NUKKLEUS INC. AND SUBSIDIARIES
The accompanying notes to unaudited condensed consolidated
financial statements are an integral part of these statements.
The accompanying notes to unaudited condensed consolidated
financial statements are an integral part of these statements.
The accompanying notes to unaudited condensed consolidated
financial statements are an integral part of these statements.
The accompanying notes to unaudited condensed consolidated
financial statements are an integral part of these statements.
The accompanying notes to unaudited condensed consolidated
financial statements are an integral part of these statements.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 1 – THE COMPANY HISTORY AND
NATURE OF THE BUSINESS
Nukkleus Inc. (f/k/a Compliance & Risk Management
Solutions Inc.) (“Nukkleus” or the “Company”) was formed on July 29, 2013 in the State of Delaware as a for-profit
Company and established a fiscal year end of September 30.
The Company is a financial technology company
which is focused on providing software and technology solutions for the worldwide retail foreign exchange (“FX”) trading
industry. The Company primarily provides its software, technology, customer sales and marketing and risk management technology hardware
and software solutions package to Triton Capital Markets Ltd. (“TCM”), formerly known as FXDD Malta Limited (“FXDD
Malta”). The FXDD brand (e.g., see FXDD.com) is the brand utilized in the retail forex trading industry by TCM.
Nukkleus Limited, a wholly-owned subsidiary of
the Company, provides its software, technology, customer sales and marketing and risk management technology hardware and software solutions
package under a General Services Agreement (“GSA”) to TCM. TCM is a private limited liability company formed under the laws
of Malta. The GSA provides that TCM will pay Nukkleus Limited at minimum $1,600,000 per month. Emil Assentato is also the majority
member of Max Q Investments LLC (“Max Q”), which is managed by Derivative Marketing Associates Inc. (“DMA”).
Mr. Assentato, who is our Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”) and chairman, is the
sole owner and manager of DMA. Max Q owns 79% of Currency Mountain Malta LLC, which in turn is the sole shareholder of TCM.
In addition, in order to appropriately service
TCM, Nukkleus Limited entered into a GSA with FXDirectDealer LLC (“FXDIRECT”), which provides that Nukkleus Limited will
pay FXDIRECT a minimum of $1,575,000 per month in consideration of providing personnel engaged in operational and technical support,
marketing, sales support, accounting, risk monitoring, documentation processing and customer care and support. FXDIRECT may terminate
this agreement upon providing 90 days’ written notice. Currency Mountain Holdings LLC is the sole shareholder of FXDIRECT.
Max Q is the majority shareholder of Currency Mountain Holdings LLC.
In July 2018, the Company incorporated Nukkleus
Malta Holding Ltd., which is a wholly-owned subsidiary. In July 2018, Nukkleus Malta Holding Ltd. incorporated Markets Direct Technology
Group Ltd (“MDTG”), formerly known as Nukkleus Exchange Malta Ltd. MDTG was exploring potentially obtaining a license to
operate an electronic exchange whereby it would facilitate the buying and selling of various digital assets as well as traditional currency
pairs used in FX Trading. During the fourth quarter of fiscal 2020, management made the decision to exit the exchange business and to
no longer pursue the regulatory licensing necessary to operate an exchange in Malta.
On August 27, 2020, the Company renamed Nukkleus
Exchange Malta Ltd. to Markets Direct Technology Group Ltd (“MDTG”). MDTG manages the technology and IP behind the Markets
Direct brand (which is operated by TCM). MDTG holds all the IP addresses and all the software licenses in its name, and it holds all
the IP rights to the brands such as Markets Direct and TCM. MDTG then leases out the rights to use these names/brands licenses to the
appropriate entities.
On May 24, 2021, the Company and the shareholders
of Match Financial Limited (the “Match Shareholders”), a private limited company formed in England and Wales (“Match”),
entered into a Purchase and Sale Agreement (the “Match Agreement”), pursuant to which the Company, on May 28, 2021, acquired 1,152 ordinary
shares of Match representing 70% of the issued and outstanding ordinary shares of Match in consideration of 70,000,000 shares
of common stock of the Company (the “Initial Transaction”). On August 30, 2021, the Company exercised its option pursuant
to which it acquired from the Match Shareholders the balance of 493 ordinary shares of Match representing 30% of the issued
and outstanding ordinary shares of Match for an additional 30,000,000 shares of common stock of the Company. Match is engaged
in providing financial services to enable conversion of fiat currencies to cryptocurrencies and vice versa.
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.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED 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 (the “Digiclear Transaction”). The Digiclear
Transaction is expected to close in March 2022.
The unaudited condensed consolidated financial
statements have been prepared using accounting principles generally accepted in the United States of America applicable for a going concern,
which assumes that the Company will realize its assets and discharge its liabilities in the ordinary course of business. The Company
incurred a net loss for the three months ended December 31, 2021 of $1,944,839, and had a working capital deficit of $2,251,170 at
December 31, 2021. The Company’s ability to continue as a going concern is dependent upon the management of expenses and ability
to obtain necessary financing to meet its obligations and pay its liabilities arising from normal business operations when they come
due, and upon profitable operations.
We cannot be certain that such necessary capital
through equity or debt financings will be available to us or whether such capital will be available on terms that are acceptable to us.
Any such financing likely would be dilutive to existing stockholders and could result in significant financial operating covenants that
would negatively impact our business. In the event that there are any unforeseen delays or obstacles in obtaining funds through the aforementioned
sources, Currency Mountain Holdings Bermuda, Limited (“CMH”), which is wholly-owned by an entity that is majority-owned
by Mr. Assentato, has committed to inject capital into the Company in order to maintain the ongoing operations of the business.
The ramifications of the outbreak of the novel
strain of COVID-19, reported to have started in December 2019 and spread globally, are filled with uncertainty and changing quickly.
Our operations have continued during the COVID-19 pandemic and we have not had significant disruption.
The Company is operating in a rapidly changing
environment so the extent to which COVID-19 impacts its business, operations and financial results from this point forward will depend
on numerous evolving factors that the Company cannot accurately predict. Those factors include the following: the duration and scope
of the pandemic; governmental, business and individuals’ actions that have been and continue to be taken in response to the pandemic.
NOTE 2 – BASIS
OF PRESENTATION
These interim condensed consolidated financial
statements of the Company and its subsidiaries are unaudited. In the opinion of management, all adjustments (consisting of normal recurring
accruals) and disclosures necessary for a fair presentation of these interim condensed consolidated financial statements have been included.
The results reported in the unaudited condensed consolidated financial statements for any interim periods are not necessarily indicative
of the results that may be reported for the entire year. The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with the rules and regulations of the Securities and Exchange Commission and do not include all information
and footnotes necessary for a complete presentation of financial statements in conformity with accounting principles generally accepted
in the United States of America (U.S. GAAP).
The Company’s unaudited condensed consolidated
financial statements include the accounts of the Company and its consolidated subsidiaries. These accounts were prepared under the accrual
basis of accounting. All significant intercompany accounts and transactions have been eliminated in consolidation.
Certain information and footnote disclosures
normally included in the annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted.
These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated
financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2021
filed with the Securities and Exchange Commission on December 29, 2021. The consolidated balance sheet as of September 30, 2021 contained
herein has been derived from the audited consolidated financial statements as of September 30, 2021, but does not include all disclosures
required by U.S. GAAP.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 3 – SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Use of estimates
The preparation of the unaudited condensed consolidated
financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Significant estimates
during the three months ended December 31, 2021 and 2020 include the useful life of intangible assets, assumptions used in assessing
impairment of long-term assets, valuation of deferred tax assets and the associated valuation allowances, and valuation of stock-based
compensation.
As described in Note
1, in fiscal year 2021, the Company completed its acquisition of Match in accordance with the terms of the Match Agreement. In February
2022, a third party valuation report in connection with the acquisition was completed. As a result, the Company adjusted the previous
estimated allocation to reflect the results of the third party valuation. The Company decreased its cost of intangible assets by $2,861,631
and adjusted the estimated useful life of trade names and regulatory licenses from 10 years to 3 years and the estimated useful life
of technology from 10 years to 5 years. This change in accounting estimate was effective in the first quarter of fiscal year 2022. Based
on the carrying value of intangible assets as of September 30, 2021 and those adjustments during the three months ended December 31,
2021, the effect of this change in estimate was an increase in amortization expense of $559,802 and an increase in net loss of $559,802.
Cash and cash equivalents
At December 31, 2021 and September 30, 2021,
the Company’s cash balances by geographic area were as follows:
Country:
|
|
December 31, 2021
|
|
|
September 30, 2021
|
|
United States
|
|
$
|
6,005
|
|
|
|
11.9
|
%
|
|
$
|
327,443
|
|
|
|
92.1
|
%
|
United Kingdom
|
|
|
44,444
|
|
|
|
87.8
|
%
|
|
|
28,056
|
|
|
|
7.9
|
%
|
Malta
|
|
|
174
|
|
|
|
0.3
|
%
|
|
|
174
|
|
|
|
0.0
|
%
|
Total cash
|
|
$
|
50,623
|
|
|
|
100.0
|
%
|
|
$
|
355,673
|
|
|
|
100.0
|
%
|
For purposes of the condensed consolidated statements
of cash flows, the Company considers all highly liquid instruments with a maturity of three months or less when purchased and money market
accounts to be cash equivalents. The Company had no cash equivalents at December 31, 2021 and September 30, 2021.
Fair value of financial instruments and
fair value measurements
The fair value of the Company’s assets
and liabilities, which qualify as financial instruments under ASC Topic 820, “Fair Value Measurement,” approximates the carrying
amounts represented in the accompanying condensed consolidated financial statements, primarily due to their short-term nature.
Credit risk and uncertainties
The Company maintains a portion of its cash in
bank and financial institution deposits within U.S. that at times may exceed federally-insured limits of $250,000. The Company manages
this credit risk by concentrating its cash balances in high quality financial institutions and by periodically evaluating the credit
quality of the primary financial institutions holding such deposits. The Company has not experienced any losses in such bank accounts
and believes it is not exposed to any risks on its cash in bank accounts. At December 31, 2021, the Company’s cash balances in
United States bank accounts were not in excess of the federally-insured limits.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 3 – SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Financial instruments which potentially subject
the Company to concentrations of credit risk consist principally of trade accounts receivable. A portion of the Company’s sales
are credit sales which is to the customer whose ability to pay is dependent upon the industry economics prevailing in these areas; however,
concentrations of credit risk with respect to trade accounts receivable is limited due to short-term payment terms. The Company also
performs ongoing credit evaluations of its customers to help further reduce credit risk.
Accounts receivable and allowance for doubtful
accounts
Accounts receivable are presented net of an allowance
for doubtful accounts. The Company maintains allowances for doubtful accounts for estimated losses. The Company reviews the accounts
receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances.
In evaluating the collectability of individual receivable balances, the Company considers many factors, including the age of the balance,
a customer’s payment history, its current credit-worthiness and current economic trends. Accounts are written off after exhaustive
efforts at collection. Management believes that the accounts receivable are fully collectable. Therefore, no allowance for
doubtful accounts is deemed to be required on its accounts receivable at December 31, 2021 and September 30, 2021. The Company historically
has not experienced significant uncollectible accounts receivable.
Prepaid expense and other current assets
Prepaid expense and other current assets primarily
consist of prepaid OTC Markets listing fees, which are recognized as expense over the related listing periods. As of December 31, 2021
and September 30, 2021, prepaid expense and other current assets amounted to $12,588 and $12,221, respectively.
Cost method investment
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 “Other income (expense), net” in the accompanying unaudited condensed consolidated statements of operations and
comprehensive loss, and a new basis in the investment is established.
Intangible assets
Intangible assets consist of trade names, regulatory
licenses and technology, 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. There were no triggering events requiring assessment of impairment as of December 31, 2021 and
September 30, 2021. For the three months ended December 31, 2021 and 2020, no impairment of long-lived assets was recognized.
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.
|
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 3 – SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Disaggregation of revenues
The Company’s revenues stream detail are
as follows:
Revenue Stream
|
|
Revenue Stream Detail
|
General support services
|
|
Providing software, technology, customer sales and marketing and risk management technology hardware and software solutions package under a GSA to a related party
|
Financial services
|
|
Providing financial services to enable conversion of fiat currencies to cryptocurrencies and vice versa
|
In the following table,
revenues are disaggregated by segment for the three months ended December 31, 2021 and 2020:
|
|
Three Months Ended
December 31,
|
|
Revenue Stream
|
|
2021
|
|
|
2020
|
|
General support services
|
|
$
|
4,800,000
|
|
|
$
|
4,800,000
|
|
Financial services
|
|
|
329,015
|
|
|
|
-
|
|
Total revenues
|
|
$
|
5,129,015
|
|
|
$
|
4,800,000
|
|
Advertising and marketing costs
All costs related to advertising and marketing
are expensed as incurred. For the three months ended December 31, 2021 and 2020, advertising and marketing costs amounted to $35,222 and
$0, respectively, which was included in other general and administrative expense on the accompanying unaudited condensed consolidated
statements of operations and comprehensive loss.
Stock-based compensation
The Company accounts for its stock-based compensation
awards in accordance with ASC Topic 718, Compensation—Stock Compensation (“ASC 718”). ASC 718 requires all stock-based
payments to employees and non-employees including grants of stock options, to be recognized as expense in the statements of operations
based on their grant date fair values. The Company estimates the grant date fair value of each option award using the Black-Scholes option-pricing
model.
Income taxes
The Company accounts for income taxes pursuant
to Financial Accounting Standards Board (“FASB”) ASC 740, Income Taxes. Deferred tax assets and liabilities are determined
based on temporary differences between the bases of certain assets and liabilities for income tax and financial reporting purposes. The
deferred tax assets and liabilities are classified according to the financial statement classification of the assets and liabilities
generating the differences.
The Company maintains a valuation allowance with
respect to deferred tax assets. The Company establishes a valuation allowance based upon the potential likelihood of realizing the deferred
tax asset and taking into consideration the Company’s financial position and results of operations for the current period. Future
realization of the deferred tax benefit depends on the existence of sufficient taxable income within the carry-forward period under the
Federal and foreign tax laws. Changes in circumstances, such as the Company generating taxable income, could cause a change in judgment
about the realizability of the related deferred tax asset. Any change in the valuation allowance will be included in income in the period
of the change in estimate.
The Company follows the provisions of FASB ASC
740-10 Uncertainty in Income Taxes (ASC 740-10). Certain recognition thresholds must be met before a tax position is recognized in the
financial statements. An entity may only recognize or continue to recognize tax positions that meet a “more-likely-than-not”
threshold.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 3 – SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Per share data
ASC Topic 260, Earnings per Share, requires
presentation of both basic and diluted earnings per share (“EPS”) with a reconciliation of the numerator and denominator
of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution. Diluted EPS
reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into
common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.
Basic net earnings per share are computed
by dividing net earnings available to common stockholders by the weighted average number of shares of common stock outstanding during
the period. Diluted net earnings per share is computed by dividing net earnings applicable to common stockholders by the weighted average
number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. For the
three months ended December 31, 2021 and 2020, potentially dilutive common shares consist of the common shares issuable upon the exercise
of common stock options (using the treasury stock method) and the conversion of Series A preferred stock (using the if-converted method).
Common stock equivalents are not included in the calculation of diluted net loss per share if their effect would be anti-dilutive. In
a period in which the Company has a net loss, all potentially dilutive securities are excluded from the computation of diluted shares
outstanding as they would have had an anti-dilutive impact.
The following table summarizes the securities
that were excluded from the diluted per share calculation because the effect of including these potential shares was antidilutive:
|
|
Three Months Ended
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Stock options
|
|
|
1,000,000
|
|
|
|
-
|
|
Convertible preferred stock
|
|
|
-
|
|
|
|
1,250,000
|
|
Potentially dilutive securities
|
|
|
1,000,000
|
|
|
|
1,250,000
|
|
Foreign currency translation
The reporting currency of the Company is U.S.
Dollars. The functional currency of the parent company, Nukkleus Inc., Nukkleus Limited, Nukkleus Malta Holding Ltd. and its subsidiaries,
is the U.S. dollar and the functional currency of Match Financial Limited and its subsidiaries is the British Pound (“GBP”).
Monetary assets and liabilities denominated in currencies other than the reporting currency are translated into the reporting currency
at the rates of exchange prevailing at the balance sheet date. Revenue and expenses are translated using average rates during each reporting
period, and shareholders’ equity is translated at historical exchange rates. Cash flows are also translated at average translation
rates for the periods, therefore, amounts reported on the statements of cash flows will not necessarily agree with changes in the corresponding
balances on the balance sheets. Translation adjustments resulting from the process of translating the local currency financial statements
into U.S. dollars are included in determining comprehensive income/loss.
Transactions denominated
in foreign currencies are translated into the functional currency at the exchange rates prevailing on the transaction dates. Assets and
liabilities denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing at the balance
sheet date with any transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency
other than the functional currency are included in the results of operations as incurred. Most of the Company’s revenue transactions
are transacted in the functional currency of the Company. The Company does not enter into any material transaction in foreign currencies.
Transaction gains or losses have not had, and are not expected to have, a material effect on the results of operations of the Company.
Asset and liability accounts at December 31,
2021 and September 30, 2021 were translated at 0.7389 GBP and 0.7426 GBP to $1.00, respectively, which were the exchange rates on the
balance sheet dates. Equity accounts were stated at their historical rates. The average translation rate applied to the statement of
operations for the three months ended December 31, 2021 was 0.7422 GBP to $1.00. Cash flows from the Company’s operations are calculated
based upon the local currencies using the average translation rate.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 3 – SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Comprehensive loss
Comprehensive loss is comprised of net loss and
all changes to the statements of equity, except those due to investments by stockholders, changes in paid-in capital and distributions
to stockholders. For the Company, comprehensive loss for the three months ended December 31, 2021 and 2020 consisted of net loss and
unrealized loss from foreign currency translation adjustment.
Segment reporting
The Company uses “the management approach”
in determining reportable operating segments. The management approach considers the internal organization and reporting used by the Company’s
chief operating decision maker for making operating decisions and assessing performance as the source for determining the Company’s
reportable segments. The Company’s chief operating decision maker is its Chief Executive Officer (“CEO”), who reviews
operating results to make decisions about allocating resources and assessing performance for the entire company. The Company has determined
that it has two reportable business segments: general support services segment, and financial services segment. These reportable segments
offer different types of services and products, have different types of revenue, and are managed separately as each requires different
operating strategies and management expertise.
Recently issued accounting pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial
Instruments - Credit Losses (“Topic 326”). The ASU introduces a new accounting model, the Current Expected Credit
Losses model (“CECL”), which requires earlier recognition of credit losses and additional disclosures related
to credit risk. The CECL model utilizes a lifetime expected credit loss measurement objective for the recognition of credit losses
at the time the financial asset is originated or acquired. ASU 2016-13 is effective for annual period beginning after December 15, 2022,
including interim reporting periods within those annual reporting periods. The Company expects that the adoption will not have a material
impact on its unaudited condensed consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair
Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurements (“ASU
2018-13”), which aims to improve the overall usefulness of disclosures to financial statement users and reduce unnecessary costs
to companies when preparing fair value measurement disclosures. ASU 2018-13 is effective for annual and interim periods in the fiscal
years beginning after December 15, 2019. Early adoption is permitted. Retrospective adoption is required, except for certain disclosures,
which will be required to be applied prospectively for only the most recent interim or annual period presented in the initial fiscal
year of adoption. The adoption of this guidance as of October 1, 2020 did not have a material impact on the Company’s unaudited
condensed consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Simplifying
the Accounting for Income Taxes, which simplifies the accounting for income taxes by removing certain exceptions to the general principles
in the existing guidance for income taxes and making other minor improvements. The amendments in the ASU are effective for the Company
on October 1, 2021. The adoption of this guidance as of October 1, 2021 did not have a material impact on the Company’s unaudited
condensed consolidated financial statements.
Other accounting standards that have been issued
or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the unaudited condensed
consolidated financial statements upon adoption. The Company does not discuss recent pronouncements that are not anticipated to have
an impact on or are unrelated to its unaudited condensed consolidated financial condition, results of operations, cash flows or disclosures.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 4 – INVESTMENT, AT COST
At December 31, 2021, cost method investment amounted
to $6,602,000. The investment represents the Company’s minority interest in Jacobi Asset Management Holdings Limited (“Jacobi”),
a private company focused on digital asset management that has received regulatory approval to launch the world’s first tier one
Bitcoin ETF.
On December 15, 2021, the Company issued 20,000,000 shares of
its common stock to Jacobi’s shareholders for acquisition of 5.0% equity interest of Jacobi. These shares were valued at $6,602,000,
the fair market value on the grant date using the reported closing share price of the Company on the date of grant.
In accordance with ASC Topic 321, the Company
elected to use the measurement alternative to measure such investments at cost, less any impairment, plus or minus changes resulting
from observable price changes in orderly transactions for identical or similar investments of the same issuer, if any. The Company monitors
its investment in the non-marketable security and will recognize, if ever existing, a loss in value which is deemed to be other than
temporary. The Company determined that there was no impairment of this investment as of December 31, 2021.
NOTE 5 – INTANGIBLE ASSETS
Intangible assets consist of the valuation of identifiable intangible assets
acquired, representing trade names, regulatory licenses and technology. The straight-line method of amortization represents the Company’s
best estimate of the distribution of the economic value of the identifiable intangible assets.
At December 31, 2021
and September 30, 2021, intangible assets consisted of the following:
|
|
Useful Life
|
|
December 31,
2021
|
|
|
September 30,
2021
|
|
Licenses and banking infrastructure (1)
|
|
10 Years
|
|
$
|
-
|
|
|
$
|
14,085,402
|
|
Trade names
|
|
3 Years
|
|
|
784,246
|
|
|
|
-
|
|
Regulatory licenses
|
|
3 Years
|
|
|
138,751
|
|
|
|
-
|
|
Technology
|
|
5 Years
|
|
|
10,300,774
|
|
|
|
-
|
|
Less: accumulated amortization
|
|
|
|
|
(1,381,229
|
)
|
|
|
(469,286
|
)
|
|
|
|
|
$
|
9,842,542
|
|
|
$
|
13,616,116
|
|
|
(1)
|
In February 2022, a third party valuation report in connection
with acquisition was completed. As a result, the Company adjusted the previous estimated allocation to reflect the results of the third
party valuation. The Company decreased its cost of intangible assets of $2,861,631 and adjusted the estimated useful life of trade names
and regulatory licenses from 10 years to 3 years and the estimated useful life of technology from 10 years to 5 years. This change in
accounting estimate was effective in the first quarter of fiscal year 2022.
|
For the three months ended December 31, 2021,
amortization expense amounted to $911,943. There was no comparable amortization for the three months ended December 31, 2020. Amortization
of intangible assets attributable to future periods is as follows:
For the Twelve-month Period Ending December 31:
|
|
Amortization Amount
|
|
2022
|
|
$
|
2,367,821
|
|
2023
|
|
|
2,367,821
|
|
2024
|
|
|
2,188,349
|
|
2025
|
|
|
2,060,155
|
|
2026 and thereafter
|
|
|
858,396
|
|
|
|
$
|
9,842,542
|
|
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 6 – ACCOUNTS PAYABLE
AND ACCRUED LIABILITIES
At December 31, 2021 and September 30, 2021, accounts payable and
accrued liabilities consisted of the following:
|
|
December 31,
2021
|
|
|
September 30,
2021
|
|
Directors’ compensation
|
|
$
|
180,538
|
|
|
$
|
170,538
|
|
Professional fees
|
|
|
295,719
|
|
|
|
125,697
|
|
Accounts payable
|
|
|
97,407
|
|
|
|
54,831
|
|
Other
|
|
|
5,687
|
|
|
|
29,655
|
|
Total
|
|
$
|
579,351
|
|
|
$
|
380,721
|
|
NOTE 7 – SHARE CAPITAL
Preferred stock
The Company’s Board of Directors is authorized
to issue, at any time, without further stockholder approval, up to 15,000,000 shares of preferred stock. The Board of Directors
has the authority to fix and determine the voting rights, rights of redemption and other rights and preferences of preferred stock.
Common stock issued for cost method investment
On December 15, 2021, the Company issued 20,000,000 shares of its common
stock to Jacobi Asset Management Holdings Limited’s shareholders as consideration of acquisition of 5.0% of the issued and outstanding
ordinary shares of Jacobi. These shares were valued at $6,602,000, the fair market value on the grant date using the reported closing
share price on the date of grant, and the Company recorded cost method investment of $6,602,000 (see Note 4).
Options
The following table summarizes the shares of
the Company’s common stock issuable upon exercise of options outstanding at December 31, 2021:
Options Outstanding
|
|
|
Options Exercisable
|
|
Exercise
Price
|
|
|
Number Outstanding at
December 31,
2021
|
|
|
Remaining Contractual
Life (Years)
|
|
|
Number Exercisable at
December 31,
2021
|
|
|
Exercise
Price
|
|
$
|
2.50
|
|
|
|
1,000,000
|
|
|
|
4.72
|
|
|
|
1,000,000
|
|
|
$
|
2.50
|
|
Stock option activities
for the three months ended December 31, 2021 were as follows:
|
|
Number of
Options
|
|
|
Exercise
Price
|
|
Outstanding at October 1, 2021
|
|
|
1,000,000
|
|
|
$
|
2.50
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Terminated / Exercised / Expired
|
|
|
-
|
|
|
|
-
|
|
Outstanding at December 31, 2021
|
|
|
1,000,000
|
|
|
$
|
2.50
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at December 31, 2021
|
|
|
1,000,000
|
|
|
$
|
2.50
|
|
The aggregate intrinsic value of both stock options
outstanding and stock options exercisable at December 31, 2021 was $0.
For the three months ended December 31, 2021,
stock-based compensation expense associated with stock options granted amounted to $378,746, which was recorded as professional fees
on the accompanying unaudited condensed consolidated statements of operations and comprehensive loss. There was no comparable stock-based
compensation expense associated with stock options for the three months ended December 31, 2020.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 7 – SHARE CAPITAL (continued)
A summary of the status of the Company’s
nonvested stock options granted as of December 31, 2021 and changes during the three months ended December 31, 2021 is presented below:
|
|
Number of
Options
|
|
|
Exercise
Price
|
|
Nonvested at October 1, 2021
|
|
|
1,000,000
|
|
|
$
|
2.50
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
(1,000,000
|
)
|
|
|
(2.50
|
)
|
Nonvested at December 31, 2021
|
|
|
-
|
|
|
$
|
-
|
|
NOTE 8 – RELATED PARTY TRANSACTIONS
Services provided
by related parties
The Company uses affiliate employees for various
services such as the use of accountants to record the books and accounts of the Company at no charge to the Company, which are considered
immaterial.
Office space from
related parties
The Company uses office space of affiliate
companies, free of rent, which is considered immaterial.
Revenue from related party and cost of
revenue from related party
The Company’s general support services
operate under a GSA with TCM providing personnel and technical support, marketing, accounting, risk monitoring, documentation processing
and customer care and support. The minimum monthly amount received is $1,600,000.
The Company’s general support services
operate under a GSA with FXDIRECT receiving personnel and technical support, marketing, accounting, risk monitoring, documentation processing
and customer care and support. The minimum monthly amount payable is $1,575,000.
Both of the above entities are affiliates through
common ownership.
During the three months ended December 31, 2021
and 2020, general support services provided to the related party, which was recorded as revenue – general support services - related
party on the accompanying unaudited condensed consolidated statements of operations and comprehensive loss were as follows:
|
|
Three Months Ended
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Service provided to:
|
|
|
|
|
|
|
TCM
|
|
$
|
4,800,000
|
|
|
$
|
4,800,000
|
|
|
|
$
|
4,800,000
|
|
|
$
|
4,800,000
|
|
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 8 – RELATED PARTY TRANSACTIONS
(continued)
During the three months ended December 31,
2021 and 2020, services received from the related party, which was recorded as cost of revenue – general support services - related
party on the accompanying unaudited condensed consolidated statements of operations and comprehensive loss were as follows:
|
|
Three Months Ended
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Service received from:
|
|
|
|
|
|
|
FXDIRECT
|
|
$
|
4,725,000
|
|
|
$
|
4,725,000
|
|
|
|
$
|
4,725,000
|
|
|
$
|
4,725,000
|
|
Due from affiliates
At December 31, 2021
and September 30, 2021, due from related parties consisted of the following:
|
|
December 31,
2021
|
|
|
September 30,
2021
|
|
NUKK Capital (*)
|
|
$
|
144,696
|
|
|
$
|
144,696
|
|
TCM
|
|
|
2,469,703
|
|
|
|
2,473,177
|
|
Total
|
|
$
|
2,614,399
|
|
|
$
|
2,617,873
|
|
|
(*)
|
An entity controlled by Emil Assentato, the Company’s
chief executive officer, chief financial officer and chairman.
|
The balance of due from NUKK Capital represent
the Company’s prior investment in digital currency that was transferred to NUKK Capital in March 2019. The balance of due from
TCM represent unsettled funds due related to the General Services Agreement and monies that the Company paid on behalf of TCM.
Management believes that the related parties’
receivables are fully collectable. Therefore, no allowance for doubtful account is deemed to be required on its due from related parties
at December 31, 2021 and September 30, 2021. The Company historically has not experienced uncollectible receivable from the related parties.
Due to affiliates
At December 31, 2021
and September 30, 2021, due to related parties consisted of the following:
|
|
December 31,
2021
|
|
|
September 30,
2021
|
|
Forexware LLC (*)
|
|
$
|
624,229
|
|
|
$
|
579,229
|
|
FXDIRECT
|
|
|
3,442,892
|
|
|
|
3,341,893
|
|
CMH
|
|
|
42,000
|
|
|
|
42,000
|
|
FXDD Trading (*)
|
|
|
296,144
|
|
|
|
294,670
|
|
Total
|
|
$
|
4,405,265
|
|
|
$
|
4,257,792
|
|
|
(*)
|
Forexware LLC and FXDD Trading are both controlled by Emil Assentato,
the Company’s chief executive officer, chief financial officer and chairman.
|
The balances of due to related parties represent
expenses paid by Forexware LLC, FXDIRECT, and FXDD Trading on behalf of the Company and advances from CMH. The balance due to FXDIRECT
may also include unsettled funds due related to the General Service Agreement.
The related parties’ payables are short-term
in nature, non-interest bearing, unsecured and repayable on demand.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 9 – INCOME TAXES
The Company recorded no income tax expense for
the three months ended December 31, 2021 and 2020 because the estimated annual effective tax rate was zero. As of December 31, 2021,
the Company continues to provide a valuation allowance against its net deferred tax assets since the Company believes it is more likely
than not that its deferred tax assets will not be realized.
NOTE 10 – CONCENTRATIONS
Customers
The following table sets forth information as
to each customer that accounted for 10% or more of the Company’s revenues for the three months ended December 31, 2021 and
2020.
|
|
Three Months Ended
December 31,
|
|
Customer
|
|
2021
|
|
|
2020
|
|
A – related party
|
|
|
97.8
|
%
|
|
|
100
|
%
|
One customer, whose outstanding receivable accounted
for 10% or more of the Company’s total outstanding accounts receivable, and accounts receivable – related party (which
is included in due from affiliates on the accompanying consolidated balance sheets) at December 31, 2021, accounted for 97.8% of
the Company’s total outstanding accounts receivable, and accounts receivable – related party at December 31, 2021.
One customer, whose outstanding receivable accounted
for 10% or more of the Company’s total outstanding accounts receivable, and accounts receivable – related party (which
is included in due from affiliates on the accompanying consolidated balance sheets) at September 30, 2021, accounted for 97.8% of
the Company’s total outstanding accounts receivable, and accounts receivable – related party at September 30, 2021.
Suppliers
The following table sets forth information as
to each supplier that accounted for 10% or more of the Company’s costs of revenues for the three months ended December 31,
2021 and 2020.
|
|
Three Months Ended
December 31,
|
|
Supplier
|
|
2021
|
|
|
2020
|
|
A – related party
|
|
|
97.3
|
%
|
|
|
100
|
%
|
One supplier, whose outstanding payable accounted
for 10% or more of the Company’s total outstanding accounts payable, and accounts payable – related party (which is included
in due to affiliates on the accompanying consolidated balance sheets) at December 31, 2021, accounted for 97.3% of the Company’s
total outstanding accounts payable, and accounts payable – related party at December 31, 2021.
One supplier, whose outstanding payable accounted
for 10% or more of the Company’s total outstanding accounts payable, and accounts payable – related party (which is included
in due to affiliates on the accompanying consolidated balance sheets) at September 30, 2021, accounted for 98.8% of the Company’s
total outstanding accounts payable, and accounts payable – related party at September 30, 2021.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 11 – SEGMENT INFORMATION
For the three months ended December 31, 2021,
the Company operated in two reportable business segments - (1) the general support services segment, in which we provide software, technology,
customer sales and marketing and risk management technology hardware and software solutions package under a GSA to a related party, and
(2) the financial services segment, in which we provide financial services to enable conversion of fiat currencies to cryptocurrencies
and vice versa. For the three months ended December 31, 2020, the Company operated in one reportable business segment – the general
support services segment. The Company’s reportable segments are strategic business units that offer different services and products.
They are managed separately based on the fundamental differences in their operations.
Information with respect to these reportable
business segments for the three months ended December 31, 2021 and 2020 was as follows:
|
|
Three Months Ended
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Revenues
|
|
|
|
|
|
|
General support services
|
|
$
|
4,800,000
|
|
|
$
|
4,800,000
|
|
Financial services
|
|
|
329,015
|
|
|
|
-
|
|
Total
|
|
|
5,129,015
|
|
|
|
4,800,000
|
|
|
|
|
|
|
|
|
|
|
Costs of revenues
|
|
|
|
|
|
|
|
|
General support services
|
|
|
4,725,000
|
|
|
|
4,725,000
|
|
Financial services
|
|
|
160,842
|
|
|
|
-
|
|
Total
|
|
|
4,885,842
|
|
|
|
4,725,000
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
|
|
General support services
|
|
|
75,000
|
|
|
|
75,000
|
|
Financial services
|
|
|
168,173
|
|
|
|
-
|
|
Total
|
|
|
243,173
|
|
|
|
75,000
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Financial services
|
|
|
1,249,644
|
|
|
|
-
|
|
Corporate/Other
|
|
|
937,152
|
|
|
|
127,085
|
|
Total
|
|
|
2,186,796
|
|
|
|
127,085
|
|
|
|
|
|
|
|
|
|
|
Other expense
|
|
|
|
|
|
|
|
|
Financial services
|
|
|
(1,216
|
)
|
|
|
-
|
|
Corporate/Other
|
|
|
-
|
|
|
|
(1,510
|
)
|
Total
|
|
|
(1,216
|
)
|
|
|
(1,510
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
General support services
|
|
|
75,000
|
|
|
|
75,000
|
|
Financial services
|
|
|
(1,082,687
|
)
|
|
|
-
|
|
Corporate/Other
|
|
|
(937,152
|
)
|
|
|
(128,595
|
)
|
Total
|
|
|
(1,944,839
|
)
|
|
|
(53,595
|
)
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
|
|
|
|
|
|
Financial services
|
|
|
911,943
|
|
|
|
-
|
|
Total
|
|
$
|
911,943
|
|
|
$
|
-
|
|
Total assets at December 31, 2021 and September 30, 2021
|
|
December 31,
2021
|
|
|
September 30,
2021
|
|
Financial services
|
|
$
|
9,945,454
|
|
|
$
|
13,703,140
|
|
Corporate/Other
|
|
|
9,232,534
|
|
|
|
2,956,696
|
|
Total
|
|
$
|
19,177,988
|
|
|
$
|
16,659,836
|
|
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 12 – CONTINGENCY
In April 16, 2020, the Company was named as a
defendant in the Adversary Proceeding filed in the United States Bankruptcy Court for the District of Massachusetts (Case No. 15-10745-FJB;
Adversary Proceeding No. 16-01178) titled In re: BT Prime Ltd (“BT Prime”). The Adversary Proceeding is 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 Inc., Nukkleus Bermuda
Limited and Currency Mountain Holdings Bermuda, Ltd. In the Amended Complaint, BT Prime is seeking, amongst other relief, a determination
that the Company and the other defendants are liable for all of the debts of BT Prime stemming from its bankruptcy proceedings, and is
seeking to recover certain amounts transferred to Forexware and FXDD Malta prior to the initiation of the bankruptcy case. In the sole
claim asserted against the Company, BT Prime alleges that the Company operated as a single business enterprise with no separate existence
outside of its collective business relationship with certain of the other Defendants, is a continuation of the business of Forexware
and is a successor-in-interest to Forexware. Based on this theory, BT Prime alleges that the Company should be jointly and severally
liable for any liability attributable to Forexware or the other Defendants, should the Court eventually find any such liability. It is
the Company’s position that there is no basis for BT Prime’s claim against it and intends to vigorously defend against the
claim at trial, the date for which has not yet been set.
NOTE 13 – SUBSEQUENT
EVENTS
Management has evaluated subsequent events through
the date of the filing.