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.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(AS RESTATED)
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.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(AS RESTATED)
NOTE 1 – THE COMPANY HISTORY AND NATURE
OF THE BUSINESS (continued)
In July 2018, the Company incorporated Nukkleus
Malta Holding Ltd., which is a wholly-owned subsidiary. In July 2018, Nukkleus Malta Holding Ltd. incorporated Markets Direct Technology
Group Ltd (“MDTG”), formerly known as Nukkleus Exchange Malta Ltd. MDTG was exploring potentially obtaining a license to operate
an electronic exchange whereby it would facilitate the buying and selling of various digital assets as well as traditional currency pairs
used in FX Trading. During the fourth quarter of fiscal 2020, management made the decision to exit the exchange business and to no longer
pursue the regulatory licensing necessary to operate an exchange in Malta.
On August 27, 2020, the Company renamed Nukkleus
Exchange Malta Ltd. to Markets Direct Technology Group Ltd (“MDTG”). MDTG manages the technology and IP behind the Markets
Direct brand (which is operated by TCM). MDTG holds all the IP addresses and all the software licenses in its name, and it holds all the
IP rights to the brands such as Markets Direct and TCM. MDTG then leases out the rights to use these names/brands licenses to the appropriate
entities.
On May 24, 2021, the Company and the shareholders
of Match Financial Limited (the “Match Shareholders”), a private limited company formed in England and Wales (“Match”),
entered into a Purchase and Sale Agreement (the “Match Agreement”), pursuant to which the Company, on May 28, 2021, acquired 1,152 ordinary
shares of Match representing 70% of the issued and outstanding ordinary shares of Match in consideration of 70,000,000 shares
of common stock of the Company (the “Initial Transaction”). On August 30, 2021, the Company exercised its option pursuant
to which it acquired from the Match Shareholders the balance of 493 ordinary shares of Match representing 30% of the issued
and outstanding ordinary shares of Match for an additional 30,000,000 shares of common stock of the Company. Match is engaged
in providing payment services from one fiat currency to another.
On October 20, 2021, the Company and the
shareholders (the “Original Shareholders”) of Jacobi Asset Management Holdings Limited (“Jacobi”) entered
into a Purchase and Sale Agreement (the “Jacobi Agreement”) pursuant to which the Company agreed to acquire 5.0% of
the issued and outstanding ordinary shares of Jacobi in consideration of 20,000,000 shares of common stock of the Company
(the “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. 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 (the “Digiclear Transaction”). The Digiclear
Transaction closed on March 17, 2022. Digiclear is a company developing a custody and settlement utility operating system.
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 and generated negative cash flow from operating activities for the six months ended March 31, 2022 of $3,871,453 and
$304,371, respectively, and had a working capital deficit of $2,975,438 at March 31, 2022. 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.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(AS RESTATED)
NOTE
2 – RESTATEMENT OF PREVIOUSLY FILED FINANCIAL STATEMENTS
The
Company concluded it should restate its previously issued financial statements by amending its Quarterly Report on Form 10- Q for the
quarterly period ended March 31, 2022, filed with the Securities and Exchange Commission (the “SEC”) on May 23, 2022 and
amended on August 1, 2022 (the “10Q Filing”), to record the classification of amortization of intangible assets representing
licenses and banking infrastructure acquired on Match acquisition. The Company had previously recorded the amortization of intangible
assets as operating expenses. In July 2022, the Company realized its financial services segment is unable to generate revenue without
the licenses and bank infrastructure. As a result, the Company reclassified the amortization of intangible assets from operating expenses
to cost of revenue – financial services.
In
accordance with SEC Staff Accounting Bulletin No. 99, “Materiality,” and SEC Staff Accounting Bulletin No. 108, “Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” the Company evaluated
the correction and has determined that the related impact was material to the previously filed financial statements that contained the
error, reported in the Company’s Form 10-Q for the quarterly period ended March 31, 2022 (the “Affected Quarterly Period”).
Therefore, the Company concluded that the Affected Quarterly Period should be restated to present the reclassification. As such, the
Company is reporting the restatement to the period in this quarterly report.
The
following table represents the impacts of the adjustment described above:
| |
As Reported | | |
Adjustment | | |
As Restated | |
Unaudited Condensed Consolidated Statement of Operations and Comprehensive Loss for the Three Months Ended March 31, 2022 | |
| | |
| | |
| |
Cost of revenue - financial services | |
$ | 163,583 | | |
$ | 526,601 | | |
$ | 690,184 | |
Total costs of revenues | |
$ | 4,888,583 | | |
$ | 526,601 | | |
$ | 5,415,184 | |
Gross profit (loss) - financial services | |
$ | 125,434 | | |
$ | (526,601 | ) | |
$ | (401,167 | ) |
Total gross profit (loss) | |
$ | 200,434 | | |
$ | (526,601 | ) | |
$ | (326,167 | ) |
Amortization of intangible assets | |
$ | 592,891 | | |
$ | (526,601 | ) | |
$ | 66,290 | |
Total operating expenses | |
$ | 2,054,156 | | |
$ | (526,601 | ) | |
$ | 1,527,555 | |
| |
As Reported | | |
Adjustment | | |
As Restated | |
Unaudited Condensed Consolidated Statement of Operations and Comprehensive Loss for the Six Months Ended March 31, 2022 | |
| | |
| | |
| |
Cost of revenue - financial services | |
$ | 324,425 | | |
$ | 1,373,190 | | |
$ | 1,697,615 | |
Total costs of revenues | |
$ | 9,774,425 | | |
$ | 1,373,190 | | |
$ | 11,147,615 | |
Gross profit (loss) - financial services | |
$ | 293,607 | | |
$ | (1,373,190 | ) | |
$ | (1,079,583 | ) |
Total gross profit (loss) | |
$ | 443,607 | | |
$ | (1,373,190 | ) | |
$ | (929,583 | ) |
Amortization of intangible assets | |
$ | 1,504,834 | | |
$ | (1,373,190 | ) | |
$ | 131,644 | |
Total operating expenses | |
$ | 4,240,952 | | |
$ | (1,373,190 | ) | |
$ | 2,867,762 | |
The
reclassifications did not have any impact on consolidated operating loss, net loss or earnings per share, cash flows or balance sheets.
NOTE
3 – 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
(AS RESTATED)
NOTE 4 – 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 and six months ended March 31, 2022 and 2021 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.
Cash and cash equivalents
At March 31, 2022 and September 30, 2021, the
Company’s cash balances by geographic area were as follows:
Country: | |
March 31, 2022 | | |
September 30, 2021 | |
United States | |
$ | 3,005 | | |
| 6.0 | % | |
$ | 327,443 | | |
| 92.1 | % |
United Kingdom | |
| 47,265 | | |
| 93.7 | % | |
| 28,056 | | |
| 7.9 | % |
Malta | |
| 174 | | |
| 0.3 | % | |
| 174 | | |
| 0.0 | % |
Total cash | |
$ | 50,444 | | |
| 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 March 31, 2022 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 March 31, 2022, the Company’s cash balances in United States bank
accounts were not in excess of the federally-insured limits.
Financial instruments which potentially subject
the Company to concentrations of credit risk consist principally of trade accounts receivable. A portion of the Company’s sales
are credit sales which is to the customer whose ability to pay is dependent upon the industry economics prevailing in these areas; however,
concentrations of credit risk with respect to trade accounts receivable is limited due to short-term payment terms. The Company also performs
ongoing credit evaluations of its customers to help further reduce credit risk.
Accounts receivable and allowance for doubtful
accounts
Accounts receivable are presented net of an allowance
for doubtful accounts. The Company maintains allowances for doubtful accounts for estimated losses. The Company reviews the accounts receivable
on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances. In
evaluating the collectability of individual receivable balances, the Company considers many factors, including the age of the balance,
a customer’s payment history, its current credit-worthiness and current economic trends. Accounts are written off after exhaustive
efforts at collection. Management believes that the accounts receivable are fully collectable. Therefore, no allowance for doubtful
accounts is deemed to be required on its accounts receivable at March 31, 2022 and September 30, 2021. The Company historically has not
experienced significant uncollectible accounts receivable.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(AS RESTATED)
NOTE 4 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Other current assets
Other current assets primarily consist of prepaid professional service
fees and prepaid OTC Markets listing fees. As of March 31, 2022 and September 30, 2021, other current assets amounted to $26,627 and
$12,221, respectively.
Investments
Investments in which the
Company does not have the ability to exercise significant influence over operating and financial matters are 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) income, and a new basis in the investment is established.
The Company
uses the equity method of accounting for its investments 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.
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. There were no triggering events requiring assessment of impairment as of March 31, 2022 and September
30, 2021. For the three and six months ended March 31, 2022 and 2021, 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 (including operational reporting and technical support infrastructure, website hosting and marketing solutions, accounting maintenance, risk monitoring services, new account processing and customer care and continued support) and these performance obligations are combined into a single unit of accounting. Fees are recognized as revenue over time as the services are rendered under the terms of the GSA. The Company recognizes the full contracted amount each period with no deferred revenue. The nature of the performance obligation is to provide the specified goods or services directly to the customer. The Company engages another party to satisfy the performance obligation on its behalf. The Company’s performance obligation is not to arrange for the provision of the specified good or service by another party. The Company is primarily responsible for fulfilling the promise to provide the specified good or service. Therefore, the Company is deemed to be a principal in the transaction and recognizes revenue for that performance obligation. The Company is a financial technology company which is focused on providing software and technology solutions for the worldwide retail foreign exchange (“FX”) trading industry. Under a General Services Agreement (“GSA”), the Company is contractually obligated to provide for the fulfillment software, technology, customer sales and marketing and risk management technology hardware and software solutions package to Triton Capital Markets Ltd. (“TCM”) The Company provides these services, obtained from affiliate service provider FXDirect Dealer, LLC which is under common ownership, and controls the services of its service provider necessary to legally transfer of the services to TCM. Consequently, the Company is defined as the principal in the transaction. The Company, as principal, satisfies its obligation by providing ongoing service support enabling TCM to conduct its retail FX business without interruption. Upon satisfaction of its obligation, the Company recognizes revenue in the gross amount of consideration it is entitled to receive. The monthly GSA price is calculated by applying the Company's 1.6% mark-up to the costs of the services being provided by FXDirect Dealer, LLC. |
|
|
|
|
● |
Financial services to its customers. Revenue related to its financial services offerings are recognized at a point in time when service is rendered. |
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(AS RESTATED)
NOTE 4 – SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Disaggregation of revenues
The Company’s revenues stream detail are
as follows:
Revenue
Stream |
|
Revenue
Stream Detail |
General support services |
|
Providing software, technology, customer sales and marketing and risk management
technology
hardware and software solutions package under a GSA to a related party |
|
|
|
Financial services
|
|
Providing payment services from one fiat currency to another |
In the following table,
revenues are disaggregated by segment for the three and six months ended March 31, 2022 and 2021:
| |
Three Months Ended
March 31, | | |
Six Months Ended
March 31, | |
Revenue Stream | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
General support services | |
$ | 4,800,000 | | |
$ | 4,800,000 | | |
$ | 9,600,000 | | |
$ | 9,600,000 | |
Financial services | |
| 289,017 | | |
| - | | |
| 618,032 | | |
| - | |
Total revenues | |
$ | 5,089,017 | | |
$ | 4,800,000 | | |
$ | 10,218,032 | | |
$ | 9,600,000 | |
Advertising
and marketing costs
All costs related to advertising and marketing
are expensed as incurred. For the three and six months ended March 31, 2022, advertising and marketing costs amounted to $163,427 and
$198,649, respectively, which was included in operating expenses on the accompanying unaudited condensed consolidated statements of operations
and comprehensive (loss) income. For the three and six months ended March 31, 2021, the Company did not incur any advertising and marketing
costs.
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
(AS RESTATED)
NOTE 4 – SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Per share data
ASC Topic 260, Earnings per Share, requires
presentation of both basic and diluted earnings per share (“EPS”) with a reconciliation of the numerator and denominator of
the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution. Diluted EPS reflects
the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then shared in the earnings of the entity.
Basic net earnings per share are computed
by dividing net earnings available to common stockholders by the weighted average number of shares of common stock outstanding during
the period. Diluted net earnings per share is computed by dividing net earnings applicable to common stockholders by the weighted average
number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. For the
three and six months ended March 31, 2022 and 2021, 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 is a reconciliation of the basic and diluted net (loss) income
per share computations for the three and six months ended March 31, 2022 and 2021:
Basic net (loss) income
per share
| |
Three Months Ended March 31, 2022 | | |
Three Months Ended March 31, 2021 | | |
Six Months Ended March 31, 2022 | | |
Six Months Ended March 31, 2021 | |
Net (loss) income available to common stockholders for basic net (loss) income per share of common stock | |
$ | (1,926,614 | ) | |
$ | 49 | | |
$ | (3,871,453 | ) | |
$ | (53,546 | ) |
Weighted average common stock outstanding - basic | |
| 354,549,624 | | |
| 230,485,100 | | |
| 345,031,364 | | |
| 230,485,100 | |
Net (loss) income per share: | |
| | | |
| | | |
| | | |
| | |
Basic | |
$ | (0.01 | ) | |
$ | 0.00 | | |
$ | (0.01 | ) | |
$ | (0.00 | ) |
Diluted net (loss)
income per share
| |
Three Months Ended March 31, 2022 | | |
Three Months Ended March 31, 2021 | | |
Six Months Ended March 31, 2022 | | |
Six Months Ended March 31, 2021 | |
Net (loss) income available to common stockholders for basic net (loss) income per share of common stock | |
$ | (1,926,614 | ) | |
$ | 49 | | |
$ | (3,871,453 | ) | |
$ | (53,546 | ) |
Add: interest expense for redeemable preferred stock | |
| - | | |
| 937 | | |
| - | | |
| - | |
Subtract: unamortized debt discount for redeemable preferred stock | |
| - | | |
| (401 | ) | |
| - | | |
| - | |
Net (loss) income available to common stockholders for diluted net (loss) income per share of common stock | |
$ | (1,926,614 | ) | |
$ | 585 | | |
$ | (3,871,453 | ) | |
$ | (53,546 | ) |
Weighted average common stock outstanding - basic | |
| 354,549,624 | | |
| 230,485,100 | | |
| 345,031,364 | | |
| 230,485,100 | |
Effect of dilutive securities: | |
| | | |
| | | |
| | | |
| | |
Series A preferred stock | |
| - | | |
| 1,250,000 | | |
| - | | |
| - | |
Weighted average common stock outstanding - diluted | |
| 354,549,624 | | |
| 231,735,100 | | |
| 345,031,364 | | |
| 230,485,100 | |
Net (loss) income per share: | |
| | | |
| | | |
| | | |
| | |
Diluted | |
$ | (0.01 | ) | |
$ | 0.00 | | |
$ | (0.01 | ) | |
$ | (0.00 | ) |
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(AS RESTATED)
NOTE 4 – SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Per share data (continued)
The following table summarizes the securities
that were excluded from the diluted per share calculation because the effect of including these potential shares was antidilutive:
| |
Three Months Ended
March 31, | | |
Six Months Ended
March 31, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Stock options | |
| 5,850,000 | | |
| - | | |
| 5,850,000 | | |
| - | |
Convertible preferred stock | |
| - | | |
| - | | |
| - | | |
| 1,250,000 | |
Potentially dilutive securities | |
| 5,850,000 | | |
| - | | |
| 5,850,000 | | |
| 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 March 31, 2022
and September 30, 2021 were translated at 0.7611 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 six months ended March 31, 2022 was 0.7439 GBP to $1.00. Cash flows from the Company’s operations are calculated based upon
the local currencies using the average translation rate.
Comprehensive (loss)
income
Comprehensive (loss) income is comprised of net
(loss) income 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) income for the three and six months ended March 31, 2022 and
2021 consisted of net (loss) income and unrealized gain from foreign currency translation adjustment.
Segment reporting
The Company uses “the management approach”
in determining reportable operating segments. The management approach considers the internal organization and reporting used by the Company’s
chief operating decision maker for making operating decisions and assessing performance as the source for determining the Company’s
reportable segments. The Company’s chief operating decision maker is its Chief Executive Officer (“CEO”), who reviews
operating results to make decisions about allocating resources and assessing performance for the entire company. The Company has determined
that it has two reportable business segments: general support services segment and financial services segment. These reportable segments
offer different types of services and products, have different types of revenue, and are managed separately as each requires different
operating strategies and management expertise.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(AS RESTATED)
NOTE 4 – SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
Reclassifications
Reclassifications occurred
to certain prior year amounts in order to confirm to the current year presentation. The reclassifications had no effect on the previously
reported net loss.
NOTE
5 – COST METHOD INVESTMENT
At March 31, 2022, 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 March 31, 2022.
NOTE 6
– EQUITY METHOD INVESTMENT
As of March 31, 2022, the equity method investment
amounted to $4,929,381. The investment represents the Company’s interest in Digiclear Inc. (“Digiclear”). Digiclear
was incorporated on July 13, 2021 in United Kingdom. The company and the other unrelated party accounted for 50% and 50% of
the total ownership, respectively. Digiclear is a company developing a custody and settlement utility operating system.
The Company accounts for the
investment in Digiclear under the equity method of accounting. Under the equity method, the investment is initially recorded at cost,
adjusted for any excess of the Company’s share of the incorporated-date fair values of the investee’s identifiable net assets
over the cost of the investment (if any). Thereafter, the investment is adjusted for the post incorporation change in the Company’s
share of the investee’s net assets and any impairment loss relating to the investment.
For the period from March 17, 2022 (date of investment)
through March 31, 2022, the Company’s share of Digiclear’s net loss of $30,320 and the
adjustment for allocated amortization of intangible asset of $40,299 were included in loss from equity method investment in the accompanying
condensed consolidated statements of operations and comprehensive (loss) income.
NUKKLEUS
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(AS RESTATED)
NOTE
6 – EQUITY METHOD INVESTMENT (continued)
The tables below present the summarized unaudited
financial information, as provided to the Company by the investee, for the unconsolidated company:
| |
March
31, 2022 | |
Current assets | |
$ | 290,515 | |
Noncurrent assets | |
| 46,601 | |
Current liabilities | |
| 70,116 | |
Noncurrent liabilities | |
| - | |
Equity | |
| 267,000 | |
| |
For the Period
from
March 17,
2022 (Date of
Investment)
through
March 31,
2022 | |
Net revenue | |
$ | - | |
Gross profit | |
| - | |
Loss from operations | |
| 60,641 | |
Net loss | |
| 60,641 | |
NOTE 7 – INTANGIBLE
ASSETS
Intangible
assets primarily 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
March 31, 2022 and September 30, 2021, intangible assets consisted of the following:
| |
Useful Life | |
March 31,
2022 | | |
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 | | |
| - | |
Software | |
3 Years | |
| 11,237 | | |
| - | |
| |
| |
| 11,235,008 | | |
| 14,085,402 | |
Less: accumulated amortization | |
| |
| (1,974,120 | ) | |
| (469,286 | ) |
| |
| |
$ | 9,260,888 | | |
$ | 13,616,116 | |
| (1) | In February
2022, a third party valuation report in connection with the acquisition of Match was completed. As a result, the Company adjusted the
previous estimated allocation to reflect the results of the third party valuation. The Company decreased its cost of intangible
assets of $2,861,631 and adjusted the estimated useful life of trade names and regulatory licenses from 10 years to 3 years and the estimated
useful life of technology from 10 years to 5 years. This change in accounting estimate was effective in the first quarter of fiscal year
2022. |
NUKKLEUS INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(AS RESTATED)
NOTE 7
– INTANGIBLE ASSETS (continued)
For the three and six months ended March 31, 2022,
amortization expense amounted to $592,891 and $1,504,834, respectively, of which, $526,601 and $1,373,190 was included in cost of revenue
– financial services, and $66,290 and $131,644 was included in operating expenses, respectively. There was no comparable amortization
for the three and six months ended March 31, 2021. Amortization of intangible assets attributable to future periods is as follows:
For the Twelve-month Period Ending March 31: | | |
Amortization Amount | |
2023 | | |
$ | 2,371,566 | |
2024 | | |
| 2,371,566 | |
2025 | | |
| 2,114,241 | |
2026 | | |
| 2,060,155 | |
2027 and thereafter | | |
| 343,360 | |
| | |
$ | 9,260,888 | |
NOTE 8 – ACCOUNTS
PAYABLE AND ACCRUED LIABILITIES
At March 31, 2022 and September 30,
2021, accounts payable and accrued liabilities consisted of the following:
| |
March 31,
2022 | | |
September 30,
2021 | |
Directors’ compensation | |
$ | 190,538 | | |
$ | 170,538 | |
Professional fees | |
| 255,388 | | |
| 125,697 | |
Accounts payable | |
| 110,000 | | |
| 54,831 | |
Others | |
| 5,534 | | |
| 29,655 | |
Total | |
$ | 561,460 | | |
$ | 380,721 | |
NOTE 9
– 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 of the Company on the date of grant, and the Company recorded cost
method investment of $6,602,000 (see Note 5).
Common
stock issued for equity method investment
On
March 17, 2022, the Company issued 15,151,515 shares of its common stock to Digiclear Shareholder for acquisition of 50%
equity interest of Digiclear. These shares were valued at $5,000,000, the fair market value on the grant date using the reported
closing share price on the date of grant.
NUKKLEUS INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(AS RESTATED)
NOTE 9
– SHARE CAPITAL (continued)
Options
The following table
summarizes the shares of the Company’s common stock issuable upon exercise of options outstanding at March 31, 2022:
| | |
Options Outstanding | | |
Options Exercisable | |
Range of Exercise Price | | |
Number Outstanding at March 31, 2022 | | |
Weighted Average Remaining Contractual Life (Years) | | |
Weighted Average Exercise Price | | |
Number Exercisable at March 31, 2022 | | |
Weighted Average Exercise Price | |
$ | 0.09 – 1.00 | | |
| 4,850,000 | | |
| 3.52 | | |
$ | 0.29 | | |
| 50,000 | | |
$ | 0.40 | |
| 2.50 | | |
| 1,000,000 | | |
| 4.47 | | |
| 2.50 | | |
| - | | |
| - | |
$ | 0.09 – 2.50 | | |
| 5,850,000 | | |
| 3.68 | | |
$ | 0.67 | | |
| 50,000 | | |
$ | 0.40 | |
Stock
option activities for the six months ended March 31, 2022 were as follows:
| |
Number of Options | | |
Weighted Average Exercise
Price | |
Outstanding at October 1, 2021 | |
| 1,000,000 | | |
$ | 2.50 | |
Granted | |
| 4,850,000 | | |
| 0.29 | |
Terminated / Exercised / Expired | |
| - | | |
| - | |
Outstanding at March 31, 2022 | |
| 5,850,000 | | |
$ | 0.67 | |
Options exercisable at March 31, 2022 | |
| 50,000 | | |
$ | 0.40 | |
Options expected to vest | |
| 5,800,000 | | |
$ | 0.67 | |
The aggregate intrinsic
value of stock options outstanding and stock options exercisable at March 31, 2022 was $300,000 and $0, respectively.
The fair values
of options granted during the six months ended March 31, 2022 were estimated at the date of grant using the Black-Scholes option-pricing
model with the following assumptions: volatility of 188.87% - 317.02%, risk-free rate of 0.39% - 1.26%, annual dividend
yield of 0% and expected life of 1.00 - 5.00 years. The aggregate fair value of the options granted during
the six months ended March 31, 2022 was $1,057,958.
For the three and
six months ended March 31, 2022, stock-based compensation expense associated with stock options granted amounted to $525,622 and $904,368,
respectively, which was recorded as professional fees on the accompanying unaudited condensed consolidated statements of operations and
comprehensive (loss) income. There was no comparable stock-based compensation expense associated with stock options for the three and
six months ended March 31, 2021.
In January 2022,
the Company issued 50,000 stock options for software purchase. The fair value of 50,000 stock options granted was $11,237 which was recorded
as the cost of software. For the three and six months ended March 31, 2022, amortization in connection with the software amounted to
$936, which was included in amortization of intangible assets on the accompanying unaudited condensed consolidated statements of operations
and comprehensive (loss) income.
A summary of the
status of the Company’s nonvested stock options granted as of March 31, 2022 and changes during the six months ended March 31,
2022 is presented below:
| |
Number of Options | | |
Weighted Average Exercise
Price | |
Nonvested at October 1, 2021 | |
| 1,000,000 | | |
$ | 2.50 | |
Granted | |
| 4,850,000 | | |
| 0.29 | |
Vested | |
| (50,000 | ) | |
| (0.40 | ) |
Nonvested at March 31, 2022 | |
| 5,800,000 | | |
$ | 0.67 | |
NUKKLEUS INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(AS RESTATED)
NOTE 10
– 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
and six months ended March 31, 2022 and 2021, 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) income were as follows:
| |
Three Months Ended
March 31, 2022 | | |
Three Months Ended
March 31, 2021 | | |
Six Months Ended
March 31, 2022 | | |
Six Months Ended March
31, 2021 | |
Service provided to: | |
| | |
| | |
| | |
| |
TCM | |
$ | 4,800,000 | | |
$ | 4,800,000 | | |
$ | 9,600,000 | | |
$ | 9,600,000 | |
| |
$ | 4,800,000 | | |
$ | 4,800,000 | | |
$ | 9,600,000 | | |
$ | 9,600,000 | |
During the
three and six months ended March 31, 2022 and 2021, 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) income were as follows:
| |
Three Months Ended
March 31, 2022 | | |
Three Months Ended
March 31, 2021 | | |
Six Months Ended
March 31, 2022 | | |
Six Months Ended March
31, 2021 | |
Service received from: | |
| | |
| | |
| | |
| |
FXDIRECT | |
$ | 4,725,000 | | |
$ | 4,725,000 | | |
$ | 9,450,000 | | |
$ | 9,450,000 | |
| |
$ | 4,725,000 | | |
$ | 4,725,000 | | |
$ | 9,450,000 | | |
$ | 9,450,000 | |
Due from
affiliates
At
March 31, 2022 and September 30, 2021, due from related parties consisted of the following:
| |
March 31, 2022 | | |
September 30,
2021 | |
NUKK Capital (*) | |
$ | - | | |
$ | 144,696 | |
TCM | |
| 1,479,413 | | |
| 2,473,177 | |
Total | |
$ | 1,479,413 | | |
$ | 2,617,873 | |
| (*) | An entity
controlled by Emil Assentato, the Company’s chief executive officer, chief financial officer and chairman. |
NUKKLEUS INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(AS RESTATED)
NOTE 10
– RELATED PARTY TRANSACTIONS (continued)
Due from
affiliates (continued)
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 March 31, 2022 and September 30, 2021. The Company historically has not experienced uncollectible
receivable from the related parties.
Due to affiliates
At
March 31, 2022 and September 30, 2021, due to related parties consisted of the following:
| |
March 31, 2022 | | |
September 30,
2021 | |
Forexware LLC (*) | |
$ | 924,229 | | |
$ | 579,229 | |
FXDIRECT | |
| 2,772,606 | | |
| 3,341,893 | |
CMH | |
| 42,000 | | |
| 42,000 | |
FXDD Trading (*) | |
| 287,519 | | |
| 294,670 | |
Total | |
$ | 4,026,354 | | |
$ | 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.
NOTE 11 – INCOME
TAXES
The Company recorded
no income tax expense for the three and six months ended March 31, 2022 and 2021 because the estimated annual effective tax rate was
zero. As of March 31, 2022, 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 12
– CONCENTRATIONS
Customers
The following table
sets forth information as to each customer that accounted for 10% or more of the Company’s revenues for the three and six
months ended March 31, 2022 and 2021.
| |
Three Months Ended
March 31, | | |
Six Months Ended
March 31, | |
Customer | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
A – related party | |
| 94.3 | % | |
| 100 | % | |
| 94.0 | % | |
| 100 | % |
One related party
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 March 31, 2022, accounted for 96.4% of the Company’s total outstanding accounts receivable, and accounts receivable –
related party at March 31, 2022.
One related party
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.
NUKKLEUS INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(AS RESTATED)
NOTE 12
– CONCENTRATIONS (continued)
Suppliers
The following table
sets forth information as to each supplier that accounted for 10% or more of the Company’s costs of revenues for the three and
six months ended March 31, 2022 and 2021.
| |
Three Months Ended
March 31, | | |
Six Months Ended
March 31, | |
Supplier | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
A – related party | |
| 96.7 | % | |
| 100 | % | |
| 96.7 | % | |
| 100 | % |
One related party
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 March 31, 2022,
accounted for 96.2% of the Company’s total outstanding accounts payable, and accounts payable – related party at March 31,
2022.
One related party
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.
NOTE 13 – SEGMENT
INFORMATION
For the three and six months ended March 31, 2022,
the Company operated in two reportable business segments - (1) the general support services segment, in which we provide software, technology,
customer sales and marketing and risk management technology hardware and software solutions package under a GSA to a related party; and
(2) the financial services segment, in which we provide payment services from one fiat currency to another. For the three and six months
ended March 31, 2021, 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.
NUKKLEUS INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(AS RESTATED)
NOTE 13 – SEGMENT
INFORMATION (continued)
Information with
respect to these reportable business segments for the three and six months ended March 31, 2022 and 2021 was as follows:
| |
Three Months Ended March 31, | | |
Six Months Ended March 31, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Revenues | |
| | |
| | |
| | |
| |
General support services | |
$ | 4,800,000 | | |
$ | 4,800,000 | | |
$ | 9,600,000 | | |
$ | 9,600,000 | |
Financial services | |
| 289,017 | | |
| - | | |
| 618,032 | | |
| - | |
Total | |
| 5,089,017 | | |
| 4,800,000 | | |
| 10,218,032 | | |
| 9,600,000 | |
| |
| | | |
| | | |
| | | |
| | |
Costs of revenues | |
| | | |
| | | |
| | | |
| | |
General support services | |
| 4,725,000 | | |
| 4,725,000 | | |
| 9,450,000 | | |
| 9,450,000 | |
Financial services | |
| 690,184 | | |
| - | | |
| 1,697,615 | | |
| - | |
Total | |
| 5,415,184 | | |
| 4,725,000 | | |
| 11,147,615 | | |
| 9,450,000 | |
| |
| | | |
| | | |
| | | |
| | |
Gross profit (loss) | |
| | | |
| | | |
| | | |
| | |
General support services | |
| 75,000 | | |
| 75,000 | | |
| 150,000 | | |
| 150,000 | |
Financial services | |
| (401,167 | ) | |
| - | | |
| (1,079,583 | ) | |
| - | |
Total | |
| (326,167 | ) | |
| 75,000 | | |
| (929,583 | ) | |
| 150,000 | |
| |
| | | |
| | | |
| | | |
| | |
Operating expenses | |
| | | |
| | | |
| | | |
| | |
Financial services | |
| 278,232 | | |
| - | | |
| 681,287 | | |
| - | |
Corporate/Other | |
| 1,249,323 | | |
| 73,441 | | |
| 2,186,475 | | |
| 200,526 | |
Total | |
| 1,527,555 | | |
| 73,441 | | |
| 2,867,762 | | |
| 200,526 | |
| |
| | | |
| | | |
| | | |
| | |
Other expense | |
| | | |
| | | |
| | | |
| | |
Financial services | |
| 1,185 | | |
| - | | |
| 2,401 | | |
| - | |
Corporate/Other | |
| 71,707 | | |
| 1,510 | | |
| 71,707 | | |
| 3,020 | |
Total | |
| 72,892 | | |
| 1,510 | | |
| 74,108 | | |
| 3,020 | |
| |
| | | |
| | | |
| | | |
| | |
Net income (loss) | |
| | | |
| | | |
| | | |
| | |
General support services | |
| 75,000 | | |
| 75,000 | | |
| 150,000 | | |
| 150,000 | |
Financial services | |
| (680,584 | ) | |
| - | | |
| (1,763,271 | ) | |
| - | |
Corporate/Other | |
| (1,321,030 | ) | |
| (74,951 | ) | |
| (2,258,182 | ) | |
| (203,546 | ) |
Total | |
| (1,926,614 | ) | |
| 49 | | |
| (3,871,453 | ) | |
| (53,546 | ) |
| |
| | | |
| | | |
| | | |
| | |
Amortization | |
| | | |
| | | |
| | | |
| | |
Financial services | |
| 591,955 | | |
| - | | |
| 1,503,898 | | |
| - | |
Corporate/Other | |
| 936 | | |
| - | | |
| 936 | | |
| - | |
Total | |
$ | 592,891 | | |
$ | - | | |
$ | 1,504,834 | | |
$ | - | |
Total assets at March 31, 2022 and September 30, 2021 | |
March 31, 2022 | | |
September 30,
2021 | |
Financial services | |
$ | 9,376,915 | | |
$ | 13,703,140 | |
Corporate/Other | |
| 13,027,730 | | |
| 2,956,696 | |
Total | |
$ | 22,404,645 | | |
$ | 16,659,836 | |
NUKKLEUS INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(AS RESTATED)
NOTE 14
– CONTINGENCY
On April 16, 2020, the Company was named as a
defendant in the Adversary Proceeding (the “BT Prime Litigation”) 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”). On May
31, 2022, the BT Prime Litigation was dismissed with prejudice by the bankruptcy court as to Nukkleus.
The BT Prime Litigation was brought by BT Prime
against Boston Technologies Powered by Forexware LLC f/k/a Forexware LLC (“Forexware”), Currency Mountain Holdings LLC, Currency
Mountain Holdings Limited f/k/a Forexware Malta Holdings Ltd., FXDirectDealer, LLC, FXDD Malta Ltd., Nukkleus, Nukkleus Bermuda Limited
and Currency Mountain Holdings Bermuda, Ltd. BT Prime sought, amongst other relief, a determination that the defendants were liable for
all of the debts of BT Prime stemming from its bankruptcy proceedings, and sought to recover certain amounts transferred to Forexware
and FXDD Malta prior to the initiation of the bankruptcy case. In the sole claim asserted against Nukkleus, BT Prime alleged that Nukkleus
acquired certain technology assets from Forexware and is a continuation of the business of Forexware and a successor-in-interest to Forexware.
Based on this theory, BT Prime alleged that Nukkleus should be jointly and severally liable for any liability attributable to Forexware
or the other defendants, should the court eventually find any such liability. Although Nukkleus acquired licenses from Forexware, Forexware
maintained other assets and continued to operate a separate business, which Nukkleus believes is the business that is pertinent to BT
Prime’s allegations. 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.
NOTE
15 – SUBSEQUENT EVENTS
The Company evaluated
subsequent events and transactions that occurred after the balance sheet date up to the date that the financial statements were issued.
Based upon this review, other than as described below, the Company did not identify any subsequent events that would have required adjustment
or disclosure in the financial statements.
Letter agreement with ClearThink
Nukkleus is party to a letter agreement with ClearThink
dated as of November 22, 2021, pursuant to which ClearThink was engaged by Nukkleus in connection with the Business Combination (See Note
15 - White Lion Stock Purchase Agreement).
Craig Marshak, a member of the Board of Directors
of Nukkleus, is a managing director of ClearThink, a transaction advisory firm. ClearThink has been engaged by Nukkleus to serve as the
exclusive transactional financial advisor, and finder with respect to the Business Combination, to advise Nukkleus with respect to the
Business Combination. As of the date of this quarterly report re-issuance Nukkleus has paid ClearThink $140,000 and upon closing of the
Business Combination Nukkleus is obligated to pay ClearThink 1.2% of the total transaction value plus reimbursable expenses less the
$140,000 paid to ClearThink as of the date of this quarterly report re-issuance.
Merger
On February 22, 2022, the Company entered into
an Agreement and Plan of Merger (as it may be amended, supplemented or otherwise modified from time to time, the “Merger Agreement”),
by and among the Company and Brilliant Acquisition Corporation, a British Virgin Islands company (“Brilliant”). The Merger
Agreement has been approved by the Company’s boards of directors. The transaction is expected to close in the fourth quarter of
fiscal year 2022 provided however there is no guarantee that the transaction will close.
White
Lion Stock Purchase Agreement
On
May 17, 2022, the Company entered into a Stock Purchase Agreement (the “White Lion Agreement”) with White Lion Capital Partners,
LLC a California-based investment fund (“White Lion”). Under the terms of the White Lion Agreement, the Company has the right,
but not the obligation, to require White Lion to purchase shares of its common stock up to a maximum amount of $75,000,000 or such lower
amount as may be required pursuant to the rules of the market on which shares of its common stock trades at such time. Pursuant to terms
of the White Lion Agreement and the Registration Rights Agreement (as defined below), the Company is required to use its commercially
reasonable efforts to file with the SEC a registration statement covering the shares to be acquired by White Lion within sixty days following
the closing of the previously announced business combination with Brilliant Acquisition Corporation described in its Current Report on
Form 8-K filed with the SEC on February 23, 2022 (the “Business Combination”).
The term of the White Lion Agreement commences on the effective date
of the registration statement and shall end on December 31, 2024, or, if earlier, the date on which White Lion has purchased the maximum
number of shares of the Company’s common stock provided under the White Lion Agreement, in each case on the terms and subject to
the conditions set forth in the White Lion Agreement. White Lion’s purchase price will be 96% of the dollar- volume weighted average
price of the Company’s common stock over the two consecutive trading days immediately following receipt of the Company’s notice
of its intent to make a draw.
During
the term of the White Lion Agreement, on the terms and subject to the conditions set forth therein, the Company may draw up to the lesser
of (i) the number of shares of the Company’s common stock which would result in beneficial ownership by White Lion of more
than 4.99% of the outstanding shares of the Company’s common stock, (ii) the number of shares of the Company’s common
stock equal to 30% of the average daily trading volume of the Company’s common stock over the five consecutive trading days immediately
following the notice date, or (iii) the number of the Company’s common stock obtained by dividing $1,500,000 by the closing
sale price of the Company’s common stock on the notice date.
NUKKLEUS INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(AS RESTATED)
NOTE
15 – SUBSEQUENT EVENTS (continued)
White
Lion Stock Purchase Agreement (continued)
The
Company is not entitled to draw on the White Lion Agreement if the closing sale price of the Company’s common stock on the trading
day immediately preceding the notice date is less than $1.00 (following the reverse stock split proposed in connection with the closing
of the Business Combination and described in the Company’s Current Report on Form 8-K filed with the SEC on February 23, 2022,
but adjusted for any other reorganization, recapitalization, non-cash dividend, stock split or other similar transaction). The Company
is not entitled to draw on the White Lion Agreement unless each of the following additional conditions is satisfied: (i) each of
the Company’s representations and warranties set forth in the White Lion Agreement is true and correct (subject to qualifications
as to materiality set forth therein) in all respects as of such time; (ii) a registration statement is and remains effective for
the resale of securities in connection with the White Lion Agreement; (iii) the trading of the Company’s common stock shall
not have been suspended by the SEC, the applicable trading market or FINRA, or otherwise halted for any reason; (iv) the Company
shall have complied with its obligations and shall not otherwise be in breach or default of any agreement set forth in the White Lion
Agreement; (v) no statute, regulation, order, guidance, decree, writ, ruling or injunction shall have been enacted, entered, promulgated,
threatened or endorsed by any federal, state, local or foreign court or governmental authority of competent jurisdiction, including,
without limitation, the SEC, which prohibits the consummation of or which would materially modify or delay any of the transactions contemplated
by the White Lion Agreement; (vi) all reports, schedules, registrations, forms, statements, information and other documents required
to have been filed by us with the SEC pursuant to the reporting requirements of the Exchange Act of 1934 (other than Forms 8-K) shall
have been filed with the SEC within the applicable time periods prescribed for such filings; (vii) to the extent the issuance of
the put shares requires shareholder approval under the listing rules of the applicable national exchange or principal quotation system
for the Company’s common stock, the Company has or will seek such approval; and (viii) certain other conditions as set forth
in the White Lion Agreement.
In
addition to the shares to be issued under the White Lion Agreement, the Company will include in its registration statement additional
shares of the Company’s common stock in the amount of $750,000 being issued to White Lion in connection with the execution of the
White Lion Agreement.
White Lion Registration Rights Agreement
In connection with
the Company’s entry into the White Lion Agreement, the Company entered into a Registration Rights Agreement with White Lion (the
“Registration Rights Agreement”). Pursuant to the terms of the Registration Rights Agreement, the Company has agreed to use
its commercially reasonable efforts to file a registration statement under the Securities Act registering the resale of the shares sold
under the White Lion Agreement within sixty days of the closing of the Business Combination. The Registration Rights Agreement also provides
that the Company is required to use its commercially reasonable efforts to keep the registration effective and to prepare and file with
the SEC such amendments and supplements if the foregoing registration statement is not then in effect, and the Company proposes to file
certain types of registration statements under as may be necessary to keep the registration statement effective.
Appointment of directors
On May 31, 2022, the Board of Directors (the “Board”)
increased the authorized number of directors of the Company and appointed Nicholas Gregory, Daniel Marcus and Brian Schwieger, each to
serve as a member of the Board, with immediate effect, each until such time as he resigns or is removed and his successor appointed. There
are no arrangements or understandings between any of Mr. Gregory, Mr. Marcus or Mr. Schwieger and the Company or any other person pursuant
to which Mr. Gregory, Mr. Marcus or Mr. Schwieger, as applicable, was elected as a director. Mr. Marcus will serve on the Company’s
audit committee, nomination committee and compensation committee. Mr. Gregory will serve on the Company’s audit committee and nomination
committee. Mr. Schwieger will serve on the Company’s audit committee, nomination committee and compensation committee.