesses will be operated as a wholly owned subsidiary of Dominari.  The FPS Purchase Agreement provides for Dominari’s acquisition of FPS’s Membership Interests in two closings, the first of which occurred on October 4, 2022 (the “Initial Closing”), at which Dominari paid to the Seller $2.0 million in consideration for a transfer by the Seller to Dominari of 20% of the FPS Membership Interests.   Following the Initial Closing, FPS filed a continuing membership application requesting approval for a change of ownership, control, or business operations with FINRA in accordance with FINRA Rule 1017 (the “Rule 1017 Application”).  The Rule 1017 Application was approved by FINRA on March 20, 2023. The second closing occurred on March 27, 2023. Dominari paid to the Seller an additional $1.4 million in consideration for a transfer by the Seller to Dominari of the remaining 80% of the Membership Interests. 

 

Reverse Stock Split

 

On June 7, 2022, the Company effected a seventeen-for-one (17-for-1) reverse stock split of its class of common stock (the “Reverse Stock Split”). The Reverse Stock Split, which was approved by stockholders at an annual stockholder meeting on May 20, 2022, was consummated pursuant to a Certificate of Amendment filed with the Secretary of State of Delaware on June 2, 2022. The Reverse Stock Split was effective on June 7, 2022. All references to common stock, convertible preferred stock, warrants to purchase common stock, options to purchase common stock, restricted stock units, restricted stock awards, share data, per share data and related information contained in the consolidated financial statements have been retrospectively adjusted to reflect the effect of the Reverse Stock Split for all periods presented. Payment for fractional shares resulting from the reverse stock split amounted to $26,000.

 

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 consolidated financial statements.

 

F-7

 

 

DOMINARI HOLDINGS INC.
(Formerly AIkido Pharma, Inc.)

Notes to Consolidated Financial Statements

 

Note 3. Summary of Significant Accounting Policies

 

Basis of Presentation and Principles of Consolidation

 

The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for financial information.

 

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 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.

  

Use of Estimates

 

The accompanying 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 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.

 

Segments

 

Operating segments are defined as components of an entity for which discrete financial information is available that is regularly reviewed by the Chief Operating Decision Maker (“CODM”) in deciding how to allocate resources to an individual segment and in assessing performance. The CODM reviews financial information for the purposes of making operating decisions, allocating resources, and evaluating financial performance of the business of the reportable operating segments, based on discrete financial information. The Company’s chief executive officer is the CODM. The measures of segment profitability that are most relied upon by the CODM are gross revenues and net loss.

 

Concentration of Cash

 

The Company maintains cash balances at four financial institutions in checking accounts. From time to time, the Company’s cash account balances exceed the balances as covered by the Federal Deposit Insurance System. The Company has never suffered a loss due to such excess balances. As of December 31, 2023 and 2022, the Company had no cash equivalents.

 

Marketable Securities

 

Marketable securities are classified as trading and are carried at fair value. The Company’s marketable securities consist of highly liquid mutual funds and exchange-traded & closed-end funds which are valued at quoted market prices.

 

Property and Equipment

 

Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which range from three to five years. Property and equipment held under finance leases are amortized on a straight-line basis over the shorter of the lease term or estimated useful life of the asset.

 

F-8

 

 

DOMINARI HOLDINGS INC.
(Formerly AIkido Pharma, Inc.)

Notes to Consolidated Financial Statements

 

Research and Development

 

Research and development costs, including acquired in-process research and development expenses for which there is no alternative future use, are expensed as incurred. Advance payments for goods and services that will be used in future research and development activities are expensed when the activity has been performed or when the goods have been received rather than when the payment is made.

 

Accounting for Warrants

 

The Company accounts for the issuance of common stock purchase warrants issued in connection with the equity offerings in accordance with the provisions of Accounting Standards Codification (“ASC”) 815, Derivatives and Hedging (“ASC 815”). The Company classifies as equity any contracts that (i) require physical settlement or net-share settlement or (ii) gives the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement).

 

Stock-based Compensation

 

The Company accounts for share-based payment awards exchanged for services at the estimated grant date fair value of the award. Stock options issued under the Company’s long-term incentive plans are granted with an exercise price equal to no less than the market price of the Company’s stock at the date of grant and expire up to ten years from the date of grant. These options generally vest over a one- to five-year period.

 

The Company estimates the fair value of stock option grants using the Black-Scholes option pricing model and the assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment.

 

Expected Term - The expected term of options represents the period that the Company’s stock-based awards are expected to be outstanding based on the simplified method, which is the half-life from vesting to the end of its contractual term.

 

Expected Volatility - The Company computes stock price volatility over expected terms based on its historical common stock trading prices.

 

Risk-Free Interest Rate - The Company bases the risk-free interest rate on the implied yield available on U. S. Treasury zero-coupon issues with an equivalent remaining term.

 

Expected Dividend - The Company has never declared or paid any cash dividends on its common shares and does not plan to pay cash dividends in the foreseeable future, and, therefore, uses an expected dividend yield of zero in its valuation models.

 

The Company accounts for forfeitures as they occur. 

 

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.

 

F-9

 

  

DOMINARI HOLDINGS INC.
(Formerly AIkido Pharma, Inc.)

Notes to Consolidated Financial Statements

 

Deposits with clearing broker

 

Deposits with Dominari Securities’ clearing broker consisted of approximately $6.7 million held in money market funds and liquid insured deposits maintained by the Company with its clearing broker as of December 31, 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 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 11 - 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 (see Note 15 - Revenue).

 

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 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 Consolidated Balance Sheet.

 

Treasury Stock

 

Treasury stock is recorded at cost and is presented as a reduction of stockholders’ equity.

  

F-10

 

 

DOMINARI HOLDINGS INC.
(Formerly AIkido Pharma, Inc.)

Notes to Consolidated Financial Statements

 

Income Taxes

 

The Company uses the asset and liability method of accounting for income taxes in accordance with ASC 740, “Income Taxes” (“ASC 740”). Under this method, income tax expense is recognized as the amount of: (i) taxes payable or refundable for the current year and (ii) deferred tax consequences of temporary difference resulting from matters that have been recognized in the Company’s consolidated financial statement or tax returns. Deferred tax assets and liabilities are determined based on the difference between the consolidated financial statement and tax bases of assets and liabilities measured at the enacted tax rates in effect for the year in which these items are expected to reverse. The Company assesses the likelihood that its deferred tax assets will be recovered from future taxable income and, to the extent it believes, based upon the weight of available evidence, that it is more likely than not that all or a portion of the deferred tax assets will not be realized, a valuation allowance is established through a charge to income tax expense. Potential for recovery of deferred tax assets is evaluated by estimating the future taxable profits expected and considering prudent and feasible tax planning strategies.

 

As required by the provisions of ASC 740, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the consolidated financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. Differences between tax positions taken or expected to be taken in a tax return and the net benefit recognized and measured pursuant to the interpretation are referred to as “unrecognized benefits.” A liability is recognized for an unrecognized tax benefit because it represents an enterprise’s potential future obligation to the taxing authority for a tax position that was not recognized as a result of applying the provisions of ASC 740. If applicable, interest costs and penalties related to unrecognized tax benefits are required to be calculated and would be classified as interest and penalties in general and administrative expense in the statement of operations.

 

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 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

 

F-11

 

  

DOMINARI HOLDINGS INC.
(Formerly AIkido Pharma, Inc.)

Notes to Consolidated Financial Statements

 

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 consolidated financial statements.

  

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 occurred on March 27, 2023. Dominari Financial paid to the Seller an additional approximate $1.4 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.

 

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 consolidated statement of operations.

 

F-12

 

 

DOMINARI HOLDINGS INC.
(Formerly AIkido Pharma, Inc.)

Notes to Consolidated Financial Statements

 

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 

 

Note 5. Investments in Marketable Securities

 

The realized gain or loss, unrealized gain or loss, and dividend income related to marketable securities for the years ended December 31, 2023 and 2022, which are recorded as a component of gains and (losses) on marketable securities on the consolidated statements of operations, are as follows ($ in thousands):

 

   Years Ended December 31, 
   2023   2022 
Realized loss  $(1,180)  $(1,405)
Unrealized gain (loss)   1,049    (4,867)
Dividend income   762    320 
Total  $630   $(5,952)

 

Note 6. Short-term investments

 

The following table presents the Company’s short-term investments as of December 31, 2023 and 2022 ($ in thousands):

 

   December 31,
2023
   December 31,
2022
 
Investment in Vicinity Motor Corp.   
     -
    13 
Total   
-
    13 

 

The change in the fair value of the short-term investments for the year ended December 31, 2023, is summarized as follows: ($ in thousands):

 

Beginning balance  $13 
Change in fair value of short-term investment   (13)
Ending balance  $
-
 

 

F-13

 

 

DOMINARI HOLDINGS INC.
(Formerly AIkido Pharma, Inc.)

Notes to Consolidated Financial Statements

 

Investment in Vicinity Motor Corp.

 

On October 25, 2021, the Company entered into a warrant agreement with Vicinity Motor Corp. (“Vicinity”) that entitles the Company to purchase up to 246,399 shares of Vicinity common stock at $5.10 per share. The warrant expires on October 25, 2024. The fair value was determined using a Black-Scholes simulation. The Company recorded the fair value of the Vicinity warrant of approximately $0 and $13,000 in the consolidated balance sheet as of December 31, 2023 and 2022, respectively, reflecting the benefit received as part of its purchase of Vicinity common stock through its brokerage account. Gains or losses associated with changes in the fair value of investments in Vicinity warrants are recognized as change in fair value of investment on the consolidated statements of operations. During the year ended December 31, 2023, the Company recorded approximately $13,000 of change in fair value of investment for this investment.

 

The following table provides quantitative information regarding Level 3 fair value measurement inputs at their measurement dates:

 

   December 31,
2023
   December 31,
2022
 
Option term (in years)         0.8    1.8 
Volatility   67.2%   76.90%
Risk-free interest rate   5.43%   4.47%
Expected dividends   0.00%   0.00%
Stock price  $
-
   $0.96 

 

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 December 31, 2023 and 2022 ($ in thousands):

 

   Cost Basis   December 31,
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    2,679    2,500 
Investment in SpaceX*   3,500    4,867    3,674 
Investment in Databricks*   1,200    842    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   $24,150   $23,103 

 

The change in the value of the long-term investments for the year ended December 31, 2023, is summarized as follows: ($ in thousands):

 

*Investments made in these companies are through a Special Purpose Vehicle (“SPV”). The SPV is the holder of the actual stock. The Company does not hold these stock certificates directly.

 

**Investments made in these companies are through both an SPV and direct investments.

 

Beginning balance  $23,103 
Purchase of investments   75 
Receiving shares in exchange of note receivable extension   179 
Change in fair value of long-term investments   793 
Ending balance  $24,150 

 

F-14

 

 

DOMINARI HOLDINGS INC.
(Formerly AIkido Pharma, Inc.)

Notes to Consolidated Financial Statements

 

Note 8. Notes Receivable

 

The following table presents the Company’s notes receivable as of December 31, 2023 and 2022 ($ in thousands):

 

December 31, 2023

 

   Maturity Date  Stated Interest Rate   Principal Amount   Interest Receivable   Fair Value 
Notes receivable, at fair value                   
Convergent convertible note - current  12/2/2024      8%  $1,006   $58   $1,064 
Raefan Industries LLC Investment  12/31/2024   8%  $1,363   $751   $2,114 
American Innovative Robotics Investment  04/01/2027   8%  $1,106   $22   $1,129 
                        
Notes receivable, at fair value - current portion                    $3,177 
                        
Notes receivable, at fair value - non-current portion                    $1,129 

 

 

December 31, 2022

 

   Maturity
Date
  Stated
Interest
Rate
   Principal
Amount
   Interest
Receivable
   Fair Value 
Short-term convertible notes receivable                   
Convergent Investment  01/29/2023     8%  $2,000   $307   $2,307 
                        
Short-term notes receivable                       
Raefan Industries LLC Investment  6/30/2023   8%  $4,730   $437   $5,167 
Total                    $7,474 
                        
Long-term notes receivable                       
American Innovative Robotics Investment  04/01/2027   8%  $1,100   $
-
   $1,100 

 

F-15

 

 

DOMINARI HOLDINGS INC.
(Formerly AIkido Pharma, Inc.)

Notes to Consolidated Financial Statements

 

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 $1.0 and $2.0 million as of December 31, 2023 and 2022, respectively. The Company recorded an interest income receivable of approximately $13,000 and $0.2 million on the Convergent Convertible Note as of December 31, 2023 and 2022, respectively.

 

The Company recorded principal repayment of $1.0 million and $0, interest receivable repayment of approximately $0.3 million and $0, and an unrealized gain on the note of approximately $6,000 and $0 on the Convergent Convertible Note for the years ended December 31, 2023 and 2022, respectively.

 

Raefan Industries LLC Investment

  

On December 6, 2021, the Company purchased an 8% promissory note (“Raefan Industries Promissory Note”) issued by Raefan Industries, LLC (“Raefan Industries”) in the principal amount of approximately $2.0 million pursuant to a Note Purchase Agreement with Raefan Industries.  On December 6, 2022, the Company, Raefan Industries and Mr. Jeffrey Cooper entered into a Consolidated, Amended and Restated Promissory Note agreement (the “Raefan Amended Note Agreement”).

 

On October 20, 2023, in consideration for extending the maturity date of the Raefan Amended Note (See Note 8 – Notes Receivable) to December 31, 2024, Raefan Industries agreed and had delivered to the Company 357,143 shares of TessPay at $0.5 per share of common stock. The Company reduced approximately $0.1 million of principal and interest receivable balance of Raefan Amended Note and recorded an income of approximately $35,000 for receiving TessPay shares.

 

The Company recorded an interest income receivable of approximately $0.4 million and $26,000 on the Amended Note as of December 31, 2023 and 2022 and an unrealized loss on the note of approximately $3.3 million and $0 for the years ended December 31, 2023 and 2022, respectively.

 

American Innovative Robotics, LLC Investment

 

The Company recorded interest income of approximately $89,000 and $67,000, and an unrealized gain on the note of approximately $6,000 and $0 on the Robotics Promissory Note for the year ended December 31, 2023 and 2022, respectively.

 

F-16

 

 

DOMINARI HOLDINGS INC.
(Formerly AIkido Pharma, Inc.)

Notes to Consolidated Financial Statements

 

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 December 31, 2023 and 2022.

 

The Company received and recorded interest income related to the Kaya Now Promissory Note of approximately $10,000 for the year ended December 31, 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.

 

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.

 

F-17

 

 

DOMINARI HOLDINGS INC.
(Formerly AIkido Pharma, Inc.)

Notes to Consolidated Financial Statements

 

The following table presents the Company’s assets and liabilities that are measured at fair value as of December 31, 2023 and 2022 ($ in thousands):

 

   Fair value measured as of December 31, 2023     
   Total at December 31,   Quoted prices in active markets   Significant other observable inputs   Significant unobservable inputs 
   2023   (Level 1)   (Level 2)   (Level 3) 
Assets                
Marketable securities:                
Equities  $13,547   $13,547   $
     -
   $
-
 
Total marketable securities  $13,547   $13,547   $
-
   $
-
 
Short-term investment  $-   $
-
   $
-
   $- 
Notes receivable at fair value, current portion  $3,177   $
-
   $
-
   $3,177 
Notes receivable at fair value, non-current portion  $1,129   $
-
   $
-
   $1,129 

 

   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 

 

F-18

 

 

DOMINARI HOLDINGS INC.
(Formerly AIkido Pharma, Inc.)

Notes to Consolidated Financial Statements

 

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, 2021  $419 
Change in fair value of investment   (406)
Short-term investment at December 31, 2022  $13 
Change in fair value of investment   (13)
Short-term investment at December 31, 2023  $
-
 

 

Notes receivable at fair value, current portion at December 31, 2021  $6,984 
Accrued interest receivable   600 
Reclassify from convertible note receivable to notes receivable at fair value   2,147 
Purchase of notes receivable   500 
Change in fair value of short-term investment   (1,858)
Conversion of note receivable to marketable securities   (899)
Notes receivable at fair value, current portion at December 31, 2022  $7,474 
Collection of principal outstanding   (1,000)
Unrealized loss on note receivable   (3,254)
Principle reduced due to receiving shares   (143)
Accrued interest receivable   100 
Notes receivable at fair value, current portion at December 31, 2023  $3,177 

 

 

Notes receivable at fair value, non-current portion at December 31, 2021  $
-
 
Purchase of notes receivable   1,100 
Notes receivable at fair value, non-current portion at December 31, 2022  $1,100 
Unrealized gain on note receivable   6 
Accrued interest receivable   23 
Notes receivable at fair value, non-current portion at December 31, 2023  $1,129 

 

F-19

 

 

DOMINARI HOLDINGS INC.
(Formerly AIkido Pharma, Inc.)

Notes to Consolidated Financial Statements

 

Note Receivable at fair value

   

As of December 31, 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.

 

Note 10. Property and Equipment

 

Property and equipment, net, consists of the following as of December 31, 2023 and 2022:

 

   Estimated
Useful Lives
  December 31,
2023
   December 31,
2022
 
Leasehold improvements  Shorter of the remaining lease term or estimated useful life  $    50   $
    -
 
Machinery, equipment and computer software   1 to 15 years   169    
-
 
Furniture and fixtures   3 to 5 years   208    
-
 
Total     $427   $
-
 
Less: Accumulated depreciation and amortization      (83)   
-
 
Total property and equipment, net     $344   $
-
 

 

Depreciation expense was $83,000 and $0 during the years ended December 31, 2023 and 2022, respectively.

 

Note 11. 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 “22nd Floor Premises”). The Company currently uses the 22nd 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 22nd Floor Premises on the Commencement Date.

 

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 February 1, 2023. 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.

  

F-20

 

 

DOMINARI HOLDINGS INC.
(Formerly AIkido Pharma, Inc.)

Notes to Consolidated Financial Statements

 

The tables below represent the Company’s lease assets and liabilities as of December 31, 2023 and 2022:

 

 

   December 31,
2023
   December 31,
2022
 
Assets:        
Operating lease right-of-use-assets  $3,335   $   919 
           
Liabilities:          
Current          
Operating   421    82 
Long-term          
Operating   3,028    680 
   $3,449   $762 

 

The following tables summarize quantitative information about the Company’s operating leases, under the adoption of ASC 842:

 

   December 31,
2023
   December 31,
2022
 
Weighted-average remaining lease term – operating leases (in years)   6.5    7.1 
Weighted-average discount rate – operating leases   10.0%   10.0%

 

During the years ended December 31, 2023 and 2022, the Company recorded approximately $0.8 million and 0.1 million of lease expense to current period operations.

 

   Year Ended   Year Ended 
   December 31,
2023
   December 31,
2022
 
Operating leases        
Operating lease cost  $668   $    73 
Operating lease expense   668    73 
Short-term lease rent expense   105    67 
Net rent expense  $773   $140 

 

Supplemental cash flow information related to leases were as follows:

 

   Year Ended
December 31,
2023
  

Year Ended
December 31,
2022

 
Operating cash flows - operating leases  $396   $  231 
Right-of-use assets obtained in exchange for operating lease liabilities  $2,780   $960 

 

As of December 31, 2023, future minimum payments during the next five years and thereafter are as follows:

 

   Operating 
   Leases 
   $ 
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   4,728 
Less present value discount   (1,279)
Operating lease liabilities  $3,449 

 

F-21

 

 

DOMINARI HOLDINGS INC.
(Formerly AIkido Pharma, Inc.)

Notes to Consolidated Financial Statements

 

Note 12. 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 years ended December 31, 2023, and 2022 are as follows:

 

   As of December 31, 
   2023   2022 
Convertible preferred stock   34    34 
Warrants to purchase common stock   444,796    444,796 
Restricted stock awards   136,309    
-
 
Options to purchase common stock   420,168    54,722 
Total   1,001,307    499,552 

 

Note 13. Redeemable Convertible Preferred Stock

 

Series O and Series P Redeemable Convertible Preferred Stock

 

On February 24, 2022, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain institutional investors (the “Investors”), pursuant to which the Company agreed to issue and sell, in concurrent registered direct offerings (the “Offerings”), (i) 11,000 shares of the Company’s Series O Redeemable Convertible Preferred Stock, par value $0.001 per share (the “Series O Preferred Stock”), and (ii) 11,000 shares of the Company’s Series P Redeemable Convertible Preferred Stock, par value $0.001 per share (the “Series P Preferred Stock” and together with the Series O Preferred Stock, the “Preferred Stock”), in each case, at an offering price of $952.38 per share, representing a 5% original issue discount to the stated value of $1,000 per share of Preferred Stock, for gross proceeds of each Offering of $10,476,180, or approximately $21.0 million in the aggregate for the Offerings, before the deduction of the placement agent’s fee and offering expenses. The shares of Series O Preferred Stock will have a stated value of $1,000 per share and will be convertible, at a conversion price of $1.00 per share, into 11,000,000 shares of common stock (subject in certain circumstances to adjustments). The shares of Series P Preferred Stock will have a stated value of $1,000 per share and will be convertible, at a conversion price of $1.00 per share, into 11,000,000 shares of common stock (subject in certain circumstances to adjustments). The Series O Preferred Stock and the Series P Preferred Stock are being offered by the Company pursuant to a registration statement on Form S-3 (File No. 333-238172) (the “Registration Statement”) filed under the Securities Act of 1933, as amended (the “Securities Act”). The Purchase Agreement contains customary representations, warranties and agreements by the Company and customary conditions to closing. The closing of the Offerings occurred on March 2, 2022. In connection with this transaction, the Company received net proceeds of $21.0 million, which was deposited in an escrow account.

 

In connection with the Offerings, the Company has entered into an engagement agreement (the “Engagement Agreement Agreement”) with H.C Wainwright & Company, LLC, as placement agent (“HCW”), pursuant to which the Company agreed to pay HCW an aggregate cash fee equal to 8% of the aggregate gross proceeds raised in the offerings and issue HCW common stock purchase warrants to purchase up to 103,528 shares of common stock in the aggregate at an exercise price of $21.25. The warrants were recorded as a component of stockholders’ equity in accordance with ASC 815.

 

F-22

 

 

DOMINARI HOLDINGS INC.
(Formerly AIkido Pharma, Inc.)

Notes to Consolidated Financial Statements

 

Redemption Rights

 

After (i) the earlier of (1) the receipt of stockholder approval and (2) the date that is 90 days following the Original Issue Date (the date of the first issuance of any shares of the Preferred Stock regardless of the number of transfers of any particular shares of Preferred Stock and regardless of the number of certificates which may be issued to evidence such Preferred Stock) and (ii) before the date that is 120 days after the Original Issue Date (the “Redemption Period”), each Holder shall have the right to cause the Company to redeem all or part of such Holder’s shares of Preferred Stock at a price per share equal to 105% of the Stated Value.

 

As a result, the Preferred Stock were recorded separately from stockholders’ equity because they are redeemable upon the occurrence of redemption events that are considered not solely within the Company’s control.

 

During the second quarter of 2022, the Company redeemed for cash at a price equal to 105% of the $1,000 stated value per share all of its 11,000 outstanding shares of Series O Preferred Stock and its 11,000 Series P Preferred Stock. The total redemption amount was $23.1 million. As a result, all shares of the Series O Preferred Stock and Series P Preferred Stock have been retired and are no longer outstanding.

 

During the year ended December 31, 2023 and 2022, the Company recognized approximately $0 and $4.1 million in deemed dividends related to the Preferred Stock in the consolidated statements of operations and the consolidated statements of changes in redeemable preferred stock and stockholders’ equity, respectively.

 

Note 14. 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.

 

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 year ended December 31, 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. During the year ended December 31, 2022, the Company repurchased 468,017 shares at a cost of approximately $3.1 million or $6.53 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.

 

Preferred Stock

 

Series D Convertible Preferred Stock

 

In connection with the acquisition of North South’s patent portfolio in September 2013, the Company issued 1,379,685 shares of its Series D Convertible Preferred Stock (“Series D Preferred Stock”) to the stockholders of North South. Each share of Series D Preferred Stock has a stated value of $0.0001 per share and is convertible into 10 over 1,373 of a share of Common Stock. Upon the liquidation, dissolution or winding up of the Company’s business, each holder of Series D Preferred Stock shall be entitled to receive, for each share of Series D Preferred Stock held, a preferential amount in cash equal to the greater of (i) the stated value or (ii) the amount the holder would receive as a holder of Common Stock on an “as converted” basis. Each holder of Series D Preferred Stock shall be entitled to vote on all matters submitted to its stockholders and shall be entitled to such number of votes equal to the number of shares of Common Stock such shares of Series D Preferred Stock are convertible into at such time, taking into account the beneficial ownership limitations set forth in the governing Certificate of Designation and the conversion limitations described below. The conversion ratio of the Series D Preferred Stock is subject to adjustment in the event of stock splits, stock dividends, combination of shares and similar recapitalization transactions.

 

As of December 31, 2023 and 2022, 5,000,000 Series D Preferred Stock was designated; 3,825 and 3,825 shares remained issued and outstanding.

 

F-23

 

 

DOMINARI HOLDINGS INC.
(Formerly AIkido Pharma, Inc.)

Notes to Consolidated Financial Statements

 

Series D-1 Convertible Preferred Stock

 

The Company’s Series D-1 Convertible Preferred Stock (“Series D-1 Preferred Stock”) was established on November 22, 2013. Each share of Series D-1 Preferred Stock has a stated value of $0.0001 per share and is convertible into 10 over 1,373 of a share of Common Stock. Upon the liquidation, dissolution or winding up of the Company’s business, each holder of Series D-1 Preferred Stock shall be entitled to receive, for each share of Series D-1 Preferred Stock held, a preferential amount in cash equal to the greater of (i) the stated value or (ii) the amount the holder would receive as a holder of Common Stock on an “as converted” basis. Each holder of Series D-1 Preferred Stock shall be entitled to vote on all matters submitted to the Company’s stockholders and shall be entitled to such number of votes equal to the number of shares of Common Stock such shares of Series D-1 Preferred Stock are convertible into at such time, taking into account the beneficial ownership limitations set forth in the governing Certificate of Designation. The conversion ratio of the Series D-1 Preferred Stock is subject to adjustment in the event of stock splits, stock dividends, combination of shares and similar recapitalization transactions. The Company commenced an exchange with holders of Series D Convertible Preferred Stock pursuant to which the holders of the Company’s outstanding shares of Series D Preferred Stock acquired in the Merger could exchange such shares for shares of the Company’s Series D-1 Preferred Stock on a one-for-one basis.

 

As of December 31, 2023 and 2022, 5,000,000 Series D-1 Preferred Stock was designated; 834 and 834 shares remained issued and outstanding.

 

Warrants

 

A summary of warrant activity for years ended December 31, 2023 and 2022 is presented below:

 

   Warrants   Weighted
Average
Exercise
Price
   Total
Intrinsic
Value
   Weighted
Average
Remaining
Contractual
Life
(in years)
 
Outstanding as of December 31, 2021   341,268   $31.68    
   -
    3.87 
Issued   103,528    21.25    
-
    4.15 
Outstanding as of December 31, 2022   444,796   $29.25    
-
    3.20 
Outstanding as of December 31, 2023   444,796   $29.25    
-
    2.20 

 

Confirmation of Mutual Understanding - In March 2022, pursuant to a Confirmation of Mutual Understanding (the “Confirmation”), all parties to the Confirmation acknowledged and confirmed a scrivener’s error set forth in warrants to purchase shares of the Company’s common stock (the “Warrants”) dated March 10, 2020, April 15, 2020 and March 2, 2021. Pursuant to the Confirmation, all parties, which were involved in the original execution of the warrants, agreed that clause (v) of the definition of Fundamental Transaction in Section 3(d) of the Warrants, is as follows:

 

the Company, directly or indirectly, in one or more related transactions consummates a stock or share purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off, merger or scheme of arrangement) with another Person or group of Persons whereby such other Person or group acquires more than 50% of the voting power of the Company’s outstanding equity securities, including with respect to the election of directors (not including any shares of Common Stock held by the other Person or other Persons making or party to, or associated or affiliated with the other Persons making or party to, such stock or share purchase agreement or other business combination)”. 

 

F-24

 

 

DOMINARI HOLDINGS INC.
(Formerly AIkido Pharma, Inc.)

Notes to Consolidated Financial Statements

 

Restricted Stock Awards

 

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 consolidated balance sheet. See Restricted Stock roll-forward below.

 

December 19, 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 1,287,129 shares of the Company’s common stock. Upon issuance, the shares were fully vested and nonforfeitable with a total fair value of approximately $2.6 million. Pursuant to the Grant Agreement, the Company withheld 657,079 of the shares granted to satisfy Soo Yu’s tax obligation of approximately $1.3 million and recorded as income taxes withheld within the consolidated balance sheet. See Restricted Stock roll-forward below.

 

December 19, 2023, pursuant to the Company’s 2022 Equity Incentive Plan, the Company executed a Grant Agreement, through which Joshua Shipley was granted 33,003 shares of the Company’s common stock. Upon issuance, the shares were fully vested and nonforfeitable with a total fair value of approximately $67,000. Pursuant to the Grant Agreement, the Company withheld 13,300 of the shares granted to satisfy Soo Yu’s tax obligation of approximately $27,000 and recorded as income taxes withheld within the consolidated balance sheet. See Restricted Stock roll-forward below.

 

During the year ended December 31, 2023, the Company also issued an aggregate of 136,309 shares of the Company’s common stock to members of the Company’s Board of Directors and an employee for services rendered.

 

During the year ended December 31, 2022, the Company issued an aggregate of 238,244 shares of the Company’s common stock to members of the Company’s Board of Directors and an employee for services rendered.

 

A summary of restricted stock awards activity for the years ended December 31, 2023 and 2022, is presented below: 

 

   Number of
Restricted
Stock Awards
   Weighted
Average
Grant Day
Fair Value
 
Nonvested at December 31, 2021   
-
   $
-
 
Granted   238,244    6.13 
Vested   (230,176)   6.14 
Nonvested at December 31, 2022   8,068   $5.90 
Granted   1,315,777   $2.27 
Vested   (1,187,536)   2.30 
Nonvested at December 31, 2023   136,309   $2.26 

 

Stock-based compensation associated with the amortization of restricted stock awards expense was approximately $2.7 million and $1.4 million for the years ended December 31, 2023, and 2022, respectively. All stock compensation was recorded as a component of general and administrative expenses.

 

As of December 31, 2023, there is approximately $0.2 million unrecognized stock-based compensation expense related to restricted stock awards.

 

F-25

 

 

DOMINARI HOLDINGS INC.
(Formerly AIkido Pharma, Inc.)

Notes to Consolidated Financial Statements

 

Stock Options

 

A summary of option activity under the Company’s stock option plan for year ended December 31, 2023 and 2022 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, 2021   28,203   $548.35   $
      -
    8.2 
Employee options granted   170,587    5.95    
-
    0.3 
Employee options forfeited   (167,381)   41.90    
-
    - 
Employee options expired   (216)   73.70    
-
    - 
Outstanding as of December 31, 2022   31,193   $302.97   $
-
    7.9 
Employee options granted   395,714    3.42    
-
    9.4 
Employee options forfeited   (5,882)   5.95    
-
    - 
Employee options expired   (857)  $9,719.07    
-
    - 
Outstanding as of December 31, 2023   420,168   $5.80   $
-
    9.3 
Options vested and exercisable   84,929   $15.16   $
-
    8.8 

 

Stock-based compensation associated with the amortization of stock option expense was approximately $0.2 million and $13,000 for the years ended December 31, 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 $0.5 million.

 

Note 15. Revenue

 

The following table presents our total revenues disaggregated by revenue type for the years ended December 31, 2023, and 2022 (in thousands):

 

   Years Ended
December 31,
 
   2023   2022 
Underwriting  $594   $
   -
 
Commissions   1,096    
-
 
Advisory fees   209    
-
 
Other   140    
-
 
Total  $2,039   $
-
 

 

Note 16. Commitments and Contingencies

 

Legal Proceedings

 

In March 2024, the Company received a notice of petition of a filed action seeking relief related to the March 2024 affiliates of new registered representatives. This notice was filed against the Company’s subsidiary Dominari Securities. The Company does not agree with the claim of the plaintiff and will defend itself accordingly. While the Company intends to defend itself vigorously from this claim, it is unable to predict the outcome of such legal proceeding. Any potential loss as a result of this legal proceeding cannot be reasonably estimated. As a result, the Company has not recorded a loss contingency for the aforementioned claim.

 

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 as described above and ordinary routine litigation incidental to the business, the Company is not aware of any material, active or pending legal proceedings brought against it.

 

F-26

 

 

DOMINARI HOLDINGS INC.
(Formerly AIkido Pharma, Inc.)

Notes to Consolidated Financial Statements

 

Note 17. Income Taxes

 

The income tax provision consists of the following ($ in thousands):

 

    For the years ended
December 31,
 
    2023     2022  
Federal            
Current   $ -     $ -  
Deferred     (3,820 )     (3,618 )
Increase in valuation allowance     3,820       3,618  
State and local                
Current    
 
     
 
 
Deferred     (3,012 )     (4,825 )
Increase in valuation allowance     3,012       4,825  
Income Tax Provision (Benefit)   $ -     $ -  

 

The following is a reconciliation of the U.S. federal statutory rate to the effective income tax rates for the years ended December 31, 2023 and 2022:

 

    For the years ended
December 31,
 
    2023     2022  
U.S. Statutory Federal Rate     21.00 %     21.00 %
State Taxes, Net of Federal Tax Benefit     15.36 %     13.58 %
Other Permanent Differences     (0.54 )%     (0.11 )%
State rate change in effect     (4.18 )%     2.95 %
AMT credit benefit     - %     - %
Decrease due to true up of State NOL     (0.11 )%     0.69 %
Decrease due to change in Federal NOL and other true ups     (1.67 )%     0.04 %
Change in Valuation Allowance     (29.85 )%     (38.15 )%
Income Tax Benefit     0.00 %     0.00 %

 

As of December 31, 2023 and 2022, the Company’s deferred tax assets and liabilities consisted of the effects of temporary differences attributable to the following ($ in thousands):

 

    As of December 31,  
    2023     2022  
Deferred tax assets:            
Net-operating loss carryforward   $ 33,124     $ 26,241  
Stock based compensation     9,754       8,358  
Patents & Licenses     8,061       9,898  
Transaction Costs     209       23  
Research & Development     1,937       2,207  
Operating lease liability     1,202       272  
Investment portfolio and other     2,879       2,445  
Total Deferred Tax assets     57,166       49,443  
Valuation allowance     (55,946 )     (49,115 )
Deferred Tax Asset, Net of Allowance   $ 1,220     $ 328  
Deferred tax liability:                
Depreciation     (57 )     -  
Right of use asset     (1,163 )     (328 )

 

F-27

 

 

DOMINARI HOLDINGS INC.
(Formerly AIkido Pharma, Inc.)

Notes to Consolidated Financial Statements

 

In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period in which those temporary differences become deductible. Management considers the Company’s history of cumulative net losses, the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. The Company has determined that, based on objective positive and negative evidence currently available, it is more likely than not that the Company will not realize the benefits of the deferred tax assets. Accordingly, the Company has provided a full valuation allowance for the deferred tax assets as of December 31, 2023 and 2022. As of December 31, 2023, the change in valuation allowance is approximately $6.8 million.

  

As of December 31, 2023, the Company has approximately $40.7 million federal net operating loss carryovers (“NOLs”), which expire from 2033 through 2037, and $68.5 million of federal NOLs which will never expire. The Company has approximately $152.3 million of state and city NOLs, which expire from 2035 through 2043. As of December 31, 2023, the Company also had federal research and development tax credit carryforwards of $0.2 million which may be available to offset future income tax liabilities and begin to expire in 2042.

 

Utilization of the U.S. NOL carryforwards and research and development tax credit carryforwards may be subject to a substantial annual limitation under Section 382 of the Internal Revenue Code of 1986, and corresponding provisions of state law, due to ownership changes that have occurred previously or that could occur in the future. These ownership changes may limit the amount of carryforwards that can be utilized annually to offset future taxable income. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain stockholders or public groups in the stock of a corporation by more than 50% over a three-year period. If the Company experiences an ownership change, as defined by Section 382, at any time since inception, utilization of the NOL carryforwards or research and development tax credit carryforwards would be subject to an annual limitation under Section 382, which is determined by first multiplying the value of the Company’s stock at the time of the ownership change by the applicable long-term tax-exempt rate, and then could be subject to additional adjustments, as required. Any limitation may result in expiration of a portion of the NOL carryforwards or research and development tax credit carryforwards before utilization. The Company determined an ownership change occurred on September 10, 2013, and any NOLs generated prior to this date are therefore limited by Section 382. Any carryforwards that will expire prior to utilization due to this limitation were removed from deferred tax assets, with a corresponding reduction of the valuation allowance. The Company has not yet determined if any additional ownership changes occurred after September 10, 2013. Any past or future ownership changes may limit the Company’s ability to utilize remaining tax attributes. Due to the existence of the valuation allowance, limitations created by the 2013 ownership change and any potential future ownership changes will not impact the Company’s effective tax rate.

 

As of December 31, 2023 and 2022, no liability for unrecognized tax benefit was required to be reported. The Company’s policy is to record interest and penalties related to income taxes outside of its income tax provision and classify as interest and penalties in general and administrative expense in the statement of operations. As of December 31, 2023 or 2022, the Company had no accrued interest or penalties related to uncertain tax positions and no amounts had been recognized in the Company’s statement of operations. The Company does not expect any significant changes in its unrecognized tax benefits in the next year. The Company files U.S. federal and state income tax returns (New York, New York City, Virginia, and Texas). As of December 31, 2023, the statute of limitations for assessment by the Internal Revenue Service and state tax authorities remains open for all years since 2020. To the extent the Company has tax attribute carryforwards, the tax years in which the attribute was generated may still be adjusted upon examination by the Internal Revenue Service or state authorities to the extent utilized in a future period. There are no audits pending in any of the above-mentioned jurisdictions during 2023 and 2022. The Company believes that its income tax positions would be sustained upon an audit and does not anticipate any adjustments that would result in material changes to its consolidated financial position.

 

In December, 2023, the FASB issued 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (ASU 2023-09) which establishes new income tax disclosure requirements in addition to modifying and eliminating certain existing requirements. Public business entities must apply the ASU’s guidance to annual periods beginning after December 15, 2024. The Company may choose to early adopt any new or revised accounting standards whenever such early adoptions is permitted. The Company has chosen not to early adopt this standard.

 

Note 18. 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 December 31, 2023, Dominari Securities had net capital of approximately $4.9 million, which was approximately $4.7 million in excess of required minimum net capital of $0.2 million.

 

Note 19. 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 $1.0 million during the years ending December 31, 2023, and 2022, respectively. These fees were included in general and administrative expenses in the consolidated statements of operations.

  

F-28

 

 

DOMINARI HOLDINGS INC.
(Formerly AIkido Pharma, Inc.)

Notes to Consolidated Financial Statements

 

Note 20. 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.

 

   Year Ended December 31, 2023 
   Dominari
Financial
   Legacy
AIkido
Pharma
   Consolidated