NUKKLEUS INC. AND SUBSIDIARIES
The accompanying notes to consolidated financial statements
are an integral part of these statements.
The accompanying notes to consolidated financial statements
are an integral part of these statements.
The accompanying notes to consolidated financial statements
are an integral part of these statements.
The accompanying notes to consolidated financial statements
are an integral part of these statements.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – THE COMPANY HISTORY AND NATURE
OF THE BUSINESS
Nukkleus Inc. (f/k/a Compliance & Risk Management
Solutions Inc.) (“Nukkleus” or the “Company”) was formed on July 29, 2013 in the State of Delaware as a for-profit
Company and established a fiscal year end of September 30.
The Company is a financial technology company
which is focused on providing software and technology solutions for the worldwide retail foreign exchange (“FX”) trading industry.
The Company primarily provides its software, technology, customer sales and marketing and risk management technology hardware and software
solutions package to Triton Capital Markets Ltd. (“TCM”), formerly known as FXDD Malta Limited (“FXDD Malta”).
The FXDD brand (e.g., see FXDD.com) is the brand utilized in the retail forex trading industry by TCM.
Nukkleus Limited, a wholly-owned subsidiary of
the Company, provides its software, technology, customer sales and marketing and risk management technology hardware and software solutions
package under a General Services Agreement (“GSA”) to TCM. TCM is a private limited liability company formed under the laws
of Malta. The GSA provides that TCM will pay Nukkleus Limited at minimum $1,600,000 per month. Emil Assentato is also the majority
member of Max Q Investments LLC (“Max Q”), which is managed by Derivative Marketing Associates Inc. (“DMA”). Mr.
Assentato, who is our Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”) and chairman, is the sole
owner and manager of DMA. Max Q owns 79% of Currency Mountain Malta LLC, which in turn is the sole shareholder of TCM.
In addition, in order to appropriately service
TCM, Nukkleus Limited entered into a GSA with FXDirectDealer LLC (“FXDIRECT”), which provides that Nukkleus Limited will pay
FXDIRECT a minimum of $1,575,000 per month in consideration of providing personnel engaged in operational and technical support,
marketing, sales support, accounting, risk monitoring, documentation processing and customer care and support. FXDIRECT may terminate
this agreement upon providing 90 days’ written notice. Currency Mountain Holdings LLC is the sole shareholder of FXDIRECT.
Max Q is the majority shareholder of Currency Mountain Holdings LLC.
In July 2018, the Company incorporated Nukkleus
Malta Holding Ltd., which is a wholly-owned subsidiary. In July 2018, Nukkleus Malta Holding Ltd. incorporated Markets Direct Technology
Group Ltd (“MDTG”), formerly known as Nukkleus Exchange Malta Ltd. MDTG was exploring potentially obtaining a license to operate
an electronic exchange whereby it would facilitate the buying and selling of various digital assets as well as traditional currency pairs
used in FX Trading. During the fourth quarter of fiscal 2020, management made the decision to exit the exchange business and to no longer
pursue the regulatory licensing necessary to operate an exchange in Malta.
On August 27, 2020, the Company renamed Nukkleus
Exchange Malta Ltd. to Markets Direct Technology Group Ltd (“MDTG”). MDTG manages the technology and IP behind the Markets
Direct brand (which is operated by TCM). MDTG holds all the IP addresses and all the software licenses in its name, and it holds all the
IP rights to the brands such as Markets Direct and TCM. MDTG then leases out the rights to use these names/brands licenses to the appropriate
entities.
On May 24, 2021, the Company and the shareholders
of Match Financial Limited (the “Match Shareholders”), a private limited company formed in England and Wales (“Match”),
entered into a Purchase and Sale Agreement (the “Match Agreement”), pursuant to which the Company, on May 28, 2021, acquired
1,152 ordinary shares of Match representing 70% of the issued and outstanding ordinary shares of Match in consideration of 70,000,000
shares of common stock of the Company (the “Initial Transaction”). On August 30, 2021, the Company exercised its option pursuant
to which it acquired from the Match Shareholders the balance of 493 ordinary shares of Match representing 30% of the issued and outstanding
ordinary shares of Match for an additional 30,000,000 shares of common stock of the Company. Match is engaged in providing payment services
from one fiat currency to another.
On October 20, 2021, the Company and the shareholders
(the “Original Shareholders”) of Jacobi Asset Management Holdings Limited (“Jacobi”) entered into a Purchase and
Sale Agreement (the “Jacobi Agreement”) pursuant to which the Company agreed to acquire 5.0% of the issued and outstanding
ordinary shares of Jacobi in consideration of 20,000,000 shares of common stock of the Company (the “Transaction”). On December
15, 2021, the Company, the Original Shareholders and the shareholders of Jacobi that were assigned their interest in Jacobi by the Original
Shareholders (the “New Jacobi Shareholders”) entered into an Amendment to Stock Purchase Agreement agreeing that the Transaction
will be entered between the Company and the New Jacobi Shareholders. The Transaction closed on December 15, 2021. Jacobi is a company
focused on digital asset management that has received regulatory approval to launch the world’s first tier one Bitcoin ETF.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – THE COMPANY HISTORY AND NATURE
OF THE BUSINESS (continued)
The consolidated financial statements have been
prepared using accounting principles generally accepted in the United States of America applicable for a going concern, which assumes
that the Company will realize its assets and discharge its liabilities in the ordinary course of business. The Company incurred a
net loss for the year ended September 30, 2021 of $936,846, and had a working capital deficit of $1,594,793 at September 30, 2021. The
Company’s ability to continue as a going concern is dependent upon the management of expenses and ability to obtain necessary financing
to meet its obligations and pay its liabilities arising from normal business operations when they come due, and upon profitable operations.
We cannot be certain that such necessary capital
through equity or debt financings will be available to us or whether such capital will be available on terms that are acceptable to us.
Any such financing likely would be dilutive to existing stockholders and could result in significant financial operating covenants that
would negatively impact our business. In the event that there are any unforeseen delays or obstacles in obtaining funds through the aforementioned
sources, Currency Mountain Holdings Bermuda, Limited (“CMH”), which is wholly-owned by an entity that is majority-owned
by Mr. Assentato, has committed to inject capital into the Company in order to maintain the ongoing operations of the business.
The ramifications of the outbreak of the novel
strain of COVID-19, reported to have started in December 2019 and spread globally, are filled with uncertainty and changing quickly. Our
operations have continued during the COVID-19 pandemic and we have not had significant disruption.
The Company is operating in a rapidly changing
environment so the extent to which COVID-19 impacts its business, operations and financial results from this point forward will depend
on numerous evolving factors that the Company cannot accurately predict. Those factors include the following: the duration and scope of
the pandemic; governmental, business and individuals’ actions that have been and continue to be taken in response to the pandemic.
NOTE 2 – BASIS OF PRESENTATION
The accompanying consolidated financial statements
and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S.
GAAP) and with the rules and regulations of the U.S. Securities and Exchange Commission for financial information.
The Company’s consolidated financial statements
include the accounts of the Company and its consolidated subsidiaries. These accounts were prepared under the accrual basis of accounting.
All intercompany accounts and transactions have been eliminated in consolidation.
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Use of estimates
The preparation of the consolidated financial
statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ from these estimates. Significant estimates during the
years ended September 30, 2021 and 2020 include the initial valuation and useful life of intangible assets, assumptions used in assessing
impairment of long-term assets, valuation of deferred tax assets and the associated valuation allowances, and valuation of stock-based
compensation.
Cash and cash equivalents
At September 30, 2021 and 2020, the Company’s
cash balances by geographic area were as follows:
Country: | |
September 30,
2021 | | |
September 30,
2020 | |
United States | |
$ | 327,443 | | |
| 92.1 | % | |
$ | 82,675 | | |
| 99.8 | % |
England | |
| 28,056 | | |
| 7.9 | % | |
| - | | |
| - | |
Malta | |
| 174 | | |
| 0.0 | % | |
| 174 | | |
| 0.2 | % |
Total cash | |
$ | 355,673 | | |
| 100.0 | % | |
$ | 82,849 | | |
| 100.0 | % |
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (continued)
Cash and cash equivalents (continued)
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid instruments with a maturity of three months or less when purchased and money market accounts to be cash equivalents.
The Company had no cash equivalents at September 30, 2021 and 2020.
Credit risk and uncertainties
The Company maintains a portion of its cash in
bank and financial institution deposits within U.S. that at times may exceed federally-insured limits of $250,000. The Company manages
this credit risk by concentrating its cash balances in high quality financial institutions and by periodically evaluating the credit quality
of the primary financial institutions holding such deposits. The Company has not experienced any losses in such bank accounts and believes
it is not exposed to any risks on its cash in bank accounts. At September 30, 2021, the Company’s cash balances in United States
bank accounts had approximately $77,000 in excess of the federally-insured limits.
Financial instruments which potentially subject
the Company to concentrations of credit risk consist principally of trade accounts receivable. A portion of the Company’s sales
are credit sales which is to the customer whose ability to pay is dependent upon the industry economics prevailing in these areas; however,
concentrations of credit risk with respect to trade accounts receivable is limited due to short-term payment terms. The Company also performs
ongoing credit evaluations of its customers to help further reduce credit risk.
Accounts receivable and allowance for doubtful
accounts
Accounts receivable are presented net of an allowance
for doubtful accounts. The Company maintains allowances for doubtful accounts for estimated losses. The Company reviews the accounts receivable
on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances. In
evaluating the collectability of individual receivable balances, the Company considers many factors, including the age of the balance,
a customer’s payment history, its current credit-worthiness and current economic trends. Accounts are written off after exhaustive
efforts at collection.
Management believes that the accounts receivable
are fully collectable. Therefore, no allowance for doubtful accounts is deemed to be required on its accounts receivable at September
30, 2021. The Company historically has not experienced significant uncollectible accounts receivable.
Prepaid expense and other current assets
Prepaid expense and other current assets primarily
consist of prepaid OTC Markets listing fees, which are recognized as expense over the related listing periods. As of September 30, 2021
and 2020, prepaid expense and other current assets amounted to $12,221 and $7,010, respectively.
Intangible assets
Intangible assets consist of license and banking
infrastructure, which are being amortized on a straight-line method over the estimated useful life of 10 years.
Impairment of long-lived assets
In accordance with ASC Topic 360, the Company
reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may
not be fully recoverable, or at least annually. The Company recognizes an impairment loss when the sum of expected undiscounted future
cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s
estimated fair value and its book value. There were no triggering events requiring assessment of impairment as of September 30, 2021.
For the years ended September 30, 2021 and 2020, no impairment of long-lived assets was recognized.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (continued)
Revenue recognition
The Company accounts for revenue under the provisions
of ASC Topic 606.
The Company’s revenues are derived from
providing:
|
● |
General support services under a GSA to a related party. The transaction price is determined in accordance with the terms of the GSA and payments are due on a monthly basis. There are multiple services provided under the GSA (including operational reporting and technical support infrastructure, website hosting and marketing solutions, accounting maintenance, risk monitoring services, new account processing and customer care and continued support) and these performance obligations are combined into a single unit of accounting. Fees are recognized as revenue over time as the services are rendered under the terms of the GSA. The Company recognizes the full contracted amount each period with no deferred revenue. The nature of the performance obligation is to provide the specified goods or services directly to the customer. The Company engages another party to satisfy the performance obligation on its behalf. The Company’s performance obligation is not to arrange for the provision of the specified good or service by another party. The Company is primarily responsible for fulfilling the promise to provide the specified good or service. Therefore, the Company is deemed to be a principal in the transaction and recognizes revenue for that performance obligation. |
| ● | Financial
services to its customers. Revenue related to its financial services offerings are recognized
at a point in time when service is rendered. |
Disaggregation of revenues
The Company’s revenues stream detail are
as follows:
Revenue Stream | |
Revenue Stream Detail |
General support services | |
Providing software, technology, customer sales and marketing and risk management technology hardware and software solutions package under a GSA to a related party |
Financial services | |
Providing payment services from one fiat currency to another |
In the following table, revenues are disaggregated
by segment for the years ended September 30, 2021 and 2020:
| |
Years Ended
September 30, | |
Revenue Stream | |
2021 | | |
2020 | |
General support services | |
$ | 19,200,000 | | |
$ | 19,200,000 | |
Financial services | |
| 86,964 | | |
| - | |
Total revenues | |
$ | 19,286,964 | | |
$ | 19,200,000 | |
Advertising costs
All costs related to advertising are expensed
as incurred. For the years ended September 30, 2021 and 2020, advertising costs amounted to $17,874 and $0, respectively, which was included
in other general and administrative expense on the accompanying consolidated statements of operations and comprehensive loss.
Stock-based compensation
The Company accounts for its stock-based compensation
awards in accordance with ASC Topic 718, Compensation—Stock Compensation (“ASC 718”). ASC 718 requires all stock-based
payments to employees and non-employees including grants of stock options, to be recognized as expense in the statements of operations
based on their grant date fair values. The Company estimates the grant date fair value of each option award using the Black-Scholes option-pricing
model.
Income taxes
The Company accounts for income taxes pursuant
to Financial Accounting Standards Board (“FASB”) ASC 740, Income Taxes. Deferred tax assets and liabilities are determined
based on temporary differences between the bases of certain assets and liabilities for income tax and financial reporting purposes. The
deferred tax assets and liabilities are classified according to the financial statement classification of the assets and liabilities generating
the differences.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (continued)
Income taxes (continued)
The Company maintains a valuation allowance with
respect to deferred tax assets. The Company establishes a valuation allowance based upon the potential likelihood of realizing the deferred
tax asset and taking into consideration the Company’s financial position and results of operations for the current period. Future
realization of the deferred tax benefit depends on the existence of sufficient taxable income within the carry-forward period under the
Federal and foreign tax laws. Changes in circumstances, such as the Company generating taxable income, could cause a change in judgment
about the realizability of the related deferred tax asset. Any change in the valuation allowance will be included in income in the year
of the change in estimate.
The Company follows the provisions of FASB ASC
740-10 Uncertainty in Income Taxes (ASC 740-10). Certain recognition thresholds must be met before a tax position is recognized in the
financial statements. An entity may only recognize or continue to recognize tax positions that meet a “more-likely-than-not”
threshold.
Foreign currency translation
The reporting currency of the Company is U.S.
Dollars. The functional currency of the parent company, Nukkleus Inc., Nukkleus Limited, Nukkleus Malta Holding Ltd. and its subsidiaries,
is the U.S. dollar and the functional currency of Match Financial Limited and its subsidiaries is the British Pound (“GBP”).
Monetary assets and liabilities denominated in currencies other than the reporting currency are translated into the reporting currency
at the rates of exchange prevailing at the balance sheet date. Revenue and expenses are translated using average rates during each reporting
period, and shareholders’ equity is translated at historical exchange rates. Cash flows are also translated at average translation
rates for the periods, therefore, amounts reported on the statement of cash flows will not necessarily agree with changes in the corresponding
balances on the consolidated balance sheet. Translation adjustments resulting from the process of translating the local currency financial
statements into U.S. dollars are included in determining comprehensive income/loss.
Transactions denominated in foreign currencies
are translated into the functional currency at the exchange rates prevailing on the transaction dates. Assets and liabilities denominated
in foreign currencies are translated into the functional currency at the exchange rates prevailing at the balance sheet date with any
transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional
currency are included in the results of operations as incurred. Most of the Company’s revenue transactions are transacted in the
functional currency of the Company. The Company does not enter into any material transaction in foreign currencies. Transaction gains
or losses have not had, and are not expected to have, a material effect on the results of operations of the Company.
Asset and liability accounts at September 30,
2021 were translated at 0.7426 GBP to $1.00, respectively, which were the exchange rates on the balance sheet dates. Equity accounts were
stated at their historical rates. The average translation rates applied to the statements of operations for the period from May 28, 2021
through September 30, 2021 was 0.7224 GBP to $1.00, respectively. Cash flows from the Company’s operations are calculated based
upon the local currencies using the average translation rate.
Comprehensive loss
Comprehensive loss is comprised of net loss and
all changes to the statements of equity, except those due to investments by stockholders, changes in paid-in capital and distributions
to stockholders. For the Company, comprehensive loss for the year ended September 30, 2021 consisted of net loss and unrealized gain from
foreign currency translation adjustment.
Segment reporting
The Company uses “the management approach”
in determining reportable operating segments. The management approach considers the internal organization and reporting used by the Company’s
chief operating decision maker for making operating decisions and assessing performance as the source for determining the Company’s
reportable segments. The Company’s chief operating decision maker is its Chief Executive Officer (“CEO”), who reviews
operating results to make decisions about allocating resources and assessing performance for the entire company. The Company has determined
that it has two reportable business segments: general support services segment, and financial services segment. These reportable segments
offer different types of services and products, have different types of revenue, and are managed separately as each requires different
operating strategies and management expertise.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (continued)
Per share data
ASC Topic 260, Earnings per Share, requires
presentation of both basic and diluted earnings per share (“EPS”) with a reconciliation of the numerator and denominator of
the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution. Diluted EPS reflects
the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then shared in the earnings of the entity.
Basic net earnings per share are computed
by dividing net earnings available to common stockholders by the weighted average number of shares of common stock outstanding during
the period. Diluted net earnings per share is computed by dividing net earnings applicable to common stockholders by the weighted average
number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. Potentially
dilutive common shares consist of the common shares issuable upon the exercise of common stock options (using the treasury stock method)
and the conversion of Series A preferred stock (using the if-converted method). Common stock equivalents are not included in the calculation
of diluted net loss per share if their effect would be anti-dilutive. In a period in which the Company has a net loss, all potentially
dilutive securities are excluded from the computation of diluted shares outstanding as they would have had an anti-dilutive impact. The
following table summarizes the securities that were excluded from the diluted per share calculation because the effect of including these
potential shares was antidilutive:
| |
Years Ended
September 30, | |
| |
2021 | | |
2020 | |
Stock options | |
| 1,000,000 | | |
| - | |
Convertible preferred stock | |
| 1,250,000 | | |
| 1,250,000 | |
Potentially dilutive securities | |
| 2,250,000 | | |
| 1,250,000 | |
Reclassification
Certain prior period amounts have been reclassified
to conform to the current period presentation. These reclassifications have no effect on the previously reported financial position, results
of operations and cash flows.
Recently issued accounting pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial
Instruments - Credit Losses (“Topic 326”). The ASU introduces a new accounting model, the Current Expected Credit
Losses model (“CECL”), which requires earlier recognition of credit losses and additional disclosures related
to credit risk. The CECL model utilizes a lifetime expected credit loss measurement objective for the recognition of credit losses
at the time the financial asset is originated or acquired. ASU 2016-13 is effective for annual period beginning after December 15, 2022,
including interim reporting periods within those annual reporting periods. The Company expects that the adoption will not have a material
impact on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair
Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurements (“ASU
2018-13”), which aims to improve the overall usefulness of disclosures to financial statement users and reduce unnecessary costs
to companies when preparing fair value measurement disclosures. ASU 2018-13 is effective for annual and interim periods in the fiscal
years beginning after December 15, 2019. Early adoption is permitted. Retrospective adoption is required, except for certain disclosures,
which will be required to be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year
of adoption. The adoption of this guidance as of October 1, 2020 did not have a material impact on the Company’s consolidated
financial statements.
In December 2019, the FASB issued ASU 2019-12, Simplifying
the Accounting for Income Taxes, which simplifies the accounting for income taxes by removing certain exceptions to the general principles
in the existing guidance for income taxes and making other minor improvements. The amendments in the ASU are effective for the Company
on October 1, 2021. The adoption of this guidance as of October 1, 2020 did not have a material impact on the Company’s consolidated
financial statements.
Other accounting standards that have been issued
or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial
statements upon adoption. The Company does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated
to its consolidated financial condition, results of operations, cash flows or disclosures.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 – ACQUISITION
On May 24, 2021, the Company and the shareholders
of Match Financial Limited (the “Match Shareholders”), a private limited company formed in England and Wales (“Match”),
entered into a Purchase and Sale Agreement (the “Match Agreement”), pursuant to which the Company, on May 28, 2021, acquired
1,152 ordinary shares of Match representing 70% of the issued and outstanding ordinary shares of Match in consideration of 70,000,000
shares of common stock of the Company (the “Initial Transaction”). On August 30, 2021, the Company exercised its option pursuant
to which it acquired from the Match Shareholders the balance of 493 ordinary shares of Match representing 30% of the issued and outstanding
ordinary shares of Match for an additional 30,000,000 shares of common stock of the Company. The shares of common stock issued to the
Match stockholders have been valued at $0.14 per share which was the closing price of the Company’s common stock on May 28,
2021, the date the Initial Transaction closed.
As described in Note 1, in fiscal year 2021,
the Company completed its acquisition of Match in accordance with the terms of the Match Agreement. To determine the accounting for this
transaction under ASU 2017-01, an assessment was made as to whether an integrated set of assets and activities should be accounted for
as an acquisition of a business or an asset acquisition. The guidance requires an initial screen test to determine if substantially all
of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets.
If that screen is met, the set is not a business. In connection with the acquisition, substantially all of the fair value is concentrated
in license and banking infrastructure. As such, the acquisition has been treated as an acquisition of Match assets and an assumption
of Match liabilities.
In connection with the acquisition, the Company incurred direct transaction costs of approximately $47,000 which
have been classified as costs of acquisition. The costs of acquisition are allocated to the acquired assets and assumed liabilities based
on their estimated fair values at the date of acquisition, and any excess is allocated to intangible assets (licenses and banking infrastructure).
The costs of acquisition exceeded the fair value of net assets acquired by approximately $14 million. The Company allocated the $14 million
excess to intangible assets (licenses and banking infrastructure). The Company uses its best estimates and assumptions as part of the
purchase price allocation process to accurately value the identifiable intangible assets at the acquisition date. The straight-line method
of amortization represents the Company’s best estimate of the distribution of the economic value of the identifiable intangible
assets. The amortization costs of intangible assets (licenses and banking infrastructure), namely, the amortization costs of acquisition,
exceeded the fair value of net assets acquired, is not a portion of the Company’s cost of revenue — financial services.
Therefore, the amortization amount is not included in cost of revenue — financial services.
The following summarizes total consideration transferred
to the March Stockholders under the acquisition as well as the fair value of the assets acquired and liabilities assumed under the acquisition:
| |
May 28,
2021 | |
Assets acquired: | |
| | |
Cash | |
$ | 21,370 | |
Accounts receivable | |
| 46,602 | |
Other current assets | |
| 142 | |
Intangible assets | |
| 14,010,631 | |
Total assets | |
| 14,078,745 | |
Liabilities assumed: | |
| | |
Accounts payable and accrued liabilities | |
| 78,745 | |
Total liabilities | |
| 78,745 | |
Purchase price | |
$ | 14,000,000 | |
The fair values of the current assets acquired
and the current liabilities assumed were estimated to be equal to the carrying value on the books of the acquired entity. The acquisition
cost of all other assets and liabilities acquired were allocated to those individual assets acquired and liabilities assumed, based on
their estimated relative fair values. Upon completion of a third party valuation report being prepared in connection with the acquisition,
the Company may adjust the estimated allocation to reflect the results of that valuation if there are material differences between the
third party valuation and the Company’s estimated allocation.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 – INTANGIBLE ASSETS
Intangible assets consist of the valuation of
identifiable intangible assets acquired (See Note 4), representing license and banking infrastructure, was completed. The Company uses
its best estimates and assumptions as part of the purchase price allocation process to accurately value the identifiable intangible assets
at the acquisition date. The straight-line method of amortization represents the Company’s best estimate of the distribution of
the economic value of the identifiable intangible assets. Furthermore, the Company is in the process of having a third-party valuation
firm conduct a valuation of the acquisition. As such, the Company’s valuation is preliminary and subject to change pending the results
of the third-party valuation report.
At September 30, 2021, intangible assets consisted
of the following:
| |
Useful Life | |
September 30, 2021 | |
License and banking infrastructure | |
10 Years | |
$ | 14,085,402 | |
Less: accumulated amortization | |
| |
| (469,286 | ) |
| |
| |
$ | 13,616,116 | |
For the year ended September 30, 2021, amortization
expense amounted to $469,286, which represented amortization from May 28, 2021 (the date of acquisition) to September 30, 2021. There
was no comparable amortization prior to the date of acquisition.
Amortization of intangible assets attributable to future periods is
as follows:
For the twelve-month period ending September 30: | |
Amortization amount | |
2022 | |
$ | 1,408,540 | |
2023 | |
| 1,408,540 | |
2024 | |
| 1,408,540 | |
2025 | |
| 1,408,540 | |
2026 and thereafter | |
| 7,981,956 | |
| |
$ | 13,616,116 | |
NOTE 6 – ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
At September 30, 2021 and 2020, accounts payable and accrued liabilities
consisted of the following:
| |
September 30, 2021 | | |
September 30, 2020 | |
Directors’ compensation | |
$ | 170,538 | | |
$ | 130,537 | |
Professional fees | |
| 125,697 | | |
| 46,640 | |
Accounts payable | |
| 54,831 | | |
| - | |
Interest payable | |
| - | | |
| 35,229 | |
Other | |
| 29,655 | | |
| - | |
Total | |
$ | 380,721 | | |
$ | 212,406 | |
NOTE 7 – SHARE CAPITAL
Preferred stock
The Company’s Board of Directors is authorized
to issue, at any time, without further stockholder approval, up to 15,000,000 shares of preferred stock. The Board of Directors
has the authority to fix and determine the voting rights, rights of redemption and other rights and preferences of preferred stock.
Common stock and Series A preferred stock sold for cash
On June 7, 2016, the Company sold to CMH 15,450,000
shares of common stock and 100,000 shares of Series A preferred stock for $1,000,000. The common stock was recorded as
equity and the Series A preferred stock was recorded as a liability. On February 13, 2018, 75,000 of the preferred shares were
redeemed and cancelled.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 – SHARE CAPITAL (continued)
Common stock and Series A preferred stock sold for cash (continued)
The Series A preferred stock has the following
key terms:
| 1) | A stated value of $10 per share; |
| 2) | The holder is entitled to receive cumulative dividends at the annual rate of 1.5% of stated value
payable semi-annually on June 30 and December 31; |
| 3) | The preferred stock must be redeemed at the stated value plus any unpaid dividends in 5 years (on or before
June 7, 2021); |
| 4) | The Series A preferred stock is non-voting. However, without the affirmative vote of the holders of the
shares of the Series A preferred stock then outstanding, the Company may not alter or change adversely the powers, preferences or rights
given to the Series A preferred stock or alter or amend the Certificate of Designation except to the extent that such vote relates to
the amendment of the Certificate of Designation; |
| 5) | The holders of the Series A preferred stock are not entitled to receive any preference upon the liquidation,
dissolution or winding up of the business of the Company. Each holder of Series A preferred stock shall share ratably with the holders
of the common stock of the Company. |
The $1,000,000 of proceeds received was allocated
to the common stock and Series A preferred stock according to their relative fair values determined at the time of issuance, and as a
result, the Company recorded a total discount of $45,793 on the Series A preferred stock, which is being amortized to interest expense
to the date of redemption. For the years ended September 30, 2021 and 2020, amortization of debt discount amounted to $1,545 and
$2,290, respectively.
The terms of the Series A preferred stock
issued represent mandatory redeemable shares, with a fixed redemption date (in 5 years) and the Company has a choice of redeeming
the instrument either in cash or a variable number of shares of common stock based on a formula in the certificate of designation. The
conversion price has a floor of $0.20 per share. As such, all dividends accrued and/or paid and any accretions are classified as
part of interest expense. For the years ended September 30, 2021 and 2020, dividends on redeemable preferred stock amounted to $2,625 and
$3,750, respectively.
On June 7, 2021, the outstanding redeemable preferred
stock of $250,000 and related accrued dividend of $37,854 were exchanged for 1,439,271 shares of the Company’s
common stock.
Common stock issued for acquisition
On May 28, 2021, the Company issued 70,000,000 shares
of its common stock to Match Shareholders for acquisition of 70% equity interest of Match. These shares were valued at $9,800,000,
the fair market value on the grant date using the reported closing share price on the date of grant.
On May 28, 2021, the Company issued 100,000 shares
of its common stock to Match Shareholders as consideration of an option commencing any time after the closing of the Initial Transaction
to acquire from the Match Shareholders the balance of 493 ordinary shares of Match representing 30% of the issued and outstanding
ordinary shares of Match for an additional 30,000,000 shares of common stock of the Company. The 100,000 shares of
the Company’s common stock were valued at $14,000, the fair market value on the grant date using the reported closing share price
on the date of grant and were included in the costs of acquisition.
On August 30, 2021, the Company exercised its
option, pursuant to which it acquired from the Match Shareholders the balance of 493 ordinary shares of Match representing 30% of the
issued and outstanding ordinary shares of Match for an additional 30,000,000 shares of common stock of the Company. These shares were
valued at $4,200,000, the fair market value on the grant date using the reported closing share price on the date of grant.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 – SHARE CAPITAL (continued)
Options
The Company did not have any options activity
during the year ended September 30, 2020.
During the year ended September 30, 2021, in connection
with a service agreement, the Company granted 1,000,000 stock options at a fixed exercise price of $2.50 to a service provider. The fair
value of options granted to the service provider were estimated at the date of grant using the Black-Scholes option-pricing model with
the following assumptions: volatility of 202.82%, risk-free rate of 0.83%, annual dividend yield of 0%, and expected life
of 5.00 years. The fair value of the options granted was $1,514,982.
Stock-based compensation expense associated with
stock options granted amounted to $42,082, which was recorded as professional fees for the year ended September 30, 2021.
The following table summarizes the shares of the
Company’s common stock issuable upon exercise of options outstanding at September 30, 2021:
Options Outstanding | | |
Options Exercisable | |
Exercise Price | | |
Number
Outstanding at
September 30, 2021 | | |
Remaining
Contractual Life
(Years) | | |
Number
Exercisable at
September 30, 2021 | | |
Exercise Price | |
$ | 2.50 | | |
| 1,000,000 | | |
| 4.97 | | |
| - | | |
$ | - | |
Stock option activities for the year ended September
30, 2021 were as follows:
| |
Number of Options | | |
Exercise Price | |
Outstanding at October 1, 2020 | |
| - | | |
$ | - | |
Granted | |
| 1,000,000 | | |
| 2.50 | |
Terminated / Exercised / Expired | |
| - | | |
| - | |
Outstanding at September 30, 2021 | |
| 1,000,000 | | |
$ | 2.50 | |
Options exercisable at September 30, 2021 | |
| - | | |
$ | - | |
Options expected to vest | |
| 1,000,000 | | |
$ | 2.50 | |
The aggregate intrinsic value of stock options
outstanding at September 30, 2021 was $0.
A summary of the status of the Company’s
nonvested stock options granted as of September 30, 2021 and changes during the year ended September 30, 2021 is presented below:
| |
Number of Options | | |
Exercise Price | |
Nonvested at October 1, 2020 | |
| - | | |
$ | - | |
Granted | |
| 1,000,000 | | |
| 2.50 | |
Vested | |
| - | | |
| - | |
Nonvested at September 30, 2021 | |
| 1,000,000 | | |
$ | 2.50 | |
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 – INCOME TAXES
The components for net income (loss) for the years
ended September 30, 2021 and 2020 was as follows:
| |
Year Ended | | |
Year Ended | |
| |
September 30,
2021 | | |
September 30,
2020 | |
United States | |
$ | (620,481 | ) | |
$ | 31,292 | |
Bermuda | |
| - | | |
| - | |
Malta | |
| (26,102 | ) | |
| (131,854 | ) |
United Kingdom | |
| (290,263 | ) | |
| - | |
Total | |
$ | (936,846 | ) | |
$ | (100,562 | ) |
The components of income taxes expense (benefit)
for the years ended September 30, 2021 and 2020 consisted of the following:
| |
Year Ended | | |
Year Ended | |
| |
September 30,
2021 | | |
September 30,
2020 | |
Current: | |
| | |
| |
Federal | |
$ | - | | |
$ | - | |
State | |
| - | | |
| - | |
Malta | |
| - | | |
| - | |
United Kingdom | |
| - | | |
| - | |
Total current income taxes expense | |
$ | - | | |
$ | - | |
Deferred: | |
| | | |
| | |
Federal | |
$ | (201,703 | ) | |
$ | 7,643 | |
State | |
| (38,419 | ) | |
| 1,456 | |
Malta | |
| (9,136 | ) | |
| (46,149 | ) |
United Kingdom | |
| (55,150 | ) | |
| - | |
Total deferred income taxes (benefit) | |
$ | (304,408 | ) | |
$ | (37,050 | ) |
Change in valuation allowance | |
| 304,408 | | |
| 37,050 | |
Total income taxes expense | |
$ | - | | |
$ | - | |
The reconciliations of the statutory income tax rate and the Company’s
effective income tax rate were as follows:
| |
Year Ended | | |
Year Ended | |
| |
September 30,
2021 | | |
September 30,
2020 | |
Statutory federal income tax rate | |
| 21.0 | % | |
| 21.0 | % |
State tax | |
| 2.6 | % | |
| (1.5 | )% |
Non-U.S. income taxed at different rates | |
| (0.2 | )% | |
| 18.4 | % |
Permanent differences | |
| (0.1 | )% | |
| (1.3 | )% |
Valuation allowance | |
| (23.3 | )% | |
| (36.6 | )% |
Effective tax rate | |
| 0.0 | % | |
| 0.0 | % |
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 – INCOME TAXES (continued)
The components of the Company’s net deferred tax assets as of
September 30, 2021 and 2020 were as follows:
| |
September 30,
2021 | | |
September 30,
2020 | |
Deferred tax assets (liabilities): | |
| | | |
| | |
Loss carry-forwards | |
$ | 577,215 | | |
$ | 293,328 | |
Accrued directors’ compensation | |
| 42,635 | | |
| 32,635 | |
Stock-based compensation | |
| 10,521 | | |
| - | |
Valuation allowance | |
| (630,371 | ) | |
| (325,963 | ) |
Total net deferred tax assets | |
$ | - | | |
$ | - | |
The Company provided a valuation allowance equal
to the deferred income tax assets for years ended September 30, 2021 and 2020 because it is not presently known whether future taxable
income will be sufficient to utilize the loss carry-forwards. The valuation allowance could be reduced or eliminated based on future earnings
and future estimates of taxable income.
As of September 30, 2021, the Company had $1,373,304
in U.S. federal net operating loss carry-forwards that can be utilized in future periods to reduce taxable income. However, due to changes
in stock ownership, the use of the U.S. federal net operating loss carry-forwards is limited under Section 382 of the Internal Revenue
Code. The Company has not performed a study to determine if the loss carryforwards are subject to these Section 382 limitations. $337,605
of the net operating loss carry-forwards will expire in fiscal years 2035 through 2038. The remaining net operating loss carry-forwards
do not expire. In addition, the Company has net operating losses in Malta totaling $503,647 with no expiration date.
As of September 30, 2021 and 2020, the Company
did not identify any uncertain tax positions that would require either recognition or disclosure in the accompanying consolidated financial
statements. The Company recognizes interest and penalties related to uncertain income tax positions in other expense. However, no such
interest and penalties were recorded as of September 30, 2021 and 2020.
The Company has a December 31 tax year-end. The
federal, state and foreign income tax returns of the Company are subject to examination by various tax authorities, generally for three
years after they are filed. The Company is not subject to income taxes in Bermuda. The Company’s 2018 through 2021 tax
years are subject to examination.
NOTE 9 – RELATED PARTY TRANSACTIONS
Services provided by related parties
The Company uses affiliate employees for various
services such as the use of accountants to record the books and accounts of the Company at no charge to the Company, which are considered
immaterial.
Office space from related parties
The Company uses office space of affiliate
companies, free of rent, which is considered immaterial.
Revenue from related party and cost of revenue from related party
The Company’s general support services operate
under a GSA with TCM providing personnel and technical support, marketing, accounting, risk monitoring, documentation processing and customer
care and support. The minimum monthly amount received is $1,600,000.
The Company’s general support services operate
under a GSA with FXDIRECT receiving personnel and technical support, marketing, accounting, risk monitoring, documentation processing
and customer care and support. The minimum monthly amount payable is $1,575,000.
Both of the above entities are affiliates through
common ownership.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 – RELATED PARTY TRANSACTIONS (continued)
Revenue from related party and cost of revenue from related party
(continued)
During the years ended September 30, 2021 and
2020, general support services provided to the related party, which was recorded as revenue – general support services - related
party on the accompanying consolidated statements of operations and comprehensive loss were as follows:
| |
Year Ended September 30, 2021 | | |
Year Ended September 30, 2020 | |
Service provided to: | |
| | |
| |
TCM | |
$ | 19,200,000 | | |
$ | 19,200,000 | |
| |
$ | 19,200,000 | | |
$ | 19,200,000 | |
During the years ended September 30, 2021
and 2020, services received from the related party, which was recorded as cost of revenue – general support services - related party
on the accompanying consolidated statements of operations and comprehensive loss were as follows:
| |
Year Ended September 30, 2021 | | |
Year Ended September 30, 2020 | |
Service received from: | |
| | |
| |
FXDIRECT | |
$ | 18,900,000 | | |
$ | 18,900,000 | |
| |
$ | 18,900,000 | | |
$ | 18,900,000 | |
Due from affiliates
At September 30, 2021 and 2020, due from related
parties consisted of the following:
| |
September 30, 2021 | | |
September 30, 2020 | |
NUKK Capital (*) | |
$ | 144,696 | | |
$ | 144,696 | |
TCM | |
| 2,473,177 | | |
| 3,565,076 | |
Total | |
$ | 2,617,873 | | |
$ | 3,709,772 | |
(*) | An entity controlled by Emil Assentato, the Company’s
chief executive officer, chief financial officer and chairman. |
The balances of due from NUKK Capital represent
the Company’s prior investment in digital currency that was transferred to NUKK Capital in March 2019. The balance of due from TCM
represent unsettled funds due related to the General Services Agreement and monies that the Company paid on behalf of TCM.
Management believes that the related parties’
receivables are fully collectable. Therefore, no allowance for doubtful account is deemed to be required on its due from related parties
at September 30, 2021 and 2020. The Company historically has not experienced uncollectible receivable from the related parties.
Due to affiliates
At September 30, 2021 and 2020, due to related
parties consisted of the following:
| |
September 30, 2021 | | |
September 30, 2020 | |
Forexware LLC (*) | |
$ | 579,229 | | |
$ | 579,229 | |
FXDIRECT | |
| 3,341,893 | | |
| 4,111,277 | |
CMH | |
| 42,000 | | |
| 42,000 | |
FXDD Trading (*) | |
| 294,670 | | |
| 471 | |
Total | |
$ | 4,257,792 | | |
$ | 4,732,977 | |
(*) | Forexware LLC and FXDD Trading are both controlled by Emil
Assentato, the Company’s chief executive officer, chief financial officer and chairman. |
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 – RELATED PARTY TRANSACTIONS (continued)
Due to affiliates (continued)
The balances of due to related parties represent
expenses paid by Forexware LLC, FXDIRECT, and FXDD Trading on behalf of the Company and advances from CMH. The balance due to FXDIRECT
may also include unsettled funds due related to the General Service Agreement.
The related parties’ payables are short-term
in nature, non-interest bearing, unsecured and repayable on demand.
NOTE 10 – CONCENTRATIONS
Customers
The following table sets forth information as
to each customer that accounted for 10% or more of the Company’s revenues for the years ended September 30, 2021 and 2020.
| |
Years Ended
September 30, | |
Customer | |
2021 | | |
2020 | |
A – related party | |
| 99.5 | % | |
| 100 | % |
One customer, whose outstanding receivable accounted
for 10% or more of the Company’s total outstanding accounts receivable, and accounts receivable – related party (which is
included in due from affiliates on the accompanying consolidated balance sheets) at September 30, 2021, accounted for 97.8% of the Company’s
total outstanding accounts receivable, and accounts receivable – related party at September 30, 2021.
One customer, whose outstanding receivable accounted
for 10% or more of the Company’s total outstanding accounts receivable – related party (which is included in due from affiliates
on the accompanying consolidated balance sheets) at September 30, 2020, accounted for 100.0% of the Company’s total outstanding
accounts receivable – related party at September 30, 2020.
Suppliers
The following table sets forth information as
to each supplier that accounted for 10% or more of the Company’s costs of revenues for the years ended September 30, 2021 and 2020.
| |
Years Ended
September 30, | |
Supplier | |
2021 | | |
2020 | |
A – related party | |
| 98.5 | % | |
| 100 | % |
One supplier, whose outstanding payable accounted
for 10% or more of the Company’s total outstanding accounts payable, and accounts payable – related party (which is included
in due to affiliates on the accompanying consolidated balance sheets) at September 30, 2021, accounted for 98.8% of the Company’s
total outstanding accounts payable, and accounts payable – related party at September 30, 2021.
One supplier, whose outstanding payable accounted
for 10% or more of the Company’s total outstanding accounts payable – related party (which is included in due to affiliates
on the accompanying consolidated balance sheets) at September 30, 2020, accounted for 100.0% of the Company’s total outstanding
accounts payable – related party at September 30, 2020.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 – SEGMENT INFORMATION
For the year ended September 30, 2021, the Company
operated in two reportable business segments - (1) the general support services segment, in which we provide software, technology, customer
sales and marketing and risk management technology hardware and software solutions package under a GSA to a related party, and (2) the
financial services segment, in which we provide payment services from one fiat currency to another. For the year ended September 30, 2020,
the Company operated in one reportable business segment – the general support services segment. The Company’s reportable segments
are strategic business units that offer different services and products. They are managed separately based on the fundamental differences
in their operations.
Information with respect to these reportable business
segments for the years ended September 30, 2021 and 2020 was as follows:
| |
Years Ended
September 30, | |
| |
2021 | | |
2020 | |
Revenues | |
| | |
| |
General support services | |
$ | 19,200,000 | | |
$ | 19,200,000 | |
Financial services | |
| 86,964 | | |
| - | |
Total | |
| 19,286,964 | | |
| 19,200,000 | |
| |
| | | |
| | |
Costs of revenues | |
| | | |
| | |
General support services | |
| 18,900,000 | | |
| 18,900,000 | |
Financial services | |
| 293,011 | | |
| - | |
Total | |
| 19,193,011 | | |
| 18,900,000 | |
| |
| | | |
| | |
Gross profit (loss) | |
| | | |
| | |
General support services | |
| 300,000 | | |
| 300,000 | |
Financial services | |
| (206,047 | ) | |
| - | |
Total | |
| 93,953 | | |
| 300,000 | |
| |
| | | |
| | |
Operating expenses | |
| | | |
| | |
Financial services | |
| 553,230 | | |
| - | |
Corporate/Other | |
| 473,127 | | |
| 413,115 | |
Total | |
| 1,026,357 | | |
| 413,115 | |
| |
| | | |
| | |
Other (expense) income | |
| | | |
| | |
Financial services | |
| (272 | ) | |
| - | |
Corporate/Other | |
| (4,170 | ) | |
| 12,553 | |
Total | |
| (4,442 | ) | |
| 12,553 | |
| |
| | | |
| | |
Net income (loss) | |
| | | |
| | |
General support services | |
| 300,000 | | |
| 300,000 | |
Financial services | |
| (759,549 | ) | |
| - | |
Corporate/Other | |
| (477,297 | ) | |
| (400,562 | ) |
Total | |
| (936,846 | ) | |
| (100,562 | ) |
| |
| | | |
| | |
Amortization | |
| | | |
| | |
Financial services | |
| 469,286 | | |
| - | |
Total | |
$ | 469,286 | | |
$ | - | |
Total assets at September 30, 2021 and 2020 | |
September 30,
2021 | | |
September 30,
2020 | |
Financial services | |
$ | 13,703,140 | | |
$ | - | |
Corporate/Other | |
| 2,956,696 | | |
| 3,799,631 | |
Total | |
$ | 16,659,836 | | |
$ | 3,799,631 | |
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 – CONTINGENCY
On April 16, 2020, the Company was named as a
defendant in the Adversary Proceeding filed in the United States Bankruptcy Court for the District of Massachusetts (Case No. 15-10745-FJB;
Adversary Proceeding No. 16-01178) titled In re: BT Prime Ltd (“BT Prime”). The BT Prime Litigation was brought by BT Prime
against Boston Technologies Powered by Forexware LLC f/k/a Forexware LLC (“Forexware”), Currency Mountain Holdings LLC, Currency
Mountain Holdings Limited f/k/a Forexware Malta Holdings Ltd., FXDirectDealer, LLC, FXDD Malta Ltd., Nukkleus, Nukkleus Bermuda Limited
and Currency Mountain Holdings Bermuda, Ltd. BT Prime sought, amongst other relief, a determination that the defendants were liable for
all of the debts of BT Prime stemming from its bankruptcy proceedings, and sought to recover certain amounts transferred to Forexware
and FXDD Malta prior to the initiation of the bankruptcy case. In the sole claim asserted against Nukkleus, BT Prime alleged that Nukkleus
acquired certain technology assets from Forexware and is a continuation of the business of Forexware and a successor-in-interest to Forexware.
Based on this theory, BT Prime alleged that Nukkleus should be jointly and severally liable for any liability attributable to Forexware
or the other defendants, should the court eventually find any such liability. Although Nukkleus acquired licenses from Forexware, Forexware
retained other assets and continued to operate a separate business, which Nukkleus believes is the business that is pertinent to BT Prime’s
allegations. Nukkleus believes that the similarity in Forexware and Nukkleus’s business, including the shared use of software, caused
BT Prime to conflate the two businesses, but Nukkleus was not connected to the events that caused the initiation of BT Prime’s liquidation
and bankruptcy proceedings.
Nukkleus has issued a limited guarantee of the
obligations under a settlement agreement among BT Prime and the defendants other than Nukkleus, limited to an amount equal to $2,050,000,
which guarantee is subject to release following payment by the defendants other than Nukkleus of their obligations under the settlement
agreement. Nukkleus management believes that the term of the limited guarantee will expire without any payment obligation or other cost
to Nukkleus. On May 31, 2022, the BT Prime Litigation was dismissed with prejudice by the bankruptcy court as to Nukkleus and FXDD Malta
Ltd.
NOTE 13 – SUBSEQUENT EVENTS
Jacobi transaction
On October 20, 2021, the Company and the shareholders
(the “Original Jacobi Shareholders”) of Jacobi Asset Management Holdings Limited (“Jacobi”), including entities
of which Jamal Khurshid and Nicholas Gregory, respectively, are the beneficial owner, entered into a Purchase and Sale Agreement (the
“Jacobi Agreement”), pursuant to which the Company agreed to acquire 5.0% of the issued and outstanding ordinary shares of
Jacobi in consideration of 20,000,000 shares of common stock of the Company (the “Jacobi Transaction”). On December 15,
2021, the Company, the Original Jacobi Shareholders and shareholders of Jacobi that were assigned their interest in Jacobi by the Original
Shareholders (the “New Jacobi Shareholders”), including entities of which Mr. Khurshid and Mr. Gregory, respectively, are
the beneficial owners, entered into an Amendment to the Jacobi Agreement agreeing that the Jacobi Transaction would be entered between
the Company and the New Jacobi Shareholders. The Jacobi Transaction closed on December 15, 2021. Jacobi is a company focused on digital
asset management that has received regulatory approval to launch the world’s first tier one Bitcoin ETF. The transactions contemplated
by the Jacobi Agreement constituted a “related-party transaction” as defined in Item 404 of Regulation S-K because of
Mr. Khurshid’s and Mr. Gregory’s position as beneficial owner of one or more Original Shareholders and New Jacobi Shareholders.
Letter agreement with ClearThink
Nukkleus is party to a letter agreement with ClearThink
dated as of November 22, 2021, pursuant to which ClearThink was engaged by Nukkleus in connection with the Business Combination (See
Note 14 - White Lion Stock Purchase Agreement).
Craig Marshak, a member of the Board of Directors of Nukkleus, is a managing
director of ClearThink, a transaction advisory firm. ClearThink has been engaged by Nukkleus to serve as the exclusive transactional financial
advisor, and finder with respect to the Business Combination, to advise Nukkleus with respect to the Business Combination. As of the date
of this annual report re-issuance Nukkleus has paid ClearThink $140,000 and upon closing of the Business Combination Nukkleus is obligated
to pay ClearThink 1.2% of the total transaction value plus reimbursable expenses less the $140,000 paid to ClearThink as of the date of
this annual report re-issuance.
NOTE
14 – EVENTS (UNAUDITED) SUBSEQUENT TO THE DATE OF THE INDEPENDENT AUDITORS’ REPORT
Digiclear transaction
On December
30, 2021, the Company and the shareholder (the “Digiclear Shareholder”) of Digiclear Ltd. (“Digiclear”) entered
into a Purchase and Sale Agreement (the “Digiclear Agreement) pursuant to which the Company agreed to acquire 5,400,000 of
the issued and outstanding ordinary shares of Digiclear in consideration of 15,151,515 shares of common stock of the Company
(the “Digiclear Transaction”). The Digiclear Transaction closed on March 17, 2022. Digiclear
is a company developing a custody and settlement utility operating system.
Third
party valuation report
In
February 2022, a third party valuation report in connection with the acquisition of Match was completed. As a result, the Company adjusted
the previous estimated allocation to reflect the results of the third party valuation. The Company decreased its cost of intangible
assets of $2,861,631 and adjusted the estimated useful life of trade names and regulatory licenses from 10 years to 3 years and the estimated
useful life of technology from 10 years to 5 years. This change in accounting estimate was effective in the first quarter of fiscal year
2022.
Merger
On February
22, 2022, the Company entered into an Agreement and Plan of Merger (as it may be amended, supplemented or otherwise modified from time
to time, the “Merger Agreement”), by and among the Company and Brilliant Acquisition Corporation, a British Virgin Islands
company (“Brilliant”). The Merger Agreement has been approved by the Company’s boards of directors. The transaction
is expected to close in the third quarter of fiscal year 2022 provided however there is no guarantee that the transaction will close.
White
Lion Stock Purchase Agreement
On May 17,
2022, the Company entered into a Stock Purchase Agreement (the “White Lion Agreement”) with White Lion Capital Partners, LLC
a California-based investment fund (“White Lion”). Under the terms of the White Lion Agreement, the Company has the right,
but not the obligation, to require White Lion to purchase shares of its common stock up to a maximum amount of $75,000,000 or such
lower amount as may be required pursuant to the rules of the market on which shares of its common stock trades at such time. Pursuant
to terms of the White Lion Agreement and the Registration Rights Agreement (as defined below), the Company is required to use its commercially
reasonable efforts to file with the SEC a registration statement covering the shares to be acquired by White Lion within sixty days following
the closing of the previously announced business combination with Brilliant Acquisition Corporation described in its Current Report on
Form 8-K filed with the SEC on February 23, 2022 (the “Business Combination”).
The term
of the White Lion Agreement commences on the effective date of the registration statement and shall end on December 31, 2024, or,
if earlier, the date on which White Lion has purchased the maximum number of shares of the Company’s common stock provided under
the White Lion Agreement, in each case on the terms and subject to the conditions set forth in the White Lion Agreement. White Lion’s
purchase price will be 96% of the dollar- volume weighted average price of the Company’s common stock over the two consecutive
trading days immediately following receipt of the Company’s notice of its intent to make a draw.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
14 – EVENTS (UNAUDITED) SUBSEQUENT TO THE DATE OF THE INDEPENDENT AUDITORS’ REPORT (continued)
White
Lion Stock Purchase Agreement (continued)
During
the term of the White Lion Agreement, on the terms and subject to the conditions set forth therein, the Company may draw up to the lesser
of (i) the number of shares of the Company’s common stock which would result in beneficial ownership by White Lion of
more than 4.99% of the outstanding shares of the Company’s common stock, (ii) the number of shares of the Company’s
common stock equal to 30% of the average daily trading volume of the Company’s common stock over the five consecutive trading days
immediately following the notice date, or (iii) the number of the Company’s common stock obtained by dividing $1,500,000 by
the closing sale price of the Company’s common stock on the notice date.
The Company
is not entitled to draw on the White Lion Agreement if the closing sale price of the Company’s common stock on the trading day immediately
preceding the notice date is less than $1.00 (following the reverse stock split proposed in connection with the closing of the Business
Combination and described in the Company’s Current Report on Form 8-K filed with the SEC on February 23, 2022, but adjusted for
any other reorganization, recapitalization, non-cash dividend, stock split or other similar transaction). The Company is not entitled
to draw on the White Lion Agreement unless each of the following additional conditions is satisfied: (i) each of the Company’s
representations and warranties set forth in the White Lion Agreement is true and correct (subject to qualifications as to materiality
set forth therein) in all respects as of such time; (ii) a registration statement is and remains effective for the resale of securities
in connection with the White Lion Agreement; (iii) the trading of the Company’s common stock shall not have been suspended
by the SEC, the applicable trading market or FINRA, or otherwise halted for any reason; (iv) the Company shall have complied with
its obligations and shall not otherwise be in breach or default of any agreement set forth in the White Lion Agreement; (v) no statute,
regulation, order, guidance, decree, writ, ruling or injunction shall have been enacted, entered, promulgated, threatened or endorsed
by any federal, state, local or foreign court or governmental authority of competent jurisdiction, including, without limitation, the
SEC, which prohibits the consummation of or which would materially modify or delay any of the transactions contemplated by the White Lion
Agreement; (vi) all reports, schedules, registrations, forms, statements, information and other documents required to have been filed
by us with the SEC pursuant to the reporting requirements of the Exchange Act of 1934 (other than Forms 8-K) shall have been filed with
the SEC within the applicable time periods prescribed for such filings; (vii) to the extent the issuance of the put shares requires
shareholder approval under the listing rules of the applicable national exchange or principal quotation system for the Company’s
common stock, the Company has or will seek such approval; and (viii) certain other conditions as set forth in the White Lion Agreement.
In addition
to the shares to be issued under the White Lion Agreement, the Company will include in its registration statement additional shares of
the Company’s common stock in the amount of $750,000 being issued to White Lion in connection with the execution of the White
Lion Agreement.
White Lion Registration Rights
Agreement
In connection
with the Company’s entry into the White Lion Agreement, the Company entered into a Registration Rights Agreement with White Lion
(the “Registration Rights Agreement”). Pursuant to the terms of the Registration Rights Agreement, the Company has agreed
to use its commercially reasonable efforts to file a registration statement under the Securities Act registering the resale of the shares
sold under the White Lion Agreement within sixty days of the closing of the Business Combination. The Registration Rights Agreement also
provides that the Company is required to use its commercially reasonable efforts to keep the registration effective and to prepare and
file with the SEC such amendments and supplements if the foregoing registration statement is not then in effect, and the Company proposes
to file certain types of registration statements under as may be necessary to keep the registration statement effective.
Appointment of directors
On May 31,
2022, the Board of Directors (the “Board”) increased the authorized number of directors of the Company and appointed Nicholas
Gregory, Daniel Marcus and Brian Schwieger, each to serve as a member of the Board, with immediate effect, each until such time as he
resigns or is removed and his successor appointed. There are no arrangements or understandings between any of Mr. Gregory, Mr. Marcus
or Mr. Schwieger and the Company or any other person pursuant to which Mr. Gregory, Mr. Marcus or Mr. Schwieger, as applicable, was elected
as a director. Mr. Marcus will serve on the Company’s audit committee, nomination committee and compensation committee. Mr.
Gregory will serve on the Company’s audit committee and nomination committee. Mr. Schwieger will serve on the Company’s audit
committee, nomination committee and compensation committee.