NUKKLEUS INC. AND SUBSIDIARIES
The accompanying notes to
unaudited condensed consolidated financial statements are an integral part of these statements.
The accompanying notes to unaudited condensed consolidated financial
statements are an integral part of these statements.
The accompanying notes to unaudited condensed consolidated financial
statements are an integral part of these statements.
The accompanying notes to unaudited condensed consolidated financial
statements are an integral part of these statements.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 1 – THE COMPANY HISTORY AND NATURE
OF THE BUSINESS
Nukkleus
Inc. (f/k/a Compliance & Risk Management Solutions Inc.) (“Nukkleus” or the “Company”) was formed on July
29, 2013 in the State of Delaware as a for-profit Company and established a fiscal year end of September 30.
The Company
is a financial technology company which is focused on providing software and technology solutions for the worldwide retail foreign exchange
(“FX”) trading industry. The Company primarily provides its software, technology, customer sales and marketing and risk management
technology hardware and software solutions package to Triton Capital Markets Ltd. (“TCM”), formerly known as FXDD Malta Limited
(“FXDD Malta”). The FXDD brand (e.g., see FXDD.com) is the brand utilized in the retail forex trading industry by TCM.
Nukkleus
Limited, a wholly-owned subsidiary of the Company, provides its software, technology, customer sales and marketing and risk management
technology hardware and software solutions package under a General Services Agreement (“GSA”) to TCM. TCM is a private limited
liability company formed under the laws of Malta. The GSA provides that TCM will pay Nukkleus Limited at minimum $1,600,000 per month.
Emil Assentato is also the majority member of Max Q Investments LLC (“Max Q”), which is managed by Derivative Marketing Associates
Inc. (“DMA”). Mr. Assentato, who is our Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”)
and chairman, is the sole owner and manager of DMA. Max Q owns 79% of Currency Mountain Malta LLC, which in turn is the sole shareholder
of TCM.
In addition,
in order to appropriately service TCM, Nukkleus Limited entered into a GSA with FXDirectDealer LLC (“FXDIRECT”), which provides
that Nukkleus Limited will pay FXDIRECT a minimum of $1,575,000 per month in consideration of providing personnel engaged in operational
and technical support, marketing, sales support, accounting, risk monitoring, documentation processing and customer care and support.
FXDIRECT may terminate this agreement upon providing 90 days’ written notice. Currency Mountain Holdings LLC is the sole
shareholder of FXDIRECT. Max Q is the majority shareholder of Currency Mountain Holdings LLC.
In July
2018, the Company incorporated Nukkleus Malta Holding Ltd., which is a wholly-owned subsidiary. In July 2018, Nukkleus Malta Holding Ltd.
incorporated Markets Direct Technology Group Ltd (“MDTG”), formerly known as Nukkleus Exchange Malta Ltd. MDTG was exploring
potentially obtaining a license to operate an electronic exchange whereby it would facilitate the buying and selling of various digital
assets as well as traditional currency pairs used in FX Trading. During the fourth quarter of fiscal 2020, management made the decision
to exit the exchange business and to no longer pursue the regulatory licensing necessary to operate an exchange in Malta.
On August
27, 2020, the Company renamed Nukkleus Exchange Malta Ltd. to Markets Direct Technology Group Ltd (“MDTG”). MDTG manages the
technology and IP behind the Markets Direct brand (which is operated by TCM). MDTG holds all the IP addresses and all the software licenses
in its name, and it holds all the IP rights to the brands such as Markets Direct and TCM. MDTG then leases out the rights to use these
names/brands licenses to the appropriate entities.
On May 24,
2021, the Company and the shareholders of Match Financial Limited (the “Match Shareholders”), a private limited company formed
in England and Wales (“Match”), entered into a Purchase and Sale Agreement (the “Match Agreement”), pursuant to
which the Company, on May 28, 2021, acquired 1,152 ordinary shares of Match representing 70% of the issued and outstanding
ordinary shares of Match in consideration of 70,000,000 shares of common stock of the Company (the “Initial Transaction”).
On August 30, 2021, the Company exercised its option pursuant to which it acquired from the Match Shareholders the balance of 493 ordinary
shares of Match representing 30% of the issued and outstanding ordinary shares of Match for an additional 30,000,000 shares
of common stock of the Company. Match is engaged in providing payment services from one fiat currency to another.
On October
20, 2021, the Company and the shareholders (the “Original Shareholders”) of Jacobi Asset Management Holdings Limited (“Jacobi”)
entered into a Purchase and Sale Agreement (the “Jacobi Agreement”) pursuant to which the Company agreed to acquire 5.0%
of the issued and outstanding ordinary shares of Jacobi in consideration of 20,000,000 shares of common stock of the Company
(the “Jacobi Transaction”). On December 15, 2021, the Company, the Original Shareholders and the shareholders of Jacobi that
were assigned their interest in Jacobi by the Original Shareholders (the “New Jacobi Shareholders”) entered into an Amendment
to Stock Purchase Agreement agreeing that the Jacobi Transaction will be entered between the Company and the New Jacobi Shareholders.
The Jacobi Transaction closed on December 15, 2021. Jacobi is a company focused on digital asset management that has received regulatory
approval to launch the world’s first tier one Bitcoin ETF. Jamal Khurshid and Nicholas Gregory own, directly and indirectly,
approximately 40% and 10% of Jacobi, respectively. Jamal Khurshid is the Company’s chief operating officer and director and Nicholas
Gregory is the Company’s director. The transactions contemplated by the Jacobi Agreement constituted a “related-party transaction”
as defined in Item 404 of Regulation S-K because of Mr. Khurshid’s and Mr. Gregory’s position as beneficial owner of
one or more Original Shareholders and New Jacobi Shareholders.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 1 – THE COMPANY HISTORY AND NATURE
OF THE BUSINESS (continued)
On December 30,
2021, the Company and the shareholder (the “Digiclear Shareholder”) of Digiclear Ltd. (“Digiclear”) entered into
a Purchase and Sale Agreement (the “Digiclear Agreement) pursuant to which the Company agreed to acquire 5,400,000 of
the issued and outstanding ordinary shares of Digiclear in consideration of 15,151,515 shares of common stock of the Company
(the “Digiclear Transaction”). The Digiclear Transaction closed on March 17, 2022. Digiclear is a company developing
a custody and settlement utility operating system.
The unaudited
condensed consolidated financial statements have been prepared using accounting principles generally accepted in the United States of
America applicable for a going concern, which assumes that the Company will realize its assets and discharge its liabilities in the ordinary
course of business. The Company incurred a net loss and generated negative cash flow from operating activities for the nine months
ended June 30, 2022 of $5,857,740 and $328,926, respectively, and had a working capital deficit of $3,484,888 at June 30, 2022. The
Company’s ability to continue as a going concern is dependent upon the management of expenses and ability to obtain necessary financing
to meet its obligations and pay its liabilities arising from normal business operations when they come due, and upon profitable operations.
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.
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, 2022 and September 30, 2021, we had cash balances of $23,142 and $355,673, respectively. We had working capital deficit
of $3,484,888 as of June 30, 2022.
Our ability to continue
as a going concern is dependent upon the management of expenses and our ability to obtain the necessary financing to meet our obligations
and pay our liabilities arising from normal business operations when they come due, and upon profitable operations.
We need to either borrow
funds or raise additional capital through equity or debt financings. However, we cannot be certain that such capital (from our stockholders
or third parties) will be available to us or whether such capital will be available on terms that are acceptable to us. Any such financing
likely would be dilutive to existing stockholders and could result in significant financial operating covenants that would negatively
impact our business. In the event that there are any unforeseen delays or obstacles in obtaining funds through the aforementioned
sources, CMH has committed to inject capital into the Company in order to maintain the ongoing operations of the business.
We cannot
be certain that such necessary capital through equity or debt financings will be available to us or whether such capital will be available
on terms that are acceptable to us. Any such financing likely would be dilutive to existing stockholders and could result in significant
financial operating covenants that would negatively impact our business. In the event that there are any unforeseen delays or obstacles
in obtaining funds through the aforementioned sources, Currency Mountain Holdings Bermuda, Limited (“CMH”), which is
wholly-owned by an entity that is majority-owned by Mr. Assentato, has committed to inject capital into the Company in order to maintain
the ongoing operations of the business.
NOTE 2 – BASIS
OF PRESENTATION
These interim
condensed consolidated financial statements of the Company and its subsidiaries are unaudited. In the opinion of management, all adjustments
(consisting of normal recurring accruals) and disclosures necessary for a fair presentation of these interim condensed consolidated financial
statements have been included. The results reported in the unaudited condensed consolidated financial statements for any interim periods
are not necessarily indicative of the results that may be reported for the entire year. The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission and do
not include all information and footnotes necessary for a complete presentation of financial statements in conformity with accounting
principles generally accepted in the United States of America (U.S. GAAP).
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 2 – BASIS
OF PRESENTATION (continued)
The Company’s
unaudited condensed consolidated financial statements include the accounts of the Company and its consolidated subsidiaries. These accounts
were prepared under the accrual basis of accounting. All significant intercompany accounts and transactions have been eliminated in consolidation.
Certain
information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with U.S.
GAAP have been condensed or omitted. These unaudited condensed consolidated financial statements should be read in conjunction with the
Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K
for the year ended September 30, 2021 filed with the Securities and Exchange Commission on December 29, 2021 and Form 10-K/A for the year
ended September 30, 2021 filed with the Securities and Exchange Commission on June 10, 2022 and July 27, 2022. The consolidated balance
sheet as of September 30, 2021 contained herein has been derived from the audited consolidated financial statements as of September 30,
2021, but does not include all disclosures required by U.S. GAAP.
NOTE 3 – SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Use of estimates
The preparation of the unaudited condensed consolidated
financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Significant estimates
during the three and nine months ended June 30, 2022 and 2021 include the useful life of intangible assets, assumptions used in assessing
impairment of long-term assets, valuation of deferred tax assets and the associated valuation allowances, and valuation of stock-based
compensation.
Cash and cash equivalents
At June 30, 2022 and September 30, 2021, the Company’s
cash balances by geographic area were as follows:
| Country: | |
June 30, 2022 | | |
September 30, 2021 | |
| United States | |
$ | 11,812 | | |
| 51.0 | % | |
$ | 327,443 | | |
| 92.1 | % |
| United Kingdom | |
| 11,156 | | |
| 48.2 | % | |
| 28,056 | | |
| 7.9 | % |
| Malta | |
| 174 | | |
| 0.8 | % | |
| 174 | | |
| 0.0 | % |
| Total cash | |
$ | 23,142 | | |
| 100.0 | % | |
$ | 355,673 | | |
| 100.0 | % |
For purposes of the condensed consolidated statements
of cash flows, the Company considers all highly liquid instruments with a maturity of three months or less when purchased and money market
accounts to be cash equivalents. The Company had no cash equivalents at June 30, 2022 and September 30, 2021.
Fair value of financial instruments and
fair value measurements
The fair value of the Company’s assets and
liabilities, which qualify as financial instruments under ASC Topic 820, “Fair Value Measurement,” approximates the carrying
amounts represented in the accompanying condensed consolidated financial statements, primarily due to their short-term nature.
Credit risk and uncertainties
The Company
maintains a portion of its cash in bank and financial institution deposits within U.S. that at times may exceed federally-insured limits
of $250,000. The Company manages this credit risk by concentrating its cash balances in high quality financial institutions and by periodically
evaluating the credit quality of the primary financial institutions holding such deposits. The Company has not experienced any losses
in such bank accounts and believes it is not exposed to any risks on its cash in bank accounts. At June 30, 2022, the Company’s
cash balances in United States bank accounts were not in excess of the federally-insured limits.
Financial
instruments which potentially subject the Company to concentrations of credit risk consist principally of trade accounts receivable. A
portion of the Company’s sales are credit sales which is to the customer whose ability to pay is dependent upon the industry economics
prevailing in these areas; however, concentrations of credit risk with respect to trade accounts receivable is limited due to short-term
payment terms. The Company also performs ongoing credit evaluations of its customers to help further reduce credit risk.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Accounts receivable and allowance for doubtful
accounts
Accounts
receivable are presented net of an allowance for doubtful accounts. The Company maintains allowances for doubtful accounts for estimated
losses. The Company reviews the accounts receivable on a periodic basis and makes general and specific allowances when there is doubt
as to the collectability of individual balances. In evaluating the collectability of individual receivable balances, the Company considers
many factors, including the age of the balance, a customer’s payment history, its current credit-worthiness and current economic
trends. Accounts are written off after exhaustive efforts at collection. Management believes that the accounts receivable are fully
collectable. Therefore, no allowance for doubtful accounts is deemed to be required on its accounts receivable at June 30, 2022 and September
30, 2021. The Company historically has not experienced significant uncollectible accounts receivable.
Other current assets
Other current assets primarily consist of prepaid
OTC Markets listing fees. As of June 30, 2022 and September 30, 2021, other current assets amounted to $9,250 and $12,221, respectively.
Investments
Investments
in which the Company does not have the ability to exercise significant influence over operating and financial matters are accounted for
using the cost method. Under the cost method, investment is recorded at cost, with gains and losses recognized as of the sale
date, and income recorded when received. The Company periodically evaluates its cost method investment for impairment due to decline
considered to be other than temporary. If the Company determines that a decline in fair value is other than temporary, then a charge to
earnings is recorded in “Other income (expense), net” in the accompanying unaudited condensed consolidated statements of operations
and comprehensive (loss) income, and a new basis in the investment is established.
The Company
uses the equity method of accounting for its investments in, and earning or loss of, a company that it does not control but over which
it does exert significant influence. The Company considers whether the fair value of its equity method investment has declined below its
carrying value whenever adverse events or changes in circumstances indicate that recorded value may not be recoverable. If the Company
considers any decline to be other than temporary (based on various factors, including historical financial results and the overall health
of the investee), then a write-down would be recorded to estimated fair value.
Intangible assets
Intangible assets consist of trade names, regulatory
licenses, technology and software, which are being amortized on a straight-line method over the estimated useful life of 3 - 5 years.
Impairment of long-lived assets
In accordance with ASC Topic 360, the Company
reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may
not be fully recoverable, or at least annually. The Company recognizes an impairment loss when the sum of expected undiscounted future
cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s
estimated fair value and its book value. There were no triggering events requiring assessment of impairment as of June 30, 2022 and September
30, 2021. For the three and nine months ended June 30, 2022 and 2021, no impairment of long-lived assets was recognized.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 3 – SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue recognition
The Company
accounts for revenue under the provisions of ASC Topic 606. The Company’s revenues are derived from providing:
| ● | General
support services under a GSA to a related party. The transaction price is determined in accordance with the terms of the GSA and payments
are due on a monthly basis. There are multiple services provided under the GSA (including operational reporting and technical support
infrastructure, website hosting and marketing solutions, accounting maintenance, risk monitoring services, new account processing and
customer care and continued support) and these performance obligations are combined into a single unit of accounting. Fees are recognized
as revenue over time as the services are rendered under the terms of the GSA. The Company recognizes the full contracted amount each
period with no deferred revenue. The nature of the performance obligation is to provide the specified goods or services directly to the
customer. The Company engages another party to satisfy the performance obligation on its behalf. The Company’s performance obligation
is not to arrange for the provision of the specified good or service by another party. The Company is primarily responsible for fulfilling
the promise to provide the specified good or service. Therefore, the Company is deemed to be a principal in the transaction and recognizes
revenue for that performance obligation. The Company is a financial technology company which is focused on providing software and technology
solutions for the worldwide retail foreign exchange (“FX”) trading industry. Under a General Services Agreement (“GSA”),
the Company is contractually obligated to provide for the fulfillment software, technology, customer sales and marketing and risk management
technology hardware and software solutions package to Triton Capital Markets Ltd. (“TCM”) The Company provides these services,
obtained from affiliate service provider FXDirect Dealer, LLC which is under common ownership, and controls the services of its service
provider necessary to legally transfer of the services to TCM. Consequently, the Company is defined as the principal in the transaction.
The Company, as principal, satisfies its obligation by providing ongoing service support enabling TCM to conduct its retail FX business
without interruption. Upon satisfaction of its obligation, the Company recognizes revenue in the gross amount of consideration it is
entitled to receive. The monthly GSA price is calculated by applying the Company’s 1.6% mark-up to the costs of the services being provided
by FXDirect Dealer, LLC. |
| ● | Financial
services to its customers. Revenue related to its financial services offerings are recognized at a point in time when service is rendered. |
Disaggregation of revenues
The Company’s revenues stream detail are
as follows:
| Revenue Stream |
|
Revenue Stream Detail |
| General support services |
|
Providing software, technology, customer sales and marketing and risk management technology hardware and software solutions package under a GSA to a related party |
| |
|
|
| Financial services |
|
Providing payment services from one fiat currency to another |
In the following table,
revenues are disaggregated by segment for the three and nine months ended June 30, 2022 and 2021:
| | |
Three Months Ended
June 30, | | |
Nine Months Ended
June 30, | |
| Revenue Stream | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| General support services | |
$ | 4,800,000 | | |
$ | 4,800,000 | | |
$ | 14,400,000 | | |
$ | 14,400,000 | |
| Financial services | |
| 352,192 | | |
| 41,602 | | |
| 970,224 | | |
| 41,602 | |
| Total revenues | |
$ | 5,152,192 | | |
$ | 4,841,602 | | |
$ | 15,370,224 | | |
$ | 14,441,602 | |
Advertising
and marketing costs
All costs related to advertising and marketing
are expensed as incurred. For the three and nine months ended June 30, 2022, advertising and marketing costs amounted to $147,177 and
$345,826, respectively, which was included in operating expenses on the accompanying unaudited condensed consolidated statements of operations
and comprehensive (loss) income. For the three and nine months ended June 30, 2021, the Company did not incur any advertising and marketing
costs.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 3 – SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Stock-based compensation
The Company accounts for its stock-based compensation
awards in accordance with ASC Topic 718, Compensation—Stock Compensation (“ASC 718”). ASC 718 requires all stock-based
payments to employees and non-employees including grants of stock options, to be recognized as expense in the statements of operations
based on their grant date fair values. The Company estimates the grant date fair value of each option award using the Black-Scholes option-pricing
model.
Income
taxes
The Company
accounts for income taxes pursuant to Financial Accounting Standards Board (“FASB”) ASC 740, Income Taxes. Deferred tax assets
and liabilities are determined based on temporary differences between the bases of certain assets and liabilities for income tax and financial
reporting purposes. The deferred tax assets and liabilities are classified according to the financial statement classification of the
assets and liabilities generating the differences.
The Company
maintains a valuation allowance with respect to deferred tax assets. The Company establishes a valuation allowance based upon the potential
likelihood of realizing the deferred tax asset and taking into consideration the Company’s financial position and results of operations
for the current period. Future realization of the deferred tax benefit depends on the existence of sufficient taxable income within the
carry-forward period under the Federal and foreign tax laws. Changes in circumstances, such as the Company generating taxable income,
could cause a change in judgment about the realizability of the related deferred tax asset. Any change in the valuation allowance will
be included in income in the period of the change in estimate.
The Company
follows the provisions of FASB ASC 740-10 Uncertainty in Income Taxes (ASC 740-10). Certain recognition thresholds must be met before
a tax position is recognized in the financial statements. An entity may only recognize or continue to recognize tax positions that meet
a “more-likely-than-not” threshold.
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, 2022 and 2021, potentially dilutive common shares consist of the common shares
issuable upon the exercise of common stock options (using the treasury stock method) and the conversion of Series A preferred stock (using
the if-converted method). Common stock equivalents are not included in the calculation of diluted net loss per share if their effect would
be anti-dilutive. In a period in which the Company has a net loss, all potentially dilutive securities are excluded from the computation
of diluted shares outstanding as they would have had an anti-dilutive impact.
The following table summarizes the securities
that were excluded from the diluted per share calculation because the effect of including these potential shares was antidilutive:
| | |
Three Months Ended
June 30, | | |
Nine Months Ended
June 30, | |
| | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| Stock options | |
| 5,850,000 | | |
| - | | |
| 5,850,000 | | |
| - | |
| Convertible preferred stock | |
| - | | |
| 1,250,000 | | |
| - | | |
| 1,250,000 | |
| Potentially dilutive securities | |
| 5,850,000 | | |
| 1,250,000 | | |
| 5,850,000 | | |
| 1,250,000 | |
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 3 – SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Foreign currency translation
The reporting
currency of the Company is U.S. Dollars. The functional currency of the parent company, Nukkleus Inc., Nukkleus Limited, Nukkleus Malta
Holding Ltd. and its subsidiaries, is the U.S. dollar and the functional currency of Match Financial Limited and its subsidiaries is the
British Pound (“GBP”). Monetary assets and liabilities denominated in currencies other than the reporting currency are translated
into the reporting currency at the rates of exchange prevailing at the balance sheet date. Revenue and expenses are translated using average
rates during each reporting period, and shareholders’ equity is translated at historical exchange rates. Cash flows are also translated
at average translation rates for the periods, therefore, amounts reported on the statements of cash flows will not necessarily agree with
changes in the corresponding balances on the balance sheets. Translation adjustments resulting from the process of translating the local
currency financial statements into U.S. dollars are included in determining comprehensive income/loss.
Transactions
denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing on the transaction dates.
Assets and liabilities denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing
at the balance sheet date with any transaction gains and losses that arise from exchange rate fluctuations on transactions denominated
in a currency other than the functional currency are included in the results of operations as incurred. Most of the Company’s revenue
transactions are transacted in the functional currency of the Company. The Company does not enter into any material transaction in
foreign currencies. Transaction gains or losses have not had, and are not expected to have, a material effect on the results of operations
of the Company.
Asset and
liability accounts at June 30, 2022 and September 30, 2021 were translated at 0.8212 GBP and 0.7426 GBP to $1.00, respectively, which
were the exchange rates on the balance sheet dates. Equity accounts were stated at their historical rates. The average translation rate
applied to the statement of operations for the nine months ended June 30, 2022 and for the period from May 28, 2021 through June 30, 2021
was 0.7615 GBP and 0.7133 GBP to $1.00, respectively. 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, 2022 and 2021 consisted of net loss
and unrealized gain from foreign currency translation adjustment.
Segment reporting
The Company uses “the management approach”
in determining reportable operating segments. The management approach considers the internal organization and reporting used by the Company’s
chief operating decision maker for making operating decisions and assessing performance as the source for determining the Company’s
reportable segments. The Company’s chief operating decision maker is its Chief Executive Officer (“CEO”), who reviews
operating results to make decisions about allocating resources and assessing performance for the entire company. The Company has determined
that it has two reportable business segments: general support services segment and financial services segment. These reportable segments
offer different types of services and products, have different types of revenue, and are managed separately as each requires different
operating strategies and management expertise.
Reclassification
Certain
prior period amounts have been reclassified to conform to the current period presentation. These reclassifications have no effect on the
previously reported financial position, results of operations and cash flows.
Recently issued accounting pronouncements
In June
2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (“Topic 326”). The ASU introduces
a new accounting model, the Current Expected Credit Losses model (“CECL”), which requires earlier recognition
of credit losses and additional disclosures related to credit risk. The CECL model utilizes a lifetime expected credit loss measurement
objective for the recognition of credit losses at the time the financial asset is originated or acquired. ASU 2016-13 is effective for
annual period beginning after December 15, 2022, including interim reporting periods within those annual reporting periods. The Company
expects that the adoption will not have a material impact on its unaudited condensed consolidated financial statements.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 3 – SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recently issued accounting pronouncements (continued)
In August
2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements
for Fair Value Measurements (“ASU 2018-13”), which aims to improve the overall usefulness of disclosures to financial
statement users and reduce unnecessary costs to companies when preparing fair value measurement disclosures. ASU 2018-13 is effective
for annual and interim periods in the fiscal years beginning after December 15, 2019. Early adoption is permitted. Retrospective adoption
is required, except for certain disclosures, which will be required to be applied prospectively for only the most recent interim or annual
period presented in the initial fiscal year of adoption. The adoption of this guidance as of October 1, 2020 did not have a material
impact on the Company’s unaudited condensed consolidated financial statements.
In December
2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, which simplifies the accounting for income
taxes by removing certain exceptions to the general principles in the existing guidance for income taxes and making other minor improvements.
The amendments in the ASU are effective for the Company on October 1, 2021. The adoption of this guidance as of October 1, 2021 did not
have a material impact on the Company’s unaudited condensed consolidated financial statements.
Other accounting
standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material
impact on the unaudited condensed consolidated financial statements upon adoption. The Company does not discuss recent pronouncements
that are not anticipated to have an impact on or are unrelated to its unaudited condensed consolidated financial condition, results of
operations, cash flows or disclosures.
NOTE
4 – COST METHOD INVESTMENT
At June
30, 2022, cost method investment amounted to $6,602,000. The investment represents the Company’s minority interest in Jacobi Asset
Management Holdings Limited (“Jacobi”), a private company focused on digital asset management that has received
regulatory approval to launch the world’s first tier one Bitcoin ETF.
On December
15, 2021, the Company issued 20,000,000 shares of its common stock to Jacobi’s shareholders for acquisition of 5.0%
equity interest of Jacobi. These shares were valued at $6,602,000, the fair market value on the grant date using the reported closing
share price of the Company on the date of grant.
In accordance
with ASC Topic 321, the Company elected to use the measurement alternative to measure such investments at cost, less any impairment, plus
or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer,
if any. The Company monitors its investment in the non-marketable security and will recognize, if ever existing, a loss in value which
is deemed to be other than temporary. The Company determined that there was no impairment of this investment as of June 30, 2022.
NOTE 5 – EQUITY
METHOD INVESTMENT
As of June
30, 2022, the equity method investment amounted to $4,598,701. The investment represents the Company’s interest in Digiclear Ltd.
(“Digiclear”). Digiclear was incorporated on July 13, 2021 in United Kingdom. The company and the other unrelated party accounted
for 50% and 50% of the total ownership, respectively. Digiclear is focused on digital asset custody and settlement.
The Company
accounts for the investment in Digiclear under the equity method of accounting. Under the equity method, the investment is initially recorded
at cost, adjusted for any excess of the Company’s share of the incorporated-date fair values of the investee’s identifiable
net assets over the cost of the investment (if any). Thereafter, the investment is adjusted for the post incorporation change in the Company’s
share of the investee’s net assets and any impairment loss relating to the investment.
For the
three months ended June 30, 2022 and the period from March 17, 2022 (date of investment) through June 30, 2022, loss on investment
in Digiclear amounted to $330,680 and $401,299, respectively, and the loss was composed of the Company’s share of Digiclear’s
net loss of $88,887 and $119,207, and the adjustment for allocated amortization of intangible asset of $241,793 and $282,092, respectively, were
included in loss from equity method investment in the accompanying condensed consolidated statements of operations and comprehensive loss.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 5 – EQUITY
METHOD INVESTMENT (continued)
The tables
below present the summarized unaudited financial information, as provided to the Company by the investee, for the unconsolidated company:
| | |
June 30,
2022 | |
| Current assets | |
$ | 9,667 | |
| Noncurrent assets | |
| 456,631 | |
| Current liabilities | |
| 231,177 | |
| Noncurrent liabilities | |
| - | |
| Equity | |
| 235,121 | |
| | |
For the
Three Months Ended
June 30,
2022 | | |
For the
Period from
March 17,
2022
(Date of
Investment)
through
June 30,
2022 | |
| | |
| | |
| |
| Net revenue | |
$ | - | | |
$ | - | |
| Gross profit | |
| - | | |
| - | |
| Loss from operations | |
| 177,774 | | |
| 238,415 | |
| Net loss | |
| 177,774 | | |
| 238,415 | |
NOTE 6 – INTANGIBLE ASSETS
Intangible
assets primarily consist of the valuation of identifiable intangible assets acquired, representing trade names, regulatory licenses, and
technology. The straight-line method of amortization represents the Company’s best estimate of the distribution of the economic
value of the identifiable intangible assets.
At June
30, 2022 and September 30, 2021, intangible assets consisted of the following:
| | |
Useful Life | |
June 30,
2022 | | |
September 30,
2021 | |
| Licenses and banking infrastructure (1) | |
10 Years | |
$ | - | | |
$ | 14,085,402 | |
| Trade names | |
3 Years | |
| 784,246 | | |
| - | |
| Regulatory licenses | |
3 Years | |
| 138,751 | | |
| - | |
| Technology | |
5 Years | |
| 10,300,774 | | |
| - | |
| Software | |
3 Years | |
| 11,237 | | |
| - | |
| | |
| |
| 11,235,008 | | |
| 14,085,402 | |
| Less: accumulated amortization | |
| |
| (2,567,012 | ) | |
| (469,286 | ) |
| | |
| |
$ | 8,667,996 | | |
$ | 13,616,116 | |
| (1) | In February 2022, a third party valuation report in connection with
the acquisition of Match was completed. As a result, the Company adjusted the previous estimated allocation to reflect the results of
the third party valuation. The Company decreased its cost of intangible assets of $2,861,631 and adjusted the estimated useful life
of trade names and regulatory licenses from 10 years to 3 years and the estimated useful life of technology from 10 years to 5 years.
This change in accounting estimate was effective in the first quarter of fiscal year 2022. |
For the three months ended June 30, 2022 and 2021,
amortization expense amounted to $592,892 and $117,145, respectively, of which, $526,601 and $117,145 was included in cost
of revenue – financial services, and $66,291 and $0 was included in operating expenses, respectively.
For the nine months ended June 30, 2022 and 2021,
amortization expense amounted to $2,097,726 and $117,145, respectively, of which, $1,899,791 and $117,145 was included
in cost of revenue – financial services, and $197,935 and $0 was included in operating expenses, respectively.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 6 – INTANGIBLE ASSETS
(continued)
Amortization of intangible assets attributable
to future periods is as follows:
| For the Twelve-month Period Ending June 30: | |
Amortization
Amount | |
| 2023 | |
$ | 2,371,566 | |
| 2024 | |
| 2,345,927 | |
| 2025 | |
| 2,062,027 | |
| 2026 | |
| 1,888,476 | |
| 2027 and thereafter | |
| - | |
| | |
$ | 8,667,996 | |
NOTE 7 – ACCOUNTS PAYABLE
AND ACCRUED LIABILITIES
At June 30, 2022 and September 30, 2021, accounts payable and accrued
liabilities consisted of the following:
| | |
June 30,
2022 | | |
September 30,
2021 | |
| Directors’ compensation | |
$ | 207,205 | | |
$ | 170,538 | |
| Professional fees | |
| 238,755 | | |
| 125,697 | |
| Accounts payable | |
| 80,816 | | |
| 54,831 | |
| Others | |
| 16,491 | | |
| 29,655 | |
| Total | |
$ | 543,267 | | |
$ | 380,721 | |
NOTE 8 – SHARE CAPITAL
Preferred stock
The Company’s Board of Directors is authorized to issue, at any
time, without further stockholder approval, up to 15,000,000 shares of preferred stock. The Board of Directors has the authority
to fix and determine the voting rights, rights of redemption and other rights and preferences of preferred stock.
Common
stock issued for cost method investment
On December 15, 2021,
the Company issued 20,000,000 shares of its common stock to Jacobi Asset Management Holdings Limited’s shareholders as
consideration of acquisition of 5.0% of the issued and outstanding ordinary shares of Jacobi. These shares were valued at $6,602,000,
the fair market value on the grant date using the reported closing share price of the Company on the date of grant, and the Company recorded
cost method investment of $6,602,000 (see Note 4).
Common
stock issued for equity method investment
On March 17, 2022, the Company issued 15,151,515 shares
of its common stock to Digiclear Shareholder for acquisition of 50% equity interest of Digiclear. These shares were valued at $5,000,000,
the fair market value on the grant date using the reported closing share price on the date of grant.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 8 – SHARE CAPITAL (continued)
Options
The following table summarizes the shares of the
Company’s common stock issuable upon exercise of options outstanding at June 30, 2022:
| Options Outstanding | | |
Options Exercisable | |
Range of
Exercise Price | | |
Number
Outstanding at
June 30,
2022 | | |
Weighted
Average
Remaining
Contractual
Life (Years) | | |
Weighted
Average
Exercise
Price | | |
Number
Exercisable at
June 30,
2022 | | |
Weighted
Average
Exercise
Price | |
| $ | 0.09 – 1.00 | | |
| 4,850,000 | | |
| 3.27 | | |
$ | 0.29 | | |
| 50,000 | | |
$ | 0.40 | |
| | 2.50 | | |
| 1,000,000 | | |
| 4.22 | | |
| 2.50 | | |
| - | | |
| - | |
| $ | 0.09 – 2.50 | | |
| 5,850,000 | | |
| 3.43 | | |
$ | 0.67 | | |
| 50,000 | | |
$ | 0.40 | |
Stock option activities
for the nine months ended June 30, 2022 were as follows:
| | |
Number of
Options | | |
Weighted
Average
Exercise
Price | |
| Outstanding at October 1, 2021 | |
| 1,000,000 | | |
$ | 2.50 | |
| Granted | |
| 4,850,000 | | |
| 0.29 | |
| Terminated / Exercised / Expired | |
| - | | |
| - | |
| Outstanding at June 30, 2022 | |
| 5,850,000 | | |
$ | 0.67 | |
| Options exercisable at June 30, 2022 | |
| 50,000 | | |
$ | 0.40 | |
| Options expected to vest | |
| 5,800,000 | | |
$ | 0.67 | |
The aggregate
intrinsic value of stock options outstanding and stock options exercisable at June 30, 2022 was $240,000 and $0, respectively.
The fair
values of options granted during the nine months ended June 30, 2022 were estimated at the date of grant using the Black-Scholes option-pricing
model with the following assumptions: volatility of 188.87% - 317.02%, risk-free rate of 0.39% - 1.26%, annual dividend
yield of 0% and expected life of 1.00 - 5.00 years. The aggregate fair value of the options granted during
the nine months ended June 30, 2022 was $1,057,958 and the Company recorded stock-based compensation expense of $293,753 for the nine
months ended June 30, 2022 and intangible asset cost of $11,237 and the remaining balance of $752,968 as of June 30, 2022 will be amortized
over the rest of corresponding service periods.
For the
three and nine months ended June 30, 2022, stock-based compensation expense associated with stock options granted amounted to $525,621
and $1,429,989, respectively, which was recorded as professional fees on the accompanying unaudited condensed consolidated statements
of operations and comprehensive loss. There was no comparable stock-based compensation expense associated with stock options for the three
and nine months ended June 30, 2021.
In January
2022, the Company issued 50,000 stock options for software purchase. The fair value of 50,000 stock options granted
was $11,237 which was recorded as the cost of software. For the three and nine months ended June 30, 2022, amortization in connection
with the software amounted to $937 and $1,873, respectively, which was included in amortization of intangible assets on the accompanying
unaudited condensed consolidated statements of operations and comprehensive loss.
A summary
of the status of the Company’s nonvested stock options granted as of June 30, 2022 and changes during the nine months ended June
30, 2022 is presented below:
| | |
Number of
Options | | |
Weighted
Average
Exercise
Price | |
| Nonvested at October 1, 2021 | |
| 1,000,000 | | |
$ | 2.50 | |
| Granted | |
| 4,850,000 | | |
| 0.29 | |
| Vested | |
| (50,000 | ) | |
| (0.40 | ) |
| Nonvested at June 30, 2022 | |
| 5,800,000 | | |
$ | 0.67 | |
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 9 – RELATED PARTY TRANSACTIONS
Services provided
by related parties
The Company uses affiliate employees for various
services such as the use of accountants to record the books and accounts of the Company at no charge to the Company, which are considered
immaterial.
Office space from
related parties
The Company uses office space of affiliate
companies, free of rent, which is considered immaterial.
Revenue from related party and cost of
revenue from related party
The Company’s
general support services operate under a GSA with TCM providing personnel and technical support, marketing, accounting, risk monitoring,
documentation processing and customer care and support. The minimum monthly amount received is $1,600,000.
The Company’s
general support services operate under a GSA with FXDIRECT receiving personnel and technical support, marketing, accounting, risk monitoring,
documentation processing and customer care and support. The minimum monthly amount payable is $1,575,000.
Both of
the above entities are affiliates through common ownership.
During the
three and nine months ended June 30, 2022 and 2021, general support services provided to the related party, which was recorded as revenue
– general support services - related party on the accompanying unaudited condensed consolidated statements of operations and comprehensive
loss were as follows:
| | |
Three
Months
Ended
June 30,
2022 | | |
Three
Months
Ended
June 30,
2021 | | |
Nine
Months
Ended
June 30,
2022 | | |
Nine
Months
Ended
June 30,
2021 | |
| Service provided to: | |
| | |
| | |
| | |
| |
| TCM | |
$ | 4,800,000 | | |
$ | 4,800,000 | | |
$ | 14,400,000 | | |
$ | 14,400,000 | |
| | |
$ | 4,800,000 | | |
$ | 4,800,000 | | |
$ | 14,40,000 | | |
$ | 14,400,000 | |
During the three and nine months ended
June 30, 2022 and 2021, services received from the related party, which was recorded as cost of revenue – general support services
- related party on the accompanying unaudited condensed consolidated statements of operations and comprehensive loss were as follows:
| | |
Three
Months
Ended
June 30,
2022 | | |
Three
Months
Ended
June 30,
2021 | | |
Nine
Months
Ended
June 30,
2022 | | |
Nine
Months
Ended
June 30,
2021 | |
| Service received from: | |
| | |
| | |
| | |
| |
| FXDIRECT | |
$ | 4,725,000 | | |
$ | 4,725,000 | | |
$ | 14,175,000 | | |
$ | 14,175,000 | |
| | |
$ | 4,725,000 | | |
$ | 4,725,000 | | |
$ | 14,175,000 | | |
$ | 14,175,000 | |
Due from affiliates
At June 30, 2022 and
September 30, 2021, due from related parties consisted of the following:
| | |
June 30,
2022 | | |
September 30,
2021 | |
| NUKK Capital (*) | |
$ | - | | |
$ | 144,696 | |
| TCM | |
| 871,344 | | |
| 2,473,177 | |
| Total | |
$ | 871,344 | | |
$ | 2,617,873 | |
| (*) | An entity controlled by
Emil Assentato, the Company’s chief executive officer, chief financial officer and chairman. |
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 9 – RELATED PARTY TRANSACTIONS
(continued)
Due from affiliates (continued)
The balance
of due from NUKK Capital represent the Company’s prior investment in digital currency that was transferred to NUKK Capital in March
2019. The balance of due from TCM represent unsettled funds due related to the General Services Agreement and monies that the Company
paid on behalf of TCM.
Management
believes that the related parties’ receivables are fully collectable. Therefore, no allowance for doubtful account is deemed to
be required on its due from related parties at June 30, 2022 and September 30, 2021. The Company historically has not experienced uncollectible
receivable from the related parties.
Due to affiliates
At June 30, 2022 and
September 30, 2021, due to related parties consisted of the following:
| | |
June 30,
2022 | | |
September 30,
2021 | |
| Forexware LLC (*) | |
$ | 1,049,229 | | |
$ | 579,229 | |
| FXDIRECT | |
| 2,556,076 | | |
| 3,341,893 | |
| CMH | |
| 42,000 | | |
| 42,000 | |
| FXDD Trading (*) | |
| 266,511 | | |
| 294,670 | |
| Total | |
$ | 3,913,816 | | |
$ | 4,257,792 | |
| (*) | Forexware LLC and FXDD Trading
are both controlled by Emil Assentato, the Company’s chief executive officer, chief financial officer and chairman. |
The balances
of due to related parties represent expenses paid by Forexware LLC, FXDIRECT, and FXDD Trading on behalf of the Company and advances from
CMH. The balance due to FXDIRECT may also include unsettled funds due related to the General Service Agreement.
The related
parties’ payables are short-term in nature, non-interest bearing, unsecured and repayable on demand.
Letter agreement with
ClearThink
Nukkleus is party to
a letter agreement with ClearThink dated as of November 22, 2021, pursuant to which ClearThink was engaged by Nukkleus in connection
with the Business Combination (See Note 14 - White Lion Stock Purchase Agreement).
Craig Marshak, a member
of the Board of Directors of Nukkleus, is a managing director of ClearThink, a transaction advisory firm. ClearThink has been engaged
by Nukkleus to serve as the exclusive transactional financial advisor, and finder with respect to the Business Combination, to advise
Nukkleus with respect to the Business Combination. As of June 30, 2022 Nukkleus has paid ClearThink $140,000, which have been included
in professional fees on the accompanying unaudited condensed consolidated statements of operations and comprehensive loss, and upon closing
of the Business Combination Nukkleus is obligated to pay ClearThink 1.2% of the total transaction value plus reimbursable expenses less
the $140,000 paid to ClearThink as of June 30, 2022.
NOTE 10 – INCOME TAXES
The Company
recorded no income tax expense for the three and nine months ended June 30, 2022 and 2021 because the estimated annual effective tax rate
was zero. As of June 30, 2022, the Company continues to provide a valuation allowance against its net deferred tax assets since the Company
believes it is more likely than not that its deferred tax assets will not be realized.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 11 – CONCENTRATIONS
Customers
The following table sets forth information as
to each customer that accounted for 10% or more of the Company’s revenues for the three and nine months ended June 30, 2022
and 2021.
| | |
Three Months Ended
June 30, | | |
Nine Months Ended
June 30, | |
| Customer | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| A – related party | |
| 93.2 | % | |
| 99.1 | % | |
| 93.7 | % | |
| 99.7 | % |
One related
party customer, whose outstanding receivable accounted for 10% or more of the Company’s total outstanding accounts receivable,
and accounts receivable – related party (which is included in due from affiliates on the accompanying consolidated balance sheets)
at June 30, 2022, accounted for 92.7% of the Company’s total outstanding accounts receivable, and accounts receivable –
related party at June 30, 2022.
One related
party customer, whose outstanding receivable accounted for 10% or more of the Company’s total outstanding accounts receivable,
and accounts receivable – related party (which is included in due from affiliates on the accompanying consolidated balance sheets)
at September 30, 2021, accounted for 97.8% of the Company’s total outstanding accounts receivable, and accounts receivable
– related party at September 30, 2021.
Suppliers
The following table sets forth information as
to each supplier that accounted for 10% or more of the Company’s costs of revenues for the three and nine months ended June
30, 2022 and 2021.
| | |
Three Months Ended
June 30, | | |
Nine Months Ended
June 30, | |
| Supplier | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| A – related party | |
| 87.1 | % | |
| 97.0 | % | |
| 85.5 | % | |
| 99.0 | % |
Two related
parties, whose outstanding payables accounted for 10% or more of the Company’s total outstanding accounts payable, and accounts
payable – related party (which is included in due to affiliates on the accompanying consolidated balance sheets) at June 30, 2022,
accounted for 80.9% of the Company’s total outstanding accounts payable, and accounts payable – related party at June
30, 2022.
One related
party supplier, whose outstanding payable accounted for 10% or more of the Company’s total outstanding accounts payable, and
accounts payable – related party (which is included in due to affiliates on the accompanying consolidated balance sheets) at September
30, 2021, accounted for 98.8% of the Company’s total outstanding accounts payable, and accounts payable – related party
at September 30, 2021.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 12 – SEGMENT INFORMATION
For the three and nine months ended June 30, 2022
and 2021, the Company operated in two reportable business segments - (1) the general support services segment, in which we provide software,
technology, customer sales and marketing and risk management technology hardware and software solutions package under a GSA to a related
party; and (2) the financial services segment, in which we provide payment services from one fiat currency to another. The Company’s
reportable segments are strategic business units that offer different services and products. They are managed separately based on the
fundamental differences in their operations. Information with respect to these reportable business segments for the three and nine months
ended June 30, 2022 and 2021 was as follows:
| | |
Three Months Ended
June 30, | | |
Nine Months Ended
June 30, | |
| | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| Revenues | |
| | |
| | |
| | |
| |
| General support services | |
$ | 4,800,000 | | |
$ | 4,800,000 | | |
$ | 14,400,000 | | |
$ | 14,400,000 | |
| Financial services | |
| 352,192 | | |
| 41,602 | | |
| 970,224 | | |
| 41,602 | |
| Total | |
| 5,152,192 | | |
| 4,841,602 | | |
| 15,370,224 | | |
| 14,441,602 | |
| | |
| | | |
| | | |
| | | |
| | |
| Costs of revenues | |
| | | |
| | | |
| | | |
| | |
| General support services | |
| 4,725,000 | | |
| 4,725,000 | | |
| 14,175,000 | | |
| 14,175,000 | |
| Financial services | |
| 700,705 | | |
| 144,781 | | |
| 2,398,320 | | |
| 144,781 | |
| Total | |
| 5,425,705 | | |
| 4,869,781 | | |
| 16,573,320 | | |
| 14,319,781 | |
| | |
| | | |
| | | |
| | | |
| | |
| Gross profit (loss) | |
| | | |
| | | |
| | | |
| | |
| General support services | |
| 75,000 | | |
| 75,000 | | |
| 225,000 | | |
| 225,000 | |
| Financial services | |
| (348,513 | ) | |
| (103,179 | ) | |
| (1,428,096 | ) | |
| (103,179 | ) |
| Total | |
| (273,513 | ) | |
| (28,179 | ) | |
| (1,203,096 | ) | |
| 121,821 | |
| | |
| | | |
| | | |
| | | |
| | |
| Operating expenses | |
| | | |
| | | |
| | | |
| | |
| Financial services | |
| 255,453 | | |
| 3,439 | | |
| 936,740 | | |
| 3,439 | |
| Corporate/Other | |
| 1,125,525 | | |
| 68,130 | | |
| 3,312,000 | | |
| 268,656 | |
| Total | |
| 1,380,978 | | |
| 71,569 | | |
| 4,248,740 | | |
| 272,095 | |
| | |
| | | |
| | | |
| | | |
| | |
| Other (expense) income | |
| | | |
| | | |
| | | |
| | |
| Financial services | |
| (918 | ) | |
| 360 | | |
| (3,319 | ) | |
| 360 | |
| Corporate/Other | |
| (330,878 | ) | |
| (1,150 | ) | |
| (402,585 | ) | |
| (4,170 | ) |
| Total | |
| (331,796 | ) | |
| (790 | ) | |
| (405,904 | ) | |
| (3,810 | ) |
| | |
| | | |
| | | |
| | | |
| | |
| Net income (loss) | |
| | | |
| | | |
| | | |
| | |
| General support services | |
| 75,000 | | |
| 75,000 | | |
| 225,000 | | |
| 225,000 | |
| Financial services | |
| (604,884 | ) | |
| (106,258 | ) | |
| (2,368,155 | ) | |
| (106,258 | ) |
| Corporate/Other | |
| (1,456,403 | ) | |
| (69,280 | ) | |
| (3,714,585 | ) | |
| (272,826 | ) |
| Total | |
| (1,986,287 | ) | |
| (100,538 | ) | |
| (5,857,740 | ) | |
| (154,084 | ) |
| | |
| | | |
| | | |
| | | |
| | |
| Amortization | |
| | | |
| | | |
| | | |
| | |
| Financial services | |
| 591,955 | | |
| 117,145 | | |
| 2,095,853 | | |
| 117,145 | |
| Corporate/Other | |
| 937 | | |
| - | | |
| 1,873 | | |
| - | |
| Total | |
$ | 592,892 | | |
$ | 117,145 | | |
$ | 2,097,726 | | |
$ | 117,145 | |
| Total assets at June 30, 2022 and September 30, 2021 | |
June 30,
2022 | | |
September 30,
2021 | |
| Financial services | |
$ | 8,738,375 | | |
$ | 13,703,140 | |
| Corporate/Other | |
| 12,102,517 | | |
| 2,956,696 | |
| Total | |
$ | 20,840,892 | | |
$ | 16,659,836 | |
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 13 – COMMITMENTS AND CONTINGENCIES
Litigation
From time to time, the Company is subject to ordinary
routine litigation incidental to its normal business operations. The Company is not currently a party to, and its property is not subject
to, any material legal proceedings, except as set forth below.
On April 16, 2020, the
Company was named as a defendant in the Adversary Proceeding (the “BT Prime Litigation”) filed in the United States Bankruptcy
Court for the District of Massachusetts (Case No. 15-10745-FJB; Adversary Proceeding No. 16-01178) titled In re: BT Prime Ltd (“BT
Prime”). On May 31, 2022, the sole claim against Nukkleus was dismissed with prejudice by the bankruptcy court.
The BT Prime Litigation
was brought by BT Prime against Boston Technologies Powered by Forexware LLC f/k/a Forexware LLC (“Forexware”), Currency Mountain
Holdings LLC, Currency Mountain Holdings Limited f/k/a Forexware Malta Holdings Ltd., FXDirectDealer, LLC, FXDD Malta Ltd., Nukkleus,
Nukkleus Bermuda Limited and Currency Mountain Holdings Bermuda, Ltd. BT Prime sought, amongst other relief, a determination that the
defendants were liable for all of the debts of BT Prime stemming from its bankruptcy proceedings, and sought to recover certain amounts
transferred to Forexware and FXDD Malta prior to the initiation of the bankruptcy case. In the sole claim asserted against Nukkleus, BT
Prime alleged that Nukkleus acquired certain technology assets from Forexware and is a continuation of the business of Forexware and a
successor-in-interest to Forexware. Based on this theory, BT Prime alleged that Nukkleus should be jointly and severally liable for any
liability attributable to Forexware or the other defendants, should the court eventually find any such liability. Although Nukkleus acquired
certain licenses from Forexware, Forexware maintained other assets and continued to operate as a separate business, which Nukkleus believes
is the business relevant to BT Prime’s allegations. Nukkleus has issued a limited guarantee of the obligations under a settlement
agreement among BT Prime and the defendants other than Nukkleus, limited to an amount equal to $2,050,000. This guarantee is subject to
release following payment by the defendants other than Nukkleus of their obligations under the settlement agreement. Nukkleus management
believes that the term of the limited guarantee will expire without any payment obligation or other cost to Nukkleus.
Merger
On February
22, 2022, the Company entered into an Agreement and Plan of Merger (as it may be amended, supplemented or otherwise modified from time
to time, the “Merger Agreement”), by and among the Company and Brilliant Acquisition Corporation, a British Virgin Islands
company (“Brilliant”). The Merger Agreement has been approved by the Company’s boards of directors. The transaction
is expected to close in the fourth quarter of fiscal year 2022 provided however there is no guarantee that the transaction will close.
White
Lion Stock Purchase Agreement
On May 17,
2022, the Company entered into a Stock Purchase Agreement (the “White Lion Agreement”) with White Lion Capital Partners, LLC
a California-based investment fund (“White Lion”). Under the terms of the White Lion Agreement, the Company has the right,
but not the obligation, to require White Lion to purchase shares of its common stock up to a maximum amount of $75,000,000 or such
lower amount as may be required pursuant to the rules of the market on which shares of its common stock trades at such time. Pursuant
to terms of the White Lion Agreement and the Registration Rights Agreement (as defined below), the Company is required to use its commercially
reasonable efforts to file with the SEC a registration statement covering the shares to be acquired by White Lion within sixty days following
the closing of the previously announced business combination with Brilliant Acquisition Corporation described in its Current Report on
Form 8-K filed with the SEC on February 23, 2022 (the “Business Combination”).
The term
of the White Lion Agreement commences on the effective date of the registration statement and shall end on December 31, 2024, or,
if earlier, the date on which White Lion has purchased the maximum number of shares of the Company’s common stock provided under
the White Lion Agreement, in each case on the terms and subject to the conditions set forth in the White Lion Agreement. White Lion’s
purchase price will be 96% of the dollar- volume weighted average price of the Company’s common stock over the two consecutive
trading days immediately following receipt of the Company’s notice of its intent to make a draw. As of June 30, 2022, the White
Lion Agreement is not yet effective.
During the
term of the White Lion Agreement, on the terms and subject to the conditions set forth therein, the Company may draw up to the lesser
of (i) the number of shares of the Company’s common stock which would result in beneficial ownership by White Lion of
more than 4.99% of the outstanding shares of the Company’s common stock, (ii) the number of shares of the Company’s common
stock equal to 30% of the average daily trading volume of the Company’s common stock over the five consecutive trading days immediately
following the notice date, or (iii) the number of the Company’s common stock obtained by dividing $1,500,000 by the closing
sale price of the Company’s common stock on the notice date.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 13 – COMMITMENTS AND CONTINGENCIES
(continued)
White
Lion Stock Purchase Agreement (continued)
The Company
is not entitled to draw on the White Lion Agreement if the closing sale price of the Company’s common stock on the trading day immediately
preceding the notice date is less than $1.00 (following the reverse stock split proposed in connection with the closing of the Business
Combination and described in the Company’s Current Report on Form 8-K filed with the SEC on February 23, 2022, but adjusted for
any other reorganization, recapitalization, non-cash dividend, stock split or other similar transaction). The Company is not entitled
to draw on the White Lion Agreement unless each of the following additional conditions is satisfied: (i) each of the Company’s
representations and warranties set forth in the White Lion Agreement is true and correct (subject to qualifications as to materiality
set forth therein) in all respects as of such time; (ii) a registration statement is and remains effective for the resale of securities
in connection with the White Lion Agreement; (iii) the trading of the Company’s common stock shall not have been suspended
by the SEC, the applicable trading market or FINRA, or otherwise halted for any reason; (iv) the Company shall have complied with
its obligations and shall not otherwise be in breach or default of any agreement set forth in the White Lion Agreement; (v) no statute,
regulation, order, guidance, decree, writ, ruling or injunction shall have been enacted, entered, promulgated, threatened or endorsed
by any federal, state, local or foreign court or governmental authority of competent jurisdiction, including, without limitation, the
SEC, which prohibits the consummation of or which would materially modify or delay any of the transactions contemplated by the White Lion
Agreement; (vi) all reports, schedules, registrations, forms, statements, information and other documents required to have been filed
by us with the SEC pursuant to the reporting requirements of the Exchange Act of 1934 (other than Forms 8-K) shall have been filed with
the SEC within the applicable time periods prescribed for such filings; (vii) to the extent the issuance of the put shares requires
shareholder approval under the listing rules of the applicable national exchange or principal quotation system for the Company’s
common stock, the Company has or will seek such approval; and (viii) certain other conditions as set forth in the White Lion Agreement.
In addition
to the shares to be issued under the White Lion Agreement, the Company will include in its registration statement additional shares of
the Company’s common stock in the amount of $750,000 being issued to White Lion in connection with the execution of the White
Lion Agreement.
White Lion Registration Rights
Agreement
In connection
with the Company’s entry into the White Lion Agreement, the Company entered into a Registration Rights Agreement with White Lion
(the “Registration Rights Agreement”). Pursuant to the terms of the Registration Rights Agreement, the Company has agreed
to use its commercially reasonable efforts to file a registration statement under the Securities Act registering the resale of the shares
sold under the White Lion Agreement within sixty days of the closing of the Business Combination. The Registration Rights Agreement also
provides that the Company is required to use its commercially reasonable efforts to keep the registration effective and to prepare and
file with the SEC such amendments and supplements if the foregoing registration statement is not then in effect, and the Company proposes
to file certain types of registration statements under as may be necessary to keep the registration statement effective.
NOTE 14 – MATCH
ACQUISITION
During December 2021,
the Company adjusted the valuation used to record the purchase price and the allocation of net assets acquired based on a third party
valuation report. During the quarter ended December 31, 2021, the original estimated fair value of the net assets acquired and recorded
by the Company decreased by $2,861,631 from the original estimated valuation with a corresponding decrease in additional paid-in capital.
The adjusted fair values of the assets acquired and liabilities assumed, plus transaction costs were as follows:
| | |
Estimated
Fair Value
as Originally
Recorded | | |
Transaction
Costs | | |
Valuation
Adjustment | | |
Adjusted
Amount | |
| Assets acquired: | |
| | |
| | |
| | |
| |
| Cash | |
$ | 21,370 | | |
| | | |
| | | |
$ | 21,370 | |
| Accounts receivable | |
| 46,602 | | |
| | | |
| | | |
| 46,602 | |
| Other current assets | |
| 142 | | |
| | | |
| | | |
| 142 | |
| Intangible assets | |
| 14,010,631 | | |
| 74,771 | | |
| (2,861,631 | ) | |
| 11,223,771 | |
| Total assets | |
| 14,078,745 | | |
| | | |
| | | |
| 11,291,885 | |
| Liabilities assumed: | |
| | | |
| | | |
| | | |
| | |
| Accounts payable and accrued liabilities | |
| 78,745 | | |
| | | |
| | | |
| 78,745 | |
| Total liabilities | |
| 78,745 | | |
| | | |
| | | |
| 78,745 | |
| Purchase price | |
$ | 14,000,000 | | |
| 74,771 | | |
| (2,861,631 | ) | |
$ | 11,213,140 | |
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.