UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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)
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) |
(Address of principal executive offices, including zip code)
(Registrant’s telephone number, including area code)
Brilliant Acquisition Corporation
(Former name or former address, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| The | ||||
| The |
Securities registered under Section 12(g) of the Exchange Act: None
Indicate by check mark whether the registrant
(1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes ☐
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 by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date.
| Class | Outstanding August 27, 2024 | |
| Common Stock, $0.0001 par value per share |
NUKKLEUS INC.
FORM 10-Q
June 30, 2024
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
| June 30, | September 30, | |||||||
| 2024 | 2023 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | $ | ||||||
| Customer custodial cash | ||||||||
| Customer digital currency assets | ||||||||
| Digital assets | ||||||||
| Due from affiliates | ||||||||
| Note receivable - related parties, net | ||||||||
| Other current assets | ||||||||
| TOTAL CURRENT ASSETS | ||||||||
| NON-CURRENT ASSETS: | ||||||||
| Cost method investment | ||||||||
| Intangible assets, net | ||||||||
| TOTAL NON-CURRENT ASSETS | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable | $ | $ | ||||||
| Customer custodial cash liabilities | ||||||||
| Customer digital currency liabilities | ||||||||
| Convertible promissory note payable, net | - | |||||||
| Promissory note payable, net | ||||||||
| Due to affiliates | ||||||||
| Loan payable - related parties | ||||||||
| Accrued payroll liability and directors’ compensation | ||||||||
| Accrued professional fees | ||||||||
| Accrued liabilities and other payables | ||||||||
| TOTAL CURRENT LIABILITIES | ||||||||
| NON-CURRENT LIABILITIES: | ||||||||
| Loan payable - related parties | ||||||||
| Interest payable - related parties | ||||||||
| TOTAL NON-CURRENT LIABILITIES | ||||||||
| TOTAL LIABILITIES | ||||||||
| COMMITMENTS AND CONTINGENCIES - (Note 14) | ||||||||
| STOCKHOLDERS’ DEFICIT: | ||||||||
| Preferred stock ($ | ||||||||
| Common stock ($ | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive (loss) income | ( | ) | ||||||
| TOTAL STOCKHOLDERS’ DEFICIT | ( | ) | ( | ) | ||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT | $ | $ | ||||||
The accompanying notes to condensed consolidated financial statements are an integral part of these statements.
1
NUKKLEUS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| 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 | ||||||||||||||||
| Gross profit - general support services - related party | ||||||||||||||||
| Gross profit (loss) - financial services | ( | ) | ( | ) | ||||||||||||
| Total gross profit | ( | ) | ( | ) | ||||||||||||
| OPERATING EXPENSES: | ||||||||||||||||
| Advertising and marketing | ||||||||||||||||
| Professional fees | ||||||||||||||||
| Compensation and related benefits | ||||||||||||||||
| Bad debt expense | ||||||||||||||||
| Other general and administrative | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| LOSS FROM OPERATIONS | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| OTHER (EXPENSE) INCOME: | ||||||||||||||||
| Interest expense - amortization of debt discount | ( | ) | ( | ) | ||||||||||||
| Interest expense - other | ( | ) | ( | ) | ||||||||||||
| Interest expense - related parties | ( | ) | ( | ) | ||||||||||||
| Loss on debts settlement | ( | ) | ( | ) | ||||||||||||
| Other income | ||||||||||||||||
| Total other (expense) income, 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 condensed consolidated financial statements are an integral part of these statements.
2
NUKKLEUS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
For the Three and Nine Months Ended June 30, 2024
(Unaudited)
| Preferred Stock | Common Stock | Additional | Accumulated Other | Total | |||||||||||||||||||||||||||||
| Number of | Number of | Paid-in | Accumulated | Comprehensive | Stockholders’ | ||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Income (Loss) | Deficit | ||||||||||||||||||||||||||
| Balance as of October 1, 2023 | $ | $ | $ | $ | ( |
) | $ | $ | ( |
) | |||||||||||||||||||||||
| Issuance of common stock for services | - | ||||||||||||||||||||||||||||||||
| Conversion of related party debts into common stock | - | ( |
) | ||||||||||||||||||||||||||||||
| Issuance of common stock in connection with reverse recapitalization | - | ||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | |||||||||||||||||||||||||||||||
| Net loss for the three months ended December 31, 2023 | - | - | ( |
) | ( |
) | |||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | ( |
) | ( |
) | |||||||||||||||||||||||||||
| Balance as of December 31, 2023 | ( |
) | ( |
) | ( |
) | |||||||||||||||||||||||||||
| Issuance of common stock for services | |||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | |||||||||||||||||||||||||||||||
| Net loss for the three months ended March 31, 2024 | - | - | ( |
) | ( |
) | |||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | |||||||||||||||||||||||||||||||
| Balance as of March 31, 2024 | ( |
) | ( |
) | ( |
) | |||||||||||||||||||||||||||
| Allocated value of warrants related to issuance of convertible debt | - | - | |||||||||||||||||||||||||||||||
| Beneficial conversion feature related to convertible debt | - | - | |||||||||||||||||||||||||||||||
| Allocated value of warrants related to debt issuance | - | - | |||||||||||||||||||||||||||||||
| Issuance of common stock for debts settlement | |||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | |||||||||||||||||||||||||||||||
| Net loss for the three months ended June 30, 2024 | - | - | ( |
) | ( |
) | |||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | ( |
) | ( |
) | |||||||||||||||||||||||||||
| Balance as of June 30, 2024 | $ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | |||||||||||||||||||||
The accompanying notes to condensed consolidated financial statements are an integral part of these statements.
3
NUKKLEUS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the Three and Nine Months Ended June 30, 2023
(Unaudited)
| Preferred Stock | Common Stock | Additional | Accumulated 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 | ( |
) | ||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | ||||||||||||||||||||||||||||||
| Net loss for the three months ended March 31, 2023 | - | - | ( |
) | ( |
) | ||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | ( |
) | ( |
) | ||||||||||||||||||||||||||
| Balance as of March 31, 2023 | ( |
) | ||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | ||||||||||||||||||||||||||||||
| Net loss for the three months ended June 30, 2023 | - | - | ( |
) | ( |
) | ||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | ( |
) | ( |
) | ||||||||||||||||||||||||||
| Balance as of June 30, 2023 | $ | $ | $ | $ | ( |
) | $ | $ | ||||||||||||||||||||||||
The accompanying notes to condensed consolidated financial statements are an integral part of these statements.
4
NUKKLEUS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the Nine Months Ended | ||||||||
| June 30, | ||||||||
| 2024 | 2023 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Amortization of debt discount | ||||||||
| Amortization of intangible assets | ||||||||
| Stock-based compensation and service expense | ||||||||
| Loss on debts settlement | ||||||||
| Provision for bad debt | ||||||||
| Bad debt recovery | ( | ) | ||||||
| Unrealized foreign currency exchange gain | ( | ) | ( | ) | ||||
| Impairment of digital assets | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Customer digital currency assets | ( | ) | ||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Digital assets | ( | ) | ||||||
| Due from affiliates | ( | ) | ||||||
| Other current assets | ( | ) | ( | ) | ||||
| Accounts payable | ||||||||
| Customer custodial cash liabilities | ( | ) | ( | ) | ||||
| Customer digital currency liabilities | ( | ) | ||||||
| Due to affiliates | ||||||||
| Accrued payroll liability and directors’ compensation | ||||||||
| Accrued professional fees | ( | ) | ||||||
| Accrued liabilities and other payables | ( | ) | ||||||
| NET CASH USED IN OPERATING ACTIVITIES | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Investment in note receivable | ( | ) | ||||||
| Purchase of intangible asset | ( | ) | ||||||
| Proceeds from note receivable – related parties | ||||||||
| NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES | ( | ) | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Cash received in reverse recapitalization | ||||||||
| Proceeds from loan payable | ||||||||
| Repayments of loan payable | ( | ) | ||||||
| Proceeds from loan payable - related parties | ||||||||
| Repayments of loan payable - related parties | ( | ) | ||||||
| Proceeds from issuance of convertible debt and warrants | ||||||||
| Proceeds from issuance of debt and warrants | ||||||||
| NET CASH PROVIDED BY FINANCING ACTIVITIES | ||||||||
| EFFECT OF EXCHANGE RATE ON CASH | ||||||||
| NET 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 | $ | $ | ||||||
| NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
| Conversion of related party debts into common stock | $ | $ | ||||||
| Allocated value of warrants and beneficial conversion features related to convertible debt | $ | $ | ||||||
| Original Issuance Discount | $ | $ | ||||||
| Allocated value of warrants related to debt | $ | $ | ||||||
| Related party’s note receivable exchange for loan payable | $ | $ | ||||||
| Accrued liabilities settled in shares | $ | $ | ||||||
The accompanying notes to condensed consolidated financial statements are an integral part of these statements.
5
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – THE COMPANY HISTORY AND NATURE OF THE BUSINESS
Nukkleus Inc. (formerly known as, Brilliant Acquisition Corporation) (“Nukkleus”) was formed on May 24, 2019. Nukkleus was formed for the purpose of acquiring, engaging in a share exchange, share reconstruction and amalgamation with, purchasing all or substantially all of the assets of, entering into contractual arrangements with, or engaging in any other similar business combination with one or more businesses or entities. On June 23, 2023, Brilliant Acquisition Corporation, a British Virgin Islands company (prior to the Merger “Brilliant”, and following the Merger, a Delaware corporation “Nukkleus”), entered into an Amended and Restated Agreement and Plan of Merger (as amended by the First Amendment to the Amended and Restated Agreement and Plan of Merger on November 1, 2023, the “Merger Agreement”), by and among Brilliant BRIL Merger Sub, Inc., a Delaware corporation and wholly-owned subsidiary of Brilliant (“Merger Sub”), and Nukkleus Inc., a Delaware corporation (“Old Nukk” or the “Company”). Old Nukk (f/k/a Compliance & Risk Management Solutions Inc.) 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 Merger Agreement provides that, among other things, at the closing (the “Closing”) of the transactions contemplated by the Merger Agreement, Merger Sub merged with and into Old Nukk (the “Merger”), with Old Nukk surviving as a wholly-owned subsidiary of Brilliant. In connection with the Merger, Brilliant changed its name to “Nukkleus Inc.” (“Nukkleus” or “Combined Company”). The Merger and other transactions contemplated by the Merger Agreement are hereinafter referred to as the “Business Combination.” The Business Combination was completed on December 22, 2023 (“Closing Date”). The accompanying financial statements are those of Old Nukk, as adjusted for the reverse recapitalization, as described in Note 2.
As a result of Business Combination, Nukkleus now 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.
In order to expand Match’s business into the Federal Republic of Nigeria, on June 28, 2024, Match acquired
6
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – THE COMPANY HISTORY AND NATURE OF THE BUSINESS (continued)
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
On December 30, 2021, Old Nukk and the shareholder
(the “Digiclear Shareholder”) of Digiclear Ltd. (“Digiclear”) entered into a Purchase and Sale Agreement (the
“Digiclear Agreement”) pursuant to which Old Nukk acquired
Liquidity and capital resources
Liquidity
is the ability of a company to generate funds to support its current and future operations, satisfy its obligations and otherwise operate
on an ongoing basis. At June 30, 2024 and September 30, 2023, the Company had cash of approximately $
The condensed
consolidated financial statements have been prepared using accounting principles generally accepted in the United States of America applicable
for a going concern, which assumes that the Company will realize its assets and discharge its liabilities in the ordinary course of business.
The Company had a working capital deficit of approximately $
The accompanying condensed consolidated financial statements do not include any adjustments related to the recoverability or classification of asset-carrying amounts or the amounts and classification of liabilities that may result should the Company be unable to continue as a going concern.
NOTE 2 – BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
Reverse recapitalization
Pursuant to the Merger Agreement, the merger between Brilliant and Old Nukk was accounted for as a reverse recapitalization in accordance with accounting principles generally accepted in the United States (the “Reverse Recapitalization”). Accordingly, for accounting purposes, the Reverse Recapitalization was treated as the equivalent of Old Nukk issuing stock for the net assets of Brilliant, accompanied by a recapitalization. The net assets of Brilliant are stated at historical cost, with no goodwill or other intangible assets recorded.
7
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2 – BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION (continued)
Reverse recapitalization (continued)
Old Nukk was determined to be the accounting acquirer based on the following predominant factors:
| ● | Old Nukk’s existing stockholders have the greatest voting interest in the Combined Company; |
| ● | Old Nukk controls the majority of the board of directors of the Combined Company and, given the board of directors election and retention provisions, Old Nukk holds the ability to maintain control of the board of directors on a go-forward basis; and |
| ● | Old Nukk’s senior management is the senior management of the Combined Company. |
The condensed consolidated assets, liabilities,
and results of operations prior to the Reverse Recapitalization are those of Old Nukk. The shares and corresponding capital amounts and
losses per share, prior to the Reverse Recapitalization, have been retroactively restated based on shares reflecting the exchange ratio
of
Principals 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 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 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 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 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, 2023 filed with the Securities and Exchange Commission on July 12, 2024. The consolidated balance sheet as of September 30, 2023 contained herein has been derived from the audited consolidated financial statements as of September 30, 2023, but does not include all disclosures required by U.S. GAAP.
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of estimates
The preparation of the 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 condensed consolidated financial statements and accompanying notes. Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the financial statements, which management considered in formulating its estimate, could change in the near term due to one or more future confirming events. Accordingly, the actual results could differ significantly from those estimates.
Significant estimates during the three and nine months ended June 30, 2024 and 2023 include the allowance for doubtful accounts, the useful life of intangible assets, the assumptions used in assessing impairment of long-term assets, the valuation of deferred tax assets and associated valuation allowances, the valuation of stock-based compensation, the fair value of customer digital currency assets and liabilities, and assumptions used to determine fair value of warrants, beneficial conversion feature and embedded conversion features of convertible note payable.
8
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Cash and cash equivalents
| Country: | June 30, 2024 | September 30, 2023 | ||||||||||||||
| United States | $ | % | $ | % | ||||||||||||
| United Kingdom | % | % | ||||||||||||||
| Republic of Lithuania | % | |||||||||||||||
| Malta | % | % | ||||||||||||||
| Total cash | $ | % | $ | % | ||||||||||||
For purposes of the condensed consolidated statements of cash flows, the Company considers all highly liquid instruments with a maturity of three months or less when purchased and money market accounts to be cash equivalents. The Company had no cash equivalents at June 30, 2024 and September 30, 2023. 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.
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 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.
9
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Fair value of financial instruments and fair value measurements
The Company adopted the guidance of Accounting Standards Codification (“ASC”) 820 for fair value measurements which clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:
| ● | Level 1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date. |
| ● | Level 2-Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data. |
| ● | Level 3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information. |
The fair value of the Company’s assets and liabilities, which qualify as financial instruments under ASC Topic 820, “Fair Value Measurement,” approximates the carrying amounts represented in the accompanying 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.
| Quoted Price in | Significant Other | Significant | ||||||||||||||
| Active Markets | Observable Inputs | Unobservable Inputs | Balance at June 30, | |||||||||||||
| (Level 1) | (Level 2) | (Level 3) | 2024 | |||||||||||||
| Customer digital currency assets | $ | $ | $ | $ | ||||||||||||
| Customer digital currency liabilities | $ | $ | $ | $ | ||||||||||||
As of September 30, 2023, the Company did not have any customer digital currency assets and 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.
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.
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 condensed consolidated statements of operations and comprehensive loss. The Company assigns costs to transactions on a first-in, first-out basis.
10
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Credit risk and uncertainties
The ramifications of the outbreak of the novel strain of COVID-19, reported to have started in December 2019 and spread globally, are filled with uncertainty and changing quickly. Our operations have continued during the COVID-19 pandemic and we have not had significant disruption.
The Company is operating in a rapidly changing environment so the extent to which COVID-19 impacts its business, operations and financial results from this point forward will depend on numerous evolving factors that the Company cannot accurately predict. Those factors include the following: the duration and scope of the pandemic; governmental, business and individuals’ actions that have been and continue to be taken in response to the pandemic.
The Company
maintains a portion of its cash in bank and financial institution deposits within U.S. that at times may exceed federally-insured limits
of $
We may maintain
our cash assets at financial institutions in the U.S. in amounts that may be in excess of the Federal Deposit Insurance Corporation (“FDIC”)
insurance limit of $
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.
Note receivable – related parties
Note receivable – related parties is presented
net of an allowance for doubtful account. The Company maintains allowance for doubtful account for estimated loss. The Company reviews
the note receivable – related parties on a periodic basis and makes general and specific allowance when there is doubt as to the
collectability of individual balance. In evaluating the collectability of individual receivable balance, the Company considers many factors,
including the age of the balance, a borrower’s historical payment history, its current credit-worthiness and current economic trend.
Note receivable is written off after exhaustive efforts at collection. During the nine months ended June 30, 2024, accounts with the amount
of approximately $
11
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Other current assets
Other current
assets primarily consist of prepaid directors and officers’ liability insurance premium, prepaid NASDAQ listing fee, security deposit,
and accounts receivable. As of June 30, 2024 and September 30, 2023, other current assets amounted to $
Variable interest entity (“VIE”)
A VIE is an entity that either (i) has insufficient equity to permit the entity to finance its activities without additional subordinated financial support or (ii) has equity investors who lack the characteristics of a controlling financial interest. The primary beneficiary of a VIE is the party with both the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and the obligation to absorb the losses or the right to receive benefits that could potentially be significant to the VIE.
To assess whether the Company has the power to direct the activities of a VIE that most significantly impact its economic performance, the Company considers all the facts and circumstances including its ongoing rights and responsibilities. This assessment includes identifying the activities that most significantly impact the VIE’s economic performance and identifying which party, if any, has power over those activities. In general, the party that makes the most significant decisions affecting the VIE is determined to have the power to direct the activities of the VIE. To assess whether the Company has the obligation to absorb the losses or the right to receive benefits that could potentially be significant to the VIE, the Company considers all of its economic interests, including debt and equity interests, and any other variable interests in the VIE. If the Company determines that it is the party with the power to make the most significant decisions affecting the VIE, and the Company has an obligation to absorb the losses or the right to receive benefits that could potentially be significant to the VIE, then the Company consolidates the VIE.
The Company analyzes its investment in Jacobi to determine whether it is a VIE and, if so, whether the Company is the primary beneficiary in accordance with ASC 810 Consolidation. The Company determines Jacobi is a VIE since it has insufficient equity to permit it to finance its activities without additional subordinated financial support. In determining whether it is the primary beneficiary, the Company considers whether it has the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance. The Company also considers whether it has the obligation to absorb losses of, or the right to receive benefits from, the VIE. The Company is not the primary beneficiary of Jacobi as it does not have the power to direct the activities that most significantly impact the economic performance of Jacobi, due to Jacobi’ management and board of directors’ structure. As a result, the variable interest entity is not consolidated. Creditors of the Company’s variable interest entity do not have recourse against the general credit of the Company. The Company uses the cost method to account for its investment in Jacobi in which the Company is not deemed to be the primary beneficiary.
The Company’s investment in unconsolidated variable interest entity is classified as cost method investment in the condensed consolidated balance sheets. The Company’s assets and liabilities with the variable interest entity are classified as due from/to affiliates.
| June 30, 2024 | September 30, 2023 | |||||||
| Cost method investment | $ | $ | ||||||
| Due from affiliates | ||||||||
| Total VIE assets | $ | $ | ||||||
| Maximum exposure to loss | $ | $ | ||||||
Intangible assets
Intangible assets consist of regulatory licenses,
which are being amortized on a straight-line method over the estimated useful life of
12
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue recognition
The Company determines revenue recognition from contracts with customers through the following steps:
| ● | Step 1: Identify the contract with the customer |
| ● | Step 2: Identify the performance obligations in the contract |
| ● | Step 3: Determine the transaction price |
| ● | Step 4: Allocate the transaction price to the performance obligations in the contract |
| ● | Step 5: Recognize revenue when the company satisfies a performance obligation |
Revenue is recognized when control of the promised goods or services is transferred to the customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The Company’s revenues are derived from providing:
| ● | General support services under a GSA to a related party. The transaction price is determined in accordance with the terms of the GSA and payments are due on a monthly basis. There are multiple services provided under the GSA (including operational reporting and technical support infrastructure, website hosting and marketing solutions, accounting maintenance, risk monitoring services, new account processing and customer care and continued support) and these performance obligations are combined into a single unit of accounting. Fees are recognized as revenue over time as the services are rendered under the terms of the GSA. The Company recognizes the full contracted amount each period with no deferred revenue. The nature of the performance obligation is to provide the specified goods or services directly to the customer. The Company engages another party to satisfy the performance obligation on its behalf. The Company’s performance obligation is not to arrange for the provision of the specified good or service by another party. The Company is primarily responsible for fulfilling the promise to provide the specified good or service. Therefore, the Company is deemed to be a principal in the transaction and recognizes revenue for that performance obligation. The Company is a financial technology company which is focused on providing software and technology solutions for the worldwide retail foreign exchange (“FX”) trading industry. Under a GSA, the Company is contractually obligated to provide for the fulfillment software, technology, customer sales and marketing and risk management technology hardware and software solutions package to TCM. The Company provides these services, obtained from affiliate service provider FXDirect Dealer, LLC which is under common ownership, and controls the services of its service provider necessary to legally transfer of the services to TCM. Consequently, the Company is defined as the principal in the transaction. The Company, as principal, satisfies its obligation by providing ongoing service support enabling TCM to conduct its retail FX business without interruption. Upon satisfaction of its obligation, the Company recognizes revenue in the gross amount of consideration it is entitled to receive. The monthly GSA price is calculated by applying the Company’s approximately |
| ● | 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). |
13
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Disaggregation of revenues
The Company’s revenues stream detail are as follows:
| Revenue Stream | Revenue Stream Detail | |
| General support services | Providing software, technology, customer sales and marketing and risk management technology hardware and software solutions package under a GSA to a related party | |
| Financial services | Providing payment services from one fiat currency to another or to digital assets |
| Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||
| Revenue Stream | 2024 | 2023 | 2024 | 2023 | ||||||||||||
| General support services | $ | $ | $ | $ | ||||||||||||
| Financial services | ||||||||||||||||
| Total revenues | $ | $ | $ | $ | ||||||||||||
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. The Company did not record any impairment charge for the three and nine months ended June 30, 2024 and 2023 as there was no impairment indicator noted.
Beneficial conversion features and warrants
The Company evaluates the conversion feature of convertible debt instruments to determine whether the conversion feature was beneficial as described in ASC 470-30, Debt with Conversion and Other Options. The Company records a beneficial conversion feature (“BCF”) related to the issuance of convertible debt that has conversion features at fixed or adjustable rates that are in-the-money when issued and records the relative fair value of any warrants issued with those instruments. The BCF for the convertible instruments is recognized and measured by allocating a portion of the proceeds to the warrants and as a reduction to the carrying amount of the convertible instrument equal to the intrinsic value of the conversion features, both of which are credited to additional paid-in capital. The Company calculates the fair value of warrants with the convertible instruments using the Black-Scholes valuation model.
Under these guidelines, the Company first allocates the value of the proceeds received from a convertible debt transaction between the convertible debt instrument and any other detachable instruments included in the transaction (such as warrants) on a relative fair value basis. A BCF is then measured as the intrinsic value of the conversion option at the commitment date, representing the difference between the effective conversion price and the Company’s stock price on the commitment date multiplied by the number of shares into which the debt instrument is convertible. The allocated value of the BCF and warrants are recorded as a debt discount and accreted over the expected term of the convertible debt as interest expense. If the intrinsic value of the BCF is greater than the proceeds allocated to the convertible debt instrument, the amount of the discount assigned to the BCF is limited to the amount of the proceeds allocated to the convertible debt instrument.
Advertising and marketing costs
All costs related to
advertising and marketing are expensed as incurred. For the three months ended June 30, 2024 and 2023, advertising and marketing costs
amounted to $
14
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income taxes
The Company accounts for income taxes pursuant to Financial Accounting Standards Board (“FASB”) ASC 740, Income Taxes. Deferred tax assets and liabilities are determined based on temporary differences between the bases of certain assets and liabilities for income tax and financial reporting purposes. The deferred tax assets and liabilities are classified according to the financial statement classification of the assets and liabilities generating the differences.
The Company maintains a valuation allowance with respect to deferred tax assets. The Company establishes a valuation allowance based upon the potential likelihood of realizing the deferred tax asset and taking into consideration the Company’s financial position and results of operations for the current period. Future realization of the deferred tax benefit depends on the existence of sufficient taxable income within the carry-forward period under the Federal and foreign tax laws. Changes in circumstances, such as the Company generating taxable income, could cause a change in judgment about the realizability of the related deferred tax asset. Any change in the valuation allowance will be included in income in the period of the change in estimate.
The Company follows the provisions of FASB ASC 740-10 Uncertainty in Income Taxes (ASC 740-10). Certain recognition thresholds must be met before a tax position is recognized in the financial statements. An entity may only recognize or continue to recognize tax positions that meet a “more-likely-than-not” threshold.
Foreign currency translation
The reporting currency of the Company is U.S. Dollars. The functional currency of the parent company, Nukkleus Inc., Nukkleus Limited, Nukkleus Malta Holding Ltd. and its subsidiaries, is the U.S. dollar, the functional currency of Match Financial Limited and its subsidiary, Digital RFQ, is the British Pound (“GBP”), the functional currency of Digital RFQ’s subsidiary, DRFQ Europe UAB, is Euro, and the functional currency of Digital RFQ’s subsidiary, DRFQ Pay North America, is CAD. Monetary assets and liabilities denominated in currencies other than the reporting currency are translated into the reporting currency at the rates of exchange prevailing at the balance sheet date. Revenue and expenses are translated using average rates during each reporting period, and stockholders’ equity is translated at historical exchange rates. Cash flows are also translated at average translation rates for the periods, therefore, amounts reported on the statements of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheets. Translation adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are included in determining comprehensive income/loss.
Transactions denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing on the transaction dates. Assets and liabilities denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing at the balance sheet date with any transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. Most of the Company’s revenue transactions are transacted in the functional currency of the Company. The Company does not enter into any material transaction in foreign currencies. Transaction gains or losses have not had, and are not expected to have, a material effect on the results of operations of the Company.
Asset and liability accounts at June 30, 2024 and September 30, 2023 were translated at 0.7904 GBP and 0.8199 GBP to $1.00, respectively, which were the exchange rates on the balance sheet dates. Asset and liability accounts at June 30, 2024 and September 30, 2023 were translated at 0.9329 EUR and 0.9446 EUR to $1.00, respectively, which were the exchange rates on the balance sheet dates. Asset and liability accounts at June 30, 2024 and September 30, 2023 were translated at 1.3694 CAD and 1.3591 CAD to $1.00, which was the exchange rate on the balance sheet date. Equity accounts were stated at their historical rates. The average translation rate applied to the statement of operations for the nine months ended June 30, 2024 and 2023 was 0.7955 GBP and 0.8249 GBP to $1.00, respectively. The average translation rate applied to the statement of operations for the nine months ended June 30, 2024 and 2023 was 0.9261 EUR and 0.9429 EUR to $1.00. The average translation rate applied to the statement of operations for the nine months ended June 30, 2024 and for the period from February 18, 2023 through June 30, 2023 was 1.3597 CAD and 1.3516 CAD to $1.00. Cash flows from the Company’s operations are calculated based upon the local currencies using the average translation rate.
Comprehensive loss
Comprehensive loss is comprised of net loss and all changes to the statements of equity, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders. For the Company, comprehensive loss for the three and nine months ended June 30, 2024 and 2023 consisted of net loss and unrealized loss from foreign currency translation adjustment.
15
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
Segment reporting
The Company uses “the management approach” in determining reportable operating segments. The management approach considers the internal organization and reporting used by the Company’s chief operating decision maker for making operating decisions and assessing performance as the source for determining the Company’s reportable segments. The Company’s chief operating decision maker is its Chief Executive Officer (“CEO”), who reviews operating results to make decisions about allocating resources and assessing performance for the entire company.
The Company has determined that it has two reportable business segments: general support services segment and financial services segment. These reportable segments offer different types of services and products, have different types of revenue, and are managed separately as each requires different operating strategies and management expertise.
Per share data
ASC Topic 260, Earnings per Share, requires presentation of both basic and diluted earnings per share (“EPS”) with a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.
Basic net earnings per share are computed by dividing net earnings available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted net earnings per share is computed by dividing net earnings applicable to common stockholders by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. For the three and nine months ended June 30, 2024 and 2023, potentially dilutive common shares consist of the common shares issuable upon the exercise of common stock options and warrants (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.
| Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Options to purchase common stock | ||||||||||||||||
| Warrants to purchase common stock | ||||||||||||||||
| Potentially dilutive security | ||||||||||||||||
Reclassification
Certain prior period amounts have been reclassified to conform to the current period presentation. These reclassifications have no effect on the previously reported financial position, results of operations and cash flows.
16
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Merger
Old Nukk completed a Business Combination with
Brilliant on December 22, 2023. All references in these condensed consolidated financial statements to shares and corresponding capital
amounts and losses per share, prior to the reverse recapitalization, have been retroactively restated based on shares reflecting the exchange
ratio of
Recently issued accounting pronouncements
In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-06, Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40), to simplify accounting for certain financial instruments. ASU 2020-06 eliminates the current models that require separation of beneficial conversion and cash conversion features from convertible instruments and simplifies the derivative scope exception guidance pertaining to equity classification of contracts in an entity’s own equity. The new standard also introduces additional disclosures for convertible debt and freestanding instruments that are indexed to and settled in an entity’s own equity. ASU 2020-06 amends the diluted earnings per share guidance, including the requirement to use the if-converted method for all convertible instruments. ASU 2020-06 is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years, with early adoption permitted. The adoption of ASU 2020-06 is not expected to have a material effect on the Company’s condensed consolidated financial statements and related disclosures.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. This guidance is intended to enhance the transparency and decision-usefulness of income tax disclosures. The amendments in ASU 2023-09 address investor requests for enhanced income tax information primarily through changes to disclosure regarding rate reconciliation and income taxes paid both in the U.S. and in foreign jurisdictions. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024 on a prospective basis, with the option to apply the standard retrospectively. Early adoption is permitted. The company is currently evaluating this guidance to determine the impact it may have on its condensed consolidated financial statements disclosures.
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 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 includes these cash deposits to be
utilized for its contractual obligations to its customers as customer custodial cash liabilities in the condensed consolidated balance
sheets.
| June 30, 2024 | September 30, 2023 | |||||||
| 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 and nine months ended June 30, 2024 and 2023, 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.
17
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4 – CUSTOMER ASSETS AND LIABILITIES (continued)
| June 30, 2024 | September 30, 2023 | |||||||||||||||
| Fair Value | Percentage of Total | Fair Value | Percentage of Total | |||||||||||||
| Stablecoin/USD Coin | $ | % | $ | |||||||||||||
| Ethereum | % | |||||||||||||||
| Total customer digital currency assets | $ | % | $ | |||||||||||||
NOTE 5 – DIGITAL ASSETS
| Asset | Estimated Useful Life | Cost | Impairment | Digital Assets | ||||||||||
| Bitcoin | $ | $ | $ | |||||||||||
| Ethereum | ||||||||||||||
| Stablecoin/USD Coin | ||||||||||||||
| Other | ||||||||||||||
| Total | $ | $ | $ | |||||||||||
| Asset | Estimated Useful Life | Cost | Impairment | Digital Assets | ||||||||||
| Bitcoin | $ | $ | $ | |||||||||||
| Ethereum | ||||||||||||||
| Stablecoin/USD Coin | ||||||||||||||
| Other | ||||||||||||||
| Total | $ | $ | $ | |||||||||||
The Company recorded impairment expense of $
The Company recorded impairment expense of
and $
NOTE 6 – LOAN PAYABLE
In November
2023, the Company entered into a loan agreement with a third party. Pursuant to the loan agreement, the Company borrowed $
In January 2024, this loan was repaid in full.
18
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 7 - CONVERTIBLE PROMISSORY NOTE PAYABLE, NET
June 11, 2024 convertible promissory note payable
On
June 11, 2024 (the “Effective Date”), the Company issued a Senior Unsecured Promissory Note (the “Note”) in the
principal amount of $
The
Company and X Group also entered into a Restructuring Agreement providing that, among other items, X Group, in its sole discretion, will
have the right for a period for six months from the Effective Date (the “Investment Period”), to lend the Company an additional
$
Based upon the Company’s analysis of the criteria contained in ASC Topic 815-40, “Derivatives and Hedging - Contracts in an Entity’s Own Equity”, the Company determined that the warrants issued to X Group are classified as equity in additional paid-in capital.
In accordance with ASC 470-20-25-2, proceeds from the sale of a debt instrument with stock purchase warrants are allocated to the two elements based on the relative fair values of the debt instrument without the warrants and of the warrants themselves at time of issuance. The portion of the proceeds so allocated to the warrants are accounted for as additional paid-in capital. The remainder of the proceeds are allocated to the debt instrument portion of the transaction.
The fair values of the warrants issued to the
investor were computed using the Black-Scholes option-pricing model with the following assumptions: volatility of
The Company
recorded a beneficial conversion feature of $
Therefore,
the Company recorded a total debt discount of $
June 17, 2024 and June 18, 2024 convertible promissory note payable
On
June 17, 2024, the Company issued an additional Note in the principal amount of $
On June
18, 2024, the Company issued an additional Note in the principal amount of $
Therefore,
the Company recorded a total debt discount of $
For the
three and nine months ended June 30, 2024, amortization of debt discount and interest expense related to the Note amounted to $
19
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 7 - CONVERTIBLE PROMISSORY NOTE PAYABLE, NET (continued)
| June 30, 2024 | ||||
| Principal amount | $ | |||
| Less: unamortized debt discount | ( | ) | ||
| Convertible promissory note payable, net | $ | |||
NOTE 8 - PROMISSORY NOTE PAYABLE, NET
On
April 30, 2024, the Company issued a promissory note (“April 2024 Loan”) in the principal amount of $
Based upon the Company’s analysis of the criteria contained in ASC Topic 815-40, “Derivatives and Hedging - Contracts in an Entity’s Own Equity”, the Company determined that the warrants issued to the investor are classified as equity in additional paid in-capital.
In accordance with ASC 470-20-25-2, proceeds from the sale of a debt instrument with stock purchase warrants are allocated to the two elements based on the relative fair values of the debt instrument without the warrants and of the warrants themselves at time of issuance. The portion of the proceeds so allocated to the warrants are accounted for as additional paid-in capital. The remainder of the proceeds are allocated to the debt instrument portion of the transaction.
The fair values of the warrants issued to the
investor were computed using the Black-Scholes option-pricing model with the following assumptions: volatility of
The warrants
issued to the investor to purchase
For the
three and nine months ended June 30, 2024, amortization of debt discount and interest expense related to the April 2024 Loan amounted
to $
| June 30, 2024 | ||||
| Principal amount | $ | |||
| Less: unamortized debt discount | ( | ) | ||
| Promissory note payable, net | $ | |||
NOTE 9 – ACCRUED LIABILITIES AND OTHER PAYABLES
| June 30, 2024 | September 30, 2023 | |||||||
| Unearned revenue | $ | $ | ||||||
| Interest payable | ||||||||
| Interest payable – related parties | ||||||||
| Others | ||||||||
| Total | $ | $ | ||||||
20
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 10 – SHARE CAPITAL
Common shares issued for services
During the nine months ended June 30, 2024, the
Company issued a total of
Common shares issued for related party debts conversion
On December
19, 2023, the Company and FXDIRECT, a related party, entered into a Debt Conversion Agreement pursuant to which the outstanding amount
of $
On December
19, 2023, the Company and Emil Assentato, the Company’s former chief executive officer and chairman, entered into a Debt Conversion
Agreement pursuant to which the outstanding principal amount of $
Common shares issued pursuant to Settlement Agreement and Stipulation
On May 28, 2024, the Company entered into a Settlement
Agreement and Stipulation (“Settlement Agreement”) with Silverback Capital Corporation (“SCC”) to settle outstanding
claims owed to SCC. Pursuant to the Settlement Agreement, on May 31, 2024, the Company settled $
Pursuant to the Settlement Agreement, the Company
issued
Options
| Options Outstanding | Options Exercisable | |||||||||||||||||||||
| Range of Exercise Price | Number Outstanding at June 30, 2024 | Weighted Average Remaining Contractual Life (Years) | Weighted Average Exercise Price | Number Exercisable at June 30, 2024 | Weighted Average Exercise Price | |||||||||||||||||
| $ | | $ | $ | |||||||||||||||||||
| $ | | $ | $ | |||||||||||||||||||
| Number of Options | Weighted Average Exercise Price | |||||||
| Outstanding at September 30, 2023 | $ | |||||||
| Granted | ||||||||
| Outstanding at June 30, 2024 | $ | |||||||
| Options exercisable at June 30, 2024 | $ | |||||||
| Options expected to vest | $ | |||||||
21
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 10 – SHARE CAPITAL (continued)
Options (continued)
The aggregate intrinsic value of both stock options
outstanding and stock options exercisable at June 30, 2024 was $
For the
three months ended June 30, 2024 and 2023, stock-based compensation expense associated with stock options granted amounted to $
For the
nine months ended June 30, 2024 and 2023, stock-based compensation expense associated with stock options granted amounted to $
| Number of Options | Weighted Average Exercise Price | |||||||
| Nonvested at September 30, 2023 | $ | |||||||
| Vested | ( | ) | ( | ) | ||||
| Nonvested at June 30, 2024 | $ | |||||||
Warrants
As a result of the Business Combination which
was completed on December 22, 2023,
| Number of Options | Weighted Average Exercise Price | |||||||
| Outstanding at Closing Date | $ | |||||||
| Granted | ||||||||
| Outstanding and exercisable at June 30, 2024 | $ | |||||||
| Warrants Outstanding | Warrants Exercisable | |||||||||||||||||||||
| Range of Exercise Price | Number Outstanding at June 30, 2024 | Weighted Average Remaining Contractual Life (Years) | Weighted Average Exercise Price | Number Exercisable at June 30, 2024 | Weighted Average Exercise Price | |||||||||||||||||
| $ | $ | $ | ||||||||||||||||||||
| $ | $ | |||||||||||||||||||||
The aggregate intrinsic
value of stock warrants outstanding and stock warrants exercisable at June 30, 2024 was approximately $
22
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 11 – 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 $
From
time to time, Jamal Khurshid, the Company’s former chief executive officer and director, 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.
| Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Service provided to: | ||||||||||||||||
| TCM | $ | $ | $ | $ | ||||||||||||
| $ | $ | $ | $ | |||||||||||||
23
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 11 – RELATED PARTY TRANSACTIONS (continued)
Revenue from related party and cost of revenue from related party (continued)
| Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Service received from: | ||||||||||||||||
| FXDIRECT | $ | $ | $ | $ | ||||||||||||
| $ | $ | $ | $ | |||||||||||||
During the three months
ended June 30, 2024 and 2023, Digital RFQ earned revenue from related parties in the amount of $
During the nine months
ended June 30, 2024 and 2023, Digital RFQ earned revenue from related parties in the amount of $
Due from affiliates
| June 30, 2024 | September 30, 2023 | |||||||
| Jacobi | $ | $ | ||||||
| FXDD Mauritius (1) | ||||||||
| TCM | ||||||||
| Total | $ | $ | ||||||
| (1) |
The balances due from Jacobi, FXDD Mauritius, and TCM represent monies that the Company paid on behalf of Jacobi, FXDD Mauritius, and TCM. The balance due from TCM as of September 30, 2023 also included unsettled funds due related to the General Service Agreement.
Management believes that the affiliates’ receivables are fully collectable. Therefore, no allowance for doubtful account is deemed to be required on its due from affiliates at June 30, 2024 and September 30, 2023.
24
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 11 – RELATED PARTY TRANSACTIONS (continued)
Due to affiliates
| June 30, 2024 | September 30, 2023 | |||||||
| Forexware LLC (1) | $ | $ | ||||||
| FXDIRECT (2) | ||||||||
| Currency Mountain Holdings Bermuda, Limited (“CMH”) | ||||||||
| FXDD Trading (1) | ||||||||
| Markets Direct Payments (1) | ||||||||
| Match Fintech Limited (3) | ||||||||
| Craig Vallis | ||||||||
| Jamal Khurshid (4) | ||||||||
| Total | $ | $ | ||||||
| (1) | |
| (2) | |
| (3) | |
| (4) |
The balances due to affiliates represent expenses paid by Forexware LLC, FXDIRECT, FXDD Trading, Markets Direct Payments, Match Fintech Limited, Craig Vallis, and Jamal Khurshid on behalf of the Company and advances from CMH. The balance due to FXDIRECT may also include unsettled funds due related to the General Service Agreement.
Amounts due to affiliates are short-term in nature, non-interest bearing, unsecured and repayable on demand.
Customer digital currency assets and liabilities – related parties
At June 30, 2024 and
September 30, 2023, related parties’ digital currency, which was controlled by Digital RFQ, amounted to $
Note receivable – related parties
Promissory note
The Company originated a note receivable to a
shareholder in the principal amount of $
25
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 11 – RELATED PARTY TRANSACTIONS (continued)
Note receivable – related parties (continued)
Line of credit
On July 31, 2023, the Company entered into a Credit
Deed (the “Credit Deed”) providing a $
| Outstanding principal under the Line of Credit at September 30, 2023 | $ | |||
| Repayment of Line of Credit | ( | ) | ||
| Outstanding principal under the Line of Credit at June 30, 2024 | $ |
During the nine months
ended June 30, 2024, accrued and unpaid interest related to the line of credit with the amount of approximately $
Loan payable – related parties and interest payable – related parties
On
July 19, 2023, Digital RFQ issued a promissory note (the “July 2023 Loan”) in the principal amount of $
On August
15, 2023, Digital RFQ issued a promissory note (the “August 2023 Loan”) in the principal amount of $
On September
18, 2023, the Company issued a promissory note (the “September 2023 Loan”) in the principal amount of $
On March 6, 2024, Digital RFQ entered into a facility
agreement with Craig Vallis, a shareholder of the Company, providing Digital RFQ with up to $
On March 12, 2024, Digital RFQ entered into a
loan agreement with Oliver Worsley, a shareholder of the Company, providing Digital RFQ with up to GBP
26
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 11 – RELATED PARTY TRANSACTIONS (continued)
Loan payable – related parties and interest payable – related parties (continued)
During the
nine months ended June 30, 2024, the Company issued a few promissory notes in the aggregate principal of $
For the
three and nine months ended June 30, 2024, the interest expense related to related parties’ loans amounted to $
As of June
30, 2024 and September 30, 2023, the related accrued and unpaid interest for related parties’ loans was $
Letter agreement with ClearThink
Nukkleus was 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.
Craig Marshak, a former member of the Board of
Directors of the Company, was a managing director of ClearThink, a transaction advisory firm. ClearThink had 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. The letter agreement was terminated on October 27, 2023. The Company paid ClearThink $
NOTE 12 – CONCENTRATIONS
Customers
| Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||
| Customer | 2024 | 2023 | 2024 | 2023 | ||||||||||||
| A – related party | % | % | % | |||||||||||||
| B | % | |||||||||||||||
| C | % | |||||||||||||||
| * |
Two related party customers,
whose outstanding receivables accounted for 10% or more of the Company’s total outstanding accounts receivable and due from affiliates
at June 30, 2024, accounted for
One related party customer,
whose outstanding receivable accounted for 10% or more of the Company’s total outstanding accounts receivable and due from affiliates
at September 30, 2023, accounted for
27
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 12 – CONCENTRATIONS (continued)
Suppliers
| Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||
| Supplier | 2024 | 2023 | 2024 | 2023 | ||||||||||||
| A – related party | % | % | % | |||||||||||||
| B | % | |||||||||||||||
| C | % | |||||||||||||||
| * | Less than 10% |
Two
related party suppliers, whose outstanding payables accounted for 10% or more of the Company’s total outstanding accounts payable,
accrued liabilities and other payables, and due to affiliates at June 30, 2024, accounted for
Two related
party suppliers, whose outstanding payables accounted for 10% or more of the Company’s total outstanding accounts payable, accrued
liabilities and other payables, and due to affiliates at September 30, 2023, accounted for
NOTE 13 – SEGMENT INFORMATION
For the three and nine months ended June 30, 2024
and 2023, the Company operated in
28
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 13 – SEGMENT INFORMATION (continued)
| Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| 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 | ||||||||||||||||
| Corporate/Other | ( | ) | ( | ) | ||||||||||||
| Total | ( | ) | ( | ) | ||||||||||||
| Net income (loss) | ||||||||||||||||
| General support services | ||||||||||||||||
| Financial services | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Corporate/Other | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Amortization | ||||||||||||||||
| Financial services | ||||||||||||||||
| Corporate/Other | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| Total assets at June 30, 2024 and September 30, 2023 | June 30, 2024 | September 30, 2023 | ||||||
| Financial services | $ | $ | ||||||
| Corporate/Other | ||||||||
| Total | $ | $ | ||||||
29
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 14 – 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.
NOTE 15 – SUBSEQUENT EVENTS
The Company evaluated subsequent events and transactions that occurred after the balance sheet date up to the date that the financial statements were issued. Based upon this review, other than as described below, the Company did not identify any subsequent events that would have required adjustment or disclosure in the financial statements.
Common shares issued for Settlement Agreement and Stipulation
On May 28, 2024, the Company entered into a Settlement
Agreement and Stipulation (the “Settlement Agreement”) with Silverback Capital Corporation (“SCC”) to settle
outstanding claims owed to SCC. Pursuant to the Settlement Agreement, during the period from July 1, 2024 through August 27, 2024, the
Company issued an aggregate of
Senior Unsecured Promissory Note – August 2024
On August 1, 2024 (the “August 2024 Effective
Date”), the Company issued a Senior Unsecured Promissory Note (the “August 2024 Note”) in the principal amount of $
Common Shares Issued for Settlement of Accrued Professional Fees
In July 2024, the Company issued
Common Shares Issued for Services
In July 2024, the Company issued
X Group’s Convertible Promissory Note Payable
On September 10, 2024, the Company issued an additional Senior Unsecured Promissory
Note (the “September 2024 Note”) in the principal amount of $
Departure of Directors or Certain Officers and Election of Directors or Appointment of Certain Officers
On July 24, 2024, Emil Assentato resigned as Chief Executive Officer and from the Board of Directors of the Company. Jamal (Jamie) Khurshid, the Chief Operating Officer and a director of the Company, was appointed as Chief Executive Officer effective July 24, 2024.
The Company has been advised that X Group and Emil Assentato and Jamal Khurshid, in a personal capacity, entered into a Settlement Agreement. Pursuant to the Settlement Agreement, Mr. Khurshid advised the Company that he was resigning as Chief Executive Officer and as a director of the Company effective September 4, 2024. Further, in conjunction with Mr. Khurshid’s resignation, the Board increased the size of the Board from six to seven and appointed David Rokach and Menachem Shalom as directors to fill such vacancies. Mr. Shalom was also appointed as Chief Executive Officer of the Company.
30
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations for the three and nine months ended June 30, 2024 and 2023 should be read in conjunction with our condensed consolidated financial statements and related notes to those 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 now a financial technology company with the aim of providing blockchain-enabled technology solutions.
Digital RFQ
Through our Digital RFQ subsidiary, we aim to provide cross-border payment and transactions solutions to institutional investors, and offer blockchain enabled financial services solutions to institutional investors in a secure, compliant and globally accessible manner. The blockchain-enabled payment gateway we have developed has the capability to deliver global cross-border transfers of fiat currencies using blockchain rails. Digital RFQ currently offers payment and settlement services, including those utilizing blockchain networks, but does not provide custody or wallet services with respect to digital assets, and does not hold digital assets, reducing the risks and regulatory burden on its business. In the future, Digital RFQ plans to offer a white labelled digital bank with end-to-end digital banking solutions for international business. We are uncertain as to when we will be able to offer these products and intend to evaluate potential strategic opportunities for DigiClear which may include the sale of the assets or a joint venture, of which there is no guarantee. Our competitors in this product category are banks and other financial institutions, and we intend to compete by offering faster and more reliable products using more advanced technology. Products and services offered by Digital RFQ are distributed through our website.
Digital RFQ is regulated in the United Kingdom by the Financial Conduct Authority and is in good standing and is and has been in the past in material compliance with the applicable laws, rules and regulations promulgated thereby. Digital RFQ is subject to Anti Money Laundering (“AML”) and Counter Terrorist Finance (“CTF”) regulations consistent with our authorization by the Financial Conduct Authority as an Electronic Money Directive Agent, among others. For a discussion of the various laws and regulations Digital RFQ is subject.
31
The “blockchain technology” used by Digital RFQ in its payment processing business includes only advanced-stage and fully tested, well-established and fully collateralized stablecoins operated on the Bitcoin, Ethereum and Tron networks. However, in future, we will be free to use other blockchain networks if we determine that they offer more sophisticated or secure technology. Based on our risk assessments, we determine the appropriate network to use for a particular transaction or customer. We do not use stablecoins of an algorithmic nature, and in the event that we determine any particular stablecoin presents a threat or risk to the security of our business, customers or the transactions we process, we promptly move to another stablecoin network. We do not accept payment in digital assets and do not hold digital assets for investment or offer digital wallet services. For a description of the risks associated with the use of blockchain technology in financial services generally, and payment processing specifically.
DigiClear
Through DigiClear, we plan to develop technology that offers a custody and settlement utility operating system aiming to deliver value and a high functioning automated post-trade solution. DigiClear aims to provide clients with the means to transfer underlying assets to alternative custodians at any time. We intend for DigiClear to use hardware security modules to offer technology that can secure client assets to block any unwanted modification of client settlement instructions or transfers. We expect that the transfer process that DigiClear’s technology will offer will be fully automated, monitored and can be processed within milliseconds. We are uncertain as to when we will be able to offer these products and intend to evaluate potential strategic opportunities for DigiClear which may include the sale of the assets or a joint venture, of which there is no guarantee. Our competitors in this product category are banks and other financial institutions and smaller financial technology companies, and we intend to compete by offering faster and more reliable products using more advanced technology. Assuming we offer DigiClear products and services once commercially developed these will be distributed through our website.
Nukkleus Technology
Our Nukkleus Technology business unit offers a full-service transactions technology and advisory business providing end-to-end transactions technology solutions. We offer an advanced transactions platform for dealing and risk management with global liquidity and customizable leverage, where users have control over quote and liquidity strategies.
On May 24, 2016, Nukkleus Limited entered into a General Service Agreement to provide its software, technology, customer sales and marketing and risk management technology hardware and software solutions package to FML Malta Ltd. In December 2017, Nukkleus Limited, FML Malta Ltd. and TCM entered into a letter agreement providing that there was an error in drafting the General Service Agreement and acknowledging that the correct counter-party to Nukkleus Limited in the General Service Agreement is TCM. Accordingly, all references to FML Malta Ltd. have been replaced with TCM. TCM is a private limited liability company formed under the laws of Malta. The General Service Agreement entered with TCM provides that TCM will pay Nukkleus Limited at minimum $2,000,000 per month. On October 17, 2017, Nukkleus Limited entered into an amendment of the General Service Agreement with TCM. In accordance with the amendment, which was effective as of October 1, 2017, the minimum amount payable by TCM to Nukkleus Limited for services was reduced from $2,000,000 per month to $1,600,000 per month. Emil Assentato is also the majority member of Max Q Investments LLC (“Max Q”), which is managed by Derivative Marketing Associates Inc. (“DMA”). Mr. Assentato is the sole owner and manager of DMA. Max Q owns 79% of Currency Mountain Malta LLC, which in turn is the sole shareholder of TCM.
In addition, on May 24, 2016, in order to appropriately service TCM, Nukkleus Limited entered into a General Service Agreement with FXDIRECT, which provides that Nukkleus Limited will pay FXDIRECT a minimum of $1,975,000 per month in consideration of providing personnel engaged in operational and technical support, marketing, sales support, accounting, risk monitoring, documentation processing and customer care and support. FXDIRECT may terminate this agreement upon providing 90 days’ written notice. On October 17, 2017, Nukkleus Limited entered into an amendment of the General Service Agreement with FXDIRECT. Pursuant to the amendment, which was effective as of October 1, 2017, the minimum amount payable by Nukkleus Limited to FXDIRECT for services was reduced from $1,975,000 per month to $1,575,000 per month. Currency Mountain Holdings LLC is the sole shareholder of FXDIRECT. Max Q is the majority shareholder of Currency Mountain Holdings LLC. Due to non-payment by TCM under the GSA, the Company has advised TCM that the GSA has been terminated effective January 1, 2024. The Company has historically generated substantially most of its revenue through the services rendered under the GSA. The Company is repositioning its focus on digital assets as the services generated under the GSA with TCM generated limited net income.
32
Financial Services Segment’s Key Performance Indicators (KPI)
The key performance indicators outlined below are our financial services segment’s metrics that provide management with the most immediate understanding of the drivers of business performance and tracking of financial targets.
| Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||
| Performance Indicator | 2024 | 2023 | 2024 | 2023 | ||||||||||||
| Trading volume | $ | 31,577,721 | $ | 67,159,843 | $ | 134,036,579 | $ | 359,730,350 | ||||||||
| Financial services revenue | $ | 175,214 | $ | 412,056 | $ | 877,362 | $ | 1,822,388 | ||||||||
| Financial services profit (loss) | $ | 125,476 | $ | (283,018 | ) | $ | 630,737 | $ | (339,929 | ) | ||||||
| Average cost per trade | $ | 158 | $ | 443 | $ | 214 | $ | 577 | ||||||||
| Average trade | 100,247 | 42,832 | 116,049 | 95,928 | ||||||||||||
| Number of trades | 315 | 1,568 | 1,155 | 3,750 | ||||||||||||
| Clients active | 47 | 45 | 75 | 172 | ||||||||||||
| Clients removed | 5 | 1 | 13 | 8 | ||||||||||||
| Gross trading margin | 0.6 | % | 0.6 | % | 0.7 | % | 0.5 | % | ||||||||
| Gross margin | 71.6 | % | (68.7 | )% | 71.9 | % | (18.7 | )% | ||||||||
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.
Financial services profit (loss) is measured as financial services revenue, less costs incurred associated with delivery of our services. For the three and nine months ended June 30, 2023, cost of financial services includes 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.
In September 2023, we assessed our intangible assets which were solely related to the Match acquisition (which consisted of license and banking infrastructure) for any impairment and concluded that there were indicators of impairment as of September 30, 2023. We calculated that the estimated undiscounted cash flows related to our intangible assets were less than their carrying amounts. We have not been able to realize the financial projections provided by Match at the time of the intangible assets purchase and have decided to impair the intangible assets to zero. Therefore, for the three and nine months ended June 30, 2024, cost of financial services only includes introducing broker fees, banking, and trading fees incurred associated with delivery of our services. We had a financial services profit for the three and nine months ended June 30, 2024 as compared to financial services loss for the three and nine months ended June 30, 2023.
Average cost per trade is driven by financial services costs. Our average cost per trade decreased measurably as costs decreased.
Active clients for the three months ended June 30, 2024 and 2023 was 47 and 45, respectively. Active clients for the nine months ended June 30, 2024 and 2023 was 75 and 172, respectively.
Gross trading margin is a metric that measures financial services revenue to trading volume.
Critical Accounting Policies
Use of Estimates
The preparation of the 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 condensed consolidated financial statements and accompanying notes. Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the financial statements, which management considered in formulating its estimate, could change in the near term due to one or more future confirming events. Accordingly, the actual results could differ significantly from those estimates.
Significant estimates during the three and nine months ended June 30, 2024 and 2023 include the allowance for doubtful accounts, the useful life of intangible assets, the assumptions used in assessing impairment of long-term assets, the valuation of deferred tax assets and associated valuation allowances, the valuation of stock-based compensation, the fair value of customer digital currency assets and liabilities, and assumptions used to determine fair value of warrants, beneficial conversion feature and embedded conversion features of convertible note payable.
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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 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.
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 and Nine Months Ended June 30, 2024 Versus the Three and Nine Months Ended June 30, 2023
Revenues
For the three months ended June 30, 2024, we had revenue from general support services rendered to TCM under a GSA of $0, as compared to $4,800,000 for the three months ended June 30, 2023, a decrease of $4,800,000, or 100.0%. For the nine months ended June 30, 2024, we had revenue from general support services rendered to TCM under a GSA of $4,800,000, as compared to $14,400,000 for the nine months ended June 30, 2023, a decrease of $9,600,000, or 66.7%. Due to non-payment by TCM under the GSA, the Company had advised TCM that the GSA has been terminated effective January 1, 2024. The Company has historically generated substantially most of its revenue through the services rendered under the GSA to TCM, the sole customer in our general support services segment. We did not have any other customers in the three months ended June 30, 2024. We do not expect any revenue from general support services until we are successful in retaining other customers.
For the three months ended June 30, 2024, we had revenue from financial services of $175,214, as compared to $412,056 for the three months ended June 30, 2023, a decrease of $236,842, or 57.5%. For the nine months ended June 30, 2024, we had revenue from financial services of $877,362, as compared to $1,822,388 for the nine months ended June 30, 2023, a decrease of $945,026, or 51.9%. The decrease was primarily attributable to the closure of our primary USD Banking rails when Signature and Silvergate closed in March 2023. We expect that our revenue from financial services will remain at its current quarterly level with minimal increase in the near future.
Costs of Revenues
For the three months ended June 30, 2024, our cost of general support services, which represented amount incurred for services rendered by FXDIRECT under a GSA, amounted to $0, as compared to $4,675,000 for the three months ended June 30, 2023, a decrease of $4,675,000, or 100.0%. For the nine months ended June 30, 2024, our cost of general support services, which represented amount incurred for services rendered by FXDIRECT under a GSA, amounted to $4,650,000, as compared to $14,125,000 for the nine months ended June 30, 2023, a decrease of $9,475,000, or 67.1%. The decrease was attributable to the decrease in our revenue from general support services, and, effective May 1, 2023, the amount payable by us to FXDIRECT for services under a GSA was reduced from $1,575,000 per month to $1,550,000 per month.
For the three and nine months ended June 30, 2023, cost of financial services includes 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.
In September 2023, we assessed our intangible assets which were solely related to the Match acquisition (which consisted of license and banking infrastructure) for any impairment and concluded that there were indicators of impairment as of September 30, 2023. We calculated that the estimated undiscounted cash flows related to our intangible assets were less than their carrying amounts. We have not been able to realize the financial projections provided by Match at the time of the intangible assets purchase and have decided to impair the intangible assets to zero. Therefore, for the three and nine months ended June 30, 2024, cost of financial services only includes introducing broker fees, banking, and trading fees incurred associated with delivery of our services.
For the three months ended June 30, 2024, cost of financial services amounted to $49,738, as compared to $695,074 for the three months ended June 30, 2023, a decrease of $645,336, or 92.8%. For the nine months ended June 30, 2024, cost of financial services amounted to $246,625, as compared to $2,162,317 for the nine months ended June 30, 2023, a decrease of $1,915,692, or 88.6%. The significant decrease was primarily attributable to decreased amount of amortization of intangible assets which consist of license and banking infrastructure acquired on Match acquisition in the three and nine months ended June 30, 2024.
Gross Profit (Loss)
Our gross profit from general support services for the three months ended June 30, 2024 was $0, as compared to $125,000 for the three months ended June 30, 2023, a decrease of $125,000, or 100.0%. Our gross profit from general support services for the nine months ended June 30, 2024 was $150,000, as compared to $275,000 for the nine months ended June 30, 2023, a decrease of $125,000, or 45.5%. Gross margin increased to 3.1% for the nine months ended June 30, 2024 from 1.9% for the nine months ended June 30, 2023. The increase in our gross margin for the general support services segment for the nine months ended June 30, 2024 as compared to the corresponding period of 2023 was attributed to the decrease in our cost of general support services as described above.
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Gross profit from financial services for the three months ended June 30, 2024 was $125,476, as compared to gross loss of $283,018 for the three months ended June 30, 2023, a decrease of $408,494, or 144.3%. Gross margin increased to 71.6% for the three months ended June 30, 2024 from (68.7)% for the three months ended June 30, 2023. Gross profit from financial services for the nine months ended June 30, 2024 was $630,737, as compared to gross loss of $339,929 for the nine months ended June 30, 2023, a decrease of $970,666, or 285.5%. Gross margin increased to 71.9% for the nine months ended June 30, 2024 from (18.7)% for the nine months ended June 30, 2023. The increase in our gross margin for the financial services segment for the three and nine months ended June 30, 2024 as compared to the comparable periods of 2023 was primarily attributed to the decrease in cost for financial services driven by decreased amount of amortization of intangible assets which consist of license and banking infrastructure acquired on Match acquisition. We expect that our gross margin for the financial services segment will remain in its current quarterly level with minimal increase in the near future.
Operating Expenses
Operating expenses consisted of advertising and marketing, professional fees, compensation and related benefits, bad debt expense, and other general and administrative expenses.
Advertising and marketing
For the three months ended June 30, 2024, advertising and marketing expense increased by $685, or 41.0%, as compared to the three months ended June 30, 2023. The increase was primarily attributable to our increased advertising and marketing activities in the three months ended June 30, 2024. For the nine months ended June 30, 2024, advertising and marketing expense decreased by $7,146, or 14.0%, as compared to the nine months ended June 30, 2023. The decrease was primarily attributable to our decreased advertising and marketing activities in the nine months ended June 30, 2024. We expect that our advertising and marketing expense will remain in its current quarterly 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 June 30, 2024, professional fees increased by $537,554, or 94.0%, as compared to the three months ended June 30, 2023. The increase was primarily attributable to an increase in consulting fees of approximately $623,000 mainly due to the increase in consulting service related to our general business development, offset by a decrease in other miscellaneous items of approximately $85,000. For the nine months ended June 30, 2024, professional fees increased by $4,194,632, or 231.1%, as compared to the nine months ended June 30, 2023. The increase was primarily attributable to a significant increase in advisory service fees of approximately $3,641,000, due to the increase in stock-based compensation of approximately $2,766,000 which reflected the value of common stock granted to advisors and the increase in advisory service fees of approximately $875,000, which were mainly driven by increased advisory service related to our business combination that was completed in December 2023 and related to capital market advice, an increase in legal service fee of approximately $234,000 resulting from the increase in legal service providers, and an increase in consulting fees of approximately $337,000 mainly due to the increase in consulting service related to our general business development, offset by a decrease in other miscellaneous items of approximately $17,000. We expect that our professional fees will decrease in the near future.
Compensation and related benefits
For the three months ended June 30, 2024, our compensation and related benefits decreased by $13,980 or 6.0%, as compared to the three months ended June 30, 2023. For the nine months ended June 30, 2024, our compensation and related benefits increased by $151,912, or 25.7%, as compared to the nine months ended June 30, 2023. The increase was mainly attributable to increased management in our financial services segment. We expect that our compensation and related benefits will remain in its current quarterly level with minimal increase in the near future.
Bad debt expense
For the three months ended June 30, 2024 and 2023, our did not record any allowance for doubtful account. For the nine months ended June 30, 2024, our had bad debt expense of $6,145,942. In December 2023, due to non-payment by TCM under the GSA, we had advised TCM that the GSA has been terminated effective January 1, 2024. We made an allowance for doubtful account for the related party’s receivable in the amount of $6,145,942 in December 2023. We did not record any allowance for doubtful account for the nine months ended June 30, 2023.
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Other general and administrative expenses
Other general and administrative expenses primarily consisted of rent, stock transfer agent service fees, amortization of intangible assets, travel and entertainment, and other miscellaneous items.
For the three months ended June 30, 2024, total other general and administrative expenses decreased by $61,919, or 25.0%, as compared to the three months ended June 30, 2023. The decrease was mainly due to a decrease in amortization of intangible assets of approximately $63,000 since we impaired our intangible assets acquired on Match acquisition in September 2023, and a decrease in stock transfer agent service fees of approximately $44,000, offset by and an increase in other miscellaneous items of approximately $45,000. For the nine months ended June 30, 2024, total other general and administrative expenses decreased by $36,609, or 5.8%, as compared to the nine months ended June 30, 2023. The decrease was mainly due to a decrease in amortization of intangible assets of approximately $189,000 since we impaired our intangible assets acquired on Match acquisition in September 2023, and a decrease in other miscellaneous items of approximately $48,000 driven by our efforts at stricter controls on corporate expenditure, offset by an increase in stock transfer agent service fees of approximately $200,000 resulting from our business combination which was completed in December 2023. We expect that other general and administrative expenses will remain in its current quarterly level with minimal decrease in the near future.
Other (Expense) Income
Other (expense) income includes third party and related party interest expense, loss on debts settlement, and other miscellaneous income.
Other expense, net, totaled $224,594 for the three months ended June 30, 2024, as compared to other income, net, of $3,057 for the three months ended June 30, 2023, a decrease of $227,651, or 7,446.9%, which was mainly attributable to an increase in third party interest expense of approximately $39,000, mainly driven by the increase in amortization of debt discount of approximately $36,000 and the increased interest expense of approximately $3,000 from third party debts in the three months ended June 30, 2024, an increase in related party interest expense of approximately $24,000 from related party debts in the three months ended June 30, 2024, and an increase in loss on debts settlement of approximately $176,000, offset by an increase in other income of approximately $12,000.
Other expense, net, totaled $215,028 for the nine months ended June 30, 2024, as compared to other income, net, of $6,345 for the nine months ended June 30, 2023, a decrease of $221,373, or 3,488.9%, which was mainly attributable to an increase in third party interest expense of approximately $39,000, mainly driven by the increase in amortization of debt discount of approximately $36,000 and the increased interest expense of approximately $3,000 from third party debts in the nine months ended June 30, 2024, an increase in related party interest expense of approximately $42,000 from related party debts in the nine months ended June 30, 2024, and an increase in loss on debts settlement of approximately $176,000, offset by an increase in other income of approximately $36,000.
Net Loss
As a result of the factors described above, our net loss was $1,616,241, or $0.11 per share (basic and diluted), for the three months ended June 30, 2024, as compared to $1,209,744, or $0.12 per share (basic and diluted), for the three months ended June 30, 2023, an increase of $406,497 or 33.6%.
As a result of the factors described above, our net loss was $12,973,753, or $1.00 per share (basic and diluted), for the nine months ended June 30, 2024, as compared to $3,149,315, or $0.31 per share (basic and diluted), for the nine months ended June 30, 2023, an increase of $9,824,438 or 312.0%.
Foreign Currency Translation Adjustment
The reporting currency of the Company is U.S. Dollars. The functional currency of the parent company, Nukkleus Inc., Nukkleus Limited, Nukkleus Malta Holding Ltd. and its subsidiaries, is the U.S. dollar, the functional currency of Match Financial Limited and its subsidiary, Digital RFQ, is the British Pound (“GBP”), the functional currency of Digital RFQ’s subsidiary, DRFQ Europe UAB, is Euro, and the functional currency of Digital RFQ’s subsidiary, DRFQ Pay North America, is CAD. The financial statements of our subsidiaries whose functional currency is the GBP or Euro or CAD are translated to U.S. dollars using period end rates of exchange for assets and liabilities, average rate of exchange for revenues, costs, and expenses and cash flows, and at historical exchange rates for equity. Net gains and losses resulting from foreign exchange transactions are included in the results of operations. As a result of foreign currency translations, which are a non-cash adjustment, we reported a foreign currency translation loss of $5,608 and $20,859 for the three months ended June 30, 2024 and 2023, respectively. As a result of foreign currency translations, which are a non-cash adjustment, we reported a foreign currency translation loss of $42,339 and $51,563 for the nine months ended June 30, 2024 and 2023, respectively. This non-cash loss had the effect of increasing our reported comprehensive loss.
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Comprehensive Loss
As a result of our foreign currency translation adjustment, we had comprehensive loss of $1,621,849 and $1,230,603 for the three months ended June 30, 2024 and 2023, respectively.
As a result of our foreign currency translation adjustment, we had comprehensive loss of $13,016,092 and $3,200,878 for the nine months ended June 30, 2024 and 2023, respectively.
Liquidity and Capital Resources
Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations and otherwise operate on an ongoing basis. At June 30, 2024 and September 30, 2023, we had cash of approximately $6,000 and $19,000, respectively, exclusive of customer custodial cash. We had working capital deficit of approximately $11,421,000 as of June 30, 2024. In addition, the current cash balance cannot be projected to cover our operating expenses for the next twelve months from the release date of this report. These matters raise substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent on our ability to raise additional capital, implement our business plan, and generate sufficient revenues. There are no assurances that we will be successful in our efforts to generate sufficient revenues, maintain sufficient cash balance or report profitable operations or to continue as a going concern. As described below, we have raised additional capital through the sale of equity and debt and we plan to raise additional capital in the future through the sale of equity or debt to implement our business plan. However, there is no assurance these plans will be realized and that any additional financings will be available to us on satisfactory terms and conditions, if at all.
The following table sets forth a summary of changes in our working capital deficit from September 30, 2023 to June 30, 2024:
| June 30, | September 30, | Changes in | ||||||||||||||
| 2024 | 2023 | Amount | Percentage | |||||||||||||
| Working capital deficit: | ||||||||||||||||
| Total current assets | $ | 706,447 | $ | 2,928,408 | $ | (2,221,961 | ) | (75.9 | )% | |||||||
| Total current liabilities | 12,127,122 | 9,123,465 | 3,003,657 | 32.9 | % | |||||||||||
| Working capital deficit | $ | (11,420,675 | ) | $ | (6,195,057 | ) | $ | (5,225,618 | ) | 84.4 | % | |||||
Our working capital deficit increased by $5,225,618 to $11,420,675 at June 30, 2024 from $6,195,057 at September 30, 2023. The increase in working capital deficit was primarily attributable to a decrease in customer custodial cash of approximately $140,000 due to the decrease in cash maintained in our bank accounts held for the benefit of our customers, a significant decrease in due from affiliates of approximately $2,021,000 which was primarily attributable to our receivable from TCM was written off after exhaustive efforts at collection in the nine months ended June 30, 2024, a decrease in note receivable – related parties, net, of approximately $163,000 driven by repayments received from note receivable – related parties in the nine months ended June 30, 2024, an increase in accounts payable of approximately $205,000, an increase in due to affiliates of approximately $1,135,000 driven by the payments received from our affiliates and expenses paid by our affiliates on behalf of us in the nine months ended June 30, 2024, an increase in short term loan payable – related parties of approximately $681,000 resulting from issuance of loans to related parties to fund our working capital needs, an increase in accrued payroll liability and directors’ compensation of approximately $150,000 resulting from increased management in our financial services segment, and an increase in accrued professional fees of approximately $1,285,000 mainly due to the increase in professional services related to our business combination which was completed in December 2023, offset by an increase in other current assets of approximately $103,000 mainly due to the increase in prepaid directors and officers’ liability insurance premium and prepaid NASDAQ listing fee, and a decrease in customer custodial cash liabilities of approximately $560,000 resulting from fulfillment of our direct obligations to our customers.
Because the exchange rate conversion is different for the condensed consolidated balance sheets and the condensed consolidated statements of cash flows, the changes in assets and liabilities reflected on the condensed consolidated statements of cash flows are not necessarily identical with the comparable changes reflected on the condensed consolidated balance sheets.
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Cash Flow for the Nine Months Ended June 30, 2024 Compared to the Nine Months Ended June 30, 2023
The following summarizes the key components of our cash flows for the nine months ended June 30, 2024 and 2023:
| Nine Months Ended June 30, | ||||||||
| 2024 | 2023 | |||||||
| Net cash used in operating activities | $ | (2,619,117 | ) | $ | (626,716 | ) | ||
| Net cash provided by (used in) investing activities | 131,740 | (195,856 | ) | |||||
| Net cash provided by financing activities | 2,296,823 | - | ||||||
| Effect of exchange rate on cash | 37,507 | 292,591 | ||||||
| Net decrease in cash | $ | (153,047 | ) | $ | (529,981 | ) | ||
Net cash flow used in operating activities for the nine months ended June 30, 2024 was $2,619,117, which primarily reflected our consolidated net loss of approximately $12,974,000, and the changes in operating assets and liabilities, primarily consisting of a significant increase in due from affiliates of approximately $4,129,000 due to the payments made to our affiliates and monies that we paid on behalf of our affiliates in the nine months ended June 30, 2024, an increase in other current assets of approximately $103,000 mainly due to the increase in prepaid directors and officers’ liability insurance premium and prepaid NASDAQ listing fee, and a decrease in customer custodial cash liabilities of approximately $610,000 driven by fulfillment of our direct obligations to our customers in the nine months ended June 30, 2024, offset by an increase in accounts payable of approximately $198,000, a significant increase in due to affiliates of approximately $3,846,000 driven by the payments received from our affiliates and expenses paid by our affiliates on behalf of us in the nine months ended June 30, 2024, an increase in accrued payroll liability and directors’ compensation of approximately $148,000 resulting from increased management in our financial services segment, and an increase in accrued professional fees of approximately $1,609,000 mainly due to the increase in professional services related to our business combination which was completed in December 2023, and the non-cash items adjustment primarily consisting of stock-based compensation and service expense of approximately $2,990,000, a loss on debts settlement of approximately $176,000, and provision for bad debt of approximately $6,146,000.
Net cash flow used in operating activities for the nine months ended June 30, 2023 was $626,716, which primarily reflected our consolidated net loss of approximately $3,149,000, and the changes in operating assets and liabilities, primarily consisting of a decrease in customer custodial cash liabilities of approximately $577,000 driven by fulfillment of our direct obligations to our customers in the nine months ended June 30, 2023, a decrease in customer digital currency liabilities of approximately $270,000 due to the decrease in customer digital currency controlled by us in the nine months ended June 30, 2023, a decrease in accrued professional fees of approximately $111,000 resulting from payments made to professional service providers in the nine months ended June 30, 2023, and a decrease in accrued liabilities and other payables of approximately $234,000 mainly due to the decrease in unearned revenue of approximately $203,000, offset by a decrease in customer digital currency assets of approximately $270,000 due to the decrease in customer digital currency controlled by us in the nine months ended June 30, 2023, a decrease in due from affiliates of approximately $648,000 resulting from the payments received from our affiliates in the nine months ended June 30, 2023, an increase in due to affiliates of approximately $506,000 driven by the payments received from our affiliates and expenses paid by our affiliates on behalf of us in the nine months ended June 30, 2023, and an increase in accrued payroll liability and directors’ compensation of approximately $126,000 due to our business expansion, and the non-cash items adjustment primarily consisting of amortization of intangible assets of approximately $1,779,000, and stock-based compensation and service expense of approximately $296,000.
Net cash flow provided by investing activities was $131,740 for the nine months ended June 30, 2024 as compared to net cash flow used in investing activities of $195,856 for the nine months ended June 30, 2023. During the nine months ended June 30, 2024, we received proceeds from note receivable – related parties of approximately $132,000. During the nine months ended June 30, 2023, we made payment for investment in note receivable of approximately $154,000 and payment for purchase of intangible asset of approximately $42,000.
Net cash flow provided by financing activities was $2,296,823 for the nine months ended June 30, 2024. During the nine months ended June 30, 2024, we received cash in reverse recapitalization of approximately $150,000, received proceeds from loan payable from third party and related party of approximately $1,952,000, received proceeds from issuance of convertible debt and warrants of $300,000, and received proceeds from issuance of debt and warrants of $78,000, offset by repayments made for loan payable to third party and related party of approximately $183,000.
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There was no financing activity during the nine months ended June 30, 2023.
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 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.
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 Condensed Consolidated Financial Statements appearing elsewhere in this report.
Foreign Currency Exchange Rate Risk
A portion of our operations are in United Kingdom. Thus, a portion of our revenues and operating results may be impacted by exchange rate fluctuations between GBP and US dollars. For the three months ended June 30, 2024 and 2023, we had an unrealized foreign currency translation loss of approximately $6,000 and $21,000, respectively, because of changes in the exchange rates. For the nine months ended June 30, 2024 and 2023, we had an unrealized foreign currency translation loss of approximately $42,000 and $52,000, respectively, because of changes in the exchange rates.
Inflation
The effect of inflation on our revenue and operating results was not significant.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are a smaller reporting company as defined in Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in reports filed or submitted under the Securities Exchange Act of 1934, as amended (“Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed under the Exchange Act is accumulated and communicated to management, including the principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.
In connection with the preparation of the quarterly report on Form 10-Q for the quarter ended June 30, 2024, 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.
Management regularly assesses controls and did so most recently for our financial reporting as of June 30, 2024. 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 concluded that our disclosure controls and procedures were not effective as of June 30, 2024 due to the material weaknesses that were previously reported in our Annual Report on Form 10-K for the year ended September 30, 2023 filed with the SEC on July 12, 2024, that have not yet been remediated. Management’s plan to remediate these material weaknesses is described in detail in such Annual Report on Form 10-K for the year ended September 30, 2023.
In light of the material weakness, we performed additional analyses and procedures in order to conclude that our condensed consolidated financial statements for the quarter ended June 30, 2024 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 condensed consolidated financial statements for the quarter ended June 30, 2024 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
Common shares issued for Settlement Agreement and Stipulation
On May 28, 2024, the Company entered into a Settlement Agreement and Stipulation (the “Settlement Agreement”) with Silverback Capital Corporation (“SCC”) to settle outstanding claims owed to SCC. Pursuant to the Settlement Agreement, SCC has agreed to purchase certain outstanding payables between the Company and designated vendors of the Company totaling $1,118,953.75 (the “Payables”) and will exchange such Payables for a settlement amount payable in shares of common stock of the Company (the “Settlement Shares”). The Settlement Shares shall be priced at 70% of the average of the three lowest trading prices during the five trading day period prior to a share request, which may not be less than $0.05 per share. In the event the Company’s market price decreases to or below $0.75 per share, then either the Company or SCC may declare a default. SCC has agreed that it will not become the beneficial owner of more than 4.99% of common stock of the Company at any point in time. Further, the Settlement Agreement provides that Settlement Shares may not be issued to SCC if such issuance would exceed 19.9% of the outstanding common stock as of May 23, 2024. The Settlement Agreement and the issuance of the Settlement Shares was approved by the Circuit Court of the Twelfth Judicial Circuit Court for Manatee County, Florida (the “Court”) on May 29, 2024 (Case No. 2024 CA 755). The Court entered an Order confirming the fairness of the terms and conditions of the Settlement Agreement and the issuance of the Settlement Shares.
Pursuant to the Settlement Agreement, during the period from July 1, 2024 through August 27, 2024, the Company issued an aggregate of 1,189,550 shares of its common stock.
Senior Unsecured Promissory Note – August 2024
On August 1, 2024 (the “August 2024 Effective Date”), the Company issued a Senior Unsecured Promissory Note (the “August 2024 Note”) in the principal amount of $515,500 to East Asia Technology Investments Limited (the “August 2024 Lender”) in consideration of cash proceeds in the amount of $412,075. The August 2024 Note bears interest of 12.0% per annum and is due and payable six months after issuance. As an additional inducement to provide the loan as outlined under the August 2024 Note, the Company issued the August 2024 Lender a Stock Purchase Warrant (“Warrant”) to acquire 1,400,000 shares of common stock at a per share price of $0.25 for a term of five years that may be exercised on a cash or cashless basis. The August 2024 Lender shall have the right to convert the principal and interest payable under the August 2024 Note into shares of common stock of the Company at a per share conversion price of $0.25.
Common Shares Issued for Settlement of Accrued Professional Fees
In July 2024, the Company issued 500,000 shares of its common stock to settle accrued and unpaid professional fees.
Common Shares Issued for Services
In July 2024, the Company issued 300,000 shares of its common stock for services rendered and to be rendered.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information
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Item 6. Exhibits
The following exhibits are incorporated into this Form 10-Q Quarterly Report:
| * | Indicates management contract or compensatory plan or arrangement. |
| # | Certain of the exhibits and schedules to this exhibit have been omitted in accordance with Regulation S-K Item 601. The Registrant agrees to furnish a copy of all omitted exhibits and schedules to the SEC upon its request. |
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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. | ||
| By: | /s/ Menachem Shalom | |
| Dated: September 11, 2024 | Menachem Shalom | |
| Chief Executive Officer (Principal Executive Officer), and Principal Financial and Accounting Officer and Director | ||
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