UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT
UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2024
OR
☐ TRANSITION
REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to
__________
Commission file number: 001-39341
Nukkleus Inc.
(Exact name of registrant as specified in its charter)
Delaware | | 38-3912845 |
(State or other jurisdiction of | | (I.R.S. Employer |
incorporation or organization) | | Identification No.) |
525 Washington Boulevard, Jersey City, New
Jersey 07310
(Address of principal executive offices, including
zip code)
212-791-4663
(Registrant’s telephone number, including
area code)
Brilliant Acquisition
Corporation
(Former name or former
address, if changed since last report)
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 | | NUKK | | The Nasdaq Stock Market LLC |
| | | | |
Warrants, each warrant exercisable for one Share of Common Stock for $11.50 per share | | NUKKW | | The Nasdaq Stock Market LLC |
Securities registered under Section 12(g) of
the Exchange Act: None
Indicate by check mark whether the registrant
(1) has filed all reports required 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 the definitions 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 is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
State the
number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date.
Class | | Outstanding
August 12, 2024 |
Common Stock, $0.0001 par value per share | | 16,791,964 shares |
NUKKLEUS INC.
FORM 10-Q
March 31, 2024
TABLE OF CONTENTS
FORWARD LOOKING STATEMENTS
This report
contains forward-looking statements regarding our business, financial condition, results of operations and prospects. Words such as “expects,”
“anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates”
and similar expressions or variations of such words are intended to identify forward-looking statements, but are not deemed to represent
an all-inclusive means of identifying forward-looking statements as denoted in this report. Additionally, statements concerning future
matters are forward-looking statements.
Although forward-looking
statements in this report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently
known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes
may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could
cause or contribute to such differences in results and outcomes include, without limitation, those specifically addressed under the headings
“Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
in our annual report on Form 10-K, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
in this Form 10-Q and information contained in other reports that we file with the SEC. You are urged not to place undue reliance on these
forward-looking statements, which speak only as of the date of this report.
We file
reports with the SEC. The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC, including us. You can also read and copy any materials we file with the SEC at
the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You can obtain additional information about the operation
of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
We undertake
no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the
date of this report, except as required by law. Readers are urged to carefully review and consider the various disclosures made throughout
the entirety of this quarterly report, which are designed to advise interested parties of the risks and factors that may affect our business,
financial condition, results of operations and prospects.
Unless
otherwise indicated, references in this report to the “Company”, “Nukkleus”, “we”, “us”,
or “our” refer to Nukkleus Inc. and its consolidated subsidiaries.
PART I - FINANCIAL INFORMATION
Item 1. Interim Financial Statements.
NUKKLEUS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| |
March 31, | | |
September 30, | |
| |
2024 | | |
2023 | |
| |
(Unaudited) | | |
| |
ASSETS | |
| | |
| |
| |
| | |
| |
CURRENT ASSETS: | |
| | |
| |
Cash | |
$ | 305,589 | | |
$ | 19,318 | |
Customer custodial cash | |
| 345,631 | | |
| 672,501 | |
Customer digital currency assets | |
| 8,100 | | |
| - | |
Digital assets | |
| 15,475 | | |
| 1,973 | |
Due from affiliates | |
| 50,094 | | |
| 2,039,274 | |
Note receivable - related parties, net | |
| 35,000 | | |
| 162,820 | |
Other current assets | |
| 48,364 | | |
| 32,522 | |
| |
| | | |
| | |
TOTAL CURRENT ASSETS | |
| 808,253 | | |
| 2,928,408 | |
| |
| | | |
| | |
NON-CURRENT ASSETS: | |
| | | |
| | |
Cost method investment | |
| 391,217 | | |
| 391,217 | |
Intangible assets, net | |
| 26,182 | | |
| 33,000 | |
| |
| | | |
| | |
TOTAL NON-CURRENT ASSETS | |
| 417,399 | | |
| 424,217 | |
| |
| | | |
| | |
TOTAL ASSETS | |
$ | 1,225,652 | | |
$ | 3,352,625 | |
| |
| | | |
| | |
LIABILITIES AND STOCKHOLDERS’ DEFICIT | |
| | | |
| | |
| |
| | | |
| | |
CURRENT LIABILITIES: | |
| | | |
| | |
Accounts payable | |
$ | 310,449 | | |
$ | 138,666 | |
Customer custodial cash liabilities | |
| 882,152 | | |
| 1,443,011 | |
Customer digital currency liabilities | |
| 8,100 | | |
| - | |
Due to affiliates | |
| 7,984,841 | | |
| 6,808,749 | |
Loan payable - related parties | |
| 732,324 | | |
| - | |
Accrued payroll liability and directors’ compensation | |
| 455,061 | | |
| 402,241 | |
Accrued professional fees | |
| 1,250,159 | | |
| 160,926 | |
Accrued liabilities and other payables | |
| 168,717 | | |
| 169,872 | |
| |
| | | |
| | |
TOTAL CURRENT LIABILITIES | |
| 11,791,803 | | |
| 9,123,465 | |
| |
| | | |
| | |
NON-CURRENT LIABILITIES: | |
| | | |
| | |
Loan payable - related parties | |
| 941,000 | | |
| 420,619 | |
Interest payable - related parties | |
| 17,601 | | |
| 1,771 | |
| |
| | | |
| | |
TOTAL NON-CURRENT LIABILITIES | |
| 958,601 | | |
| 422,390 | |
| |
| | | |
| | |
TOTAL LIABILITIES | |
| 12,750,404 | | |
| 9,545,855 | |
| |
| | | |
| | |
COMMITMENTS AND CONTINGENCIES - (Note 12) | |
| | | |
| | |
| |
| | | |
| | |
STOCKHOLDERS’ DEFICIT: | |
| | | |
| | |
Preferred stock ($0.0001 par value; 15,000,000 shares authorized; 0 share issued and outstanding at March 31, 2024 and September 30, 2023) | |
| - | | |
| - | |
Common stock ($0.0001 par value; 40,000,000 shares authorized; 14,102,414 and 10,074,657 shares issued and outstanding at March 31, 2024 and September 30, 2023, respectively) | |
| 1,410 | | |
| 1,007 | |
Additional paid-in capital | |
| 35,848,468 | | |
| 25,543,048 | |
Accumulated deficit | |
| (47,369,858 | ) | |
| (31,769,244 | ) |
Accumulated other comprehensive (loss) income | |
| (4,772 | ) | |
| 31,959 | |
| |
| | | |
| | |
TOTAL STOCKHOLDERS’ DEFICIT | |
| (11,524,752 | ) | |
| (6,193,230 | ) |
| |
| | | |
| | |
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT | |
$ | 1,225,652 | | |
$ | 3,352,625 | |
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
NUKKLEUS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(Unaudited)
| |
For the Three
Months | | |
For the Six Months | |
| |
Ended March 31, | | |
Ended March 31, | |
| |
2024 | | |
2023 | | |
2024 | | |
2023 | |
REVENUES | |
| | |
| | |
| | |
| |
Revenue - general support services - related party | |
$ | - | | |
$ | 4,800,000 | | |
$ | 4,800,000 | | |
$ | 9,600,000 | |
Revenue - financial services | |
| 259,757 | | |
| 833,944 | | |
| 702,148 | | |
| 1,410,332 | |
Total revenues | |
| 259,757 | | |
| 5,633,944 | | |
| 5,502,148 | | |
| 11,010,332 | |
| |
| | | |
| | | |
| | | |
| | |
COSTS OF REVENUES | |
| | | |
| | | |
| | | |
| | |
Cost of revenue - general support services - related party | |
| - | | |
| 4,725,000 | | |
| 4,650,000 | | |
| 9,450,000 | |
Cost of revenue - financial services | |
| 63,196 | | |
| 760,982 | | |
| 196,887 | | |
| 1,467,243 | |
Total costs of revenues | |
| 63,196 | | |
| 5,485,982 | | |
| 4,846,887 | | |
| 10,917,243 | |
| |
| | | |
| | | |
| | | |
| | |
GROSS PROFIT | |
| | | |
| | | |
| | | |
| | |
Gross profit - general support services - related party | |
| - | | |
| 75,000 | | |
| 150,000 | | |
| 150,000 | |
Gross profit (loss) - financial services | |
| 196,561 | | |
| 72,962 | | |
| 505,261 | | |
| (56,911 | ) |
Total gross profit | |
| 196,561 | | |
| 147,962 | | |
| 655,261 | | |
| 93,089 | |
| |
| | | |
| | | |
| | | |
| | |
OPERATING EXPENSES: | |
| | | |
| | | |
| | | |
| | |
Advertising and marketing | |
| 20,568 | | |
| 295 | | |
| 41,586 | | |
| 49,417 | |
Professional fees | |
| 2,038,407 | | |
| 566,336 | | |
| 4,900,517 | | |
| 1,243,439 | |
Compensation and related benefits | |
| 269,848 | | |
| 197,532 | | |
| 523,684 | | |
| 357,792 | |
Bad debt expense | |
| - | | |
| - | | |
| 6,145,942 | | |
| - | |
Other general and administrative | |
| 287,587 | | |
| 190,163 | | |
| 410,610 | | |
| 385,300 | |
| |
| | | |
| | | |
| | | |
| | |
Total operating expenses | |
| 2,616,410 | | |
| 954,326 | | |
| 12,022,339 | | |
| 2,035,948 | |
| |
| | | |
| | | |
| | | |
| | |
LOSS FROM OPERATIONS | |
| (2,419,849 | ) | |
| (806,364 | ) | |
| (11,367,078 | ) | |
| (1,942,859 | ) |
| |
| | | |
| | | |
| | | |
| | |
OTHER (EXPENSE) INCOME: | |
| | | |
| | | |
| | | |
| | |
Interest expense - related parties | |
| (10,348 | ) | |
| - | | |
| (17,770 | ) | |
| - | |
Other income | |
| 780 | | |
| 715 | | |
| 27,336 | | |
| 3,288 | |
| |
| | | |
| | | |
| | | |
| | |
Total other (expense) income, net | |
| (9,568 | ) | |
| 715 | | |
| 9,566 | | |
| 3,288 | |
| |
| | | |
| | | |
| | | |
| | |
LOSS BEFORE INCOME TAXES | |
| (2,429,417 | ) | |
| (805,649 | ) | |
| (11,357,512 | ) | |
| (1,939,571 | ) |
| |
| | | |
| | | |
| | | |
| | |
INCOME TAXES | |
| - | | |
| - | | |
| - | | |
| - | |
| |
| | | |
| | | |
| | | |
| | |
NET LOSS | |
$ | (2,429,417 | ) | |
$ | (805,649 | ) | |
$ | (11,357,512 | ) | |
$ | (1,939,571 | ) |
| |
| | | |
| | | |
| | | |
| | |
COMPREHENSIVE LOSS: | |
| | | |
| | | |
| | | |
| | |
NET LOSS | |
$ | (2,429,417 | ) | |
$ | (805,649 | ) | |
$ | (11,357,512 | ) | |
$ | (1,939,571 | ) |
OTHER COMPREHENSIVE INCOME (LOSS) | |
| | | |
| | | |
| | | |
| | |
Unrealized foreign currency translation gain (loss) | |
| 26,582 | | |
| (2,721 | ) | |
| (36,731 | ) | |
| (30,704 | ) |
COMPREHENSIVE LOSS | |
$ | (2,402,835 | ) | |
$ | (808,370 | ) | |
$ | (11,394,243 | ) | |
$ | (1,970,275 | ) |
| |
| | | |
| | | |
| | | |
| | |
NET LOSS PER COMMON SHARE: | |
| | | |
| | | |
| | | |
| | |
Basic and diluted | |
$ | (0.17 | ) | |
$ | (0.08 | ) | |
$ | (0.92 | ) | |
$ | (0.19 | ) |
| |
| | | |
| | | |
| | | |
| | |
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: | |
| | | |
| | | |
| | | |
| | |
Basic and diluted | |
| 14,035,589 | | |
| 10,074,657 | | |
| 12,290,131 | | |
| 10,074,657 | |
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
NUKKLEUS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS’ DEFICIT
For the Three and Six Months Ended March 31, 2024
(Unaudited)
| |
| | |
| | |
| | |
| | |
| | |
| | |
Accumulated | | |
| |
| |
Preferred Stock | | |
Common Stock | | |
Additional | | |
| | |
Other | | |
Total | |
| |
Number of | | |
| | |
Number of | | |
| | |
Paid-in | | |
Accumulated | | |
Comprehensive | | |
Stockholders’ | |
| |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Capital | | |
Deficit | | |
Income (Loss) | | |
Deficit | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Balance as of October 1, 2023 | |
| - | | |
$ | - | | |
| 10,074,657 | | |
$ | 1,007 | | |
$ | 25,543,048 | | |
$ | (31,769,244 | ) | |
$ | 31,959 | | |
$ | (6,193,230 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Issuance of common stock for services | |
| - | | |
| - | | |
| 425,295 | | |
| 43 | | |
| 2,015,558 | | |
| - | | |
| - | | |
| 2,015,601 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Conversion of related party debts into common stock | |
| - | | |
| - | | |
| 827,807 | | |
| 83 | | |
| 7,240,643 | | |
| (4,243,102 | ) | |
| - | | |
| 2,997,624 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Issuance of common stock in connection with reverse recapitalization | |
| - | | |
| - | | |
| 2,571,953 | | |
| 257 | | |
| 149,904 | | |
| - | | |
| - | | |
| 150,161 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Stock-based compensation | |
| - | | |
| - | | |
| - | | |
| - | | |
| 74,667 | | |
| - | | |
| - | | |
| 74,667 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net loss for the three months ended December 31, 2023 | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (8,928,095 | ) | |
| - | | |
| (8,928,095 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Foreign currency translation adjustment | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (63,313 | ) | |
| (63,313 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Balance as of December 31, 2023 | |
| - | | |
| - | | |
| 13,899,712 | | |
| 1,390 | | |
| 35,023,820 | | |
| (44,940,441 | ) | |
| (31,354 | ) | |
| (9,946,585 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Issuance of common stock for services | |
| - | | |
| - | | |
| 202,702 | | |
| 20 | | |
| 749,980 | | |
| - | | |
| - | | |
| 750,000 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Stock-based compensation | |
| - | | |
| - | | |
| - | | |
| - | | |
| 74,668 | | |
| - | | |
| - | | |
| 74,668 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net loss for the three months ended March 31, 2024 | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (2,429,417 | ) | |
| - | | |
| (2,429,417 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Foreign currency translation adjustment | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 26,582 | | |
| 26,582 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Balance as of March 31, 2024 | |
| - | | |
$ | - | | |
| 14,102,414 | | |
$ | 1,410 | | |
$ | 35,848,468 | | |
$ | (47,369,858 | ) | |
$ | (4,772 | ) | |
$ | (11,524,752 | ) |
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
NUKKLEUS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS’ EQUITY
For the Three and Six Months Ended March 31, 2023
(Unaudited)
| |
| | |
| | |
| | |
| | |
| | |
| | |
Accumulated | | |
| |
| |
Preferred Stock | | |
Common Stock | | |
Additional | | |
| | |
Other | | |
Total | |
| |
Number of | | |
| | |
Number of | | |
| | |
Paid-in | | |
Accumulated | | |
Comprehensive | | |
Stockholders’ | |
| |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Capital | | |
Deficit | | |
Income | | |
Equity | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Balance as of October 1, 2022 | |
| - | | |
$ | - | | |
| 10,074,657 | | |
$ | 1,007 | | |
$ | 25,172,170 | | |
$ | (14,340,816 | ) | |
$ | 58,219 | | |
$ | 10,890,580 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Stock-based compensation | |
| - | | |
| - | | |
| - | | |
| - | | |
| 146,876 | | |
| - | | |
| - | | |
| 146,876 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net loss for the three months ended December 31, 2022 | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (1,133,922 | ) | |
| - | | |
| (1,133,922 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Foreign currency translation adjustment | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (27,983 | ) | |
| (27,983 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Balance as of December 31, 2022 | |
| - | | |
| - | | |
| 10,074,657 | | |
| 1,007 | | |
| 25,319,046 | | |
| (15,474,738 | ) | |
| 30,236 | | |
| 9,875,551 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Stock-based compensation | |
| - | | |
| - | | |
| - | | |
| - | | |
| 74,667 | | |
| - | | |
| - | | |
| 74,667 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net loss for the three months ended March 31, 2023 | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (805,649 | ) | |
| - | | |
| (805,649 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Foreign currency translation adjustment | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (2,721 | ) | |
| (2,721 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Balance as of March 31, 2023 | |
| - | | |
$ | - | | |
| 10,074,657 | | |
$ | 1,007 | | |
$ | 25,393,713 | | |
$ | (16,280,387 | ) | |
$ | 27,515 | | |
$ | 9,141,848 | |
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
NUKKLEUS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS
OF CASH FLOWS
(Unaudited)
| |
For the Six Months Ended | |
| |
March 31, | |
| |
2024 | | |
2023 | |
CASH FLOWS FROM OPERATING ACTIVITIES: | |
| | |
| |
Net loss | |
$ | (11,357,512 | ) | |
$ | (1,939,571 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | |
| | | |
| | |
Amortization of intangible assets | |
| 6,932 | | |
| 1,185,783 | |
Stock-based compensation and service expense | |
| 2,914,936 | | |
| 221,543 | |
Provision for bad debt | |
| 6,145,942 | | |
| - | |
Bad debt recovery | |
| (4,942 | ) | |
| - | |
Unrealized foreign currency exchange (gain) loss | |
| (2,578 | ) | |
| 132 | |
Impairment of digital assets | |
| - | | |
| 7,743 | |
Changes in operating assets and liabilities: | |
| | | |
| | |
Customer digital currency assets | |
| (8,050 | ) | |
| (113,686 | ) |
Accounts receivable | |
| (1,882 | ) | |
| - | |
Digital assets | |
| (13,348 | ) | |
| 24,158 | |
Due from affiliates | |
| (4,148,682 | ) | |
| 676,576 | |
Other current assets | |
| (13,025 | ) | |
| (20,764 | ) |
Accounts payable | |
| 165,851 | | |
| 24,053 | |
Customer custodial cash liabilities | |
| (607,856 | ) | |
| (1,934,733 | ) |
Customer digital currency liabilities | |
| 8,050 | | |
| 113,686 | |
Due to affiliates | |
| 3,887,344 | | |
| (43,259 | ) |
Accrued payroll liability and directors’ compensation | |
| 51,472 | | |
| 97,311 | |
Accrued professional fees | |
| 1,089,227 | | |
| 34,452 | |
Interest payable - related parties | |
| 16,348 | | |
| - | |
Accrued liabilities and other payables | |
| (6,835 | ) | |
| (215,925 | ) |
| |
| | | |
| | |
NET CASH USED IN OPERATING ACTIVITIES | |
| (1,878,608 | ) | |
| (1,882,501 | ) |
| |
| | | |
| | |
CASH FLOWS FROM INVESTING ACTIVITIES: | |
| | | |
| | |
Investment in note receivable | |
| - | | |
| (154,150 | ) |
Purchase of intangible asset | |
| - | | |
| (41,245 | ) |
Proceeds from note receivable – related parties | |
| 131,492 | | |
| - | |
| |
| | | |
| | |
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES | |
| 131,492 | | |
| (195,395 | ) |
| |
| | | |
| | |
CASH FLOWS FROM FINANCING ACTIVITIES | |
| | | |
| | |
Cash received in reverse recapitalization | |
| 150,161 | | |
| - | |
Proceeds from loan payable | |
| 50,000 | | |
| - | |
Repayments of loan payable | |
| (50,000 | ) | |
| - | |
Proceeds from loan payable - related parties | |
| 1,648,748 | | |
| - | |
Repayments of loan payable - related parties | |
| (132,811 | ) | |
| - | |
| |
| | | |
| | |
NET CASH PROVIDED BY FINANCING ACTIVITIES | |
| 1,666,098 | | |
| - | |
| |
| | | |
| | |
EFFECT OF EXCHANGE RATE ON CASH | |
| 40,419 | | |
| 180,425 | |
| |
| | | |
| | |
NET DECREASE IN CASH | |
| (40,599 | ) | |
| (1,897,471 | ) |
| |
| | | |
| | |
Cash - beginning of period | |
| 691,819 | | |
| 2,384,417 | |
| |
| | | |
| | |
Cash - end of period | |
$ | 651,220 | | |
$ | 486,946 | |
| |
| | | |
| | |
Cash consisted of the following: | |
| | | |
| | |
Cash | |
$ | 305,589 | | |
$ | 246,650 | |
Customer custodial cash | |
| 345,631 | | |
| 240,296 | |
Total cash | |
$ | 651,220 | | |
$ | 486,946 | |
| |
| | | |
| | |
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | |
| | | |
| | |
Cash paid for: | |
| | | |
| | |
Interest | |
$ | 1,422 | | |
$ | - | |
| |
| | | |
| | |
NON-CASH INVESTING AND FINANCING ACTIVITIES: | |
| | | |
| | |
Conversion of related party debts into common stock | |
$ | 2,997,624 | | |
$ | - | |
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – THE COMPANY HISTORY AND NATURE
OF THE BUSINESS
Nukkleus
Inc. (formerly known as, Brilliant Acquisition Corporation) (“Nukkleus”) was formed on May 24, 2019. Nukkleus was formed for
the purpose of acquiring, engaging in a share exchange, share reconstruction and amalgamation with, purchasing all or substantially all
of the assets of, entering into contractual arrangements with, or engaging in any other similar business combination with one or more
businesses or entities. On June 23, 2023, Brilliant Acquisition Corporation, a British Virgin Islands company (prior to the Merger “Brilliant”,
and following the Merger, a Delaware corporation “Nukkleus”), entered into an Amended and Restated Agreement and Plan of Merger
(as amended by the First Amendment to the Amended and Restated Agreement and Plan of Merger on November 1, 2023, the “Merger Agreement”),
by and among Brilliant BRIL Merger Sub, Inc., a Delaware corporation and wholly-owned subsidiary of Brilliant (“Merger Sub”),
and Nukkleus Inc., a Delaware corporation (“Old Nukk” or the “Company”). Old Nukk (f/k/a Compliance & Risk
Management Solutions Inc.) 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 Merger Agreement provides that, among other
things, at the closing (the “Closing”) of the transactions contemplated by the Merger Agreement, Merger Sub merged with and
into Old Nukk (the “Merger”), with Old Nukk surviving as a wholly-owned subsidiary of Brilliant. In connection with the Merger,
Brilliant changed its name to “Nukkleus Inc.” (“Nukkleus” or “Combined Company”). The Merger and other
transactions contemplated by the Merger Agreement are hereinafter referred to as the “Business Combination.” The Business
Combination was completed on December 22, 2023 (“Closing Date”). The accompanying financial statements are those of Old
Nukk, as adjusted for the reverse recapitalization, as described in Note 2.
As a result of Business Combination, Nukkleus
now 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. Due to
non-payment by TCM under the GSA, the Company has advised TCM that the GSA has been terminated effective January 1, 2024. 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 the Company’s Former Chief Executive Officer (“CEO”) 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. Effective May 1, 2023,
the minimum amount payable by Nukkleus Limited to FXDIRECT for services was reduced from $1,575,000 per month to $1,550,000 per
month. 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 Internet Protocol (“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.
In fiscal year 2021, the Company completed its
acquisition of Match Financial Limited, a private limited company formed in England and Wales (“Match”) and its subsidiaries.
Match, through its Digital RFQ Limited (“Digital RFQ”) subsidiary, is engaged in providing payment services from one fiat
currency to another or to digital assets.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – THE COMPANY HISTORY AND NATURE
OF THE BUSINESS (continued)
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 548,767 shares of common stock of the Company (the “Jacobi 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 Jacobi Transaction will 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 exchange-traded fund (“ETF”). Jamal Khurshid and Nicholas Gregory own, directly and indirectly, approximately 40%
and 10% of Jacobi, respectively. Jamal Khurshid is the Company’s chief executive officer and director and Nicholas Gregory
is the Company’s director. 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.
On December 30, 2021, Old Nukk and the shareholder
(the “Digiclear Shareholder”) of Digiclear Ltd. (“Digiclear”) entered into a Purchase and Sale Agreement (the
“Digiclear Agreement”) pursuant to which Old Nukk acquired 5,400,000 of the issued and outstanding ordinary shares
of Digiclear in consideration of shares of common stock, which following the Merger represented 415,733 shares of common stock
of the Company (valued at $5,000,000 based on the market price of Old Nukk’s common stock on the acquisition date) (the “Digiclear
Transaction”). The Digiclear Transaction closed on March 17, 2022. In addition, upon the closing of the Merger, the Company agreed
to provide an additional $1 million in investment to Digiclear in exchange for 4.545% of additional shares of Digiclear’s
capital stock subject to the parties entering a definitive agreement. The Company and Digiclear have not entered into an additional agreement
outlining the terms pursuant to which the Company would acquire the additional shares of Digiclear. Digiclear is a company developing
a custody and settlement utility operating system.
Liquidity
and capital resources
Liquidity
is the ability of a company to generate funds to support its current and future operations, satisfy its obligations and otherwise operate
on an ongoing basis. At March 31, 2024 and September 30, 2023, the Company had cash of approximately $305,000 and $19,000, respectively,
exclusive of customer custodial cash.
The condensed
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 had a working capital deficit of approximately $10,984,000 at March 31, 2024 and incurred a net loss and generated negative
cash flow from operating activities of approximately $11,358,000 and $1,879,000 for the six months ended March 31,
2024, respectively. In addition, the current cash balance cannot be projected to cover the operating expenses for the next twelve months
from the release date of this report. These matters raise substantial doubt about the Company’s ability to continue as a going concern.
The ability of the Company to continue as a going concern is dependent on the Company’s ability to raise additional capital, implement
its business plan, and generate significant revenues. There are no assurances that the Company will be successful in its efforts to generate
significant revenues, maintain sufficient cash balance or report profitable operations or to continue as a going concern. The Company
plans on raising capital through the sale of equity to implement its business plan. However, there is no assurance these plans will be
realized and that any additional financings will be available to the Company on satisfactory terms and conditions, if any.
The accompanying condensed consolidated financial
statements do not include any adjustments related to the recoverability or classification of asset-carrying amounts or the amounts and
classification of liabilities that may result should the Company be unable to continue as a going concern.
NOTE 2 – BASIS
OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
Pursuant to the Merger Agreement, the merger between
Brilliant and Old Nukk was accounted for as a reverse recapitalization in accordance with accounting principles generally accepted in
the United States (the “Reverse Recapitalization”). Accordingly, for accounting purposes, the Reverse Recapitalization was
treated as the equivalent of Old Nukk issuing stock for the net assets of Brilliant, accompanied by a recapitalization. The net assets
of Brilliant are stated at historical cost, with no goodwill or other intangible assets recorded.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2 – BASIS
OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION (continued)
Reverse recapitalization (continued)
Old Nukk was determined to be the accounting acquirer
based on the following predominant factors:
|
● |
Old Nukk’s existing stockholders have the greatest voting interest in the Combined Company; |
|
● |
Old Nukk controls the majority of the board of directors of the Combined Company and, given the board of directors election and retention provisions, Old Nukk holds the ability to maintain control of the board of directors on a go-forward basis; and |
|
● |
Old Nukk’s senior management is the senior management of the Combined Company. |
The condensed consolidated assets, liabilities,
and results of operations prior to the Reverse Recapitalization are those of Old Nukk. The shares and corresponding capital amounts and
losses per share, prior to the Reverse Recapitalization, have been retroactively restated based on shares reflecting the exchange ratio
of 36.44532 established in the Business Combination.
Principals of consolidation
These interim
condensed consolidated financial statements of the Company and its subsidiaries are unaudited. In the opinion of management, all adjustments
(consisting of normal recurring accruals) and disclosures necessary for a fair presentation of these interim condensed consolidated financial
statements have been included. The results reported in the condensed consolidated financial statements for any interim periods are not
necessarily indicative of the results that may be reported for the entire year. The accompanying condensed consolidated financial statements
have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission and do not include all information
and footnotes necessary for a complete presentation of financial statements in conformity with accounting principles generally accepted
in the United States of America (U.S. GAAP).
The Company’s
condensed consolidated financial statements include the accounts of the Company and its consolidated subsidiaries. These accounts were
prepared under the accrual basis of accounting. All significant intercompany accounts and transactions have been eliminated in consolidation.
Certain
information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with U.S.
GAAP have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the Company’s
audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended
September 30, 2023 filed with the Securities and Exchange Commission on July 12, 2024. The consolidated balance sheet as of September
30, 2023 contained herein has been derived from the audited consolidated financial statements as of September 30, 2023, but does not include
all disclosures required by U.S. GAAP.
NOTE 3 – SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Use of estimates
The preparation of the condensed 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. Changes in these estimates and assumptions may have a material impact on
the condensed consolidated financial statements and accompanying notes. Making estimates requires management to exercise significant judgment.
It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the
date of the financial statements, which management considered in formulating its estimate, could change in the near term due to one or
more future confirming events. Accordingly, the actual results could differ significantly from those estimates.
Significant estimates during the three and six
months ended March 31, 2024 and 2023 include the allowance for doubtful accounts, the useful life of intangible assets, the assumptions
used in assessing impairment of long-term assets, the valuation of deferred tax assets and associated valuation allowances, the valuation
of stock-based compensation, and the fair value of customer digital currency assets and liabilities.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Cash and cash equivalents
At March 31, 2024 and September 30, 2023, the
Company’s cash balances by geographic area were as follows:
Country: | |
March
31, 2024 | | |
September
30, 2023 | |
United States | |
$ | 5,811 | | |
| 1.9 | % | |
$ | 7,675 | | |
| 39.7 | % |
United Kingdom | |
| 297,473 | | |
| 97.3 | % | |
| 11,469 | | |
| 59.4 | % |
Republic of Lithuania | |
| 2,131 | | |
| 0.7 | % | |
| - | | |
| - | |
Malta | |
| 174 | | |
| 0.1 | % | |
| 174 | | |
| 0.9 | % |
Total cash | |
$ | 305,589 | | |
| 100.0 | % | |
$ | 19,318 | | |
| 100.0 | % |
For
purposes of the condensed 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 March 31,
2024 and September 30, 2023. Cash and cash equivalents excludes customer legal tender, which is reported separately as customer custodial
cash in the accompanying condensed consolidated balance sheets. Refer to “customer custodial cash and customer custodial cash liabilities”
below for further details.
Customer custodial cash and customer custodial
cash liabilities
Customer
custodial cash represents cash and cash equivalents maintained in Company bank accounts that are controlled by the Company but held for
the benefit of customers. Customer custodial cash liabilities represent these cash deposits to be utilized for its contractual obligations
to its customers. The Company classifies the assets as current based on their purpose and availability to fulfill the Company’s
direct obligations to its customers.
Customer digital currency
assets and liabilities
At
certain times, Digital RFQ’s customers’ funds that Digital RFQ uses to make payments on behalf of its customers, remain in
the form of digital assets in its customers’ wallets at its digital asset trading platforms awaiting final conversion and/or transfer
to the customer’s payment final destination. These indirectly held digital assets, may consist of USDT (Stablecoin), Bitcoin, and
Ethereum (collectively, “Customer digital currency assets”). Digital RFQ maintains the internal recordkeeping of its customer
digital currency assets, including the amount and type of digital asset owned by each of its customers.
Digital
RFQ has control of the private keys and knows the balances of all wallets with its digital asset trading platforms in order to be able
to successfully carry out the movement of digital assets for its client payment instruction. As part of its customer payment instruction,
Digital RFQ can execute withdrawals on the wallets in its digital asset trading platforms.
Management
has determined that Digital RFQ has control of the customer digital currency assets and records these assets on its balance sheet with
a corresponding liability. Digital RFQ recognizes customer digital currency liabilities and corresponding customer digital currency assets,
on initial recognition and at each reporting date, at fair value of the customer digital currency assets. Subsequent changes in fair value
are adjusted to the carrying amount of these customer digital currency assets, with changes in fair value recorded in other general and
administrative expense in the condensed consolidated statements of operations and comprehensive loss.
Any
loss, theft, or other misuse would impact the measurement of customer digital currency assets. The Company classifies the customer digital
currency assets as current based on their purpose and availability to fulfill the Company’s direct obligations to its customers.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Fair value of financial
instruments and fair value measurements
The
Company adopted the guidance of Accounting Standards Codification (“ASC”) 820 for fair value measurements which clarifies
the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs
used in measuring fair value as follows:
|
● |
Level 1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date. |
|
● |
Level 2-Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data. |
|
● |
Level 3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information. |
The fair
value of the Company’s assets and liabilities, which qualify as financial instruments under ASC Topic 820, “Fair Value Measurement,”
approximates the carrying amounts represented in the accompanying condensed consolidated financial statements, primarily due to their
short-term nature.
Assets
and liabilities measured at fair value on a recurring basis. Customer digital currency assets and liabilities are measured
at fair value on a recurring basis. These assets and liabilities are measured at fair value on an ongoing basis.
The
following table provides these assets and liabilities carried at fair value, measured as of March 31, 2024:
| |
Quoted
Price
in
Active Markets | | |
Significant
Other
Observable
Inputs | | |
Significant
Unobservable
Inputs | | |
Balance at
March 31, | |
| |
(Level
1) | | |
(Level
2) | | |
(Level
3) | | |
2024 | |
Customer digital currency assets | |
$ | - | | |
$ | 8,100 | | |
$ | - | | |
$ | 8,100 | |
Customer digital currency liabilities | |
$ | - | | |
$ | 8,100 | | |
$ | - | | |
$ | 8,100 | |
As of September
30, 2023, the Company did not have any customer digital currency assets and liabilities.
Customer
digital currency assets and liabilities represent the Company’s obligation to safeguard customers’ digital assets. Accordingly,
the Company has valued the assets and liabilities using quoted market prices for the underlying digital assets which is based on Level
2 inputs.
ASC 825-10
“Financial Instruments”, allows entities to voluntarily choose to measure certain financial assets and liabilities at fair
value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new
election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses for that instrument should be
reported in earnings at each subsequent reporting date. The Company did not elect to apply the fair value option to any outstanding instruments.
Digital assets
The digital
assets held by the Company are accounted for as intangible assets with indefinite useful lives, and are initially measured at cost. Digital
assets accounted for as intangible assets are subject to impairment losses if the fair value of digital assets decreases below the carrying
value at any time during the period. The fair value is measured using the quoted price of the digital asset at the time its fair value
is being measured. Impairment expense is reflected in other general and administrative expense in the condensed consolidated statements
of operations and comprehensive loss. The Company assigns costs to transactions on a first-in, first-out basis.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Credit risk and uncertainties
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.
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, including customer custodial cash, in high quality
financial institutions and by periodically evaluating the credit quality of the primary financial institutions holding such deposits.
The Company may also hold cash at digital asset trading platforms and performs a regular assessment of these digital asset trading platforms
as part of its risk management process. 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 March 31, 2024, there were no balances in excess of the federally-insured limits.
We may maintain
our cash assets at financial institutions in the U.S. in amounts that may be in excess of the Federal Deposit Insurance Corporation (“FDIC”)
insurance limit of $250,000. Actual events involving limited liquidity, defaults, non-performance or other adverse developments that affect
financial institutions, transactional counterparties or other companies in the financial services industry or the financial services industry
generally, or concerns or rumors about any events of these kinds or other similar risks, have in the past and may in the future lead to
market-wide liquidity problems. For example, in response to the rapidly declining financial condition of regional banks Silicon Valley
Bank (“SVB”) and Signature Bank (“Signature”), the California Department of Financial Protection and Innovation
and the New York State Department of Financial Services closed SVB and Signature on March 10, 2023 and March 12, 2023, respectively, and
the FDIC was appointed as receiver for SVB and Signature. In the event of a failure or liquidity issues of or at any of the financial
institutions where we maintain our deposits or other assets, we may incur a loss to the extent such loss exceeds the FDIC insurance limitation,
which could have a material adverse effect upon our liquidity, financial condition and our results of operations. Similarly, if our customers
experience liquidity issues as a result of financial institution defaults or non-performance where they hold cash assets, their ability
to pay us may become impaired and could have a material adverse effect on our results of operations, including the collection of accounts
receivable and cash flows.
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.
Note receivable – related parties
Note receivable – related parties is presented
net of an allowance for doubtful account. The Company maintains allowance for doubtful account for estimated loss. The Company reviews
the note receivable – related parties on a periodic basis and makes general and specific allowance when there is doubt as to the
collectability of individual balance. In evaluating the collectability of individual receivable balance, the Company considers many factors,
including the age of the balance, a borrower’s historical payment history, its current credit-worthiness and current economic trend.
Note receivable is written off after exhaustive efforts at collection. During the six months ended March 31, 2024, accounts with the amount
of approximately $600,000 were written off after exhaustive efforts at collection with a corresponding debit to the allowance for doubtful
account. The writes-offs of note receivable – related parties against the allowance for doubtful accounts only impact the balance
sheet accounts. At March 31, 2024 and September 30, 2023, the Company has established, based on a review of its outstanding balances,
an allowance for doubtful account in the amounts of $0 and $637,072, respectively, for its note receivable – related parties.
Other current assets
Other current
assets primarily consist of security deposit, accounts receivable, interest receivable, and prepaid miscellaneous items. As of March 31,
2024 and September 30, 2023, other current assets amounted to $48,364 and $32,522, respectively.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Variable interest entity (“VIE”)
A VIE is an entity that either (i) has insufficient
equity to permit the entity to finance its activities without additional subordinated financial support or (ii) has equity investors who
lack the characteristics of a controlling financial interest. The primary beneficiary of a VIE is the party with both the power to direct
the activities of the VIE that most significantly impact the VIE’s economic performance and the obligation to absorb the losses
or the right to receive benefits that could potentially be significant to the VIE.
To assess whether the Company has the power to
direct the activities of a VIE that most significantly impact its economic performance, the Company considers all the facts and circumstances
including its ongoing rights and responsibilities. This assessment includes identifying the activities that most significantly impact
the VIE’s economic performance and identifying which party, if any, has power over those activities. In general, the party that
makes the most significant decisions affecting the VIE is determined to have the power to direct the activities of the VIE. To assess
whether the Company has the obligation to absorb the losses or the right to receive benefits that could potentially be significant to
the VIE, the Company considers all of its economic interests, including debt and equity interests, and any other variable interests in
the VIE. If the Company determines that it is the party with the power to make the most significant decisions affecting the VIE, and the
Company has an obligation to absorb the losses or the right to receive benefits that could potentially be significant to the VIE, then
the Company consolidates the VIE.
The Company analyzes its investment in Jacobi
to determine whether it is a VIE and, if so, whether the Company is the primary beneficiary in accordance with ASC 810 Consolidation.
The Company determines Jacobi is a VIE since it has insufficient equity to permit it to finance its activities without additional subordinated
financial support. In determining whether it is the primary beneficiary, the Company considers whether it has the power to direct the
activities of the VIE that most significantly impact the VIE’s economic performance. The Company also considers whether it has the
obligation to absorb losses of, or the right to receive benefits from, the VIE. The Company is not the primary beneficiary of Jacobi as
it does not have the power to direct the activities that most significantly impact the economic performance of Jacobi, due to Jacobi’
management and board of directors’ structure. As a result, the variable interest entity is not consolidated. Creditors of the Company’s
variable interest entity do not have recourse against the general credit of the Company. The Company uses the cost method to account for
its investment in Jacobi in which the Company is not deemed to be the primary beneficiary.
The Company’s investment in unconsolidated
variable interest entity is classified as cost method investment in the condensed consolidated balance sheets. The Company’s assets
and liabilities with the variable interest entity are classified as due from/to affiliates.
As of March 31, 2024 and September 30, 2023, the
carrying value of assets and liabilities recognized in the condensed consolidated balance sheets related to the Company’s interest
in the non-consolidated VIE and the Company’s maximum exposure to loss relating to non-consolidated VIE were as follows:
| |
March
31,
2024 | | |
September
30,
2023 | |
Cost method investment | |
$ | 391,217 | | |
$ | 391,217 | |
Due from affiliates | |
| - | | |
| 95,274 | |
Total VIE assets | |
$ | 391,217 | | |
$ | 486,491 | |
Maximum exposure to loss | |
$ | 391,217 | | |
$ | 486,491 | |
Intangible assets
Intangible assets consist of regulatory licenses,
which are being amortized on a straight-line method over the estimated useful life of 3 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. The Company did not record any impairment charge for the
three and six months ended March 31, 2024 and 2023 as there was no impairment indicator noted.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Revenue recognition
The Company determines revenue recognition from
contracts with customers through the following steps:
|
● |
Step 1: Identify the contract with the customer |
|
● |
Step 2: Identify the performance obligations in the contract |
|
● |
Step 3: Determine the transaction price |
|
● |
Step 4: Allocate the transaction price to the performance obligations in the contract |
|
● |
Step 5: Recognize revenue when the company satisfies a performance obligation |
Revenue
is recognized when control of the promised goods or services is transferred to the customers, in an amount that reflects the consideration
the Company expects to be entitled to in exchange for those goods or services. 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. 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. Under a GSA, the Company is contractually obligated to provide for the fulfillment software, technology, customer sales and marketing and risk management technology hardware and software solutions package to TCM. The Company provides these services, obtained from affiliate service provider FXDirect Dealer, LLC which is under common ownership, and controls the services of its service provider necessary to legally transfer of the services to TCM. Consequently, the Company is defined as the principal in the transaction. The Company, as principal, satisfies its obligation by providing ongoing service support enabling TCM to conduct its retail FX business without interruption. Upon satisfaction of its obligation, the Company recognizes revenue in the gross amount of consideration it is entitled to receive. The monthly GSA price is calculated by applying the Company’s approximately 2% mark-up to the costs of the services being provided by FXDirect Dealer, LLC. |
|
● |
Financial services to its customers. Revenue related to its financial services offerings are recognized at a point in time when service is rendered. Prepayments, if any, received from customers prior to the services being performed are recorded as advances from customers. In these cases, when the services are performed, the appropriate portion of the amount recorded as advance from customers is recognized as revenue. There are 4 distinct stages that each trade must go through to be completed and must be converted from one currency into another. Where possible, fees are taken in United States dollar (“USD”) and therefore if there is an agreed fee with the client then this will be taken on the USD leg of the transaction regardless of whether it is pre-conversion or post-conversion. The first stage is notification and there is no real opportunity for us to realize revenue at this stage. The second stage is the funding stage and it allows us to charge the agreed fee before any currency conversion, we call this pre-trade revenue. The third stage of the transaction is conversion and we are able to realize revenue in the spread between the price we pay for the conversion and the price we charge the client for the conversion. The fourth opportunity for us to realize revenue (charge our fee) is after the conversion has taken place (post-trade). |
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
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 or to digital assets |
In the following table,
revenues are disaggregated by segment for the three and six months ended March 31, 2024 and 2023:
| |
Three
Months Ended March 31, | | |
Six
Months Ended March 31, | |
Revenue Stream | |
2024 | | |
2023 | | |
2024 | | |
2023 | |
General support services | |
$ | - | | |
$ | 4,800,000 | | |
$ | 4,800,000 | | |
$ | 9,600,000 | |
Financial services | |
| 259,757 | | |
| 833,944 | | |
| 702,148 | | |
| 1,410,332 | |
Total revenues | |
$ | 259,757 | | |
$ | 5,633,944 | | |
$ | 5,502,148 | | |
$ | 11,010,332 | |
Advertising and marketing costs
All costs related to
advertising and marketing are expensed as incurred. For the three months ended March 31, 2024 and 2023, advertising and marketing costs
amounted to $20,568 and $295, respectively, which was included in operating expenses on the accompanying condensed consolidated statements
of operations and comprehensive loss. For the six months ended March 31, 2024 and 2023, advertising and marketing costs amounted to $41,586
and $49,417, respectively, which was included in operating expenses on the accompanying condensed consolidated statements of operations
and comprehensive loss.
Stock-based compensation
The Company
measures and recognizes compensation expense for all stock-based awards granted to non-employees, including stock options, based on the
grant date fair value of the award. The Company estimates the grant date fair value of each option award using the Black-Scholes option-pricing
model.
For non-employee
stock-based awards, fair value is measured based on the value of the Company’s common stock on the date that the commitment for
performance by the counterparty has been reached or the counterparty’s performance is complete. The fair value of the equity instrument
is calculated and then recognized as compensation expense over the requisite performance period.
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.
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 period 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.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
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, the functional currency of Match Financial Limited and its subsidiary, Digital
RFQ, is the British Pound (“GBP”), the functional currency of Digital RFQ’s subsidiary, DRFQ Europe UAB, is Euro, and
the functional currency of Digital RFQ’s subsidiary, DRFQ Pay North America, is CAD. 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 stockholders’ equity
is translated at historical exchange rates. Cash flows are also translated at average translation rates for the periods, therefore, amounts
reported on the statements of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheets.
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 March 31, 2024 and September 30, 2023 were translated at 0.7920 GBP and 0.8199 GBP to $1.00, respectively, which
were the exchange rates on the balance sheet dates. Asset and liability accounts at March 31, 2024 and September 30, 2023 were translated
at 0.9260 EUR and 0.9446 EUR to $1.00, respectively, which were the exchange rates on the balance sheet dates. Asset and liability accounts
at March 31, 2024 and September 30, 2023 were translated at 1.3542 CAD and 1.3591 CAD to $1.00, which was the exchange rate on the balance
sheet date. Equity accounts were stated at their historical rates. The average translation rate applied to the statement of operations
for the six months ended March 31, 2024 and 2023 was 0.7970 GBP and 0.8379 GBP to $1.00, respectively. The average translation rate applied
to the statement of operations for the six months ended March 31, 2024 and 2023 was 0.9248 EUR and 0.9559 EUR to $1.00. The average translation
rate applied to the statement of operations for the six months ended March 31, 2024 and for the period from February 18, 2023 through
March 31, 2023 was 1.3553 CAD and 1.3667 CAD to $1.00. 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 three and six months ended March 31, 2024 and 2023 consisted of net loss
and unrealized gain/loss 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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. For the three and six months ended March 31, 2024 and 2023, potentially dilutive common shares consist of the common shares
issuable upon the exercise of common stock options and warrants (using the treasury stock 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:
| |
Three
Months Ended March 31, | | |
Six
Months Ended March 31, | |
| |
2024 | | |
2023 | | |
2024 | | |
2023 | |
Options to purchase common stock | |
| 124,286 | | |
| 124,286 | | |
| 124,286 | | |
| 167,143 | |
Warrants to purchase common stock | |
| 6,701,000 | | |
| - | | |
| 6,701,000 | | |
| - | |
Potentially dilutive security | |
| 6,825,286 | | |
| 124,286 | | |
| 6,825,286 | | |
| 167,143 | |
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.
Merger
Old Nukk completed a Business Combination with
Brilliant on December 22, 2023. All references in these condensed consolidated financial statements to shares and corresponding capital
amounts and losses per share, prior to the reverse recapitalization, have been retroactively restated based on shares reflecting the exchange
ratio of 36.44532 established in the Business Combination.
Recently issued accounting pronouncements
In December 2023, the Financial Accounting Standards
Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-09, Income Taxes (Topic 740): Improvements to Income
Tax Disclosures. This guidance is intended to enhance the transparency and decision-usefulness of income tax disclosures. The amendments
in ASU 2023-09 address investor requests for enhanced income tax information primarily through changes to disclosure regarding rate reconciliation
and income taxes paid both in the U.S. and in foreign jurisdictions. ASU 2023-09 is effective for fiscal years beginning after December
15, 2024 on a prospective basis, with the option to apply the standard retrospectively. Early adoption is permitted. The company is currently
evaluating this guidance to determine the impact it may have on its condensed consolidated financial statements disclosures.
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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4 - CUSTOMER
ASSETS AND LIABILITIES
The Company
includes customer funds in the condensed consolidated balance sheets as customer custodial cash and includes these cash deposits to be
utilized for its contractual obligations to its customers as customer custodial cash liabilities in the condensed consolidated balance
sheets.
The following
table presents customers’ cash and digital positions:
| |
March
31, 2024 | | |
September
30, 2023 | |
Customer custodial cash | |
$ | 345,631 | | |
$ | 672,501 | |
Customer digital currency assets | |
| 8,100 | | |
| - | |
Total customer assets | |
$ | 353,731 | | |
$ | 672,501 | |
| |
| | | |
| | |
Customer custodial cash liabilities | |
$ | 882,152 | | |
$ | 1,443,011 | |
Customer digital currency liabilities | |
| 8,100 | | |
| - | |
Total customer liabilities | |
$ | 890,252 | | |
$ | 1,443,011 | |
The Company controls
digital assets for its customers in digital wallets and digital token identifiers necessary to access digital assets on digital asset
trading platforms. The Company maintains a record of all assets in digital wallets held on digital asset trading platforms as well as
the private keys, which are maintained on behalf of customers. The Company records the assets and liabilities, on the initial recognition
and at each reporting date, at the fair value of the digital assets which it controls for its customers. Any loss or theft would impact
the measurement of the customer digital currency assets. During the three and six months ended March 31, 2024 and 2023, no losses have
been incurred in connection with customer digital currency assets. The Company also controls the bank accounts holding the customer custodial
cash, as reflected on the accompanying condensed consolidated balance sheets.
The following table sets
forth the fair market value of customer digital currency assets, as shown in the condensed consolidated balance sheets, as customer digital
currency assets and customer digital currency liabilities, as of March 31, 2024 and September 30, 2023:
| |
March
31, 2024 | | |
September
30, 2023 | |
| |
Fair
Value | | |
Percentage
of
Total | | |
Fair
Value | | |
Percentage
of
Total | |
Stablecoin/USD Coin | |
$ | 7,526 | | |
| 92.9 | % | |
$ | - | | |
| - | |
Ethereum | |
| 574 | | |
| 7.1 | % | |
| - | | |
| - | |
Total customer digital currency assets | |
$ | 8,100 | | |
| 100.0 | % | |
$ | - | | |
| - | |
NOTE
5 – DIGITAL ASSETS
The following
table summarizes the Company’s digital asset holdings as of March 31, 2024:
Asset | | Estimated
Useful Life | | Cost | | | Impairment | | | Digital Assets | |
Bitcoin | | Indefinite | | $ | 1,674 | | | $ | - | | | $ | 1,674 | |
Ethereum | | Indefinite | | | 745 | | | | - | | | | 745 | |
Stablecoin/USD Coin | | Indefinite | | | 12,625 | | | | - | | | | 12,625 | |
Other | | Indefinite | | | 431 | | | | - | | | | 431 | |
Total | | | | $ | 15,475 | | | $ | - | | | $ | 15,475 | |
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
5 – DIGITAL ASSETS (continued)
The following
table summarizes the Company’s digital asset holdings as of September 30, 2023:
Asset | | Estimated
Useful Life | | Cost | | | Impairment | | | Digital Assets | |
Bitcoin | | Indefinite | | $ | 894 | | | $ | - | | | $ | 894 | |
Ethereum | | Indefinite | | | 709 | | | | - | | | | 709 | |
Stablecoin/USD Coin | | Indefinite | | | 284 | | | | - | | | | 284 | |
Other | | Indefinite | | | 86 | | | | - | | | | 86 | |
Total | | | | $ | 1,973 | | | $ | - | | | $ | 1,973 | |
The Company recorded impairment expense of $0
and $133 for the three months ended March 31, 2024 and 2023, respectively, which was included in other general and administrative expenses
on the accompanying condensed consolidated statements of operations and comprehensive loss. The Company recorded impairment expense of
$0 and $7,743 for the six months ended March 31, 2024 and 2023, respectively, which was included in other general and administrative expenses
on the accompanying condensed consolidated statements of operations and comprehensive loss.
NOTE 6– LOAN
PAYABLE
In November
2023, the Company entered into a loan agreement with a third party. Pursuant to the loan agreement, the Company borrowed $50,000 from
the third party. The loan bore a fixed interest rate of 0% per annum and was payable on demand.
In January
2024, this loan was repaid in full.
NOTE 7– ACCRUED
LIABILITIES AND OTHER PAYABLES
At March 31, 2024 and September
30, 2023, accrued liabilities and other payables consisted of the following:
| |
March
31,
2024 | | |
September
30,
2023 | |
Unearned revenue | |
$ | 156,958 | | |
$ | 151,617 | |
Others | |
| 11,759 | | |
| 18,255 | |
Total | |
$ | 168,717 | | |
$ | 169,872 | |
NOTE 8 – SHARE CAPITAL
Common shares issued for services
During the six months ended March 31, 2024, the
Company issued a total of 627,997 shares of its common stock for services rendered. These shares were valued at $2,765,601, the fair market
values on the grant dates using the reported closing share prices on the dates of grant, and the Company recorded stock-based compensation
expense of $2,765,601 for the six months ended March 31, 2024.
Common
shares issued for related party debts conversion
On December
19, 2023, the Company and FXDIRECT, a related party, entered into a Debt Conversion Agreement pursuant to which the outstanding amount
of $2,727,061 was converted into 757,678 shares of common stock of the Company. The fair market value of the shares issued
exceeded the total amount of the debt converted of $2,727,061 by $3,900,255 which was treated as a distribution transaction
due to FXDIRECT’s relationship with the Company.
On December
19, 2023, the Company and Emil Assentato, the Company’s former chief executive officer and chairman, entered into a Debt Conversion
Agreement pursuant to which the outstanding principal amount of $270,000 and unpaid interest of $563 were converted into 70,129 shares
of common stock of the Company (see Note 9 - Loan payable – related parties and interest payable – related parties).
The fair market value of the shares issued exceeded the total amount of the debt converted of $270,563 by $342,847 which was
treated as a distribution transaction due to Mr. Assentato’s relationship with the Company.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 8 – SHARE CAPITAL (continued)
Options
The following
table summarizes the shares of the Company’s common stock issuable upon exercise of options outstanding at March 31, 2024:
Options Outstanding | | | Options Exercisable | |
Range of
Exercise
Price | | | Number
Outstanding at
March 31,
2024 | | | Weighted Average
Remaining
Contractual Life
(Years) | | | Weighted
Average
Exercise
Price | | | Number
Exercisable at
March 31,
2024 | | | Weighted
Average
Exercise Price | |
$ | 3.15 – 15.75 | | | | 95,715 | | | | 2.76 | | | $ | 4.44 | | | | 64,286 | | | $ | 4.51 | |
| 87.50 | | | | 28,571 | | | | 2.47 | | | | 87.50 | | | | 28,571 | | | | 87.50 | |
$ | 3.15 – 87.50 | | | | 124,286 | | | | 2.69 | | | $ | 23.53 | | | | 92,857 | | | $ | 30.05 | |
Stock option activities
for the six months ended March 31, 2024 were as follows:
| |
Number
of
Options | | |
Weighted
Average
Exercise
Price | |
Outstanding at September 30, 2023 | |
| 124,286 | | |
$ | 23.53 | |
Granted | |
| - | | |
| - | |
Outstanding at March 31, 2024 | |
| 124,286 | | |
$ | 23.53 | |
Options exercisable at March 31, 2024 | |
| 92,857 | | |
$ | 30.05 | |
Options expected to vest | |
| 31,429 | | |
$ | 4.30 | |
The aggregate intrinsic value of both stock options
outstanding and stock options exercisable at March 31, 2024 was $0.
For the
three months ended March 31, 2024 and 2023, stock-based compensation expense associated with stock options granted amounted to $74,668 and
$74,667, respectively, which was recorded as professional fees on the accompanying condensed consolidated statements of operations and
comprehensive loss.
For the
six months ended March 31, 2024 and 2023, stock-based compensation expense associated with stock options granted amounted to $149,335 and
$221,543, respectively, which was recorded as professional fees on the accompanying condensed consolidated statements of operations and
comprehensive loss.
A summary of the status
of the Company’s nonvested stock options granted as of March 31, 2024 and changes during the six months ended March 31, 2024 is
presented below:
| |
Number
of
Options | | |
Weighted
Average
Exercise
Price | |
Nonvested at September 30, 2023 | |
| 34,286 | | |
$ | 5.25 | |
Vested | |
| (2,857 | ) | |
| (15.75 | ) |
Nonvested at March 31, 2024 | |
| 31,429 | | |
$ | 4.30 | |
Warrants
As a result of the Business Combination which
was completed on December 22, 2023, 6,701,000 warrants of Brilliant were converted into 6,701,000 warrants of the
Combined Company.
There was no stock warrant activity during the
period from Closing Date to March 31, 2024.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 8 – SHARE CAPITAL (continued)
The following
table summarizes the shares of the Company’s common stock issuable upon exercise of warrants outstanding at March 31, 2024:
Warrants Outstanding | | | Warrants Exercisable | |
Exercise
Price | | | Number
Outstanding at March 31, 2024 | | | Remaining
Contractual Life
(Years) | | | Number
Exercisable at March 31, 2024 | | | Exercise Price | |
$ | 11.5 | | | | 6,701,000 | | | | 4.74 | | | | 6,701,000 | | | $ | 11.5 | |
The aggregate intrinsic value of stock warrants
outstanding and stock warrants exercisable at March 31, 2024 was $0.
NOTE 9 – RELATED PARTY TRANSACTIONS
Services
provided by related parties
From time
to time, Oliver Worsley, a shareholder of the Company, provides consulting services to the Company. As compensation for professional
services provided, the Company recognized consulting expenses of $8,938 and $14,506 for the three months ended March 31, 2024
and 2023, respectively, which have been included in professional fees on the accompanying condensed consolidated statements of operations
and comprehensive loss. As compensation for professional services provided, the Company recognized consulting expenses of $23,839 and
$25,063 for the six months ended March 31, 2024 and 2023, respectively, which have been included in professional fees on the accompanying
condensed consolidated statements of operations and comprehensive loss.
From time
to time, Craig Vallis, a shareholder of the Company, provides consulting services to the Company. As compensation for professional services
provided, the Company recognized consulting expenses of $14,080 and $51,708 for the three months ended March 31, 2024 and
2023, respectively, which have been included in professional fees on the accompanying condensed consolidated statements of operations
and comprehensive loss. As compensation for professional services provided, the Company recognized consulting expenses of $40,778 and
$73,995 for the six months ended March 31, 2024 and 2023, respectively, which have been included in professional fees on the accompanying
condensed consolidated statements of operations and comprehensive loss.
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. Due to non-payment by TCM under the GSA,
the Company had advised TCM that the GSA has been terminated effective January 1, 2024.
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. Effective
May 1, 2023, the minimum amount payable by the Company to FXDIRECT for services was reduced from $1,575,000 per month to $1,550,000 per
month.
Both of the above entities
are affiliates through common ownership.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 9 – RELATED PARTY TRANSACTIONS (continued)
During the three and six months ended March 31, 2024
and 2023, general support services provided to the related party, which was recorded as revenue – general support services - related
party on the accompanying condensed consolidated statements of operations and comprehensive loss were as follows:
Revenue from related party and
cost of revenue from related party (continued)
| |
Three Months Ended March 31, | | |
Six Months Ended March 31, | |
| |
2024 | | |
2023 | | |
2024 | | |
2023 | |
Service provided to: | |
| | |
| | |
| | |
| |
TCM | |
$ | - | | |
$ | 4,800,000 | | |
$ | 4,800,000 | | |
$ | 9,600,000 | |
| |
$ | - | | |
$ | 4,800,000 | | |
$ | 4,800,000 | | |
$ | 9,600,000 | |
During
the three and six months ended March 31, 2024 and 2023, services received from the related party, which was recorded as cost of revenue
– general support services - related party on the accompanying condensed consolidated statements of operations and comprehensive
loss were as follows:
| |
Three
Months Ended
March 31, | | |
Six
Months Ended
March 31, | |
| |
2024 | | |
2023 | | |
2024 | | |
2023 | |
Service received from: | |
| | |
| | |
| | |
| |
FXDIRECT | |
$ | - | | |
$ | 4,725,000 | | |
$ | 4,650,000 | | |
$ | 9,450,000 | |
| |
$ | - | | |
$ | 4,725,000 | | |
$ | 4,650,000 | | |
$ | 9,450,000 | |
During the three months ended
March 31, 2024 and 2023, Digital RFQ earned revenue from related parties in the amount of $40,454 and $53,772, respectively, which
was included in revenue – financial services on the accompanying condensed consolidated statements of operations and comprehensive
loss.
During the six months ended
March 31, 2024 and 2023, Digital RFQ earned revenue from related parties in the amount of $61,328 and $78,516, respectively, which
was included in revenue – financial services on the accompanying condensed consolidated statements of operations and comprehensive
loss.
Due from affiliates
At March 31,
2024 and September 30, 2023, due from affiliates consisted of the following:
| |
March 31,
2024 | | |
September 30,
2023 | |
Jacobi | |
$ | - | | |
$ | 95,274 | |
FXDD Mauritius (1) | |
| 4,498 | | |
| 1,500 | |
TCM | |
| 9,496 | | |
| 1,942,500 | |
Craig Vallis | |
| 11,810 | | |
| - | |
Jamal Khurshid (2) | |
| 24,290 | | |
| - | |
Total | |
$ | 50,094 | | |
$ | 2,039,274 | |
The balances due from Jacobi, FXDD Mauritius, TCM,
Craig Vallis, and Jamal Khurshid represent monies that the Company paid on behalf of Jacobi, FXDD Mauritius, TCM, Craig Vallis, and Jamal
Khurshid. The balance due from TCM as of September 30, 2023 also included unsettled funds due related to the General Service Agreement.
Management believes that the affiliates’ receivables
are fully collectable. Therefore, no allowance for doubtful account is deemed to be required on its due from affiliates at March 31, 2024
and September 30, 2023.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 9 – RELATED PARTY TRANSACTIONS
(continued)
Due to affiliates
At March 31,
2024 and September 30, 2023, due to affiliates consisted of the following:
| |
March 31,
2024 | | |
September 30,
2023 | |
Forexware LLC (1) | |
$ | 1,208,704 | | |
$ | 1,211,778 | |
FXDIRECT (2) | |
| 6,269,258 | | |
| 5,064,428 | |
Currency Mountain Holdings Bermuda, Limited (“CMH”) | |
| 42,000 | | |
| 42,000 | |
FXDD Trading (1) | |
| 410,755 | | |
| 396,793 | |
Markets Direct Payments (1) | |
| 2,399 | | |
| 2,317 | |
Match Fintech Limited (3) | |
| 51,725 | | |
| 91,433 | |
Total | |
$ | 7,984,841 | | |
$ | 6,808,749 | |
The balances due to affiliates represent expenses
paid by Forexware LLC, FXDIRECT, FXDD Trading, Markets Direct Payments, and Match Fintech Limited 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.
Amounts due to affiliates are short-term in nature,
non-interest bearing, unsecured and repayable on demand.
Customer digital currency assets and liabilities
– related parties
At March 31, 2024 and September
30, 2023, related parties’ digital currency, which was controlled by Digital RFQ, amounted to $1,422 and $0, respectively, which
was included in customer digital currency assets and liabilities on the accompanying condensed consolidated balance sheets.
Note receivable –
related parties
Promissory note
The Company originated a note receivable to a shareholder
in the principal amount of $35,000 on September 1, 2022. The note matured with respect to $17,500 on March 1, 2023 and with
respect to $17,500 on September 1, 2023. The note bears a fixed interest rate of 5.0% per annum. The principal was funded with
cash custodial money. Currently, this loan is in default.
For the three
months ended March 31, 2024 and 2023, the interest income related to this note amounted to $475 and $455, respectively, and
has been included in other (expense) income: other income on the accompanying condensed consolidated statements of operations and comprehensive
loss.
For the six
months ended March 31, 2024 and 2023, the interest income related to this note amounted to $940 and $894, respectively, and
has been included in other (expense) income: other income on the accompanying condensed consolidated statements of operations and comprehensive
loss.
As of March 31, 2024 and
September 30, 2023, the outstanding interest balance related to this note was $2,995 and $1,980, respectively, and was included in
other current assets on the accompanying condensed consolidated balance sheets.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 9 – RELATED PARTY TRANSACTIONS
(continued)
Note receivable –
related parties (continued)
Line of credit
On July 31, 2023, the Company entered into a Credit
Deed (the “Credit Deed”) providing a $1 million line of credit (the “Line of Credit”) to a related party
company which is a client of Digital RFQ. The Line of Credit allows the related party company to request loans thereunder until amount
reaches $1 million. Loan drawn under the Line of Credit bears interest at an annual rate of 8% and will be receivable in installments
commencing on December 31, 2023. The Line of Credit was collateralized by 133,514 shares of common stock of the Company.
In the six months
ended March 31, 2024, activity recorded for the Line of Credit is summarized in the following table:
Outstanding principal under the Line of Credit at September 30, 2023 | |
$ | 127,820 | |
Repayment of Line of Credit | |
| (127,820 | ) |
Outstanding principal under the Line of Credit at March 31, 2024 | |
$ | - | |
During the six months ended
March 31, 2024, accrued and unpaid interest related to the line of credit with the amount of approximately $10,000 was written off
after exhaustive efforts at collection with a corresponding debit to the allowance for doubtful account. The writes-off of interest receivable
against the allowance for doubtful accounts only impact the balance sheet accounts. At March 31, 2024 and September 30, 2023, the
Company has established, based on a review of its outstanding interest receivable, an allowance for doubtful account in the amounts of
$0 and $10,199, respectively, for the receivable.
Loan payable
– related parties and interest payable – related parties
On July 19,
2023, Digital RFQ issued a promissory note (the “July 2023 Loan”) in the principal amount of $75,619 to Jamal Khurshid,
the Company’s chief executive officer and director, in consideration of cash proceeds in the amount of $75,619. The July 2023 Loan
bore interest of 5.0% per annum and was due and payable on July 19, 2026. On November 24, 2023, Digital RFQ borrowed additional GBP 4,000 from
Jamal Khurshid. On November 27, 2023, all outstanding balances of principal and accrued interest related to the borrowings from Janal
Khurshid were repaid in full.
On August 15,
2023, Digital RFQ issued a promissory note (the “August 2023 Loan”) in the principal amount of $75,000 to Emil Assentato,
the Company’s former chief executive officer and chairman, in consideration of cash proceeds in the amount of $75,000. The August
2023 Loan bears interest of 5.0% per annum and is due and payable on August 15, 2026. In January 2024, the Company repaid $50,000.
As of March 31, 2024, the outstanding principal balance was $25,000.
On September
18, 2023, the Company issued a promissory note (the “September 2023 Loan”) in the principal amount of $270,000 to Emil
Assentato, the Company’s former chief executive officer and chairman, in consideration of cash proceeds in the amount of $270,000.
The September 2023 Loan bore interest of 5.0% per annum and was due and payable on September 18, 2026. In December 2023, the September
2023 Loan principal of $270,000 and related accrued interest of $563 were converted into 70,129 shares of common stock
of the Company (See Note 8 – Common shares issued for related party debts conversion).
On March 6, 2024, Digital
RFQ entered into a facility agreement with Craig Vallis, a shareholder of the Company, providing Digital RFQ with up to $500,000 loan.
The facility allows Digital RFQ to request loans thereunder and to use the proceeds of such loans for working capital and operating expense
purposes. Loans drawn under the facility bear interest at a monthly rate of 4%. This loan will be repaid in according to these installments
set out in the facility agreement with the last installment due on July 31, 2024. As of March 31, 2024, the outstanding principal balance
was $416,667. As of the date of this report, this loan is still outstanding.
On March 12, 2024, Digital RFQ entered into a
loan agreement with Oliver Worsley, a shareholder of the Company, providing Digital RFQ with up to GBP 395,000 (approximately
$499,000) loan. The loan agreement allows Digital RFQ to request loans thereunder and to use the proceeds of such loans for working
capital and operating expense purposes. Loans drawn under the loan agreement bear interest at an annual rate of 10%. This loan is
unsecured and is due and payable on March 31, 2025. As of March 31, 2024, the outstanding principal balance was $315,657.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 9 – RELATED PARTY TRANSACTIONS
(continued)
Loan payable
– related parties and interest payable – related parties (continued)
During the six
months ended March 31, 2024, the Company issued a few of promissory notes in the aggregate principal of $916,000 to Emil Assentato
and Max Q, in consideration of cash proceeds in the amount of $916,000. These loans bear interest of 5.0% per annum and each individual
loan will be due and payable three years from the date of issuance. As of March 31, 2024 and September 30, 2023, the outstanding principal
balance totaled $916,000 and $420,619, respectively.
For the three
months ended March 31, 2024, the interest expense related to related parties’ loans amounted to $10,348 and has been reflected
as interest expense – related parties on the accompanying condensed consolidated statements of operations and comprehensive loss.
For the six months ended March 31, 2024, the interest expense related to related parties’ loans amounted to $17,770 and has
been reflected as interest expense – related parties on the accompanying condensed consolidated statements of operations and comprehensive
loss.
As of March
31, 2024 and September 30, 2023, the related accrued and unpaid interest for related parties’ loans was $17,601 and $1,771,
respectively, and has been reflected as interest payable – related parties on the accompanying condensed consolidated balance sheets.
Letter agreement
with ClearThink
Nukkleus was 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.
Craig Marshak, a former member of the Board of Directors
of the Company, was a managing director of ClearThink, a transaction advisory firm. ClearThink had been engaged by the Company to serve
as the exclusive transactional financial advisor, and finder with respect to the Business Combination, to advise the Company with respect
to the Business Combination. The letter agreement was terminated on October 27, 2023. The Company paid ClearThink $210,000 as
of the date of closing of the Business Combination.
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 three and six
months ended March 31, 2024 and 2023.
| |
Three Months Ended
March 31, | | |
Six Months Ended
March 31, | |
Customer | |
2024 | | |
2023 | | |
2024 | | |
2023 | |
A – related party | |
| * | | |
| 85.2 | % | |
| 87.2 | % | |
| 87.2 | % |
B | |
| 28.7 | % | |
| * | | |
| * | | |
| * | |
C | |
| 23.8 | % | |
| * | | |
| * | | |
| * | |
D | |
| 10.8 | % | |
| * | | |
| * | | |
| * | |
Three related party customers,
whose outstanding receivables accounted for 10% or more of the Company’s total outstanding accounts receivable and due from
affiliates at March 31, 2024, accounted for 86.6% of the Company’s total outstanding accounts receivable and due from affiliates
at March 31, 2024.
One related party customer,
whose outstanding receivable accounted for 10% or more of the Company’s total outstanding accounts receivable and due from
affiliates at September 30, 2023, accounted for 95.2% of the Company’s total outstanding accounts receivable and due from affiliates
at September 30, 2023.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 10 – CONCENTRATIONS
(continued)
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 three and six months ended March 31, 2024 and
2023.
| |
Three Months Ended
March 31, | | |
Six Months Ended
March 31, | |
Supplier | |
2024 | | |
2023 | | |
2024 | | |
2023 | |
A – related party | |
| * | | |
| 86.1 | % | |
| 95.9 | % | |
| 86.6 | % |
B | |
| 57.1 | % | |
| * | | |
| * | | |
| * | |
C | |
| 22.9 | % | |
| * | | |
| * | | |
| * | |
Two
related party suppliers, whose outstanding payables accounted for 10% or more of the Company’s total outstanding accounts payable,
accrued liabilities and other payables, and due to affiliates at March 31, 2024, accounted for 73.5% of the Company’s total
outstanding accounts payable, accrued liabilities and other payables, and due to affiliates at March 31, 2024.
Two related
party suppliers, whose outstanding payables accounted for 10% or more of the Company’s total outstanding accounts payable,
accrued liabilities and other payables, and due to affiliates at September 30, 2023, accounted for 81.7% of the Company’s total
outstanding accounts payable, accrued liabilities and other payables, and due to affiliates at September 30, 2023.
NOTE 11 – SEGMENT
INFORMATION
For the three and six months ended March 31, 2024
and 2023, 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 or
to digital assets. 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.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 11 – SEGMENT
INFORMATION (continued)
Information with respect to these reportable business
segments for the three and six months ended March 31, 2024 and 2023 was as follows:
| |
Three
Months Ended March 31, | | |
Six
Months Ended
March 31, | |
| |
2024 | | |
2023 | | |
2024 | | |
2023 | |
Revenues | |
| | |
| | |
| | |
| |
General support services | |
$ | - | | |
$ | 4,800,000 | | |
$ | 4,800,000 | | |
$ | 9,600,000 | |
Financial services | |
| 259,757 | | |
| 833,944 | | |
| 702,148 | | |
| 1,410,332 | |
Total | |
| 259,757 | | |
| 5,633,944 | | |
| 5,502,148 | | |
| 11,010,332 | |
| |
| | | |
| | | |
| | | |
| | |
Costs of revenues | |
| | | |
| | | |
| | | |
| | |
General support services | |
| - | | |
| 4,725,000 | | |
| 4,650,000 | | |
| 9,450,000 | |
Financial services | |
| 63,196 | | |
| 760,982 | | |
| 196,887 | | |
| 1,467,243 | |
Total | |
| 63,196 | | |
| 5,485,982 | | |
| 4,846,887 | | |
| 10,917,243 | |
| |
| | | |
| | | |
| | | |
| | |
Gross profit (loss) | |
| | | |
| | | |
| | | |
| | |
General support services | |
| - | | |
| 75,000 | | |
| 150,000 | | |
| 150,000 | |
Financial services | |
| 196,561 | | |
| 72,962 | | |
| 505,261 | | |
| (56,911 | ) |
Total | |
| 196,561 | | |
| 147,962 | | |
| 655,261 | | |
| 93,089 | |
| |
| | | |
| | | |
| | | |
| | |
Operating expenses | |
| | | |
| | | |
| | | |
| | |
Financial services | |
| 536,177 | | |
| 543,688 | | |
| 994,810 | | |
| 1,037,727 | |
Corporate/Other | |
| 2,080,233 | | |
| 410,638 | | |
| 11,027,529 | | |
| 998,221 | |
Total | |
| 2,616,410 | | |
| 954,326 | | |
| 12,022,339 | | |
| 2,035,948 | |
| |
| | | |
| | | |
| | | |
| | |
Other income (expense) | |
| | | |
| | | |
| | | |
| | |
Financial services | |
| 457 | | |
| 715 | | |
| 25,453 | | |
| 3,288 | |
Corporate/Other | |
| (10,025 | ) | |
| - | | |
| (15,887 | ) | |
| - | |
Total | |
| (9,568 | ) | |
| 715 | | |
| 9,566 | | |
| 3,288 | |
| |
| | | |
| | | |
| | | |
| | |
Net income (loss) | |
| | | |
| | | |
| | | |
| | |
General support services | |
| - | | |
| 75,000 | | |
| 150,000 | | |
| 150,000 | |
Financial services | |
| (339,159 | ) | |
| (470,011 | ) | |
| (464,096 | ) | |
| (1,091,350 | ) |
Corporate/Other | |
| (2,090,258 | ) | |
| (410,638 | ) | |
| (11,043,416 | ) | |
| (998,221 | ) |
Total | |
| (2,429,417 | ) | |
| (805,649 | ) | |
| (11,357,512 | ) | |
| (1,939,571 | ) |
| |
| | | |
| | | |
| | | |
| | |
Amortization | |
| | | |
| | | |
| | | |
| | |
Financial services | |
| 3,483 | | |
| 591,954 | | |
| 6,932 | | |
| 1,183,910 | |
Corporate/Other | |
| - | | |
| 937 | | |
| - | | |
| 1,873 | |
Total | |
$ | 3,483 | | |
$ | 592,891 | | |
$ | 6,932 | | |
$ | 1,185,783 | |
Total assets at March 31, 2024 and September 30, 2023 | |
March 31,
2024 | | |
September 30,
2023 | |
Financial services | |
$ | 816,440 | | |
$ | 1,004,708 | |
Corporate/Other | |
| 409,212 | | |
| 2,347,917 | |
Total | |
$ | 1,225,652 | | |
$ | 3,352,625 | |
NUKKLEUS
INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 12 – COMMITMENTS AND CONTINGENCIES
Digital asset
wallets
Digital RFQ has committed to safeguard all digital
assets and digital token identifiers on behalf of its customers. As such, Digital RFQ may be liable to its customers for losses arising
from theft or loss of customer private keys. Digital RFQ has no reason to believe it will incur any expense associated with such potential
liability because (i) it has no known or historical experience of claims to use as a basis of measurement, (ii) it accounts for and continually
verifies the amount of digital assets within its control, and (iii) it engages third parties, which are digital asset trading platforms,
to provide certain custodial services, including holding its customers’ digital token identifiers, securing its customers’
digital assets, and protecting them from loss or theft, including indemnification against certain types of losses such as theft. Its third-party
digital asset trading platforms hold the digital assets in accounts in Digital RFQ’s name for the benefit of Digital RFQ’s
customers.
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 had 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. On February 21, 2024, the Company terminated the White Lion
Agreement.
NOTE 13 – SUBSEQUENT
EVENTS
The Company evaluated subsequent events and transactions
that occurred after the balance sheet date up to the date that the financial statements were issued. Based upon this review, other than
as described below, the Company did not identify any subsequent events that would have required adjustment or disclosure in the financial
statements.
Common shares issued for Settlement Agreement and
Stipulation
On May 28, 2024, the Company entered into a
Settlement Agreement and Stipulation (the “Settlement Agreement”) with Silverback Capital Corporation
(“SCC”) to settle outstanding claims owed to SCC. Pursuant to the Settlement Agreement, during the period from May 31,
2024 through July 22, 2024, the Company issued 1,889,550 shares of its common stock.
Senior Unsecured Promissory Note – June 2024
On June 11, 2024 (the “June 2024 Effective
Date”), the Company issued a Senior Unsecured Promissory Note (the “Note”) in the principal amount of $312,500 to X
Group Fund of Funds, a Michigan limited partnership (the “Lender”) in consideration of cash proceeds in the amount of $250,000.
The Note bears interest of 12.0% per annum and is due and payable six months after issuance. As an additional inducement to provide the
loan as outlined under the Note, the Company issued the Lender a Stock Purchase Warrant (“Warrant”) to acquire 1,200,000 shares
of common stock at a per share price of $0.25 for a term of five years that may be exercised on a cash or cashless basis. The Lender shall
have the right to convert the principal and interest payable under the Note into shares of common stock of the Company at a per share
conversion price of $0.25.
The Company and the Lender also entered into a Restructuring Agreement
providing that, among other items, the Lender, in its sole discretion, will have the right for a period for six months from the June 2024
Effective Date (the “Investment Period”), to lend the Company an additional $500,000 in consideration of a convertible promissory
note that will have a term of two years, bear interest at 12% and will convert into shares of common stock at a per share price of $0.25.
During the Investment Period, the Company may not incur additional debt or enter into any equity financing arrangement without the written
consent of the Lender. The Company has agreed, in its good faith, to negotiate the sale of its wholly owned subsidiary, Digital RFQ Ltd.
(“Digital”) to Digital’s current management team led by Jamie Khurshid subject to approval of the Company’s Board
of Directors and shareholders and subject to compliance with all federal, state and Nasdaq rules. The Lender provided an additional $50,000
following the initial closing, with such funds was disbursed as agreed between the Company and the Lender.
Further, during the Investment Period, the Lender,
without any additional compensation, will be exclusive advisor to the Company with respect to potential acquisitions by the Company and
the Company will use its reasonable best efforts to consider all proposals by the Lender. Any such acquisition proposal provided by the
Lender will be subject to the Lender and such party entering a definitive binding agreement and the Board of Directors and shareholders
of the Company approving such acquisition.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 13 – SUBSEQUENT
EVENTS (continued)
Senior Unsecured Promissory Note – June 2024
(continued)
In order to induce the Lender to provide the loan
contemplated pursuant to the Note, Emil Assentato entered into a Voting Agreement with the Company and the Lender agreeing to vote his
shares in support of any transaction provided by the Lender. The Company and the Lender have agreed that 100% of all loan balances including
loans payable to Emil Assentato by the Company will be recorded on the books of the Company as a bona fide debt of the Company, of which
30% of such debt will be paid within nine (9) months of the June 2024 Effective Date and the balance to be repaid within twenty-four (24)
months of the June 2024 Effective Date.
Senior Unsecured Promissory Note – August
2024
On August 1, 2024 (the “August 2024 Effective
Date”), the Company issued a Senior Unsecured Promissory Note (the “Note”) in the principal amount of $515,500 to East
Asia Technology Investments Limited (the “Lender”) in consideration of cash proceeds in the amount of $412,075. The Note bears
interest of 12.0% per annum and is due and payable six months after issuance. As an additional inducement to provide the loan as outlined
under the Note, the Company issued the Lender a Stock Purchase Warrant (“Warrant”) to acquire 1,400,000 shares of common stock
at a per share price of $0.25 for a term of five years that may be exercised on a cash or cashless basis. The Lender shall have the right
to convert the principal and interest payable under the Note into shares of common stock of the Company at a per share conversion price
of $0.25.
Common Shares Issued for Settlement of Accrued
Professional Fees
In July 2024, the Company issued 500,000 shares
of its common stock to settle accrued and unpaid professional fees.
Common Shares Issued for Services
In July 2024, the Company issued 300,000 shares
of its common stock for services rendered and to be rendered.
Item 2. Management’s Discussion and Analysis of Financial Condition
and Results of Operations.
The following discussion
and analysis of our financial condition and results of operations for the three and six months ended March 31, 2024 and 2023 should be
read in conjunction with our condensed consolidated financial statements and related notes to those condensed consolidated financial statements
that are included elsewhere in this report.
Certain matters discussed
herein are forward-looking statements. Such forward-looking statements contained in this Form 10-Q involve risks and uncertainties, including
statements as to:
|
● |
our future operating results; |
|
● |
our business prospects; |
|
● |
any contractual arrangements and relationships with third parties; |
|
● |
the dependence of our future success on the general economy; |
|
● |
any possible financings; and |
|
● |
the adequacy of our cash resources and working capital. |
Impact of COVID-19 on Our Operations
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. Due to the nature of our business, the technology
we use and offer to our customers, and our employees’ ability to work remotely, there was no material impact of COVID-19 on our
business, operations and financial results.
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,
and governmental, business and individuals’ actions that have been and continue to be taken in response to the pandemic.
Overview
We are now a financial technology company with the aim of providing
blockchain-enabled technology solutions.
Digital RFQ
Through our Digital RFQ subsidiary, we aim to provide cross-border payment
and transactions solutions to institutional investors, and offer blockchain-enabled financial services solutions to institutional
investors in a secure, compliant and globally accessible manner. The blockchain-enabled payment gateway we have developed has the
capability to deliver global cross-border transfers of fiat currencies using blockchain rails. Digital RFQ currently offers payment
and settlement services, including those utilizing blockchain networks, but does not provide custody or wallet services with respect to
digital assets, and does not hold digital assets, reducing the risks and regulatory burden on its business. In future, Digital RFQ plans
to offer a white-labelled digital bank with end-to-end digital banking solutions for international business. We are uncertain
as to when we will be able to offer these products and intend to evaluate potential strategic opportunities for DigiClear which may include
the sale of the assets or a joint venture, of which there is no guarantee. Our competitors in this product category are banks and other
financial institutions, and we intend to compete by offering faster and more reliable products using more advanced technology. Products
and services offered by Digital RFQ are distributed through our website.
Digital RFQ is regulated in the United Kingdom by the Financial Conduct
Authority and is in good standing and is and has been in the past in material compliance with the applicable laws, rules and regulations
promulgated thereby. Digital RFQ is subject to Anti Money Laundering (“AML”) and Counter Terrorist Finance (“CTF”)
regulations consistent with our authorization by the Financial Conduct Authority as an Electronic Money Directive Agent, among others.
For a discussion of the various laws and regulations Digital RFQ is subject.
The “blockchain technology” used by Digital RFQ in its
payment processing business includes only advanced-stage and fully tested, well-established and fully collateralized stablecoins
operated on the Bitcoin, Ethereum and Tron networks. However, in future, we will be free to use other blockchain networks if we determine
that they offer more sophisticated or secure technology. Based on our risk assessments, we determine the appropriate network to use for
a particular transaction or customer. We do not use stablecoins of an algorithmic nature, and in the event that we determine any particular
stablecoin presents a threat or risk to the security of our business, customers or the transactions we process, we promptly move to another
stablecoin network. We do not accept payment in digital assets and do not hold digital assets for investment or offer digital wallet services.
For a description of the risks associated with the use of blockchain technology in financial services generally, and payment processing
specifically.
DigiClear
Through DigiClear, we plan to develop technology that offers a custody
and settlement utility operating system aiming to deliver value and a high-functioning automated post-trade solution. DigiClear
aims to provide clients with the means to transfer underlying assets to alternative custodians at any time. We intend for DigiClear to
use hardware security modules to offer technology that can secure client assets to block any unwanted modification of client settlement
instructions or transfers. We expect that the transfer process that DigiClear’s technology will offer will be fully automated, monitored
and can be processed within milliseconds. We are uncertain as to when we will be able to offer these products and intend to evaluate potential
strategic opportunities for DigiClear which may include the sale of the assets or a joint venture, of which there is no guarantee. Our
competitors in this product category are banks and other financial institutions and smaller financial technology companies, and we intend
to compete by offering faster and more reliable products using more advanced technology. Assuming we offer DigiClear products and services
once commercially developed these will be distributed through our website.
Nukkleus Technology
Our Nukkleus Technology business unit offers a full-service transactions
technology and advisory business providing end-to-end transactions technology solutions. We offer an advanced transactions platform
for dealing and risk management with global liquidity and customizable leverage, where users have control over quote and liquidity strategies.
On May 24, 2016, Nukkleus Limited entered into a General Service
Agreement to provide its software, technology, customer sales and marketing and risk management technology hardware and software solutions
package to FML Malta Ltd. In December 2017, Nukkleus Limited, FML Malta Ltd. and TCM entered into a letter agreement providing that
there was an error in drafting the General Service Agreement and acknowledging that the correct counter-party to Nukkleus Limited
in the General Service Agreement is TCM. Accordingly, all references to FML Malta Ltd. have been replaced with TCM. TCM is a
private limited liability company formed under the laws of Malta. The General Service Agreement entered with TCM provides that TCM will
pay Nukkleus Limited at minimum $2,000,000 per month. On October 17, 2017, Nukkleus Limited entered into an amendment of the General
Service Agreement with TCM. In accordance with the amendment, which was effective as of October 1, 2017, the minimum amount
payable by TCM to Nukkleus Limited for services was reduced from $2,000,000 per month to $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 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, on May 24, 2016, in order to appropriately service
TCM, Nukkleus Limited entered into a General Service Agreement with FXDIRECT, which provides that Nukkleus Limited will pay FXDIRECT a
minimum of $1,975,000 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. On October 17, 2017, Nukkleus Limited entered into an amendment of the General Service
Agreement with FXDIRECT. Pursuant to the amendment, which was effective as of October 1, 2017, the minimum amount payable by
Nukkleus Limited to FXDIRECT for services was reduced from $1,975,000 per month to $1,575,000 per month. Currency Mountain Holdings LLC
is the sole shareholder of FXDIRECT. Max Q is the majority shareholder of Currency Mountain Holdings LLC. Due to non-payment by TCM
under the GSA, the Company has advised TCM that the GSA has been terminated effective January 1, 2024. The Company has historically generated
substantially most of its revenue through the services rendered under the GSA. The Company is repositioning its focus on digital assets
as the services generated under the GSA with TCM generated limited net income.
Financial Services Segment’s
Key Performance Indicators (KPI)
The
key performance indicators outlined below are our financial services segment’s metrics that provide management with the most immediate
understanding of the drivers of business performance and tracking of financial targets.
| |
Three Months Ended
March 31, | | |
Six Months Ended
March 31, | |
Performance Indicator | |
2024 | | |
2023 | | |
2024 | | |
2023 | |
Trading volume | |
$ | 33,074,974 | | |
$ | 288,802,729 | | |
$ | 102,458,858 | | |
$ | 430,670,151 | |
Financial services revenue | |
$ | 259,757 | | |
$ | 833,944 | | |
$ | 702,148 | | |
$ | 1,410,332 | |
Financial services profit (loss) | |
$ | 196,561 | | |
$ | 72,962 | | |
$ | 505,261 | | |
$ | (56,911 | ) |
Average cost per trade | |
$ | 163 | | |
$ | 588 | | |
$ | 234 | | |
$ | 672 | |
Average trade | |
| 85,465 | | |
| 223,186 | | |
| 121,975 | | |
| 197,374 | |
Number of trades | |
| 387 | | |
| 1,294 | | |
| 840 | | |
| 2,182 | |
Clients active | |
| 45 | | |
| 70 | | |
| 66 | | |
| 127 | |
Clients removed | |
| 5 | | |
| 1 | | |
| 8 | | |
| 7 | |
Gross trading margin | |
| 0.8 | % | |
| 0.3 | % | |
| 0.7 | % | |
| 0.3 | % |
Gross margin | |
| 75.7 | % | |
| 8.7 | % | |
| 72.0 | % | |
| (4.0 | )% |
Trading volume is
measured by number of trades and represents aggregate notional value of all trades.
Financial services revenue represents
the top-line revenue generated from trades, before considering the costs associated with the generation of financial services revenue.
Financial services
income (loss) is measured as financial services revenue, less costs incurred associated with delivery of our services. For the
three and six months ended March 31, 2023, cost of financial services includes amortization of intangible assets which consist of license
and banking infrastructure acquired on Match acquisition, introducing broker fees, banking, and trading fees incurred associated with
delivery of our services.
In September 2023, we
assessed our intangible assets which were solely related to the Match acquisition (which consisted of license and banking infrastructure)
for any impairment and concluded that there were indicators of impairment as of September 30, 2023. We calculated that the estimated undiscounted
cash flows related to our intangible assets were less than their carrying amounts. We have not been able to realize the financial projections
provided by Match at the time of the intangible assets purchase and have decided to impair the intangible assets to zero. Therefore, for
the three and six months ended March 31, 2024, cost of financial services only includes introducing broker fees, banking, and trading
fees incurred associated with delivery of our services. We had a financial services income for the six months ended March 31, 2024 as
compared to financial services loss for the six months ended March 31, 2023.
Average cost per trade is
driven by financial services costs. Our average cost per trade decreased measurably as costs decreased.
Active clients for
the three months ended March 31, 2024 and 2023 was 45 and 70, respectively. Active clients for the six months ended March 31, 2024
and 2023 was 66 and 127, respectively.
Gross trading margin is
a metric that measures financial services revenue to trading volume.
Critical Accounting
Policies
Use of Estimates
The preparation of the
condensed 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. Changes in these estimates and assumptions may have a material
impact on the condensed consolidated financial statements and accompanying notes. Making estimates requires management to exercise significant
judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed
at the date of the financial statements, which management considered in formulating its estimate, could change in the near term due to
one or more future confirming events. Accordingly, the actual results could differ significantly from those estimates.
Significant estimates
during the three and six months ended March 31, 2024 and 2023 include the allowance for doubtful accounts, the useful life of intangible
assets, the assumptions used in assessing impairment of long-term assets, the valuation of deferred tax assets and associated valuation
allowances, the valuation of stock-based compensation, and the fair value of customer digital currency assets and liabilities.
Customer Custodial
Cash and Customer Custodial Cash Liabilities
Customer
custodial cash represents cash and cash equivalents maintained in Company bank accounts that are controlled by the Company but held for
the benefit of customers. Customer custodial cash liabilities represent these cash deposits to be utilized for its contractual obligations
to its customers. The Company classifies the assets as current based on their purpose and availability to fulfill the Company’s
direct obligations to its customers.
Customer Digital
Currency Assets and Liabilities
At certain times, Digital
RFQ’s customers’ funds that Digital RFQ uses to make payments on behalf of its customers, remain in the form of digital assets
in its customers’ wallets at its digital asset trading platforms awaiting final conversion and/or transfer to the customer’s
payment final destination. These indirectly held digital assets, may consist of USDT (Stablecoin), Bitcoin, and Ethereum (collectively,
“Customer digital currency assets”). Digital RFQ maintains the internal recordkeeping of its customer digital currency assets,
including the amount and type of digital asset owned by each of its customers.
Digital RFQ has control of the private keys and
knows the balances of all wallets with its digital asset trading platforms in order to be able to successfully carry out the movement
of digital assets for its client payment instruction. As part of its customer payment instruction, Digital RFQ can execute withdrawals
on the wallets in its digital asset trading platforms.
The Company has determined
that the Company has control of the customer digital currency assets and records these assets on its balance sheet with a corresponding
liability. The Company recognizes customer digital currency liabilities and corresponding customer digital currency assets, on initial
recognition and at each reporting date, at fair value of the customer digital currency assets. Subsequent changes in fair value are adjusted
to the carrying amount of these customer digital currency assets, with changes in fair value recorded in other general and administrative
expense in the condensed consolidated statements of operations and comprehensive loss.
Any
loss, theft, or other misuse would impact the measurement of customer digital currency assets. The Company classifies the customer digital
currency assets as current based on their purpose and availability to fulfill the Company’s direct obligations to its customers.
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 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. Revenue is recorded at gross as the Company is deemed to be a principal in the
transactions. |
| ● | Financial services to its customers. Revenue related to its financial
services offerings are recognized at a point in time when service is rendered. |
Stock-based Compensation
The Company measures
and recognizes compensation expense for all stock-based awards granted to non-employees, including stock options, based on the grant date
fair value of the award. The Company estimates the grant date fair value of each option award using the Black-Scholes option-pricing model.
For non-employee stock-based
awards, fair value is measured based on the value of the Company’s common stock on the date that the commitment for performance
by the counterparty has been reached or the counterparty’s performance is complete. The fair value of the equity instrument is calculated
and then recognized as compensation expense over the requisite performance period.
Results of Operations
Summary of Key Results
For
the Three and Six Months Ended March 31, 2024 Versus the Three and Six Months Ended March 31, 2023
Revenues
For the three
months ended March 31, 2024, we had revenue from general support services rendered to TCM under a GSA of $0, as compared to
$4,800,000 for the three months ended March 31, 2023, a decrease of $4,800,000, or 100.0%. For the six months ended March 31, 2024,
we had revenue from general support services rendered to TCM under a GSA of $4,800,000, as compared to $9,600,000 for the six months
ended March 31, 2023, a decrease of $4,800,000, or 50.0%. Due to non-payment by TCM under the GSA, the Company had advised TCM that
the GSA has been terminated effective January 1, 2024. The Company has historically generated substantially most of its revenue
through the services rendered under the GSA to TCM, the sole customer in our general support services segment. We did not have any
other customers in the three months ended March 31, 2024. We do not expect any revenue from general support services until we are
successful in retaining other customers.
For the three months
ended March 31, 2024, we had revenue from financial services of $259,757, as compared to $833,944 for the three months ended March 31,
2023, a decrease of $574,187, or 68.9%. For the six months ended March 31, 2024, we had revenue from financial services of $702,148, as
compared to $1,410,332 for the six months ended March 31, 2023, a decrease of $708,184, or 50.2%. The decrease was primarily attributable
to the closure of our primary USD Banking rails when Signature and Silvergate closed in March 2023. We expect that our revenue from financial
services will remain at its current quarterly level with minimal increase in the near future.
Costs of Revenues
For
the three months ended March 31, 2024, our cost of general support services, which represented amount incurred for services rendered by
FXDIRECT under a GSA, amounted to $0, as compared to $4,725,000 for the three months ended March 31, 2023, a decrease of $4,725,000, or
100.0%. For the six months ended March 31, 2024, our cost of general support services, which represented amount incurred for services
rendered by FXDIRECT under a GSA, amounted to $4,650,000, as compared to $9,450,000 for the six months ended March 31, 2023, a decrease
of $4,800,000, or 50.8%. The decrease was attributable to the decrease in our revenue from general support services,
and, effective May 1, 2023, the amount payable by us to FXDIRECT for services under a GSA was reduced from $1,575,000 per month to $1,550,000
per month.
For the three and six
months ended March 31, 2023, cost of financial services includes amortization of intangible assets which consist of license and banking
infrastructure acquired on Match acquisition, introducing broker fees, banking, and trading fees incurred associated with delivery of
our services.
In September 2023, we
assessed our intangible assets which were solely related to the Match acquisition (which consisted of license and banking infrastructure)
for any impairment and concluded that there were indicators of impairment as of September 30, 2023. We calculated that the estimated undiscounted
cash flows related to our intangible assets were less than their carrying amounts. We have not been able to realize the financial projections
provided by Match at the time of the intangible assets purchase and have decided to impair the intangible assets to zero. Therefore, for
the three and six months ended March 31, 2024, cost of financial services only includes introducing broker fees, banking, and trading
fees incurred associated with delivery of our services.
For the three months
ended March 31, 2024, cost of financial services amounted to $63,196, as compared to $760,982 for the three months ended March 31, 2023,
a decrease of $697,786, or 91.7%. For the six months ended March 31, 2024, cost of financial services amounted to $196,887, as compared
to $1,467,243 for the six months ended March 31, 2023, a decrease of $1,270,356, or 86.6%. The significant decrease was primarily
attributable to decreased amount of amortization of intangible assets which consist of license and banking infrastructure acquired on
Match acquisition in the three and six months ended March 31, 2024.
Gross Profit (Loss)
Our gross profit from
general support services for the three months ended March 31, 2024 was $0, as compared to $75,000 for the three months ended March 31,
2023, a decrease of $75,000, or 100.0%. Our gross profit from general support services for both the six months ended March 31, 2024 and
2023 was $150,000. Gross margin increased to 3.1% for the six months ended March 31, 2024 from 1.6% for the six months ended March 31,
2023. The increase in our gross margin for the general support services segment for the six months ended March 31, 2024 as compared to
the corresponding period of 2023 was attributed to the decrease in our cost of general support services as described above.
Gross profit from financial
services for the three months ended March 31, 2024 was $196,561, as compared to $72,962 for the three months ended March 31, 2023, an
increase of $123,599, or 169.4%. Gross margin increased to 75.7% for the three months ended March 31, 2024 from 8.7% for the three months
ended March 31, 2023. Gross profit from financial services for the six months ended March 31, 2024 was $505,261, as compared to gross
loss of $56,911 for the six months ended March 31, 2023, a decrease of $562,172, or 987.8%. Gross margin increased to 72.0% for the six
months ended March 31, 2024 from (4.0)% for the six months ended March 31, 2023. The increase in our gross margin for the financial services
segment for the three and six months ended March 31, 2024 as compared to the comparable periods of 2023 was primarily attributed to the
decrease in cost for financial services driven by decreased amount of amortization of intangible assets which consist of license and banking
infrastructure acquired on Match acquisition. We expect that our gross margin for the financial services segment will remain in its current
quarterly level with minimal increase in the near future.
Operating Expenses
Operating
expenses consisted of advertising and marketing, professional fees, compensation and related benefits, bad debt expense, and
other general and administrative expenses.
Advertising and marketing
For the three months
ended March 31, 2024, advertising and marketing expense increased by $20,273, or 6,872.2%, as compared to the three months ended March
31, 2023. The increase was primarily attributable to our increased advertising and marketing activities in the three months ended March
31, 2024. For the six months ended March 31, 2024, advertising and marketing expense decreased by $7,831, or 15.8%, as compared to the
six months ended March 31, 2023. The decrease was primarily attributable to our decreased advertising and marketing activities in the
six months ended March 31, 2024. We expect that our advertising and marketing expense will remain in its current quarterly level with
minimal increase in the near future.
Professional fees
Professional
fees primarily consisted of audit fees, legal service fees, advisory fees, and consulting fees. For the three months ended March
31, 2024, professional fees increased by $1,472,071, or 259.9%, as compared to the three months ended March 31, 2023. The increase was
primarily attributable to a significant increase in advisory service fees of approximately $1,348,000 due to common stock granted to advisor
of $750,000 and the increase of approximately $598,000 mainly driven by increased advisory service providers, and an increase in legal
service fee of approximately $276,000 resulting from the increase in legal service providers, offset by a decrease in consulting fees
of approximately $155,000 mainly due to the decrease in consulting service providers. For the six months ended March 31, 2024, professional
fees increased by $3,657,078, or 294.1%, as compared to the six months ended March 31, 2023. The increase was primarily attributable to
a significant increase in advisory service fees of approximately $3,641,000 due to common stock granted to advisors of approximately $2,766,000
and the increase of approximately $875,000 mainly driven by increased advisory service providers, and an increase in other miscellaneous
items of approximately $16,000. We expect that our professional fees will decrease in the near future.
Compensation and related
benefits
For
the three months ended March 31, 2024, our compensation and related benefits increased by $72,316, or 36.6%, as compared to the three
months ended March 31, 2023. For the six months ended March 31, 2024, our compensation and related benefits increased by $165,892, or
46.4%, as compared to the six months ended March 31, 2023. The increase was mainly attributable to increased management in our financial
services segment. We expect that our compensation and related benefits will remain in its current quarterly level with minimal increase
in the near future.
Bad debt expense
For the three months ended March 31, 2024 and 2023, our did not record
any allowance for doubtful account. For the six months ended March 31, 2024, our had bad debt expense of $6,145,942. In December 2023,
due to non-payment by TCM under the GSA, we had advised TCM that the GSA has been terminated effective January 1, 2024. We made an allowance
for doubtful account for the related party’s receivable in the amount of $6,145,942 in December 2023. We did not record any
allowance for doubtful account for the six months ended March 31, 2023.
Other general and
administrative expenses
Other general and administrative
expenses primarily consisted of rent, filing fees, amortization of intangible assets, travel and entertainment, and other miscellaneous
items.
For the three months ended March 31, 2024, total other general and
administrative expenses increased by $97,424, or 51.2%, as compared to the three months ended March 31, 2023. The increase was mainly
due to an increase in filing fees of approximately $191,000 resulting from our merger completed in December 2023, offset by a decrease
in amortization of intangible assets of approximately $63,000 since we impaired our intangible assets acquired on Match acquisition in
September 2023, and a decrease in other miscellaneous items of approximately $31,000 driven by our efforts at stricter controls on corporate
expenditure. For the six months ended March 31, 2024, total other general and administrative expenses increased by $25,310,, or 6.6%,
as compared to the six months ended March 31, 2023. The increase was mainly due to an increase in filing fees of approximately $244,000
resulting from our merger completed in December 2023, offset by a decrease in amortization of intangible assets of approximately $126,000
since we impaired our intangible assets acquired on Match acquisition in September 2023, and a decrease in other miscellaneous items of
approximately $93,000 driven by our efforts at stricter controls on corporate expenditure. We expect that other general and administrative
expenses will remain in its current quarterly level with minimal decrease in the near future.
Other (Expense) Income
Other (expense) income
includes related parties’ interest expense and other miscellaneous income.
Other expense, net, totaled
$9,568 for the three months ended March 31, 2024, as compared to other income, net, of $715 for the three months ended March 31, 2023,
a decrease of $10,283, or 1,438.2%, which was mainly attributable to an increase in related parties’ interest expense of approximately
$10,000.
Other income, net, totaled
$9,566 for the six months ended March 31, 2024, as compared to $3,288 for the six months ended March 31, 2023, an increase of $6,278,
or 190.9%, which was attributable to an increase in other miscellaneous income of approximately $24,000, offset by an increase in related
parties’ interest expense of approximately $18,000.
Net Loss
As
a result of the factors described above, our net loss was $2,429,417, or $0.17 per share (basic and diluted), for the three months ended
March 31, 2024, as compared to $805,649, or $0.08 per share (basic and diluted), for the three months ended March 31, 2023, an increase
of $1,623,768 or 201.5%.
As
a result of the factors described above, our net loss was $11,357,512, or $0.92 per share (basic and diluted), for the six months ended
March 31, 2024, as compared to $1,939,571, or $0.19 per share (basic and diluted), for the six months ended March 31, 2023, an increase
of $9,417,941 or 485.6%.
Foreign Currency Translation
Adjustment
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, the functional currency of Match Financial Limited and its subsidiary, Digital
RFQ, is the British Pound (“GBP”), the functional currency of Digital RFQ’s subsidiary, DRFQ Europe UAB, is Euro, and
the functional currency of Digital RFQ’s subsidiary, DRFQ Pay North America, is CAD. The financial statements of our subsidiaries
whose functional currency is the GBP or Euro or CAD are translated to U.S. dollars using period end rates of exchange for assets and liabilities,
average rate of exchange for revenues, costs, and expenses and cash flows, and at historical exchange rates for equity. Net gains and
losses resulting from foreign exchange transactions are included in the results of operations. As a result of foreign currency translations,
which are a non-cash adjustment, we reported a foreign currency translation gain of $26,582 and a foreign currency translation loss of
$2,721 for the three months ended March 31, 2024 and 2023, respectively. As a result of foreign currency translations, which are a non-cash
adjustment, we reported a foreign currency translation loss of $36,731 and $30,704 for the six months ended March 31, 2024 and 2023, respectively.
This non-cash gain/loss had the effect of decreasing/increasing our reported comprehensive loss.
Comprehensive Loss
As
a result of our foreign currency translation adjustment, we had comprehensive loss of $2,402,835 and $808,370 for the three months ended
March 31, 2024 and 2023, respectively.
As
a result of our foreign currency translation adjustment, we had comprehensive loss of $11,394,243 and $1,970,275 for the six months ended
March 31, 2024 and 2023, respectively.
Liquidity and Capital Resources
Liquidity
is the ability of a company to generate funds to support its current and future operations, satisfy its obligations and otherwise operate
on an ongoing basis. At March 31, 2024 and September 30, 2023, we had cash of approximately $306,000 and $19,000, respectively, exclusive
of customer custodial cash. We had working capital deficit of approximately $10,984,000 as of March 31, 2024. In addition, the current
cash balance cannot be projected to cover our operating expenses for the next twelve months from the release date of this report. These
matters raise substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent
on our ability to raise additional capital, implement our business plan, and generate sufficient revenues. There are no assurances that
we will be successful in our efforts to generate sufficient revenues, maintain sufficient cash balance or report profitable operations
or to continue as a going concern. As described below, we have raised additional capital through the sale of equity and debt and we plan
to raise additional capital in the future through the sale of equity or debt to implement our business plan. However, there is no assurance
these plans will be realized and that any additional financings will be available to us on satisfactory terms and conditions, if at all.
The
following table sets forth a summary of changes in our working capital deficit from September 30, 2023 to March 31, 2024:
| |
March 31, | | |
September
30, | | |
Changes
in | |
| |
2024 | | |
2023 | | |
Amount | | |
Percentage | |
Working capital deficit: | |
| | |
| | |
| | |
| |
Total current assets | |
$ | 808,253 | | |
$ | 2,928,408 | | |
$ | (2,120,155 | ) | |
| (72.4 | )% |
Total current liabilities | |
| 11,791,803 | | |
| 9,123,465 | | |
| 2,668,338 | | |
| 29.2 | % |
Working capital deficit | |
$ | (10,983,550 | ) | |
$ | (6,195,057 | ) | |
$ | (4,788,493 | ) | |
| 77.3 | % |
Our working capital deficit
increased by $4,788,493 to $10,983,550 at March 31, 2024 from $6,195,057 at September 30, 2023. The increase in working capital deficit
was primarily attributable to a decrease in customer custodial cash of approximately $327,000 due to the decrease in cash maintained in
our bank accounts held for the benefit of our customers, a significant decrease in due from affiliates of approximately $1,989,000 which
was primarily attributable to our receivable from TCM was written off after exhaustive efforts at collection in the six months ended March
31, 2024, a decrease in note receivable – related parties, net, of approximately $128,000 driven by repayments received from note
receivable – related parties in the six months ended March 31, 2024, an increase in accounts payable of approximately $172,000,
an increase in due to affiliates of approximately $1,176,000 driven by the payments received from our affiliates and expenses paid by
our affiliates on behalf of us in the six months ended March 31, 2024, an increase in short-term loan payable – related parties
of approximately $732,000 resulting from issuance of loans to related parties to fund our working capital needs, and an increase in accrued
professional fees of approximately $1,089,000 mainly due to the increase in professional services providers, offset by an increase in
cash of approximately $286,000, and a decrease in customer custodial cash liabilities of approximately $561,000 resulting from fulfillment
of our direct obligations to our customers.
Because the exchange
rate conversion is different for the condensed consolidated balance sheets and the condensed consolidated statements of cash flows, the
changes in assets and liabilities reflected on the condensed consolidated statements of cash flows are not necessarily identical with
the comparable changes reflected on the condensed consolidated balance sheets.
Cash Flow for the Six Months Ended March 31,
2024 Compared to the Six Months Ended March 31, 2023
The
following summarizes the key components of our cash flows for the six months ended March 31, 2024 and 2023:
| |
Six
Months Ended
March 31, | |
| |
2024 | | |
2023 | |
Net cash used in operating activities | |
$ | (1,878,608 | ) | |
$ | (1,882,501 | ) |
Net cash provided by (used in) investing activities | |
| 131,492 | | |
| (195,395 | ) |
Net cash provided by financing activities | |
| 1,666,098 | | |
| - | |
Effect of exchange rate on cash | |
| 40,419 | | |
| 180,425 | |
Net decrease in cash | |
$ | (40,599 | ) | |
$ | (1,897,471 | ) |
Net cash
flow used in operating activities for the six months ended March 31, 2024 was $1,878,608, which primarily reflected our consolidated net
loss of approximately $11,358,000, and the changes in operating assets and liabilities, primarily consisting of a significant increase
in due from affiliates of approximately $4,149,000 due to the payments made to our affiliates and monies that we paid on behalf of our
affiliates in the six months ended March 31, 2024, and a decrease in customer custodial cash liabilities of approximately $608,000 driven
by fulfillment of our direct obligations to our customers in the six months ended March 31, 2024, offset by an increase in accounts payable
of approximately $166,000, a significant increase in due to affiliates of approximately $3,887,000 driven by the payments received from
our affiliates and expenses paid by our affiliates on behalf of us in the six months ended March 31, 2024, and an
increase in accrued professional fees of approximately $1,089,000 mainly due to the increase in professional services providers, and the
non-cash items adjustment primarily consisting of stock-based compensation and service expense of approximately $2,915,000, and provision
for bad debt of approximately $6,146,000.
Net
cash flow used in operating activities for the six months ended March 31, 2023 was $1,882,501, which primarily reflected our consolidated
net loss of approximately $1,940,000, and the changes in operating assets and liabilities, primarily consisting of an increase in customer
digital currency assets of approximately $114,000 due to the increase in customer digital currency controlled by us in the six months
ended March 31, 2023, a decrease in customer custodial cash liabilities of approximately $1,935,000 driven by fulfillment of our direct
obligations to our customers in the six months ended March 31, 2023, and a decrease in accrued liabilities and other payables of approximately
$216,000 mainly due to the decrease in unearned revenue of approximately $203,000, offset by a decrease in due from affiliates of approximately
$677,000 resulting from the payments received from our affiliates in the six months ended March 31, 2023, an increase in customer digital
currency liabilities of approximately $114,000 due to the increase in customer digital currency controlled by us in the six months ended
March 31, 2023, and an increase in accrued payroll liability and directors’ compensation of approximately $97,000, and the non-cash
items adjustment primarily consisting of amortization of intangible assets of approximately $1,186,000, and stock-based compensation and
service expense of approximately $222,000.
Net
cash flow provided by investing activities was $131,492 for the six months ended March 31, 2024 as compared to net cash flow used in investing
activities of $195,395 for the six months ended March 31, 2023. During the six months ended March 31, 2024, we received proceeds from
note receivable – related parties of approximately $131,000. During the six months ended March 31, 2023, we made payment for investment
in note receivable of approximately $154,000 and payment for purchase of intangible asset of approximately $41,000.
Net
cash flow provided by financing activities was $1,666,098 for the six months ended March 31, 2024. During the six months ended March 31,
2024, we received cash in reverse recapitalization of approximately $150,000 and received proceeds from loans payable from third party
and related party of approximately $1,699,000, offset by repayments made for loans payable to third party and related party of approximately
$183,000.
There
was no financing activity during the six months ended March 31, 2023.
Our
operations will require additional funding for the foreseeable future. Unless and until we are able to generate a sufficient amount of
revenue and reduce our costs, we expect to finance future cash needs through public and/or private offerings of equity securities and/or
debt financings. We do not currently have any committed future funding. To the extent we raise additional capital by issuing equity securities,
our stockholders could at that time experience substantial dilution. Any debt financing we are able to obtain may involve operating covenants
that restrict our business. Our capital requirements for the next twelve months primarily relate to mergers, acquisitions and the development
of business opportunities. In addition, we expect to use cash to pay fees related to professional services. The following trends are reasonably
likely to result in a material decrease in our liquidity over the near to long term:
|
● |
The working capital requirements to finance our current business; |
|
● |
The use of capital for development of business opportunities; |
|
● |
Addition of personnel as the business grows; and |
|
● |
The cost of being a public company. |
We need to either borrow
funds or raise additional capital through equity or debt financings. However, we cannot be certain that such capital (from our stockholders
or third parties) 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. If we are unable to raise sufficient additional capital on acceptable terms, we will have insufficient funds to operate
our business or pursue our planned growth.
Consistent with Section 144 of the Delaware General
Corporation Law, it is our current policy that all transactions between us and our officers, directors and their affiliates will be entered
into only if such transactions are approved by a majority of the disinterested directors, are approved by vote of the stockholders, or
are fair to us as a corporation as of the time it is authorized, approved or ratified by the board. We will conduct an appropriate review
of all related party transactions on an ongoing basis.
Off-Balance Sheet Arrangements
We
had no outstanding derivative financial instruments, off-balance sheet guarantees, interest rate swap transactions or foreign currency
contracts. We do not engage in trading activities involving non-exchange traded contracts.
Recently Issued Accounting Pronouncements
For
information about recently issued accounting standards, refer to Note 3 to our Condensed Consolidated Financial Statements appearing elsewhere
in this report.
Foreign Currency Exchange
Rate Risk
A
portion of our operations are in United Kingdom. Thus, a portion of our revenues and operating results may be impacted by exchange rate
fluctuations between GBP and US dollars. For the three months ended March 31, 2024 and 2023, we had an unrealized foreign currency translation
gain of approximately $27,000 and an unrealized foreign currency translation loss of approximately $3,000, respectively, because of changes
in the exchange rates. For the six months ended March 31, 2024 and 2023, we had an unrealized foreign currency translation loss of approximately
$37,000 and $31,000, respectively, because of changes in the exchange rates.
Inflation
The effect of inflation
on our revenue and operating results was not significant.
Item 3. Quantitative and Qualitative Disclosures
about Market Risk
We
are a smaller reporting company as defined in Rule 12b-2 of the Exchange Act and are not required to provide the information required
under this item.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Disclosure controls and
procedures are designed to ensure that information required to be disclosed by us in reports filed or submitted under the Securities Exchange
Act of 1934, as amended (“Exchange Act”) is recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed under the Exchange Act is accumulated and communicated to management, including the principal
executive and financial officers, as appropriate to allow timely decisions regarding required disclosure. There are inherent limitations
to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention
or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable
assurance of achieving their control objectives.
In connection with the
preparation of the quarterly report on Form 10-Q for the quarter ended March 31, 2024, our management, including our principal executive
officer and principal financial officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures, which
are defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Disclosure controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under
the Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers,
or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Management regularly
assesses controls and did so most recently for our financial reporting as of March 31, 2024. This assessment was based on criteria for
effective internal control over financial reporting described in the Internal Control Integrated Framework issued by the Committee of
Sponsoring Organizations (COSO) of the Treadway Commission. Based on this assessment, management concluded that our disclosure controls
and procedures were not effective as of March 31, 2024 due to the material weaknesses that were previously reported in our Annual Report
on Form 10-K for the year ended September 30, 2023 filed with the SEC on July 12, 2024, that have not yet been remediated. Management’s
plan to remediate these material weaknesses is described in detail in such Annual Report on Form 10-K for the year ended September 30,
2023.
In light of the material weakness, we performed
additional analyses and procedures in order to conclude that our condensed consolidated financial statements for the quarter ended March
31, 2024 included in this Quarterly Report on Form 10-Q were fairly stated in accordance with US GAAP. Accordingly, management believes
that despite our material weakness, our condensed consolidated financial statements for the quarter ended March 31, 2024 are fairly stated,
in all material respects, in accordance with US GAAP.
Changes in Internal
Control over Financial Reporting
There
were no changes in our internal control over financial reporting during the most recently completed fiscal quarter that have materially
affected or are reasonably likely to materially affect, our internal control over financial reporting.
Item 5. Other
General Services Agreement
The Company, through its wholly owned subsidiary,
provides software and technology solutions for the worldwide retail foreign exchange trading industry. The Company’s primary customer
is Triton Capital Markets Ltd. (“TCM”) (formerly known as FXDD Malta Limited). Emil Assentato, the former CEO, a former director
of the Company and a shareholder of the Company, is also the majority member of Max Q Investments LLC (“Max Q”), which is
managed by Derivative Marketing Associates Inc. (“DMA”). Mr. Assentato 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 order to define the services rendered to TCM, Nukkleus
Limited, a wholly-owned subsidiary of the Company, entered into a General Services Agreement (“GSA”) with TCM in May 2016.
The GSA provides that TCM will pay Nukkleus Limited a minimum of $1,600,000 per month. Due to non-payment by TCM under the GSA, the Company
has advised TCM that the GSA has been terminated effective January 1, 2024. The Company has historically generated substantially most
of its revenue through the services rendered under the GSA.
Resignation/Appointment
On July 24, 2024, Emil Assentato resigned as Chief
Executive Officer and from the Board of Directors of the Company, effective immediately. His resignation was not due to any disagreement
with the Company on any matter relating to the Company’s operations, policies or practices. Jamal (Jamie) Khurshid, the Chief Operating
Officer and a director of the Company, was appointed as Chief Executive Officer effective July 24, 2024.
Part II - Other Information
Item 1. Legal Proceedings
From
time to time, we are subject to ordinary routine litigation incidental to our normal business operations. We are not currently a party
to any material legal proceedings.
Item 1A. Risk Factors
Not
applicable to a “smaller reporting company” as defined in Item 10(f)(1) of SEC Regulation S-K.
Item 2. Unregistered Sales of Equity Securities
and Use of Proceeds
Common shares issued for Settlement Agreement
and Stipulation
On May 28, 2024, the Company entered into a Settlement
Agreement and Stipulation (the “Settlement Agreement”) with Silverback Capital Corporation (“SCC”) to settle outstanding
claims owed to SCC. Pursuant to the Settlement Agreement, SCC has agreed to purchase certain outstanding payables between the Company
and designated vendors of the Company totaling $1,118,953.75 (the “Payables”) and will exchange such Payables for a settlement
amount payable in shares of common stock of the Company (the “Settlement Shares”). The Settlement Shares shall be priced at
70% of the average of the three lowest trading prices during the five trading day period prior to a share request, which may not be less
than $0.05 per share. In the event the Company’s market price decreases to or below $0.75 per share, then either the Company or
SCC may declare a default. SCC has agreed that it will not become the beneficial owner of more than 4.99% of common stock of the Company
at any point in time. Further, the Settlement Agreement provides that Settlement Shares may not be issued to SCC if such issuance would
exceed 19.9% of the outstanding common stock as of May 23, 2024. The Settlement Agreement and the issuance of the Settlement Shares was
approved by the Circuit Court of the Twelfth Judicial Circuit Court for Manatee County, Florida (the “Court”) on May 29, 2024
(Case No. 2024 CA 755). The Court entered an Order confirming the fairness of the terms and conditions of the Settlement Agreement and
the issuance of the Settlement Shares.
Pursuant to the Settlement Agreement, during the
period from on May 31, 2024 through July 22, 2024, the Company issued 1,889,550700,000 shares of its common stock.
Senior Unsecured Promissory Note – June
2024
On June 11, 2024 (the “June 2024 Effective
Date”), the Company issued a Senior Unsecured Promissory Note (the “Note”) in the principal amount of $312,500 to X
Group Fund of Funds, a Michigan limited partnership (the “Lender”) in consideration of cash proceeds in the amount of $250,000.
The Note bears interest of 12.0% per annum and is due and payable six months after issuance. As an additional inducement to provide the
loan as outlined under the Note, the Company issued the Lender a Stock Purchase Warrant (“Warrant”) to acquire 1,200,000 shares
of common stock at a per share price of $0.25 for a term of five years that may be exercised on a cash or cashless basis. The Lender shall
have the right to convert the principal and interest payable under the Note into shares of common stock of the Company at a per share
conversion price of $0.25.
The Company and the Lender also entered into a Restructuring Agreement
providing that, among other items, the Lender, in its sole discretion, will have the right for a period for six months from the June 2024
Effective Date (the “Investment Period”), to lend the Company an additional $500,000 in consideration of a convertible promissory
note that will have a term of two years, bear interest at 12% and will convert into shares of common stock at a per share price of $0.25.
During the Investment Period, the Company may not incur additional debt or enter into any equity financing arrangement without the written
consent of the Lender. The Company has agreed, in its good faith, to negotiate the sale of its wholly owned subsidiary, Digital RFQ Ltd.
(“Digital”) to Digital’s current management team led by Jamie Khurshid subject to approval of the Company’s Board
of Directors and shareholders and subject to compliance with all federal, state and Nasdaq rules. The Lender provided an additional $50,000
following the initial closing, with such funds was disbursed as agreed between the Company and the Lender.
Further, during the Investment Period, the Lender,
without any additional compensation, will be exclusive advisor to the Company with respect to potential acquisitions by the Company and
the Company will use its reasonable best efforts to consider all proposals by the Lender. Any such acquisition proposal provided by the
Lender will be subject to the Lender and such party entering a definitive binding agreement and the Board of Directors and shareholders
of the Company approving such acquisition.
In order to induce the Lender to provide the loan contemplated pursuant
to the Note, Emil Assentato entered into a Voting Agreement with the Company and the Lender agreeing to vote his shares in support of
any transaction provided by the Lender. The Company and the Lender have agreed that 100% of all loan balances including loans payable
to Emil Assentato by the Company will be recorded on the books of the Company as a bona fide debt of the Company, of which 30% of such
debt will be paid within nine (9) months of the June 2024 Effective Date and the balance to be repaid within twenty-four (24) months of
the June 2024 Effective Date.
Senior Unsecured Promissory Note – August
2024
On August 1, 2024 (the “August 2024 Effective
Date”), the Company issued a Senior Unsecured Promissory Note (the “Note”) in the principal amount of $515,500 to East
Asia Technology Investments Limited (the “Lender”) in consideration of cash proceeds in the amount of $412,075. The Note bears
interest of 12.0% per annum and is due and payable six months after issuance. As an additional inducement to provide the loan as outlined
under the Note, the Company issued the Lender a Stock Purchase Warrant (“Warrant”) to acquire 1,400,000 shares of common stock
at a per share price of $0.25 for a term of five years that may be exercised on a cash or cashless basis. The Lender shall have the right
to convert the principal and interest payable under the Note into shares of common stock of the Company at a per share conversion price
of $0.25.
Common Shares Issued for Settlement of Accrued
Professional Fees
In July 2024, the Company issued 500,000 shares
of its common stock to settle accrued and unpaid professional fees.
Common Shares Issued for Services
In July 2024, the Company issued 300,000 shares
of its common stock for services rendered and to be rendered.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information
None.
Item 6. Exhibits
The following exhibits are incorporated into this Form 10-Q Quarterly
Report:
|
|
|
Incorporated by Reference |
Exhibit |
|
Description |
|
Schedule/ Form |
|
Exhibits |
|
Filing Date |
2.1# |
|
Amended and Restated Agreement and Plan of Merger dated as of June 23, 2023, by and among Nukkleus and Brilliant. |
|
Form 8-K |
|
2.1 |
|
June 26, 2023 |
2.2# |
|
First Amendment to Amended and Restated Agreement and Plan of Merger dated as of November 1, 2023, by and among Nukkleus and Brilliant. |
|
Form 8-K |
|
2.2 |
|
November 2, 2023 |
3.1 |
|
Amended and Restated Certificate of Incorporation of Nukkleus Inc. (f/k/a Brilliant Acquisition Corp.) |
|
Form 8-K |
|
3.2 |
|
January 2, 2024 |
3.2 |
|
Bylaws of Nukkleus Inc. |
|
Form 8-K |
|
3.3 |
|
January 2, 2024 |
4.1 |
|
Senior Unsecured Promissory Note dated June 11, 2024 issued to X Group Fund of Funds |
|
Form 8-K |
|
4.1 |
|
June 17, 2024 |
4.2 |
|
Common Stock Purchase Warrant issued to X Group Fund of Funds |
|
Form 8-K |
|
4.2 |
|
June 17, 2024 |
4.3 |
|
Senior Unsecured Promissory Note dated August 1, 2024 issued to East Asia Technology Investments Limited |
|
Form 8-K |
|
4.1 |
|
August 5, 2024 |
4.4 |
|
Common Stock Purchase Warrant issued to East Asia Technology Investments Limited |
|
Form 8-K |
|
4.2 |
|
August 5, 2024 |
10.1* |
|
Nukkleus 2023 Incentive Award Plan. |
|
Form 8-K |
|
10.1 |
|
January 2, 2024 |
10.2 |
|
Form of Registration Rights Agreement by and among Nukkleus, Brilliant and certain stockholders. |
|
Form 8-K |
|
10.3 |
|
June 26, 2023 |
10.3 |
|
Form of Lock-Up Agreement by and among Nukkleus, Brilliant and certain stockholders. |
|
Form 8-K |
|
10.2 |
|
June 26, 2023 |
10.4 |
|
General Service Agreement between Nukkleus Limited and FML Malta Limited dated May 24, 2016 |
|
Form 10-K |
|
10.4 |
|
July 12, 2024 |
10.5 |
|
General Service Agreement between Nukkleus Limited and FXDirectDealer LLC dated May 24, 2016 |
|
Form 10-K |
|
10.5 |
|
July 12, 2024 |
10.6 |
|
Amendment No. 1 dated June 3, 2016 to the General Service Agreement between Nukkleus Limited and FXDD Trading Limited |
|
Form 10-K |
|
10.6 |
|
July 12, 2024 |
10.7 |
|
Amendment dated October 17, 2017 of that certain General Service Agreement between Nukkleus Limited and FML Malta Limited |
|
Form 10-K |
|
10.7 |
|
July 12, 2024 |
10.8 |
|
Letter Agreement entered between FML Malta Ltd., FXDD Malta Limited and Nukkleus Limited |
|
Form 10-K |
|
10.8 |
|
July 12, 2024 |
10.9 |
|
Settlement Agreement and Stipulation dated May 28, 2024 by and between Nukkleus Inc. and Silverback Capital Corporation |
|
Form 8-K |
|
10.1 |
|
June 4, 2024 |
10.10 |
|
Restructuring Agreement dated June 11, 2024 between Nukkleus Inc. and X Group Fund of Funds |
|
Form 8-K |
|
10.1 |
|
June 17, 2024 |
10.11 |
|
Voting Agreement dated June 11, 2024 between Nukkleus Inc. and X Group Fund of Funds |
|
Form 8-K |
|
10.2 |
|
June 17, 2024 |
21.1 |
|
List of Subsidiaries |
|
Form 10-K |
|
21.1 |
|
July 12, 2024 |
31.1 |
|
Rule 13a-14(a) Certification of the Chief Executive Officer and Principal Financial Officer |
|
|
|
|
|
|
32.1 |
|
Section 1350 Certification of Chief Executive Officer and Principal Financial Officer |
|
|
|
|
|
|
101.INS |
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Inline XBRL Instance Document. |
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101.SCH |
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Inline XBRL Taxonomy Extension Schema Document. |
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101.CAL |
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Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
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101.DEF |
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Inline XBRL Taxonomy Extension Definition Linkbase Document. |
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101.LAB |
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Inline XBRL Taxonomy Extension Label Linkbase Document. |
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101.PRE |
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Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
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104 |
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Cover Page Interactive Data File - the cover page XBRL tags are embedded within the Inline XBRL document. |
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* |
Indicates management contract or compensatory plan or arrangement. |
# |
Certain of the exhibits and schedules to this exhibit have been
omitted in accordance with Regulation S-K Item 601. The Registrant agrees to furnish a copy of all omitted exhibits and schedules to
the SEC upon its request. |
SIGNATURES
Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
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NUKKLEUS INC. |
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Dated: August 14, 2024 |
By: |
/s/ Jamal (Jamie) Khurshid |
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Jamal (Jamie) Khurshid |
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Chief Executive Officer (Principal Executive Officer),
and Principal Financial and Accounting Officer and Director |
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