UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM
For
the quarterly period ended
OR
For the transition period from __________ to __________
Commission
file number:
(Exact name of registrant as specified in its charter)
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Securities
registered under Section 12(b) of the Exchange Act:
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.
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).
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 | ☐ |
☒ | 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
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State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date.
Class | Outstanding May 19, 2023 | |
Common Stock, $0.0001 par value per share |
NUKKLEUS INC.
FORM 10-Q
December 31, 2022
TABLE OF CONTENTS
i |
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.
ii |
PART I - FINANCIAL INFORMATION
Item 1. Interim Financial Statements.
NUKKLEUS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
As of | ||||||||
December 31, | September 30, | |||||||
2022 | 2022 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
CURRENT ASSETS: | ||||||||
Cash | $ | $ | ||||||
Customer custodial cash | ||||||||
Customer digital currency assets | ||||||||
Digital assets | ||||||||
Due from affiliates | ||||||||
Note receivable - related party | ||||||||
Note receivable | - | |||||||
Other current assets | ||||||||
TOTAL CURRENT ASSETS | ||||||||
NON-CURRENT ASSETS: | ||||||||
Cost method investment | ||||||||
Intangible assets, net | ||||||||
TOTAL NON-CURRENT ASSETS | ||||||||
TOTAL ASSETS | $ | $ | ||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
CURRENT LIABILITIES: | ||||||||
Customer custodial cash liabilities | $ | $ | ||||||
Customer digital currency liabilities | ||||||||
Due to affiliates | ||||||||
Accounts payable and accrued liabilities | ||||||||
TOTAL CURRENT LIABILITIES | ||||||||
TOTAL LIABILITIES | ||||||||
COMMITMENTS AND CONTINGENCIES - (Note 15) | ||||||||
STOCKHOLDERS’ EQUITY: | ||||||||
Preferred stock ($ | ||||||||
Common stock ($ | ||||||||
Additional paid-in capital | ||||||||
Accumulated deficit | ( | ) | ( | ) | ||||
Accumulated other comprehensive income | ||||||||
TOTAL STOCKHOLDERS’ EQUITY | ||||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | $ |
The accompanying notes to unaudited condensed consolidated financial statements are an integral part of these statements.
1 |
NUKKLEUS INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
For the Three Months Ended December 31, | ||||||||
2022 | 2021 | |||||||
(as restated) | ||||||||
REVENUES | ||||||||
Revenue - general support services - related party | $ | $ | ||||||
Revenue - financial services | ||||||||
Total revenues | ||||||||
COSTS OF REVENUES | ||||||||
Cost of revenue - general support services - related party | ||||||||
Cost of revenue - financial services | ||||||||
Total costs of revenues | ||||||||
GROSS PROFIT (LOSS) | ||||||||
Gross profit - general support services - related party | ||||||||
Gross loss - financial services | ( | ) | ( | ) | ||||
Total gross loss | ( | ) | ( | ) | ||||
OPERATING EXPENSES: | ||||||||
Advertising and marketing | ||||||||
Professional fees | ||||||||
Compensation and related benefits | ||||||||
Amortization of intangible assets | ||||||||
Other general and administrative | ||||||||
Total operating expenses | ||||||||
LOSS FROM OPERATIONS | ( | ) | ( | ) | ||||
OTHER INCOME (EXPENSE): | ||||||||
Other income (expense) | ( | ) | ||||||
Total other income (expense), net | ( | ) | ||||||
LOSS BEFORE INCOME TAXES | ( | ) | ( | ) | ||||
INCOME TAXES | ||||||||
NET LOSS | $ | ( | ) | $ | ( | ) | ||
COMPREHENSIVE LOSS: | ||||||||
NET LOSS | $ | ( | ) | $ | ( | ) | ||
OTHER COMPREHENSIVE LOSS | ||||||||
Unrealized foreign currency translation loss | ( | ) | ( | ) | ||||
COMPREHENSIVE LOSS | $ | ( | ) | $ | ( | ) | ||
NET LOSS PER COMMON SHARE: | ||||||||
$ | ( | ) | $ | ( | ) | |||
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: | ||||||||
The accompanying notes to unaudited condensed consolidated financial statements are an integral part of these statements.
2 |
NUKKLEUS INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the Three Months Ended December 31, 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, 2022 | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||||||
Stock-based compensation | - | - | ||||||||||||||||||||||||||||||
Net loss for the three months ended December 31, 2022 | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
Foreign currency translation adjustment | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
Balance as of December 31, 2022 | $ | $ | $ | $ | ( | ) | $ | $ |
The accompanying notes to unaudited condensed consolidated financial statements are an integral part of these statements.
3 |
NUKKLEUS INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the Three Months Ended December 31, 2021
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 | - | $ | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||||
Common stock issued in connection with cost method investment | - | |||||||||||||||||||||||||||||||
Stock-based compensation | - | - | ||||||||||||||||||||||||||||||
Net loss for the three months ended December 31, 2021 | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
Foreign currency translation adjustment | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
Balance as of December 31, 2021 | $ | $ | $ | $ | ( | ) | $ | $ |
The accompanying notes to unaudited condensed consolidated financial statements are an integral part of these statements.
4 |
NUKKLEUS INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended December 31, | ||||||||
2022 | 2021 | |||||||
(as restated) | ||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net loss | $ | ( | ) | $ | ( | ) | ||
Adjustments to reconcile net loss to net cash | ||||||||
provided by (used in) operating activities: | ||||||||
Amortization of intangible assets | ||||||||
Stock-based compensation and service expense | ||||||||
Unrealized foreign currency exchange loss | - | |||||||
Impairment of digital assets | ||||||||
Changes in operating assets and liabilities: | ||||||||
Customer digital currency assets | ( | ) | ||||||
Accounts receivable | - | |||||||
Digital assets | ( | ) | ||||||
Other current assets | ( | ) | ( | ) | ||||
Due from affiliates | ||||||||
Customer custodial cash liabilities | ( | ) | ||||||
Customer digital currency liabilities | ( | ) | ||||||
Due to affiliates | ||||||||
Accounts payable and accrued liabilities | ( | ) | ||||||
Net cash provided by (used in) operating activities | ( | ) | ||||||
CASH FLOW FROM INVESTING ACTIVITIES: | ||||||||
Investment in note receivable | ( | ) | ||||||
Net cash used in investing activities | ( | ) | ||||||
EFFECT OF EXCHANGE RATE ON CASH | ||||||||
NET INCREASE (DECREASE) IN CASH | ( | ) | ||||||
Cash - beginning of period | ||||||||
Cash - end of period | $ | $ | ||||||
Cash consisted of the following: | ||||||||
Cash | $ | $ | ||||||
Customer custodial cash | ||||||||
Total cash | $ | $ | ||||||
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 | $ | $ |
The accompanying notes to unaudited condensed consolidated financial statements are an integral part of these statements.
5 |
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 $
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 $
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
6 |
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
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 December 31, 2022 and September 30, 2022, the Company had cash of $
The unaudited condensed consolidated financial
statements have been prepared using accounting principles generally accepted in the United States of America applicable for a going concern,
which assumes that the Company will realize its assets and discharge its liabilities in the ordinary course of business. The Company incurred
a net loss for the three months ended December 31, 2022 of $
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.
7 |
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 months ended December 31, 2022 and 2021 include the useful life of intangible assets, assumptions used in assessing impairment of long-term assets, valuation of deferred tax assets and the associated valuation allowances, valuation of stock-based compensation, and fair value of customer digital currency assets and liabilities.
Cash and cash equivalents
At December 31, 2022 and September 30, 2022, the Company’s cash balances by geographic area were as follows:
Country: | December 31, 2022 | September 30, 2022 | ||||||||||||||
United States | $ | % | $ | % | ||||||||||||
United Kingdom | % | % | ||||||||||||||
Lithuania | % | - | - | |||||||||||||
Malta | % | % | ||||||||||||||
Total cash | $ | % | $ | % |
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 December 31, 2022 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.
8 |
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.
The following table provides these assets and liabilities carried at fair value, measured as of December 31, 2022:
Quoted Price in Active Markets | Significant Other Observable Inputs | Significant Unobservable Inputs | Balance at December 31, | |||||||||||||
(Level 1) | (Level 2) | (Level 3) | 2022 | |||||||||||||
Customer digital currency assets | $ | $ | $ | $ | ||||||||||||
Customer digital currency liabilities | $ | $ | $ | $ |
The following table provides these assets and liabilities carried at fair value, measured as of September 30, 2022:
Quoted Price in Active Markets | Significant Other Observable Inputs | Significant Unobservable Inputs | Balance at September 30, | |||||||||||||
(Level 1) | (Level 2) | (Level 3) | 2022 | |||||||||||||
Customer digital currency assets | $ | $ | $ | $ | ||||||||||||
Customer digital currency liabilities | $ | $ | $ | $ |
Customer digital currency assets and liabilities represent the Company’s obligation to safeguard customers’ digital assets. Accordingly, the Company has valued the assets and liabilities using quoted market prices for the underlying digital assets which is based on Level 2 inputs.
9 |
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Fair value of financial instruments and fair value measurements (continued)
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.
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 $
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.
10 |
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 OTC Markets listing fees. As of December 31, 2022 and September 30, 2022, other current assets amounted to $
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 months ended December 31, 2022 and 2021.
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
Impairment of long-lived assets
In accordance with ASC Topic 360, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable, or at least annually. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book value. There were no triggering events requiring assessment of impairment as of December 31, 2022. For the three months ended December 31, 2022 and 2021, no impairment of long-lived assets was recognized.
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 |
11 |
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue recognition (continued)
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 |
● | 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). |
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 months ended December 31, 2022 and 2021:
Three
Months Ended December 31, | ||||||||
Revenue Stream | 2022 | 2021 | ||||||
General support services | $ | $ | ||||||
Financial services | ||||||||
Total revenues | $ | $ |
12 |
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Advertising and marketing costs
All costs related to
advertising and marketing are expensed as incurred. For the three months ended December 31, 2022 and 2021, advertising and marketing costs
amounted to $
Stock-based compensation
The Company measures and recognizes compensation expense for all stock-based awards granted to non-employees, including stock options, based on the grant date fair value of the award. The Company estimates the grant date fair value of each option award using the Black-Scholes option-pricing model.
For non-employee stock-based awards, fair value is measured based on the value of the Company’s common stock on the date that the commitment for performance by the counterparty has been reached or the counterparty’s performance is complete. The fair value of the equity instrument is calculated and then recognized as compensation expense over the requisite performance period.
Income taxes
The Company accounts for income taxes pursuant to Financial Accounting Standards Board (“FASB”) ASC 740, Income Taxes. Deferred tax assets and liabilities are determined based on temporary differences between the bases of certain assets and liabilities for income tax and financial reporting purposes. The deferred tax assets and liabilities are classified according to the financial statement classification of the assets and liabilities generating the differences.
The Company maintains a valuation allowance with respect to deferred tax assets. The Company establishes a valuation allowance based upon the potential likelihood of realizing the deferred tax asset and taking into consideration the Company’s financial position and results of operations for the current period. Future realization of the deferred tax benefit depends on the existence of sufficient taxable income within the carry-forward period under the Federal and foreign tax laws. Changes in circumstances, such as the Company generating taxable income, could cause a change in judgment about the realizability of the related deferred tax asset. Any change in the valuation allowance will be included in income in the period of the change in estimate.
The Company follows the provisions of FASB ASC 740-10 Uncertainty in Income Taxes (ASC 740-10). Certain recognition thresholds must be met before a tax position is recognized in the financial statements. An entity may only recognize or continue to recognize tax positions that meet a “more-likely-than-not” threshold.
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”) and the functional currency of Digital RFQ’s subsidiary, DRFQ Europe UAB, is Euro. 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.
13 |
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Foreign currency translation (continued)
Asset and liability accounts at December 31, 2022 and September 30, 2022 were translated at 0.8266 GBP and 0.8987 GBP to $1.00, respectively, which were the exchange rates on the balance sheet dates. Asset and liability accounts at December 31, 2022 and September 30, 2022 were translated at 0.9323 EUR and 1.0221 EUR to $1.00, respectively, which were the exchange rates on the balance sheet dates. Equity accounts were stated at their historical rates. The average translation rate applied to the statement of operations for the three months ended December 31, 2022 and 2021 was 0.8525 GBP and 0.7422 GBP to $1.00, respectively. The average translation rate applied to the statement of operations for the three months ended December 31, 2022 was 0.9806 EUR to $1.00. Cash flows from the Company’s operations are calculated based upon the local currencies using the average translation rate.
Comprehensive loss
Comprehensive loss is comprised of net loss and all changes to the statements of equity, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders. For the Company, comprehensive loss for the three months ended December 31, 2022 and 2021 consisted of net loss and unrealized loss from foreign currency translation adjustment.
Segment reporting
The Company uses “the management approach” in determining reportable operating segments. The management approach considers the internal organization and reporting used by the Company’s chief operating decision maker for making operating decisions and assessing performance as the source for determining the Company’s reportable segments. The Company’s chief operating decision maker is its Chief Executive Officer (“CEO”), who reviews operating results to make decisions about allocating resources and assessing performance for the entire company. The Company has determined that it has two reportable business segments: general support services segment and financial services segment. These reportable segments offer different types of services and products, have different types of revenue, and are managed separately as each requires different operating strategies and management expertise.
Per share data
ASC Topic 260, Earnings per Share, requires presentation of both basic and diluted earnings per share (“EPS”) with a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.
Basic net earnings per share are computed by dividing net earnings available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted net earnings per share is computed by dividing net earnings applicable to common stockholders by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. For the three months ended December 31, 2022 and 2021, potentially dilutive common shares consist of the common shares issuable upon the exercise of common stock options (using the treasury stock method). Common stock equivalents are not included in the calculation of diluted net loss per share if their effect would be anti-dilutive. In a period in which the Company has a net loss, all potentially dilutive securities are excluded from the computation of diluted shares outstanding as they would have had an anti-dilutive impact.
The following table summarizes the securities that were excluded from the diluted per share calculation because the effect of including these potential shares was antidilutive:
Three
Months Ended December 31, | |||||||
2022 | 2021 | ||||||
Stock options | |||||||
Potentially dilutive securities |
14 |
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recently issued accounting pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (“Topic 326”). The ASU introduces a new accounting model, the Current Expected Credit Losses model (“CECL”), which requires earlier recognition of credit losses and additional disclosures related to credit risk. The CECL model utilizes a lifetime expected credit loss measurement objective for the recognition of credit losses at the time the financial asset is originated or acquired. ASU 2016-13 is effective for annual period beginning after December 15, 2022, including interim reporting periods within those annual reporting periods. The Company expects that the adoption will not have a material impact on its unaudited condensed consolidated financial statements.
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:
December
31, 2022 | September
30, 2022 | |||||||
Customer custodial cash | $ | $ | ||||||
Customer digital currency assets | ||||||||
Total customer assets | $ | $ | ||||||
Customer custodial cash liabilities | $ | $ | ||||||
Customer digital currency liabilities | ||||||||
Total customer liabilities | $ | $ |
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 months ended December 31, 2022 and 2021, 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.
15 |
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - CUSTOMER ASSETS AND LIABILITIES (continued)
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 December 31, 2022 and September 30, 2022:
December 31, 2022 | September 30, 2022 | |||||||||||||||
Fair value | Percentage of total | Fair value | Percentage of total | |||||||||||||
Bitcoin | $ | % | $ | % | ||||||||||||
Stablecoin/USD Coin | % | % | ||||||||||||||
Ethereum | % | % | ||||||||||||||
Others | % | - | - | |||||||||||||
Total customer digital currency assets | $ | % | $ | % |
NOTE 5 – DIGITAL ASSETS
The following table summarizes the Company’s digital asset holdings as of December 31, 2022:
Asset | Estimated useful life | Cost | Impairment | Digital assets | ||||||||||
Bitcoin | $ | $ | $ | |||||||||||
Ethereum | ||||||||||||||
Stablecoin/USD Coin | ||||||||||||||
Other | ||||||||||||||
Total | $ | $ | $ |
The following table summarizes the Company's digital asset holdings as of September 30, 2022:
Asset | Estimated useful life | Cost | Impairment | Digital assets | ||||||||||
Bitcoin | $ | $ | $ | |||||||||||
Ethereum | ||||||||||||||
Stablecoin/USD Coin | ||||||||||||||
Other | ||||||||||||||
Total | $ | $ | $ |
The
Company recorded impairment expense of $
16 |
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 – NOTE RECEIVABLE
As of December
31, 2022, the Company made loans with an aggregate principal of $
NOTE 7 – COST METHOD INVESTMENT
At
December 31, 2022, cost method investment amounted to $
On
December 15, 2021, the Company issued
In accordance with ASC Topic 321, the Company elected to use the measurement alternative to measure such investments at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer, if any. The Company monitors its investment in the non-marketable security and will recognize, if ever existing, a loss in value which is deemed to be other than temporary. The Company determined that there was no impairment of this investment as of December 31, 2022.
NOTE 8 – EQUITY METHOD INVESTMENT
As
of both December 31, 2022 and September 30, 2022, the equity method investment amounted to $
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 $
17 |
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 – INTANGIBLE ASSETS
Intangible
At December 31, 2022 and September 30, 2022, intangible assets consisted of the following:
Useful Life | December
31, 2022 | September
30, 2022 | ||||||||
Trade names | $ | $ | ||||||||
Regulatory licenses | ||||||||||
Technology | ||||||||||
Software | ||||||||||
Less: accumulated amortization | ( | ) | ( | ) | ||||||
$ | $ |
For
the three months ended December 31, 2022 and 2021, amortization expense amounted to $
Amortization of intangible assets attributable to future periods is as follows:
For the Twelve-month Period Ending December 31: | Amortization amount | ||||
2023 | $ | ||||
2024 | |||||
2025 | |||||
2026 | |||||
2027 and thereafter | |||||
$ |
NOTE 10 – ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
At December 31, 2022 and September 30, 2022, accounts payable and accrued liabilities consisted of the following:
December 31, 2022 | September 30, 2022 | |||||||
Directors’ compensation | $ | $ | ||||||
Unearned revenue | ||||||||
Professional fees | ||||||||
Accounts payable | ||||||||
Others | ||||||||
Total | $ | $ |
18 |
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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
Options
The following table summarizes the shares of the Company’s common stock issuable upon exercise of options outstanding at December 31, 2022:
Options Outstanding | Options Exercisable | |||||||||||||||||||||
Range
of Exercise Price | Number Outstanding at December 31, 2022 | Weighted Average Remaining Contractual Life (Years) | Weighted
Average Exercise Price | Number 2022 | Weighted Average Exercise Price | |||||||||||||||||
$ | $ | $ | ||||||||||||||||||||
$ | $ | $ |
Stock option activities for the three months ended December 31, 2022 were as follows:
Number of Options | Weighted Average Exercise Price | |||||||
Outstanding at October 1, 2022 | $ | |||||||
Granted | ||||||||
Terminated / Exercised / Expired | ||||||||
Outstanding at December 31, 2022 | $ | |||||||
Options exercisable at December 31, 2022 | $ | |||||||
Options expected to vest | $ |
The
aggregate intrinsic value of both stock options outstanding and stock options exercisable at December 31, 2022 was $
For
the three months ended December 31, 2022 and 2021, stock-based compensation expense associated with stock options granted amounted to
$
A summary of the status of the Company’s nonvested stock options granted as of December 31, 2022 and changes during the three months ended December 31, 2022 is presented below:
Number of Options | Weighted Average Exercise Price | |||||||
Nonvested at October 1, 2022 | $ | |||||||
Granted | ||||||||
Vested | ||||||||
Nonvested at December 31, 2022 | $ |
19 |
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 $
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 $
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 $
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 $
Both of the above entities are affiliates through common ownership.
During the three months ended December 31, 2022 and 2021, general support services provided to the related party, which was recorded as revenue – general support services - related party on the accompanying unaudited condensed consolidated statements of operations and comprehensive loss were as follows:
Three
Months Ended December 31, | ||||||||
2022 | 2021 | |||||||
Service provided to: | ||||||||
TCM | $ | $ | ||||||
$ | $ |
During the three months ended December 31, 2022 and 2021, services received from the related party, which was recorded as cost of revenue – general support services - related party on the accompanying unaudited condensed consolidated statements of operations and comprehensive loss were as follows:
Three
Months Ended December 31, | ||||||||
2022 | 2021 | |||||||
Service received from: | ||||||||
FXDIRECT | $ | $ | ||||||
$ | $ |
During the three months ended December 31, 2022 and 2021, Digital RFQ
earned revenue from related parties in the amount of $
20 |
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 – RELATED PARTY TRANSACTIONS (continued)
Due from affiliates
At December 31, 2022 and September 30, 2022, due from affiliates consisted of the following:
December 31, 2022 | September 30, 2022 | |||||||
Digiclear | $ | $ | ||||||
TCM | ||||||||
Total | $ | $ |
The balance due from Digiclear represents advances made to Digiclear. 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 December 31, 2022 and September 30, 2022. The Company historically has not experienced uncollectible receivable from the related parties.
Due to affiliates
At December 31, 2022 and September 30, 2022, due to affiliates consisted of the following:
December
31, 2022 | September
30, 2022 | |||||||
Forexware LLC (1) | $ | $ | ||||||
FXDIRECT | ||||||||
Currency Mountain Holdings Bermuda, Limited (“CMH”) | ||||||||
FXDD Trading (1) | ||||||||
Markets Direct Payments (1) | ||||||||
Match Fintech Limited (2) | ||||||||
Total | $ | $ |
(1) |
(2) |
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 December
31, 2022 and September 30, 2022, related parties’ digital currency, which was controlled by Digital RFQ, amounted to $
21 |
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 – RELATED PARTY TRANSACTIONS (continued)
Note receivable – related party
The Company
originated a note receivable to a shareholder in the principal amount of $
For
the three months ended December 31, 2022, the interest income related to this note amounted to $
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.
NOTE 13 – CONCENTRATIONS
Customers
The
following table sets forth information as to each customer that accounted for
Three
Months Ended December 31, | ||||||||
Customer | 2022 | 2021 | ||||||
A – related party | % | % |
Two related
party customers, whose outstanding receivables accounted for
One
related party customer, whose outstanding receivable accounted for
Suppliers
The
following table sets forth information as to each supplier that accounted for
Three Months Ended December 31, | ||||||||
Supplier | 2022 | 2021 | ||||||
A – related party | % | % |
Two related
party suppliers, whose outstanding payables accounted for
Two
related party suppliers, whose outstanding payables accounted for
22 |
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 – SEGMENT INFORMATION
For the three months ended December 31, 2022 and 2021, the Company operated in two reportable business segments - (1) the general support services segment, in which we provide software, technology, customer sales and marketing and risk management technology hardware and software solutions package under a GSA to a related party; and (2) the financial services segment, in which we provide 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 months ended December 31, 2022 and 2021 was as follows:
Three Months Ended December 31, | ||||||||
2022 | 2021 | |||||||
(as restated) | ||||||||
Revenues | ||||||||
General support services | $ | $ | ||||||
Financial services | ||||||||
Total | ||||||||
Costs of revenues | ||||||||
General support services | ||||||||
Financial services | ||||||||
Total | ||||||||
Gross profit (loss) | ||||||||
General support services | ||||||||
Financial services | ( | ) | ( | ) | ||||
Total | ( | ) | ( | ) | ||||
Operating expenses | ||||||||
Financial services | ||||||||
Corporate/Other | ||||||||
Total | ||||||||
Other income (expense) | ||||||||
Financial services | ( | ) | ||||||
Total | ( | ) | ||||||
Net income (loss) | ||||||||
General support services | ||||||||
Financial services | ( | ) | ( | ) | ||||
Corporate/Other | ( | ) | ( | ) | ||||
Total | ( | ) | ( | ) | ||||
Amortization | ||||||||
Financial services | ||||||||
Corporate/Other | ||||||||
Total | $ | $ |
23 |
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 – SEGMENT INFORMATION (continued)
Total assets at December 31, 2022 and September 30, 2022 | December 31, 2022 | September 30, 2022 | ||||||
Financial services | $ | $ | ||||||
Corporate/Other | ||||||||
Total | $ | $ |
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 January 20, 2023, parties to the Merger Agreement entered into an Amendment No. 3 to the Merger Agreement (the “Amendment”) solely to extend the Outside Closing Date (as defined in the Merger Agreement), to June 23, 2023 (following the approval by Brilliant’s shareholders of the extension of the life of the SPAC pursuant to Brilliant’s organizational documents, which was granted on April 20, 2023). The transactions contemplated by the Merger Agreement are expected to close in the third 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 $
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
24 |
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 – COMMITMENTS AND CONTINGENCIES (continued)
White lion stock purchase agreement (continued)
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
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 $
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 $
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
The Company evaluated subsequent events and transactions that occurred after the balance sheet date up to the date that the financial statements were issued. Based upon this review, other than as described below, the Company did not identify any subsequent events that would have required adjustment or disclosure in the financial statements.
The Company made loans with an aggregate principal
of $
We currently, and may in the future, have assets held at financial institutions that may exceed the insurance coverage offered by the Federal Deposit Insurance Corporation (“FDIC”), the loss of which would have a severe negative affect on our operations and liquidity.
We may maintain our cash assets at financial institutions
in the U.S. in amounts that may be in excess of the FDIC insurance limit of $
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.
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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 months ended December 31, 2022 and 2021 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; |
● | our business prospects; |
● | any contractual arrangements and relationships with third parties; |
● | the dependence of our future success on the general economy; |
● | any possible financings; and |
● | the adequacy of our cash resources and working capital. |
Impact of COVID-19 on Our Operations
The ramifications of the outbreak of the novel strain of COVID-19, reported to have started in December 2019 and spread globally, are filled with uncertainty and changing quickly. Our operations have continued during the COVID-19 pandemic and we have not had significant disruption. Due to the nature of our business, the technology we use and offer to our customers, and our employees’ ability to work remotely, there was no material impact of COVID-19 on our business, operations and financial results.
The Company is operating in a rapidly changing environment so the extent to which COVID-19 impacts its business, operations and financial results from this point forward will depend on numerous evolving factors that the Company cannot accurately predict. Those factors include the following: the duration and scope of the pandemic, and governmental, business and individuals’ actions that have been and continue to be taken in response to the pandemic.
Overview
We are a financial technology company which is focused on providing software and technology solutions for the worldwide retail foreign exchange (“FX”) trading industry. We primarily provide our software, technology, customer sales and marketing and risk management technology hardware and software solutions package to TCM. The FXDD brand (e.g., see FXDD.com) is the brand utilized in the retail forex trading industry by TCM.
We have ownership of FOREXWARE, the primary software suite and technology solution which powers the FXDD brand globally today. We also have ownership of the FOREXWARE brand name. We have also acquired ownership of the customer interface and other software trading solutions being used by FXDD.com. By virtue of our relationship with TCM and FXDIRECT, we provide turnkey software and technology solutions for FXDD.com. We offer the customers of FXDD 24 hours, five days a week direct access to the global over the counter (“OTC”) FX market, which is a decentralized market in which participants trade directly with one another, rather than through a central exchange.
In an FX trade, participants effectively buy one currency and simultaneously sell another currency, with the two currencies that make up the trade being referred to as a “currency pair”. Our software and technology solutions enable FXDD to present its customers with price quotations on over the counter tradeable instruments, including over the counter currency pairs, and also provide our customers the ability to trade FX derivative contracts on currency pairs through a product referred to as Contracts for Difference (“CFD”). Our software solutions also offer other CFD products, including CFDs on metals, such as gold, and on futures linked to other products.
In July 2018, the Company incorporated Nukkleus Malta Holding Ltd., which is a wholly-owned subsidiary. In July 2018, Nukkleus Malta Holding Ltd. incorporated MDTG, formerly known as Nukkleus Exchange Malta Ltd. MDTG was exploring potentially obtaining a license to operate an electronic exchange whereby it would facilitate the buying and selling of various digital assets as well as traditional currency pairs used in FX Trading. During the fourth quarter of fiscal 2020, management made the decision to exit the exchange business and to no longer pursue the regulatory licensing necessary to operate an exchange in Malta.
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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 December 31, | ||||||||
Performance Indicator | 2022 | 2021 | ||||||
(as restated) | ||||||||
Trading volume | $ | 141,867,422 | $ | 4,854,373 | ||||
Financial services revenue | $ | 576,388 | $ | 329,015 | ||||
Financial services loss | $ | (129,873 | ) | $ | (545,190 | ) | ||
Average cost per trade | $ | 795 | $ | 8,571 | ||||
Average trade | 159,761 | 47,592 | ||||||
Number of trades | 888 | 102 | ||||||
Clients active | 57 | 30 | ||||||
Gross trading margin | 0.4 | % | 6.8 | % | ||||
Gross margin | (22.5 | )% | (165.7 | )% |
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.
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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 December 31, 2022, we saw a 2,822.5% increase in trade volume over the three months ended December 31, 2021. The increase in trading volume had a similar positive effect on all other KPIs.
Average cost per trade is driven by financial services costs. We gained significant economies of scale as average cost per trade decreased measurably as trading volume increased.
Active clients for the three months ended December 31, 2022 and 2021 was 57 and 30, respectively. We continue to bring on introducing brokers as well as increases in marketing spend from which we continue to add new clients.
Gross trading margin is a metric that measures financial services revenue to trading volume.
Critical Accounting Policies
Use of Estimates
The preparation of the 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 months ended December 31, 2022 and 2021 include the useful life of intangible assets, assumptions used in assessing impairment of long-term assets, valuation of deferred tax assets and the associated valuation allowances, 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.
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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 months ended December 31, 2022 and 2021.
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 December 31, 2022. For the three months ended December 31, 2022 and 2021, no impairment of long-lived assets was recognized.
Revenue Recognition
The Company accounts for revenue under the provisions of ASC Topic 606. The Company’s revenues are derived from providing:
● | General support services under a GSA to a related party. The transaction price is determined in accordance with the terms of the GSA and payments are due on a monthly basis. There are multiple services provided under the GSA 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.
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Results of Operations
Summary of Key Results
For the Three Months Ended December 31, 2022 Versus the Three Months Ended December 31, 2021
Revenues
For both of the three months ended December 31, 2022 and 2021, we had revenue from general support services rendered to TCM under a GSA of $4,800,000.
For the three months ended December 31, 2022, we had revenue from financial services of $576,388, as compared to $329,015 for the three months ended December 31, 2021, an increase of $247,373, or 75.2%. The significant increase was primarily attributable to our business expansion. We expect that our revenue from financial services will continue to increase in the near future since we are making efforts on expanding our financial services.
Costs of Revenues
For both of the three months ended December 31, 2022 and 2021, our cost of general support services was $4,725,000, which represented amount incurred for services rendered by FXDIRECT under a GSA.
Cost of financial services include amortization of intangible assets which consist of license and banking infrastructure acquired on Match acquisition, introducing broker fees, banking, and trading fees incurred associated with delivery of our services.
For the three months ended December 31, 2022, cost of financial services amounted to $706,261, as compared to $874,205 for the three months ended December 31, 2021, a decrease of $167,944, or 19.2%. The decrease was primarily attributable to the decrease in amortization costs of intangible assets which consist of license and banking infrastructure acquired on Match acquisition.
Gross Profit (Loss)
For both of the three months ended December 31, 2022 and 2021, our gross profit from general support services was $75,000, representing gross margin of 1.6%.
Gross loss from financial services for the three months ended December 31, 2022 was $129,873, as compared to $545,190 for the three months ended December 31, 2021, a decrease of $415,317, or 76.2%. Gross margin increased to (22.5)% for the three months ended December 31, 2022 from gross margin of (165.7)% for the three months ended December 31, 2021. The gross losses were primarily attributable to a large portion of our cost of financial services are fixed and do not change along with the increase/decrease in our revenue from financial services. The significant increase in our gross margin for the financial services segment for the three months ended December 31, 2022 as compared to the three months ended December 31, 2021 was primarily attributed to the decreased amortization costs of intangible assets and the increased scale of operations resulting from larger revenue, which is reflected in the allocation of fixed costs, mainly consisting of amortization costs of intangible assets, to cost of revenue. We expect that our gross margin for the financial services segment will continue to increase since we anticipate we will generate more revenue from financial services and we can improve our gross margin from financial services segment to the extent that we can become more efficient by increasing our revenue.
Operating Expenses
Operating expenses consisted of advertising and marketing, professional fees, compensation and related benefits, amortization of intangible assets, and other general and administrative expenses.
Advertising and marketing
For the three months ended December 31, 2022, advertising and marketing expense increased by $13,900, or 39.5%, as compared to the three months ended December 31, 2021. The increase was primarily attributable to our incurred advertising and marketing activities to enhance the visibility and marketability of our services and to improve brand recognition and awareness. We expect that our advertising and marketing expense will remain in its current level with minimal increase in the near future.
Professional fees
Professional fees primarily consisted of audit fees, legal service fees, advisory fees, and consulting fees. For the three months ended December 31, 2022, professional fees decreased by $377,855, or 35.8% as compared to the three months ended December 31, 2021. The decrease was primarily attributable to a significant decrease in advisory service fees of approximately $277,000 mainly due to decreased advisory service related to our merger and acquisition, a decrease in legal service fees of approximately $76,000 due to decreased legal service related to our merger and acquisition, a decrease in consulting fees of approximately $94,000 mainly due to decreased consulting services related to our merger and acquisition, offset by an increase in other miscellaneous items of approximately $69,000 resulting from our business expansion. We expect that our professional fees will remain in its current level with minimal increase in the near future.
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Compensation and related benefits
For the three months ended December 31, 2022, our compensation and related benefits increased by $34,887, or 27.8%, as compared to the three months ended December 31, 2021. The increase was mainly attributable to increased management in our financial services segment. We expect that our compensation and related benefits will remain in its current level with minimal increase in the near future.
Amortization of intangible assets
For the three months ended December 31, 2022, our amortization of intangible assets increased by $937, or 1.4%, as compared to the three months ended December 31, 2021. The increase was primarily attributable to increased intangible assets in the three months ended December 31 2022. We expect that our amortization of intangible assets will remain in its current level in the near future.
Other general and administrative expenses
Other general and administrative expenses primarily consisted of rent, filing fee, and other miscellaneous items.
For the three months ended December 31, 2022, total other general and administrative expenses decreased by $63,680, or 33.1%, as compared to the three months ended December 31, 2021. The decrease was mainly due to a decrease in filing fee of approximately $11,000, a decrease in rent of approximately $8,000, and a decrease in other miscellaneous items of approximately $45,000 reflecting our efforts at stricter controls on corporate expenditure. We expect that other general and administrative expenses will remain in its current level with minimal increase in the near future.
Other (Expense) Income
Other income, net, totaled $2,573 for the three months ended December 31, 2022, as compared to other expense, net, of $1,216 for the three months ended December 31, 2021, an increase of $3,789.
Net Loss
As a result of the factors described above, our net loss was $1,133,922, or $0.00 per share (basic and diluted), for the three months ended December 31, 2022, as compared to $1,944,839, or $0.00 per share (basic and diluted), for the three months ended December 31, 2021, a decrease of $810,917 or 41.7%.
Foreign Currency Translation Adjustment
The reporting currency of the Company is U.S. Dollars. The functional currency of the parent company, Nukkleus Inc., Nukkleus Limited, Nukkleus Malta Holding Ltd. and its subsidiaries, is the U.S. dollar, the functional currency of Match Financial Limited and its subsidiary, Digital RFQ Limited, is the British Pound (“GBP”) and the functional currency of Digital RFQ Limited’s subsidiary, DRFQ Europe UAB, is Euro. The financial statements of our subsidiaries whose functional currency is the GBP or Euro are translated to U.S. dollars using period end rates of exchange for assets and liabilities, average rate of exchange for revenues, costs, and expenses and cash flows, and at historical exchange rates for equity. Net gains and losses resulting from foreign exchange transactions are included in the results of operations. As a result of foreign currency translations, which are a non-cash adjustment, we reported a foreign currency translation loss of $27,983 and $2,227 for the three months ended December 31, 2022 and 2021, respectively. This non-cash loss had the effect of increasing our reported comprehensive loss.
Comprehensive Loss
As a result of our foreign currency translation adjustment, we had comprehensive loss of $1,161,905 and $1,947,066 for the three months ended December 31, 2022 and 2021, respectively.
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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 December 31, 2022 and September 30, 2022, we had cash of $279,728 and $364,023, respectively, exclusive of customer custodial cash. We had working capital deficit of $4,208,662 as of December 31, 2022.
Our ability to continue as a going concern is dependent upon the management of expenses and our ability to obtain the necessary financing to meet our obligations and pay our liabilities arising from normal business operations when they come due, and upon profitable operations.
We need to either borrow funds or raise additional capital through equity or debt financings. However, we cannot be certain that such capital (from our stockholders or third parties) will be available to us or whether such capital will be available on terms that are acceptable to us. Any such financing likely would be dilutive to existing stockholders and could result in significant financial operating covenants that would negatively impact our business. In the event that there are any unforeseen delays or obstacles in obtaining funds through the aforementioned sources, TCM has committed to inject capital into the Company in order to maintain the ongoing operations of the business.
The following table sets forth a summary of changes in our working capital deficit from September 30, 2022 to December 31, 2022:
December 31, | September 30, | Changes in | ||||||||||||||
2022 | 2022 | Amount | Percentage | |||||||||||||
Working capital deficit: | ||||||||||||||||
Total current assets | $ | 9,707,972 | $ | 3,687,799 | $ | 6,020,173 | 163.2 | % | ||||||||
Total current liabilities | 13,916,634 | 7,474,324 | 6,442,310 | 86.2 | % | |||||||||||
Working capital deficit | $ | (4,208,662 | ) | $ | (3,786,525 | ) | $ | (422,137 | ) | 11.1 | % |
Our working capital deficit increased by $422,137 to $4,208,662 at December 31, 2022 from $3,786,525 at September 30, 2022. The increase in working capital deficit was primarily attributable to a decrease in due from affiliates of approximately $285,000 resulting from the payments received from our affiliates in the three months ended December 31, 2022, a significant increase in customer custodial cash liabilities of approximately $6,235,000 resulting from our business expansion, an increase in due to affiliates of approximately $124,000 driven by the payments received from our affiliates and expenses paid by our affiliates on behalf of us in the three months ended December 31, 2022, offset by a significant increase in customer custodial cash of approximately $6,235,000 resulting from our business expansion.
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 Three Months Ended December 31, 2022 Compared to the Three Months Ended December 31, 2021
Net cash flow provided by operating activities for the three months ended December 31, 2022 was $5,834,320, which primarily reflected the non-cash items adjustment primarily consisting of amortization of intangible assets, mainly representing intangible assets acquired on Match acquisition, of approximately $593,000, and stock-based compensation and service expense of approximately $147,000 due to options granted for professional services, and the changes in operating assets and liabilities, primarily consisting of a decrease in due from affiliates of approximately $285,000 resulting from the payments received from our affiliates in the first quarter of fiscal 2023, a significant increase in customer custodial cash liabilities of approximately $5,875,000 resulting from our business expansion, an increase in due to affiliates of approximately $93,000 driven by the payments received from our affiliates and expenses paid by our affiliates on behalf of us in the first quarter of fiscal 2023, offset by our consolidated net loss of approximately $1,134,000.
Net cash flow used in operating activities was $1,060,333 for the three months ended December 31, 2021, which primarily reflected our consolidated net loss of approximately $1,945,000, and the changes in operating assets and liabilities, primarily consisting of an decrease in customer custodial cash liabilities of approximately $709,000 due to the decrease in customer custodial cash in the first quarter of fiscal 2022, a decrease in customer digital currency liabilities of approximately $151,000 due to the decrease in customer digital currency controlled by us in the first quarter of fiscal 2022, offset by a decrease in customer digital currency assets of approximately $151,000 due to the decrease in customer digital currency controlled by us in the first quarter of fiscal 2022, an increase in due to affiliates of approximately $146,000 resulting from the payments received from our affiliates and expenses paid by our affiliates on behalf of us in the first quarter of fiscal 2022, and an increase in accounts payable and accrued liabilities of approximately $152,000 which was mainly due to the increase in accrued professional fees of approximately $170,000 driven by the increase in professional service providers, and the non-cash items adjustment consisting of amortization of intangible assets of approximately $912,000 and stock-based compensation and service expense of approximately $379,000.
Net cash flow used in investing activities was $68,000 for the three months ended December 31, 2022. During the three months ended December 31, 2022, we made payment for note receivable of approximately $68,000.
There were no investing activities for the three months ended December 31, 2021.
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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 December 31, 2022 and 2021, we had an unrealized foreign currency translation loss of approximately $28,000 and $2,000, 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.
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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 December 31, 2022, 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 December 31, 2022. 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 December 31, 2022.
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 weaknesses, we performed additional analyses and procedures in order to conclude that our consolidated financial statements for the quarter ended December 31, 2022 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 three months ended December 31, 2022 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.
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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, 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 January 20, 2023, parties to the Merger Agreement entered into an Amendment No. 3 to the Merger Agreement (the “Amendment”) solely to extend the Outside Closing Date (as defined in the Merger Agreement), to June 23, 2023 (following the approval by Brilliant’s shareholders of the extension of the life of the SPAC pursuant to Brilliant’s organizational documents, which was granted on April 20, 2023). The transactions contemplated by the Merger Agreement are expected to close in the third 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 December 31, 2022, the White Lion Agreement is not yet effective.
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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.
Item 6. Exhibits
The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q.
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(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) | Incorporated by reference to the Form 8K Current Report filed with the SEC on February 23, 2022. |
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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: May 19, 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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