UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-Q
☒
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the quarterly period ended June 30, 2023
OR
☐
TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the transition period from __________ to __________
Commission
file number: 000-55922
Nukkleus
Inc.
(Exact
name of registrant as specified in its charter)
Delaware | | 38-3912845 |
(State or other jurisdiction of
incorporation or organization) | | (I.R.S. Employer
Identification No.) |
525
Washington Boulevard, Jersey City, New Jersey 07310
(Address
of principal executive offices, including zip code)
212-791-4663
(Registrant’s
telephone number, including area code)
Securities
registered under Section 12(b) of the Exchange Act: None
Indicate
by check mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files). Yes ☒ No ☐
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”,
“smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ |
Non-accelerated filer | ☒ | Smaller reporting company | ☒ |
| | Emerging growth company | ☐ |
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
State
the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date.
Class | | Outstanding August 14, 2023 |
Common Stock, $0.0001 par value per share | | 367,175,886 shares |
NUKKLEUS
INC.
FORM
10-Q
June
30, 2023
TABLE
OF CONTENTS
FORWARD
LOOKING STATEMENTS
This report
contains forward-looking statements regarding our business, financial condition, results of operations and prospects. Words such as “expects,”
“anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates”
and similar expressions or variations of such words are intended to identify forward-looking statements, but are not deemed to represent
an all-inclusive means of identifying forward-looking statements as denoted in this report. Additionally, statements concerning future
matters are forward-looking statements.
Although forward-looking
statements in this report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently
known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes
may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could
cause or contribute to such differences in results and outcomes include, without limitation, those specifically addressed under the headings
“Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
in our annual report on Form 10-K, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
in this Form 10-Q and information contained in other reports that we file with the SEC. You are urged not to place undue reliance on
these forward-looking statements, which speak only as of the date of this report.
We file
reports with the SEC. The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC, including us. You can also read and copy any materials we file with the SEC
at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You can obtain additional information about the operation
of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
We undertake
no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the
date of this report, except as required by law. Readers are urged to carefully review and consider the various disclosures made throughout
the entirety of this quarterly report, which are designed to advise interested parties of the risks and factors that may affect our business,
financial condition, results of operations and prospects.
Unless
otherwise indicated, references in this report to the “Company”, “Nukkleus”, “we”, “us”,
or “our” refer to Nukkleus Inc. and its consolidated subsidiaries.
PART
I - FINANCIAL INFORMATION
Item
1. Interim Financial Statements.
NUKKLEUS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| |
June 30, | | |
September 30, | |
| |
2023 | | |
2022 | |
| |
(Unaudited) | | |
| |
ASSETS | |
| | |
| |
| |
| | |
| |
CURRENT ASSETS: | |
| | |
| |
Cash | |
$ | 142,341 | | |
$ | 364,023 | |
Customer custodial cash | |
| 1,712,095 | | |
| 2,020,394 | |
Customer digital currency assets | |
| - | | |
| 248,214 | |
Digital assets | |
| 1,107 | | |
| 73,415 | |
Due from affiliates | |
| 308,461 | | |
| 931,136 | |
Note receivable - related party | |
| 35,000 | | |
| 35,000 | |
Note receivable | |
| 154,150 | | |
| - | |
Other current assets | |
| 52,703 | | |
| 15,617 | |
| |
| | | |
| | |
TOTAL CURRENT ASSETS | |
| 2,405,857 | | |
| 3,687,799 | |
| |
| | | |
| | |
NON-CURRENT ASSETS: | |
| | | |
| | |
Cost method investment | |
| 6,602,000 | | |
| 6,602,000 | |
Intangible assets, net | |
| 6,339,021 | | |
| 8,075,105 | |
| |
| | | |
| | |
TOTAL NON-CURRENT ASSETS | |
| 12,941,021 | | |
| 14,677,105 | |
| |
| | | |
| | |
TOTAL ASSETS | |
$ | 15,346,878 | | |
$ | 18,364,904 | |
| |
| | | |
| | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | |
| | | |
| | |
| |
| | | |
| | |
CURRENT LIABILITIES: | |
| | | |
| | |
Accounts payable | |
$ | 106,779 | | |
$ | 51,712 | |
Customer custodial cash liabilities | |
| 1,703,893 | | |
| 2,020,717 | |
Customer digital currency liabilities | |
| - | | |
| 248,214 | |
Due to affiliates | |
| 5,100,131 | | |
| 4,514,063 | |
Accrued payroll liability and directors’ compensation | |
| 365,257 | | |
| 237,205 | |
Accrued professional fees | |
| 65,725 | | |
| 170,058 | |
Accrued liabilities and other payables | |
| 19,181 | | |
| 232,355 | |
| |
| | | |
| | |
TOTAL CURRENT LIABILITIES | |
| 7,360,966 | | |
| 7,474,324 | |
| |
| | | |
| | |
TOTAL LIABILITIES | |
| 7,360,966 | | |
| 7,474,324 | |
| |
| | | |
| | |
COMMITMENTS AND CONTINGENCIES - (Note 15) | |
| | | |
| | |
| |
| | | |
| | |
STOCKHOLDERS’ EQUITY: | |
| | | |
| | |
Preferred stock ($0.0001 par value; 15,000,000 shares authorized; 0 share issued and outstanding at June 30, 2023 and September 30, 2022) | |
| - | | |
| - | |
Common stock ($0.0001 par value; 900,000,000 shares authorized; 367,175,886 shares issued and outstanding at June 30, 2023 and September 30, 2022) | |
| 36,718 | | |
| 36,718 | |
Additional paid-in capital | |
| 25,432,669 | | |
| 25,136,459 | |
Accumulated deficit | |
| (17,490,131 | ) | |
| (14,340,816 | ) |
Accumulated other comprehensive income | |
| 6,656 | | |
| 58,219 | |
| |
| | | |
| | |
TOTAL STOCKHOLDERS’ EQUITY | |
| 7,985,912 | | |
| 10,890,580 | |
| |
| | | |
| | |
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | |
$ | 15,346,878 | | |
$ | 18,364,904 | |
The accompanying notes to unaudited condensed consolidated financial statements are an integral part of these statements.
NUKKLEUS INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
| |
For the Three Months Ended June 30, | | |
For the Nine Months Ended June 30, | |
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
| |
| | |
(as restated) | | |
| | |
(as restated) | |
REVENUES | |
| | |
| | |
| | |
| |
Revenue - general support services - related party | |
$ | 4,800,000 | | |
$ | 4,800,000 | | |
$ | 14,400,000 | | |
$ | 14,400,000 | |
Revenue - financial services | |
| 412,056 | | |
| 352,192 | | |
| 1,822,388 | | |
| 970,224 | |
Total revenues | |
| 5,212,056 | | |
| 5,152,192 | | |
| 16,222,388 | | |
| 15,370,224 | |
| |
| | | |
| | | |
| | | |
| | |
COSTS OF REVENUES | |
| | | |
| | | |
| | | |
| | |
Cost of revenue - general support services - related party | |
| 4,675,000 | | |
| 4,725,000 | | |
| 14,125,000 | | |
| 14,175,000 | |
Cost of revenue - financial services | |
| 695,074 | | |
| 565,633 | | |
| 2,162,317 | | |
| 1,987,557 | |
Total costs of revenues | |
| 5,370,074 | | |
| 5,290,633 | | |
| 16,287,317 | | |
| 16,162,557 | |
| |
| | | |
| | | |
| | | |
| | |
GROSS PROFIT (LOSS) | |
| | | |
| | | |
| | | |
| | |
Gross profit - general support services - related party | |
| 125,000 | | |
| 75,000 | | |
| 275,000 | | |
| 225,000 | |
Gross loss - financial services | |
| (283,018 | ) | |
| (213,441 | ) | |
| (339,929 | ) | |
| (1,017,333 | ) |
Total gross loss | |
| (158,018 | ) | |
| (138,441 | ) | |
| (64,929 | ) | |
| (792,333 | ) |
| |
| | | |
| | | |
| | | |
| | |
OPERATING EXPENSES: | |
| | | |
| | | |
| | | |
| | |
Advertising and marketing | |
| 1,670 | | |
| 147,177 | | |
| 51,087 | | |
| 345,826 | |
Professional fees | |
| 571,761 | | |
| 1,046,927 | | |
| 1,815,200 | | |
| 3,311,166 | |
Compensation and related benefits | |
| 233,569 | | |
| 90,614 | | |
| 591,361 | | |
| 345,858 | |
Amortization of intangible assets | |
| 66,291 | | |
| 66,291 | | |
| 198,871 | | |
| 197,935 | |
Other general and administrative | |
| 181,492 | | |
| 165,041 | | |
| 434,212 | | |
| 458,718 | |
Total operating expenses | |
| 1,054,783 | | |
| 1,516,050 | | |
| 3,090,731 | | |
| 4,659,503 | |
| |
| | | |
| | | |
| | | |
| | |
LOSS FROM OPERATIONS | |
| (1,212,801 | ) | |
| (1,654,491 | ) | |
| (3,155,660 | ) | |
| (5,451,836 | ) |
| |
| | | |
| | | |
| | | |
| | |
OTHER (EXPENSE) INCOME: | |
| | | |
| | | |
| | | |
| | |
Loss from equity method investment | |
| - | | |
| (330,680 | ) | |
| - | | |
| (401,299 | ) |
Other income (expense) | |
| 3,057 | | |
| (1,116 | ) | |
| 6,345 | | |
| (4,605 | ) |
Total other income (expense), net | |
| 3,057 | | |
| (331,796 | ) | |
| 6,345 | | |
| (405,904 | ) |
| |
| | | |
| | | |
| | | |
| | |
LOSS BEFORE INCOME TAXES | |
| (1,209,744 | ) | |
| (1,986,287 | ) | |
| (3,149,315 | ) | |
| (5,857,740 | ) |
| |
| | | |
| | | |
| | | |
| | |
INCOME TAXES | |
| - | | |
| - | | |
| - | | |
| - | |
| |
| | | |
| | | |
| | | |
| | |
NET LOSS | |
$ | (1,209,744 | ) | |
$ | (1,986,287 | ) | |
$ | (3,149,315 | ) | |
$ | (5,857,740 | ) |
| |
| | | |
| | | |
| | | |
| | |
COMPREHENSIVE LOSS: | |
| | | |
| | | |
| | | |
| | |
NET LOSS | |
$ | (1,209,744 | ) | |
$ | (1,986,287 | ) | |
$ | (3,149,315 | ) | |
$ | (5,857,740 | ) |
OTHER COMPREHENSIVE (LOSS) INCOME | |
| | | |
| | | |
| | | |
| | |
Unrealized foreign currency translation (loss) gain | |
| (20,859 | ) | |
| 27,644 | | |
| (51,563 | ) | |
| 38,631 | |
COMPREHENSIVE LOSS | |
$ | (1,230,603 | ) | |
$ | (1,958,643 | ) | |
$ | (3,200,878 | ) | |
$ | (5,819,109 | ) |
| |
| | | |
| | | |
| | | |
| | |
NET LOSS PER COMMON SHARE: | |
| | | |
| | | |
| | | |
| | |
Basic and diluted | |
$ | (0.00 | ) | |
$ | (0.01 | ) | |
$ | (0.01 | ) | |
$ | (0.02 | ) |
| |
| | | |
| | | |
| | | |
| | |
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: | |
| | | |
| | | |
| | | |
| | |
Basic and diluted | |
| 367,175,886 | | |
| 367,175,886 | | |
| 367,175,886 | | |
| 352,412,872 | |
The accompanying notes to unaudited condensed consolidated financial statements are an integral part of these statements.
NUKKLEUS INC. AND SUBSIDIARIES
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the Three and Nine Months Ended June 30, 2023
| |
| | |
| | |
| | |
| | |
| | |
| | |
Accumulated | | |
| |
| |
Preferred Stock | | |
Common Stock | | |
Additional | | |
| | |
Other | | |
Total | |
| |
Number of | | |
| | |
Number of | | |
| | |
Paid-in | | |
Accumulated | | |
Comprehensive | | |
Stockholders’ | |
| |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Capital | | |
Deficit | | |
Income | | |
Equity | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Balance as of October 1, 2022 | |
| - | | |
$ | - | | |
| 367,175,886 | | |
$ | 36,718 | | |
$ | 25,136,459 | | |
$ | (14,340,816 | ) | |
$ | 58,219 | | |
$ | 10,890,580 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Stock-based compensation | |
| - | | |
| - | | |
| - | | |
| - | | |
| 146,876 | | |
| - | | |
| - | | |
| 146,876 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net loss for the three months ended December 31, 2022 | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (1,133,922 | ) | |
| - | | |
| (1,133,922 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Foreign currency translation adjustment | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (27,983 | ) | |
| (27,983 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Balance as of December 31, 2022 | |
| - | | |
| - | | |
| 367,175,886 | | |
| 36,718 | | |
| 25,283,335 | | |
| (15,474,738 | ) | |
| 30,236 | | |
| 9,875,551 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Stock-based compensation | |
| - | | |
| - | | |
| - | | |
| - | | |
| 74,667 | | |
| - | | |
| - | | |
| 74,667 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net loss for the three months ended March 31, 2023 | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (805,649 | ) | |
| - | | |
| (805,649 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Foreign currency translation adjustment | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (2,721 | ) | |
| (2,721 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Balance as of March 31, 2023 | |
| - | | |
| - | | |
| 367,175,886 | | |
| 36,718 | | |
| 25,358,002 | | |
| (16,280,387 | ) | |
| 27,515 | | |
| 9,141,848 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Stock-based compensation | |
| - | | |
| - | | |
| - | | |
| - | | |
| 74,667 | | |
| - | | |
| - | | |
| 74,667 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net loss for the three months ended June 30, 2023 | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (1,209,744 | ) | |
| - | | |
| (1,209,744 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Foreign currency translation adjustment | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (20,859 | ) | |
| (20,859 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Balance as of June 30, 2023 | |
| - | | |
$ | - | | |
| 367,175,886 | | |
$ | 36,718 | | |
$ | 25,432,669 | | |
$ | (17,490,131 | ) | |
$ | 6,656 | | |
$ | 7,985,912 | |
The accompanying notes to unaudited condensed consolidated financial statements are an integral part of these statements.
NUKKLEUS INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the Three and Nine Months Ended June 30, 2022
| |
| | |
| | |
| | |
| | |
| | |
| | |
Accumulated | | |
| |
| |
Preferred Stock | | |
Common Stock | | |
Additional | | |
| | |
Other | | |
Total | |
| |
Number of | | |
| | |
Number of | | |
| | |
Paid-in | | |
Accumulated | | |
Comprehensive | | |
Stockholders’ | |
| |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Capital | | |
Deficit | | |
Income | | |
Equity | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Balance as of October 1, 2021 | |
| - | | |
$ | - | | |
| 332,024,371 | | |
$ | 33,203 | | |
$ | 11,613,208 | | |
$ | (2,495,159 | ) | |
$ | 8,440 | | |
$ | 9,159,692 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Common stock issued in connection with cost method investment | |
| - | | |
| - | | |
| 20,000,000 | | |
| 2,000 | | |
| 6,600,000 | | |
| - | | |
| - | | |
| 6,602,000 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Stock-based compensation | |
| - | | |
| - | | |
| - | | |
| - | | |
| 378,746 | | |
| - | | |
| - | | |
| 378,746 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net loss for the three months ended December 31, 2021 | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (1,944,839 | ) | |
| - | | |
| (1,944,839 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Foreign currency translation adjustment | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (2,227 | ) | |
| (2,227 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Balance as of December 31, 2021 | |
| - | | |
| - | | |
| 352,024,371 | | |
| 35,203 | | |
| 18,591,954 | | |
| (4,439,998 | ) | |
| 6,213 | | |
| 14,193,372 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Common stock issued in connection with equity method investment | |
| - | | |
| - | | |
| 15,151,515 | | |
| 1,515 | | |
| 4,998,485 | | |
| - | | |
| - | | |
| 5,000,000 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Stock options issued for the purchase of an intangible asset | |
| - | | |
| - | | |
| - | | |
| - | | |
| 11,237 | | |
| - | | |
| - | | |
| 11,237 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Stock-based compensation | |
| - | | |
| - | | |
| - | | |
| - | | |
| 525,622 | | |
| - | | |
| - | | |
| 525,622 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net loss for the three months ended March 31, 2022 | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (1,926,614 | ) | |
| - | | |
| (1,926,614 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Foreign currency translation adjustment | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 13,214 | | |
| 13,214 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Balance as of March 31, 2022 | |
| - | | |
| - | | |
| 367,175,886 | | |
| 36,718 | | |
| 24,127,298 | | |
| (6,366,612 | ) | |
| 19,427 | | |
| 17,816,831 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Stock-based compensation | |
| - | | |
| - | | |
| - | | |
| - | | |
| 525,621 | | |
| - | | |
| - | | |
| 525,621 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net loss for the three months ended June 30, 2022 | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (1,986,287 | ) | |
| - | | |
| (1,986,287 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Foreign currency translation adjustment | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 27,644 | | |
| 27,644 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Balance as of June 30, 2022 | |
| - | | |
$ | - | | |
| 367,175,886 | | |
$ | 36,718 | | |
$ | 24,652,919 | | |
$ | (8,352,899 | ) | |
$ | 47,071 | | |
$ | 16,383,809 | |
The accompanying notes to unaudited condensed consolidated financial statements are an integral part of these statements.
NUKKLEUS INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| |
For the Nine Months Ended
June 30, | |
| |
2023 | | |
2022 | |
| |
| | |
(as restated) | |
CASH FLOWS FROM OPERATING ACTIVITIES: | |
| | |
| |
Net loss | |
$ | (3,149,315 | ) | |
$ | (5,857,740 | ) |
Adjustments to reconcile net loss to net cash used in
operating activities: | |
| | | |
| | |
Amortization of intangible assets | |
| 1,778,675 | | |
| 2,097,726 | |
Stock-based compensation and service expense | |
| 296,210 | | |
| 1,429,989 | |
Unrealized foreign currency exchange gain | |
| (441 | ) | |
| - | |
Loss on equity method investment | |
| - | | |
| 401,299 | |
Changes in operating assets and liabilities: | |
| | | |
| | |
Customer digital currency assets | |
| 270,421 | | |
| 1,139,351 | |
Accounts receivable | |
| (298 | ) | |
| (17,311 | ) |
Digital assets | |
| 78,927 | | |
| (20,769 | ) |
Due from affiliates | |
| 648,073 | | |
| 1,746,529 | |
Other current assets | |
| (34,864 | ) | |
| 2,936 | |
Accounts payable | |
| 45,496 | | |
| 33,649 | |
Customer custodial cash liabilities | |
| (576,514 | ) | |
| 262,180 | |
Customer digital currency liabilities | |
| (270,421 | ) | |
| (1,139,351 | ) |
Due to affiliates | |
| 506,149 | | |
| (315,817 | ) |
Accrued payroll liability and directors’ compensation | |
| 126,450 | | |
| 36,667 | |
Accrued professional fees | |
| (111,362 | ) | |
| (18,650 | ) |
Accrued liabilities and other payables | |
| (233,902 | ) | |
| 162,478 | |
| |
| | | |
| | |
NET CASH USED IN OPERATING ACTIVITIES | |
| (626,716 | ) | |
| (56,834 | ) |
| |
| | | |
| | |
CASH FLOWS FROM INVESTING ACTIVITIES: | |
| | | |
| | |
Investment in note receivable | |
| (154,150 | ) | |
| - | |
Purchase of intangible asset | |
| (41,706 | ) | |
| - | |
| |
| | | |
| | |
NET CASH USED IN INVESTING ACTIVITIES | |
| (195,856 | ) | |
| - | |
| |
| | | |
| | |
EFFECT OF EXCHANGE RATE ON CASH | |
| 292,591 | | |
| (104,494 | ) |
| |
| | | |
| | |
NET DECREASE IN CASH | |
| (529,981 | ) | |
| (161,328 | ) |
| |
| | | |
| | |
Cash - beginning of period | |
| 2,384,417 | | |
| 1,203,073 | |
| |
| | | |
| | |
Cash - end of period | |
$ | 1,854,436 | | |
$ | 1,041,745 | |
| |
| | | |
| | |
Cash consisted of the following: | |
| | | |
| | |
Cash | |
$ | 142,341 | | |
$ | 75,827 | |
Customer custodial cash | |
| 1,712,095 | | |
| 965,918 | |
Total cash | |
$ | 1,854,436 | | |
$ | 1,041,745 | |
| |
| | | |
| | |
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | |
| | | |
| | |
Cash paid for: | |
| | | |
| | |
Interest | |
$ | - | | |
$ | - | |
Income taxes | |
$ | - | | |
$ | - | |
| |
| | | |
| | |
NON-CASH INVESTING AND FINANCING ACTIVITIES: | |
| | | |
| | |
Common stock issued in connection with cost method investment | |
$ | - | | |
$ | 6,602,000 | |
Common stock issued in connection with equity method investment | |
$ | - | | |
$ | 5,000,000 | |
Stock options issued for the purchase of an intangible asset | |
$ | - | | |
$ | 11,237 | |
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.
Effective May 1, 2023, the minimum amount payable by Nukkleus Limited to FXDIRECT for services was
reduced from $1,575,000 per month to $1,550,000 per month. FXDIRECT may terminate this agreement upon providing 90 days’ written
notice. Currency Mountain Holdings LLC is the sole shareholder of FXDIRECT. Max Q is the majority shareholder of Currency Mountain Holdings
LLC.
In July
2018, the Company incorporated Nukkleus Malta Holding Ltd., which is a wholly-owned subsidiary. In July 2018, Nukkleus Malta Holding Ltd.
incorporated Markets Direct Technology Group Ltd (“MDTG”), formerly known as Nukkleus Exchange Malta Ltd. MDTG was exploring
potentially obtaining a license to operate an electronic exchange whereby it would facilitate the buying and selling of various digital
assets as well as traditional currency pairs used in FX Trading. During the fourth quarter of fiscal 2020, management made the decision
to exit the exchange business and to no longer pursue the regulatory licensing necessary to operate an exchange in Malta.
On August
27, 2020, the Company renamed Nukkleus Exchange Malta Ltd. to Markets Direct Technology Group Ltd (“MDTG”). MDTG manages the
technology and Internet Protocol (“IP”) behind the Markets Direct brand (which is operated by TCM). MDTG holds all the IP
addresses and all the software licenses in its name, and it holds all the IP rights to the brands such as Markets Direct and TCM. MDTG
then leases out the rights to use these names/brands licenses to the appropriate entities.
In fiscal
year 2021, the Company completed its acquisition of Match Financial Limited, a private limited company formed in England and Wales (“Match”)
and its subsidiaries. Match, through its Digital RFQ Limited (“Digital RFQ”) subsidiary, is engaged in providing payment services
from one fiat currency to another or to digital assets.
On October
20, 2021, the Company and the shareholders (the “Original Shareholders”) of Jacobi Asset Management Holdings Limited (“Jacobi”)
entered into a Purchase and Sale Agreement (the “Jacobi Agreement”) pursuant to which the Company agreed to acquire 5.0% of
the issued and outstanding ordinary shares of Jacobi in consideration of 20,000,000 shares of common stock of the Company (the “Jacobi
Transaction”). On December 15, 2021, the Company, the Original Shareholders and the shareholders of Jacobi that were assigned their
interest in Jacobi by the Original Shareholders (the “New Jacobi Shareholders”) entered into an Amendment to Stock Purchase
Agreement agreeing that the Jacobi Transaction will be entered between the Company and the New Jacobi Shareholders. The Jacobi Transaction
closed on December 15, 2021. Jacobi is a company focused on digital asset management that has received regulatory approval to launch the
world’s first tier one Bitcoin exchange-traded fund (“ETF”). Jamal Khurshid and Nicholas Gregory own, directly and indirectly,
approximately 40% and 10% of Jacobi, respectively. Jamal Khurshid is the Company’s chief operating officer and director and Nicholas
Gregory is the Company’s director. The transactions contemplated by the Jacobi Agreement constituted a “related-party transaction”
as defined in Item 404 of Regulation S-K because of Mr. Khurshid’s and Mr. Gregory’s position as beneficial owner of one or
more Original Shareholders and New Jacobi Shareholders.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO 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 (valued at
$5,000,000 based on the market price of the Company’s common stock on the acquisition date) (the “Digiclear Transaction”).
In addition to, if and when the Company is acquired by a Special Purpose Acquisition Company (“SPAC”), the Company will fund
and capitalize Digiclear with a minimum of $1,000,000 operating capital in exchange for 4.545% of additional shares of Digiclear’s
capital stock. Digiclear shall retain the right to unwind the transaction and to have the Company return the 5,400,000 ordinary shares
of Digiclear share in return for Digiclear returning to the Company the 15,151,515 of Company common shares. Digiclear can only unwind
the transaction if the Company is no longer under contract to be acquired by a SPAC (See Note 15 – Merger). The Digiclear Transaction
closed on March 17, 2022. Digiclear is a company developing a custody and settlement utility operating system.
Liquidity
and capital resources
Liquidity
is the ability of a company to generate funds to support its current and future operations, satisfy its obligations and otherwise operate
on an ongoing basis. At June 30, 2023 and September 30, 2022, the Company had cash of $142,341 and $364,023, respectively, exclusive of
customer custodial cash.
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 had a working capital deficit of approximately $4,955,000 at June 30, 2023 and incurred a net loss and
generated negative cash flow from operating activities of approximately $3,149,000 and $627,000 for the nine months ended June 30, 2023,
respectively. These are indicators of substantial doubt as to the Company’s ability to continue as a going concern for at least
one year from issuance of these financial statements. The Company’s ability to continue as a going concern is dependent upon the
management of expenses and ability to obtain necessary financing to meet its obligations and pay its liabilities arising from normal business
operations when they come due, and upon profitable operations.
The Company
cannot be certain that such necessary capital through equity or debt financings will be available to it or whether such capital will be
available on terms that are acceptable to it. Any such financing likely would be dilutive to existing stockholders and could result in
significant financial operating covenants that would negatively impact the Company business. In the event that there are any unforeseen
delays or obstacles in obtaining funds through the aforementioned sources, TCM, which is wholly-owned by an entity that is majority-owned
by Mr. Assentato, has committed to inject capital into the Company in order to maintain the ongoing operations of the business.
Based on
the foregoing, management believes that its current financial resources, as of the date of the issuance of these financial statements,
are sufficient to fund its current twelve-month operating budget, alleviating any concerns by its historical operating results and satisfying
its estimated liquidity needs for the twelve months from the issuance of these financial statements.
NOTE 2 – BASIS
OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
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, 2022 filed with the Securities and Exchange Commission on April 10, 2023. The consolidated balance sheet as of September
30, 2022 contained herein has been derived from the audited consolidated financial statements as of September 30, 2022, 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. Changes in these estimates and assumptions may have a material impact on
the unaudited condensed consolidated financial statements and accompanying notes. Making estimates requires management to exercise significant
judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed
at the date of the financial statements, which management considered in formulating its estimate, could change in the near term due to
one or more future confirming events. Accordingly, the actual results could differ significantly from those estimates.
Significant estimates during the three and nine
months ended June 30, 2023 and 2022 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, valuation of stock-based compensation, and fair
value of customer digital currency assets and liabilities.
Cash and cash equivalents
At June 30, 2023 and September 30, 2022, the Company’s
cash balances by geographic area were as follows:
Country: | |
June 30, 2023 | | |
September 30, 2022 | |
United States | |
$ | 74,396 | | |
| 52.3 | % | |
$ | 47,860 | | |
| 13.1 | % |
United Kingdom | |
| 65,636 | | |
| 46.1 | % | |
| 315,989 | | |
| 86.8 | % |
Lithuania | |
| 2,135 | | |
| 1.5 | % | |
| - | | |
| - | |
Malta | |
| 174 | | |
| 0.1 | % | |
| 174 | | |
| 0.1 | % |
Total cash | |
$ | 142,341 | | |
| 100.0 | % | |
$ | 364,023 | | |
| 100.0 | % |
For purposes of the unaudited
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 June 30, 2023 and September
30, 2022. Cash and cash equivalents excludes customer legal tender, which is reported separately as Customer custodial cash in the accompanying
condensed consolidated balance sheets. Refer to “customer custodial cash and customer custodial cash liabilities” below for
further details.
Customer custodial
cash and customer custodial cash liabilities
Customer custodial cash
represents cash and cash equivalents maintained in Company bank accounts that are controlled by the Company but held for the benefit of
customers. Customer custodial cash liabilities represent these cash deposits to be utilized for its contractual obligations to its customers.
The Company classifies the assets as current based on their purpose and availability to fulfill the Company’s direct obligations
to its customers.
Customer digital currency
assets and liabilities
At certain times, Digital
RFQ’s customers’ funds that Digital RFQ uses to make payments on behalf of its customers, remain in the form of digital assets
in its customers’ wallets at its digital asset trading platforms awaiting final conversion and/or transfer to the customer’s
payment final destination. These indirectly held digital assets, may consist of USDT (Stablecoin), Bitcoin, and Ethereum (collectively,
“Customer digital currency assets”). Digital RFQ maintains the internal recordkeeping of its customer digital currency assets,
including the amount and type of digital asset owned by each of its customers.
Digital RFQ has control
of the private keys and knows the balances of all wallets with its digital asset trading platforms in order to be able to successfully
carry out the movement of digital assets for its client payment instruction. As part of its customer payment instruction, Digital RFQ
can execute withdrawals on the wallets in its digital asset trading platforms.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Customer digital currency
assets and liabilities (continued)
Management has determined
that Digital RFQ has control of the customer digital currency assets and records these assets on its balance sheet with a corresponding
liability. Digital RFQ recognizes customer digital currency liabilities and corresponding customer digital currency assets, on initial
recognition and at each reporting date, at fair value of the customer digital currency assets. Subsequent changes in fair value are adjusted
to the carrying amount of these customer digital currency assets, with changes in fair value recorded in other general and administrative
expense in the unaudited condensed consolidated statements of operations and comprehensive loss.
Any loss, theft, or other
misuse would impact the measurement of customer digital currency assets. The Company classifies the customer digital currency assets as
current based on their purpose and availability to fulfill the Company’s direct obligations to its customers.
Fair value of financial
instruments and fair value measurements
The
Company adopted the guidance of Accounting Standards Codification (“ASC”) 820 for fair value measurements which clarifies
the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs
used in measuring fair value as follows:
| ● | Level 1-Inputs are
unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date. |
| ● | Level 2-Inputs are
unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities
in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable
market data. |
| ● | Level 3-Inputs are
unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use
in pricing the asset or liability based on the best available information. |
The fair
value of the Company’s assets and liabilities, which qualify as financial instruments under ASC Topic 820, “Fair Value Measurement,”
approximates the carrying amounts represented in the accompanying unaudited condensed consolidated financial statements, primarily due
to their short-term nature.
Assets
and liabilities measured at fair value on a recurring basis. Customer digital currency assets and liabilities are measured at
fair value on a recurring basis. These assets and liabilities are measured at fair value on an ongoing basis.
As of June
30, 2023, the Company did not have any customer digital currency assets and liabilities.
The following
table provides these assets and liabilities carried at fair value, measured as of September 30, 2022:
| |
Quoted
Price in | | |
Significant
Other | | |
Significant | | |
| |
| |
Active
Markets | | |
Observable
Inputs | | |
Unobservable
Inputs | | |
Balance at
September 30, | |
| |
(Level 1) | | |
(Level 2) | | |
(Level 3) | | |
2022 | |
Customer digital currency assets | |
$ | - | | |
$ | 248,214 | | |
$ | - | | |
$ | 248,214 | |
Customer digital currency liabilities | |
$ | - | | |
$ | 248,214 | | |
$ | - | | |
$ | 248,214 | |
Customer digital currency assets and liabilities
represent the Company’s obligation to safeguard customers’ digital assets. Accordingly, the Company has valued the assets
and liabilities using quoted market prices for the underlying digital assets which is based on Level 2 inputs.
ASC 825-10 “Financial Instruments”,
allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (fair value option). The fair
value option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new election date occurs. If the fair value
option is elected for an instrument, unrealized gains and losses for that instrument should be reported in earnings at each subsequent
reporting date. The Company did not elect to apply the fair value option to any outstanding instruments.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Credit risk and uncertainties
The ramifications of the outbreak of the novel
strain of COVID-19, reported to have started in December 2019 and spread globally, are filled with uncertainty and changing quickly. Our
operations have continued during the COVID-19 pandemic and we have not had significant disruption.
The Company is operating in a rapidly changing
environment so the extent to which COVID-19 impacts its business, operations and financial results from this point forward will depend
on numerous evolving factors that the Company cannot accurately predict. Those factors include the following: the duration and scope of
the pandemic; governmental, business and individuals’ actions that have been and continue to be taken in response to the pandemic.
The Company maintains a portion of its cash in
bank and financial institution deposits within U.S. that at times may exceed federally-insured limits of $250,000. The Company manages
this credit risk by concentrating its cash balances, including customer custodial cash, in high quality financial institutions and by
periodically evaluating the credit quality of the primary financial institutions holding such deposits. The Company may also hold cash
at digital asset trading platforms and performs a regular assessment of these digital asset trading platforms as part of its risk management
process. The Company has not experienced any losses in such bank accounts and believes it is not exposed to any risks on its cash in bank
accounts. At June 30, 2023, there were no balances in excess of the federally-insured limits.
We may maintain our cash assets at financial institutions
in the U.S. in amounts that may be in excess of the Federal Deposit Insurance Corporation (“FDIC”) insurance limit of $250,000.
Actual events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions,
transactional counterparties or other companies in the financial services industry or the financial services industry generally, or concerns
or rumors about any events of these kinds or other similar risks, have in the past and may in the future lead to market-wide liquidity
problems. For example, in response to the rapidly declining financial condition of regional banks Silicon Valley Bank (“SVB”)
and Signature Bank (“Signature”), the California Department of Financial Protection and Innovation and the New York State
Department of Financial Services closed SVB and Signature on March 10, 2023 and March 12, 2023, respectively, and the FDIC was appointed
as receiver for SVB and Signature. In the event of a failure or liquidity issues of or at any of the financial institutions where we maintain
our deposits or other assets, we may incur a loss to the extent such loss exceeds the FDIC insurance limitation, which could have a material
adverse effect upon our liquidity, financial condition and our results of operations. Similarly, if our customers experience liquidity
issues as a result of financial institution defaults or non-performance where they hold cash assets, their ability to pay us may become
impaired and could have a material adverse effect on our results of operations, including the collection of accounts receivable and cash
flows.
Financial instruments which potentially subject
the Company to concentrations of credit risk consist principally of trade accounts receivable. A portion of the Company’s sales
are credit sales which is to the customer whose ability to pay is dependent upon the industry economics prevailing in these areas; however,
concentrations of credit risk with respect to trade accounts receivable is limited due to short-term payment terms. The Company also performs
ongoing credit evaluations of its customers to help further reduce credit risk.
Digital assets
The digital assets held by the Company are accounted
for as intangible assets with indefinite useful lives, and are initially measured at cost. Digital assets accounted for as intangible
assets are subject to impairment losses if the fair value of digital assets decreases below the carrying value at any time during the
period. The fair value is measured using the quoted price of the digital asset at the time its fair value is being measured. Impairment
expense is reflected in other general and administrative expense in the unaudited condensed consolidated statements of operations and
comprehensive loss. The Company assigns costs to transactions on a first-in, first-out basis.
Other
current assets
Other current assets primarily consist of security
deposit and prepaid listing fees. As of June 30, 2023 and September 30, 2022, other current assets amounted to $52,703 and $15,617, respectively.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Revenue recognition
The Company determines revenue recognition from
contracts with customers through the following steps:
| ● | Step 1: Identify the contract with the customer |
| ● | Step 2: Identify the performance obligations in the contract |
| ● | Step 3: Determine the transaction price |
| ● | Step 4: Allocate the transaction price to the performance
obligations in the contract |
| ● | Step 5: Recognize revenue when the company satisfies a performance
obligation |
Revenue is recognized when control of the promised
goods or services is transferred to the customers, in an amount that reflects the consideration the Company expects to be entitled to
in exchange for those goods or services. The Company’s revenues are derived from providing:
| ● | General support services under a GSA to a related party.
The transaction price is determined in accordance with the terms of the GSA and payments are due on a monthly basis. There are multiple
services provided under the GSA (including operational reporting and technical support infrastructure, website hosting and marketing
solutions, accounting maintenance, risk monitoring services, new account processing and customer care and continued support) and these
performance obligations are combined into a single unit of accounting. Fees are recognized as revenue over time as the services are rendered
under the terms of the GSA. The Company recognizes the full contracted amount each period with no deferred revenue. The nature of the
performance obligation is to provide the specified goods or services directly to the customer. The Company engages another party to satisfy
the performance obligation on its behalf. The Company’s performance obligation is not to arrange for the provision of the specified
good or service by another party. The Company is primarily responsible for fulfilling the promise to provide the specified good or service.
Therefore, the Company is deemed to be a principal in the transaction and recognizes revenue for that performance obligation. The Company
is a financial technology company which is focused on providing software and technology solutions for the worldwide retail foreign exchange
(“FX”) trading industry. Under a GSA, the Company is contractually obligated to provide for the fulfillment software, technology,
customer sales and marketing and risk management technology hardware and software solutions package to TCM. The Company provides these
services, obtained from affiliate service provider FXDirect Dealer, LLC which is under common ownership, and controls the services of
its service provider necessary to legally transfer of the services to TCM. Consequently, the Company is defined as the principal in the
transaction. The Company, as principal, satisfies its obligation by providing ongoing service support enabling TCM to conduct its retail
FX business without interruption. Upon satisfaction of its obligation, the Company recognizes revenue in the gross amount of consideration
it is entitled to receive. The monthly GSA price is calculated by applying the Company’s 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. Prepayments, if any, received from customers
prior to the services being performed are recorded as advances from customers. In these cases, when the services are performed, the appropriate
portion of the amount recorded as advance from customers is recognized as revenue. There are 4 distinct stages that each trade
must go through to be completed and must be converted from one currency into another. Where possible, fees are taken in United States
dollar (“USD”) and therefore if there is an agreed fee with the client then this will be taken on the USD leg of the transaction
regardless of whether it is pre-conversion or post-conversion. The first stage is notification and there is no real opportunity
for us to realize revenue at this stage. The second stage is the funding stage and it allows us to charge the agreed fee before
any currency conversion, we call this pre-trade revenue. The third stage of the transaction is conversion and we are able to realize
revenue in the spread between the price we pay for the conversion and the price we charge the client for the conversion. The fourth opportunity
for us to realize revenue (charge our fee) is after the conversion has taken place (post-trade). |
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO 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 payment services from one fiat currency to another or to digital assets |
In the following table,
revenues are disaggregated by segment for the three and nine months ended June 30, 2023 and 2022:
| |
Three Months Ended
June 30, | | |
Nine Months Ended
June 30, | |
Revenue Stream | |
2023 | | |
2022 | | |
2023 | | |
2022 | |
General support services | |
$ | 4,800,000 | | |
$ | 4,800,000 | | |
$ | 14,400,000 | | |
$ | 14,400,000 | |
Financial services | |
| 412,056 | | |
| 352,192 | | |
| 1,822,388 | | |
| 970,224 | |
Total revenues | |
$ | 5,212,056 | | |
$ | 5,152,192 | | |
$ | 16,222,388 | | |
$ | 15,370,224 | |
Cost method investment
Investment 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
(expense) income” in the accompanying unaudited condensed consolidated statements of operations and comprehensive loss, and a new
basis in the investment is established. No impairment expense was recorded for the three and nine months ended June 30, 2023 and 2022.
Intangible assets
Intangible assets consist of trade names, regulatory
licenses, technology and software, which are being amortized on a straight-line method over the estimated useful life of 3 - 5 years.
Impairment of long-lived assets
In accordance with ASC Topic 360, the Company
reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may
not be fully recoverable, or at least annually. The Company recognizes an impairment loss when the sum of expected undiscounted future
cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s
estimated fair value and its book value. There were no triggering events requiring assessment of impairment as of June 30, 2023. For the
three and nine months ended June 30, 2023 and 2022, no impairment of long-lived assets was recognized.
Advertising and marketing costs
All costs related to
advertising and marketing are expensed as incurred. For the three months ended June 30, 2023 and 2022, advertising and marketing costs
amounted to $1,670 and $147,177, respectively, which was included in operating expenses on the accompanying unaudited condensed consolidated
statements of operations and comprehensive loss. For the nine months ended June 30, 2023 and 2022, advertising and marketing costs amounted
to $51,087 and $345,826, respectively, which is included in operating expenses on the accompanying unaudited condensed consolidated statements
of operations and comprehensive loss.
Stock-based compensation
The Company measures and recognizes compensation
expense for all stock-based awards granted to non-employees, including stock options, based on the grant date fair value of the award.
The Company estimates the grant date fair value of each option award using the Black-Scholes option-pricing model.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Stock-based compensation
(continued)
For non-employee stock-based awards, fair value
is measured based on the value of the Company’s common stock on the date that the commitment for performance by the counterparty
has been reached or the counterparty’s performance is complete. The fair value of the equity instrument is calculated and then recognized
as compensation expense over the requisite performance period.
Income taxes
The Company accounts for income taxes pursuant
to Financial Accounting Standards Board (“FASB”) ASC 740, Income Taxes. Deferred tax assets and liabilities are determined
based on temporary differences between the bases of certain assets and liabilities for income tax and financial reporting purposes. The
deferred tax assets and liabilities are classified according to the financial statement classification of the assets and liabilities generating
the differences.
The Company maintains a valuation allowance with
respect to deferred tax assets. The Company establishes a valuation allowance based upon the potential likelihood of realizing the deferred
tax asset and taking into consideration the Company’s financial position and results of operations for the current period. Future
realization of the deferred tax benefit depends on the existence of sufficient taxable income within the carry-forward period under the
Federal and foreign tax laws. Changes in circumstances, such as the Company generating taxable income, could cause a change in judgment
about the realizability of the related deferred tax asset. Any change in the valuation allowance will be included in income in the period
of the change in estimate.
The Company follows the provisions of FASB ASC
740-10 Uncertainty in Income Taxes (ASC 740-10). Certain recognition thresholds must be met before a tax position is recognized in the
financial statements. An entity may only recognize or continue to recognize tax positions that meet a “more-likely-than-not”
threshold.
Foreign
currency translation
The reporting currency of the Company is U.S.
Dollars. The functional currency of the parent company, Nukkleus Inc., Nukkleus Limited, Nukkleus Malta Holding Ltd. and its subsidiaries,
is the U.S. dollar, the functional currency of Match Financial Limited and its subsidiary, Digital RFQ, is the British Pound (“GBP”),
the functional currency of Digital RFQ’s subsidiary, DRFQ Europe UAB, is Euro, and the functional currency of Digital RFQ’s
subsidiary, DRFQ Pay North America, is CAD. Monetary assets and liabilities denominated in currencies other than the reporting currency
are translated into the reporting currency at the rates of exchange prevailing at the balance sheet date. Revenue and expenses are translated
using average rates during each reporting period, and stockholders’ equity is translated at historical exchange rates. Cash flows
are also translated at average translation rates for the periods, therefore, amounts reported on the statements of cash flows will not
necessarily agree with changes in the corresponding balances on the balance sheets. Translation adjustments resulting from the process
of translating the local currency financial statements into U.S. dollars are included in determining comprehensive income/loss.
Transactions denominated in foreign currencies
are translated into the functional currency at the exchange rates prevailing on the transaction dates. Assets and liabilities denominated
in foreign currencies are translated into the functional currency at the exchange rates prevailing at the balance sheet date with any
transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional
currency are included in the results of operations as incurred. Most of the Company’s revenue transactions are transacted in the
functional currency of the Company. The Company does not enter into any material transaction in foreign currencies. Transaction gains
or losses have not had, and are not expected to have, a material effect on the results of operations of the Company.
Asset and liability accounts at June 30, 2023
and September 30, 2022 were translated at 0.7867 GBP and 0.8987 GBP to $1.00, respectively, which were the exchange rates on the balance
sheet dates. Asset and liability accounts at June 30, 2023 and September 30, 2022 were translated at 0.9162 EUR and 1.0221 EUR to $1.00,
respectively, which were the exchange rates on the balance sheet dates. Asset and liability accounts at June 30, 2023 were translated
at 1.3235 CAD to $1.00, which was the exchange rate on the balance sheet date. Equity accounts were stated at their historical rates.
The average translation rate applied to the statement of operations for the nine months ended June 30, 2023 and 2022 was 0.8249 GBP and
0.7615 GBP to $1.00, respectively. The average translation rate applied to the statement of operations for the nine months ended June
30, 2023 was 0.9429 EUR to $1.00. The average translation rate applied to the statement of operations for the period from February 18,
2023 through June 30, 2023 was 1.3516 CAD 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 and nine months ended June 30, 2023 and 2022 consisted of net loss
and unrealized loss/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.
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 nine months ended June 30, 2023 and 2022, potentially dilutive common shares consist of the common shares issuable upon the
exercise of common stock options (using the treasury stock method). Common stock equivalents are not included in the calculation of diluted
net loss per share if their effect would be anti-dilutive. In a period in which the Company has a net loss, all potentially dilutive securities
are excluded from the computation of diluted shares outstanding as they would have had an anti-dilutive impact.
The following table summarizes the securities
that were excluded from the diluted per share calculation because the effect of including these potential shares was antidilutive:
| |
Three Months Ended
June 30, | | |
Nine Months Ended
June 30, | |
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
Stock options | |
| 4,350,000 | | |
| 5,850,000 | | |
| 5,850,000 | | |
| 5,850,000 | |
Potentially dilutive security | |
| 4,350,000 | | |
| 5,850,000 | | |
| 5,850,000 | | |
| 5,850,000 | |
Reclassification
Certain prior period amounts have been reclassified
to conform to the current period presentation. These reclassifications have no effect on the previously reported financial position, results
of operations and cash flows.
Recently issued accounting pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial
Instruments - Credit Losses (“Topic 326”). The ASU introduces a new accounting model, the Current Expected Credit
Losses model (“CECL”), which requires earlier recognition of credit losses and additional disclosures related
to credit risk. The CECL model utilizes a lifetime expected credit loss measurement objective for the recognition of credit losses
at the time the financial asset is originated or acquired. ASU 2016-13 is effective for annual period beginning after December 15, 2022,
including interim reporting periods within those annual reporting periods. The Company expects that the adoption will not have a material
impact on its unaudited condensed consolidated financialss statements.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Recently issued accounting pronouncements
(continued)
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 consolidated financial condition, results of operations, cash flows or disclosures.
NOTE 4 - CUSTOMER
ASSETS AND LIABILITIES
The Company includes
customer funds in the condensed consolidated balance sheets as customer custodial cash and also includes such a corresponding liability
reflected as customer custodial cash liabilities in the condensed consolidated balance sheets.
The following table presents
customers’ cash and digital positions:
| |
June 30,
2023 | | |
September 30,
2022 | |
Customer custodial cash | |
$ | 1,712,095 | | |
$ | 2,020,394 | |
Customer digital currency assets | |
| - | | |
| 248,214 | |
Total customer assets | |
$ | 1,712,095 | | |
$ | 2,268,608 | |
| |
| | | |
| | |
Customer custodial cash liabilities | |
$ | 1,703,893 | | |
$ | 2,020,717 | |
Customer digital currency liabilities | |
| - | | |
| 248,214 | |
Total customer liabilities | |
$ | 1,703,893 | | |
$ | 2,268,931 | |
The Company controls
digital assets for its customers in digital wallets and digital token identifiers necessary to access digital assets on digital asset
trading platforms. The Company maintains a record of all assets in digital wallets held on digital asset trading platforms as well as
the private keys, which are maintained on behalf of customers. The Company records the assets and liabilities, on the initial recognition
and at each reporting date, at the fair value of the digital assets which it controls for its customers. Any loss or theft would impact
the measurement of the customer digital currency assets. During the three and nine months ended June 30, 2023 and 2022, no losses have
been incurred in connection with customer digital currency assets. The Company also controls the bank accounts holding the customer custodial
cash, as reflected on the accompanying condensed consolidated balance sheets.
The following table sets
forth the fair market value of customer digital currency assets, as shown in the condensed consolidated balance sheets, as customer digital
currency assets and customer digital currency liabilities, as of June 30, 2023 and September 30, 2022:
| |
June 30, 2023 | | |
September 30, 2022 | |
| |
Fair value | | |
Percentage of total | | |
Fair value | | |
Percentage of total | |
Bitcoin | |
$ | - | | |
| - | | |
$ | 162,294 | | |
| 65.4 | % |
Stablecoin/USD Coin | |
| - | | |
| - | | |
| 85,897 | | |
| 34.6 | % |
Ethereum | |
| - | | |
| - | | |
| 23 | | |
| 0.0 | % |
Others | |
| - | | |
| - | | |
| - | | |
| - | |
Total customer digital currency assets | |
$ | - | | |
| - | | |
$ | 248,214 | | |
| 100.0 | % |
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE
5 – DIGITAL ASSETS
The following
table summarizes the Company’s digital asset holdings as of June 30, 2023:
Asset | |
Estimated
useful life | |
Cost | | |
Impairment | | |
Digital assets | |
Bitcoin | |
Indefinite | |
$ | 218 | | |
$ | - | | |
$ | 218 | |
Ethereum | |
Indefinite | |
| 487 | | |
| - | | |
| 487 | |
Stablecoin/USD Coin | |
Indefinite | |
| 308 | | |
| - | | |
| 308 | |
Other | |
Indefinite | |
| 94 | | |
| - | | |
| 94 | |
Total | |
| |
$ | 1,107 | | |
$ | - | | |
$ | 1,107 | |
The following
table summarizes the Company’s digital asset holdings as of September 30, 2022:
Asset | |
Estimated
useful life | |
Cost | | |
Impairment | | |
Digital assets | |
Bitcoin | |
Indefinite | |
$ | 63,377 | | |
$ | 774 | | |
$ | 62,603 | |
Ethereum | |
Indefinite | |
| 1,289 | | |
| - | | |
| 1,289 | |
Stablecoin/USD Coin | |
Indefinite | |
| 9,417 | | |
| - | | |
| 9,417 | |
Other | |
Indefinite | |
| 106 | | |
| - | | |
| 106 | |
Total | |
| |
$ | 74,189 | | |
$ | 774 | | |
$ | 73,415 | |
The Company recorded impairment expense of $122
and $0 for the three months ended June 30, 2023 and 2022, respectively. The Company recorded impairment expense of $7,865 and $0 for the
nine months ended June 30, 2023 and 2022, respectively.
NOTE
6 – NOTE RECEIVABLE
As of June 30, 2023, the Company made loans with
an aggregate principal of $154,150 to Brilliant. The principal shall be payable promptly after the date on which Brilliant consummates
an initial business combination with a target business. The principal may be prepaid at any time. These loans bear a fixed interest rate
of 0% per annum. These loans shall not be convertible into any securities of Brilliant, and the Company shall have no recourse with respect
to Brilliant’s ability to convert these loans into any securities of Brilliant (See Note 15 – Merger).
NOTE
7 – COST METHOD INVESTMENT
At June 30, 2023, cost method investment amounted
to $6,602,000. The investment represents the Company’s minority interest in 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
($0.3301 per share), 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 June 30, 2023.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE
8 – EQUITY METHOD INVESTMENT
As of both June 30, 2023 and September 30, 2022,
the equity method investment amounted to $0. The investment represents the Company’s interest in 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.
In September 2022, the Company assessed its equity
method investment for any impairment and concluded that there were indicators of impairment as of September 30, 2022. The impairment is
due to the Company’s conclusion that it will be unable to recover the carrying amount of the investment due to the investee’s
a series of operating losses and global economic environment. The Company calculated that the estimated undiscounted cash flows were less
than the carrying amount related to the equity method investment. The Company has recognized an impairment loss of $4,310,745 related
to the equity method investment for the year ended September 30, 2022, which reduced the investment value to zero.
NOTE 9 – 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 June 30, 2023 and September 30, 2022, intangible
assets consisted of the following:
| |
Useful Life | |
June 30,
2023 | | |
September 30,
2022 | |
Trade names | |
3 Years | |
$ | 784,246 | | |
$ | 784,246 | |
Regulatory licenses | |
3 Years | |
| 181,342 | | |
| 138,751 | |
Technology | |
5 Years | |
| 10,300,774 | | |
| 10,300,774 | |
Software | |
3 Years | |
| 11,237 | | |
| 11,237 | |
| |
| |
| 11,277,599 | | |
| 11,235,008 | |
Less: accumulated amortization | |
| |
| (4,938,578 | ) | |
| (3,159,903 | ) |
| |
| |
$ | 6,339,021 | | |
$ | 8,075,105 | |
For the three months ended June 30, 2023 and
2022, amortization expense amounted to $592,892 and $592,892, respectively, of which, $526,602 and $526,601 was included
in cost of revenue – financial services, and $66,290 and $66,291 was included in operating expenses,
respectively.
For the nine months ended June 30, 2023 and 2022,
amortization expense amounted to $1,778,675 and $2,097,726, respectively, of which, $1,579,804 and $1,899,791 was included
in cost of revenue – financial services, and $198,871 and $197,935 was included in operating expenses, respectively.
Amortization of intangible assets attributable
to future periods is as follows:
For the Twelve-month Period Ending June 30: | |
Amortization amount | |
2024 | |
$ | 2,360,124 | |
2025 | |
| 2,076,224 | |
2026 | |
| 1,902,673 | |
2027 and thereafter | |
| - | |
| |
$ | 6,339,021 | |
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 10 – ACCRUED
LIABILITIES AND OTHER PAYABLES
At June 30, 2023 and September
30, 2022, accrued liabilities and other payables consisted of the following:
| |
June 30,
2023 | | |
September 30,
2022 | |
Unearned revenue | |
$ | - | | |
$ | 203,222 | |
Others | |
| 19,181 | | |
| 29,133 | |
Total | |
$ | 19,181 | | |
$ | 232,355 | |
NOTE 11 – 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.
Options
The following table summarizes the shares of the
Company’s common stock issuable upon exercise of options outstanding at June 30, 2023:
|
Options Outstanding | | |
Options Exercisable | |
|
Range of
Exercise Price | | |
Number
Outstanding at
June 30,
2023 | | |
Weighted Average
Remaining
Contractual Life
(Years) | | |
Weighted Average
Exercise Price | | |
Number
Exercisable at
June 30,
2023 | | |
Weighted Average
Exercise Price | |
$ |
0.09 – 0.45 | | |
| 3,350,000 | | |
| 3.51 | | |
$ | 0.13 | | |
| 1,150,000 | | |
$ | 0.13 | |
|
2.50 | | |
| 1,000,000 | | |
| 3.22 | | |
| 2.50 | | |
| 1,000,000 | | |
| 2.50 | |
$ |
0.09 – 2.50 | | |
| 4,350,000 | | |
| 3.44 | | |
$ | 0.67 | | |
| 2,150,000 | | |
$ | 1.23 | |
Stock option activities
for the nine months ended June 30, 2023 were as follows:
| |
Number of
Options | | |
Weighted
Average
Exercise
Price | |
Outstanding at October 1, 2022 | |
| 5,850,000 | | |
$ | 0.67 | |
Granted | |
| - | | |
| - | |
Expired | |
| (1,500,000 | ) | |
| (0.67 | ) |
Outstanding at June 30, 2023 | |
| 4,350,000 | | |
$ | 0.67 | |
Options exercisable at June 30, 2023 | |
| 2,150,000 | | |
$ | 1.23 | |
Options expected to vest | |
| 2,200,000 | | |
$ | 0.12 | |
The aggregate intrinsic value of both stock options
outstanding and stock options exercisable at June 30, 2023 was $0.
For the three months ended June 30, 2023 and 2022,
stock-based compensation expense associated with stock options granted amounted to $74,667 and $525,621, respectively, which was
recorded as professional fees on the accompanying unaudited condensed consolidated statements of operations and comprehensive loss.
For the nine months ended June 30, 2023 and 2022,
stock-based compensation expense associated with stock options granted amounted to $296,210 and $1,429,989, respectively, which was recorded
as professional fees on the accompanying unaudited condensed consolidated statements of operations and comprehensive loss.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 11 – SHARE CAPITAL (continued)
A summary of the status of the Company’s
nonvested stock options granted as of June 30, 2023 and changes during the nine months ended June 30, 2023 is presented below:
| |
Number of
Options | | |
Weighted
Average
Exercise
Price | |
Nonvested at October 1, 2022 | |
| 3,800,000 | | |
$ | 0.35 | |
Granted | |
| - | | |
| - | |
Vested | |
| (1,600,000 | ) | |
| (0.65 | ) |
Nonvested at June 30, 2023 | |
| 2,200,000 | | |
$ | 0.12 | |
NOTE 12 – RELATED PARTY TRANSACTIONS
Services
provided by related parties
From time to time, Oliver Worsley, a shareholder
of the Company, provides consulting services to the Company. As compensation for professional services provided, the Company recognized
consulting expenses of $14,942 and $7,879 for the three months ended June 30, 2023 and 2022, respectively, which have been included in
professional fees on the accompanying unaudited condensed consolidated statements of operations and comprehensive loss. As compensation
for professional services provided, the Company recognized consulting expenses of $40,005 and $7,879 for the nine months ended June 30,
2023 and 2022, respectively, which have been included in professional fees on the accompanying unaudited condensed consolidated statements
of operations and comprehensive loss. As of June 30, 2023 and September 30, 2022, the accrued and unpaid services charge related to Oliver
Worsley amounted to $0 and $16,691, respectively, which have been included in accrued professional fees on the accompanying condensed
consolidated balance sheets.
From time to time, Craig Vallis, a shareholder
of the Company, provides consulting services to the Company. As compensation for professional services provided, the Company recognized
consulting expenses of $26,017 and $23,991 for the three months ended June 30, 2023 and 2022, respectively, which have been included in
professional fees on the accompanying unaudited condensed consolidated statements of operations and comprehensive loss. As compensation
for professional services provided, the Company recognized consulting expenses of $100,012 and $65,529 for the nine months ended June
30, 2023 and 2022, respectively, which have been included in professional fees on the accompanying unaudited condensed consolidated statements
of operations and comprehensive loss.
The Company uses affiliate employees for various
services such as the use of accountants to record the books and accounts of the Company at no charge to the Company, which are considered
immaterial.
Office
space from related parties
The Company uses office space of affiliate
companies, free of rent, which is considered immaterial.
Revenue from related party
and cost of revenue from related party
The Company’s general support services operate
under a GSA with TCM providing personnel and technical support, marketing, accounting, risk monitoring, documentation processing and customer
care and support. The minimum monthly amount received is $1,600,000.
The Company’s general support services operate
under a GSA with FXDIRECT receiving personnel and technical support, marketing, accounting, risk monitoring, documentation processing
and customer care and support. The minimum monthly amount payable is $1,575,000. Effective May 1,
2023, the minimum amount payable by the Company to FXDIRECT for services was reduced from $1,575,000 per month to $1,550,000 per month.
Both of the above entities are affiliates through
common ownership.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 12 – RELATED PARTY TRANSACTIONS
(continued)
Revenue from related party
and cost of revenue from related party (continued)
During the three and nine months ended June 30,
2023 and 2022, 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
June 30, | | |
Nine Months Ended
June 30, | |
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
Service provided to: | |
| | |
| | |
| | |
| |
TCM | |
$ | 4,800,000 | | |
$ | 4,800,000 | | |
$ | 14,400,000 | | |
$ | 14,400,000 | |
| |
$ | 4,800,000 | | |
$ | 4,800,000 | | |
$ | 14,400,000 | | |
$ | 14,400,000 | |
During the three
and nine months ended June 30, 2023 and 2022, 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
June 30, | | |
Nine Months Ended
June 30, | |
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
Service received from: | |
| | |
| | |
| | |
| |
FXDIRECT | |
$ | 4,675,000 | | |
$ | 4,725,000 | | |
$ | 14,125,000 | | |
$ | 14,175,000 | |
| |
$ | 4,675,000 | | |
$ | 4,725,000 | | |
$ | 14,125,000 | | |
$ | 14,175,000 | |
During the three months ended June 30, 2023 and
2022, Digital RFQ earned revenue from related parties in the amount of $29,343 and $17,974, respectively, which was included in revenue
– financial services on the accompanying unaudited condensed consolidated statements of operations and comprehensive loss.
During the nine months ended June 30, 2023 and
2022, Digital RFQ earned revenue from related parties in the amount of $107,859 and $28,239, respectively, which was included in revenue
– financial services on the accompanying unaudited condensed consolidated statements of operations and comprehensive loss.
Due from affiliates
At June
30, 2023 and September 30, 2022, due from affiliates consisted of the following:
| |
June 30,
2023 | | |
September 30,
2022 | |
Digiclear | |
$ | 229,837 | | |
$ | 35,762 | |
Jacobi | |
| 24,422 | | |
| - | |
FXDD Mauritius (1) | |
| 3,012 | | |
| - | |
TCM | |
| 51,190 | | |
| 895,374 | |
Total | |
$ | 308,461 | | |
$ | 931,136 | |
The balance due from Digiclear represents advances
made to Digiclear and monies that the Company paid on behalf of Digiclear. The balances due from Jacobi and FXDD Mauritius represent monies
that the Company paid on behalf of Jacobi and FXDD Mauritius. The balance due from TCM represents 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 June 30, 2023 and September 30, 2022. The Company historically has not experienced uncollectible receivable from the related parties.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 12 – RELATED PARTY TRANSACTIONS
(continued)
Due to affiliates
At June
30, 2023 and September 30, 2022, due to affiliates consisted of the following:
| |
June 30,
2023 | | |
September 30,
2022 | |
Forexware LLC (1) | |
$ | 1,211,665 | | |
$ | 1,079,229 | |
FXDIRECT | |
| 3,289,537 | | |
| 3,042,101 | |
Currency Mountain Holdings Bermuda, Limited (“CMH”) | |
| 42,000 | | |
| 42,000 | |
FXDD Trading (1) | |
| 498,963 | | |
| 242,113 | |
Markets Direct Payments (1) | |
| 2,415 | | |
| 2,114 | |
Match Fintech Limited (2) | |
| 55,551 | | |
| 106,506 | |
Total | |
$ | 5,100,131 | | |
$ | 4,514,063 | |
The balances due to affiliates represents expenses
paid by Forexware LLC, FXDIRECT, FXDD Trading, Markets Direct Payments, and Match Fintech Limited on behalf of the Company and advances
from CMH. The balance due to FXDIRECT may also include unsettled funds due related to the General Service Agreement.
Amounts due to affiliates are short-term in nature,
non-interest bearing, unsecured and repayable on demand.
Customer digital currency assets and liabilities
– related parties
At June 30, 2023 and September 30, 2022, related
parties’ digital currency, which was controlled by Digital RFQ, amounted to $0 and $248,214, respectively, which was included in
customer digital currency assets and liabilities on the accompanying condensed consolidated balance sheets.
Note receivable –
related party
The Company originated a note receivable to a
shareholder in the principal amount of $35,000 on September 1, 2022. The note shall mature with respect to $17,500 on March 1, 2023 and
with respect to $17,500 on September 1, 2023. The note bears a fixed interest rate of 5.0% per annum. Currently, this loan is in default.
For the three months ended June 30, 2023, the
interest income related to this note amounted to $468 and has been included in other income on the accompanying unaudited condensed consolidated
statements of operations and comprehensive loss. For the nine months ended June 30, 2023, the interest income related to this note amounted
to $1,362 and has been included in other income on the accompanying unaudited condensed consolidated statements of operations and comprehensive
loss.
As of June 30, 2023 and September 30, 2022, the
outstanding interest balance related to this note was $1,587 and $159, respectively, and was included in other current assets on the accompanying
condensed consolidated balance sheets.
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 the Company, is a managing director of ClearThink, a transaction advisory firm. ClearThink has been engaged by the Company to serve
as the exclusive transactional financial advisor, and finder with respect to the Business Combination, to advise the Company with respect
to the Business Combination. As of June 30, 2023, the Company has paid ClearThink $140,000, and upon closing of the Business Combination
the Company is obligated to pay ClearThink 1.2% of the total transaction value plus reimbursable expenses less the $140,000 paid to ClearThink
as of June 30, 2023.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 13 – 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 nine
months ended June 30, 2023 and 2022.
| |
Three Months Ended
June 30, | | |
Nine Months Ended
June 30, | |
Customer | |
2023 | | |
2022 | | |
2023 | | |
2022 | |
A – related party | |
| 92.1 | % | |
| 93.2 | % | |
| 88.8 | % | |
| 93.7 | % |
Two related party customers, whose outstanding
receivables accounted for 10% or more of the Company’s total outstanding accounts receivable and due from affiliates at June
30, 2023, accounted for 91.0% of the Company’s total outstanding accounts receivable and due from affiliates at June 30, 2023.
One related party customer, whose outstanding
receivable accounted for 10% or more of the Company’s total outstanding due from affiliates at September 30, 2022, accounted for
96.2% of the Company’s total outstanding due from affiliates at September 30, 2022.
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 nine months ended June
30, 2023 and 2022.
| |
Three Months Ended
June 30, | | |
Nine Months Ended
June 30, | |
Supplier | |
2023 | | |
2022 | | |
2023 | | |
2022 | |
A – related party | |
| 87.1 | % | |
| 89.3 | % | |
| 86.7 | % | |
| 87.7 | % |
Two related party suppliers, whose outstanding
payables accounted for 10% or more of the Company’s total outstanding accounts payable and due to affiliates at June 30, 2023,
accounted for 79.5% of the Company’s total outstanding accounts payable and due to affiliates at June 30, 2023.
Two related party suppliers, whose outstanding
payables accounted for 10% or more of the Company’s total outstanding accounts payable and due to affiliates at September 30,
2022, accounted for 79.2% of the Company’s total outstanding accounts payable and due to affiliates at September 30, 2022.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE
14 – SEGMENT INFORMATION
For the three and nine months ended June 30, 2023
and 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. 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 and nine months ended June 30, 2023 and 2022 was as follows:
| |
Three Months Ended
June 30, | | |
Nine Months Ended
June 30, | |
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
| |
| | |
(as restated) | | |
| | |
(as restated) | |
Revenues | |
| | |
| | |
| | |
| |
General support services | |
$ | 4,800,000 | | |
$ | 4,800,000 | | |
$ | 14,400,000 | | |
$ | 14,400,000 | |
Financial services | |
| 412,056 | | |
| 352,192 | | |
| 1,822,388 | | |
| 970,224 | |
Total | |
| 5,212,056 | | |
| 5,152,192 | | |
| 16,222,388 | | |
| 15,370,224 | |
| |
| | | |
| | | |
| | | |
| | |
Costs of revenues | |
| | | |
| | | |
| | | |
| | |
General support services | |
| 4,675,000 | | |
| 4,725,000 | | |
| 14,125,000 | | |
| 14,175,000 | |
Financial services | |
| 695,074 | | |
| 565,633 | | |
| 2,162,317 | | |
| 1,987,557 | |
Total | |
| 5,370,074 | | |
| 5,290,633 | | |
| 16,287,317 | | |
| 16,162,557 | |
| |
| | | |
| | | |
| | | |
| | |
Gross profit (loss) | |
| | | |
| | | |
| | | |
| | |
General support services | |
| 125,000 | | |
| 75,000 | | |
| 275,000 | | |
| 225,000 | |
Financial services | |
| (283,018 | ) | |
| (213,441 | ) | |
| (339,929 | ) | |
| (1,017,333 | ) |
Total | |
| (158,018 | ) | |
| (138,441 | ) | |
| (64,929 | ) | |
| (792,333 | ) |
| |
| | | |
| | | |
| | | |
| | |
Operating expenses | |
| | | |
| | | |
| | | |
| | |
Financial services | |
| 558,228 | | |
| 390,525 | | |
| 1,595,955 | | |
| 1,347,503 | |
Corporate/Other | |
| 496,555 | | |
| 1,125,525 | | |
| 1,494,776 | | |
| 3,312,000 | |
Total | |
| 1,054,783 | | |
| 1,516,050 | | |
| 3,090,731 | | |
| 4,659,503 | |
| |
| | | |
| | | |
| | | |
| | |
Other income (expense) | |
| | | |
| | | |
| | | |
| | |
Financial services | |
| 3,057 | | |
| (918 | ) | |
| 6,345 | | |
| (3,319 | ) |
Corporate/Other | |
| - | | |
| (330,878 | ) | |
| - | | |
| (402,585 | ) |
Total | |
| 3,057 | | |
| (331,796 | ) | |
| 6,345 | | |
| (405,904 | ) |
| |
| | | |
| | | |
| | | |
| | |
Net income (loss) | |
| | | |
| | | |
| | | |
| | |
General support services | |
| 125,000 | | |
| 75,000 | | |
| 275,000 | | |
| 225,000 | |
Financial services | |
| (838,189 | ) | |
| (604,884 | ) | |
| (1,929,539 | ) | |
| (2,368,155 | ) |
Corporate/Other | |
| (496,555 | ) | |
| (1,456,403 | ) | |
| (1,494,776 | ) | |
| (3,714,585 | ) |
Total | |
| (1,209,744 | ) | |
| (1,986,287 | ) | |
| (3,149,315 | ) | |
| (5,857,740 | ) |
| |
| | | |
| | | |
| | | |
| | |
Amortization | |
| | | |
| | | |
| | | |
| | |
Financial services | |
| 591,955 | | |
| 591,955 | | |
| 1,775,865 | | |
| 2,095,853 | |
Corporate/Other | |
| 937 | | |
| 937 | | |
| 2,810 | | |
| 1,873 | |
Total | |
$ | 592,892 | | |
$ | 592,892 | | |
$ | 1,778,675 | | |
$ | 2,097,726 | |
Total assets at June 30, 2023 and September 30, 2022 | |
June 30,
2023 | | |
September 30,
2022 | |
Financial services | |
$ | 8,203,817 | | |
$ | 10,768,309 | |
Corporate/Other | |
| 7,143,061 | | |
| 7,596,595 | |
Total | |
$ | 15,346,878 | | |
$ | 18,364,904 | |
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 15 – COMMITMENTS AND
CONTINGENCIES
Digital
asset wallets
Digital RFQ has committed to safeguard all digital
assets and digital token identifiers on behalf of its customers. As such, Digital RFQ may be liable to its customers for losses arising
from theft or loss of customer private keys. Digital RFQ has no reason to believe it will incur any expense associated with such potential
liability because (i) it has no known or historical experience of claims to use as a basis of measurement, (ii) it accounts for and continually
verifies the amount of digital assets within its control, and (iii) it engages third parties, which are digital asset trading platforms,
to provide certain custodial services, including holding its customers’ digital token identifiers, securing its customers’
digital assets, and protecting them from loss or theft, including indemnification against certain types of losses such as theft. Its third-party
digital asset trading platforms hold the digital assets in accounts in Digital RFQ’s name for the benefit of Digital RFQ’s
customers.
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. On June 23, 2023, the Company, Brilliant and BRIL Merger Sub,
Inc., a Delaware corporation and wholly-owned subsidiary of Brilliant (“Merger Sub”), entered into an Amended and Restated
Agreement and Plan of Merger (the “A&R Merger Agreement”). The A&R Merger Agreement extended the Outside Closing Date
(as defined in the A&R Merger Agreement), to the later of (i) July 23, 2023, or, (ii) following the approval by Brilliant’s
shareholders of an extension of the life of the SPAC pursuant to Brilliant’s organizational documents, to the date so approved,
but not later than December 23, 2023. The transactions contemplated by the A&R Merger Agreement are expected to close in the fourth
quarter of fiscal year 2023, 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. As of June 30, 2023, the White Lion Agreement is not yet effective.
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
NOTE 15 – COMMITMENTS AND CONTINGENCIES
(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.
NOTE 16 – SUBSEQUENT
EVENTS
Management has evaluated
subsequent events through the date of the filing. Management is not aware of any significant
events that occurred subsequent to the balance sheet date that would have a material effect on the financial statements and would require
adjustment or disclosure thereto.
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
The following discussion
and analysis of our financial condition and results of operations for the three and nine months ended June 30, 2023 and 2022 should be
read in conjunction with our unaudited condensed consolidated financial statements and related notes to those unaudited condensed consolidated
financial statements that are included elsewhere in this report.
Certain matters discussed
herein are forward-looking statements. Such forward-looking statements contained in this Form 10-Q involve risks and uncertainties, including
statements as to:
| ● | our future operating results; |
| ● | any contractual arrangements and relationships with third
parties; |
| ● | the dependence of our future success on the general economy; |
| ● | any possible financings; and |
| ● | the adequacy of our cash resources and working capital. |
Impact of COVID-19 on Our Operations
The ramifications of
the outbreak of the novel strain of COVID-19, reported to have started in December 2019 and spread globally, are filled with uncertainty
and changing quickly. Our operations have continued during the COVID-19 pandemic and we have not had significant disruption. Due to the
nature of our business, the technology we use and offer to our customers, and our employees’ ability to work remotely, there was
no material impact of COVID-19 on our business, operations and financial results.
The Company is operating
in a rapidly changing environment so the extent to which COVID-19 impacts its business, operations and financial results from this point
forward will depend on numerous evolving factors that the Company cannot accurately predict. Those factors include the following: the
duration and scope of the pandemic, and governmental, business and individuals’ actions that have been and continue to be taken
in response to the pandemic.
Overview
We are a financial technology
company which is focused on providing software and technology solutions for the worldwide retail foreign exchange (“FX”) trading
industry. We primarily provide our software, technology, customer sales and marketing and risk management technology hardware and software
solutions package to TCM. The FXDD brand (e.g., see FXDD.com) is the brand utilized in the retail forex trading industry by TCM.
We have ownership of
FOREXWARE, the primary software suite and technology solution which powers the FXDD brand globally today. We also have ownership of the
FOREXWARE brand name. We have also acquired ownership of the customer interface and other software trading solutions being used by FXDD.com.
By virtue of our relationship with TCM and FXDIRECT, we provide turnkey software and technology solutions for FXDD.com. We offer the customers
of FXDD 24 hours, five days a week direct access to the global over the counter (“OTC”) FX market, which is a decentralized
market in which participants trade directly with one another, rather than through a central exchange.
In an FX trade,
participants effectively buy one currency and simultaneously sell another currency, with the two currencies that make up the trade being
referred to as a “currency pair”. Our software and technology solutions enable FXDD to present its customers with price quotations
on over the counter tradeable instruments, including over the counter currency pairs, and also provide our customers the ability to trade
FX derivative contracts on currency pairs through a product referred to as Contracts for Difference (“CFD”). Our software
solutions also offer other CFD products, including CFDs on metals, such as gold, and on futures linked to other products.
In July 2018, the Company
incorporated Nukkleus Malta Holding Ltd., which is a wholly-owned subsidiary. In July 2018, Nukkleus Malta Holding Ltd. incorporated MDTG,
formerly known as Nukkleus Exchange Malta Ltd. MDTG was exploring potentially obtaining a license to operate an electronic exchange whereby
it would facilitate the buying and selling of various digital assets as well as traditional currency pairs used in FX Trading. During
the fourth quarter of fiscal 2020, management made the decision to exit the exchange business and to no longer pursue the regulatory licensing
necessary to operate an exchange in Malta.
On August 27, 2020, the
Company renamed Nukkleus Exchange Malta Ltd. to Markets Direct Technology Group Ltd (“MDTG”). MDTG manages the technology
and IP behind the Markets Direct brand (which is operated by TCM). MDTG holds all the IP addresses and all the software licenses in its
name, and it holds all the IP rights to the brands such as Markets Direct and TCM. MDTG then leases out the rights to use these names/brands
licenses to the appropriate entities.
In fiscal year 2021,
the Company completed its acquisition of Match Financial Limited, a private limited company formed in England and Wales (“Match”). Match
is engaged in providing payment services from one fiat currency to another.
On October 20, 2021,
the Company and the shareholders (the “Original Shareholders”) of Jacobi Asset Management Holdings Limited (“Jacobi”)
entered into a Purchase and Sale Agreement (the “Jacobi Agreement”) pursuant to which the Company agreed to acquire 5.0%
of the issued and outstanding ordinary shares of Jacobi in consideration of 20,000,000 shares of common stock of the Company
(the “Jacobi Transaction”). On December 15, 2021, the Company, the Original Shareholders and the shareholders of Jacobi that
were assigned their interest in Jacobi by the Original Shareholders (the “New Jacobi Shareholders”) entered into an Amendment
to Stock Purchase Agreement agreeing that the Jacobi Transaction will be entered between the Company and the New Jacobi Shareholders.
The Jacobi Transaction closed on December 15, 2021. Jacobi is a company focused on digital asset management that has received regulatory
approval to launch the world’s first tier one Bitcoin ETF. Jamal Khurshid and Nicholas Gregory own, directly and indirectly,
approximately 40% and 10% of Jacobi, respectively. Jamal Khurshid is the Company’s chief operating officer and director and Nicholas
Gregory is the Company’s director. The transactions contemplated by the Jacobi Agreement constituted a “related-party transaction”
as defined in Item 404 of Regulation S-K because of Mr. Khurshid’s and Mr. Gregory’s position as beneficial owner of
one or more Original Shareholders and New Jacobi Shareholders.
On December 30, 2021,
the Company and the shareholder (the “Digiclear Shareholder”) of Digiclear Ltd. (“Digiclear”) entered into a Purchase
and Sale Agreement (the “Digiclear Agreement) pursuant to which the Company agreed to acquire 5,400,000 of the issued and outstanding
ordinary shares of Digiclear in consideration of 15,151,515 shares of common stock of the Company (valued at $5,000,000 based on the market
price of the Company’s common stock on the acquisition date) (the “Digiclear Transaction”). In addition to, if and when
the Company is acquired by a Special Purpose Acquisition Company (“SPAC”), the Company will fund and capitalize Digiclear
with a minimum of $1,000,000 operating capital. Digiclear shall retain the right to unwind the transaction and to have the Company return
the 5,400,000 ordinary shares of Digiclear share in return for Digiclear returning to the Company the 15,151,515 of Company common shares.
Digiclear can only unwind the transaction if the Company is no longer under contract to be acquired by a SPAC. The Digiclear Transaction
closed on March 17, 2022. Digiclear is a company developing a custody and settlement utility operating system.
Financial Services
Segment’s Key Performance Indicators (KPI)
The key performance indicators
outlined below are our financial services segment’s metrics that provide management with the most immediate understanding of the
drivers of business performance and tracking of financial targets.
| |
Three Months Ended
June 30, | | |
Nine Months Ended
June 30, | |
Performance Indicator | |
2023 | | |
2022 | | |
2023 | | |
2022 | |
| |
| | |
(as restated) | | |
| | |
(as restated) | |
Trading volume | |
$ | 67,159,843 | | |
$ | 49,413,367 | | |
$ | 359,730,350 | | |
$ | 108,718,193 | |
Financial services revenue | |
$ | 412,056 | | |
$ | 352,192 | | |
$ | 1,822,388 | | |
$ | 970,224 | |
Financial services loss | |
$ | (283,018 | ) | |
$ | (213,441 | ) | |
$ | (339,929 | ) | |
$ | (1,017,333 | ) |
Average cost per trade | |
$ | 443 | | |
$ | 1,917 | | |
$ | 577 | | |
$ | 3,346 | |
Average trade | |
| 42,832 | | |
| 167,503 | | |
| 95,928 | | |
| 183,027 | |
Number of trades | |
| 1,568 | | |
| 295 | | |
| 3,750 | | |
| 594 | |
Clients active | |
| 45 | | |
| 39 | | |
| 172 | | |
| 52 | |
Clients removed | |
| 1 | | |
| 0 | | |
| 8 | | |
| 0 | |
Gross trading margin | |
| 0.6 | % | |
| 0.7 | % | |
| 0.5 | % | |
| 0.9 | % |
Gross margin | |
| (68.7 | )% | |
| (60.6 | )% | |
| (18.7 | )% | |
| (104.9 | )% |
Trading volume is
measured by number of trades and represents aggregate notional value of all trades.
Financial services
revenue represents the top-line revenue generated from trades, before considering the costs associated with the generation of
financial services revenue.
Financial services
loss is measured as financial services revenue, less costs which include amortization of intangible assets which consist of license
and banking infrastructure acquired on Match acquisition, introducing broker fees, banking, and trading fees incurred associated with
delivery of our services. For the three months ended June 30, 2023, we saw a 35.9% increase in trading volume over the three months
ended June 30, 2022. For the nine months ended June 30, 2023, we saw a 230.9% increase in trading volume over the nine months ended June
30, 2022. The increase in trading volume had a similar positive effect on all other KPIs.
Average cost per trade is
driven by financial services costs. We gained significant economies of scale as average cost per trade decreased measurably as trading
volume increased.
Active clients for
the three months ended June 30, 2023 and 2022 was 45 and 39, respectively. For the nine months ended June 30, 2023 and 2022 was 172 and
52, respectively.
Gross trading margin is
a metric that measures financial services revenue to trading volume.
Critical Accounting
Policies
Use of Estimates
The preparation of the
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. Changes in these estimates and assumptions may
have a material impact on the unaudited condensed consolidated financial statements and accompanying notes. Making estimates requires
management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation
or set of circumstances that existed at the date of the financial statements, which management considered in formulating its estimate,
could change in the near term due to one or more future confirming events. Accordingly, the actual results could differ significantly
from those estimates.
Significant estimates
during the three and nine months ended June 30, 2023 and 2022 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, valuation of stock-based compensation, and
fair value of customer digital currency assets and liabilities.
Customer Custodial
Cash and Customer Custodial Cash Liabilities
Customer custodial cash
represents cash and cash equivalents maintained in Company bank accounts that are controlled by the Company but held for the benefit of
customers. Customer custodial cash liabilities represent these cash deposits to be utilized for its contractual obligations to its customers.
The Company classifies the assets as current based on their purpose and availability to fulfill the Company’s direct obligations
to its customers.
Customer Digital
Currency Assets and Liabilities
At certain times, Digital
RFQ’s customers’ funds that Digital RFQ uses to make payments on behalf of its customers, remain in the form of digital assets
in its customers’ wallets at its digital asset trading platforms awaiting final conversion and/or transfer to the customer’s
payment final destination. These indirectly held digital assets, may consist of USDT (Stablecoin), Bitcoin, and Ethereum (collectively,
“Customer digital currency assets”). Digital RFQ maintains the internal recordkeeping of its customer digital currency assets,
including the amount and type of digital asset owned by each of its customers.
Digital RFQ has control
of the private keys and knows the balances of all wallets with its digital asset trading platforms in order to be able to successfully
carry out the movement of digital assets for its client payment instruction. As part of its customer payment instruction, Digital RFQ
can execute withdrawals on the wallets in its digital asset trading platforms.
The Company has determined
that the Company has control of the customer digital currency assets and records these assets on its balance sheet with a corresponding
liability. The Company recognizes customer digital currency liabilities and corresponding customer digital currency assets, on initial
recognition and at each reporting date, at fair value of the customer digital currency assets. Subsequent changes in fair value are adjusted
to the carrying amount of these customer digital currency assets, with changes in fair value recorded in other general and administrative
expense in the unaudited condensed consolidated statements of operations and comprehensive loss.
Any loss, theft, or other
misuse would impact the measurement of customer digital currency assets. The Company classifies the customer digital currency assets as
current based on their purpose and availability to fulfill the Company’s direct obligations to its customers.
Investment, at
Cost
Investment in which the
Company does not have the ability to exercise significant influence over operating and financial matters is accounted for using the cost
method. Under the cost method, investment is recorded at cost, with gains and losses recognized as of the sale date, and income recorded
when received. The Company periodically evaluates its cost method investment for impairment due to decline considered to be other
than temporary. If the Company determines that a decline in fair value is other than temporary, then a charge to earnings is recorded
in “Other (expense) income” in the accompanying unaudited condensed consolidated statements of operations and comprehensive
loss, and a new basis in the investment is established. No impairment expense for cost method investment was recorded for the three and
nine months ended June 30, 2023 and 2022.
Intangible Assets
Intangible assets consist
of trade names, regulatory licenses, technology and software, which are being amortized on a straight-line method over the estimated useful
life of 3 - 5 years.
Impairment of Long-lived
Assets
In accordance with ASC
Topic 360, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying
amount of the assets may not be fully recoverable, or at least annually. The Company recognizes an impairment loss when the sum of expected
undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between
the asset’s estimated fair value and its book value. There were no triggering events requiring assessment of impairment as of June
30, 2023. For the three and nine months ended June 30, 2023 and 2022, 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. |
Stock-based Compensation
The Company measures
and recognizes compensation expense for all stock-based awards granted to non-employees, including stock options, based on the grant date
fair value of the award. The Company estimates the grant date fair value of each option award using the Black-Scholes option-pricing model.
For non-employee stock-based
awards, fair value is measured based on the value of the Company’s common stock on the date that the commitment for performance
by the counterparty has been reached or the counterparty’s performance is complete. The fair value of the equity instrument is calculated
and then recognized as compensation expense over the requisite performance period.
Results of Operations
Summary of Key Results
For the Three and
Nine Months Ended June 30, 2023 Versus the Three and Nine Months Ended June 30, 2022
Revenues
For both the three months
ended June 30, 2023 and 2022, we had revenue from general support services rendered to TCM under a GSA of $4,800,000. For both the nine
months ended June 30, 2023 and 2022, we had revenue from general support services rendered to TCM under a GSA of $14,400,000.
For the three months
ended June 30, 2023, we had revenue from financial services of $412,056 as compared to $352,192 for the three months ended June 30, 2022,
an increase of $59,864, or 17.0%. For the nine months ended June 30, 2023, we had revenue from financial services of $1,822,388, as compared
to $970,224 for the nine months ended June 30, 2022, an increase of $852,164, or 87.8%. The significant increase was primarily attributable
to our business expansion. We expect that our revenue from financial services will continue to increase in the near future since we are
making efforts on expanding our financial services.
Costs of Revenues
For the three months ended June 30, 2023, our
cost of general support services, which represented amount incurred for services rendered by FXDIRECT under a GSA, amounted to $4,675,000,
as compared to $4,725,000 for the three months ended June 30, 2022, a decrease of $50,000, or 1.1%. For the nine months ended June
30, 2023, our cost of general support services, which represented amount incurred for services rendered by FXDIRECT under a GSA, amounted
to $14,125,000, as compared to $14,175,000 for the nine months ended June 30, 2022, a decrease of $50,000, or 0.4%. Effective
May 1, 2023, the amount payable by us to FXDIRECT for services under a GSA was reduced from $1,575,000 per month to $1,550,000 per month.
Therefore, our cost of general support services for three and nine months ended June 30, 2023 was decreased as compared to the corresponding
periods in fiscal 2022.
Cost of financial services
include amortization of intangible assets which consist of license and banking infrastructure acquired on Match acquisition, introducing
broker fees, banking, and trading fees incurred associated with delivery of our services.
For the three months
ended June 30, 2023, cost of financial services amounted to $695,074, as compared to $565,633 for the three months ended June 30, 2022,
an increase of $129,441, or 22.9%. For the nine months ended June 30, 2023, cost of financial services amounted to $2,162,317, as
compared to $1,987,557 for the nine months ended June 30, 2022, an increase of $174,760, or 8.8%. The increase was primarily attributable
to an increase in our revenue from financial services.
Gross Profit (Loss)
Our gross profit from
general support services for the three months ended June 30, 2023 was $125,000, as compared to $75,000 for the three months ended June
30, 2022, an increase of $50,000, or 66.7%. Gross margin increased to 2.6% for the three months ended June 30, 2023 from 1.6% for the
three months ended June 30, 2022. Our gross profit from general support services for the nine months ended June 30, 2023 was $275,000,
as compared to $225,000 for the nine months ended June 30, 2022, an increase of $50,000, or 22.2%. Gross margin increased to 1.9% for
the nine months ended June 30, 2023 from 1.6% for the nine months ended June 30, 2022. The increase in our gross margin for the general
support services segment for the three and nine months ended June 30, 2023 as compared to the corresponding periods in fiscal 2022 was
attributed to the decrease in our cost of general support services as described above.
Gross loss from financial
services for the three months ended June 30, 2023 was $283,018, as compared to $213,441 for the three months ended June 30, 2022, an increase
of $69,577, or 32.6%. Gross margin decreased to (68.7)% for the three months ended June 30, 2023 from (60.6)% for the three months ended
June 30, 2022. The decrease in our gross margin for the financial services segment for the three months ended June 30, 2023 as compared
to the corresponding period in fiscal 2022 was primarily attributed to the increased cost of financial services. Gross loss from financial
services for the nine months ended June 30, 2023 was $339,929, as compared to $1,017,333 for the nine months ended June 30, 2022, a decrease
of $677,404, or 66.6%. Gross margin increased to (18.7)% for the nine months ended June 30, 2023 from (104.9)% for the nine months ended
June 30, 2022. The significant increase in our gross margin for the financial services segment for the nine months ended June 30, 2023
as compared to the corresponding period in fiscal 2022 was primarily attributed to the increased scale of operations resulting from larger
revenue, which is reflected in the allocation of fixed costs, mainly consisting of amortization costs of intangible assets, to cost of
revenue. A large portion of our cost of financial services are fixed and do not change along with the increase/decrease in our revenue
from financial services. We expect that our gross margin for the financial services segment will continue to increase since we anticipate
we will generate more revenue from financial services and we can improve our gross margin from financial services segment to the extent
that we can become more efficient by increasing our revenue.
Operating Expenses
Operating expenses consisted
of advertising and marketing, professional fees, compensation and related benefits, amortization of intangible assets, and other general
and administrative expenses.
Advertising and marketing
For the three months
ended June 30, 2023, advertising and marketing expense decreased by $145,507, or 98.9%, as compared to the three months ended June 30,
2022. For the nine months ended June 30, 2023, advertising and marketing expense decreased by $294,739, or 85.2%, as compared to the nine
months ended June 30, 2022. The decrease was primarily attributable to our decreased advertising and marketing activities. We expect that
our advertising and marketing expense will increase in the near future.
Professional fees
Professional fees primarily
consisted of audit fees, legal service fees, advisory fees, and consulting fees. For the three months ended June 30, 2023, professional
fees decreased by $475,166, or 45.4%, as compared to the three months ended June 30, 2022. The decrease was primarily attributable to
a significant decrease in consulting fees of approximately $622,000 mainly due to decreased consulting services related to our merger
and acquisition, offset by an increase in other miscellaneous items of approximately $147,000 resulting from our business expansion. For
the nine months ended June 30, 2023, professional fees decreased by $1,495,966, or 45.2%, as compared to the nine months ended June 30,
2022. The decrease was primarily attributable to a significant decrease in advisory service fees of approximately $679,000 mainly due
to decreased advisory service related to our merger and acquisition, a decrease in legal service fees of approximately $123,000 due to
decreased legal service related to our merger and acquisition, a decrease in consulting fees of approximately $864,000 mainly due to decreased
consulting services related to our merger and acquisition, offset by an increase in audit fees of approximately $162,000 and an increase
in other miscellaneous items of approximately $8,000. We expect that our professional fees will remain in its current quarterly level
with minimal increase in the near future.
Compensation and related
benefits
For the three months
ended June 30, 2023, our compensation and related benefits increased by $142,955, or 157.8%, as compared to the three months ended June
30, 2022. For the nine months ended June 30, 2023, our compensation and related benefits increased by $245,503, or 71.0%, as compared
to the nine months ended June 30, 2022. The increase was mainly attributable to increased management in our financial services segment.
We expect that our compensation and related benefits will remain in its current quarterly level with minimal increase in the near future.
Amortization of intangible
assets
For the three and nine
months ended June 30, 2023, our amortization of intangible assets remained roughly the same as the comparable periods in fiscal 2022.
Other general and
administrative expenses
Other general and administrative
expenses primarily consisted of rent, filing fee, and other miscellaneous items.
For the three months
ended June 30, 2023, total other general and administrative expenses increased by $16,451, or 10.0%, as compared to the three months ended
June 30, 2022. The increase was mainly due to an increase in filing fee of approximately $32,000 mainly due to the increase in our public
filings, offset by a decrease in other miscellaneous items of approximately $15,000. For the nine months ended June 30, 2023, total other
general and administrative expenses decreased by $24,506, or 5.3%, as compared to the nine months ended June 30, 2022. The decrease was
mainly due to a decrease in rent of approximately $35,000, offset by an increase in other miscellaneous items of approximately $11,000.
We expect that other general and administrative expenses will remain in its current quarterly level with minimal increase in the near
future.
Other (Expense) Income
Other (expense) income
includes loss from equity method investment and other miscellaneous income (expense).
Other income, net, totaled
$3,057 for the three months ended June 30, 2023, as compared to other expense, net, of $331,796 for the three months ended June 30, 2022,
a decrease of $334,853, or 100.9%, which was attributable to a decrease in loss from equity method investment of approximately $331,000
and a decrease in other miscellaneous expense of approximately $4,000.
Other income, net, totaled
$6,345 for the nine months ended June 30, 2023, as compared to other expense, net, of $405,904 for the nine months ended June 30, 2022,
a decrease of $412,249, or 101.6%, which was attributable to a decrease in loss from equity method investment of approximately $401,000
and a decrease in other miscellaneous expense of approximately $11,000.
Net Loss
As a result of the factors
described above, our net loss was $1,209,744, or $0.00 per share (basic and diluted), for the three months ended June 30, 2023, as compared
to $1,986,287, or $0.01 per share (basic and diluted), for the three months ended June 30, 2022, a decrease of $776,543 or 39.1%.
As a result of the factors
described above, our net loss was $3,149,315, or $0.01 per share (basic and diluted), for the nine months ended June 30, 2023, as compared
to $5,857,740, or $0.02 per share (basic and diluted), for the nine months ended June 30, 2022, a decrease of $2,708,425 or 46.2%.
Foreign Currency Translation
Adjustment
The reporting currency of the Company is U.S.
Dollars. The functional currency of the parent company, Nukkleus Inc., Nukkleus Limited, Nukkleus Malta Holding Ltd. and its subsidiaries,
is the U.S. dollar, the functional currency of Match Financial Limited and its subsidiary, Digital RFQ, is the British Pound (“GBP”),
the functional currency of Digital RFQ’s subsidiary, DRFQ Europe UAB, is Euro, and the functional currency of Digital RFQ’s
subsidiary, DRFQ Pay North America, is CAD. The financial statements of our subsidiaries whose functional currency is the GBP or Euro
or CAD are translated to U.S. dollars using period end rates of exchange for assets and liabilities, average rate of exchange for revenues,
costs, and expenses and cash flows, and at historical exchange rates for equity. Net gains and losses resulting from foreign exchange
transactions are included in the results of operations. As a result of foreign currency translations, which are a non-cash adjustment,
we reported a foreign currency translation loss of $20,859 and a foreign currency translation gain of $27,644 for the three months ended
June 30, 2023 and 2022, respectively. As a result of foreign currency translations, which are a non-cash adjustment, we reported a foreign
currency translation loss of $51,563 and a foreign currency translation gain of $38,631 for the nine months ended June 30, 2023 and 2022,
respectively. This non-cash loss/gain had the effect of increasing/decreasing our reported comprehensive loss.
Comprehensive Loss
As a result of our foreign
currency translation adjustment, we had comprehensive loss of $1,230,603 and $1,958,643 for the three months ended June 30, 2023 and 2022,
respectively. As a result of our foreign currency translation adjustment, we had comprehensive loss of $3,200,878 and $5,819,109 for the
nine months ended June 30, 2023 and 2022, respectively.
Liquidity and Capital Resources
Liquidity is the ability
of a company to generate funds to support its current and future operations, satisfy its obligations and otherwise operate on an ongoing
basis. At June 30, 2023 and September 30, 2022, we had cash of approximately $142,000 and $364,000, respectively, exclusive of customer
custodial cash. We had working capital deficit of approximately $4,955,000 as of June 30, 2023.
Our ability to continue
as a going concern is dependent upon the management of expenses and our ability to obtain the necessary financing to meet our obligations
and pay our liabilities arising from normal business operations when they come due, and upon profitable operations.
We need to either borrow
funds or raise additional capital through equity or debt financings. However, we cannot be certain that such capital (from our stockholders
or third parties) will be available to us or whether such capital will be available on terms that are acceptable to us. Any such financing
likely would be dilutive to existing stockholders and could result in significant financial operating covenants that would negatively
impact our business. In the event that there are any unforeseen delays or obstacles in obtaining funds through the aforementioned
sources, TCM has committed to inject capital into the Company in order to maintain the ongoing operations of the business.
The following table sets
forth a summary of changes in our working capital deficit from September 30, 2022 to June 30, 2023:
| |
June 30, | | |
September 30, | | |
Changes in | |
| |
2023 | | |
2022 | | |
Amount | | |
Percentage | |
Working capital deficit: | |
| | |
| | |
| | |
| |
Total current assets | |
$ | 2,405,857 | | |
$ | 3,687,799 | | |
$ | (1,281,942 | ) | |
| (34.8 | )% |
Total current liabilities | |
| 7,360,966 | | |
| 7,474,324 | | |
| (113,358 | ) | |
| (1.5 | )% |
Working capital deficit | |
$ | (4,955,109 | ) | |
$ | (3,786,525 | ) | |
$ | (1,168,584 | ) | |
| 30.9 | % |
Our working capital deficit
increased by $1,168,584 to $4,955,109 at June 30, 2023 from $3,786,525 at September 30, 2022. The increase in working capital deficit
was primarily attributable to a decrease in cash of approximately $222,000, a decrease in customer custodial cash of approximately $308,000
due to the decrease in cash maintained in our bank accounts held for the benefit of our customers, a decrease in customer digital currency
assets of approximately $248,000 due to the decrease in customer digital currency controlled by us in the nine months ended June 30, 2023,
a decrease in due from affiliates of approximately $623,000 resulting from the payments received from our affiliates in the nine months
ended June 30, 2023, an increase in due to affiliates of approximately $586,000 driven by the payments received from our affiliates and
expenses paid by our affiliates on behalf of us in the nine months ended June 30, 2023, an increase in accrued payroll liability and directors’
compensation of approximately $128,000 due to our business expansion, offset by an increase in note receivable of approximately $154,000
driven by payment made for investment in note receivable in the nine months ended June 30, 2023, a decrease in customer custodial cash
liabilities of approximately $317,000 resulting from fulfillment of our direct obligations to our customers, a decrease in customer digital
currency liabilities of approximately $248,000 due to the decrease in customer digital currency controlled by us in the nine months ended
June 30, 2023, a decrease in accrued professional fees of approximately $104,000 resulting from payments made to professional service
providers in the nine months ended June 30, 2023, and a decrease in accrued liabilities and other payables of approximately $213,000 mainly
due to the decrease in unearned revenue of approximately $203,000.
Because the exchange
rate conversion is different for the condensed consolidated balance sheets and the unaudited condensed consolidated statements of cash
flows, the changes in assets and liabilities reflected on the unaudited condensed consolidated statements of cash flows are not necessarily
identical with the comparable changes reflected on the condensed consolidated balance sheets.
Cash Flow for the Nine Months Ended June 30,
2023 Compared to the Nine Months Ended June 30, 2022
Net cash flow used in
operating activities for the nine months ended June 30, 2023 was $626,716, which primarily reflected our consolidated net loss of approximately
$3,149,000, and the changes in operating assets and liabilities, primarily consisting of a decrease in customer custodial cash liabilities
of approximately $577,000 driven by fulfillment of our direct obligations to our customers in the nine months ended June 30, 2023, a decrease
in customer digital currency liabilities of approximately $270,000 due to the decrease in customer digital currency controlled by us in
the nine months ended June 30, 2023, a decrease in accrued professional fees of approximately $111,000 resulting from payments made to
professional service providers in the nine months ended June 30, 2023, and a decrease in accrued liabilities and other payables of approximately
$234,000 mainly due to the decrease in unearned revenue of approximately $203,000, offset by a decrease in customer digital currency assets
of approximately $270,000 due to the decrease in customer digital currency controlled by us in the nine months ended June 30, 2023, a
decrease in due from affiliates of approximately $648,000 resulting from the payments received from our affiliates in the nine months
ended June 30, 2023, an increase in due to affiliates of approximately $506,000 driven by the payments received from our affiliates and
expenses paid by our affiliates on behalf of us in the nine months ended June 30, 2023, and an increase in accrued payroll liability and
directors’ compensation of approximately $126,000 due to our business expansion, and the non-cash items adjustment primarily consisting
of amortization of intangible assets of approximately $1,779,000, and stock-based compensation and service expense of approximately $296,000.
Net
cash flow used in operating activities for the nine months ended June 30, 2022 was $56,834, which primarily reflected our consolidated
net loss of approximately $5,858,000, and the changes in operating assets and liabilities, primarily consisting of a decrease in customer
digital currency liabilities of approximately $1,139,000 due to the decrease in customer digital currency controlled by us in the nine
months ended June 30, 2022, a decrease in due to affiliates of approximately $316,000 due to the payments made to our affiliates in the
nine months ended June 30, 2022, offset by a decrease in customer digital currency assets of approximately $1,139,000 due to the decrease
in customer digital currency controlled by us in the nine months ended June 30, 2022, a decrease in due from affiliates of approximately
$1,747,000 resulting from the payments received from our affiliates in the nine months ended June 30, 2022, an increase in customer custodial
cash liabilities of approximately $262,000 resulting from our business expansion, and an increase in accrued liabilities and other payables
of approximately $162,000 which was mainly due to the increase in accrued professional fees of approximately $113,000 resulting from the
increase in professional service providers, and the non-cash items adjustment primarily consisting of amortization of intangible assets
of approximately $2,098,000, stock-based compensation and service expense of approximately $1,430,000, and loss on equity method investment
of approximately $401,000.
Net cash flow used in
investing activities was $195,856 for the nine months ended June 30, 2023. During the nine months ended June 30, 2023, we made payment
for investment in note receivable of approximately $154,000 and payment for purchase of intangible asset of approximately $42,000.
There was no investing
activity during the nine months ended June 30, 2022.
Our operations will require
additional funding for the foreseeable future. Unless and until we are able to generate a sufficient amount of revenue and reduce our
costs, we expect to finance future cash needs through public and/or private offerings of equity securities and/or debt financings. We
do not currently have any committed future funding. To the extent we raise additional capital by issuing equity securities, our stockholders
could at that time experience substantial dilution. Any debt financing we are able to obtain may involve operating covenants that restrict
our business. Our capital requirements for the next twelve months primarily relate to mergers, acquisitions and the development of business
opportunities. In addition, we expect to use cash to pay fees related to professional services. The following trends are reasonably likely
to result in a material decrease in our liquidity over the near to long term:
| ● | The working capital requirements to finance our current business; |
| ● | The use of capital for mergers, acquisitions and the development
of business opportunities; |
| ● | Addition of personnel as the business grows; and |
| ● | The cost of being a public company. |
We need to either borrow
funds or raise additional capital through equity or debt financings. However, we cannot be certain that such capital (from our stockholders
or third parties) will be available to us or whether such capital will be available on terms that are acceptable to us. Any such financing
likely would be dilutive to existing stockholders and could result in significant financial operating covenants that would negatively
impact our business. If we are unable to raise sufficient additional capital on acceptable terms, we will have insufficient funds to operate
our business or pursue our planned growth. However, TCM has committed to inject capital into the Company in order to maintain the ongoing
operations of the business.
Consistent with Section
144 of the Delaware General Corporation Law, it is our current policy that all transactions between us and our officers, directors and
their affiliates will be entered into only if such transactions are approved by a majority of the disinterested directors, are approved
by vote of the stockholders, or are fair to us as a corporation as of the time it is authorized, approved or ratified by the board. We
will conduct an appropriate review of all related party transactions on an ongoing basis.
Off-Balance Sheet Arrangements
We had no outstanding
derivative financial instruments, off-balance sheet guarantees, interest rate swap transactions or foreign currency contracts. We do not
engage in trading activities involving non-exchange traded contracts.
Recently Issued Accounting Pronouncements
For information about
recently issued accounting standards, refer to Note 3 to our Unaudited Condensed Consolidated Financial Statements appearing elsewhere
in this report.
Foreign Currency Exchange
Rate Risk
A portion of our operations
are in United Kingdom. Thus, a portion of our revenues and operating results may be impacted by exchange rate fluctuations between GBP
and US dollars. For the three months ended June 30, 2023 and 2021, we had an unrealized foreign currency translation loss of approximately
$21,000 and an unrealized foreign currency translation gain of approximately $28,000, respectively, because of changes in the exchange
rates. For the nine months ended June 30, 2023 and 2021, we had an unrealized foreign currency translation loss of approximately $52,000
and an unrealized foreign currency translation gain of approximately $39,000, respectively, because of changes in the exchange rates.
Inflation
The effect of inflation
on our revenue and operating results was not significant.
Item 3. Quantitative and Qualitative Disclosures
about Market Risk
We are a smaller reporting company as defined
in Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Disclosure controls and
procedures are designed to ensure that information required to be disclosed by us in reports filed or submitted under the Securities Exchange
Act of 1934, as amended (“Exchange Act”) is recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed under the Exchange Act is accumulated and communicated to management, including the principal
executive and financial officers, as appropriate to allow timely decisions regarding required disclosure. There are inherent limitations
to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention
or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable
assurance of achieving their control objectives.
In connection with the
preparation of the quarterly report on Form 10-Q for the quarter ended June 30, 2023, our management, including our principal executive
officer and principal financial officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures, which
are defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Disclosure controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under
the Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers,
or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our CEO and our CFO is
the same person.
Management regularly
assesses controls and did so most recently for our financial reporting as of June 30, 2023. This assessment was based on criteria for
effective internal control over financial reporting described in the Internal Control Integrated Framework issued by the Committee of
Sponsoring Organizations (COSO) of the Treadway Commission. Based on this assessment, management has concluded that, because of the Company’s
small size and limited resources, internal controls over financial reporting were not effective as of June 30, 2023.
Management determined
that the Company has the following material weaknesses:
a) |
we have not sufficiently designed, implemented and documented internal controls at the entity level and across the key business and financial
processes to allow us to achieve complete, accurate and timely financial reporting; |
|
|
b) |
we have not designed and implemented controls to maintain appropriate segregation of duties in our business processes; and |
|
|
c) |
we utilize third party service providers in our financial services segment, for which the Company relies on for determining amounts pertaining
to revenue and cryptocurrency asset completeness, accuracy and existence. The third party service providers lack a key service organization
control report. |
We plan to take steps
to enhance and improve the design of our internal control over financial reporting. To remediate such weaknesses, we hope to implement
the following changes during our fiscal year ending September 30, 2023: (i) design, implement and document internal controls at the entity
level and across the key business and financial processes and (ii) design and implement controls and appoint or hire sufficient staff
to maintain appropriate segregation of duties in our business processes. The remediation efforts set out in (i) and (ii) are largely dependent
upon our securing additional financing to cover the costs of implementing the changes required. If we are unsuccessful in securing such
funds, remediation efforts may be adversely affected in a material manner.
In light of the material
weakness, we performed additional analyses and procedures in order to conclude that our consolidated financial statements for the quarter
ended June 30, 2023 included in this Quarterly Report on Form 10-Q were fairly stated in accordance with US GAAP. Accordingly, management
believes that despite our material weakness, our consolidated financial statements for the quarter ended June 30, 2023 are fairly stated,
in all material respects, in accordance with US GAAP.
Changes in Internal
Control over Financial Reporting
There were no changes
in our internal control over financial reporting during the most recently completed fiscal quarter that have materially affected or are
reasonably likely to materially affect, our internal control over financial reporting.
Item 5. Other
None.
Part II - Other Information
Item 1. Legal Proceedings
From time to time, we
are subject to ordinary routine litigation incidental to our normal business operations. We are not currently a party to any material
legal proceedings.
Item 1A. Risk Factors
Not applicable to a “smaller
reporting company” as defined in Item 10(f)(1) of SEC Regulation S-K.
Item 2. Unregistered Sales of Equity Securities
and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information
Merger
On February 22, 2022,
Nukkleus entered into an Agreement and Plan of Merger (as it may be amended, supplemented or otherwise modified from time to time, the
“Original Agreement”), by and among Nukkleus and Brilliant Acquisition Corporation, a British Virgin Islands company (“Brilliant”).
On June 23, 2023, Nukkleus, Brilliant and BRIL Merger Sub, Inc., a Delaware corporation and wholly-owned subsidiary of Brilliant (“Merger
Sub”), entered into an Amended and Restated Agreement and Plan of Merger (the “A&R Merger Agreement”). Pursuant
to the Original Agreement, NB Merger Sub, Inc., a wholly-owned subsidiary of Nukkleus, would have merged with and into Brilliant, with
Brilliant surviving the merger as a wholly-owned subsidiary of Nukkleus, and Nukkleus would have become a Nasdaq-listed company and the
parent company of Brilliant. Pursuant to the terms of the A&R Merger Agreement, Brilliant will continue out of the British Virgin
Islands and into the State of Delaware so as to re-domicile as and become a Delaware corporation (the “Domestication”), following
which Merger Sub will merge with and into Nukkleus, with Nukkleus surviving the merger as a wholly-owned subsidiary of Brilliant (the
“Merger”), such transactions being referred to herein as the “Business Combination.” Following the Business Combination,
Nukkleus and Brilliant will operate as a combined company.
As a result of and upon
the closing of the Business Combination, pursuant to the terms of the A&R Merger Agreement, all of the outstanding shares of common
stock, par value $0.0001 per share, of Nukkleus (“Nukkleus Common Stock”) will be cancelled in exchange for the right to receive
a pro-rata portion of 14,000,000 shares of common stock of Brilliant (“Brilliant Common Stock”). Each outstanding option to
purchase shares of Nukkleus Common Stock (whether vested or unvested) will be assumed by Brilliant and automatically converted into an
option to purchase shares of Brilliant Common Stock (each, an “Assumed Option”). The holder of each Assumed Option will: (i)
have the right to acquire a number of shares of Brilliant Common Stock equal to (as rounded down to the nearest whole number) the product
of (A) the number of shares of Nukkleus Common Stock subject to such option prior to the effective time of the Merger, multiplied by (B)
the exchange ratio of 1:26.227 (the “Exchange Ratio”); (ii) have an exercise price equal to (as rounded up to the nearest
whole cent) the quotient of (A) the exercise price of the option, divided by (B) the Exchange Ratio; and (iii) be subject to the same
vesting schedule as the applicable option of Nukkleus.
Pursuant to the A&R
Merger Agreement, in connection with the Domestication, all of the issued and outstanding ordinary shares, no par value per share, of
Brilliant (“Brilliant Ordinary Shares”), rights to receive one-tenth of one ordinary share of Brilliant per right (“Brilliant
Rights”) and warrants entitling the holder thereof to purchase one Brilliant Ordinary Share at a price of $11.50 per Brilliant Ordinary
Share (“Brilliant Warrants”) will remain outstanding and become substantially identical securities of the SPAC as a Delaware
corporation. The A&R Merger Agreement also provides for holders of Brilliant securities, other than Brilliant’s sponsor or affiliates,
to receive an additional issuance, as follows: (1) in the case of holders of Brilliant Ordinary Shares, such number of newly issued
shares of Brilliant Common Stock equal to a pro rata share of the Backstop Pool (as defined below); and (2) in the case of holders
of Brilliant Rights, such number of shares of Brilliant Common Stock equal to a pro rata share of the Backstop Pool, in each case subject
to rounding in accordance with the A&R Merger Agreement (such ratio of the aggregate number of shares of Brilliant Common Stock issuable
to each Brilliant public shareholder, including such shareholder’s share in the Backstop Pool, to the aggregate number of Brilliant
Ordinary Shares and Brilliant Rights held by such Brilliant public shareholder, the “SPAC Additional Share Ratio”). Outstanding
Brilliant Warrants held by holders other than Brilliant’s sponsor or affiliates will receive a number of Brilliant Warrants equal
to one warrant exercisable to receive one share of Brilliant Common Stock plus an additional number of warrants equal to the SPAC Additional
Share Ratio, with each warrant exercisable to receive one share of Brilliant Common Stock per warrant. The Backstop Pool is defined in
the A&R Merger Agreement as a pool of shares of Brilliant Common Stock equal to the lower of (1) 1,012,000 and (2) 40% of
the aggregate number of Brilliant Ordinary Shares and Brilliant Rights to receive one-tenth of one Brilliant Ordinary Share, subject to
rounding in accordance with the Merger Agreement.
The A&R Merger Agreement
also extended the Outside Closing Date (as defined in the A&R Merger Agreement), to the later of (i) July 23, 2023, or,
(ii) following the approval by Brilliant’s shareholders of an extension of the life of the SPAC pursuant to Brilliant’s organizational
documents, to the date so approved, but not later than December 23, 2023.
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. As of June 30, 2023, the White Lion Agreement
is not yet effective.
During the term of the
White Lion Agreement, on the terms and subject to the conditions set forth therein, the Company may draw up to the lesser of (i) the
number of shares of the Company’s common stock which would result in beneficial ownership by White Lion of more than 4.99% of the
outstanding shares of the Company’s common stock, (ii) the number of shares of the Company’s common stock equal to 30%
of the average daily trading volume of the Company’s common stock over the five consecutive trading days immediately following the
notice date, or (iii) the number of the Company’s common stock obtained by dividing $1,500,000 by the closing sale price of
the Company’s common stock on the notice date.
The Company is not entitled
to draw on the White Lion Agreement if the closing sale price of the Company’s common stock on the trading day immediately preceding
the notice date is less than $1.00 (following the reverse stock split proposed in connection with the closing of the Business Combination
and described in the Company’s Current Report on Form 8-K filed with the SEC on February 23, 2022, but adjusted for any other reorganization,
recapitalization, non-cash dividend, stock split or other similar transaction). The Company is not entitled to draw on the White Lion
Agreement unless each of the following additional conditions is satisfied: (i) each of the Company’s representations and warranties
set forth in the White Lion Agreement is true and correct (subject to qualifications as to materiality set forth therein) in all respects
as of such time; (ii) a registration statement is and remains effective for the resale of securities in connection with the White
Lion Agreement; (iii) the trading of the Company’s common stock shall not have been suspended by the SEC, the applicable trading
market or FINRA, or otherwise halted for any reason; (iv) the Company shall have complied with its obligations and shall not otherwise
be in breach or default of any agreement set forth in the White Lion Agreement; (v) no statute, regulation, order, guidance, decree,
writ, ruling or injunction shall have been enacted, entered, promulgated, threatened or endorsed by any federal, state, local or foreign
court or governmental authority of competent jurisdiction, including, without limitation, the SEC, which prohibits the consummation of
or which would materially modify or delay any of the transactions contemplated by the White Lion Agreement; (vi) all reports, schedules,
registrations, forms, statements, information and other documents required to have been filed by us with the SEC pursuant to the reporting
requirements of the Exchange Act of 1934 (other than Forms 8-K) shall have been filed with the SEC within the applicable time periods
prescribed for such filings; (vii) to the extent the issuance of the put shares requires shareholder approval under the listing rules
of the applicable national exchange or principal quotation system for the Company’s common stock, the Company has or will seek such
approval; and (viii) certain other conditions as set forth in the White Lion Agreement.
In addition to the shares
to be issued under the White Lion Agreement, the Company will include in its registration statement additional shares of the Company’s
common stock in the amount of $750,000 being issued to White Lion in connection with the execution of the White Lion Agreement.
White Lion Registration Rights Agreement
In connection
with the Company’s entry into the White Lion Agreement, the Company entered into a Registration Rights Agreement with White Lion
(the “Registration Rights Agreement”). Pursuant to the terms of the Registration Rights Agreement, the Company has agreed
to use its commercially reasonable efforts to file a registration statement under the Securities Act registering the resale of the shares
sold under the White Lion Agreement within sixty days of the closing of the Business Combination. The Registration Rights Agreement also
provides that the Company is required to use its commercially reasonable efforts to keep the registration effective and to prepare and
file with the SEC such amendments and supplements if the foregoing registration statement is not then in effect, and the Company proposes
to file certain types of registration statements under as may be necessary to keep the registration statement effective.
General Services Agreement
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 Triton Capital Markets Ltd.
(“TCM”). In addition, in order to appropriately service TCM, Nukkleus Limited entered into a GSA with FXDirectDealer LLC (“FXDIRECT”),
which provides that Nukkleus Limited will pay FXDIRECT a minimum of $1,575,000 per month in consideration of providing personnel engaged
in operational and technical support, marketing, sales support, accounting, risk monitoring, documentation processing and customer care
and support. Effective May 1, 2023, the minimum amount payable by Nukkleus Limited to FXDIRECT
for services was reduced from $1,575,000 per month to $1,550,000 per month. FXDIRECT may terminate this agreement upon providing 90 days’
written notice. Currency Mountain Holdings LLC is the sole shareholder of FXDIRECT. Max Q is the majority shareholder of Currency Mountain
Holdings LLC.
Item 6. Exhibits
The following exhibits are filed
as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q.
Exhibit Number |
|
Description |
2.1 |
|
Agreement and Plan of Merger, dated as of February 22, 2022, by and among Nukkleus Inc. and Brilliant Acquisition Corporation (12) |
|
|
|
2.2 |
|
Amended and Restated Agreement and Plan of Merger dated as of June 23, 2023 by and among Nukkleus Inc., Brilliant Acquisition Corporation and BRIL Merger Sub, Inc. (13) |
|
|
|
3.1 |
|
Certificate of Amendment to the Certificate of Incorporation filed June 3, 2016 (2) |
|
|
|
3.2 |
|
Statement of Designation, Powers, Preferences and Rights of Series A Preferred Stock (2) |
|
|
|
3.3 |
|
Amended and Restated By-laws of Nukkleus Inc. (3) |
|
|
|
4.1 |
|
Securities Purchase Agreement between Nukkleus Inc. and Currency Mountain Holdings Bermuda, Limited dated June 3, 2016 (2) |
|
|
|
10.1 |
|
Purchase and Sale Agreement by and between Nukkleus, Inc. and Michael Stephen Greenacre; Nicholas Aaron Gregory; Jamal Khurshid; Travers David Lee; Azam Shah; Craig Iain Vallis; Bertram Bartholomew Worsley; and Oliver James Worsley dated May 24, 2021 (10) |
|
|
|
10.2 |
|
General Service Agreement between Nukkleus Limited and FML Malta Limited dated May 24, 2016 (4) |
|
|
|
10.3 |
|
General Service Agreement between Nukkleus Limited and FXDirectDealer LLC dated May 24, 2016 (1) |
|
|
|
10.4 |
|
Stock Purchase Agreement dated May 27, 2016 among Nukkleus Inc., IBIH Limited, the shareholders of IBIH Limited and Currency Mountain Holdings LLC (2) |
|
|
|
10.5 |
|
Amendment No. 1 dated June 2, 2016 to the Asset Purchase Agreement by and between Nukkleus Inc., its majority shareholder Charms Investments Ltd., and its wholly-owned subsidiary, Nukkleus Limited and Currency Mountain Holdings Bermuda, Limited (2) |
|
|
|
10.6 |
|
Amendment No. 1 dated June 3, 2016 to the General Service Agreement between Nukkleus Limited and FXDD Trading Limited (2) |
|
|
|
10.7 |
|
Letter Agreement between Nukkleus Inc. and IBIH Limited dated June 3, 2016 (2) |
|
|
|
10.8 |
|
Director Agreement by and between Nukkleus Inc. and Craig Marshak dated August 1, 2016 (3) |
|
|
|
10.9 |
|
Amendment dated October 17, 2017 of that certain General Service Agreement between Nukkleus Limited and FML Malta Limited (5) |
|
|
|
10.10 |
|
Amendment dated October 17, 2017 of that certain General Service Agreement between Nukkleus Limited and FXDirectDealer LLC (5) |
|
|
|
10.11 |
|
Settlement Agreement and Mutual Release between Nukkleus Inc., IBIH Limited, Terra (FX) Offshore Limited, Ludico Investments Limited, Currency Mountain Holdings LLC and the IBIH Shareholders dated November 17, 2017 (6) |
|
|
|
10.12 |
|
Letter Agreement entered between FML Malta Ltd., FXDD Malta Limited and Nukkleus Limited (7) |
|
|
|
10.13 |
|
Stock Redemption Agreement dated February 13, 2018 between Nukkleus Inc. and Currency Mountain Holdings Bermuda, Limited (8) |
|
|
|
10.14 |
|
Form of Support Agreement, dated as of February 22, 2022 among Brilliant Acquisition Corporation and the investors party thereto (12) |
|
|
|
10.15 |
|
Form of Registration Rights Agreement (12) |
|
|
|
10.16 |
|
Form of Lock-Up Agreement (12) |
|
|
|
10.17* |
|
Amendment to the General Services Agreement between Nukkleus Limited and FXDirectDealer LLC |
(1) |
Incorporated by reference to the Form 8K Current Report filed with the SEC on May 31, 2016. |
(2) |
Incorporated by reference to the Form 8K Current Report filed with the SEC on June 3, 2016. |
(3) |
Incorporated by reference to the Form 8K Current Report filed with the SEC on August 9, 2016. |
(4) |
Incorporated by reference to the Form 8K Current Report filed with the SEC on October 25, 2016. |
(5) |
Incorporated by reference to the Form 8K Current Report filed with the SEC on October 19, 2017. |
(6) |
Incorporated by reference to the Form 8K Current Report filed with the SEC on December 5, 2017. |
(7) |
Incorporated by reference to the Form 10K Annual Report filed with the SEC on December 27, 2017. |
(8) |
Incorporated by reference to the Form 10Q Quarterly Report filed with the SEC on February 13, 2018. |
(9) |
Incorporated by reference to the Form 10K Annual Report filed with the SEC on December 28, 2020. |
(10) |
Incorporated by reference to the Form 8K Current Report filed with the SEC on June 3, 2021. |
(11) |
Incorporated by reference to the Form 10K Annual Report filed with the SEC on December 29, 2021. |
(12)
(13) |
Incorporated by reference to the Form 8K Current
Report filed with the SEC on February 23, 2022.
Incorporated by reference to the Form 8K Current
Report filed with the SEC on June 26, 2023. |
SIGNATURES
Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
|
NUKKLEUS INC. |
|
(Registrant) |
|
|
|
Date: August 14, 2023 |
By: |
/s/ Emil Assentato |
|
|
Emil Assentato |
|
|
Chief Executive Officer
(Principal Executive Officer) and
Chief Financial Officer
(Principal Financial and Accounting Officer) and Chairman |
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Certification of Chief Executive Officer and Chief
Financial Officer Pursuant to 18 U.S.C. Section 1350
The undersigned, Emil Assentato, in his capacities
as Chief Executive Officer and Chief Financial Officer of Nukkleus Inc. (the “Registrant”) do each hereby certify with respect
to the Quarterly Report on Form 10-Q of the Registrant for the period ended June 30, 2023, as filed with the Securities and Exchange Commission
on the date hereof (the “Report”), that, to the best of its knowledge: