UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For
the fiscal year ended September 30, 2022
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For
the transition period from _________ to _________
000-55922
Commission
file number
Nukkleus Inc.
(Exact
name of registrant as specified in its charter)
Delaware |
|
38-3912845 |
(State
or other jurisdiction of
incorporation or organization) |
|
(I.R.S.
Employer
Identification No.) |
|
|
|
525
Washington Boulevard, Jersey City, New Jersey |
|
07310 |
(Address
of principal executive offices) |
|
(Zip
Code) |
212-791-4663
Registrant’s
telephone number, including area code
Securities
registered pursuant to Section 12(b) of the Act:
Title
of each class |
|
Trading
Symbol(s) |
|
Name
of each exchange on which registered |
Not
applicable. |
|
|
|
|
Securities
registered under Section 12(b) of the Exchange Act:
None
Securities
registered under Section 12(g) of the Exchange Act: Common Stock,
par value $0.0001
Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate
by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No
☒
Indicate
by check mark whether the registrant (1) has filed all reports
required 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
and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted 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 and post such files). ☒ Yes ☐ No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (§ 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ☒
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 has filed a report on
and attestation to its management’s assessment of the effectiveness
of its internal control over financial reporting under Section
404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the
registered public accounting firm that prepared or issued its audit
report. Yes ☐ No ☒
If
securities are registered pursuant to Section 12(b) of the Act,
indicate by check mark whether the financial statements of the
registrant included in the filing reflect the correction of an
error to previously issued financial
statements. ☐
Indicate by check mark whether any of those error corrections are
restatements that required a recovery analysis of incentive-based
compensation received by any of the registrant’s executive officers
during the relevant recovery period pursuant to
§240.10D-1(b). ☐
Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The
aggregate market value of the voting and non-voting common equity
held by non-affiliates of the registrant was approximately
$20,327,000 as of March 31, 2022, based upon the closing stock
price $0.19 per share reported for such date.
State
the number of shares outstanding of each of the issuer’s classes of
common equity, as of the latest practicable date.
Class |
|
Outstanding
April 7, 2023 |
Common
Stock, $0.0001 par value per share |
|
367,175,886
shares |
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
report contains forward-looking statements that involve a number of
risks and uncertainties. Although our forward-looking statements
reflect the good faith judgment of our management, these statements
can be based only on facts and factors of which we are currently
aware. Consequently, forward-looking statements are inherently
subject to risks and uncertainties. Actual results and outcomes may
differ materially from results and outcomes discussed in the
forward-looking statements.
Forward-looking
statements can be identified by the use of forward-looking words
such as “may,” “will,” “should,” “anticipate,” “believe,” “expect,”
“plan,” “future,” “intend,” “could,” “estimate,” “predict,” “hope,”
“potential,” “continue,” or the negative of these terms or other
similar expressions. These statements include, but are not limited
to, statements under the captions “Risk Factors,” “Management’s
Discussion and Analysis or Plan of Operation” and “Description of
Business,” as well as other sections in this report. Such
forward-looking statements are based on our management’s current
plans and expectations and are subject to risks, uncertainties and
changes in plans that may cause actual results to differ materially
from those anticipated in the forward-looking statements. You
should be aware that, as a result of any of these factors
materializing, the trading price of our common stock may decline.
These factors include, but are not limited to, the
following:
|
● |
the
availability and adequacy of capital to support and grow our
business; |
|
|
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|
● |
economic,
competitive, business and other conditions in our local and
regional markets; |
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● |
actions
taken or not taken by others, including competitors, as well as
legislative, regulatory, judicial and other governmental
authorities; |
|
|
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|
● |
competition
in our industry; |
|
|
|
|
● |
changes
in our business and growth strategy, capital improvements or
development plans; |
|
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|
● |
the
availability of additional capital to support development;
and |
|
|
|
|
● |
other
factors discussed elsewhere in this annual report. |
The
cautionary statements made in this annual report are intended to be
applicable to all related forward-looking statements wherever they
may appear in this report.
We
urge you not to place undue reliance on these forward-looking
statements, which speak only as of the date of this report. We
undertake no obligation to publicly update any forward
looking-statements, whether as a result of new information, future
events or otherwise.
All
references in this Form 10-K that refer to the “Company”,
“Nukkleus”, “we,” “us” or “our” refer to Nukkleus Inc. and its
consolidated subsidiaries.
TABLE
OF CONTENTS
PART
I
Item
1. Business.
Nukkleus
Inc. (formerly known as, Compliance & Risk Management Solutions
Inc.) (the “Company” or “Nukkleus”) 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.
Overview
We
are a financial technology company with the aim of providing
blockchain-enabled technology solutions.
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. Such
technology and advisory services are currently offered through our
General Services Agreement (“GSA”) with FXDD (for more information
see the section captioned “FXDD Agreements” below).
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 expect to offer these products in the second or third
calendar quarter of 2023. 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 expect to offer these products in the second or
third calendar quarter of 2023. 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. Products and services offered by DigiClear are
distributed through our website.

(1) |
Emil
Assentato owns 100% of DMA. |
(2) |
Emil
Assentato directly owns approximately 85% of Max Q, and indirectly
owns an additional 1%. The remainder of Max Q is owned by various
individuals and entities unaffiliated with Nukkleus’s officers and
directors. |
(3) |
Emil
Assentato owns 1% of Currency Mountain Malta LLC, and the remainder
of Currency Mountain Malta LLC is owned by Rubens Investment
Services, Inc., a wholly owned subsidiary of Compagnie Financière
Tradition, a public company based in Switzerland, both of which are
unaffiliated with Nukkleus’s officers and directors. |
(4) |
See
section entitled “Security Ownership of Certain Beneficial
Owners and Management” for director and officer beneficial
ownership of Nukkleus shares. As Nukkleus’s common stock is quoted
for trading on the OTC Pink Sheets, information on its other owners
is not readily available. |
(5) |
Jamal
Khurshid and Nicholas Gregory own, directly and indirectly,
approximately 40% and 10% of Jacobi, respectively. The remainder of
Jacobi is owned by various individuals and entities unaffiliated
with Nukkleus’s officers and directors. |
(6) |
Navarock,
Ltd., an entity unaffiliated with Nukkleus’s officers and
directors, owns the remaining 50% of Digiclear. |
(7) |
Angel
Holdings LLC, an entity unaffiliated with Nukkleus’s officers and
directors, owns the remaining 49% of DRFQ Emerging
Markets. |
Recent
Developments
Merger
Agreement – Brilliant Acquisition Corporation
On
February 22, 2022, Nukkleus entered into an Agreement and Plan of
Merger (as it may be amended, supplemented or otherwise modified
from time to time, the “Merger Agreement”), by and among Nukkleus
and Brilliant Acquisition Corporation, a British Virgin Islands
company (“Brilliant”). Upon consummation of the transactions
contemplated by the Merger Agreement, Nukkleus would become a
Nasdaq-listed company (“PubCo”) and the parent company
of Brilliant. The transactions contemplated by the Merger
Agreement, are hereinafter referred to as the “Business
Combination.
On
September 21, 2022, parties to the Merger Agreement entered into an
Amendment No. 1 to the Merger Agreement (the “Amendment”) solely to
extend the Outside Closing Date (as defined in the Merger
Agreement), to the later of (i) October 23, 2022, or, (ii)
following the approval by Brilliant’s shareholders of the extension
of the life of the SPAC pursuant to Brilliant’s organizational
documents, to the date so approved, but not later than January 23,
2023.
On
September 28, 2022, parties to the Merger Agreement entered into an
Amendment No. 2 to the Merger Agreement (the “Second Amendment”)
pursuant to which the parties agreed to increase the amount of the
“Backstop Pool” (as defined in the Merger Agreement) of shares to
be issued to Brilliant Public Shareholders in the Business
Combination from the lower of (1) 506,000, and (2) 20% of the
aggregate number of SPAC Shares and SPAC Rights issued and
outstanding immediately prior to the Effective Time (each as
defined in the Merger Agreement) prior to the Amendment to the
lower of (1) 1,012,000, and (2) 40% of the aggregate number of SPAC
Shares and SPAC Rights issued and outstanding immediately prior to
the Effective Time pursuant to the Amendment.
On
January 20, 2023, parties to the Merger Agreement entered into an
Amendment No. 3 to the Merger Agreement (the “Third Amendment”) solely to
extend the Outside Closing Date (as defined in the Merger
Agreement), to the later of (i) April 23, 2023, or,
(ii) following the approval by Brilliant’s shareholders of the
extension of the life of the SPAC pursuant to Brilliant’s
organizational documents, to the date so approved, but not later
than June 23, 2023.
White
Lion Stock Purchase Agreement
On
May 17, 2022, Nukkleus 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, Nukkleus has the right, but not the
obligation, to require White Lion to purchase shares of Nukkleus
common stock up to a maximum amount of $75,000,000 or such lower
amount as may be required pursuant to the rules of the market on
which shares of Nukkleus common stock trades at such time. Pursuant
to terms of the White Lion Agreement and the Registration Rights
Agreement (as defined below), Nukkleus is required to use its
commercially reasonable efforts to file with the SEC a registration
statement covering the shares to be acquired by White Lion within
sixty days following the closing of the previously announced
business combination with Brilliant Acquisition Corporation
described in Nukkleus’s Current Report on Form 8-K filed with the
SEC on February 23, 2022 (the “Business Combination”).
The
term of the White Lion Agreement commences on the effective date of
the registration statement and shall end on December 31, 2024, or,
if earlier, the date on which White Lion has purchased the maximum
number of shares of Nukkleus Common Stock provided under the White
Lion Agreement, in each case on the terms and subject to the
conditions set forth in the White Lion Agreement. White Lion’s
purchase price will be 96% of the dollar- volume weighted average
price of Nukkleus common stock over the two consecutive trading
days immediately following receipt of Nukkleus’s notice of its
intent to make a draw.
During
the term of the White Lion Agreement, on the terms and subject to
the conditions set forth therein, Nukkleus may draw up to the
lesser of (i) the number of shares of Nukkleus common stock
which would result in beneficial ownership by White Lion of more
than 4.99% of the outstanding shares of Nukkleus common stock,
(ii) the number of shares of Nukkleus common stock equal to
30% of the average daily trading volume of Nukkleus common stock
over the five consecutive trading days immediately following the
notice date, or (iii) the number of Nukkleus common stock
obtained by dividing $1,500,000 by the closing sale price of
Nukkleus common stock on the notice date.
Nukkleus
is not entitled to draw on the White Lion Agreement if the closing
sale price of Nukkleus common stock on the trading day immediately
preceding the notice date is less than $1.00 (following the reverse
stock split proposed in connection with the closing of the Business
Combination and described in Nukkleus’s Current Report on Form 8-K
filed with the SEC on February 23, 2022, but adjusted for any other
reorganization, recapitalization, non-cash dividend, stock split or
other similar transaction). Nukkleus is not entitled to draw on the
White Lion Agreement unless each of the following additional
conditions is satisfied: (i) each of Nukkleus’s
representations and warranties set forth in the White Lion
Agreement is true and correct (subject to qualifications as to
materiality set forth therein) in all respects as of such time;
(ii) a registration statement is and remains effective for the
resale of securities in connection with the White Lion Agreement;
(iii) the trading of the Company’s common stock shall not have
been suspended by the SEC, the applicable trading market or FINRA,
or otherwise halted for any reason; (iv) the Company shall
have complied with its obligations and shall not otherwise be in
breach or default of any agreement set forth in the White Lion
Agreement; (v) no statute, regulation, order, guidance,
decree, writ, ruling or injunction shall have been enacted,
entered, promulgated, threatened or endorsed by any federal, state,
local or foreign court or governmental authority of competent
jurisdiction, including, without limitation, the SEC, which
prohibits the consummation of or which would materially modify or
delay any of the transactions contemplated by the White Lion
Agreement; (vi) all reports, schedules, registrations, forms,
statements, information and other documents required to have been
filed by us with the SEC pursuant to the reporting requirements of
the Exchange Act of 1934 (other than Forms 8-K) shall have been
filed with the SEC within the applicable time periods prescribed
for such filings; (vii) to the extent the issuance of the put
shares requires shareholder approval under the listing rules of the
applicable national exchange or principal quotation system for the
Nukkleus common stock, the Company has or will seek such approval;
and (viii) certain other conditions as set forth in the White
Lion Agreement.
In
addition to the shares to be issued under the White Lion Agreement,
Nukkleus will include in its registration statement additional
shares of Nukkleus common stock in the amount of $750,000 being
issued to White Lion in connection with the execution of the White
Lion Agreement.
White
Lion Registration Rights Agreement
In
connection with the Company’s entry into the White Lion Agreement,
Nukkleus entered into a Registration Rights Agreement with White
Lion (the “Registration Rights Agreement”). Pursuant to the terms
of the Registration Rights Agreement, Nukkleus has agreed to use
its commercially reasonable efforts to file a registration
statement under the Securities Act registering the resale of the
shares sold under the White Lion Agreement within sixty days of the
closing of the Business Combination. The Registration Rights
Agreement also provides that Nukkleus is required to use its
commercially reasonable efforts to keep the registration effective
and to prepare and file with the SEC such amendments and
supplements if the foregoing registration statement is not then in
effect, and the Company proposes to file certain types of
registration statements under as may be necessary to keep the
registration statement effective.
FXDD
Agreements
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 Triton Capital Markets Ltd.
(“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.
The
foregoing descriptions of the terms and conditions of the General
Services Agreement with FML Malta Ltd, the amendment to such
General Services Agreement, and the General Services Agreement with
FXDIRECT are not complete and are qualified in their entirety by
the full text of the applicable agreement, which are filed herewith
as Exhibit 10.5, Exhibit 10.6 and Exhibit 10.7, respectively, and
incorporated herein by reference.
The
Market Opportunity
The
FX market is a global, decentralized market for the trading of
currencies. Nukkleus’s management believes that FX trading involves
the simultaneous buying and selling of a currency pair for the
purposes of hedging currency risk or to generate a profit.
Nukkleus’s management believes that the FX market, once limited to
large financial institutions, has expanded and matured over the
past decade, and now captures a wide range of participants,
including central banks, commercial banks,
non-bank corporations, hedge funds, brokers and individual
investors and traders. The market’s expansion has helped lead to a
significant increase in trading activity. In addition to the
increase in the breadth of market participants, management believes
the key factors driving higher transaction volumes include the
adoption of electronic and high frequency trading, tighter trading
spreads, rising volatility among currencies and enhanced access to
FX trading markets — primarily through online brokers,
such as FXDD — for retail investors.
Management
believes that FX trading, initially utilized primarily for hedging
purposes, has evolved as investor sophistication levels have risen,
trading costs have fallen, and as currencies have become
increasingly viewed as a viable investment asset class. FX’s low,
(or even negative) correlation among certain other portfolio
assets, namely equities and fixed income, may help investors reduce
overall portfolio volatility. As such, we believe that currencies
are often viewed as an important portfolio diversification
tool.
Fueled
by the growing adoption of the internet, the retail segment of the
FX market began to emerge in the late 1990s. Developing online
brokerage firms provided individual investors with direct access to
the global FX markets. Prior to the development of these trading
platforms, we believe that individual retail investors were
effectively locked out of the FX market as minimum trade sizes were
typically too high for individual retail investors. Online FX
brokers lowered the minimum volume barriers and transactions costs
for retail trading, allowing individuals to establish trading
accounts with much lower initial deposits. We believe the retail FX
segment now represents the fastest growing portion of the overall
FX market. We believe this growth will be driven by a handful of
key market trends, including:
|
● |
Increased
investor demand for exposure to currencies; |
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Increasing
internet adoption across the globe; |
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Growing
engagement of the “offline” market; |
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Development
of emerging markets and the emergence of an affluent middle class;
and |
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Increasing
regulation resulting in greater confidence. |
Participants
in the retail FX market are geographically dispersed. Retail FX
brokers, such as FXDD are seeking to expand their presence in
projected high growth regional areas, such as Asia and the Middle
East.
Systems
and Services
Nukkleus
provides its services in the following service categories,
including pursuant to its General Services Agreement with TCM.
Under the General Services Agreement, Nukkleus provides software
technology and technical support to TCM in each of these service
categories.
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● |
Category
One: Introducing Broker Dealer Network and the Introducing Broker
Interface |
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Category
Two: Chinese and Middle East customer desk support |
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Category
Three: Bridging software to the XWare (MT4 and MT5)
platforms |
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Category
Four: Forex Market Liquidity Access |
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Category
Five: Turnkey risk management support software and Risk Management
Team |
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Category
Six: Front End Software Retail Trading Platforms and Customer
Application Systems |
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Category
Seven: Back Office Systems management |
Category One:
Introducing Broker Dealer Network
Nukkleus,
by arrangement pursuant to our services agreement with TCM and
FXDIRECT, provides to TCM clients an introducing broker (IB)
network spread across China, Japan and the Middle East. Our
approach to the retail FX market is to focus on the development of
relationships with independent local referring brokers who provide
a recurring source of new customers. These referring brokers do not
have an exclusive relationship with us, but are offered a
competitive commission structure to deliver new customers to us.
Our account managers primarily focus on building relationships with
referring brokers, and master referring brokers (who refer other
referring brokers to us), as well as with customers referred to us
by referring brokers and acquired by us directly. We believe this
approach, in contrast to retail FX brokers that focus solely or
primarily on acquiring accounts through online marketing campaigns,
has allowed us to provide services to TCM, which allows entities to
achieve strong levels of net trading income, and accounts, as well
as lower up front customer acquisition costs and greater customer
satisfaction. Referring brokers are typically either individuals
who are current or former FX traders or individuals or companies
active in the area of FX trading and education and investment
services advisory business.
The
Introducing Broker Interface: The Introducing Broker (“IB”)
interface empowers our partners to view real time account data such
as payouts, customer activity and reports.
Nukkleus
delivers the software product in this category to TCM pursuant to
the GSA with TCM and does not monitor or measure the number of end
users of the software.
Category Two: Asia,
including Chinese and Middle East Customer Desk
Support
Nukkleus,
by arrangement pursuant to our services agreement, provides to TCM
customer desk support in multiple languages. A key element of the
business strategy is the large, multi-lingual and
multi-ethnic team of account managers at the headquarters in
Jersey City, New Jersey, as well as in certain other locations such
as Malta, Jakarta, Indonesia and Tokyo, Japan. We obtained the
services of account managers by virtue of our services agreement
with FXDIRECT. Account managers are compensated to a
significant degree based on their performance, measured by net
deposits inflows, new accounts funded and transaction volume
generated by customers. We believe that this compensation structure
motivates our account managers and leads to more active
communication with our referring brokers and customers, an improved
customer trading experience, improved referring broker and customer
retention and increased deposits.
Nukkleus
delivers the software product in this category to TCM pursuant to
the GSA with TCM and does not monitor or measure the number of end
users of the software.
Category Three:
Bridging Software to the XWare (MT4 and MT5)
platforms
XWare
4 Bridge: The MT4 Bridge is a middleware product that connects
the XWare server with the XW Trading System. The Bridge passes both
market data (i.e. quotes) and trading data (i.e. trade executions)
between MT4 and the XW servers. By seamlessly integrating the two,
the Bridge allows for real time trade execution, reduced slippage,
and access to liquidity through the XW Liquidity Matrix.
Nukkleus
delivers the software product in this category to TCM pursuant to
the GSA with TCM and does not monitor or measure the number of end
users of the software.
Category Four: Forex
Market Liquidity Access
XWare
Liquidity Matrix: Dealers need access to as much liquidity as
possible. Forexware’s liquidity aggregation technology supports API
from most of the world’s largest liquidity providers, including
banks, hedge funds and electronic communication networks (ECN). Our
aggregation technology integrates seamlessly with customers’
existing infrastructure, providing the power to optimize trading
processes, manage accounts and revealing the most relevant
information to make effective trading decisions.
The
XWare Liquidity Bridge: With the XWare liquidity bridge,
brokers can automatically submit trade requests to the liquidity
provider of choice and receive confirmation prior to sending an
“accept” or “reject” message to the broker’s client. The XWare
Liquidity Bridge was developed to improve liquidity processes, risk
and availability by providing a direct line of communication to
vital backend processes. Brokers can create unique price streams
from aggregated liquidity with sophisticated control over liquidity
sources, pricing models, execution models and risk
management.
XWare
Live Rate Feed: The XWare Live Rate Feed provides customers
with streaming liquidity and prices in real time that integrate
seamlessly with existing trading platforms. The Quote Aggregator
identifies outliers and bad ticks to ensure our clients capture
accurate and reliable pricing to protect them from price
fluctuations and anomalies that frequently occur with Liquidity
Providers.
Nukkleus
delivers the software product in this category to TCM pursuant to
the GSA with TCM and does not monitor or measure the number of end
users of the software.
Category Five:
Turnkey Risk Management Support Software, and Risk Management
Team
Nukkleus,
by arrangement pursuant to our services agreement with FXDIRECT,
fields a risk management team of seasoned professionals who
constantly monitor liquidity flows and manage the hedging of
transactions on a 24 / 7 basis, with three eight-hour shifts.
This service is provided both to the TCM clients, as well as to
third-party clients who request this service.
XWare
Risk Monitor: The XWare Risk Manager is an essential component
of the Forexware’s turnkey Xware suite, offered to new brokers
entering the market, or existing brokers looking to replace their
existing systems. Our management is of the belief that the Risk
Manager software suite is the most vigorous and advanced risk
management system available in the market today providing customers
the power to customize risk management settings at their
fingertips.
Nukkleus
delivers the software product in this category to TCM pursuant to
the GSA with TCM and does not monitor or measure the number of end
users of the software.
Category Six: Front
End Software Retail Trading Platforms and Customer Application
Systems
XWare
Trader: is a proprietary platform for retail and institutional
traders. It offers fully customizable layouts including colors,
layout manager and undocking of windows. Advanced charting,
one-click trading, and automated execution for algo traders
are all embedded in a modern interface.
Swordfish
Trader: Swordfish Trader is a proprietary platform for retail
and institutional traders. It offers fully customizable layouts
including colors, layout manager, and undocking of windows.
Advanced charting, one-click trading, and automated execution
for algo traders are all embedded in a modern interface. Swordfish
further offers risk management monitors unique from other trading
platforms. Nukkleus has also acquired the right to apply for a US
federal copyright in relation to Swordfish Trader.
Nukkleus
delivers the software product in this category to TCM pursuant to
the GSA with TCM and does not monitor or measure the number of end
users of the software.
Category Seven: Back
Office Systems Management:
XWare
Apptracker: Xware Apptracker is a data workflow system designed
to automate and manage new customer applications and account
information in a centralized location. Xware App Tracker provides
customers easy to use tools that save time, organize and track
customer application information and manage new customer contract
details for fast and efficient review and approval.
Reporting
System: This complex and proprietary application generates
customized reports, with numerous data queries pre-loaded to
run in addition to those a client to choose to customize. It is
designed to pull any number of named, defined data fields from both
local databases and those from third party-run databases, such
as Oracle Financials.
Nukkleus
delivers the software product in this category to TCM pursuant to
the GSA with TCM and does not monitor or measure the number of end
users of the software.
In
regard to its Digital RFQ business, Nukkleus currently quantifies
and monitors certain metrics and indicators on a weekly, monthly,
quarterly, semi-annual, and annual basis, including the
following:
|
● |
Total
Number of Trades, |
|
|
|
|
● |
Average
Trading Volume, |
|
|
|
|
● |
Average
Trading Margin. |
Intellectual Property
We
have several registered trademarks and service marks (US and
foreign) and software assets. We also intend to pursue additional
foreign trademark registrations. Nukkleus has been assigned various
registrations and trademarks relating to:
|
● |
When
the News Breaks, Be there to Trade it |
|
|
|
Nukkleus
has further acquired Patent Number 8799142 in relation to Forexware
Patent. This relates to a method of displaying information
associated with currency exchange transactions in real
time.
In
addition to the revenues from our General Services Agreement with
TCM, Nukkleus received revenue from financial services through
Digital RFQ.
Corporate
Office
Nukkleus’s
principal executive office is 525 Washington Blvd,
14th Floor, Jersey City, New Jersey 07310. Our main
telephone number is 212- 791-4663.
Employees
We
have the equivalent to approximately 12 employees, of which 11
employees work for Digital RFQ and one employee works for Nukkleus.
Through our relationship with FXDIRECT, we have access to
approximately 30 account managers who speak over 10 different
languages, and FXDIRECT has contractual relationships with hundreds
of referring brokers in at least twenty different countries. It
also has contracts with various independent contractors and
consultants to fulfill additional needs, including investor
relations, exploration, development, permitting, and other
administrative functions, and may staff further with employees as
it expands activities and brings new projects online.
Item
1A. Risk Factors.
Summary of Risk Factors The following summarizes the principal
factors that make an investment in our company speculative or
risky, all of which are more fully described in the Risk Factors
section below. This summary should be read in conjunction with the
Risk Factors section and should not be relied upon as an exhaustive
summary of the material risks facing our business. The following
factors could result in harm to our business, reputation, revenue,
financial results, and prospects, among other impacts:
Risks
Related to Nukkleus’s Business
|
● |
We
have a limited operating history in an evolving and highly volatile
industry, which makes it difficult to evaluate our future prospects
and may increase the risk that we will not be
successful. |
|
● |
If we
do not effectively manage our growth and the associated demands on
our operational, risk management, sales and marketing, technology,
compliance and finance and accounting resources, our business may
be adversely impacted. |
|
● |
We
face intense and increasing competition and, if we do not compete
effectively, our competitive positioning and our operating results
will be harmed. |
|
● |
We
currently compete at multiple levels with a variety of
competitors. |
|
● |
Cyberattacks
and security breaches of our systems, or those impacting our
customers or third parties, could adversely impact our brand and
reputation and our business, operating results and financial
condition. |
|
● |
We
may incur significant liability as a result of ongoing
disputes. |
|
● |
Any
significant disruption in our technology could adversely impact our
brand and reputation and our business, operating results, and
financial condition. |
|
● |
We
rely on third parties in critical aspects of our business, which
creates additional risk. Our ability to offer our services depends
on relationships with other financial services institutions and
entities, and our inability to maintain existing relationships or
to enter into new such relationships could impact our ability to
offer services to customers. |
|
● |
Our
banking relationships for transaction processing are concentrated
in a small number of partners. |
|
● |
Certain
large customers provide a significant share of our revenue and the
termination of such agreements or reduction in business with such
customers could harm our business. If we lose or are unable to
renew these and other marketplace and enterprise client contracts
at favorable terms, our results of operations and financial
condition may be adversely affected. |
|
● |
Our
products and services may be exploited to facilitate illegal
activity such as fraud, money laundering, gambling, tax evasion,
and scams. If any of our customers use our products or services to
further such illegal activities, we could be subject to liability
and our business could be adversely affected. Our efforts to detect
and monitor such transactions for compliance with law may require
significant costs, and our failure to effectively deal with bad,
fraudulent or fictitious transactions and material internal or
external fraud could negatively impact our business. |
|
● |
Our
compliance and risk management methods might not be effective and
may result in outcomes that could adversely affect our reputation,
operating results, and financial condition. We rely on third
parties for some of our KYC and other compliance
obligations. |
|
● |
We
rely on connectivity with blockchain networks for our
Platforms. |
|
● |
If we
fail to develop, maintain, and enhance our brand and reputation,
our business, operating results, and financial condition may be
adversely affected. Moreover, unfavorable media coverage could
negatively affect our business. |
|
● |
Our
future growth depends significantly on our marketing efforts, and
if our marketing efforts are not successful, our business and
results of operations will be harmed. |
|
● |
Concerns
about the environmental impacts of blockchain technology could
adversely impact usage and perceptions of Nukkleus, its
subsidiaries and our Platforms. |
|
● |
The
COVID-19 pandemic could have unpredictable, including adverse,
effects on our business, operating results, and financial
condition. |
|
● |
As a
remote-first company, we are subject to heightened operational and
cybersecurity risks. |
Risks
Related to Nukkleus’s Platforms
|
● |
Our
product offerings are centered on WebTrader, MetaTrader, XWare,
Forexware and certain other platforms and product offerings
(together, our “Platforms”). The regulatory landscape as it relates
to processing payment transactions, including through our
Platforms, continues to evolve. Such evolution may create
additional regulatory burden and expense and could materially
impact the use and adoption of our Platforms. |
|
● |
The
future development and growth of our Platforms is subject to a
variety of factors that are difficult to predict and evaluate and
may be in the hands of third parties to a substantial extent. If
our Platforms do not grow as we expect, our business, operating
results, and financial condition could be adversely
affected. |
|
● |
Due
to unfamiliarity and some negative publicity associated with
blockchain technology, our customer base may lose confidence in
products and services that utilize blockchain
technology. |
|
● |
Our
Platforms and blockchain-enabled payment processing services are
innovative and are difficult to analyze vis-à-vis existing
financial services laws and regulations around the world. Our
platforms involve certain risks, including reliance on third
parties, which could limit or restrict our ability to offer the
product in certain jurisdictions. |
Risks
Related to Nukkleus’s Financial Condition
|
● |
There
is no assurance that we will maintain profitability or that our
revenue and business models will be successful. |
|
● |
We
may experience fluctuations in our quarterly operating
results. |
|
● |
Our
financial forecasts, which were presented to Nukkleus’s Board and
are included in this proxy statement/prospectus, may not prove to
be accurate. |
|
● |
Changes
in U.S. and foreign tax laws, as well as the application of
such laws, could adversely impact our financial position and
operating results. |
|
● |
If
our estimates or judgment relating to our critical accounting
policies prove to be incorrect, our operating results could be
adversely affected. |
|
● |
The
nature of our business requires the application of complex
financial accounting rules, and there is limited guidance from
accounting standard setting bodies. If financial accounting
standards undergo significant changes, our operating results could
be adversely affected. |
|
● |
Business
metrics and other estimates are subject to inherent challenges in
measurement, and our business, operating results, and financial
condition could be adversely affected by real or perceived
inaccuracies in those metrics. |
|
● |
We
are subject to changes in financial reporting standards or
policies, including as a result of choices made by us, which could
materially adversely affect our reported results of operations and
financial condition and may have a corresponding material adverse
impact on capital ratios. |
|
● |
As a
public company, we are required to develop and maintain proper and
effective internal controls over financial reporting, and any
failure to maintain the adequacy of these internal controls may
adversely affect investor confidence in our company and, as a
result, the value of our stock. |
|
● |
We
might require additional capital to support business growth, and
this capital might not be available or may require stockholder
approval to obtain. |
|
● |
We
may be affected by fluctuations in currency exchange
rates |
Risks
Related to Nukkleus’s Employees and Other Service
Providers
|
● |
In
the event of employee or service provider misconduct or error, our
business may be adversely impacted. |
|
● |
The
loss of one or more of our key personnel, or our failure to attract
and retain other highly qualified personnel in the future, could
adversely impact our business, operating results, and financial
condition. |
|
● |
Our
culture emphasizes innovation, and if we cannot maintain this
culture as we grow, our business and operating results could be
adversely impacted. |
|
● |
Our
officers, directors, employees, and large stockholders may
encounter potential conflicts of interests with respect to their
positions or interests in certain entities, and other initiatives,
which could adversely affect our business and
reputation. |
Risks
Related to Government Regulation
|
● |
We
are subject to various laws and regulations, and any adverse
changes to, or our failure to comply with, any laws and regulations
could adversely affect our brand, reputation, business, operating
results, and financial condition. |
|
● |
Legislative
and regulatory actions taken now or in the future may increase our
costs and impact our business, governance structure, financial
condition or results of operations. |
|
● |
The
regulatory environment to which we are subject gives rise to
various licensing requirements, legal and financial compliance
costs and management time, and non-compliance could result in
monetary and reputational damages, all of which could have a
material adverse effect on our business, financial position and
results of operations. |
|
● |
The
financial services industry is subject to intensive regulation.
Major changes in laws and regulations, as well as enforcement
actions, could adversely affect our business, financial position,
results of operations and prospects. |
|
● |
We
are subject to laws, regulations, and executive orders regarding
economic and trade sanctions, anti-bribery, anti-money laundering,
and counter-terror financing that could impair our ability to
compete in international markets or subject us to criminal or civil
liability if we violate them. As we continue to expand and localize
our international activities, our obligations to comply with the
laws, rules, regulations, and policies of a variety of
jurisdictions will increase and we may be subject to investigations
and enforcement actions by U.S. and non-U.S. regulators
and governmental authorities. |
|
● |
Our
consolidated balance sheets may not contain sufficient amounts or
types of regulatory capital to meet the changing requirements of
our various regulators worldwide, which could adversely affect our
business, operating results, and financial condition. |
|
● |
We
obtain and process a large amount of sensitive customer data. Any
real or perceived improper use of, disclosure of, or access to such
data could harm our reputation, as well as have an adverse effect
on our business. |
|
● |
We
are subject to complex and evolving laws, regulations, and industry
requirements related to data privacy, data protection and
information security across different markets where we conduct our
business, including in the EEA, such laws, regulations, and
industry requirements are constantly evolving and changing. Our
actual or perceived failure to comply with such laws, regulations,
and industry requirements, or our privacy policies/notices could
harm our business by impairing customer trust and could subject us
to fines and reputational harm. |
|
● |
We
are and may continue to be subject to litigation, including
individual and class action lawsuits, as well as regulatory audits,
disputes, inquiries, investigations and enforcement actions by
regulators and governmental authorities. |
Risks
Related to Nukkleus’s Intellectual Property
|
● |
Our
intellectual property rights are valuable, and any inability to
protect them could adversely impact our business, operating
results, and financial condition. |
|
● |
In
the future we may be sued by third parties for alleged infringement
of their proprietary rights. |
General
Risk Factors
|
● |
The
SEC has adopted amendments to Rule 15c2-11 under the Securities
Exchange Act of 1934, which could adversely affect our common
stock. |
|
● |
Adverse
economic conditions may adversely affect our business. |
|
● |
We
may be adversely affected by natural disasters, pandemics, and
other catastrophic events, and by man-made problems such as war or
terrorism, that could disrupt our business operations, and our
business continuity and disaster recovery plans may not adequately
protect us from a serious disaster. |
|
● |
Acquisitions,
joint ventures or other strategic transactions create certain risks
and may adversely affect our business, financial condition or
results of operations. |
|
● |
Delaware
law and our Certificate of Incorporation and Bylaws will contain
certain provisions, including anti-takeover provisions that limit
the ability of stockholders to take certain actions and could delay
or discourage takeover attempts that stockholders may consider
favorable. |
Risks
Related to Nukkleus’s Business
We have a limited operating history in an evolving and highly
volatile industry, which makes it difficult to evaluate our future
prospects and may increase the risk that we will not be
successful.
Nukkleus
was formed in 2013 and since then our business model has continued
to evolve. In 2021, we acquired a controlling interest in Match. In
2019, our Digital RFQ indirect subsidiary, and wholly owned
subsidiary of Match, began to operate a payment processing business
partly using blockchain technology. The comparability of our
results in prior quarterly or annual periods should not be viewed
as an indication of future performance. The “blockchain technology”
used by Digital RFQ in its payment processing business and referred
to throughout this proxy statement/prospectus is intended to refer
to stablecoins operated on the Bitcoin, Ethereum and Tron networks,
or such other blockchain networks as Digital RFQ may determine to
be reliable and well established in the financial services
industry, at an advanced stage and fully tested and collaterialized
based on certain criteria summarized below. The blockchain networks
used by Digital RFQ in its payment processing business are
maintained and operated by third parties.
Because
Digital RFQ makes use of blockchain technology only to process
payments and does not hold digital assets, the criteria for the
adoption and use of any blockchain network may differ from those of
investors in stablecoins. Digital RFQ evaluates each blockchain
and/or stablecoin on a daily and
transaction-by-transaction basis, to minimize any risk
associated with the blockchain or stablecoin and to ensure that
Digital RFQ can reliably complete the transaction in and out of the
stablecoin quickly to minimize such risk. Digital RFQ determines
that a blockchain or stablecoin is suitable for use in its payment
processing services by assessing the following criteria:
|
● |
First,
how widely supported is the blockchain stablecoin combination by
Digital RFQ’s trading partners, including the banks and financial
institutions Digital RFQ uses to support its business. Having
sufficient trading partners that support the blockchain or
stablecoin means there may be multiple choices of blockchain to use
for any given trade. |
|
● |
Second,
whether there is sufficient liquidity in those partners’ holdings
of the stablecoin to ensure Digital RFQ is able to trade in or out
without exposure to volatility and price risk. |
To
determine whether any blockchain technology meets Digital RFQ’s
requirements and is a suitable candidate for use in Digital RFQ’s
payment processing business, we assess the following criteria. We
monitor these criteria for each blockchain or stablecoin we use
regularly on an ongoing basis:
|
● |
Market
share. Digital RFQ assesses a blockchain or stablecoin’s share
of the stablecoin market as a whole and market capitalization from
publicly available information. Some stablecoins have been in
existence longer than others and may have a larger market share and
market capitalization. These factors also have an influence on the
market perception of such stablecoins. For example, USDT ‘Tether’
is the most prominent stablecoin measured by market capitalization
but has faced auditing issues, while newer products such as GBPT
have had professional Big Four auditors from inception but do not
have material market share to date and thus would not be perceived
or assessed as at an advanced stage or well
established. |
|
● |
Auditing
and Collateralization. Auditing is paramount to the security
and stability of stablecoins and for this reason Digital RFQ will
only work with firms that adhere to full collateralization that is
independently verified by an outside auditor. Digital RFQ believes
that collateralization is key in maturing stablecoins. For example,
the UST Terra Luna ‘collapse’ showed that
algorithmically-backed stability creates vulnerability to
counterparty mismanagement and influence, driven by the difficulty
and lack of auditing and intrinsic connection to the Terra network
itself. In contrast, collateralized stablecoins such as USDT and
USDC are fully backed by reserve fiat currency holdings and can be
redeemed by holders for such fiat currency. Digital RFQ also views
traditional markets, while much more established, as not completely
free of risk since they rely substantially on fractional reserve
banking to maintain the market. |
|
● |
Counterparty
Risk. Digital RFQ assesses counterparty risk in its stablecoin
and blockchain selection in the issuer of the stablecoin and its
governance and in the banks and financial institutions it uses to
source liquidity. Digital RFQ assesses the degree of governance
decentralization that may give direct control over funds (as
backing, for example) or attack vectors to the governance
architecture that could expose control over funds, and determines
the degree of counterparty risk from the level of centralization.
To assess the degree of centralization, Digital RFQ examines the
number of parties controlling the blockchain protocol, the number
of holders and the level of founder backing (demonstrated by
founders holding a significant amount of the stablecoin). Digital
RFQ is able to remain operationally stable throughout any given
payment processing transaction due primarily to a robust
counterparty infrastructure and minimal exposure to these ‘transit’
legs of the transaction (for more information on the third parties
involved in Digital RFQ’s payment processing business, please refer
to the section titled “We rely on connectivity to blockchain
networks for our Platforms”. |
|
● |
Smart
Contract Risk. Smart contract risk relates to the technical
security of a blockchain or stablecoin based on its underlying
code. If one of the supported stablecoins or other digital
currencies is compromised, collateral will be affected, thus
threatening the solvency of the blockchain protocol. Projects must
have undergone audits to be considered. We assess maturity based on
the number of days and the number of transactions of the smart
contract as a representation of use, community and development.
These proxies show how strong the code is. |
However,
because Digital RFQ makes use of blockchain technology only to
process payments, and does not hold digital assets, we are able to
constantly monitor the status of any blockchain network or
stablecoin before, during and after a payment is processed, and
determine which of the available blockchain networks is suitable
for a particular transaction. We therefore do not believe we are
exposed to material risks associated with holding stablecoins or
other digital assets. Furthermore, 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.
Because
we have a limited history operating our business at its current
scale and scope, it is difficult to evaluate our current business
and future prospects, including our ability to plan for and model
future growth. For example, recently launched services require
substantial resources and there is no guarantee that such
expenditures will result in profit or growth of our business. The
rapidly evolving nature of the market in which we operate,
substantial uncertainty concerning how these markets may develop,
and other economic factors beyond our control, reduces our ability
to accurately forecast quarterly or annual revenue. Failure to
manage our current and future growth effectively could have an
adverse effect on our business, operating results, and financial
condition.
If we do not effectively manage our growth and the associated
demands on our operational, risk management, sales and marketing,
technology, compliance and finance and accounting resources, our
business may be adversely impacted.
We
have experienced recent significant growth through our acquisition
of Match. In our recent acquisitions, including our acquisition of
Match, our business has become increasingly complex by expanding
the services we offer to include financial services and payment
processing services. To effectively manage and capitalize on our
growth, we must continue to expand our information technology and
financial, operating, and administrative systems and controls, and
continue to manage headcount, capital, and processes efficiently.
Our continued growth could strain our existing resources, and we
could experience ongoing operating difficulties in managing our
business as it expands across numerous jurisdictions, including
difficulties in hiring, training, and managing an employee base.
Failure to scale and preserve our company culture with growth could
harm our future success, including our ability to retain and
recruit personnel and to effectively focus on and pursue our
corporate objectives. If we do not adapt to meet these evolving
challenges, or if our management team does not effectively scale
with our growth, we may experience erosion to our brand, the
quality of our products and services may suffer, and our company
culture may be harmed. Moreover, the failure of our systems and
processes could undermine our ability to provide accurate, timely,
and reliable reports on our financial and operating results,
including the financial statements provided herein, and could
impact the effectiveness of our internal controls over financial
reporting. In addition, our systems and processes may not prevent
or detect all errors, omissions, or fraud, though we have
experienced no such material errors, omissions or fraud in the
past. For example, our employees may fail to identify transaction
errors or fraudulent information provided by our customers. Any of
the foregoing operational failures could lead to noncompliance with
laws, loss of operating licenses or other authorizations, or loss
of bank relationships that could substantially impair or even
suspend company operations.
We
intend to continue to develop our technology, in particular our
blockchain-enabled payment processing offering. Successful
implementation of this strategy may require significant
expenditures before any substantial associated revenue is generated
and we cannot guarantee that these increased investments will
result in corresponding and offsetting revenue growth. Our growth
may not be sustainable and depends on our ability to retain
existing customers, attract new customers, expand product
offerings, and increase processed volumes and revenue from both new
and existing customers.
The
future growth of our business depends on its ability to retain
existing customers, attract new customers as well as getting
existing customers and new customers to increase the volumes
processed through our payments platform and therefore grow revenue.
Our customers are not subject to any minimum volume commitments and
they have no obligation to continue to use our services, and we
cannot be sure that customers will continue to use our services or
that we will be able to continue to attract new volumes at the same
rate as we have in the past.
A
customer’s use of our services may decrease for a variety of
reasons, including the customer’s level of satisfaction with our
products and services, the expansion of business to offer new
products and services, the effectiveness of our support services,
the pricing of our products and services, the pricing, range and
quality of competing products or services, the effects of global
economic conditions, regulatory or financial institution
limitations, trust, perception and interest in foreign exchange and
payment processing services and in our products and services, or
reductions in the customer’s payment and transfer activity.
Furthermore, the complexity and costs associated with switching to
a competitor may not be significant enough to prevent a customer
from switching service providers, especially for larger customers
who commonly engage more than one payment service provider at any
one time.
Any
failure by us to retain existing customers, attract new customers,
and increase revenue from both new and existing customers could
materially and adversely affect our business, financial condition,
results of operations and prospects. These efforts may require
substantial financial expenditures, commitments of resources,
developments of our processes, and other investments and
innovations.
We face intense and increasing competition and, if we do not
compete effectively, our competitive positioning and our operating
results will be harmed.
We
operate in a rapidly changing and highly competitive industry, and
our results of operations and future prospects depend on, among
other things:
|
● |
the
growth of our customer base, |
|
● |
our
ability to monetize our customer base, |
|
● |
our
ability to acquire customers at a lower cost, and |
|
● |
our
ability to increase the overall value to us of each of our
customers while they use our products and services. |
Despite
the regulatory barriers to enter the markets we serve, we expect
our competition to continue to increase. In addition to established
enterprises, we may also face competition from
early-stage companies attempting to capitalize on the same, or
similar, opportunities as we are. Some of our current and potential
competitors have longer operating histories, particularly with
respect to our digital financial services products, significantly
greater financial, technical, marketing and other resources, and a
larger customer base than we do. This allows them, among others, to
potentially offer more competitive pricing or other terms or
features, a broader range of digital financial products, or a more
specialized set of specific products or services, as well as
respond more quickly than we can to new or emerging technologies
and changes in customer preferences.
Our
existing or future competitors may develop products or services
that are similar to our products and services or that achieve
greater market acceptance than our products and services. This
could attract new customers away from our services and reduce our
market share in the future. Additionally, when new competitors seek
to enter our markets, or when existing market participants seek to
increase their market share, these competitors sometimes undercut,
or otherwise exert pressure on, the pricing terms prevalent in that
market, which could adversely affect our market share and/or
ability to capitalize on new market opportunities.
We currently compete at multiple levels with a variety of
competitors, including:
|
● |
banks
and non-bank financial institutions (including without
limitation those using the Society for Worldwide Interbank
Financial Telecommunication (SWIFT) payment system);
and |
|
● |
foreign
exchange and derivative, including contract for difference (“CFD”),
transfer processors. |
Because
we do not currently control a bank or a bank holding company, we
may be subject to regulation by a variety of state, federal and
international regulators across our products and services and we
rely on third-party banks to provide
payment-processing services to our customers. This regulation
by federal, state and international authorities increases our
compliance costs, as we navigate multiple regimes with different
examination schedules and processes and varying disclosure
requirements.
We
believe that our ability to compete depends upon many factors, both
within and beyond our control, including the following:
|
● |
the
size, diversity and activity levels of our customer
base; |
|
● |
the
timing and market acceptance of products and services, including
developments and enhancements to those products and services
offered by us and our competitors; |
|
● |
customer
service and support efforts; |
|
● |
selling
and marketing efforts; |
|
● |
the
ease of use, performance, price and reliability of solutions
developed either by us or our competitors; |
|
● |
changes
in economic conditions, regulatory and policy
developments; |
|
● |
our
ability to successfully execute on our business plans; |
|
● |
our
ability to enter new markets; |
|
● |
general
digital payments, capital markets, blockchain and stablecoin market
conditions; |
|
● |
the
ongoing impact of the COVID-19 pandemic; and |
|
● |
our
brand strength relative to our competitors. |
Our
current and future business prospects demand that we act to meet
these competitive challenges but, in doing so, our revenue and
results of operations could be adversely affected if we, for
example, increase marketing expenditures or make other
expenditures. All of the foregoing factors and events could
adversely affect our business, financial condition, results of
operations, cash flows and future prospects.
Cyberattacks and security breaches of our systems, or those
impacting our customers or third parties, could adversely impact
our brand and reputation and our business, operating results and
financial condition.
Our
business involves the collection, storage, processing and
transmission of confidential information, customer, employee,
service provider and other personal data, as well as information
required to access customer assets. We have built our reputation on
the premise that our products and services offer customers a secure
way to accept and make payments and store value. As a result, any
actual or perceived security breach of us or our
third-party partners may:
|
● |
harm
our reputation and brand; |
|
● |
result
in our systems or services being unavailable and interrupt our
operations; |
|
● |
result
in improper disclosure of data and violations of applicable privacy
and other laws; |
|
● |
result
in significant regulatory scrutiny, investigations, fines,
penalties, and other legal, regulatory and financial
exposure; |
|
● |
cause
us to incur significant remediation costs; |
|
● |
lead
to theft or irretrievable loss of our or our customers’
assets; |
|
● |
reduce
customer confidence in, or decreased use of, our products and
services; |
|
● |
divert
the attention of management from the operation of our
business; |
|
● |
result
in significant compensation or contractual penalties from us to our
customers or third parties as a result of losses to them or claims
by them; and |
|
● |
adversely
affect our business and operating results. |
Further,
any actual or perceived breach or cybersecurity attack directed at
other financial institutions or blockchain companies, whether or
not we are directly impacted, could lead to a general loss of
customer confidence in the use of technology to conduct financial
transactions, which could negatively impact us including the market
perception of the effectiveness of our security measures and
technology infrastructure.
An
increasing number of organizations, including large businesses,
technology companies and financial institutions, as well as
government institutions, have disclosed breaches of their
information security systems, some of which have involved
sophisticated and highly targeted attacks, including on their
websites, mobile applications, and infrastructure. Attacks upon
systems across a variety of industries, including the payment
processing, forex and CFD industry, are increasing in their
frequency, persistence, and sophistication, and, in many cases, are
being conducted by sophisticated, well-funded, and organized groups
and individuals, including state actors. The techniques used to
obtain unauthorized, improper, or illegal access to systems and
information (including customers’ personal data and digital
assets), disable or degrade services, or sabotage systems are
constantly evolving, may be difficult to detect quickly, and often
are not recognized or detected until after they have been launched
against a target. These attacks may occur on our systems or those
of our third-party service providers or partners. Certain
types of cyberattacks could harm us even if our systems are left
undisturbed. For example, attacks may be designed to deceive
employees and service providers into releasing control of our
systems to a hacker, while others may aim to introduce computer
viruses or malware into our systems with a view to stealing
confidential or proprietary data. Additionally, certain threats are
designed to remain dormant or undetectable until launched against a
target and we may not be able to implement adequate preventative
measures.
Although
we do not have a past history of material security breaches or
cyberattacks, and do not believe we are a target of such breaches
or attacks, we have developed systems and processes designed to
protect the data we manage, prevent data loss and other security
breaches, effectively respond to known and potential risks. We
expect to continue to expend significant resources to bolster these
protections, but there can be no assurance that these security
measures will provide absolute security or prevent breaches or
attacks. Threats can come from a variety of sources, including
criminal hackers, hacktivists, state-sponsored intrusions,
industrial espionage, and insiders. Certain threat actors may be
supported by significant financial and technological resources,
making them even more sophisticated and difficult to detect. As a
result, our costs and the resources we devote to protecting against
these advanced threats and their consequences may increase over
time.
Although
we maintain insurance coverage that we believe is adequate for our
business, it may be insufficient to protect us against all losses
and costs stemming from security breaches, cyberattacks, and other
types of unlawful activity, or any resulting disruptions from such
events. Outages and disruptions of our systems, including any
caused by cyberattacks, may harm our reputation and our business,
operating results, and financial condition.
We may incur significant liability as a result of ongoing
disputes.
We were party to the BT Prime Litigation, and the case against us
has now been dismissed with prejudice with no material liability to
us. We may be subject to various other legal proceedings, consumer
arbitrations, and regulatory investigation matters. If any of these
matters are resolved unfavorably to us, our business and results of
operations may be adversely affected.
Any significant disruption in our technology could adversely impact
our brand and reputation and our business, operating results, and
financial condition.
Our
reputation and ability to grow our business depends on our ability
to operate our service at high levels of reliability, scalability,
and performance, including the ability to process and monitor, on a
daily basis, a large number of transactions that occur at high
volume and frequencies across multiple systems. The proper
functioning of our products and services, the ability of our
customers to make and receive payments, and our ability to operate
at a high level, are dependent on our ability to access the
blockchain networks underlying our Platforms and other supported
blockchain-based products and technology, for which access is
dependent on our systems’ ability to access the internet. Further,
the successful and continued operations of such blockchain networks
will depend on a network of computers, miners, or validators, and
their continued operations, all of which may be impacted by service
interruptions.
Our
systems, the systems of our third-party service providers and
partners, and certain blockchain networks, have experienced from
time to time and may experience in the future service interruptions
or degradation because of hardware and software defects or
malfunctions, distributed denial-of-service and other
cyberattacks, insider threats, break-ins, sabotage, human error,
vandalism, earthquakes, hurricanes, floods, fires, and other
natural disasters, power losses, disruptions in telecommunications
services, fraud, military or political conflicts, terrorist
attacks, computer viruses or other malware, or other events. In
addition, extraordinary site usage could cause our computer systems
to operate at an unacceptably slow speed or even fail. Some of our
systems, including systems of companies we have acquired, or the
systems of our third-party service providers and partners are
not fully redundant, and our or their disaster recovery planning
may not be sufficient for all possible outcomes or
events.
If
any of our systems, or those of our third-party service
providers, are disrupted for any reason, our products and services
may fail, resulting in unanticipated disruptions, slower response
times and delays in our services, including our customers’ payments
through our Platforms. This could lead to failed or unauthorized
payments, incomplete or inaccurate accounting, loss of customer
information, increased demand on limited customer support
resources, customer claims, and complaints with regulatory
organizations, lawsuits, or enforcement actions.
A
prolonged interruption in the availability or reduction in the
availability, speed, or functionality of our products and services
could harm our business. Frequent or persistent interruptions in
our services could cause current or potential customers or partners
to believe that our systems are unreliable, leading them to switch
to our competitors or to avoid or reduce the use of our products
and services, and could permanently harm our reputation and
brands.
Moreover,
to the extent that any system failure or similar event results in
damages to our customers or their business partners, these
customers or partners could seek significant compensation or
contractual penalties from us for their losses, and those claims,
even if unsuccessful, are likely to be time-consuming and
costly for us to address. Problems with the reliability or security
of our systems would harm our reputation, and damage to our
reputation and the cost of remedying these problems could
negatively affect our business, operating results, and financial
condition.
In
addition, we are continually improving and upgrading our
information systems and technologies. Implementation of new systems
and technologies is complex, expensive, time-consuming, and may not
be successful. If we fail to timely and successfully implement new
information systems and technologies, or improvements or upgrades
to existing information systems and technologies, or if such
systems and technologies do not operate as intended, it could have
an adverse impact on our business, internal controls (including
internal controls over financial reporting), operating results, and
financial condition.
Because
we are subject to regulation in certain jurisdictions, frequent or
persistent interruptions could also lead to regulatory scrutiny,
significant fines and penalties, and mandatory and costly changes
to our business practices, and ultimately could cause us to lose
existing licenses or banking relationships that we need to operate,
or prevent or delay us from obtaining additional licenses that may
be required for our business.
We rely on third parties in critical aspects of our business, which
creates additional risk. Our ability to offer our services depends
on relationships with other financial services institutions and
entities, and our inability to maintain existing relationships or
to enter into new such relationships could impact our ability to
offer services to customers.
We
depend on various third-party partners and payment systems.
More specifically, our offering of payments and transfer services
depends on our ability to offer blockchain transaction processing,
Automated Clearing House network (“ACH”) transaction processing,
wire transfer and other payment processing services to our
customers.
In
order to provide such transaction processing services, we have
established relationships with financial institutions whereby such
financial institutions provide us with access into the relevant
payment networks (e.g., the card networks and the ACH). Our ability
to offer our core services depends on our ability to maintain
existing relationships with financial institutions and to seek out
and obtain new such relationships.
Also,
critical aspects of our technology rely on
third-party technologies, including blockchain networks. Our
regulatory status, the status of our Platforms and of blockchain
technologies more generally, may be an impediment to our ability to
receive or obtain services from financial institutions. Should our
partners cease providing access to such technologies and networks,
we would be at risk of being unable to provide the payment
processing services that are core to our customer
offering.
Third
parties upon which we rely to process transactions may refuse to
process transactions adequately, may breach their agreements with
us, refuse to renew agreements on commercially reasonable terms,
take actions that degrade the functionality of our services, impose
additional costs or requirements on us, or give preferential
treatment to competitive services or suffer outages in their
systems, any of which could disrupt our operations and materially
and adversely affect our business, financial condition, results of
operations and prospects.
Some
third parties that provide services to us may have or gain market
power and be able to increase their prices to us without
competitive constraint. In addition, there can be no assurance that
third parties that provide services directly to us will continue to
do so on acceptable terms, or at all, or will not suffer from
outages to their systems. If any third parties were to stop
providing services to us on acceptable terms, we may be unable to
procure alternatives from other third parties in a timely and
efficient manner and on acceptable terms, or at all, which may
materially and adversely affect our business, financial condition,
results of operations and prospects.
We are subject to credit risks in respect of counterparties,
including financial institutions.
We
are and will continue to be subject to the risk of actual or
perceived deterioration of the commercial and financial soundness,
or perceived soundness, of other financial institutions, in
particular in relation to receivables from financial institutions
regarding settled payment transactions, and cash and
cash-equivalents held at financial institutions. One
institution defaulting, failing a stress test or requiring
mail-in by its shareholders and/or creditors and/or
bail-out by a government could lead to significant liquidity
problems and losses or defaults by other institutions. Even the
perceived lack of creditworthiness of, or questions about, a
counterparty or major financial institution may lead to
market-wide liquidity problems and losses or defaults by
financial institutions on which we have an exposure. This risk
resulting from the interdependence on financial institutions is
sometimes referred to as “systemic risk” and may adversely affect
financial intermediaries, such as industry payment systems and
banks, with whom we interact on a daily basis. Systemic risk,
particularly within the United States, could have a material
adverse effect on our ability to raise new funding and on our
business, financial condition, results of operations and
prospects.
Our banking relationships for transaction processing are
concentrated in a small number of partners.
We
use a small number of banks and financial institutions as banking
services providers. Should our relationships with such banks and
financial institutions deteriorate, we may be limited in our
ability to offer the payment processing services that are core to
our offerings. While we have multiple such banking partners and are
working to diversify these relationships further, we do not have
written agreements with such banks and financial institutions and
there remains some risk that, in the short term, our ability to
provide payment processing services may be affected by any
interruption in the banking services we receive. As such, should
our relationships with our existing banking and financial
institution partners deteriorate or if such banks and financial
institutions make a decision to discontinue the services they
provide us, we could lose our ability to process payments,
financial transfers and other transactions. In such an event,
the value of our services would be negatively impacted and our
institutional investor clients could be forced to process smaller
transaction volume with us or to cease transaction processing
through us entirely.
Certain large customers provide a significant share of our revenue
and the termination of such agreements or reduction in business
with such customers could harm our business. If we lose or are
unable to renew these and other marketplace and enterprise client
contracts at favorable terms, our results of operations and
financial condition may be adversely affected.
The
largest customer provides significant contribution to our revenue.
For the year ended September 30, 2022, our largest customer, TCM,
represented 89.2% of our revenue. Failure to retain this and other
customers could negatively impact our business and could lead to
significant fluctuations in our performance. Customers may seek
price reductions when renewing, expanding or changing their
services with us and/or when their need for payment, asset storage,
investing or capital raise services experiences significant volume
changes.
Should
the rate of growth of our customers’ business slow or decline, this
could have an adverse effect on volumes processed and therefore an
adverse effect on our results of operations. If our contracts are
terminated by our large customers or if our large customers shift
business away, or if we are unsuccessful in retaining contract
terms that are favorable to us, our business, financial condition,
results of operations and prospects may be materially and adversely
affected.
Our products and services may be exploited to facilitate illegal
activity such as fraud, money laundering, gambling, tax evasion,
and scams. If any of our customers use our products or services to
further such illegal activities, we could be subject to liability
and our business could be adversely affected. Our efforts to detect
and monitor such transactions for compliance with law may require
significant costs, and our failure to effectively deal with bad,
fraudulent or fictitious transactions and material internal or
external fraud could negatively impact our
business.
We
may in the future be subject to liability for illegal transactions,
including fraudulent payments initiated by our customers, money
laundering, gambling, tax evasion, and scams. Examples of fraud
include when a party knowingly uses stolen or otherwise illicitly
acquired access information to a transaction. In addition, we are
subject to the risk that our employees, counterparties or
third-party service providers commit fraudulent activity
against us or our customers.
Criminals
are using increasingly sophisticated methods to engage in illegal
activities such as counterfeiting, account takeover and fraud. It
is possible that incidents of fraud could increase in the future.
The use of our products or services for illegal or improper
purposes could subject us to claims, individual and class action
lawsuits, and government and regulatory investigations,
prosecutions, enforcement actions, inquiries, or requests that
could result in liability and reputational harm for us. In
addition, our efforts to detect and monitor such transactions for
compliance with law may require significant costs.
Moreover,
certain activities that may be legal in one jurisdiction may be
illegal in another jurisdiction, and certain activities that are at
one time legal may in the future be deemed illegal in the same
jurisdiction. As a result, there is significant uncertainty and
cost associated with detecting and monitoring transactions for
compliance with local laws. In the event that a customer is found
responsible for intentionally or inadvertently violating the laws
in any jurisdiction, we may be subject to governmental inquiries,
enforcement actions, prosecuted, or otherwise held secondarily
liable for aiding or facilitating such activities. Changes in law
have also increased the penalties for money transmitters,
e-money issuers, broker-dealers and alternative trading
systems for certain illegal activities, and government authorities
may consider increased or additional penalties from time to time.
Owners of intellectual property rights or government authorities
may seek to bring legal action against us for involvement in the
sale of infringing or allegedly infringing items. Any threatened or
resulting claims could result in reputational harm, and any
resulting liabilities, loss of transaction volume, or increased
costs could harm our business.
Moreover,
while fiat currencies can be used to facilitate illegal activities,
blockchain technologies, such those used in our Platforms are
relatively new and, in many jurisdictions, may be lightly regulated
or largely unregulated. Many blockchains have characteristics such
as the speed with which digital asset transactions can be
conducted, the ability to conduct transactions without the
involvement of regulated intermediaries, the ability to engage in
transactions across multiple jurisdictions, the irreversible nature
of certain blockchain transactions, and encryption technology that
anonymizes these transactions, which may make blockchain technology
susceptible to use in illegal activity.
U.S. federal
and state and foreign regulatory authorities and law enforcement
agencies, such as the Department of Justice, the SEC, the Commodity
Futures Trading Commission, The Federal Trade Commission, the IRS
and various state securities and financial regulators investigate,
issue subpoenas and civil investigative demands, and take legal
action against persons and entities alleged to be engaged in
fraudulent schemes or other illicit activity involving blockchain
technologies.
While
we believe that our risk management and compliance framework is
designed to detect significant illicit activities conducted by our
potential or existing customers, we cannot ensure that we will be
able to detect all illegal activity on our systems. If any of our
customers use our products and services to further such illegal
activities, our business could be adversely affected. We have not
detected any material illicit activities in the past.
Our
risk management and compliance framework is key to our operations
and is designed to address Anti Money Laundering (“AML”) and
Counter Terrorist Finance (“CTF”) considerations consistent with
our authorization by the Financial Conduct Authority as an
Electronic Money Directive Agent, among others. The key elements of
the regulatory framework that impact us include, but are not
limited to, the following U.K. legislation:
|
● |
The
European Union 5th and 6th Money
Laundering Directives. The main components of the
5th Money Laundering Directive was to (i) grant
access to the general public to beneficial ownership information of
EU based companies; (ii) requires regulated entities to consult the
beneficial ownership register when performing AML due diligence;
(iii) obliges EU member states to create a list of national public
offices and functions that qualify as politically exposed persons
(PEP); and (iv) introduces strict enhanced due diligence measures
for financial flows from high risk third countries. The
6th Money Laundering Directive introduced a
harmonised list of 22 predicate offences that constitute money
laundering and expanded its regulatory scope and criminal
definition to include “aiding and abetting”. Regulated entities
such as Digital RFQ are required to ensure that their AML/CFT
programs address those offences. Criminal liability for those
laundering money has been extended to legal persons, which means
that organisations can be punished for offences committed by the
people that work for them. The change means that responsibility for
corporate criminal conduct falls on management personnel in
addition to individual employees. |
|
● |
The
Money Laundering, Terrorist Financing and Transfer of Funds
(Information on the Payer), Regulation 2017. |
|
● |
Proceeds
of Crime Act 2002. Digital RFQ is required to ensure sufficient
controls are in place to enable its employees to recognise money
laundering. |
|
● |
Terrorism
Act 2000 and Counter Terrorism Act 2008. Digital RFQ is
required to ensure sufficient controls are in place so that the
firm can recognise terrorist financing. |
|
● |
Fraud
Act 2006. Digital RFQ is required to ensure controls are in
place to identify the risk of both internal and external fraud and
the necessary controls are implemented |
|
● |
Bribery
Act 2010. Digital RFQ is required to ensure controls are in
place to identify the risk of bribery and corruption and the
necessary controls are implemented |
The
primary objectives in establishing our AML/CTF policy are
to:
|
● |
Conduct
regular assessments to continually understand the money laundering
and terrorist financing (“ML/TF”) risks associated with our
business activities; |
|
● |
Prevent
Digital RFQ’s services from being used for tax evasion
purposes; |
|
● |
Ensure
Digital RFQ has appropriate controls to mitigate the ML/TF and tax
evasion risks faced by the business; |
|
● |
Establish
minimum standards of customer due diligence to be obtained for all
entities we conduct business with, including to: |
|
|
● |
Identify
and verify legal existence; |
|
|
● |
Understand
who are the natural persons that ultimately own or control the
entity; |
|
|
● |
Understand
the risks posed by higher risks clients, business relationships or
transactions; and |
|
|
● |
Establish
standards to allow us to identify unusual or potential suspicious
behavior and report suspicions of ML/TF or other financial crime,
as advised by law. |
DigitalRFQ’s
risk-based approach to AML/CTF is driven by the clients risk
rating. DigitalRFQ operates a three-tiered classification of a
potential client relationship:
|
1. |
Low
Risk — applying simplified due diligence of customers |
|
2. |
Medium
Risk — applying standard client due diligence |
|
3. |
High
Risk — applying enhanced due diligence |
Standard
customer due diligence is conducted on the majority of customers,
who present a normal level of risk. Where enough low risk factors
from the customer are identified, Digital RFQ employs simplified
due diligence, which is a light touch approach involving less
stringent checks. Conversely, if high risk factors are identified,
then the firm employs enhanced due diligence, which involves a
thorough ‘deep dive’ review of the customer. These customers, if
approved, are then subject to ongoing monitoring.
Simplified
due diligence is for customers who present a very low
risk:
|
1. |
Timing
— the general rule is to verify identity before the establishment
of a business relationship. However, there is now an exemption to
this if there is little risk of money laundering. With simplified
due diligence, the verification can take place later, so we do not
interrupt the normal flow of business, provided that the
verification is completed as soon as practicable after contact is
first established. |
|
2. |
Electronic
— a customer’s identification can be based purely on electronic
identification if the verification software used is of sufficient,
accredited standard and that they can corroborate some of the
information obtained with the customer. This could even be the case
in some non-face-to-face relationships, if there are
sufficient low risk factors in place. |
|
3. |
Documentation
— this can be done with one document only and need not be
independently certified. |
Enhanced
due diligence is followed in all circumstances where a customer is
identified as high-risk, and this involves seven specific
tasks:
|
1. |
Conduct
enhanced monitoring of the business relationship by increasing the
number and timing of controls applied, and selecting patterns of
transactions that need further examination. |
|
2. |
Obtaining
additional information about the customer. |
|
3. |
Capturing
additional information about the intended nature of the business
relationship. |
|
4. |
Finding
out about the source of the funds or wealth of the
customer. |
|
5. |
Understanding
the reasons for the intended or performed transactions. |
|
6. |
Getting
the approval of senior management for continuing the business
relationship. |
|
7. |
Requiring
the first payment to be carried out through an account in the
customer’s name with a bank subject to similar customer due
diligence standards. |
Digital
RFQ performs a customer risk assessment to determine whether a
specific customer is high, medium or low risk and will take into
consideration the customer type, their geographic location and the
product or service being provided. When assessing the risk, Digital
RFQ considers the following risk factors:
Risk
Type |
|
High
Risk Factors |
|
Low
Risk Factors |
Customer |
|
The
business relationship is conducted in unusual
circumstances
Customers
that are resident in jurisdictions considered to present a ‘higher’
risk
Legal
persons or arrangements that are personal
asset-holding vehicles
Companies
that have nominee shareholders or shares in bearer form
Businesses
that are cash-intensive
The
ownership structure of the company appears unusual or excessively
complex given the nature of the company’s business
|
|
Public
companies listed on a stock exchange and subject to disclosure
requirements (either by stock exchange rules or through law or
enforceable means), which impose requirements to ensure adequate
transparency of beneficial ownership
Public
administrations or enterprises Customers that are resident in
jurisdictions considered to present a ‘lower’ risk
|
|
|
|
|
|
Geographic
Location |
|
Countries
identified by credible sources as not having effective
anti-money laundering (AML) or Combating the Financing of
Terrorism (CFT) systems (such as mutual evaluations, detailed
assessment reports or published follow-up reports)
Countries
identified by credible sources as having significant levels of
corruption or other criminal activity
Countries
subject to sanctions, embargos or similar measures issued by, for
example, the European Union or the United Nations
Countries
providing funding or support for terrorist activities, or that have
designated terrorist organisations operating within their
country
|
|
EU
Member States
Third
leg countries having effective AML/CFT systems
Third
leg countries identified by credible sources as having a low level
of corruption or other criminal activity
Third
leg countries which, on the basis of credible sources such as
mutual evaluations, detailed assessment reports or published
follow-up reports, have requirements to combat money
laundering and terrorist financing consistent with the revised FATF
recommendations and effectively implement those
requirements
|
Risk
Type |
|
High
Risk Factors |
|
Low
Risk Factors |
Product
or Service |
|
Products
or transactions that might favour anonymity
Non-face-to-face business
relationships or transactions, without certain safeguards, such as
electronic signatures
Payments
received from unknown or un-associated third
parties
New
products and new business practices
|
|
Life
insurance policies for which the premium is low
Insurance
policies for pension schemes, if there is no early surrender option
and the policy cannot be used as collateral
Financial
products or services that provide appropriately defined and limited
services to certain types of customers, so as to increase access
for financial inclusion purposes
|
Digital
RFQ undertakes ongoing monitoring regardless of the customer risk
level and whether the onboarding process involved simple, standard
or enhanced due diligence. This is carried out using a
risk-based approach that focuses on reviewing customer data
and monitoring transactions:
Low
risk factors |
|
Normal
risk factors |
|
High
risk factors |
Simplified
Due Diligence at onboarding, with ongoing DD monitoring conducted
on a real-time suspicion basis only.
All
checks with regards to Peps, Sanctions and adverse media take place
and are refreshed every 6 months.
Transaction
monitoring on a daily basis
Wallet
verification and analysis when we whitelist the wallet
KYC
refresh every 12 months for updated KYC for Directors,
Shareholders, UBO’s
6 month
review of client and transactions
|
|
Standard
Due Diligence at onboarding and then real time transaction checks
as well as full customer review every couple
of years.
All
checks with regards to Peps, Sanctions and adverse media take place
and are refreshed every 3 months or every transaction in some
circumstances.
Transaction
monitoring on a daily basis
Wallet
verification and analysis every transaction
KYC
refresh every 6 months for updated KYC for Directors,
Shareholders, UBO’s
6 month
review of client and transactions
|
|
Enhanced
Due Diligence at onboarding and then real time transaction checks
as well as retrospective transaction checks on a monthly basis. A
full customer review every 6 months.
All
checks with regards to Peps, Sanctions and adverse media take place
and are reviewed every transaction that takes place.
Transaction
monitoring on a daily basis
Wallet
verification and analysis on a regular basis
KYC
refresh every 3 months for updated KYC for Directors,
Shareholders, UBO’s
Monthly
review of client and transactions
|
Where
Digital RFQ identifies suspicious activity, a designated officer
notifies the UK National Crime Agency via a Suspicious Activity
Report (SAR).
Internal |
|
External |
Raised
by employee to the nominated officer
Suspicious
activity is irrespective of amount and derives from red flags that
have been identified by the employee throughout the course of their
working life
An
official Internal SAR form should be completed
Nominated
officer decides to authorise or raise an external SAR
|
|
Raised
by nominated officer to the National Crime Agency (NCA)
Can
contain details identified in internal SAR or from risk
assessments
Must
wait for approval from NCA to continue
Details
of all SARs (internal and external) must be recorded
Company
must have documented procedures
|
The
client risk rating reflects DigitalRFQ’s assessment of the money
laundering and terrorist financing risk the client poses and is
determined by a combination of factors including:
|
● |
Country
risk — Jurisdictions involved with respect to the domicile,
operation and control of the client entity and personal links to
the beneficial owners and controllers; |
|
● |
Sector
risk — Links to sectors associated with higher risk corruption or
links to sectors that involve significant amounts of cash as
certain businesses are considered to present a higher risk of
potential financial crime; |
|
● |
Entity
risk — the legal form of the entity and its level of transparency
including ownership and source of wealth; |
|
● |
Product
or service risk — the nature of the client’s business and the
products or services that the client will require as far as can be
assessed throughout the relationship and the risk classifications
that Digital RFQ has attributed to them; |
|
● |
Reputation
— any adverse media such as allegations or criminality, frozen
assets or concerns of beneficial owner/director integrity;
and |
|
● |
PEP
risk — all client relationships that have one or more PEPs either
as their ultimate beneficial owner or a controller will be
classified as a PEP relationship or may be designated as high
risk. |
|
● |
Sanctions
risk — individuals and related organisations may have sanctions
imposed. |
The
above factors have a cumulative effect on risk rating; multiple
adverse factors will increase the risk rating of the client and
must be referred to compliance for assessment. The client risk
rating drives the frequency of periodic reviews. All due diligence
is completed inline with our AML policy and procedures and is
documented and stored for five years.
Digital
RFQ performs an annual risk assessment covering the following risk
categories:
Risk
Types |
|
Assessment
factors |
|
Information
sources |
Product
Risk |
|
The
inherent financial crime risks presented by the product(s) and
services that we are offering — being in financial
services we are subject to be a target for money laundering or
helping to facilitate money laundering. |
|
UK
National Risk Assessment |
|
|
|
|
|
Customer
Risk |
|
Separate
to the Customer Risk Assessment, this is an integral part of the
business wide risk assessment, which considers the customer base
that is being targeted and the risks that they will bring due to
Peps/sanctions lists and adverse media. |
|
Financial
Actions Task Force (FATF)FCA Thematic Reviews |
|
|
|
|
|
Organisational
Risk |
|
The
inherent organisational risks in relation to financial crime and
convoluted organisational structures in relation to shareholdings
and establishing the UBO’s. |
|
National Crime
Agency |
|
|
|
|
|
Geographical
Risk |
|
The
inherent geographical risks our company faces by medium or high
risk jurisdictions. This also includes sanctioned countries and
those listed on OFAC or FAFT in relation to their risk for money
laundering |
|
The
European Commission |
Digital
RFQ follows internal controls that are proportionate to its
businesses size and nature and consist of a number of controls
including senior management oversight, training and record
keeping.
Our compliance and risk management methods might not be effective
and may result in outcomes that could adversely affect our
reputation, operating results, and financial condition. We rely on
third parties for some of our KYC and other compliance
obligations.
Our
ability to comply with applicable complex and evolving laws,
regulations, and rules is largely dependent on the establishment
and maintenance of our compliance, audit, and reporting systems, as
well as our ability to attract and retain qualified compliance and
other risk management personnel. While we have devoted significant
resources to develop policies and procedures to identify, monitor,
and manage our risks, and expect to continue to do so in the
future, we cannot assure that our policies and procedures will
always be effective or that we will always be successful in
monitoring or evaluating the risks to which we are or may be
exposed in all market environments or against all types of risks,
including unidentified or unanticipated risks. Our risk management
policies and procedures rely on a combination of technical and
human controls and supervision that are subject to error and
failure.
Some
of our methods for managing risk are discretionary by nature and
are based on internally developed controls, observed historical
market behavior, and standard industry practices. These methods may
not adequately prevent losses, particularly as they relate to
extreme market movements which may be significantly greater than
historical fluctuations in the market. Our risk management policies
and procedures also may not adequately prevent losses due to
technical errors if our testing and quality control practices are
not effective in preventing failures. In addition, we may elect to
adjust our risk management policies and procedures to allow for an
increased risk tolerance, which could expose us
to the risk of greater losses.
Regulators
periodically review our compliance with our own policies and
procedures and with a variety of laws and regulations. Though we
believe we have robust risk management and compliance procedures,
and have received no findings from any applicable regulator of any
violations of applicable laws and regulations, if we fail to comply
with these in future, or do not adequately remediate certain
findings, regulators could take a variety of actions that could
impair our ability to conduct our business, including delaying,
denying, withdrawing, or conditioning approval of our licenses, or
certain products and services. In addition, regulators have broad
enforcement powers to censure, fine, issue
cease-and-desist orders or prohibit us from engaging in some
of our business activities. In the case of non-compliance or
alleged non-compliance, we could be subject to investigations and
proceedings that may result in substantial penalties or civil
lawsuits, including by customers, for damages, which can be
significant. Any of these outcomes would adversely affect our
reputation and brand and our business, operating results, and
financial condition. Some of these outcomes could adversely affect
our ability to conduct our business.
Furthermore,
we rely on third parties for some of our KYC and other compliance
obligations. If these third parties fail to effectively provide
these services, we may be subject to adverse consequences as
described above.
We rely on connectivity with blockchain networks for our
Platforms.
Our
connectivity with existing blockchain networks, including the
Bitcoin, Ethereum, Tron and other stablecoin networks, will enable
our customers to derive the benefit such networks may provide them
in facilitating our payment processing services. Providing such
connectivity presents a risk that we may, under derivative theories
of liability, be held responsible for the bad acts, failures or
violations of law of the blockchain networks.
Although
we seek to minimize risks associated with any one blockchain
network by electing which network to use for a given transaction
and by determining which network is appropriate for such
transaction, based on our assessment of whether such blockchain
technology is at an advanced-stage, is fully tested,
well-established and fully collateralized, we may be exposed
to risks that affect blockchain networks generally, or we may not
be aware of or be able to identify risks associated with any
individual network (for a summary of Digital RFQ’s considerations
in assessing which blockchain networks to use in its payment
processing business. Each blockchain network has only been in
existence for a limited number of years, and digital assets
markets have a limited performance record, making them part of a
new and rapidly evolving industry that is subject to a variety of
factors that are difficult to evaluate. For example, the following
are some of the risks could materially adversely affect Digital
RFQ’s financial performance and results of operations:
|
● |
As a
blockchain network continues to develop and grow, certain technical
issues might be uncovered and the trouble-shooting and
resolution of such issues requires the attention and efforts of
blockchains’ global development community. Like all software,
blockchain networks are at risk of vulnerabilities and bugs that
can potentially be exploited by malicious actors. For example, in
2010, the Bitcoin network underwent a fork to reverse the effects
of a hack in which an unknown attacker took advantage of a software
vulnerability in the early source code of the Bitcoin network to
fraudulently mint a large amount of digital assets. |
|
● |
Different
blockchain networks are subject to material changes in their
structure as technology and markets for digital assets evolve, and
such changes may lead to adverse consequences. As an example, the
Ethereum network expects to complete, by the end of 2021, a change
from the “proof-of-work” consensus method to a “proof-of-stake”
consensus method. The consequences of such change cannot be
entirely foreseen, and flaws resulting from that transition could
negatively affect the Ethereum network. |
|
● |
Certain
privacy-preserving features have been or are expected to be
introduced to blockchain networks, such as the Ethereum network.
This could damage the public perception of blockchain networks
generally or any one blockchain network in particular, and their or
its utility in Digital RFQ’s payment processing system. |
|
● |
Networks
rely on the internet. A significant disruption of internet
connectivity (i.e., one that affects large numbers of users or
geographic regions) could disrupt blockchain networks’
functionality and operations until the disruption in the internet
is resolved. |
|
● |
The
governance of decentralized networks, such as certain blockchain
networks, is by voluntary consensus and open competition. In other
words, a typical network has no central decision- making body or
clear manner in which participants can come to an agreement other
than through voluntary, widespread consensus. As a result, a lack
of widespread consensus in the governance of a network may
adversely affect the network’s utility and ability to adapt and
face challenges, including technical and scaling challenges. The
decentralized governance of a network may make it difficult to find
or implement solutions or marshal sufficient effort to overcome
existing or future problems, especially protracted ones requiring
substantial directed effort and resource commitment over a long
period of time, such as scaling challenges. A network’s failure to
overcome governance challenges could exacerbate problems
experienced by the network or cause the network to fail to meet the
needs of its users, and could cause users, miners, and developer
talent to abandon the network or lead to a drop in speculative
interest, which could cause the value of a digital currency to
decline. |
|
● |
A
network may use a cryptographic protocol to govern the interactions
within it. In the case of Bitcoin, a loose community known as the
“core developers” has evolved to informally manage the source code
for the protocol. The core developers can propose amendments to the
network’s source code that, if accepted by users, could alter the
protocols and software of the network. These alterations would
occur through software upgrades, and could potentially include
changes to the irreversibility of transactions. Alternatively,
software upgrades and other changes to the protocols of the network
could fail to work as intended or could introduce bugs, security
risks, or otherwise adversely affect, the network. Similar dynamics
occur in other blockchain networks. |
|
● |
Networks
that operate based on an open-source protocol are often
maintained by the core developers and other contributor. As
blockchain network protocols generally are not sold or made
available subject to licensing or subscription fees and their use
does not generate revenues for their development team, the core
developers are generally not compensated for maintaining and
updating the source code for the network protocol. Consequently,
there is a lack of financial incentive for developers to maintain
or develop a blockchain network and the core developers may lack
the resources to adequately address emerging issues with the
network protocol. Although blockchain networks are typically
supported by core developers, there can be no guarantee that such
support will continue or be sufficient in the future.
Alternatively, some developers may be funded by entities, such as
foundations or corporations, whose interests are at odds with other
participants in the network. In addition, a bad actor could also
attempt to interfere with the operation of a network by attempting
to exercise a malign influence over a core developer. To the extent
that material issues arise with a network protocol and the core
developers and open-source contributors are unable to address
the issues adequately or in a timely manner, a blockchain network
may be adversely affected. |
|
● |
Blockchain
technologies are premised on theoretical conjectures as to the
impossibility, in practice, of solving certain mathematical
problems quickly. Those conjectures remain unproven, however, and
mathematical or technological advances could conceivably prove them
to be incorrect. Blockchain technology may also be negatively
affected by cryptography or other technological or mathematical
advances, such as the development of quantum computers with
significantly more power than computers presently available, that
undermine or vitiate the cryptographic consensus mechanism
underpinning the blockchain and other distributed ledger protocols.
If either of these events were to happen, markets and processes
that rely on blockchain technologies, such as Digital RFQ’s
blockchain-enabled payment processing operations, could be
adversely affected. |
If we fail to develop, maintain, and enhance our brand and
reputation, our business, operating results, and financial
condition may be adversely affected. Moreover, unfavorable media
coverage could negatively affect our business.
Our
brand and reputation are key assets and a competitive advantage.
Maintaining, protecting, and enhancing our brand depends largely on
the success of our marketing efforts, ability to provide
consistent, high-quality, and secure products, services, features,
and support, and our ability to successfully secure, maintain, and
defend our rights to use the “Nukkleus”, “Forexware”, “XWare”,
“MetaTrader” and other related marks and other trademarks important
to our brand. We believe that the importance of our brand will
increase as competition further intensifies. Our brand and
reputation could be harmed if we fail to achieve these objectives
or if our public image were to be tarnished by negative publicity,
unexpected events, or actions by third parties.
We
receive a high degree of media coverage. Unfavorable publicity
regarding, for example, our product changes, product quality,
litigation or regulatory activity, privacy practices, terms of
service, employment matters, the use of our products, services, or
supported blockchain technologies for illicit or objectionable
ends, the actions of our customers, or the actions of other
companies that provide similar services to ours, has in the past,
and could in the future, adversely affect our
reputation.
In
addition, actions by, or unfavorable publicity about, Emil
Assentato, our Chairman and Chief Executive Officer, Jamal
Khurshid, our Chief Operating Officer, or other officers and
managers of Nukkleus and its subsidiaries may adversely impact our
brand and reputation. Such negative publicity also could have an
adverse effect on the size and engagement of our customers and
could result in decreased revenue, which could have an adverse
effect on our business, operating results, and financial condition.
Further may be the target of social-media campaigns
criticizing actual or perceived actions or inactions that are
disfavored by our customers, employees, or society at-large, which
campaigns could materially impact our customers’ decisions to use
our products and services. Any such negative publicity could have
an adverse effect on the size, activity, and loyalty of our
customers and result in a decrease in net revenue, which could
adversely affect our business, operating results, and financial
condition.
Our future growth depends significantly on our marketing efforts,
and if our marketing efforts are not successful, our business and
results of operations will be harmed.
We
have dedicated some, and intend to significantly increase,
resources to marketing efforts. Our ability to attract and retain
customers depends in large part on the success of these marketing
efforts and the success of the marketing channels we use to promote
our products. Our marketing channels include, but are not limited
to, social media, traditional media such as the press, online
affiliations, search engine optimization, search engine marketing,
and offline partnerships.
While
our goal remains to increase the strength, recognition and trust in
our brand by increasing our customer base and expanding our
products and services, if any of our current marketing channels
becomes less effective, if we are unable to continue to use any of
these channels, if the cost of using these channels was to
significantly increase or if we are not successful in generating
new channels, we may not be able to attract new customers in a
cost-effective manner or increase the use of our products and
services. If we are unable to recover our marketing costs through
increases in the size, value or other product selection and
utilization, it could have a material adverse effect on our
business, financial condition, results of operations, cash flows
and future prospects.
Concerns about the environmental impacts of blockchain technology
could adversely impact usage and perceptions of Nukkleus, its
subsidiaries and our Platforms.
The
energy usage and environmental impact of blockchain technology,
particularly in relation to proof of work mining, has attracted
considerable recent attention. Government scrutiny related to
restrictions on such energy consumption may increase, resulting in
additional regulation that could adversely impact usage of our
Platforms and harm our business. The considerable consumption of
electricity by mining operators may also have a negative
environmental impact, including contribution to climate change,
which could create a negative consumer sentiment and perception of
blockchain technology generally and adversely affect our business,
prospects, financial condition, and operating results.
The COVID-19 pandemic could have unpredictable, including adverse,
effects on our business, operating results, and financial
condition.
The
global spread and unprecedented impact of the
COVID-19 pandemic continues to create significant volatility,
uncertainty and economic disruption. The future effect on our
operational and financial performance will depend on future
developments, including the duration, spread and intensity of the
pandemic (including any resurgences), impact of the new
COVID-19 variants and the rollout of COVID-19 vaccines,
and the level of social and economic restrictions imposed in the
United States and abroad in an effort to curb the spread of
the virus, all of which are uncertain and difficult to predict
considering the rapidly evolving landscape. The continued impact of
COVID-19 and the imposition of related public health measures
have resulted in, and are expected to continue to result in,
increased volatility and uncertainty in the broader economy. As a
result, it is not currently possible to ascertain the overall
impact of COVID-19 on our business, results of operations,
financial condition or liquidity.
As a remote-first company, we are subject to heightened operational
and cybersecurity risks.
As a
remote-first company, we are subject to heightened operational
and cybersecurity risks. We are a remote-first company,
meaning that for all existing roles many of our employees work from
their homes or other non-company dwellings. For example,
technologies in our employees’ and service providers’ homes and
shared office spaces may not be as robust and could cause the
networks, information systems, applications, and other tools
available to employees and service providers to be more limited or
less reliable. Further, the security systems in place at our
employees’ and service providers’ homes and shared office spaces
may be less secure than those used in corporate offices, and while
we have implemented technical and administrative safeguards to help
protect our systems as our employees and service providers work
from home, we may be subject to increased cybersecurity risk which
could expose us to risks of data or financial loss, and could
disrupt our business operations. There is no guarantee that the
data security and privacy safeguards we have put in place will be
completely effective or that we will not encounter risks associated
with employees and service providers accessing company data and
systems remotely. We also face challenges due to the need to
operate with a remote workforce and are addressing so to minimize
the impact on our ability to operate.
Risks
Related to Nukkleus’s Platforms
Our product offerings are centered on WebTrader, MetaTrader, XWare,
Forexware and certain other platforms and product offerings
(together, our “Platforms”). The regulatory landscape as it relates
to processing payment transactions, including through our
Platforms, continues to evolve. Such evolution may create
additional regulatory burden and expense and could materially
impact the use and adoption of our Platforms.
The
entirety of our product offering is today built on the ability of
our customers to transfer funds and otherwise transact using our
Platforms. The blockchain technologies underlying our Platforms
represent a relatively new development in the payments and
financial services industry. As such, the regulatory status of the
use of our Platforms and other blockchain-enabled transfer
processing technologies remains somewhat uncertain in the
United States and other jurisdictions. As regulatory
interpretations develop throughout the world, we may be required to
obtain registrations and/or licenses in various jurisdictions that
we do not currently hold. We may also be required to take on new
and additional compliance obligations in certain jurisdictions, or
we could be directed to cease operations involving certain
Platforms or other Nukkleus or Digital RFQ products or services in
one or more jurisdictions. Any of these scenarios could have a
detrimental impact on our business given that our Platforms and
such other services are central to our Digital RFQ business, which
comprises a significant portion of our overall business.
The
regulatory treatment of our Platforms and other
blockchain-enabled transfer processing technologies is highly
uncertain and has drawn significant attention from legislative and
regulatory bodies around the world. The use of such technologies
may implicate a variety of banking, deposit, money transmission,
prepaid access and stored value, anti-money laundering,
commodities, securities, sanctions, and other laws and regulations
in the United States and in other jurisdictions.
Further,
our business model relies on our ability to market and sell the
utility of our Platforms to existing and potential customers. Our
core services involve offering fund transfer and payment
functionalities to our customers utilizing our Platforms. The use
of such services by our customers, as well as the integration of
such technologies into the product offerings that our customers
make available to their end customers, raises numerous regulatory
questions. Financial services regulators in the United States
or in other jurisdictions around the world may not agree with our
legal positions. In addition, should financial services regulators
make changes to or alter interpretations of applicable laws and
regulations as they relate to our Platforms, we may be unable to
continue offering our transfer and payment, services to customers
in certain jurisdictions or we may have to alter the services in a
manner that may be materially detrimental to our financial
performance.
The future development and growth of our Platforms is subject to a
variety of factors that are difficult to predict and evaluate and
may be in the hands of third parties to a substantial extent. If
our Platforms do not grow as we expect, our business, operating
results, and financial condition could be adversely
affected.
We
introduced fund transfer and payment processing using blockchain
technologies only in 2019, and such technology remains in the early
stages of development while continuing to evolve. The further
growth and development of any such technology and the underlying
networks and other cryptographic and algorithmic protocols
governing such technology and products represent a new and evolving
paradigm that is subject to a variety of factors that are difficult
to evaluate, including:
|
● |
Any
blockchain-enabled process or product, like our Platforms,
rely on third parties, including financial institutions and
counterparties, to hold funds, cash equivalents, and other assets.
Those third parties have their own policies and may change their
view and acceptance of any blockchain or stablecoin at any time.
This may result in delays and other barriers to payment processing
through our Platforms. |
|
● |
Many
blockchain networks have limited operating histories, have not been
validated in production, and are still in the process of developing
and making significant decisions that will affect the underlying
blockchain, any of which could adversely affect the blockchain
technologies on which our Platforms rely. |
|
● |
The
governance of many blockchain networks is by voluntary consensus
and open competition, and many developers are not directly
compensated for their contributions. As a result, there may be a
lack of consensus or clarity on the governance of any particular
blockchain network, a lack of incentives for developers to maintain
or develop the network, and other unforeseen issues, any of which
could result in unexpected or undesirable errors, bugs, or changes,
or stymie such network’s utility and ability to respond to
challenges and grow. |
These
risks are fundamentally beyond our control and could materially and
adversely affect our Platforms and our business, financial
condition and operating results.
Due to unfamiliarity and some negative publicity associated with
blockchain technology, our customer base may lose confidence in
products and services that utilize blockchain
technology.
Products
and services that are based on blockchain technologies are
relatively new. Many of our competitors are unlicensed,
unregulated, operate without supervision by any governmental
authorities, and do not provide the public with significant
information regarding their ownership structure, management team,
corporate practices, cybersecurity, and regulatory compliance. As a
result, customers and the general public may lose confidence in
blockchain technology, including regulated products and services
like ours.
Since
the inception of blockchain technologies, numerous
blockchain-enabled businesses and platforms have been sued,
investigated, or shut down due to fraud, illegal activities, the
sale or issuance of unregistered securities, manipulative
practices, business failure, and security breaches. In many of
these instances, customers of these platforms, products and
services were not compensated or made whole for their losses. We
may be a target of hackers and malware and may also be more likely
to be targets of regulatory enforcement actions.
Negative
perception, a lack of stability and standardized regulation, and
the closure or temporary shutdown of
blockchain-enabled platforms, including our Platforms, due to
fraud, business failure, hackers or malware, or government mandated
regulation, and associated losses suffered by customers may reduce
confidence in blockchain technologies and result in greater
volatility of the prices of assets, including significant
depreciation in value. Any of these events could have a material
and adverse impact on our business.
Our Platforms and blockchain-enabled payment processing services
are innovative and are difficult to analyze vis-à-vis existing
financial services laws and regulations around the world. Our
platforms involve certain risks, including reliance on third
parties, which could limit or restrict our ability to offer the
product in certain jurisdictions.
Our
ability to offer our Platforms in jurisdictions around the world is
unclear from a regulatory perspective. Further, our Platforms are
dependent on certain partners who will provide liquidity and the
regulatory requirements with respect to those partners are
uncertain. Our dependency on the performance of those partners
raises risk that turns upon their performance. If our partners fail
to perform, both we and our customers could be subject to losses,
and we may be required to cease offering such Platform.
Risks
Related to Nukkleus’s Financial Condition
There is no assurance that we will maintain profitability or that
our revenue and business models will be
successful.
Our
ability to achieve and maintain profitability is based on numerous
factors, many of which are beyond our control. We may not be able
to generate sufficient revenue to maintain profitability in the
short or long-term. Our revenue growth may slow, or our revenue may
decline for a number of other reasons, including reduced demand for
our offerings, increased competition, a decrease in the growth or
size of the forex and CFD industry, in the usage of blockchain
technologies generally, or any failure to capitalize on growth
opportunities.
We
are continually refining our revenue and business model and have
shifted our focus to the development and commercialization of our
Platforms. There is no assurance that these efforts will be
successful or that we will generate revenues commensurate with our
efforts and expectations or become or stay profitable. We may be
forced to make significant changes to our revenue and business
model to compete with our competitors’ offerings, and even if such
changes are undertaken, there is no guarantee that they will be
successful or profitable. Additionally, we will need to hire,
train, and integrate qualified personnel to meet and further such
changes to our business objectives at potentially significant
additional expense. Failure to successfully implement revenue and
business models or manage related expenses could cause us to be
unprofitable and have an adverse effect on our business, operating
results and financial condition.
We may experience fluctuations in our quarterly operating
results.
We
could experience significant fluctuations in our quarterly
operating results due to a number of factors, many of which are
beyond our control. You should not rely on
period-to-period comparisons of our operating results as an
indication of our future performance. Factors that may cause
fluctuations in our quarterly operating results include, but are
not limited to, the following:
|
● |
a
change in the transaction volume of TCM and our core forex and CFD
transactions business generally; |
|
● |
a
change in the transaction volume of our customers and use of our
Platforms; |
|
● |
planned
and unplanned increases in marketing, sales and other operating
expenses that it may incur to grow and expand our customer base and
operations, and to remain competitive; |
|
● |
the
success, or lack of success, in new marketing approaches we have
recently undertaken or plan to undertake, which have not been
previously or fully tested; |
|
● |
the
continued market acceptance of our Platforms in a highly
competitive environment; |
|
● |
system
disruptions, outages and other performance problems or
interruptions on our Platforms, or breaches of data or system
security, including ransomware or other major cyber-attacks, which,
if extended or severe, may harm our credibility and reputation in
the market; |
|
● |
our
failure to provide adequate customer service; |
|
● |
our
ability to successfully, and in a timely manner, continue
development, improvement and feature-enhancement of its
products and services, including its intellectual property, data
analytics, proprietary technology and customer support
functions; |
|
● |
the
timing and success of new product and service introductions, and
new product and service features or enhancements, by Nukkleus and
its subsidiaries, or our competitors, or other changes in the
competitive landscape of the markets in which we
operate; |
|
● |
the
success of our expansion into new markets, products and services,
or ones in which it is in the early stages; |
|
● |
changes
in the adoption and use of blockchain technologies and the public
perception of them, including changes in perceptions and demands
regarding such technologies as trading vehicles; |
|
● |
changes
in the legislative or regulatory environment, scope or focus of
regulatory investigations and inquiries, or interpretations of
regulatory requirements, or outright prohibition of certain
activities; |
|
● |
disputes
with our customers, adverse litigation and regulatory judgments,
enforcement actions, settlements or other related costs and the
reputational impact and public perception of such occurrences,
including in emerging industries, or emerging components of
industries; |
|
● |
the
timing and amount of non-cash expenses, such as
stock-based compensation and asset impairment; |
|
● |
fraudulent,
unlawful or otherwise inappropriate customer behavior; |
|
● |
development
of features or services that may be the subject of regulatory
criticism or form the basis for regulatory enforcement action,
including regulatory actions to prohibit certain practices or
features; |
|
● |
the
overall tax rate for our business, which may be affected by new
laws affecting the taxation or tax treatment of transactional taxes
or other tax treatment for trading in financial markets generally
or for unrealized gains in financial services accounts; |
|
● |
changes
in accounting standards, policies, guidance, interpretations or
principles; and |
|
● |
general
economic conditions in either domestic or international markets,
including the impact of the ongoing
COVID-19 pandemic. |
Our
operating results may fall below the expectations of market
analysts and investors in some future periods, which could cause
the market price of our Common Stock to decline
substantially.
Our financial forecasts, which were presented to Nukkleus’s Board
and are included in this proxy statement/prospectus, may not prove
to be accurate.
In
connection with the proposed Merger, Nukkleus’s management
presented certain forecasted financial information for Nukkleus and
the Combined Company to its Board, which information was internally
prepared and provided by us. The forecasts were based on numerous
variables and assumptions known to us at the time of preparation.
Such variables and assumptions are inherently uncertain and many
are beyond our control. Important factors that may affect actual
results and cause the forecasts to not be achieved include, but are
not limited to, risks and uncertainties relating to our business,
industry performance, the competitive environment, changes in
technology, and general business and economic conditions. Various
assumptions underlying the forecasts may prove to not have been, or
may no longer be, accurate. The forecasts may not be realized, and
actual results may be significantly higher or lower than projected
in the forecasts. The forecasts also reflect assumptions as to
certain business strategies or plans that are subject to change. As
a result, the inclusion of such forecasts in this proxy
statement/prospectus should not be relied on as “guidance” or
otherwise predictive of actual future events, and actual results
may differ materially from the forecasts.
Changes in U.S. and foreign tax laws, as well as the
application of such laws, could adversely impact our financial
position and operating results.
We
are subject to complex income and non-income tax laws and
regulations in the United States and a variety of foreign
jurisdictions. Both the United States and foreign
jurisdictions may revise corporate income tax and other
non-income tax laws which could impact the amount of tax due
in such jurisdiction.
Our
determination of our corporate income tax liability is subject to
review and may be challenged by applicable U.S. and foreign
tax authorities. Any adverse outcome of such challenge could harm
our operating results and financial condition. The determination of
our worldwide provision for income taxes and other tax liabilities
requires significant judgment and, in the ordinary course of
business, there are many transactions and calculations where the
ultimate tax determination is complex and uncertain. Moreover, as a
multinational business, we have subsidiaries that engage in many
intercompany transactions in a variety of tax jurisdictions where
the ultimate tax determination is complex and uncertain. Our
existing corporate structure and intercompany arrangements have
been implemented in a manner we believe is in compliance with
current prevailing tax laws. Furthermore, as we operate in multiple
taxing jurisdictions, the application of tax laws can be subject to
diverging and sometimes conflicting interpretations by tax
authorities of these jurisdictions. It is not uncommon for taxing
authorities in different countries to have conflicting views with
respect to, among other things, the characterization and source of
income or other tax items, the manner in which the
arm’s-length standard is applied for transfer pricing
purposes, or with respect to the valuation of intellectual
property. The taxing authorities of the jurisdictions in which we
operate may challenge our tax treatment of certain items or the
methodologies we use for valuing developed technology or
intercompany arrangements, which could impact our worldwide
effective tax rate and harm our financial position and operating
results.
We
are also subject to non-income taxes, such as payroll, sales,
use, value-added, net worth, property, and goods and services taxes
in the United States and various foreign jurisdictions. A
change in the tax law could impact tax positions which could result
in an increased exposure related to such tax liabilities. Such
changes could have an adverse effect on our operating results and
financial condition.
In
addition, under Section 382 of the Internal Revenue Code of
1986, as amended (the “Code”), a corporation that undergoes an
“ownership change” (as defined under Sections 382 and 383 of the
Code and applicable Treasury Regulations) is subject to limitations
on its ability to utilize its pre-change NOLs and certain
other tax attributes to offset post-change taxable income or
taxes.
We
have not performed a study to determine whether our NOLs are
currently subject to Section 382 limitations. We may also
experience a future ownership change under Section 382 of the
Code that could affect our ability to utilize our NOLs to offset
our income.
If our estimates or judgment relating to our critical accounting
policies prove to be incorrect, our operating results could be
adversely affected.
The
preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect
the amounts reported in the consolidated financial statements and
accompanying notes. We base our estimates on historical experience
and on various other assumptions that we believe to be reasonable
under the circumstances, as provided in the section titled
“Management’s Discussion and Analysis of Financial Condition and
Results of Operations of Nukkleus — Critical
Accounting Policies”. The results of these estimates form the basis
for making judgments about the carrying values of assets,
liabilities, and equity, and the amount of revenue and expenses
that are not readily apparent from other sources. Significant
estimates and judgments involve the identification of performance
obligations in revenue recognition, evaluation of tax positions,
inter-company transactions, and the valuation of
stock-based awards and the fiat reserves we hold, among
others. Our operating results may be adversely affected if our
assumptions change or if actual circumstances differ from those in
our assumptions, which could cause our operating results to fall
below the expectations of analysts and investors, resulting in a
decline in the trading price of Nukkleus Common Stock.
The nature of our business requires the application of complex
financial accounting rules, and there is limited guidance from
accounting standard setting bodies. If financial accounting
standards undergo significant changes, our operating results could
be adversely affected.
The
accounting rules and regulations that we must comply with are
complex and subject to interpretation by the Financial Accounting
Standards Board, the SEC, and various bodies formed to promulgate
and interpret appropriate accounting principles. A change in these
principles or interpretations could have a significant effect on
our reported financial results and may even affect the reporting of
transactions completed before the announcement or effectiveness of
a change. Recent actions and public comments from the FASB and the
SEC have focused on the integrity of financial reporting and
internal controls. In addition, many companies’ accounting policies
are being subject to heightened scrutiny by regulators and the
public.
For
example, on March 31, 2022, the staff of the SEC issued Staff
Accounting Bulletin No. 121, or SAB 121, which represents a
significant change regarding how a company safeguarding digital
assets held for its platform users reports such digital assets on
its balance sheet and requires retrospective application as of
January 1, 2022. Moreover, recent actions and public comments from
the FASB and the SEC have focused on the integrity of financial
reporting and internal controls. In addition, many companies’
accounting policies are being subjected to heightened scrutiny by
regulators and the public. Further, there has been limited
precedent for the financial accounting of digital assets and
related valuation and revenue recognition, and no official guidance
has been provided by the FASB or the SEC, with the exception of SAB
121. In May 2022, the FASB added a project to its technical agenda
to improve the accounting for and disclosure of certain digital
assets. In October 2022, the FASB decided to require fair value
measurement of digital assets that fall within the scope of this
project. While the FASB has begun deliberating on the scope of this
project, there has been no formal proposal or guidance issued
related to the project and no timeline has been publicly
communicated for the issuance of such guidance.
At
certain times, the funds of customers of Digital RFQ that we use to
make payments on behalf of our customers, remain in the form of
digital assets in our customers’ wallets at our licensed trust
companies 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, “our customers’ digital assets”). We engage
third parties, which are licensed trust companies, to provide
certain custodial services, including holding our customers’
digital token identifiers, securing our customers’ digital assets,
and protecting them from loss or theft, including indemnification
against certain types of losses such as theft. Our third-party
custodian holds the digital assets in a custodial account in
Digital RFQ’s name for the benefit of Digital RFQ’s customers. We
maintain the internal recordkeeping of our customers’ digital
assets, including the amount and type of digital asset owned by
each of our customers and digital token identifiers in that
custodial account. Given that we currently utilize one third-party
custodian, there is concentration risk in the event the custodian
is not able to perform in accordance with our agreement.
There
remains uncertainty on how companies can account for blockchain
transactions, value, and related revenue. Uncertainties in or
changes to regulatory or financial accounting standards could
result in the need to change our accounting methods, restate our
financial statements or impair our ability to provide timely and
accurate financial information, which could adversely affect our
financial statements, result in a loss of investor confidence, and
more generally impact our business, operating results, and
financial condition.
Business metrics and other estimates are subject to inherent
challenges in measurement, and our business, operating results, and
financial condition could be adversely affected by real or
perceived inaccuracies in those metrics.
We
regularly review business metrics and other measures to evaluate
growth trends, measure our performance, and make strategic
decisions. For example, we measure transaction volumes and
concentration. These metrics are calculated using internal company
data and have not been validated by an independent third party.
While these numbers are based on what we currently believe to be
reasonable estimates for the applicable period of measurement,
there are inherent challenges in such measurements. If we fail to
maintain an effective analytics platform, our calculations may be
inaccurate, and we may not be able to identify those
inaccuracies.
Our
business metrics may also be impacted by compliance or
fraud-related bans, technical incidents, or false or spam
accounts in existence on our platform. Our customers are primarily
institutional and, though we believe there is no reason for them to
establish multiple accounts with us unless such accounts serve a
different business purpose for them, we permit our customers to
hold and access multiple accounts, which could overstate the number
of customers we serve. Though we rely predominantly on transaction
volumes to make projections about our business, such customer
metrics may also be used in our models. If our metrics provide us
with incorrect or incomplete information about customers and their
behavior, we may make inaccurate conclusions about our
business.
We are subject to changes in financial reporting standards or
policies, including as a result of choices made by us, which could
materially adversely affect our reported results of operations and
financial condition and may have a corresponding material adverse
impact on capital ratios.
Our
consolidated financial statements are prepared in accordance with
GAAP, which are periodically revised or expanded. Accordingly, from
time to time we are required to adopt new or revised accounting
standards issued by recognized bodies. It is possible that future
accounting standards and financial reporting standards or policies,
including as a result of choices made by us, which we are required
to adopt, could change the current accounting treatment that
applies to our consolidated financial statements and that such
changes could have a material adverse effect on our reported
results of operations and financial condition, and may have a
corresponding material adverse effect on capital ratios.
As a public company, we are required to develop and maintain
proper and effective internal controls over financial reporting,
and the fact that we are currently unable to conclude that our
internal controls are effective as of September 30, 2022 or any
future failure to maintain the adequacy of these internal controls
may adversely affect investor confidence in our company and, as a
result, the value of our stock.
We are required to furnish a report by management on, among other
things, the effectiveness of our internal control over financial
reporting. This assessment includes disclosure of any material
weaknesses identified by our management in our internal control
over financial reporting. During the evaluation and testing process
of our internal controls, if we identify one or more material
weaknesses in our internal control over financial reporting, we
will be unable to certify that our internal control over financial
reporting is effective. As of September 30, 2022, management
assessed the effectiveness of the Company’s internal control over
financial reporting based on the criteria set forth
in Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on this assessment, management has
concluded that, because of the Company’s small size and limited
resources, internal controls over financial reporting were not
effective as of September 30, 2022. Further, we cannot
assure that there will not be material weaknesses or significant
deficiencies in our internal control over financial reporting in
the future. Any failure to maintain internal control over financial
reporting in addition to that which has been identified in this
report could severely inhibit our ability to accurately report our
financial condition or results of operations. The conclusion that
our internal controls as of September 30, 2022 were not effective,
if we are unable to conclude that our internal control over
financial reporting are effective in future filings, or if our
independent registered public accounting firm determines we have a
material weakness or significant deficiency in our internal control
over financial reporting, we could lose investor confidence in the
accuracy and completeness of our financial reports, the market
price of our stock could decline, and we could be subject to
sanctions or investigations by the exchange on which shares of our
stock are listed, the SEC or other regulatory authorities. Failure
to remedy any material weakness in our internal control over
financial reporting, or to implement or maintain other effective
control systems required of public companies, could also restrict
our future access to the capital markets.
We might require additional capital to support business growth, and
this capital might not be available or may require stockholder
approval to obtain.
We
have funded our operations since inception primarily through equity
financings, convertible notes, and revenue generated by our
products and services. We intend to continue to make investments in
our business to respond to business challenges, including
developing new products and services, enhancing our operating
infrastructure, expanding our international operations, and
acquiring complementary businesses and technologies, all of which
may require us to secure additional funds.
Additional
financing may not be available on terms favorable to us, if at all.
If we incur additional debt, the debt holders would have rights
senior to holders of Nukkleus’s commons stock to make claims on our
assets, and the terms of any debt could restrict our
operations.
We may be affected by fluctuations in currency exchange
rates
We
are potentially exposed to adverse as well as beneficial movements
in currency exchange rates. An increase in the value of the dollar
could increase the real cost to our customers of our products in
those markets outside the U.S. where we sell in dollars, and a
weakened dollar could increase the cost of local operating expenses
from sources outside the United States, and overseas capital
expenditures. We also conduct certain investing and financing
activities in local currencies. Therefore, changes in exchange
rates could harm our financial condition and results of
operations.
Risks
Related to Nukkleus’s Employees and Other Service
Providers
In the event of employee or service provider misconduct or error,
our business may be adversely impacted.
Employee
or service provider misconduct or error could subject us to legal
liability, financial losses, and regulatory sanctions, and could
seriously harm our reputation and negatively affect our business.
Such misconduct could include engaging in improper or unauthorized
transactions or activities, misappropriation of customer funds, and
misappropriation of information, failing to supervise other
employees or service providers, or improperly using confidential
information.
Employee
or service provider errors, including mistakes in executing,
recording, or processing transactions for customers, could expose
us to the risk of material losses even if the errors are detected.
Although we have implemented processes and procedures and provide
trainings to our employees and service providers to reduce the
likelihood of misconduct and error, these efforts may not be
successful. Moreover, the risk of employee or service provider
error or misconduct may be even greater for novel products and
services, and is compounded by the fact that many of our employees
and service providers are accustomed to working at tech companies
which generally do not maintain the same compliance customs and
rules as financial services firms.
This
can lead to high risk of confusion among employees and service
providers, particularly in a fast growth company like ours, with
respect to compliance obligations particularly including
confidentiality, data access, trading, and conflicts. It is not
always possible to deter misconduct and the precautions we take to
prevent and detect this activity may not be effective in all cases.
If we were found not to have met our regulatory oversight and
compliance and other obligations, we could be subject to regulatory
sanctions, financial penalties and restrictions on our activities
for failure to properly identify, monitor and respond to
potentially problematic activity, which could seriously damage our
reputation. Our employees, contractors, and agents could also
commit errors that subject us to financial claims for negligence,
as well as regulatory actions, or result in financial liability.
Further, allegations by regulatory or criminal authorities of
improper transactions could affect our brand and
reputation.
The loss of one or more of our key personnel, or our failure to
attract and retain other highly qualified personnel in the future,
could adversely impact our business, operating results, and
financial condition.
We
operate in a relatively new industry that is not widely understood
and requires highly skilled and technical personnel. We believe
that our future success is highly dependent on the talents and
contributions of our senior management team, including Jamal
Khurshid, our Chief Operating Officer, members of our executive
leadership team, and other key service providers across finance,
compliance, legal, talent and marketing.
Our
future success depends on our ability to attract, develop,
motivate, and retain highly qualified and skilled employees and
service providers. The pool of qualified talent is extremely
limited, particularly with respect to executive talent,
engineering, risk management, and financial regulatory expertise.
We face intense competition for qualified individuals from numerous
software and other technology companies. To attract and retain key
personnel, we incur significant costs, including salaries and
benefits and equity incentives. Even so, these measures may not be
enough to attract and retain the personnel we require to operate
our business effectively. The loss of even a few qualified
employees, or an inability to attract, retain and motivate
additional highly skilled employees required for the planned
expansion of our business, could adversely impact our operating
results and impair our ability to grow.
Our culture emphasizes innovation, and if we cannot maintain this
culture as we grow, our business and operating results could be
adversely impacted.
We
believe that our entrepreneurial and innovative corporate culture
has been a key contributor to our success. We encourage and empower
our employees and service providers to develop and launch new and
innovative products and services, which we believe is essential to
attracting high quality talent, partners, and developers, as well
as serving the best, long-term interests of our company. If we
cannot maintain this culture as we grow, we could lose the
innovation, creativity and teamwork that has been integral to our
business, in which case our products and services may suffer and
our business, operating results, and financial condition could be
adversely impacted.
Our officers, directors, employees, and large stockholders may
encounter potential conflicts of interests with respect to their
positions or interests in certain entities, and other initiatives,
which could adversely affect our business and
reputation.
We
frequently engage with a wide variety of foreign exchange, CFD,
payment processing and blockchain industry participants, as well as
startups and growth companies. These transactions could create
potential conflicts of interests in management decisions that we
make. For instance, certain of our officers, directors, and
employees are active investors in other growth companies
themselves, and may make investment decisions that favor projects
that they have personally invested in. Many of our large
stockholders also make investments in such businesses. For more
information, see the section titled “Certain Relationships and
Related Transactions”. Our Chairman and Chief Executive Officer,
Emil Assentato, and our Chief Operating Officer, Jamal Khurshid,
are involved in a number of initiatives related to such businesses
and more broadly, which could divert their time and attention from
overseeing our business operations and have a negative impact on
our business.
Risks
Related to Government Regulation
We are subject to various laws and regulations, and any adverse
changes to, or our failure to comply with, any laws and regulations
could adversely affect our brand, reputation, business, operating
results, and financial condition.
Our
business is subject to laws, rules, regulations, policies, orders,
determinations, directives, treaties, and legal and regulatory
interpretations and guidance in the markets in which we operate,
which may include those governing financial services and banking,
securities, broker-dealers, cross-border and domestic money
transmission, foreign currency exchange, CFD exchange, blockchain
technologies, privacy, data governance, data protection,
cybersecurity, fraud detection, payment services, escheatment,
antitrust and competition, bankruptcy, tax, anti-bribery, economic
and trade sanctions, anti-money laundering, and
counter-terrorist financing.
The
key elements of the regulatory framework that impact us include,
but are not limited to, the following U.K. legislation:
|
● |
The
European Union 5th and 6th Money
Laundering Directives, |
|
● |
The
Money Laundering, Terrorist Financing and Transfer of Funds
(Information on the Payer), Regulation 2017, |
|
● |
Proceeds
of Crime Act 2002, |
|
● |
Counter
Terrorism Act 2008, |
These
legal and regulatory regimes, including the laws, rules, and
regulations thereunder, evolve frequently and may be modified,
interpreted, and applied in an inconsistent manner from one
jurisdiction to another, and may conflict with one another. For a
discussion of our risk management framework and more detailed
descriptions of the legislation and regulations applicable to
Digital RFQ’s business.
We
are currently regulated in the United Kingdom by the Financial
Conduct Authority. We plan to expand our operations to other
countries in future, including Dubai and Lithuania, in which case
we would be subject to regulation in those jurisdictions. From our
UK operations, we currently offer cross-border payment
processing services, in numerous countries in Europe, Dubai,
Sub-Saharan Africa and Asia. We offer payment processing
services using blockchain technologies in the United Kingdom, the
United States and Sub-Saharan Africa, and intend to develop
such products and services across other regions. As a business, we
do not differentiate between cross-border and domestic payment
processing, so generally offer cross-border services in the
countries in which we operate. While we believe our risk management
and compliance frameworks are sufficient to ensure we remain in
material compliance with the applicable laws, and regulations of
the jurisdictions in which we operate, to the extent we do not
comply with such laws, rules, and regulations, we could be subject
to fines, revocation of licenses, limitations on our products and
services, reputational harm, and other regulatory consequences,
each of which may be significant and could adversely affect our
business, operating results, and financial condition.
In
addition to existing laws and regulations, various governmental and
regulatory bodies, including legislative and executive bodies in
the United States, United Kingdom and in other countries, may
adopt new laws and regulations, or new interpretations of existing
laws and regulations may be issued by such bodies or the judiciary,
which may adversely impact the development of blockchain as a whole
and our legal and regulatory status in particular by changing how
we operate our business, how our products and services are
regulated, and what products or services we and our competitors can
offer, requiring changes to our compliance and risk mitigation
measures, imposing new licensing requirements, or imposing a total
ban on transactions using blockchain technologies.
Legislative and regulatory actions taken now or in the future may
increase our costs and impact our business, governance structure,
financial condition or results of operations.
Federal,
state and international regulatory agencies frequently adopt
changes to their regulations or change the way existing regulations
are applied. Regulatory or legislative changes to laws applicable
to the financial industry, if enacted or adopted, may impact the
profitability of our business activities, require more oversight or
change certain of our business practices, including the ability to
offer new products and to continue offering our current products,
and could expose us to additional costs, including increased
compliance costs. These changes also may require us to invest
significant management attention and resources to make any
necessary changes to operations to comply and could have a material
adverse effect on our business, financial condition and results of
operations.
Various
U.S. federal, state, and local and foreign governmental
organizations and public advocacy groups have been examining the
operations of businesses using blockchain technologies and
networks, and the safety and soundness of platforms and other
service providers that hold use such networks and technologies on
behalf of users. Many of these entities have called for heightened
regulatory oversight and have issued advisories describing the
risks posed by blockchain technologies to users and investors. Use
of blockchain technologies is novel and there is limited access to
policymakers and lobbying organizations in many jurisdictions.
Competitors from other, more established industries, including
traditional financial services, may have greater access to
lobbyists or governmental officials, and regulators that are
concerned about the potential for stablecoins for illicit usage may
affect statutory and regulatory changes. As a result, new laws and
regulations may be proposed and adopted in the United States
and internationally, or existing laws and regulations may be
interpreted in new ways that harm the stablecoin and blockchain
industry, which could adversely impact our business.
The regulatory environment to which we are subject gives rise to
various licensing requirements, legal and financial compliance
costs and management time, and non-compliance could result in
monetary and reputational damages, all of which could have a
material adverse effect on our business, financial position and
results of operations.
There
can be no assurance that we will be able to maintain our existing,
or obtain additional, required regulatory licenses, certifications
and regulatory approvals in the countries where we provide services
or want to expand to. Furthermore, where we have obtained such
regulatory licenses, certifications and regulatory approvals, there
are costs and potential product changes involved in maintaining
such regulatory licenses, certifications, and approvals, and we
could be subject to fines or other enforcement action if we are
found to violate disclosure, reporting, anti-money laundering,
capitalization, corporate governance or other requirements of such
licenses. These factors could impose substantial additional costs
and involve considerable delay to the development or provision of
our products or services, or could require significant and costly
operational changes or prevent us from providing any products or
services in a given market.
These
laws, regulations and standards are subject to varying
interpretations, in many cases due to their lack of specificity or
unclear application to the business of
non-traditional financial services. As a result, their
application in practice may evolve over time as new guidance is
provided by supervisory authorities and the interpretation of
requirements by supervisory authorities and courts may be further
clarified over time. If our efforts to comply with new laws,
regulations and standards differ from the activities intended by
regulatory bodies or supervisory authorities due to ambiguities
related to their interpretation, application and practice,
supervisory authorities may initiate legal and regulatory
proceedings against us and our business, reputation, financial
condition, results of operations and cash flow could be materially
and adversely affected.
In
certain countries, it may not be clear whether we are required to
be licensed as a money transmitter, payment services provider,
bank, financial institution, custodian, broker-dealer, exchange, or
otherwise. Local regulators may use their power to slow or halt
payments or otherwise prohibit us from doing business in a country.
We and our local businesses do not only need to comply with the
local laws and regulations, but also with certain laws and
regulations with worldwide application. Further, because our
services are accessible worldwide, one or more jurisdictions may
claim that we or our customers or partners are required to comply
with their laws. Laws regulating the internet, mobile and related
technologies outside the United States may impose different,
more specific, or even conflicting obligations on us, as well as
broader liability.
If we
are unable to commit sufficient resources to regulatory compliance,
this could lead to delays and errors and may force us to choose
between prioritizing compliance matters over administrative support
for business activities, or may ultimately force us to cease
offering certain products or services globally or in certain
jurisdictions. Any delays or errors in implementing regulatory
compliance could lead to substantial monetary damages and fines,
public reprimands, a material adverse effect on our reputation,
regulatory measures in the form of cease and desists orders,
increased regulatory compliance requirements or other potential
regulatory restrictions on our business, enforced suspension of
operations and in extreme cases, withdrawal of regulatory licenses
or authorizations to operate particular businesses, or criminal
prosecution in certain circumstances.
In
addition to non-compliance by us ourselves, we may in the
future suffer negative consequences of non-compliance by third
parties that use our payments and transfer infrastructure. We may
also suffer negative consequences of customers operating businesses
or schemes in violation of applicable rules and regulations whose
activities we could be held responsible for monitoring and, where
applicable, to denounce, interrupt or terminate the extension of
services to such customers. We may be required to incur greater
expenditures and devote additional resources and management time to
addressing these liabilities and requirements, which could have an
adverse effect on our business, financial position and results of
operations.
The financial services industry is subject to intensive regulation.
Major changes in laws and regulations, as well as enforcement
actions, could adversely affect our business, financial position,
results of operations and prospects.
In
pursuit of a broad reform and restructuring of financial services
regulation, national and supra-national legislatures and
supervisory authorities, predominantly in the United States
and Europe but also elsewhere, continue to introduce and implement
a wide range of proposals that could result in major changes to the
way our global operations are regulated and could have adverse
consequences for our business, business model, financial position,
results of operations, reputation and prospects. These changes
could materially impact the profitability of our businesses or the
value of our assets, require changes to business practices or force
us to discontinue businesses and expose us to additional costs,
taxes, liabilities, enforcement actions and reputational risk and
are likely to have a material impact on us.
The
timing and full impact of new laws and regulations cannot be
determined and are beyond our control. The introduction of these
and other new rules and requirements could significantly impact the
manner in which we operate, particularly in situations where
regulatory legislation can interfere with or even set aside
national private law. New requirements may adversely affect
our business, capital and risk management strategies and may result
in us deciding to modify our legal entity structure, capital and
funding structures and business mix or exit certain business
activities altogether, or determine not to expand in certain
business areas despite their otherwise attractive
potential.
The
large number of legislative initiatives, in particular with respect
to the financial services industry, requires constant attention
from our senior management and consumes significant levels of
resources to identify and analyze the implications of these
initiatives. We may have to adapt our strategy, operations and
businesses, including policies, procedures and documentation, to
comply with these new legal requirements. Based on the volume of
existing initiatives, it cannot be excluded that certain new
requirements will not be implemented in a timely fashion or
implemented without errors, or in a manner satisfactory to the
applicable supervisory authority, resulting in
non-compliance and possible associated negative consequences
such as administrative fine or public reprimands. Additionally, we
may be forced to cease to serve certain types of customers or cease
to offer certain services or products as a result of new
requirements. Any of the other above factors, events or
developments may materially adversely affect our businesses,
financial position and results of operations and
prospects.
We are subject to laws, regulations, and executive orders regarding
economic and trade sanctions, anti-bribery, anti-money laundering,
and counter-terror financing that could impair our ability to
compete in international markets or subject us to criminal or civil
liability if we violate them. As we continue to expand and localize
our international activities, our obligations to comply with the
laws, rules, regulations, and policies of a variety of
jurisdictions will increase and we may be subject to investigations
and enforcement actions by U.S. and non-U.S. regulators
and governmental authorities.
As we
expand and localize our international activities, we have and will
become increasingly obligated to comply with the laws, rules,
regulations, policies, and legal interpretations both of the
jurisdictions in which we operate and those into which we offer
services on a cross-border basis. Laws regulating financial
services, the internet, mobile technologies, blockchain
technologies, and related technologies outside the
United States often impose different, more specific, or even
conflicting obligations on us, as well as broader
liability.
We
are subject to various anti-money laundering and
counter-terrorist financing laws and regulations around the
world that prohibit, among other things, our involvement in
transferring the proceeds of criminal activities. In the
United States, most of our services are subject to
anti-money laundering laws and regulations, including the Bank
Secrecy Act of 1970, as amended by the USA PATRIOT
Act of 2001, and its implementing regulations
(collectively, the “BSA”) and other similar laws and regulations.
The BSA, among other things, requires money transmitters to develop
and implement risk-based anti-money laundering programs,
to report large cash transactions and suspicious activity, and, in
some cases, to collect and maintain information about customers who
use their services and maintain other transaction records.
Regulators in the United States and globally continue to
increase their scrutiny of compliance with these obligations, which
may require us to further revise or expand our compliance program
including the procedures we use to verify the identity of our
customers and to monitor transactions on our system, including
payments to persons outside of the United States. Regulators
regularly re-examine the transaction volume thresholds at
which we must obtain and keep applicable records or verify
identities of customers, and any change in such thresholds could
result in greater costs for compliance. We could be subject to
potentially significant fines, penalties, inquiries, audits,
investigations, enforcement actions, and criminal and civil
liability if regulators or third-party auditors identify gaps
in our anti-money laundering program and such gaps are not
sufficiently remediated, or if our anti-money laundering
program is found to violate the BSA by a regulator.
Despite
our efforts to comply with the applicable laws, rules, and
regulations, there can be no guarantee that these measures will be
viewed as compliant. If we were to be found to have violated
sanctions, or become involved in government investigations, that
could result in negative consequences for us, including costs
related to government investigations, financial penalties, and harm
to our reputation. The impact on us related to these matters could
be substantial. Although we have implemented controls and screening
tools designed to prevent similar activity, there is no guarantee
that we will not inadvertently provide our products and services to
individuals, entities, or governments prohibited by
U.S. sanctions or those of another jurisdiction to whose laws
and regulations we may be subject.
Regulators
worldwide frequently study each other’s approaches to the
regulation of any novel or developing industry, including those
using blockchain-enabled technologies. Consequently,
developments in any jurisdiction may influence other jurisdictions.
New developments in one jurisdiction may be extended to additional
services and other jurisdictions. The European Commission, for
example, has proposed revisions to the Anti-Money Laundering
Directives, which could make compliance more costly and
operationally difficult to manage. As a result, the risks created
by any new law or regulation in one jurisdiction are magnified by
the potential that they may be replicated, affecting our business
in another place or involving another service. Conversely, if
regulations diverge worldwide, we may face difficulty adjusting our
products, services, and other aspects of our business with the same
effect. These risks are heightened as we face increased competitive
pressure from other similarly situated businesses that engage in
regulatory arbitrage to avoid the compliance costs associated with
regulatory changes.
We
may operate our business in foreign countries where companies often
engage in business practices that are prohibited by regulations
applicable to us. We are subject to anti-corruption laws and
regulations, including the FCPA and other laws that prohibit the
making or offering of improper payments to foreign government
officials and political figures. We have implemented policies,
procedures, systems, and controls designed to identify and address
potentially impermissible transactions under such laws and
regulations; however, there can be no assurance that all of our
employees, consultants and agents, including those that may be
based in or from countries where practices that violate
U.S. or other laws may be customary, will not take actions in
violation of our policies, for which we may be ultimately
responsible.
Our consolidated balance sheets may not contain sufficient amounts
or types of regulatory capital to meet the changing requirements of
our various regulators worldwide, which could adversely affect our
business, operating results, and financial
condition.
Effective
management of our capital and liquidity is critical to our ability
to operate our businesses, to grow organically and to pursue our
strategy. As a regulated and licensed entity in various
jurisdictions, we may be required to possess sufficient financial
soundness and strength to adequately support our regulated
affiliate entities. The maintenance of adequate capital and
liquidity is also necessary for our financial flexibility in the
face of turbulence and uncertainty in the global economy. We may
from time to time incur indebtedness and other obligations which
could make it more difficult to meet applicable regulatory
requirements.
In
addition, although we are not a bank holding company for purposes
of United States law or the law of any other jurisdiction, as
a global provider of financial services and in light of the
changing regulatory environment in various jurisdictions, we could
become subject to new capital requirements introduced or imposed by
U.S. federal, state or international regulators. The changes
to applicable current or future capital and liquidity requirements
may require us to raise additional regulatory capital or hold
additional liquidity buffers, for example because of different
interpretations of or methods for calculating risk exposure amounts
or liquidity outflows or inflows, or because we do not comply with
ratios and levels, or instruments and collateral requirements that
currently qualify as capital or capital risk mitigating techniques
no longer do so in the future because of changes to the
requirements or interpretations thereof. Any change or increase in
these regulatory requirements could have an adverse effect on our
business, operating results, and financial condition.
If we
are unable to raise the requisite regulatory capital, we may be
required to reduce the amount of our risk exposure amount or
business levels, restrict certain activities or engage in the
disposition of core and other non-core businesses, which may
not occur on a timely basis or at prices which would otherwise be
attractive to us, and such inability to raise sufficient regulatory
capital could have an adverse effect on the market’s trust in
respect of the long-term viability of our products and
services, which could, for example, result in customers
transferring to use our competitors’ platforms for financial
transfer and payment infrastructure. As a result of stricter
liquidity requirements or higher liquidity buffers, we may be
required to optimize our funding composition which may result in
higher funding costs for us, and in having to maintain buffers of
liquid assets which may result in lower returns than less liquid
assets. Furthermore, if we are unable to adequately manage our
liquidity position, this may prevent us from meeting our
short-term financial obligations. It is possible we may
experience errors in currency handling, accounting, and regulatory
reporting that leads us to be out of compliance with those
requirements.
The
above changes and any other changes that limit our ability to
manage effectively our balance sheet, liquidity position and
capital resources going forward, or to access funding sources,
could have a material adverse impact on our financial position,
regulatory capital position and liquidity provision.
We obtain and process a large amount of sensitive customer data.
Any real or perceived improper use of, disclosure of, or access to
such data could harm our reputation, as well as have an adverse
effect on our business.
Our
operations involve the storage and/or transmission of sensitive
information, including highly personal data of our customers.
Consequently, we are subject to complex and evolving UK, European,
and other jurisdictions’ laws, rules, regulations, orders and
directives (referred to as “privacy laws”) relating to the
collection, use, retention, security, processing and transfer
(referred to as “process”) of personally identifiable information
(referred to as “personal data”) in the countries where we operate.
Much of the personal data that we process, especially financial
information, is regulated by multiple privacy laws and, in some
cases, the privacy laws of multiple jurisdictions. In many cases,
these laws apply not only to third-party transactions, but
also to transfers of information between or among us and our
subsidiaries. Any failure, or perceived failure, by us to comply
with our privacy policies or with any applicable privacy laws in
one or more jurisdictions could result in proceedings or actions
against us by governmental entities or others, including class
action privacy litigation in certain jurisdictions, significant
fines, penalties, judgments and reputational damages to us,
requiring us to change our business practices, increasing the costs
and complexity of compliance, any of which could materially and
adversely affect its business, financial condition, results of
operations and prospects.
Data
protection, privacy and information security have become the
subject of increasing public, media and legislative concern. If our
customers were to reduce their use of our products and services as
a result of these concerns, our business could be materially
harmed. In addition, we are also subject to the possibility of
security breaches, which themselves may result in a violation of
these privacy laws. Any failure of us or our partners or others who
use our services to adequately protect sensitive data could have a
material and adverse effect on its reputation, business, financial
condition, results of operations and prospects.
We are subject to complex and evolving laws, regulations, and
industry requirements related to data privacy, data protection and
information security across different markets where we conduct our
business, including in the EEA, such laws, regulations, and
industry requirements are constantly evolving and changing. Our
actual or perceived failure to comply with such laws, regulations,
and industry requirements, or our privacy policies/notices could
harm our business by impairing customer trust and could subject us
to fines and reputational harm.
Various
local, state, federal, and international laws, directives, and
regulations apply to our collection, use, retention, protection,
disclosure, transfer, and any other processing of personal data.
There is uncertainty and inconsistency in how these data protection
and privacy laws and regulations are interpreted and applied, and
they continue to evolve in ways that could adversely impact our
business. These laws have a substantial impact on our operations
directly as a data controller/business and as a data
processor/service provider and handler for various offshore
entities.
In
the United States, state and federal lawmakers and regulatory
authorities have increased their attention on the collection and
use of consumer data. While our current product offering does not
target retail consumers, some of our prior products have been
offered to retail consumers. In the United States,
non-sensitive consumer data generally may be used under
current rules and regulations, subject to certain restrictions, so
long as the consumer does not affirmatively “opt out” of the
collection or use of such data. If an “opt-in” model or additional
required “opt-outs” were to be adopted in the United States,
less data could be available, and the cost of data would be
higher.
California
has enacted the California Consumer Privacy Act, or the CCPA, along
with related regulations, in 2020 and the California Privacy Rights
Act, or the CPRA, which has been passed and will become effective
on January 1, 2023. The CCPA gives California residents new
rights to access and request deletion of their personal data, opt
out of the sale of personal data, and receive detailed information
about how their personal data is processed. The CCPA provides for
civil penalties for violations, as well as a private right of
action for data breaches that involving the loss of personal data.
This private right of action may increase the likelihood of, and
risks associated with, data breach litigation. The CPRA
significantly modifies the CCPA, including by expanding consumers’
rights with respect to certain personal data and creating a new
state agency to oversee implementation and enforcement efforts.
While the CCPA currently has exemptions for
business-to-business and human resources data, these
exemptions are set to expire on January 1, 2023. It is unclear
if they will be extended. The CCPA and CPRA may increase our
compliance costs and potential liability, particularly in the event
of a data breach, and could have a material adverse effect on our
business, including how we use personal data, our financial
condition, and our operating results.
Additionally,
the CCPA has prompted a number of proposals for new federal and
state-level privacy legislation, such as in Nevada, Virginia,
Colorado, and others. Virginia’s legislation, the Consumer Data
Protection Act, or CDPA, passed and becomes effective
January 1, 2023. On June 8, 2021, the state of Colorado
passed its bill, which is pending signature by the state governor.
As of June 11, 2021, five states have proposed legislation
under consideration in the local legislatures. As each new state
law is passed, it could add increasing complexity to and
significantly expand the scope of our compliance efforts, impact
our business strategies, increase our potential liability, increase
our compliance costs, and adversely affect our business.
As a
result of our presence in Europe and our service offering in the
European Union, we are subject to the European General Data
Protection Regulation, which imposes stringent EU data protection
requirements, and could increase the risk of
non-compliance and the costs of providing our products and
services in a compliant manner. A breach of the GDPR could result
in regulatory investigations, reputational damage, fines and
sanctions, orders to cease or change our processing of our data,
enforcement notices, or assessment notices (for a compulsory
audit). We may also face civil claims including representative
actions and other class action type litigation (where individuals
have suffered harm), potentially amounting to significant
compensation or damages liabilities, as well as associated costs,
diversion of internal resources, and reputational harm.
Additionally,
the UK Data Protection Act contains provisions, including its own
derogations, for how GDPR is applied in the UK. We have to
continue to comply with the GDPR and also the Data Protection Act,
with each regime having the ability to fine up to the greater of
€20 million (£17 million) or 4% of annual global
turnover. The relationship between the UK and the EU remains
uncertain, for example how data transfers between the UK and the EU
and other jurisdictions will be treated and the role of the UK’s
supervisory authority. On June 28, 2021, the European
Commission issued the UK with an “adequacy decision” to facilitate
the continued free flow of personal data from EU member states to
the UK. However, this adequacy decision has a limited duration
of four years in case there is a future divergence between EU
and UK data protection laws. In the event that the UK maintains an
equivalent standard.at the end of the four year period, it is open
to the European Commission to renew its finding. In the event that
the adequacy decisions is not renewed after this time, the
adjustments required to facilitate data transfers from EU member
states to the UK will lead to additional costs as we try to ensure
compliance with new privacy legislation and will increase our
overall risk exposure.
In
addition, the GDPR imposes strict rules on the transfer of personal
data out of the EU to a “third country”, including the United
Kingdom or the United States. These obligations may be
interpreted and applied in a manner that is inconsistent from one
jurisdiction to another and may conflict with other requirements or
our practices. On July 16, 2020, the Court of Justice of the
European Union invalidated the European Union-United States
“Privacy Shield” (under which personal data could be transferred
from the EU to U.S. entities that had
self-certified under the Privacy Shield scheme) on the grounds
that the Privacy Shield failed to offer adequate protections to EU
personal data transferred to the United States. In addition,
while the ECJ upheld the adequacy of the standard contractual
clauses (a standard form of contract approved by the European
Commission as an adequate personal data transfer mechanism, and
potential alternative to the Privacy Shield), it made clear that
reliance on them alone may not necessarily be sufficient in all
circumstances.
Use
of the standard contractual clauses must now be assessed on a case
by case basis taking into account the legal regime applicable in
the destination country, in particular applicable surveillance laws
and rights of individuals. The use of standard contractual clauses
for the transfer of personal data specifically to the
United States remains under review by a number of European
data protection supervisory authorities, along with those of some
other E.U. member states.
German
and Irish supervisory authorities have indicated, and enforced in
recent rulings, that the standard contractual clauses alone provide
inadequate protection for E.U.-U.S. data transfers. As
supervisory authorities continue to issue further guidance on
personal data, we could suffer additional costs, complaints, or
regulatory investigations or fines, and if we are otherwise unable
to transfer personal data between and among countries and regions
in which we operate, it could affect the manner in which we provide
our services, the geographical location or segregation of our
relevant systems and operations, and could adversely affect our
financial results.
We
are also subject to evolving EU privacy laws on cookies and
e-marketing. In the European Union, regulators are increasingly
focusing on compliance with requirements in the online behavioral
advertising ecosystem, and an EU regulation known as the ePrivacy
Regulation will significantly increase fines for
non-compliance once in effect. In the European Union informed
consent, including a prohibition on pre-checked consents and a
requirement to ensure separate consents for each cookie, is
required for the placement of a cookie or similar technologies on a
user’s device and for direct electronic marketing. As regulators
start to enforce the strict approach in recent guidance, this could
lead to substantial costs, require significant systems changes,
limit the effectiveness of our marketing activities, divert the
attention of our technology personnel, negatively impact our
efforts to understand customers, adversely affect our margins,
increase costs, and subject us to additional
liabilities.
As
these and other laws and regulations may continue to evolve and be
enacted, or new interpretations of existing laws and regulations
apply, it may require us to modify our
data-processing practices, agreements and policies and to
incur substantial costs in order to comply with this evolving
regulatory landscape. Restrictions on the collection, use, sharing
or disclosure of personal information or additional requirements
and liability for security and data integrity could require us to
materially modify our solutions and features, could limit our
ability to develop new services and features and could subject us
to increased compliance obligations and regulatory scrutiny. We use
a variety of technical and organizational security measures and
other measures to protect the data we process, in particular
personal data pertaining to our customers, employees and business
partners. Despite measures we put in place, we may be unable to
anticipate or prevent unauthorized access to such personal
data.
There
is a risk that as we expand, we may assume liabilities for breaches
experienced by the companies we acquire. Despite our efforts to
comply with applicable laws, regulations and other obligations
relating to privacy, data protection, and information security, it
is possible that our practices or technology could fail, or be
alleged to fail to meet applicable requirements. For instance, the
overall regulatory framework governing the application of privacy
laws to blockchain technology is still highly undeveloped and
likely to evolve. Despite our efforts to choose vendors that meet
applicable laws, regulations and other obligations relating to
privacy, data protection, and information security and maintain
robust security controls, it is possible that a vendor could fail
to comply or experience a data breach impacting our data and our
business. Our failure, or the failure by our
third-party providers or partners, to comply with applicable
laws or regulations and to prevent unauthorized access to, or use
or release of personal data, or the perception that any of the
foregoing types of failure has occurred, could damage our
reputation or result in fines or proceedings by governmental
agencies and private claims and litigation, any of which could
adversely affect our business, operating results, and financial
condition.
We are and may continue to be subject to litigation, including
individual and class action lawsuits, as well as regulatory audits,
disputes, inquiries, investigations and enforcement actions by
regulators and governmental authorities.
We
have been and may from time to time become subject to material
claims, arbitrations, individual and class action lawsuits,
government and regulatory investigations, inquiries, actions or
requests and other proceedings alleging violations of laws, rules,
and regulations, both foreign and domestic, involving competition
and antitrust law, intellectual property, privacy, data protection,
information security, anti-money laundering, counter terrorist
financing, sanctions, anti-corruption, accessibility claims,
securities, tax, labor and employment, payment network rules,
commercial disputes, services, and other matters.
The
laws, rules and regulations affecting our business, including those
pertaining to blockchain technologies, payment processing and
financial transaction services, and other financial services, are
subject to ongoing interpretation by the courts and governmental
and supervisory authorities, and the resulting uncertainty in the
scope and application of these laws, rules and regulations
increases the risk that we will be subject to private claims,
governmental and regulatory actions alleging violations of those
laws, rules, and regulations.
The
scope, determination, and impact of claims, lawsuits, government
and regulatory investigations, enforcement actions, disputes, and
proceedings to which we are subject cannot be predicted with
certainty, and may result in:
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substantial
payments to satisfy judgments, fines, or penalties; |
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substantial
outside counsel legal fees and costs; |
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additional
compliance and licensure requirements; |
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loss
or non-renewal of existing licenses or authorizations, or
prohibition from or delays in obtaining additional licenses or
authorizations, required for our business; |
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loss
of productivity and high demands on employee time; |
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civil
or criminal sanctions or consent decrees; |
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termination
of certain employees, including members of our executive
team; |
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barring
of certain employees from participating in our business in whole or
in part; |
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orders
that restrict our business or prevent us from offering certain
products or services; |
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changes
to our business model and practices; |
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delays
to planned transactions, product launches or improvements;
and |
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damage
to our brand and reputation. |
Any
such matters can have an adverse impact, which may be material, on
our business, operating results, or financial condition because of
legal costs, diversion of management resources, reputational
damage, and other factors.
Risks
Related to Nukkleus’s Intellectual Property
Our intellectual property rights are valuable, and any inability to
protect them could adversely impact our business, operating
results, and financial condition.
Our business depends in large part on our proprietary technology
and our brand. We rely on, and expect to continue to rely on, a
combination of trademark, trade dress, domain name, copyright, and
trade secret and laws, as well as confidentiality and license
agreements with our employees, contractors, consultants, and third
parties with whom we have relationships, to establish and protect
our brand and other intellectual property rights. As of April 7,
2023, we held four registered trademarks in the United States,
including “Forexware”, “XW”, “Total Broker Solution” and
“Swordfish”, and also held one registered trademark in various
foreign jurisdictions.
Our
efforts to protect our intellectual property rights may not be
sufficient or effective. Our proprietary technology and trade
secrets could be lost through misappropriation or breach of our
confidentiality and license agreements, and any of our intellectual
property rights may be challenged, which could result in them being
narrowed in scope or declared invalid or unenforceable. There can
be no assurance that our intellectual property rights will be
sufficient to protect against others offering products, services,
or technologies that are substantially similar to ours and that
compete with our business.
As we
have grown, we have sought to obtain and protect our intellectual
property rights in an increasing number of countries, a process
that can be expensive and may not always be successful. For
example, the U.S. Patent and Trademark Office and various
foreign governmental intellectual property agencies require
compliance with a number of procedural requirements to complete the
trademark application process and to maintain issued trademarks,
and noncompliance or non-payment could result in abandonment
or lapse of a trademark or trademark application, resulting in
partial or complete loss of trademark rights in a relevant
jurisdiction. Further, intellectual property protection may not be
available to us in every country in which our products and services
are available. We may also agree to license our intellectual
property to third parties as part of various agreements. Those
licenses may diminish our ability, though, to
counter-assert our intellectual property rights against
certain parties that may bring claims against us.
In the future we may be sued by third parties for alleged
infringement of their proprietary rights.
In
recent years, there has been considerable patent, copyright,
trademark, domain name, trade secret and other intellectual
property development activity, as well as litigation, based on
allegations of infringement or other violations of intellectual
property, including by large financial institutions. Furthermore,
individuals and groups can purchase patents and other intellectual
property assets for the purpose of making claims of infringement to
extract settlements from companies like ours. Our use of
third-party intellectual property rights also may be subject
to claims of infringement or misappropriation.
We
cannot guarantee that our internally developed or acquired
technologies and content do not or will not infringe the
intellectual property rights of others. From time to time, our
competitors or other third parties may claim that we are infringing
upon or misappropriating their intellectual property rights, and we
may be found to be infringing upon such rights. Any claims or
litigation could cause us to incur significant expenses and, if
successfully asserted against us, could require that we pay
substantial damages or ongoing royalty payments, prevent us from
offering our products or services or using certain technologies,
force us to implement expensive work-arounds, or impose other
unfavorable terms. Our exposure to damages resulting from
infringement claims could increase and this could further exhaust
our financial and management resources. Further, during the course
of any litigation, we may make announcements regarding the results
of hearings and motions, and other interim developments. If
securities analysts and investors regard these announcements as
negative, the market price of Nukkleus Common Stock may decline.
Even if intellectual property claims do not result in litigation or
are resolved in our favor, these claims, and the time and resources
necessary to resolve them, could divert the resources of our
management and require significant expenditures. Any of the
foregoing could prevent us from competing effectively and could
have an adverse effect on our business, operating results, and
financial condition.
Our
and our ecosystem partners’ products and services, including the
blockchain technologies on which our Platforms are built, contain
third-party open source software components, and failure to
comply with the terms of the underlying open source software
licenses could harm our business.
Our
products and services contains software modules licensed to us by
third-party authors under “open source” licenses. Also, the
blockchain technologies on which our Platforms are built rely on
open source licenses to operate. We also make certain of our own
software available to customers for free under various open source
licenses. Use and distribution of open source software may entail
greater risks than use of third-party commercial software, as
open source licensors generally do not provide support, warranties,
indemnification or other contractual protections regarding
infringement claims or the quality of the code. In addition, the
public availability of such software may make it easier for others
to compromise our products and services.
Some
open-source licenses contain requirements that we make
available source code for modifications or derivative works we
create based upon the type of open source software we use, or grant
other licenses to our intellectual property. If we combine our
proprietary software with open source software in a certain manner,
we could, under certain open source licenses, be required to
release the source code of our proprietary software to the public.
This would allow our competitors to create similar offerings with
lower development effort and time and ultimately could result in a
loss of our competitive advantages. Alternatively, to avoid the
public release of the affected portions of our source code, we
could be required to expend substantial time and resources to
re-engineer some or all of our software.
Although
we monitor our use of open-source software to avoid subjecting
our products and services to conditions we do not intend, we have
not recently conducted an extensive audit of our use of open source
software and, as a result, we cannot assure you that our processes
for controlling our use of open source software in our products and
services are, or will be, effective. If we are held to have
breached or failed to fully comply with all the terms and
conditions of an open source software license, we could face
litigation or infringement or other liability, or be required to
seek costly licenses from third parties to continue providing our
offerings on terms that are not economically feasible, to
re-engineer our products or services, to discontinue or delay
the provision of our offerings if re-engineering could not be
accomplished on a timely basis or to make generally available, in
source code form, our proprietary code, any of which could
adversely affect our business, operating results, and financial
condition.
Moreover,
the terms of many open-source licenses have not been
interpreted by U.S. or foreign courts. As a result, there is a
risk that these licenses could be construed in a way that could
impose unanticipated conditions or restrictions on our ability to
provide or distribute our products and services. From time to time,
there have been claims challenging the ownership of open source
software against companies that incorporate open source software
into their solutions. As a result, we could be subject to lawsuits
by parties claiming ownership of what we believe to be
open-source software.
General
Risk Factors
The SEC has adopted amendments to Rule 15c2-11 under the Securities
Exchange Act of 1934, which could adversely affect our common
stock.
Rule
15c2-11 (the “Rule”) became effective on September 28, 2021 and
will have an impact on the over-the-counter (“OTC”) market
regulatory structure. The amended Rule is ostensibly to enhance
disclosure and investor protection in the OTC market by ensuring
that broker-dealers in the OTC market do not publish quotations for
an issuer’s security when current issuer information is not
publicly available. Therefore, under the new Amendments to Rule
15c2-11, now, all OTC quoted companies must file at least current
annual financial statements or companies will not be publicly
quoted on the OTC Markets and risk being downgraded to the Expert
Market. Our Company is currently listed on the OTC markets “Pink –
Limited Information” Tier. Currently, we have not filed all of our
annual and quarterly reports which are required to be filed by us
with the SEC. We are striving to achieve this goal. Even so, it is
possible that our common stock may be downgraded to the Expert
Market, if it determined that we failed to file our appropriate
annual and quarterly reports in a timely manner as required by the
SEC. As of the date hereof, the Company has filed its annual report
on Form 10K for the year ended September 30, 2022 late and is
presently required to file its quarterly report on Form 10Q for the
quarter ended December 31, 2022, which is currently late. If it is
determined that we did not comply with these new requirements, it
is highly likely that it may make it more difficult for investors
in our stock to resell their shares to third parties or to
alternatively dispose of them in the open market or
otherwise.
Adverse economic conditions may adversely affect our
business.
Our
performance is subject to general economic conditions, and their
impact on the foreign exchange transfer and payments markets, as
well as our customers. The United States and other key
European and other international economies have experienced
cyclical downturns from time to time in which economic activity
declined resulting in lower consumption rates, restricted credit,
reduced profitability, weaknesses in financial markets,
bankruptcies, and overall uncertainty with respect to the economy.
The impact of general economic conditions on our business is highly
uncertain and dependent on a variety of factors, including market
activity, global trends in the blockchain economy, central bank
monetary policies, and other events beyond our control.
Geopolitical developments, such as trade wars and foreign exchange
limitations can also increase the severity and levels of
unpredictability globally and increase the volatility of global
financial markets. To the extent that conditions in the general
economic and digital asset markets materially deteriorate, our
ability to attract and retain customers may suffer.
We may be adversely affected by natural disasters, pandemics, and
other catastrophic events, and by man-made problems such as war or
terrorism, that could disrupt our business operations, and our
business continuity and disaster recovery plans may not adequately
protect us from a serious disaster.
Natural
disasters or other catastrophic events may also cause damage or
disruption to our operations, international commerce, and the
global economy, and could have an adverse effect on our business,
operating results, and financial condition. Our business operations
are subject to interruption by natural disasters, fire, power
shortages, and other events beyond our control.
In
addition, our global operations expose us to risks associated with
public health crises, such as pandemics and epidemics, which could
harm our business and cause our operating results to suffer. For
example, the ongoing effects of the COVID-19 pandemic and/or
the precautionary measures that we have adopted have resulted, and
could continue to result, in difficulties or changes to our
customer support, or create operational or other challenges, any of
which could adversely impact our business and operating
results.
Further,
war, acts of terrorism, labor activism and other geopolitical
unrest could cause disruptions in our business or the businesses of
our partners or the economy as a whole. In the event of a natural
disaster, including a major earthquake, blizzard, or hurricane, or
a catastrophic event such as a fire, power loss, or
telecommunications failure, we may be unable to continue our
operations and may endure system interruptions, reputational harm,
delays in development of our products and services, lengthy
interruptions in service, breaches of data security, and loss of
critical data, all of which could have an adverse effect on our
future operating results.
Acquisitions, joint ventures or other strategic transactions create
certain risks and may adversely affect our business, financial
condition or results of operations.
Acquisitions,
partnerships and joint ventures are part of our growth strategy. We
evaluate and expect in the future to evaluate potential strategic
acquisitions of, and partnerships or joint ventures with,
complementary businesses, services or technologies. We may not be
successful in identifying acquisition, partnership and joint
venture targets. In addition, we may not be able to successfully
finance or integrate any businesses, services or technologies that
we acquire or with which we form a partnership or joint
venture.
We
may not be able to identify suitable acquisition candidates or
complete acquisitions in the future, which could adversely affect
our future growth; or businesses that we acquire may not perform as
well as expected or may be more difficult or expensive to integrate
and manage than expected, which could adversely affect our business
and results of operations. In addition, the process of integrating
these acquisitions may disrupt our business and divert our
resources.
In
addition, acquisitions outside our current operating jurisdictions
often involve additional or increased risks including, for
example:
|
● |
managing
geographically separated organizations, systems and
facilities; |
|
● |
integrating
personnel with diverse business backgrounds and organizational
cultures; |
|
● |
complying
with foreign regulatory requirements; |
|
● |
fluctuations
in exchange rates; |
|
● |
enforcement
and protection of intellectual property in some foreign
countries; |
|
● |
difficulty
entering new foreign markets due to, among other things, customer
acceptance and business knowledge of these new markets;
and |
|
● |
general
economic and political conditions. |
These
risks may arise for a number of reasons: we may not be able to find
suitable businesses to acquire at affordable valuations or on other
acceptable terms; we may face competition for acquisitions from
other potential acquirers; we may need to borrow money or sell
equity or debt securities to the public to finance acquisitions and
the terms of these financings may be adverse to us; changes in
accounting, tax, securities or other regulations could increase the
difficulty or cost for us to complete acquisitions; we may incur
unforeseen obligations or liabilities in connection with
acquisitions; we may need to devote unanticipated financial and
management resources to an acquired business; we may not realize
expected operating efficiencies or product integration benefits
from an acquisition; we could enter markets where we have minimal
prior experience; and we may experience decreases in earnings as a
result of non-cash impairment charges.
We
cannot ensure that any acquisition, partnership or joint venture we
make will not have a material adverse effect on our business,
financial condition and results of operations.
Delaware law and our Certificate of Incorporation and Bylaws will
contain certain provisions, including anti-takeover provisions that
limit the ability of stockholders to take certain actions and could
delay or discourage takeover attempts that stockholders may
consider favorable.
Nukkleus’s
Certificate of Incorporation and bylaws contains provisions that
could have the effect of rendering more difficult, delaying, or
preventing an acquisition deemed undesirable by the Nukkleus Board
and therefore depress the trading price of Nukkleus Common Stock.
In addition, as a Delaware corporation, the Company will generally
be subject to provisions of Delaware law, including the DGCL. These
provisions could also make it difficult for stockholders to take
certain actions, including electing directors who are not nominated
by the current members of the Nukkleus Board or taking other
corporate actions, including effecting changes in
management.
Such
provisions, alone or together, could delay or prevent hostile
takeovers and changes in control or changes in the Nukkleus Board
or management.
Any
provision of Nukkleus’s Certificate of Incorporation or bylaws or
Delaware law that has the effect of delaying or preventing a change
in control could limit the opportunity for stockholders to receive
a premium for their shares of the Company’s capital stock and could
also affect the price that some investors are willing to pay for
Nukkleus Common Stock.
Item
1B. Unresolved Staff Comments.
We
are a smaller reporting company as defined by Rule 12b-2 of the
Exchange Act and are not required to provide the information under
this item.
Item
2. Properties.
The
Company’s headquarters are located in Jersey City, New Jersey. The
Company uses office space of FXDD, an affiliated company, free of
rent, which is considered immaterial.
We
believe our facilities are adequate for our current and planned
business operations.
Item
3. 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, except as set forth
below.
On
April 16, 2020, the Company was named as a defendant in the BT
Prime Litigation. The BT Prime Litigation
was brought by BT Prime against Boston Technologies
Powered by Forexware LLC f/k/a Forexware LLC (“Forexware”),
Currency Mountain Holdings LLC, Currency Mountain Holdings Limited
f/k/a Forexware Malta Holdings Ltd., FXDirectDealer, LLC, FXDD
Malta Ltd., Nukkleus, Nukkleus Bermuda Limited and Global Elite
Holdings Ltd. f/k/a Currency Mountain Holdings Bermuda, Ltd. BT
Prime sought, amongst other relief, a determination that the
defendants were liable for all of the debts of BT Prime stemming
from its bankruptcy proceedings, and sought to recover certain
amounts transferred to Forexware and FXDD Malta prior to the
initiation of the bankruptcy case. In the sole claim asserted
against Nukkleus, BT Prime alleged that Nukkleus acquired certain
technology assets from Forexware and is a continuation of the
business of Forexware and a successor-in-interest to
Forexware. Based on this theory, BT Prime alleged that Nukkleus
should be jointly and severally liable for any liability
attributable to Forexware or the other defendants, should the court
eventually find any such liability. Although Nukkleus acquired
licenses from Forexware, Forexware retained other assets and
continued to operate a separate business, which Nukkleus believes
is the business that is pertinent to BT Prime’s allegations.
Nukkleus believes that the similarity in Forexware and Nukkleus’s
business, including the shared use of software, caused BT Prime to
conflate the two businesses, but Nukkleus was not connected to the
events that caused the initiation of BT Prime’s liquidation and
bankruptcy proceedings.
Nukkleus
has issued a limited guarantee of the obligations under a
settlement agreement among BT Prime and the defendants other than
Nukkleus, limited to an amount equal to $2,050,000, which guarantee
is subject to release following payment by the defendants other
than Nukkleus of their obligations under the settlement agreement.
Nukkleus management believes that the term of the limited guarantee
will expire without any payment obligation or other cost to
Nukkleus. On May 31, 2022, the BT Prime Litigation was
dismissed with prejudice by the bankruptcy court as to Nukkleus and
FXDD Malta Ltd., following which none of Nukkleus or any of its
direct or indirect subsidiaries were party to the BT Prime
Litigation.
Item
4. Mine Safety Disclosures
Not
applicable
PART
II
Item
5. Market for Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities.
Market
Information
LIMITED
PUBLIC MARKET FOR COMMON STOCK
A
symbol was assigned for our securities so that our securities may
be quoted for trading under the symbol “NUKK” on the Pink Limited
Information tier. Minimal trading occurred through the date of this
Annual Report based on a limited float. There can be no assurance
that a liquid market for our securities will ever develop. Transfer
of our common stock may also be restricted under the securities or
blue-sky laws of various states and foreign jurisdictions.
Consequently, investors may not be able to liquidate their
investments and should be prepared to hold the common stock for an
indefinite period of time.
Quarterly ended |
|
Low
Price |
|
|
High
Price |
|
December 31, 2020 |
|
$ |
0.04 |
|
|
$ |
0.09 |
|
March 31, 2021 |
|
$ |
0.04 |
|
|
$ |
2.05 |
|
June 30, 2021 |
|
$ |
0.14 |
|
|
$ |
0.51 |
|
September 30, 2021 |
|
$ |
0.06 |
|
|
$ |
2.29 |
|
December 31, 2021 |
|
$ |
0.17 |
|
|
$ |
0.93 |
|
March 31, 2022 |
|
$ |
0.15 |
|
|
$ |
0.38 |
|
June 30, 2022 |
|
$ |
0.10 |
|
|
$ |
0.23 |
|
September 30, 2022 |
|
$ |
0.07 |
|
|
$ |
0.17 |
|
Holders
of Our Common Stock
As of April 7, 2023, there were 64 holders of record of our common
stock. This number does not include shares held by brokerage
clearing houses, depositories or others in unregistered form.
Stock
Option Grants
In
January 2022, the Company issued 50,000 stock options for
software purchase that are exercisable at a per share price of
$0.40.
The
Company granted an option to acquire 5,800,000 shares of common
stock at an exercise price of $0.09 per share to $2.50. The
option’s life is one to five years.
Transfer
Agent and Registrar
The
transfer agent for our common stock is Issuer Direct Corporation,
500 Perimeter Park Drive, Suite D, Morrisville, NC 27560,
telephone: (919) 481-4000.
Dividends
To
date, we have not paid dividends on shares of our common stock and
we do not expect to declare or pay dividends on shares of our
common stock in the foreseeable future. The payment of any
dividends will depend upon our future earnings, if any, our
financial condition, and other factors deemed relevant by our Board
of Directors.
Recent
Sales of Unregistered Securities
Except
as set forth below, the Company has not sold unregistered
securities during the fiscal year ended September 30, 2022 and
through the date hereof.
On
October 20, 2021, the Company and the shareholders (the “Original
Shareholders”) of Jacobi Asset Management Holdings Limited
(“Jacobi”) entered into a Purchase and Sale Agreement (the “Jacobi
Agreement”) pursuant to which the Company agreed to acquire 5.0% of
the issued and outstanding ordinary shares of Jacobi in
consideration of 20,000,000 shares of common stock of the Company
(the “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 ETF. Jamal
Khurshid and Nicholas Gregory own, directly and indirectly,
approximately 40% and 10% of Jacobi, respectively. Jamal Khurshid
is the Company’s chief operating 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, the Company and the shareholder (the “Digiclear
Shareholder”) of Digiclear Ltd. (“Digiclear”) entered into a
Purchase and Sale Agreement (the “Digiclear Agreement) pursuant to
which the Company agreed to acquire 5,400,000 of the issued and
outstanding ordinary shares of Digiclear in consideration of
15,151,515 shares of common stock of the Company (valued at
$5,000,000 based on the market price of the Company’s common stock
on the acquisition date) (the “Digiclear Transaction”). In addition
to, if and when the Company is acquired by a Special Purpose
Acquisition Company (“SPAC”), the Company will fund and capitalize
Digiclear with a minimum of $1,000,000 operating capital. Digiclear
shall retain the right to unwind the transaction and to have the
Company return the 5,400,000 ordinary shares of Digiclear share in
return for Digiclear returning to the Company the 15,151,515 of
Company common shares. Digiclear can only unwind the transaction if
the Company is no longer under contract to be acquired by a SPAC.
The Digiclear Transaction closed on March 17, 2022. Digiclear is a
company developing a custody and settlement utility operating
system.
No
underwriters were involved in the transactions described
above. All of the securities issued in the foregoing
transactions were issued by the Company in reliance upon the
exemption from registration available under Section 4(a)(2) of
the Securities Act, including Regulation D and Regulation S
promulgated thereunder, in that the transactions involved the
issuance and sale of the Company’s securities to financially
sophisticated individuals or entities that were aware of the
Company’s activities and business and financial condition and took
the securities for investment purposes and understood the
ramifications of their actions, or were non-U.S. persons. The
Company did not engage in any form of general solicitation or
general advertising in connection with the transactions. The
individuals represented that they were each and “accredited
investor” as defined in Regulation D or non-U.S. person as defined
in Regulation S at the time of issuance of the securities, and that
it was acquiring such securities for its own account and not for
distribution. All certificates representing the securities
issued have a legend imprinted on them stating that the shares have
not been registered under the Securities Act and cannot be
transferred until properly registered under the Securities Act or
an exemption applies.
Item
6. [Reserved].
Item
7. 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 years ended September 30, 2022 and
2021 should be read in conjunction with our consolidated financial
statements and related notes to those 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-K 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 a financial technology company which is focused on providing
software and technology solutions for the worldwide retail foreign
exchange (“FX”) trading industry. We primarily provide our
software, technology, customer sales and marketing and risk
management technology hardware and software solutions package to
TCM. The FXDD brand (e.g., see FXDD.com) is the brand utilized in
the retail forex trading industry by TCM.
We
have ownership of FOREXWARE, the primary software suite and
technology solution which powers the FXDD brand globally today. We
also have ownership of the FOREXWARE brand name. We have also
acquired ownership of the customer interface and other software
trading solutions being used by FXDD.com. By virtue of our
relationship with TCM and FXDIRECT, we provide turnkey software and
technology solutions for FXDD.com. We offer the customers of FXDD
24 hours, five days a week direct access to the global over the
counter (“OTC”) FX market, which is a decentralized market in which
participants trade directly with one another, rather than through a
central exchange.
In an
FX trade, participants effectively buy one currency and
simultaneously sell another currency, with the two currencies that
make up the trade being referred to as a “currency pair”. Our
software and technology solutions enable FXDD to present its
customers with price quotations on over the counter tradeable
instruments, including over the counter currency pairs, and also
provide our customers the ability to trade FX derivative contracts
on currency pairs through a product referred to as Contracts for
Difference (“CFD”). Our software solutions also offer other CFD
products, including CFDs on metals, such as gold, and on futures
linked to other products.
In
July 2018, the Company incorporated Nukkleus Malta Holding Ltd.,
which is a wholly-owned subsidiary. In July 2018, Nukkleus Malta
Holding Ltd. incorporated MDTG, formerly known as Nukkleus Exchange
Malta Ltd. MDTG was exploring potentially obtaining a license to
operate an electronic exchange whereby it would facilitate the
buying and selling of various digital assets as well as traditional
currency pairs used in FX Trading. During the fourth quarter of
fiscal 2020, management made the decision to exit the exchange
business and to no longer pursue the regulatory licensing necessary
to operate an exchange in Malta.
On
August 27, 2020, the Company renamed Nukkleus Exchange Malta Ltd.
to Markets Direct Technology Group Ltd (“MDTG”). MDTG manages the
technology and IP behind the Markets Direct brand (which is
operated by TCM). MDTG holds all the IP addresses and all the
software licenses in its name, and it holds all the IP rights to
the brands such as Markets Direct and TCM. MDTG then leases out the
rights to use these names/brands licenses to the appropriate
entities.
In
fiscal year 2021, the Company completed its acquisition of
Match Financial Limited, a private limited company formed in
England and Wales (“Match”). Match is engaged in
providing payment services from one fiat currency to
another.
On
October 20, 2021, the Company and the shareholders (the “Original
Shareholders”) of Jacobi Asset Management Holdings Limited
(“Jacobi”) entered into a Purchase and Sale Agreement (the “Jacobi
Agreement”) pursuant to which the Company agreed to
acquire 5.0% of the issued and outstanding ordinary shares of
Jacobi in consideration of 20,000,000 shares of common
stock of the Company (the “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 ETF. Jamal Khurshid and Nicholas Gregory own, directly
and indirectly, approximately 40% and 10% of Jacobi, respectively.
Jamal Khurshid is the Company’s chief operating 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, the Company and the shareholder (the
“Digiclear Shareholder”) of Digiclear Ltd. (“Digiclear”) entered
into a Purchase and Sale Agreement (the “Digiclear Agreement)
pursuant to which the Company agreed to acquire 5,400,000 of the
issued and outstanding ordinary shares of Digiclear in
consideration of 15,151,515 shares of common stock of the Company
(valued at $5,000,000 based on the market price of the Company’s
common stock on the acquisition date) (the “Digiclear
Transaction”). In addition to, if and when the Company is acquired
by a Special Purpose Acquisition Company (“SPAC”), the Company will
fund and capitalize Digiclear with a minimum of $1,000,000
operating capital. Digiclear shall retain the right to unwind the
transaction and to have the Company return the 5,400,000 ordinary
shares of Digiclear share in return for Digiclear returning to the
Company the 15,151,515 of Company common shares. Digiclear can only
unwind the transaction if the Company is no longer under contract
to be acquired by a SPAC. The Digiclear Transaction closed on March
17, 2022. Digiclear is a company developing a custody and
settlement utility operating system.
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.
|
|
Year Ended |
|
|
From May 28,
2021 To |
|
Performance Indicator |
|
September 30,
2022 |
|
|
September 30,
2021 |
|
Trading
volume |
|
$ |
350,448,095 |
|
|
$ |
7,299,147 |
|
Financial services
revenue |
|
$ |
2,313,474 |
|
|
$ |
86,964 |
|
Financial services
loss |
|
$ |
(961,396 |
) |
|
$ |
(382,322 |
) |
Average cost per trade |
|
$ |
2,122 |
|
|
$ |
15,643 |
|
Average trade |
|
|
227,121 |
|
|
|
243,305 |
|
Number of trades |
|
|
1,543 |
|
|
|
30 |
|
Clients active |
|
|
93 |
|
|
|
18 |
|
Gross trading
margin |
|
|
0.7 |
% |
|
|
1.2 |
% |
Gross margin |
|
|
(41.6 |
)% |
|
|
(439.6 |
)% |
On
May 28, 2021, the Company acquired a controlling interest in Match.
There was no comparable information prior to the date the Company
acquired a controlling interest in Match.
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 loss is measured as financial services revenue,
less costs which include 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. For the year
ended September 30, 2022, we saw a 4,701.2% increase in trade
volume over the period from May 28, 2021 through September 30,
2021. The increase in trading volume had a similar positive effect
on all other KPIs.
Average
cost per trade is driven by financial services costs. We gained
significant economies of scale as average cost per trade decreased
measurably as trading volume increased.
Active
clients for the year ended September 30, 2022 and for the
period from May 28, 2021 through September 30, 2021 was 93 and 18,
respectively. We continue to bring on introducing brokers as well
as increases in marketing spend from which we continue to add new
clients.
Gross
trading margin is a metric that measures financial services
revenue to trading volume.
Critical
Accounting Policies
Use of Estimates
The
preparation of the consolidated financial statements in conformity
with U.S. GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Changes in these
estimates and assumptions may have a material impact on the
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 years ended September 30, 2022 and 2021
include the useful life of intangible assets, assumptions used in
assessing impairment of long-term assets, the fair value of assets
acquired and liabilities assumed in the asset acquisition of Match,
valuation of deferred tax assets and the associated valuation
allowances, valuation of stock-based compensation, and 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 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.
Investment, at Cost
Investment in which the Company does not have the ability to
exercise significant influence over operating and financial matters
is accounted for using the cost method. Under the cost
method, investment is recorded at cost, with gains and losses
recognized as of the sale date, and income recorded when received.
The Company periodically evaluates its cost method
investment for impairment due to decline considered to be
other than temporary. If the Company determines that a decline in
fair value is other than temporary, then a charge to earnings is
recorded in operating expenses in the accompanying consolidated
statements of operations and comprehensive loss, and a new basis in
the investment is established. No impairment expense for cost
method investment was recorded for the year ended September 30,
2022.
Investment in Unconsolidated Company – Digiclear
Ltd.
The
Company uses the equity method of accounting for its investment in,
and earning or loss of, a company that it does not control but over
which it does exert significant influence. The Company considers
whether the fair value of its equity method investment has declined
below its carrying value whenever adverse events or changes in
circumstances indicate that recorded value may not be recoverable.
If the Company considers any decline to be other than temporary
(based on various factors, including historical financial results
and the overall health of the investee), then a write-down would be
recorded to estimated fair value. Impairment of equity method
investment amounted to $4,310,745 for the year ended December 31,
2022.
Intangible Assets
Intangible
assets consist of trade names, regulatory licenses, technology and
software, which are being amortized on a straight-line method over
the estimated useful life of 3 - 5 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.
In September 2022, the Company assessed its long-lived assets for
any impairment and concluded that there were indicators of
impairment as of September 30, 2022 and it calculated that the
estimated undiscounted cash flows related to its equity method
investment were less than the carrying amount of the equity method
investment. Based on its analysis, the Company recognized an
impairment loss of $4,310,745 for the year ended September 30,
2022, which reduced the value of equity method investment to $0.
The Company did not record any impairment charge for the year ended
September 30, 2021 as there was no impairment indicator noted.
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 Year Ended September 30, 2022 Versus the Year Ended September
30, 2021
Revenues
For
both of the years ended September 30, 2022 and 2021, we had revenue
from general support services rendered to TCM under a GSA of
$19,200,000.
We
had revenue from financial services commencing in May
2021. For the year ended September 30, 2022, we had revenue
from financial services of $2,313,474, as compared to $86,964 for
the year ended September 30, 2021, an increase of $2,226,510, or
2,560.3%. The significant increase was primarily attributable to
our business expansion. We expect that our revenue from financial
services will continue to increase in the near future since we are
making efforts on expanding our financial services.
Costs of Revenues
For
both of the years ended September 30, 2022 and 2021, our cost of
general support services was $18,900,000, which represented amount
incurred for services rendered by FXDIRECT under a GSA.
Cost
of financial services include 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.
For
the year ended September 30, 2022, cost of financial services
amounted to $3,274,870, as compared to $469,286 for the year ended
September 30, 2021, an increase of $2,805,584, or 597.8%. The
significant increase was primarily attributable to the increase in
amortization costs of intangible assets which consist of license
and banking infrastructure acquired on Match
acquisition.
Gross Profit (Loss)
For
both of the years ended September 30, 2022 and 2021, our gross
profit from general support services was $300,000, representing
gross margin of 1.6%.
Gross
loss from financial services for the year ended September 30, 2022
was $961,396, as compared to $382,322 for the year ended September
30, 2021, an increase of $579,074, or 151.5%. Gross margin
increased to (41.6)% for the year ended September 30, 2022 from
gross margin of (439.6)% for the year ended September 30, 2021. The
gross losses were primarily attributable to a large portion of our
cost of financial services are fixed and do not change along with
the increase/decrease in our revenue from financial services. The
significant increase in our gross margin for the financial services
segment for the year ended September 30, 2022 as compared to the
year ended September 30, 2021 was primarily attributed to the
increased scale of operations resulting from larger revenue, which
is reflected in the allocation of fixed costs, mainly consisting of
amortization costs of intangible assets, to cost of revenue. We
expect that our gross margin for the financial services segment
will continue to increase since we anticipate we will generate more
revenue from financial services and we can improve our gross margin
from financial services segment to the extent that we can become
more efficient by increasing our revenue.
Operating Expenses
Operating expenses consisted of advertising and marketing,
professional fees, compensation and related benefits, amortization
of intangible assets, other general and administrative expenses,
and impairment of equity method investment.
Advertising
and marketing
For
the year ended September 30, 2022, advertising and marketing
expense increased by $402,312, or 2,250.8%, as compared to the year
ended September 30, 2021. The significant increase was primarily
attributable to our incurred advertising and marketing activities
to enhance the visibility and marketability of our services and to
improve brand recognition and awareness. We expect that our
advertising and marketing expense will remain in its current 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 year ended
September 30, 2022, professional fees increased by $3,795,152, or
709.6%. The significant increase was primarily attributable to an
increase in advisory service fees of approximately $498,000 mainly
due to increased advisory service related to our merger and
acquisition, an increase in legal service fees of approximately
$149,000 due to increased legal service related to our merger and
acquisition, an increase in consulting fees of approximately
$2,919,000, which was due to the increase in options granted to
consultants of approximately $1,914,000 and the increase of
approximately $1,005,000 mainly related to merger and acquisition
consulting services, and an increase in other miscellaneous items
of approximately $230,000 resulting from our business expansion. We
expect that our professional fees will remain in its current level
with minimal increase in the near future.
Compensation
and related benefits
For
the year ended September 30, 2022, our compensation and related
benefits increased by $355,113, or 231.6%, as compared to the year
ended September 30, 2021. 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 level with minimal increase in the near future.
Amortization
of intangible assets
For
the year ended September 30, 2022, our amortization of intangible
assets increased by $264,224, or 100.0%, as compared to the year
ended September 30, 2021. The increase was primarily attributable
to increased intangible assets in fiscal 2022. We expect that
our amortization of intangible assets will remain in its current
level in the near future.
Other
general and administrative expenses
Other
general and administrative expenses primarily consisted of rent,
filing fee, travel and entertainment, miscellaneous taxes, and
other miscellaneous items.
For
the year ended September 30, 2022, total other general and
administrative expenses increased by $503,300, or 349.5%, as
compared to the year ended September 30, 2021. The increase was
mainly due to an increase in rent expense of approximately $115,000
resulting from our business expansion, an increase in filing fee of
approximately $72,000, an increase in platform fee of approximately
$91,000, an increase in travel and entertainment of approximately
$51,000, an increase in miscellaneous taxes of approximately
$41,000, and an increase in other miscellaneous items of
approximately $133,000 resulting from our business expansion. We
expect that other general and administrative expenses will remain
in its current level with minimal increase in the near
future.
Impairment of equity method investment
In September 2022, we assessed our equity method investment for any
impairment and concluded that there were indicators of impairment
as of September 30, 2022 and we calculated that the estimated
undiscounted cash flows related to our equity method investment
were less than the carrying amount of the equity method investment.
The impairment is due to our conclusion that it will be unable to
recover the carrying amount of the investment due to the investee’s
a series of operating losses and global economic environment. Based
on our analysis, we recognized an impairment loss of $4,310,745
related to the equity method investment for the year ended December
31, 2022, which reduced the investment value to zero. We did not
record any impairment charge for the year ended September 30,
2021.
Other (Expense) Income
Other
(expense) income includes loss from equity method investment and
other miscellaneous income (expense).
Other
expense, net, totaled $703,333 for the year ended September 30,
2022, as compared to $4,442 for the year ended September 30, 2021,
an increase of $698,891, which was primarily attributable to an
increase in loss from equity method investment of approximately
$689,000.
Net Loss
As a result of the factors described above, our net loss was
$11,845,657, or $0.03 per share (basic and diluted),
for the year ended September 30, 2022, as compared to $936,846, or
$0.00 per share (basic and diluted), for the year ended September
30, 2021, an increase of $10,908,811 or 1,164.4%.
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 Limited, is the British Pound (“GBP”) and
the functional currency of Digital RFQ Limited’s subsidiary, DRFQ
Europe UAB, is Euro. The financial statements of our subsidiaries
whose functional currency is the GBP or Euro 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 $49,779 and
$8,440 for the years ended September 30, 2022 and 2021,
respectively. This non-cash gain had the effect of decreasing our
reported comprehensive loss.
Comprehensive Loss
As a
result of our foreign currency translation adjustment, we had
comprehensive loss of $11,795,878 and $928,406 for the years ended
September 30, 2022 and 2021, 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 September 30, 2022 and
2021, we had cash of $364,023 and $403,771, respectively, exclusive
of customer custodial cash. We had working capital deficit of
$3,786,525 as of September 30, 2022.
Our
ability to continue as a going concern is dependent upon the
management of expenses and our ability to obtain the necessary
financing to meet our obligations and pay our liabilities arising
from normal business operations when they come due, and upon
profitable operations.
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. In the event that there are any unforeseen delays or
obstacles in obtaining funds through the aforementioned sources,
TCM has committed to inject capital into the Company in order to
maintain the ongoing operations of the business.
The
following table sets forth a summary of changes in our working
capital deficit from September 30, 2021 to September 30,
2022:
|
|
September
30, |
|
|
September
30, |
|
|
Changes
in |
|
|
|
2022 |
|
|
2021 |
|
|
Amount |
|
|
Percentage |
|
Working capital deficit: |
|
|
|
|
|
|
|
|
|
|
|
|
Total
current assets |
|
$ |
3,687,799 |
|
|
$ |
5,060,372 |
|
|
$ |
(1,372,573 |
) |
|
|
(27.1 |
)% |
Total
current liabilities |
|
|
7,474,324 |
|
|
|
6,655,165 |
|
|
|
819,159 |
|
|
|
12.3 |
% |
Working
capital deficit |
|
$ |
(3,786,525 |
) |
|
$ |
(1,594,793 |
) |
|
$ |
(2,191,732 |
) |
|
|
137.4 |
% |
Our working capital deficit increased by $2,191,732 to $3,786,525
at September 30, 2022 from $1,594,793 at September 30, 2021. The
increase in working capital deficit was primarily attributable to a
decrease in customer digital currency assets of approximately
$920,000 due to the decrease in customer digital currency
controlled by us in fiscal 2022, a decrease in due from affiliates
of approximately $1,687,000 resulting from the payments received
from our affiliates in fiscal 2022, an increase in customer
custodial cash liabilities of approximately $1,221,000 resulting
from our business expansion, an increase in due to affiliates of
approximately $256,000 driven by the payments received from our
affiliates and expenses paid by our affiliates on behalf of us in
fiscal 2022, and an increase in accounts payable and accrued
liabilities of approximately $262,000, which mainly attributable to
the increase in accrued directors’ compensation of approximately
$67,000 and the increase in unearned revenue of approximately
$154,000 and the increase in accrued professional fees of
approximately $44,000, offset by an increase in customer custodial
cash of approximately $1,221,000 resulting from our business
expansion, and a decrease in customer digital currency liabilities
of approximately $920,000 due to the decrease in customer digital
currency controlled by us in fiscal 2022.
Because
the exchange rate conversion is different for the consolidated
balance sheets and the consolidated statements of cash flows, the
changes in assets and liabilities reflected on the consolidated
statements of cash flows are not necessarily identical with the
comparable changes reflected on the consolidated balance
sheets.
Cash
Flow for the Year Ended September 30, 2022 Compared to the Year
Ended September 30, 2021
Net cash flow provided by operating activities for the year ended
September 30, 2022 was $1,615,606, which primarily reflected the
non-cash items adjustment primarily consisting of amortization of
intangible assets, mainly representing intangible assets acquired
on Match acquisition, of approximately $2,691,000, stock-based
compensation and service expense of approximately $1,914,000 due to
options granted for professional services, loss on equity method
investment of approximately $689,000, and impairment of equity
method investment of approximately $4,311,000, and the changes in
operating assets and liabilities, primarily consisting of a
decrease in customer digital currency assets of approximately
$823,000 due to the decrease in customer digital currency
controlled by us in fiscal 2022, a decrease in due from affiliates
of approximately $1,687,000 resulting from the payments received
from our affiliates in fiscal 2022, an increase in customer
custodial cash liabilities of approximately $1,560,000 resulting
from our business expansion, an increase in due to affiliates of
approximately $323,000 driven by the payments received from our
affiliates and expenses paid by our affiliates on behalf of us in
fiscal 2022, and an increase in accounts payable and accrued
liabilities of approximately $321,000, which was mainly due to the
increase in accrued directors’ compensation of approximately
$67,000 and the increase in unearned revenue of approximately
$154,000 and the increase in accrued professional fees of
approximately $44,000 and the increase in accrued other
miscellaneous items of approximately $56,000, offset by a decrease
in customer digital currency liabilities of approximately $823,000
due to the decrease in customer digital currency controlled by us
in fiscal 2022, and our consolidated net loss of approximately
$11,846,000.
Net cash flow provided by operating activities was
$1,166,982 for the year ended September 30, 2021, which primarily
reflected the changes in operating assets and liabilities, net of
assets acquired and liabilities assumed in acquisition, mainly
consisting of a decrease in due from affiliates of approximately
$1,092,000 resulting from the payments received from our affiliates
in fiscal 2021, an increase in customer custodial cash liabilities
of approximately $822,000 mainly due to our business expansion, an
increase in customer digital currency liabilities of approximately
$1,201,000 resulting from our business expansion, and an increase
in accounts payable and accrued liabilities of approximately
$164,000, which was primarily attributable to the increase in
Match’s accounts payable of approximately $55,000 and the increase
in accrued directors’ compensation of approximately $40,000 and the
increase in unearned revenue of approximately $49,000, and the
non-cash items mainly consisting of amortization of intangible
assets representing license and banking infrastructure acquired on
Match acquisition of approximately $469,000 and stock-based
compensation of approximately $42,000 due to options granted for
professional services, offset by consolidated net loss of
approximately $937,000, and the changes in operating assets and
liabilities, net of assets acquired and liabilities assumed in
acquisition, mainly consisting of an increase in customer digital
currency assets of approximately $1,201,000 due to our business
expansion, a decrease in due to affiliates of approximately
$467,000 due to the payments made to our affiliates in fiscal
2021.
Net
cash flow used in investing activities was $35,000 for the year
ended September 30, 2022. During the year ended September 30, 2022,
we made payment for note receivable of $35,000.
Net
cash flow used in investing activities was $23,302 for the year
ended September 30, 2021. During the year ended September 30, 2021,
we made payments for acquisition of approximately $45,000, offset
by cash acquired on acquisition of approximately
$21,000.
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 mergers, acquisitions and the 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. However, TCM has committed to inject
capital into the Company in order to maintain the ongoing
operations of the business.
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.
Contractual
Obligations and Off-Balance Sheet Arrangements
Contractual Obligations
As
of September 30, 2022, we had no material contractual
obligations other than: FXDirectDealer LLC receives a minimum of
$1,575,000 per month and such obligation may be terminated by the
Company upon providing 90 days’ notice.
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 Consolidated Financial Statements appearing elsewhere
in this report.
Item
7A. 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
8. Financial Statements and Supplementary Data.
NUKKLEUS
INC. AND SUBSIDIARIES
CONSOLIDATED
FINANCIAL STATEMENTS
September
30, 2022 and 2021
NUKKLEUS
INC. AND SUBSIDIARIES
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2022 and 2021
CONTENTS
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Nukkleus Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of
Nukkleus Inc. and subsidiaries (the “Company”) as of September 30,
2022, the related consolidated statements of operations, changes in
stockholders' deficit and cash flows for the year then ended, and
the related notes (collectively referred to as the “consolidated
financial statements”). In our opinion, the consolidated financial
statements present fairly, in all material respects, the financial
position of the Company at September 30, 2022 and the results of
its operations and its cash flows for the year ended September 30,
2022, in conformity with accounting principles generally accepted
in the United States of America.
Restatement
As discussed in Note 16 to the consolidated financial statements,
the 2021 financial statements have been restated to correct
errors.
We also have audited the adjustments described in Note 16 that were
applied to restate the 2021 consolidated financial statements to
correct errors. In our opinion, such adjustments are appropriate
and have been properly applied. We were not engaged to audit,
review, or apply any procedures to the 2021 consolidated financial
statements of the Company other than with respect to the
adjustments and, accordingly, we do not express an opinion or any
other form of assurance on the 2021 consolidated financial
statements taken as a whole.
Basis for Opinion
These consolidated financial statements are the responsibility of
the Company’s management. Our responsibility is to express an
opinion on the Company’s consolidated financial statements based on
our audit. We are a public accounting firm registered with the
Public Company Accounting Oversight Board (United States) (“PCAOB”)
and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We conducted our audit in accordance with the standards of the
PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement, whether due
to error or fraud. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial
reporting. As part of our audit we are required to obtain an
understanding of internal control over financial reporting but not
for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of
material misstatement of the consolidated financial statements,
whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a
test basis, evidence regarding the amounts and disclosures in the
consolidated financial statements. Our audit also included
evaluating the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation
of the consolidated financial statements. We believe that our audit
provides a reasonable basis for our opinion.
Critical Audit Matters
Critical audit matters are matters arising from the current period
audit of the financial statements that were communicated or
required to be communicated to the audit committee and that: (1)
relate to accounts or disclosures that are material to the
financial statements and (2) involved our especially challenging,
subjective, or complex judgments. We determined that there are no
critical audit matters.
/s/ Marcum LLP
We have served as the Company’s auditor since 2016 (such date takes
into account the acquisition Rotenberg, Meril Solomon, Bertiger
& Guttilla, P.C. by Marcum LLP effective February 1, 2023)
Saddle Brook, New Jersey
April 7, 2023
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Nukkleus Inc.
Opinion on the Financial Statements
We have audited, before the effects of the adjustments the Company
identified during 2022 to restate the financial statements as
described in 16, the accompanying consolidated balance sheet of
Nukkleus Inc. and Subsidiaries (the "Company") as of September 30,
2021, and the related consolidated statements of operations,
changes in stockholders' deficit and cash flows for the year then
ended, and the related notes (collectively referred to as the
"financial statements") (the 2021 financial statements before the
effects of the adjustments the Company identified during 2022 to
restate the financial statements as described in Note 16 are not
presented herein). In our opinion, the 2021 financial statements,
before the effects of the adjustments described in Note 16, present
fairly, in all material respects, the financial position of the
Company as of September 30, 2021, and the results of its operations
and its cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of
America.
We were not engaged to audit, review or apply any procedures to the
adjustments the Company identified during 2022 to restate the
financial statements as described in Note 16, accordingly, we do
not express an opinion or any other form of assurance about whether
such adjustments are appropriate and have been properly applied.
Those adjustments were audited by other auditors.
Basis for Opinion
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the
Company's financial statements based on our audit. We are a public
accounting firm that was registered with the Public Company
Accounting Oversight Board (United States) ("PCAOB") and were
required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We conducted our audit in accordance with the standards of
the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement, whether due to error
or fraud. The Company is not required to have, nor were we engaged
to perform, an audit of its internal control over financial
reporting. As part of our audit we are required to obtain an
understanding of internal control over financial reporting, but not
for the purpose of expressing an opinion on the effectiveness of
the Company's internal control over financial reporting.
Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial
statements. Our audit also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our
opinion.
/s/ Rotenberg Meril Solomon Bertiger & Guttilla, P.C.
We served as the Company's auditor from 2016 to 2022.
Saddle Brook, New Jersey
December 29, 2021
NUKKLEUS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
As of September 30, |
|
|
|
2022 |
|
|
2021 |
|
|
|
|
|
|
(as
restated in note 16) |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS: |
|
|
|
|
|
|
|
|
Cash |
|
$ |
364,023 |
|
|
$ |
403,771 |
|
Customer custodial cash |
|
|
2,020,394 |
|
|
|
799,302 |
|
Customer digital currency assets |
|
|
248,214 |
|
|
|
1,168,349 |
|
Accounts receivable |
|
|
-
|
|
|
|
57,953 |
|
Digital assets |
|
|
73,415 |
|
|
|
903 |
|
Due from affiliates |
|
|
931,136 |
|
|
|
2,617,873 |
|
Note receivable - related party |
|
|
35,000 |
|
|
|
-
|
|
Other current assets |
|
|
15,617 |
|
|
|
12,221 |
|
|
|
|
|
|
|
|
|
|
TOTAL CURRENT ASSETS |
|
|
3,687,799 |
|
|
|
5,060,372 |
|
|
|
|
|
|
|
|
|
|
NON-CURRENT ASSETS: |
|
|
|
|
|
|
|
|
Cost method investment |
|
|
6,602,000 |
|
|
|
-
|
|
Intangible assets, net |
|
|
8,075,105 |
|
|
|
10,754,485 |
|
|
|
|
|
|
|
|
|
|
TOTAL NON-CURRENT ASSETS |
|
|
14,677,105 |
|
|
|
10,754,485 |
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
18,364,904 |
|
|
$ |
15,814,857 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES: |
|
|
|
|
|
|
|
|
Customer custodial cash liabilities |
|
$ |
2,020,717 |
|
|
$ |
799,302 |
|
Customer digital currency liabilities |
|
|
248,214 |
|
|
|
1,168,349 |
|
Due to affiliates |
|
|
4,514,063 |
|
|
|
4,257,792 |
|
Accounts payable and accrued liabilities |
|
|
691,330 |
|
|
|
429,722 |
|
|
|
|
|
|
|
|
|
|
TOTAL CURRENT LIABILITIES |
|
|
7,474,324 |
|
|
|
6,655,165 |
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES |
|
|
7,474,324 |
|
|
|
6,655,165 |
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES - (Note
15) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY: |
|
|
|
|
|
|
|
|
Preferred stock ($0.0001 par value; 15,000,000 shares authorized; 0
share issued and outstanding at September 30, 2022 and 2021) |
|
|
-
|
|
|
|
-
|
|
Common stock ($0.0001 par value; 900,000,000 shares authorized;
367,175,886 and 332,024,371 shares issued and outstanding at
September 30, 2022 and 2021, respectively) |
|
|
36,718 |
|
|
|
33,203 |
|
Additional paid-in capital |
|
|
25,136,459 |
|
|
|
11,613,208 |
|
Accumulated deficit |
|
|
(14,340,816 |
) |
|
|
(2,495,159 |
) |
Accumulated other comprehensive income |
|
|
58,219 |
|
|
|
8,440 |
|
|
|
|
|
|
|
|
|
|
TOTAL STOCKHOLDERS’ EQUITY |
|
|
10,890,580 |
|
|
|
9,159,692 |
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
$ |
18,364,904 |
|
|
$ |
15,814,857 |
|
The accompanying notes to consolidated financial statements are an
integral part of these statements.
NUKKLEUS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
|
|
For the
Years Ended
September 30, |
|
|
|
2022 |
|
|
2021 |
|
|
|
|
|
|
(as restated in note
16) |
|
REVENUES |
|
|
|
|
|
|
Revenue - general support services - related party |
|
$ |
19,200,000 |
|
|
$ |
19,200,000 |
|
Revenue - financial services |
|
|
2,313,474 |
|
|
|
86,964 |
|
Total
revenues |
|
|
21,513,474 |
|
|
|
19,286,964 |
|
|
|
|
|
|
|
|
|
|
COSTS OF REVENUES |
|
|
|
|
|
|
|
|
Cost of revenue
- general support services - related party |
|
|
18,900,000 |
|
|
|
18,900,000 |
|
Cost of revenue - financial services |
|
|
3,274,870 |
|
|
|
469,286 |
|
Total
costs of revenues |
|
|
22,174,870 |
|
|
|
19,369,286 |
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
(LOSS) |
|
|
|
|
|
|
|
|
Gross
profit - general support services - related party |
|
|
300,000 |
|
|
|
300,000 |
|
Gross
loss - financial services |
|
|
(961,396 |
) |
|
|
(382,322 |
) |
Total
gross loss |
|
|
(661,396 |
) |
|
|
(82,322 |
) |
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES: |
|
|
|
|
|
|
|
|
Advertising and
marketing |
|
|
420,186 |
|
|
|
17,874 |
|
Professional
fees |
|
|
4,329,988 |
|
|
|
534,836 |
|
Compensation
and related benefits |
|
|
508,471 |
|
|
|
153,358 |
|
Amortization of
intangible assets |
|
|
264,224 |
|
|
|
-
|
|
Other general and administrative |
|
|
647,314 |
|
|
|
144,014 |
|
Impairment of equity method investment |
|
|
4,310,745 |
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
10,480,928 |
|
|
|
850,082 |
|
|
|
|
|
|
|
|
|
|
LOSS
FROM OPERATIONS |
|
|
(11,142,324 |
) |
|
|
(932,404 |
) |
|
|
|
|
|
|
|
|
|
OTHER (EXPENSE)
INCOME: |
|
|
|
|
|
|
|
|
Loss from
equity method investment |
|
|
(689,255 |
) |
|
|
-
|
|
Interest
expense on redeemable preferred stock |
|
|
-
|
|
|
|
(2,625 |
) |
Amortization of
debt discount |
|
|
-
|
|
|
|
(1,545 |
) |
Other
expense |
|
|
(15,005 |
) |
|
|
(1,033 |
) |
Other income |
|
|
927 |
|
|
|
761 |
|
|
|
|
|
|
|
|
|
|
Total other expense, net |
|
|
(703,333 |
) |
|
|
(4,442 |
) |
|
|
|
|
|
|
|
|
|
LOSS BEFORE INCOME
TAXES |
|
|
(11,845,657 |
) |
|
|
(936,846 |
) |
|
|
|
|
|
|
|
|
|
INCOME
TAXES |
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS |
|
$ |
(11,845,657 |
) |
|
$ |
(936,846 |
) |
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
LOSS: |
|
|
|
|
|
|
|
|
NET LOSS |
|
$ |
(11,845,657 |
) |
|
$ |
(936,846 |
) |
OTHER
COMPREHENSIVE INCOME |
|
|
|
|
|
|
|
|
Unrealized foreign currency translation gain |
|
|
49,779 |
|
|
|
8,440 |
|
COMPREHENSIVE
LOSS |
|
$ |
(11,795,878 |
) |
|
$ |
(928,406 |
) |
|
|
|
|
|
|
|
|
|
NET LOSS PER COMMON SHARE: |
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$ |
(0.03 |
) |
|
$ |
(0.00 |
) |
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING: |
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
356,133,960 |
|
|
|
257,771,553 |
|
The accompanying notes to consolidated financial statements are an
integral part of these statements.
NUKKLEUS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ (DEFICIT)
EQUITY
For the Years Ended September 30, 2022 and 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
Total |
|
|
|
Preferred
Stock |
|
|
Common
Stock |
|
|
Additional |
|
|
|
|
|
Other |
|
|
Stockholders’ |
|
|
|
Number of |
|
|
|
|
|
Number of |
|
|
|
|
|
Paid-in |
|
|
Accumulated |
|
|
Comprehensive |
|
|
(Deficit) |
|
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Deficit |
|
|
Income |
|
|
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of October 1, 2020 |
|
|
-
|
|
|
$ |
-
|
|
|
|
230,485,100 |
|
|
$ |
23,049 |
|
|
$ |
141,057 |
|
|
$ |
(1,558,313 |
) |
|
$ |
-
|
|
|
$ |
(1,394,207 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued in connection with acquisition |
|
|
- |
|
|
|
-
|
|
|
|
100,100,000 |
|
|
|
10,010 |
|
|
|
11,142,359 |
|
|
|
-
|
|
|
|
-
|
|
|
|
11,152,369 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for redeemable preferred stock conversion and
related dividend |
|
|
- |
|
|
|
-
|
|
|
|
1,439,271 |
|
|
|
144 |
|
|
|
287,710 |
|
|
|
-
|
|
|
|
-
|
|
|
|
287,854 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
- |
|
|
|
-
|
|
|
|
- |
|
|
|
-
|
|
|
|
42,082 |
|
|
|
-
|
|
|
|
-
|
|
|
|
42,082 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss for the year |
|
|
- |
|
|
|
-
|
|
|
|
- |
|
|
|
-
|
|
|
|
-
|
|
|
|
(936,846 |
) |
|
|
-
|
|
|
|
(936,846 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment |
|
|
- |
|
|
|
-
|
|
|
|
- |
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,440 |
|
|
|
8,440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as
of September 30, 2021, as restated in note 16 |
|
|
-
|
|
|
|
-
|
|
|
|
332,024,371 |
|
|
|
33,203 |
|
|
|
11,613,208 |
|
|
|
(2,495,159 |
) |
|
|
8,440 |
|
|
|
9,159,692 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued in connection with cost method investment |
|
|
- |
|
|
|
-
|
|
|
|
20,000,000 |
|
|
|
2,000 |
|
|
|
6,600,000 |
|
|
|
-
|
|
|
|
-
|
|
|
|
6,602,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued in connection with equity method
investment |
|
|
- |
|
|
|
-
|
|
|
|
15,151,515 |
|
|
|
1,515 |
|
|
|
4,998,485 |
|
|
|
-
|
|
|
|
-
|
|
|
|
5,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options issued for the purchase of an intangible asset |
|
|
- |
|
|
|
-
|
|
|
|
- |
|
|
|
-
|
|
|
|
11,237 |
|
|
|
-
|
|
|
|
-
|
|
|
|
11,237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
- |
|
|
|
-
|
|
|
|
- |
|
|
|
-
|
|
|
|
1,913,529 |
|
|
|
-
|
|
|
|
-
|
|
|
|
1,913,529 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss for the year |
|
|
- |
|
|
|
-
|
|
|
|
- |
|
|
|
-
|
|
|
|
-
|
|
|
|
(11,845,657 |
) |
|
|
-
|
|
|
|
(11,845,657 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment |
|
|
- |
|
|
|
-
|
|
|
|
- |
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
49,779 |
|
|
|
49,779 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2022 |
|
|
-
|
|
|
$ |
-
|
|
|
|
367,175,886 |
|
|
$ |
36,718 |
|
|
$ |
25,136,459 |
|
|
$ |
(14,340,816 |
) |
|
$ |
58,219 |
|
|
$ |
10,890,580 |
|
The
accompanying notes to consolidated financial statements are an
integral part of these statements.
NUKKLEUS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
For the Years Ended
September 30, |
|
|
|
2022 |
|
|
2021 |
|
|
|
|
|
|
(as restated in note 16) |
|
CASH FLOWS FROM OPERATING
ACTIVITIES: |
|
|
|
|
|
|
Net loss |
|
$ |
(11,845,657 |
) |
|
$ |
(936,846 |
) |
Adjustments to reconcile net loss to net
cash |
|
|
|
|
|
|
|
|
provided by operating activities: |
|
|
|
|
|
|
|
|
Amortization of debt discount |
|
|
- |
|
|
|
1,545 |
|
Amortization of intangible assets |
|
|
2,690,617 |
|
|
|
469,286 |
|
Stock-based compensation and service
expense |
|
|
1,913,529 |
|
|
|
42,082 |
|
Provision for bad debt |
|
|
1,454 |
|
|
|
12 |
|
Unrealized foreign currency exchange
gain |
|
|
(768 |
) |
|
|
(761 |
) |
Loss on equity method investment |
|
|
689,255 |
|
|
|
- |
|
Impairment of digital assets |
|
|
887 |
|
|
|
- |
|
Impairment of
equity method investment |
|
|
4,310,745 |
|
|
|
-
|
|
Changes in operating assets and
liabilities, net of assets acquired and liabilities assumed in
acquisition: |
|
|
|
|
|
|
|
|
Customer digital currency assets |
|
|
822,650 |
|
|
|
(1,201,019 |
) |
Accounts receivable |
|
|
53,474 |
|
|
|
(12,972 |
) |
Digital assets |
|
|
(84,241 |
) |
|
|
(929 |
) |
Other current assets |
|
|
(4,716 |
) |
|
|
(5,110 |
) |
Due from affiliates |
|
|
1,686,737 |
|
|
|
1,091,899 |
|
Customer custodial cash liabilities |
|
|
1,560,251 |
|
|
|
821,653 |
|
Customer digital currency
liabilities |
|
|
(822,650 |
) |
|
|
1,201,019 |
|
Due to affiliates |
|
|
323,129 |
|
|
|
(466,959 |
) |
Accounts payable and accrued
liabilities |
|
|
320,910 |
|
|
|
164,082 |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities |
|
|
1,615,606 |
|
|
|
1,166,982 |
|
|
|
|
|
|
|
|
|
|
CASH
FLOW FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Investment in note receivable |
|
|
(35,000 |
) |
|
|
- |
|
Cash acquired on asset acquisition |
|
|
- |
|
|
|
21,371 |
|
Transaction costs of asset
acquisition |
|
|
- |
|
|
|
(44,673 |
) |
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities |
|
|
(35,000 |
) |
|
|
(23,302 |
) |
|
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATE ON CASH |
|
|
(399,262 |
) |
|
|
(23,456 |
) |
|
|
|
|
|
|
|
|
|
NET
INCREASE IN CASH |
|
|
1,181,344 |
|
|
|
1,120,224 |
|
Cash - beginning of year |
|
|
1,203,073 |
|
|
|
82,849 |
|
Cash - end of year |
|
$ |
2,384,417 |
|
|
$ |
1,203,073 |
|
|
|
|
|
|
|
|
|
|
Cash
consisted of the following: |
|
|
|
|
|
|
|
|
Cash |
|
$ |
364,023 |
|
|
$ |
403,771 |
|
Customer custodial cash |
|
|
2,020,394 |
|
|
|
799,302 |
|
Total cash |
|
$ |
2,384,417 |
|
|
$ |
1,203,073 |
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION: |
|
|
|
|
|
|
|
|
Cash paid for: |
|
|
|
|
|
|
|
|
Interest |
|
$ |
- |
|
|
$ |
- |
|
Income taxes |
|
$ |
- |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
NON-CASH INVESTING AND FINANCING
ACTIVITIES: |
|
|
|
|
|
|
|
|
Common stock issued in connection
with cost method investment |
|
$ |
6,602,000 |
|
|
$ |
- |
|
Common stock issued in connection
with equity method investment |
|
$ |
5,000,000 |
|
|
$ |
- |
|
Stock options issued for the
purchase of an intangible asset |
|
$ |
11,237 |
|
|
$ |
- |
|
Common stock issued in connection
with asset acquisition |
|
$ |
- |
|
|
$ |
11,152,369 |
|
Common stock issued for redeemable
preferred stock conversion and related dividend |
|
$ |
- |
|
|
$ |
287,854 |
|
Cost of asset acquisition in accrued
liabilities |
|
$ |
- |
|
|
$ |
16,098 |
|
Adjustment for common stock issued
in connection with asset acquisition |
|
$ |
2,861,631 |
|
|
$ |
- |
|
The
accompanying notes to consolidated financial statements are an
integral part of these statements.
NUKKLEUS
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 – THE COMPANY HISTORY AND
NATURE OF THE BUSINESS
Nukkleus
Inc. (f/k/a Compliance & Risk Management Solutions Inc.)
(“Nukkleus” or the “Company”) was formed on July 29, 2013 in the
State of Delaware as a for-profit Company and established a fiscal
year end of September 30.
The
Company is a financial technology company which is focused on
providing software and technology solutions for the worldwide
retail foreign exchange (“FX”) trading industry. The Company
primarily provides its software, technology, customer sales and
marketing and risk management technology hardware and software
solutions package to Triton Capital Markets Ltd. (“TCM”), formerly
known as FXDD Malta Limited (“FXDD Malta”). The FXDD brand (e.g.,
see FXDD.com) is the brand utilized in the retail forex trading
industry by TCM.
Nukkleus
Limited, a wholly-owned subsidiary of the Company, provides its
software, technology, customer sales and marketing and risk
management technology hardware and software solutions package under
a General Services Agreement (“GSA”) to TCM. TCM is a private
limited liability company formed under the laws of Malta. The GSA
provides that TCM will pay Nukkleus Limited at minimum
$1,600,000 per month. Emil Assentato is also the majority
member of Max Q Investments LLC (“Max Q”), which is managed by
Derivative Marketing Associates Inc. (“DMA”). Mr. Assentato, who is
our Chief Executive Officer (“CEO”), Chief Financial Officer
(“CFO”) and chairman, is the sole owner and manager of DMA. Max Q
owns 79% of Currency Mountain Malta LLC, which in turn is the
sole shareholder of TCM.
In
addition, in order to appropriately service TCM, Nukkleus Limited
entered into a GSA with FXDirectDealer LLC (“FXDIRECT”), which
provides that Nukkleus Limited will pay FXDIRECT a minimum of
$1,575,000 per month in consideration of providing personnel
engaged in operational and technical support, marketing, sales
support, accounting, risk monitoring, documentation processing and
customer care and support. FXDIRECT may terminate this agreement
upon providing 90 days’ written notice. Currency Mountain
Holdings LLC is the sole shareholder of FXDIRECT. Max Q is the
majority shareholder of Currency Mountain Holdings LLC.
In
July 2018, the Company incorporated Nukkleus Malta Holding Ltd.,
which is a wholly-owned subsidiary. In July 2018, Nukkleus Malta
Holding Ltd. incorporated Markets Direct Technology Group Ltd
(“MDTG”), formerly known as Nukkleus Exchange Malta Ltd. MDTG was
exploring potentially obtaining a license to operate an electronic
exchange whereby it would facilitate the buying and selling of
various digital assets as well as traditional currency pairs used
in FX Trading. During the fourth quarter of fiscal 2020, management
made the decision to exit the exchange business and to no longer
pursue the regulatory licensing necessary to operate an exchange in
Malta.
On August 27, 2020, the Company renamed Nukkleus Exchange
Malta Ltd. to Markets Direct Technology Group Ltd (“MDTG”). MDTG
manages the technology and 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.
On October 20, 2021, the Company and the shareholders (the
“Original Shareholders”) of Jacobi Asset Management Holdings
Limited (“Jacobi”) entered into a Purchase and Sale Agreement (the
“Jacobi Agreement”) pursuant to which the Company agreed to
acquire 5.0% of the issued and outstanding ordinary shares of
Jacobi in consideration of 20,000,000 shares of common
stock of the Company (the “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 operating 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.
NUKKLEUS
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 – THE COMPANY HISTORY AND
NATURE OF THE BUSINESS (continued)
On December 30, 2021, the Company and the shareholder (the
“Digiclear Shareholder”) of Digiclear Ltd. (“Digiclear”) entered
into a Purchase and Sale Agreement (the “Digiclear Agreement”)
pursuant to which the Company agreed to acquire 5,400,000 of the
issued and outstanding ordinary shares of Digiclear in
consideration of 15,151,515 shares of common stock of the Company
(valued at $5,000,000 based on the market price of the Company’s
common stock on the acquisition date) (the “Digiclear
Transaction”). In addition to, if and when the Company is acquired
by a Special Purpose Acquisition Company (“SPAC”), the Company will
fund and capitalize Digiclear with a minimum of $1,000,000
operating capital in exchange for 4.545% of additional shares of
Digiclear’s capital stock. Digiclear shall retain the right to
unwind the transaction and to have the Company return the 5,400,000
ordinary shares of Digiclear share in return for Digiclear
returning to the Company the 15,151,515 of Company common shares.
Digiclear can only unwind the transaction if the Company is no
longer under contract to be acquired by a SPAC. The Digiclear
Transaction closed on March 17, 2022. 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 September 30, 2022 and
2021, the Company had cash of $364,023 and $403,771,
respectively, exclusive of customer custodial cash.
The
consolidated financial statements have been prepared using
accounting principles generally accepted in the United States of
America applicable for a going concern, which assumes that the
Company will realize its assets and discharge its liabilities in
the ordinary course of business. The Company incurred a net loss
for the year ended September 30, 2022 of $11,845,657 and had a
working capital deficit of $3,786,525 at September 30, 2022. These
are indicators of substantial doubt as to the Company’s ability to
continue as a going concern for at least one year from issuance of
these financial statements. The Company’s ability to continue as a
going concern is dependent upon the management of expenses and
ability to obtain necessary financing to meet its obligations and
pay its liabilities arising from normal business operations when
they come due, and upon profitable operations.
The Company cannot be certain that such necessary capital
through equity or debt financings will be available to it or
whether such capital will be available on terms that are acceptable
to it. Any such financing likely would be dilutive to existing
stockholders and could result in significant financial operating
covenants that would negatively impact the Company business. In the
event that there are any unforeseen delays or obstacles in
obtaining funds through the aforementioned sources, TCM,
which is wholly-owned by an entity that is majority-owned by
Mr. Assentato, has committed to inject capital into the Company in
order to maintain the ongoing operations of the
business.
Based
on the foregoing, management believes that its current financial
resources, as of the date of the issuance of these financial
statements, are sufficient to fund its current twelve-month
operating budget, alleviating any concerns by its historical
operating results and satisfying its estimated liquidity needs for
the twelve months from the issuance of these financial
statements.
NOTE
2 – BASIS OF PRESENTATION
AND PRINCIPLES OF CONSOLIDATION
The
accompanying consolidated financial statements and related notes
have been prepared in accordance with accounting principles
generally accepted in the United States of America (U.S. GAAP) and
with the rules and regulations of the U.S. Securities and Exchange
Commission for financial information.
The
Company’s consolidated financial statements include the accounts of
the Company and its consolidated subsidiaries. These accounts were
prepared under the accrual basis of accounting. All intercompany
accounts and transactions have been eliminated in
consolidation.
NUKKLEUS
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
3 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Use of estimates
The preparation of the consolidated financial statements in
conformity with U.S. GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Changes in these
estimates and assumptions may have a material impact on the
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 years ended September 30, 2022 and 2021
include the useful life of intangible assets, assumptions used in
assessing impairment of long-term assets, the fair value of assets
acquired and liabilities assumed in the asset acquisition of Match,
valuation of deferred tax assets and the associated valuation
allowances, valuation of stock-based compensation, and fair
value of customer digital currency assets and
liabilities.
Cash and cash equivalents
At
September 30, 2022 and 2021, the Company’s cash balances by
geographic area were as follows:
Country: |
|
September
30, 2022 |
|
|
September
30, 2021 |
|
|
|
|
|
|
(as restated) |
|
United States |
|
$ |
47,860 |
|
|
|
13.1 |
% |
|
$ |
327,443 |
|
|
|
81.1 |
% |
United Kingdom |
|
|
315,989 |
|
|
|
86.8 |
% |
|
|
76,154 |
|
|
|
18.9 |
% |
Malta |
|
|
174 |
|
|
|
0.1 |
% |
|
|
174 |
|
|
|
0.0 |
% |
Total cash |
|
$ |
364,023 |
|
|
|
100.0 |
% |
|
$ |
403,771 |
|
|
|
100.0 |
% |
For
purposes of the consolidated statements of cash flows, the Company
considers all highly liquid instruments with a maturity of three
months or less when purchased and money market accounts to be cash
equivalents. The Company had no cash equivalents at September 30,
2022 and 2021. Cash and cash equivalents excludes customer legal
tender, which is reported separately as Customer custodial cash in
the accompanying 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 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 CONSOLIDATED FINANCIAL STATEMENTS
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 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 September 30, 2022:
|
|
Quoted
Price in |
|
|
Significant
Other |
|
|
Significant |
|
|
|
|
|
|
Active
Markets |
|
|
Observable
Inputs |
|
|
Unobservable
Inputs |
|
|
Balance at
September 30, |
|
|
|
(Level
1) |
|
|
(Level
2) |
|
|
(Level
3) |
|
|
2022 |
|
Customer digital currency assets |
|
$ |
-
|
|
|
$ |
248,214 |
|
|
$ |
-
|
|
|
$ |
248,214 |
|
Customer
digital currency liabilities |
|
$ |
-
|
|
|
$ |
248,214 |
|
|
$ |
-
|
|
|
$ |
248,214 |
|
The
following table provides these assets and liabilities carried at
fair value, measured as of September 30, 2021:
|
|
Quoted
Price in |
|
|
Significant
Other |
|
|
Significant |
|
|
|
|
|
|
Active
Markets |
|
|
Observable
Inputs |
|
|
Unobservable
Inputs |
|
|
Balance at
September 30, |
|
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
2021 |
|
|
|
|
|
|
|
|
|
|
|
|
(as restated) |
|
Customer digital currency assets |
|
$ |
-
|
|
|
$ |
1,168,349 |
|
|
$ |
-
|
|
|
$ |
1,168,349 |
|
Customer
digital currency liabilities |
|
$ |
-
|
|
|
$ |
1,168,349 |
|
|
$ |
-
|
|
|
$ |
1,168,349 |
|
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.
Assets and liabilities measured at fair value on a
nonrecurring basis. Certain assets and liabilities are measured
at fair value on a nonrecurring basis. These assets and liabilities
are not measured at fair value on an ongoing basis, but are subject
to fair value adjustments in certain circumstances. These assets
and liabilities can include equity method investment that are
written down to fair value when they are impaired.
Equity method investment. The factors used to determine fair
value are subject to management’s judgment and expertise and
include, but are not limited to, the investee’s a series of
operating losses and global economic environment. These assumptions
represent Level 3 inputs. Impairment of equity method investment
for the year ended December 31, 2022 was $4,310,745.
ASC
825-10 “Financial Instrument