NUKKLEUS INC. AND SUBSIDIARIES
NUKKLEUS INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS AND COMPREHENSIVE LOSS
| |
For the Three Months Ended March 31, | | |
For the Six Months
Ended March 31, | |
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
| |
| | |
(as restated) | | |
| | |
(as restated) | |
REVENUES | |
| | |
| | |
| | |
| |
Revenue - general support services - related party | |
$ | 4,800,000 | | |
$ | 4,800,000 | | |
$ | 9,600,000 | | |
$ | 9,600,000 | |
Revenue - financial services | |
| 833,944 | | |
| 289,017 | | |
| 1,410,332 | | |
| 618,032 | |
Total revenues | |
| 5,633,944 | | |
| 5,089,017 | | |
| 11,010,332 | | |
| 10,218,032 | |
| |
| | | |
| | | |
| | | |
| | |
COSTS OF REVENUES | |
| | | |
| | | |
| | | |
| | |
Cost of revenue - general support services - related party | |
| 4,725,000 | | |
| 4,725,000 | | |
| 9,450,000 | | |
| 9,450,000 | |
Cost of revenue - financial services | |
| 760,982 | | |
| 547,719 | | |
| 1,467,243 | | |
| 1,421,924 | |
Total costs of revenues | |
| 5,485,982 | | |
| 5,272,719 | | |
| 10,917,243 | | |
| 10,871,924 | |
| |
| | | |
| | | |
| | | |
| | |
GROSS PROFIT (LOSS) | |
| | | |
| | | |
| | | |
| | |
Gross profit - general support services - related party | |
| 75,000 | | |
| 75,000 | | |
| 150,000 | | |
| 150,000 | |
Gross profit (loss) - financial services | |
| 72,962 | | |
| (258,702 | ) | |
| (56,911 | ) | |
| (803,892 | ) |
Total gross profit (loss) | |
| 147,962 | | |
| (183,702 | ) | |
| 93,089 | | |
| (653,892 | ) |
| |
| | | |
| | | |
| | | |
| | |
OPERATING EXPENSES: | |
| | | |
| | | |
| | | |
| | |
Advertising and marketing | |
| 295 | | |
| 163,427 | | |
| 49,417 | | |
| 198,649 | |
Professional fees | |
| 566,336 | | |
| 1,209,281 | | |
| 1,243,439 | | |
| 2,264,239 | |
Compensation and related benefits | |
| 197,532 | | |
| 129,871 | | |
| 357,792 | | |
| 255,244 | |
Amortization of intangible assets | |
| 66,289 | | |
| 66,290 | | |
| 132,580 | | |
| 131,644 | |
Other general and administrative | |
| 123,874 | | |
| 101,151 | | |
| 252,720 | | |
| 293,677 | |
Total operating expenses | |
| 954,326 | | |
| 1,670,020 | | |
| 2,035,948 | | |
| 3,143,453 | |
| |
| | | |
| | | |
| | | |
| | |
LOSS FROM OPERATIONS | |
| (806,364 | ) | |
| (1,853,722 | ) | |
| (1,942,859 | ) | |
| (3,797,345 | ) |
| |
| | | |
| | | |
| | | |
| | |
OTHER (EXPENSE) INCOME: | |
| | | |
| | | |
| | | |
| | |
Loss from equity method investment | |
| - | | |
| (70,619 | ) | |
| - | | |
| (70,619 | ) |
Other income (expense) | |
| 715 | | |
| (2,273 | ) | |
| 3,288 | | |
| (3,489 | ) |
Total other income (expense), net | |
| 715 | | |
| (72,892 | ) | |
| 3,288 | | |
| (74,108 | ) |
| |
| | | |
| | | |
| | | |
| | |
LOSS BEFORE INCOME TAXES | |
| (805,649 | ) | |
| (1,926,614 | ) | |
| (1,939,571 | ) | |
| (3,871,453 | ) |
| |
| | | |
| | | |
| | | |
| | |
INCOME TAXES | |
| - | | |
| - | | |
| - | | |
| - | |
| |
| | | |
| | | |
| | | |
| | |
NET LOSS | |
$ | (805,649 | ) | |
$ | (1,926,614 | ) | |
$ | (1,939,571 | ) | |
$ | (3,871,453 | ) |
| |
| | | |
| | | |
| | | |
| | |
COMPREHENSIVE LOSS: | |
| | | |
| | | |
| | | |
| | |
NET LOSS | |
$ | (805,649 | ) | |
$ | (1,926,614 | ) | |
$ | (1,939,571 | ) | |
$ | (3,871,453 | ) |
OTHER COMPREHENSIVE (LOSS) INCOME | |
| | | |
| | | |
| | | |
| | |
Unrealized foreign currency translation (loss) gain | |
| (2,721 | ) | |
| 13,214 | | |
| (30,704 | ) | |
| 10,987 | |
COMPREHENSIVE LOSS | |
$ | (808,370 | ) | |
$ | (1,913,400 | ) | |
$ | (1,970,275 | ) | |
$ | (3,860,466 | ) |
| |
| | | |
| | | |
| | | |
| | |
NET LOSS PER COMMON SHARE: | |
| | | |
| | | |
| | | |
| | |
Basic and diluted | |
$ | (0.00 | ) | |
$ | (0.01 | ) | |
$ | (0.01 | ) | |
$ | (0.01 | ) |
| |
| | | |
| | | |
| | | |
| | |
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: | |
| | | |
| | | |
| | | |
| | |
Basic and diluted | |
| 367,175,886 | | |
| 354,549,624 | | |
| 367,175,886 | | |
| 345,031,364 | |
The accompanying notes to unaudited condensed consolidated financial
statements are an integral part of these statements.
NUKKLEUS INC. AND SUBSIDIARIES
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the Three and Six Months Ended March 31, 2023
| |
| | |
| | |
| | |
| | |
| | |
| | |
Accumulated | | |
| |
| |
Preferred Stock | | |
Common Stock | | |
Additional | | |
| | |
Other | | |
Total | |
| |
Number of | | |
| | |
Number of | | |
| | |
Paid-in | | |
Accumulated | | |
Comprehensive | | |
Stockholders’ | |
| |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Capital | | |
Deficit | | |
Income | | |
Equity | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Balance as of October 1, 2022 | |
| - | | |
$ | - | | |
| 367,175,886 | | |
$ | 36,718 | | |
$ | 25,136,459 | | |
$ | (14,340,816 | ) | |
$ | 58,219 | | |
$ | 10,890,580 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Stock-based compensation | |
| - | | |
| - | | |
| - | | |
| - | | |
| 146,876 | | |
| - | | |
| - | | |
| 146,876 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net loss for the three months ended December 31, 2022 | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (1,133,922 | ) | |
| - | | |
| (1,133,922 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Foreign currency translation adjustment | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (27,983 | ) | |
| (27,983 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Balance as of December 31, 2022 | |
| - | | |
| - | | |
| 367,175,886 | | |
| 36,718 | | |
| 25,283,335 | | |
| (15,474,738 | ) | |
| 30,236 | | |
| 9,875,551 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Stock-based compensation | |
| - | | |
| - | | |
| - | | |
| - | | |
| 74,667 | | |
| - | | |
| - | | |
| 74,667 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net loss for the three months ended March 31, 2023 | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (805,649 | ) | |
| - | | |
| (805,649 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Foreign currency translation adjustment | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (2,721 | ) | |
| (2,721 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Balance as of March 31, 2023 | |
| - | | |
$ | - | | |
| 367,175,886 | | |
$ | 36,718 | | |
$ | 25,358,002 | | |
$ | (16,280,387 | ) | |
$ | 27,515 | | |
$ | 9,141,848 | |
The accompanying notes to unaudited condensed consolidated financial statements are an integral part of these statements.
NUKKLEUS INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the Three and Six Months Ended March 31, 2022
| |
| | |
| | |
| | |
| | |
Accumulated | | |
| |
| |
Preferred Stock | | |
Common Stock | | |
Additional | | |
| | |
Other | | |
Total | |
| |
Number of | | |
| | |
Number of | | |
| | |
Paid-in | | |
Accumulated | | |
Comprehensive | | |
Stockholders’ | |
| |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Capital | | |
Deficit | | |
Income | | |
Equity | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Balance as of October 1, 2021 | |
| - | | |
$ | - | | |
| 332,024,371 | | |
$ | 33,203 | | |
$ | 11,613,208 | | |
$ | (2,495,159 | ) | |
$ | 8,440 | | |
$ | 9,159,692 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Common stock issued in connection with cost method investment | |
| - | | |
| - | | |
| 20,000,000 | | |
| 2,000 | | |
| 6,600,000 | | |
| - | | |
| - | | |
| 6,602,000 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Stock-based compensation | |
| - | | |
| - | | |
| - | | |
| - | | |
| 378,746 | | |
| - | | |
| - | | |
| 378,746 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net loss for the three months ended December 31, 2021 | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (1,944,839 | ) | |
| - | | |
| (1,944,839 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Foreign currency translation adjustment | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (2,227 | ) | |
| (2,227 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Balance as of December 31, 2021 | |
| - | | |
| - | | |
| 352,024,371 | | |
| 35,203 | | |
| 18,591,954 | | |
| (4,439,998 | ) | |
| 6,213 | | |
| 14,193,372 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Common stock issued in connection with equity method investment | |
| - | | |
| - | | |
| 15,151,515 | | |
| 1,515 | | |
| 4,998,485 | | |
| - | | |
| - | | |
| 5,000,000 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Stock options issued for the purchase of an intangible asset | |
| - | | |
| - | | |
| - | | |
| - | | |
| 11,237 | | |
| - | | |
| - | | |
| 11,237 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Stock-based compensation | |
| - | | |
| - | | |
| - | | |
| - | | |
| 525,622 | | |
| - | | |
| - | | |
| 525,622 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net loss for the three months ended March 31, 2022 | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (1,926,614 | ) | |
| - | | |
| (1,926,614 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Foreign currency translation adjustment | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 13,214 | | |
| 13,214 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Balance as of March 31, 2022 | |
| - | | |
$ | - | | |
| 367,175,886 | | |
$ | 36,718 | | |
$ | 24,127,298 | | |
$ | (6,366,612 | ) | |
$ | 19,427 | | |
$ | 17,816,831 | |
The accompanying notes to unaudited condensed consolidated financial statements are an integral part of these statements.
NUKKLEUS INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| |
For the Six Months
Ended March 31, | |
| |
2023 | | |
2022 | |
| |
| | |
(as restated) | |
CASH FLOWS FROM OPERATING ACTIVITIES: | |
| | |
| |
Net loss | |
$ | (1,939,571 | ) | |
$ | (3,871,453 | ) |
Adjustments to reconcile net loss to net cash | |
| | | |
| | |
used in operating activities: | |
| | | |
| | |
Amortization of intangible assets | |
| 1,185,783 | | |
| 1,504,834 | |
Stock-based compensation and service expense | |
| 221,543 | | |
| 904,368 | |
Unrealized foreign currency exchange loss | |
| 132 | | |
| - | |
Loss on equity method investment | |
| - | | |
| 70,619 | |
Changes in operating assets and liabilities: | |
| | | |
| | |
Customer digital currency assets | |
| (113,686 | ) | |
| (170,955 | ) |
Accounts receivable | |
| - | | |
| 667 | |
Digital assets | |
| 31,901 | | |
| (528 | ) |
Due from affiliates | |
| 676,576 | | |
| 1,138,460 | |
Other current assets | |
| (20,764 | ) | |
| (14,943 | ) |
Accounts payable | |
| 24,053 | | |
| 57,775 | |
Customer custodial cash liabilities | |
| (1,934,733 | ) | |
| 309,542 | |
Customer digital currency liabilities | |
| 113,686 | | |
| 170,955 | |
Due to affiliates | |
| (43,259 | ) | |
| (224,287 | ) |
Accrued payroll liability and directors’ compensation | |
| 97,311 | | |
| 20,000 | |
Accrued professional fees | |
| 34,452 | | |
| (25,202 | ) |
Accrued liabilities and other payables | |
| (215,925 | ) | |
| 111,656 | |
| |
| | | |
| | |
Net cash used in operating activities | |
| (1,882,501 | ) | |
| (18,492 | ) |
| |
| | | |
| | |
CASH FLOWS FROM INVESTING ACTIVITIES: | |
| | | |
| | |
Investment in note receivable | |
| (154,150 | ) | |
| - | |
Purchase of intangible asset | |
| (41,245 | ) | |
| - | |
| |
| | | |
| | |
NET CASH USED IN INVESTING ACTIVITIES | |
| (195,395 | ) | |
| - | |
| |
| | | |
| | |
EFFECT OF EXCHANGE RATE ON CASH | |
| 180,425 | | |
| (27,915 | ) |
| |
| | | |
| | |
NET DECREASE IN CASH | |
| (1,897,471 | ) | |
| (46,407 | ) |
| |
| | | |
| | |
Cash - beginning of period | |
| 2,384,417 | | |
| 1,203,073 | |
| |
| | | |
| | |
Cash - end of period | |
$ | 486,946 | | |
$ | 1,156,666 | |
| |
| | | |
| | |
Cash consisted of the following: | |
| | | |
| | |
Cash | |
$ | 246,650 | | |
$ | 74,245 | |
Customer custodial cash | |
| 240,296 | | |
| 1,082,421 | |
Total cash | |
$ | 486,946 | | |
$ | 1,156,666 | |
| |
| | | |
| | |
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | |
| | | |
| | |
Cash paid for: | |
| | | |
| | |
Interest | |
$ | - | | |
$ | - | |
Income taxes | |
$ | - | | |
$ | - | |
| |
| | | |
| | |
NON-CASH INVESTING AND FINANCING ACTIVITIES: | |
| | | |
| | |
Common stock issued in connection with cost method investment | |
$ | - | | |
$ | 6,602,000 | |
Common stock issued in connection with equity method investment | |
$ | - | | |
$ | 5,000,000 | |
Stock options issued for the purchase of an intangible asset | |
$ | - | | |
$ | 11,237 | |
The accompanying notes to
unaudited condensed consolidated financial statements are an integral part of these statements.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – THE COMPANY HISTORY AND
NATURE OF THE BUSINESS
Nukkleus Inc. (f/k/a Compliance & Risk Management
Solutions Inc.) (“Nukkleus” or the “Company”) was formed on July 29, 2013 in the State of Delaware as a for-profit
Company and established a fiscal year end of September 30.
The Company is a financial technology company
which is focused on providing software and technology solutions for the worldwide retail foreign exchange (“FX”) trading
industry. The Company primarily provides its software, technology, customer sales and marketing and risk management technology hardware
and software solutions package to Triton Capital Markets Ltd. (“TCM”), formerly known as FXDD Malta Limited (“FXDD
Malta”). The FXDD brand (e.g., see FXDD.com) is the brand utilized in the retail forex trading industry by TCM.
Nukkleus Limited, a wholly-owned subsidiary of
the Company, provides its software, technology, customer sales and marketing and risk management technology hardware and software solutions
package under a General Services Agreement (“GSA”) to TCM. TCM is a private limited liability company formed under the laws
of Malta. The GSA provides that TCM will pay Nukkleus Limited at minimum $1,600,000 per month. Emil Assentato is also the majority member
of Max Q Investments LLC (“Max Q”), which is managed by Derivative Marketing Associates Inc. (“DMA”). Mr. Assentato,
who is our Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”) and chairman, is the sole owner and
manager of DMA. Max Q owns 79% of Currency Mountain Malta LLC, which in turn is the sole shareholder of TCM.
In addition, in order to appropriately service
TCM, Nukkleus Limited entered into a GSA with FXDirectDealer LLC (“FXDIRECT”), which provides that Nukkleus Limited will
pay FXDIRECT a minimum of $1,575,000 per month in consideration of providing personnel engaged in operational and technical support,
marketing, sales support, accounting, risk monitoring, documentation processing and customer care and support. FXDIRECT may terminate
this agreement upon providing 90 days’ written notice. Currency Mountain Holdings LLC is the sole shareholder of FXDIRECT. Max
Q is the majority shareholder of Currency Mountain Holdings LLC.
In July 2018, the Company incorporated Nukkleus
Malta Holding Ltd., which is a wholly-owned subsidiary. In July 2018, Nukkleus Malta Holding Ltd. incorporated Markets Direct Technology
Group Ltd (“MDTG”), formerly known as Nukkleus Exchange Malta Ltd. MDTG was exploring potentially obtaining a license to
operate an electronic exchange whereby it would facilitate the buying and selling of various digital assets as well as traditional currency
pairs used in FX Trading. During the fourth quarter of fiscal 2020, management made the decision to exit the exchange business and to
no longer pursue the regulatory licensing necessary to operate an exchange in Malta.
On August 27, 2020, the Company renamed Nukkleus
Exchange Malta Ltd. to Markets Direct Technology Group Ltd (“MDTG”). MDTG manages the technology and Internet Protocol (“IP”)
behind the Markets Direct brand (which is operated by TCM). MDTG holds all the IP addresses and all the software licenses in its name,
and it holds all the IP rights to the brands such as Markets Direct and TCM. MDTG then leases out the rights to use these names/brands
licenses to the appropriate entities.
In fiscal year 2021, the Company completed its
acquisition of Match Financial Limited, a private limited company formed in England and Wales (“Match”) and its subsidiaries.
Match, through its Digital RFQ Limited (“Digital RFQ”) subsidiary, is engaged in providing payment services from one fiat
currency to another or to digital assets.
On October 20, 2021, the Company and the shareholders
(the “Original Shareholders”) of Jacobi Asset Management Holdings Limited (“Jacobi”) entered into a Purchase
and Sale Agreement (the “Jacobi Agreement”) pursuant to which the Company agreed to acquire 5.0% of the issued and outstanding
ordinary shares of Jacobi in consideration of 20,000,000 shares of common stock of the Company (the “Jacobi Transaction”).
On December 15, 2021, the Company, the Original Shareholders and the shareholders of Jacobi that were assigned their interest in Jacobi
by the Original Shareholders (the “New Jacobi Shareholders”) entered into an Amendment to Stock Purchase Agreement agreeing
that the Jacobi Transaction will be entered between the Company and the New Jacobi Shareholders. The Jacobi Transaction closed on December
15, 2021. Jacobi is a company focused on digital asset management that has received regulatory approval to launch the world’s first
tier one Bitcoin exchange-traded fund (“ETF”). Jamal Khurshid and Nicholas Gregory own, directly and indirectly, approximately
40% and 10% of Jacobi, respectively. Jamal Khurshid is the Company’s chief operating officer and director and Nicholas Gregory
is the Company’s director. The transactions contemplated by the Jacobi Agreement constituted a “related-party transaction”
as defined in Item 404 of Regulation S-K because of Mr. Khurshid’s and Mr. Gregory’s position as beneficial owner of one
or more Original Shareholders and New Jacobi Shareholders.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – THE COMPANY HISTORY AND
NATURE OF THE BUSINESS (continued)
On December 30, 2021, the Company and the shareholder
(the “Digiclear Shareholder”) of Digiclear Ltd. (“Digiclear”) entered into a Purchase and Sale Agreement (the
“Digiclear Agreement”) pursuant to which the Company agreed to acquire 5,400,000 of the issued and outstanding ordinary shares
of Digiclear in consideration of 15,151,515 shares of common stock of the Company (valued at $5,000,000 based on the market price of
the Company’s common stock on the acquisition date) (the “Digiclear Transaction”). In addition to, if and when the
Company is acquired by a Special Purpose Acquisition Company (“SPAC”), the Company will fund and capitalize Digiclear with
a minimum of $1,000,000 operating capital in exchange for 4.545% of additional shares of Digiclear’s capital stock. Digiclear shall
retain the right to unwind the transaction and to have the Company return the 5,400,000 ordinary shares of Digiclear share in return
for Digiclear returning to the Company the 15,151,515 of Company common shares. Digiclear can only unwind the transaction if the Company
is no longer under contract to be acquired by a SPAC (See Note 15 – Merger). The Digiclear Transaction closed on March 17, 2022.
Digiclear is a company developing a custody and settlement utility operating system.
Liquidity and capital resources
Liquidity is the ability of a company to generate
funds to support its current and future operations, satisfy its obligations and otherwise operate on an ongoing basis. At March 31, 2023
and September 30, 2022, the Company had cash of $246,650 and $364,023, respectively, exclusive of customer custodial cash.
The unaudited condensed consolidated financial
statements have been prepared using accounting principles generally accepted in the United States of America applicable for a going concern,
which assumes that the Company will realize its assets and discharge its liabilities in the ordinary course of business. The Company
had a working capital deficit of approximately $4,391,000 at March 31, 2023 and incurred a net loss and generated negative cash flow
from operating activities of approximately $1,940,000 and $1,883,000 for the six months ended March 31, 2023, respectively. These are
indicators of substantial doubt as to the Company’s ability to continue as a going concern for at least one year from issuance
of these financial statements. The Company’s ability to continue as a going concern is dependent upon the management of expenses
and ability to obtain necessary financing to meet its obligations and pay its liabilities arising from normal business operations when
they come due, and upon profitable operations.
The Company cannot be certain that such necessary
capital through equity or debt financings will be available to it or whether such capital will be available on terms that are acceptable
to it. Any such financing likely would be dilutive to existing stockholders and could result in significant financial operating covenants
that would negatively impact the Company business. In the event that there are any unforeseen delays or obstacles in obtaining funds
through the aforementioned sources, TCM, which is wholly-owned by an entity that is majority-owned by Mr. Assentato, has committed
to inject capital into the Company in order to maintain the ongoing operations of the business.
Based on the foregoing, management believes that
its current financial resources, as of the date of the issuance of these financial statements, are sufficient to fund its current twelve-month
operating budget, alleviating any concerns by its historical operating results and satisfying its estimated liquidity needs for the twelve
months from the issuance of these financial statements.
NOTE 2 – BASIS
OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
These interim condensed consolidated financial
statements of the Company and its subsidiaries are unaudited. In the opinion of management, all adjustments (consisting of normal recurring
accruals) and disclosures necessary for a fair presentation of these interim condensed consolidated financial statements have been included.
The results reported in the unaudited condensed consolidated financial statements for any interim periods are not necessarily indicative
of the results that may be reported for the entire year. The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with the rules and regulations of the Securities and Exchange Commission and do not include all information
and footnotes necessary for a complete presentation of financial statements in conformity with accounting principles generally accepted
in the United States of America (U.S. GAAP).
The Company’s unaudited condensed consolidated
financial statements include the accounts of the Company and its consolidated subsidiaries. These accounts were prepared under the accrual
basis of accounting. All significant intercompany accounts and transactions have been eliminated in consolidation.
Certain information
and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with U.S. GAAP have
been condensed or omitted. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s
audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended
September 30, 2022 filed with the Securities and Exchange Commission on April 10, 2023. The consolidated balance sheet as of September
30, 2022 contained herein has been derived from the audited consolidated financial statements as of September 30, 2022, but does not
include all disclosures required by U.S. GAAP.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Use of estimates
The preparation of the unaudited condensed consolidated
financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Changes in these estimates and assumptions may have a material impact on
the unaudited condensed consolidated financial statements and accompanying notes. Making estimates requires management to exercise significant
judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed
at the date of the financial statements, which management considered in formulating its estimate, could change in the near term due to
one or more future confirming events. Accordingly, the actual results could differ significantly from those estimates.
Significant estimates during the three and six
months ended March 31, 2023 and 2022 include the useful life of intangible assets, assumptions used in assessing impairment of long-term
assets, valuation of deferred tax assets and the associated valuation allowances, valuation of stock-based compensation, and fair
value of customer digital currency assets and liabilities.
Cash and cash equivalents
At March 31, 2023 and September 30, 2022, the
Company’s cash balances by geographic area were as follows:
Country: | |
March 31, 2023 | | |
September 30, 2022 | |
United States | |
$ | 183,686 | | |
| 74.5 | % | |
$ | 47,860 | | |
| 13.1 | % |
United Kingdom | |
| 61,986 | | |
| 25.1 | % | |
| 315,989 | | |
| 86.8 | % |
Lithuania | |
| 804 | | |
| 0.3 | % | |
| - | | |
| - | |
Malta | |
| 174 | | |
| 0.1 | % | |
| 174 | | |
| 0.1 | % |
Total cash | |
$ | 246,650 | | |
| 100.0 | % | |
$ | 364,023 | | |
| 100.0 | % |
For purposes of the
unaudited condensed consolidated statements of cash flows, the Company considers all highly liquid instruments with a maturity of three
months or less when purchased and money market accounts to be cash equivalents. The Company had no cash equivalents at March 31, 2023
and September 30, 2022. Cash and cash equivalents excludes customer legal tender, which is reported separately as Customer custodial
cash in the accompanying condensed consolidated balance sheets. Refer to “customer custodial cash and customer custodial cash liabilities”
below for further details.
Customer custodial
cash and customer custodial cash liabilities
Customer custodial cash
represents cash and cash equivalents maintained in Company bank accounts that are controlled by the Company but held for the benefit
of customers. Customer custodial cash liabilities represent these cash deposits to be utilized for its contractual obligations to its
customers. The Company classifies the assets as current based on their purpose and availability to fulfill the Company’s direct
obligations to its customers.
Customer digital
currency assets and liabilities
At certain times, Digital
RFQ’s customers’ funds that Digital RFQ uses to make payments on behalf of its customers, remain in the form of digital assets
in its customers’ wallets at its digital asset trading platforms awaiting final conversion and/or transfer to the customer’s
payment final destination. These indirectly held digital assets, may consist of USDT (Stablecoin), Bitcoin, and Ethereum (collectively,
“Customer digital currency assets”). Digital RFQ maintains the internal recordkeeping of its customer digital currency assets,
including the amount and type of digital asset owned by each of its customers.
Digital RFQ has control
of the private keys and knows the balances of all wallets with its digital asset trading platforms in order to be able to successfully
carry out the movement of digital assets for its client payment instruction. As part of its customer payment instruction, Digital RFQ
can execute withdrawals on the wallets in its digital asset trading platforms.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Customer digital
currency assets and liabilities (continued)
Management has determined
that Digital RFQ has control of the customer digital currency assets and records these assets on its balance sheet with a corresponding
liability. Digital RFQ recognizes customer digital currency liabilities and corresponding customer digital currency assets, on initial
recognition and at each reporting date, at fair value of the customer digital currency assets. Subsequent changes in fair value are adjusted
to the carrying amount of these customer digital currency assets, with changes in fair value recorded in other general and administrative
expense in the unaudited condensed consolidated statements of operations and comprehensive loss.
Any loss, theft, or
other misuse would impact the measurement of customer digital currency assets. The Company classifies the customer digital currency assets
as current based on their purpose and availability to fulfill the Company’s direct obligations to its customers.
Fair value of financial
instruments and fair value measurements
The Company adopted
the guidance of Accounting Standards Codification (“ASC”) 820 for fair value measurements which clarifies the definition
of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring
fair value as follows:
| ● | Level 1-Inputs are unadjusted quoted prices in active markets
for identical assets or liabilities available at the measurement date. |
|
● |
Level 2-Inputs are unadjusted quoted prices for similar assets and liabilities in active markets,
quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that
are observable, and inputs derived from or corroborated by observable market data. |
|
● |
Level 3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions
on what assumptions the market participants would use in pricing the asset or liability based on the best available information. |
The fair value of the Company’s assets
and liabilities, which qualify as financial instruments under ASC Topic 820, “Fair Value Measurement,” approximates the carrying
amounts represented in the accompanying unaudited condensed consolidated financial statements, primarily due to their short-term nature.
Assets and liabilities measured at fair value
on a recurring basis. Customer digital currency assets and liabilities are measured at fair value on a recurring basis. These
assets and liabilities are measured at fair value on an ongoing basis.
The following table provides these assets and
liabilities carried at fair value, measured as of March 31, 2023:
| |
Quoted Price in | | |
Significant Other | | |
Significant | | |
| |
| |
Active Markets | | |
Observable Inputs | | |
Unobservable Inputs | | |
Balance at
March 31, | |
| |
(Level 1) | | |
(Level 2) | | |
(Level 3) | | |
2023 | |
Customer digital currency assets | |
$ | - | | |
$ | 393,045 | | |
$ | - | | |
$ | 393,045 | |
Customer digital currency liabilities | |
$ | - | | |
$ | 393,045 | | |
$ | - | | |
$ | 393,045 | |
The following table provides these assets and
liabilities carried at fair value, measured as of September 30, 2022:
| |
Quoted Price in | | |
Significant Other | | |
Significant | | |
| |
| |
Active Markets | | |
Observable Inputs | | |
Unobservable Inputs | | |
Balance at
September 30, | |
| |
(Level 1) | | |
(Level 2) | | |
(Level 3) | | |
2022 | |
Customer digital currency assets | |
$ | - | | |
$ | 248,214 | | |
$ | - | | |
$ | 248,214 | |
Customer digital currency liabilities | |
$ | - | | |
$ | 248,214 | | |
$ | - | | |
$ | 248,214 | |
Customer digital currency assets and liabilities
represent the Company’s obligation to safeguard customers’ digital assets. Accordingly, the Company has valued the assets
and liabilities using quoted market prices for the underlying digital assets which is based on Level 2 inputs.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Fair value of financial
instruments and fair value measurements (continued)
ASC 825-10 “Financial Instruments”,
allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (fair value option). The fair
value option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new election date occurs. If the fair value
option is elected for an instrument, unrealized gains and losses for that instrument should be reported in earnings at each subsequent
reporting date. The Company did not elect to apply the fair value option to any outstanding instruments.
Credit risk and uncertainties
The ramifications of the outbreak of the novel
strain of COVID-19, reported to have started in December 2019 and spread globally, are filled with uncertainty and changing quickly.
Our operations have continued during the COVID-19 pandemic and we have not had significant disruption.
The Company is operating in a rapidly changing
environment so the extent to which COVID-19 impacts its business, operations and financial results from this point forward will depend
on numerous evolving factors that the Company cannot accurately predict. Those factors include the following: the duration and scope
of the pandemic; governmental, business and individuals’ actions that have been and continue to be taken in response to the pandemic.
The Company maintains a portion of its cash in
bank and financial institution deposits within U.S. that at times may exceed federally-insured limits of $250,000. The Company manages
this credit risk by concentrating its cash balances, including customer custodial cash, in high quality financial institutions and by
periodically evaluating the credit quality of the primary financial institutions holding such deposits. The Company may also hold cash
at digital asset trading platforms and performs a regular assessment of these digital asset trading platforms as part of its risk management
process. The Company has not experienced any losses in such bank accounts and believes it is not exposed to any risks on its cash in
bank accounts. At March 31, 2023, there were no balances in excess of the federally-insured limits.
We may maintain our cash assets at financial
institutions in the U.S. in amounts that may be in excess of the Federal Deposit Insurance Corporation (“FDIC”) insurance
limit of $250,000. Actual events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial
institutions, transactional counterparties or other companies in the financial services industry or the financial services industry generally,
or concerns or rumors about any events of these kinds or other similar risks, have in the past and may in the future lead to market-wide
liquidity problems. For example, in response to the rapidly declining financial condition of regional banks Silicon Valley Bank (“SVB”)
and Signature Bank (“Signature”), the California Department of Financial Protection and Innovation and the New York State
Department of Financial Services closed SVB and Signature on March 10, 2023 and March 12, 2023, respectively, and the FDIC was appointed
as receiver for SVB and Signature. In the event of a failure or liquidity issues of or at any of the financial institutions where we
maintain our deposits or other assets, we may incur a loss to the extent such loss exceeds the FDIC insurance limitation, which could
have a material adverse effect upon our liquidity, financial condition and our results of operations. Similarly, if our customers experience
liquidity issues as a result of financial institution defaults or non-performance where they hold cash assets, their ability to pay us
may become impaired and could have a material adverse effect on our results of operations, including the collection of accounts receivable
and cash flows.
Financial instruments which potentially subject
the Company to concentrations of credit risk consist principally of trade accounts receivable. A portion of the Company’s sales
are credit sales which is to the customer whose ability to pay is dependent upon the industry economics prevailing in these areas; however,
concentrations of credit risk with respect to trade accounts receivable is limited due to short-term payment terms. The Company also
performs ongoing credit evaluations of its customers to help further reduce credit risk.
Digital assets
The digital assets held by the Company are accounted
for as intangible assets with indefinite useful lives, and are initially measured at cost. Digital assets accounted for as intangible
assets are subject to impairment losses if the fair value of digital assets decreases below the carrying value at any time during the
period. The fair value is measured using the quoted price of the digital asset at the time its fair value is being measured. Impairment
expense is reflected in other general and administrative expense in the unaudited condensed consolidated statements of operations and
comprehensive loss. The Company assigns costs to transactions on a first-in, first-out basis.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Other current assets
Other current assets primarily consist of security
deposit, prepaid professional fee, and prepaid OTC Markets listing fees. As of March 31, 2023 and September 30, 2022, other current assets
amounted to $37,789 and $15,617, respectively.
Revenue recognition
The Company determines revenue recognition from
contracts with customers through the following steps:
|
● |
Step 1: Identify the contract with the customer |
|
● |
Step 2: Identify the performance obligations in the contract |
|
● |
Step 3: Determine the transaction price |
|
● |
Step 4: Allocate the transaction price to the performance obligations in the contract |
|
● |
Step 5: Recognize revenue when the company satisfies a performance obligation |
Revenue is recognized when control of the promised
goods or services is transferred to the customers, in an amount that reflects the consideration the Company expects to be entitled to
in exchange for those goods or services. The Company’s revenues are derived from providing:
| ● | General support services under a GSA to a related party. The transaction price is determined in accordance with the terms of the GSA and payments are due on a monthly basis. There are multiple services provided under the GSA (including operational reporting and technical support infrastructure, website hosting and marketing solutions, accounting maintenance, risk monitoring services, new account processing and customer care and continued support) and these performance obligations are combined into a single unit of accounting. Fees are recognized as revenue over time as the services are rendered under the terms of the GSA. The Company recognizes the full contracted amount each period with no deferred revenue. The nature of the performance obligation is to provide the specified goods or services directly to the customer. The Company engages another party to satisfy the performance obligation on its behalf. The Company’s performance obligation is not to arrange for the provision of the specified good or service by another party. The Company is primarily responsible for fulfilling the promise to provide the specified good or service. Therefore, the Company is deemed to be a principal in the transaction and recognizes revenue for that performance obligation. The Company is a financial technology company which is focused on providing software and technology solutions for the worldwide retail foreign exchange (“FX”) trading industry. Under a GSA, the Company is contractually obligated to provide for the fulfillment software, technology, customer sales and marketing and risk management technology hardware and software solutions package to TCM. The Company provides these services, obtained from affiliate service provider FXDirect Dealer, LLC which is under common ownership, and controls the services of its service provider necessary to legally transfer of the services to TCM. Consequently, the Company is defined as the principal in the transaction. The Company, as principal, satisfies its obligation by providing ongoing service support enabling TCM to conduct its retail FX business without interruption. Upon satisfaction of its obligation, the Company recognizes revenue in the gross amount of consideration it is entitled to receive. The monthly GSA price is calculated by applying the Company’s 1.6% mark-up to the costs of the services being provided by FXDirect Dealer, LLC. |
|
● |
Financial services to its customers. Revenue related to its financial services offerings are recognized
at a point in time when service is rendered. Prepayments, if any, received from customers prior to the services being performed are
recorded as advances from customers. In these cases, when the services are performed, the appropriate portion of the amount recorded
as advance from customers is recognized as revenue. There are 4 distinct stages that each trade must go through to be
completed and must be converted from one currency into another. Where possible, fees are taken in United States dollar (“USD”)
and therefore if there is an agreed fee with the client then this will be taken on the USD leg of the transaction regardless of whether
it is pre-conversion or post-conversion. The first stage is notification and there is no real opportunity for us to realize
revenue at this stage. The second stage is the funding stage and it allows us to charge the agreed fee before any currency
conversion, we call this pre-trade revenue. The third stage of the transaction is conversion and we are able to realize revenue in
the spread between the price we pay for the conversion and the price we charge the client for the conversion. The fourth opportunity
for us to realize revenue (charge our fee) is after the conversion has taken place (post-trade). |
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Disaggregation of revenues
The Company’s revenues stream detail are
as follows:
Revenue Stream |
|
Revenue Stream Detail |
General support services |
|
Providing software, technology, customer sales and marketing and risk management technology hardware
and software solutions package under a GSA to a related party |
Financial services |
|
Providing payment services from one fiat currency to another or to digital assets |
In the following table,
revenues are disaggregated by segment for the three and six months ended March 31, 2023 and 2022:
| |
Three Months Ended March 31, | | |
Six Months Ended March 31, | |
Revenue Stream | |
2023 | | |
2022 | | |
2023 | | |
2022 | |
General support services | |
$ | 4,800,000 | | |
$ | 4,800,000 | | |
$ | 9,600,000 | | |
$ | 9,600,000 | |
Financial services | |
| 833,944 | | |
| 289,017 | | |
| 1,410,332 | | |
| 618,032 | |
Total revenues | |
$ | 5,633,944 | | |
$ | 5,089,017 | | |
$ | 11,010,332 | | |
$ | 10,218,032 | |
Cost method investment
Investment in which the Company does not have
the ability to exercise significant influence over operating and financial matters are accounted for using the cost method. Under
the cost method, investment is recorded at cost, with gains and losses recognized as of the sale date, and income recorded when
received. The Company periodically evaluates its cost method investment for impairment due to decline considered to be other than
temporary. If the Company determines that a decline in fair value is other than temporary, then a charge to earnings is recorded in “Other
(expense) income” in the accompanying unaudited condensed consolidated statements of operations and comprehensive loss, and a new
basis in the investment is established. No impairment expense was recorded for the three and six months ended March 31, 2023 and 2022.
Intangible assets
Intangible assets consist of trade names, regulatory
licenses, technology and software, which are being amortized on a straight-line method over the estimated useful life of 3 - 5 years.
Impairment of long-lived assets
In accordance with ASC Topic 360, the Company
reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets
may not be fully recoverable, or at least annually. The Company recognizes an impairment loss when the sum of expected undiscounted future
cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s
estimated fair value and its book value. There were no triggering events requiring assessment of impairment as of March 31, 2023. For
the three and six months ended March 31, 2023 and 2022, no impairment of long-lived assets was recognized.
Advertising and marketing costs
All costs related to
advertising and marketing are expensed as incurred. For the three months ended March 31, 2023 and 2022, advertising and marketing costs
amounted to $295 and $163,427, respectively, which was included in operating expenses on the accompanying unaudited condensed consolidated
statements of operations and comprehensive loss. For the six months ended March 31, 2023 and 2022, advertising and marketing costs amounted
to $49,417 and $198,649, respectively, which is included in operating expenses on the accompanying unaudited condensed consolidated statements
of operations and comprehensive loss.
Stock-based compensation
The Company measures and recognizes compensation
expense for all stock-based awards granted to non-employees, including stock options, based on the grant date fair value of the award.
The Company estimates the grant date fair value of each option award using the Black-Scholes option-pricing model.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Stock-based compensation
(continued)
For non-employee stock-based awards, fair value
is measured based on the value of the Company’s common stock on the date that the commitment for performance by the counterparty
has been reached or the counterparty’s performance is complete. The fair value of the equity instrument is calculated and then
recognized as compensation expense over the requisite performance period.
Income taxes
The Company accounts for income taxes pursuant
to Financial Accounting Standards Board (“FASB”) ASC 740, Income Taxes. Deferred tax assets and liabilities are determined
based on temporary differences between the bases of certain assets and liabilities for income tax and financial reporting purposes. The
deferred tax assets and liabilities are classified according to the financial statement classification of the assets and liabilities
generating the differences.
The Company maintains a valuation allowance with
respect to deferred tax assets. The Company establishes a valuation allowance based upon the potential likelihood of realizing the deferred
tax asset and taking into consideration the Company’s financial position and results of operations for the current period. Future
realization of the deferred tax benefit depends on the existence of sufficient taxable income within the carry-forward period under the
Federal and foreign tax laws. Changes in circumstances, such as the Company generating taxable income, could cause a change in judgment
about the realizability of the related deferred tax asset. Any change in the valuation allowance will be included in income in the period
of the change in estimate.
The Company follows the provisions of FASB ASC
740-10 Uncertainty in Income Taxes (ASC 740-10). Certain recognition thresholds must be met before a tax position is recognized in the
financial statements. An entity may only recognize or continue to recognize tax positions that meet a “more-likely-than-not”
threshold.
Foreign currency translation
The reporting currency of the Company is U.S.
Dollars. The functional currency of the parent company, Nukkleus Inc., Nukkleus Limited, Nukkleus Malta Holding Ltd. and its subsidiaries,
is the U.S. dollar, the functional currency of Match Financial Limited and its subsidiary, Digital RFQ, is the British Pound (“GBP”),
the functional currency of Digital RFQ’s subsidiary, DRFQ Europe UAB, is Euro, and the functional currency of Digital RFQ’s
subsidiary, DRFQ Pay North America, is CAD. Monetary assets and liabilities denominated in currencies other than the reporting currency
are translated into the reporting currency at the rates of exchange prevailing at the balance sheet date. Revenue and expenses are translated
using average rates during each reporting period, and stockholders’ equity is translated at historical exchange rates. Cash flows
are also translated at average translation rates for the periods, therefore, amounts reported on the statements of cash flows will not
necessarily agree with changes in the corresponding balances on the balance sheets. Translation adjustments resulting from the process
of translating the local currency financial statements into U.S. dollars are included in determining comprehensive income/loss.
Transactions denominated in foreign currencies
are translated into the functional currency at the exchange rates prevailing on the transaction dates. Assets and liabilities denominated
in foreign currencies are translated into the functional currency at the exchange rates prevailing at the balance sheet date with any
transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional
currency are included in the results of operations as incurred. Most of the Company’s revenue transactions are transacted in the
functional currency of the Company. The Company does not enter into any material transaction in foreign currencies. Transaction
gains or losses have not had, and are not expected to have, a material effect on the results of operations of the Company.
Asset and liability accounts at March 31, 2023
and September 30, 2022 were translated at 0.8099 GBP and 0.8987 GBP to $1.00, respectively, which were the exchange rates on the balance
sheet dates. Asset and liability accounts at March 31, 2023 and September 30, 2022 were translated at 0.9206 EUR and 1.0221 EUR to $1.00,
respectively, which were the exchange rates on the balance sheet dates. Asset and liability accounts at March 31, 2023 were translated
at 1.3529 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 six months ended March 31, 2023 and 2022 was 0.8379 GBP and
0.7439 GBP to $1.00, respectively. The average translation rate applied to the statement of operations for the six months ended March
31, 2023 was 0.9559 EUR to $1.00. The average translation rate applied to the statement of operations for the period from February 18,
2023 through March 31, 2023 was 1.3667 CAD to $1.00. Cash flows from the Company’s operations are calculated based upon the local
currencies using the average translation rate.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Comprehensive loss
Comprehensive loss is comprised of net loss and
all changes to the statements of equity, except those due to investments by stockholders, changes in paid-in capital and distributions
to stockholders. For the Company, comprehensive loss for the three and six months ended March 31, 2023 and 2022 consisted of net loss
and unrealized loss/gain from foreign currency translation adjustment.
Segment reporting
The Company uses “the management approach”
in determining reportable operating segments. The management approach considers the internal organization and reporting used by the Company’s
chief operating decision maker for making operating decisions and assessing performance as the source for determining the Company’s
reportable segments. The Company’s chief operating decision maker is its Chief Executive Officer (“CEO”), who reviews
operating results to make decisions about allocating resources and assessing performance for the entire company.
The Company has determined that it has two reportable
business segments: general support services segment and financial services segment. These reportable segments offer different types of
services and products, have different types of revenue, and are managed separately as each requires different operating strategies and
management expertise.
Per share data
ASC Topic 260, Earnings per Share, requires
presentation of both basic and diluted earnings per share (“EPS”) with a reconciliation of the numerator and denominator
of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution. Diluted EPS
reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into
common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.
Basic net earnings per share are computed
by dividing net earnings available to common stockholders by the weighted average number of shares of common stock outstanding during
the period. Diluted net earnings per share is computed by dividing net earnings applicable to common stockholders by the weighted average
number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. For the
three and six months ended March 31, 2023 and 2022, potentially dilutive common shares consist of the common shares issuable upon the
exercise of common stock options (using the treasury stock method). Common stock equivalents are not included in the calculation of diluted
net loss per share if their effect would be anti-dilutive. In a period in which the Company has a net loss, all potentially dilutive
securities are excluded from the computation of diluted shares outstanding as they would have had an anti-dilutive impact.
The following table summarizes the securities
that were excluded from the diluted per share calculation because the effect of including these potential shares was antidilutive:
| |
Three Months Ended March 31, | | |
Six Months Ended March 31, | |
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
Stock options | |
| 4,350,000 | | |
| 5,850,000 | | |
| 5,850,000 | | |
| 5,850,000 | |
Potentially dilutive security | |
| 4,350,000 | | |
| 5,850,000 | | |
| 5,850,000 | | |
| 5,850,000 | |
Reclassification
Certain prior period amounts have been reclassified
to conform to the current period presentation. These reclassifications have no effect on the previously reported financial position,
results of operations and cash flows.
Recently issued accounting pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial
Instruments - Credit Losses (“Topic 326”). The ASU introduces a new accounting model, the Current Expected Credit
Losses model (“CECL”), which requires earlier recognition of credit losses and additional disclosures related
to credit risk. The CECL model utilizes a lifetime expected credit loss measurement objective for the recognition of credit losses
at the time the financial asset is originated or acquired. ASU 2016-13 is effective for annual period beginning after December 15, 2022,
including interim reporting periods within those annual reporting periods. The Company expects that the adoption will not have a material
impact on its unaudited condensed consolidated 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)
Other accounting standards that have been issued
or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the unaudited condensed
consolidated financial statements upon adoption. The Company does not discuss recent pronouncements that are not anticipated to have
an impact on or are unrelated to its consolidated financial condition, results of operations, cash flows or disclosures.
NOTE 4 - CUSTOMER
ASSETS AND LIABILITIES
The Company includes
customer funds in the condensed consolidated balance sheets as customer custodial cash and also includes such a corresponding liability
reflected as customer custodial cash liabilities in the condensed consolidated balance sheets.
The following table
presents customers’ cash and digital positions:
| |
March 31,
2023 | | |
September 30,
2022 | |
Customer custodial cash | |
$ | 240,296 | | |
$ | 2,020,394 | |
Customer digital currency assets | |
| 393,045 | | |
| 248,214 | |
Total customer assets | |
$ | 633,341 | | |
$ | 2,268,608 | |
| |
| | | |
| | |
Customer custodial cash liabilities | |
$ | 240,654 | | |
$ | 2,020,717 | |
Customer digital currency liabilities | |
| 393,045 | | |
| 248,214 | |
Total customer liabilities | |
$ | 633,699 | | |
$ | 2,268,931 | |
The Company controls
digital assets for its customers in digital wallets and digital token identifiers necessary to access digital assets on digital asset
trading platforms. The Company maintains a record of all assets in digital wallets held on digital asset trading platforms as well as
the private keys, which are maintained on behalf of customers. The Company records the assets and liabilities, on the initial recognition
and at each reporting date, at the fair value of the digital assets which it controls for its customers. Any loss or theft would impact
the measurement of the customer digital currency assets. During the three and six months ended March 31, 2023 and 2022, no losses have
been incurred in connection with customer digital currency assets. The Company also controls the bank accounts holding the customer custodial
cash, as reflected on the accompanying condensed consolidated balance sheets.
The following table
sets forth the fair market value of customer digital currency assets, as shown in the condensed consolidated balance sheets, as customer
digital currency assets and customer digital currency liabilities, as of March 31, 2023 and September 30, 2022:
| |
March 31, 2023 | | |
September 30, 2022 | |
| |
Fair value | | |
Percentage of total | | |
Fair value | | |
Percentage of total | |
Bitcoin | |
$ | 3,210 | | |
| 0.8 | % | |
$ | 162,294 | | |
| 65.4 | % |
Stablecoin/USD Coin | |
| 387,868 | | |
| 98.7 | % | |
| 85,897 | | |
| 34.6 | % |
Ethereum | |
| 1,805 | | |
| 0.5 | % | |
| 23 | | |
| 0.0 | % |
Others | |
| 162 | | |
| 0.0 | % | |
| - | | |
| - | |
Total customer digital currency assets | |
$ | 393,045 | | |
| 100.0 | % | |
$ | 248,214 | | |
| 100.0 | % |
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 – DIGITAL ASSETS
The following table summarizes the Company’s
digital asset holdings as of March 31, 2023:
Asset | |
Estimated useful life | |
Cost | | |
Impairment | | |
Digital assets | |
Bitcoin | |
Indefinite | |
$ | 12,526 | | |
$ | - | | |
$ | 12,526 | |
Ethereum | |
Indefinite | |
| 1,352 | | |
| - | | |
| 1,352 | |
Stablecoin/USD Coin | |
Indefinite | |
| 34,407 | | |
| - | | |
| 34,407 | |
Other | |
Indefinite | |
| 175 | | |
| - | | |
| 175 | |
Total | |
| |
$ | 48,460 | | |
$ | - | | |
$ | 48,460 | |
The following table summarizes the Company’s
digital asset holdings as of September 30, 2022:
Asset | |
Estimated useful life | |
Cost | | |
Impairment | | |
Digital assets | |
Bitcoin | |
Indefinite | |
$ | 63,377 | | |
$ | 774 | | |
$ | 62,603 | |
Ethereum | |
Indefinite | |
| 1,289 | | |
| - | | |
| 1,289 | |
Stablecoin/USD Coin | |
Indefinite | |
| 9,417 | | |
| - | | |
| 9,417 | |
Other | |
Indefinite | |
| 106 | | |
| - | | |
| 106 | |
Total | |
| |
$ | 74,189 | | |
$ | 774 | | |
$ | 73,415 | |
The Company recorded impairment expense of $133
and $0 for the three months ended March 31, 2023 and 2022, respectively. The Company recorded impairment expense of $7,743 and $0 for
the six months ended March 31, 2023 and 2022, respectively.
NOTE 6 – NOTE RECEIVABLE
As of March 31, 2023, the Company made loans
with an aggregate principal of $154,150 to Brilliant. The principal shall be payable promptly after the date on which Brilliant consummates
an initial business combination with a target business. The principal may be prepaid at any time. These loans bear a fixed interest rate
of 0% per annum. These loans shall not be convertible into any securities of Brilliant, and the Company shall have no recourse with respect
to Brilliant’s ability to convert these loans into any securities of Brilliant (See Note 15 – Merger).
NOTE 7 – COST METHOD INVESTMENT
At March 31, 2023, cost method investment amounted
to $6,602,000. The investment represents the Company’s minority interest in Jacobi, a private company focused on digital asset
management that has received regulatory approval to launch the world’s first tier one Bitcoin ETF.
On December 15, 2021, the Company issued 20,000,000 shares
of its common stock to Jacobi’s shareholders for acquisition of 5.0% equity interest of Jacobi. These shares were valued at $6,602,000
($0.3301 per share), the fair market value on the grant date using the reported closing share price of the Company on the date of grant.
In accordance with ASC Topic 321, the Company
elected to use the measurement alternative to measure such investments at cost, less any impairment, plus or minus changes resulting
from observable price changes in orderly transactions for identical or similar investments of the same issuer, if any. The Company monitors
its investment in the non-marketable security and will recognize, if ever existing, a loss in value which is deemed to be other than
temporary. The Company determined that there was no impairment of this investment as of March 31, 2023.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 – EQUITY METHOD INVESTMENT
As of both March 31, 2023 and September 30, 2022,
the equity method investment amounted to $0. The investment represents the Company’s interest in Digiclear. Digiclear was incorporated
on July 13, 2021 in United Kingdom. The company and the other unrelated party accounted for 50% and 50% of the total ownership, respectively.
Digiclear is a company developing a custody and settlement utility operating system.
The Company accounts for the investment in Digiclear
under the equity method of accounting. Under the equity method, the investment is initially recorded at cost, adjusted for any excess
of the Company’s share of the incorporated-date fair values of the investee’s identifiable net assets over the cost of the
investment (if any). Thereafter, the investment is adjusted for the post incorporation change in the Company’s share of the investee’s
net assets and any impairment loss relating to the investment.
In September 2022, the Company assessed its equity
method investment for any impairment and concluded that there were indicators of impairment as of September 30, 2022. The impairment
is due to the Company’s conclusion that it will be unable to recover the carrying amount of the investment due to the investee’s
a series of operating losses and global economic environment. The Company calculated that the estimated undiscounted cash flows were
less than the carrying amount related to the equity method investment. The Company has recognized an impairment loss of $4,310,745 related
to the equity method investment for the year ended September 30, 2022, which reduced the investment value to zero.
NOTE 9 – INTANGIBLE ASSETS
Intangible assets primarily consist of the valuation
of identifiable intangible assets acquired, representing trade names, regulatory licenses, and technology. The straight-line method of
amortization represents the Company’s best estimate of the distribution of the economic value of the identifiable intangible assets.
At March 31, 2023 and September 30, 2022, intangible
assets consisted of the following:
| |
Useful Life | |
March 31,
2023 | | |
September 30,
2022 | |
Trade names | |
3 Years | |
$ | 784,246 | | |
$ | 784,246 | |
Regulatory licenses | |
3 Years | |
| 180,417 | | |
| 138,751 | |
Technology | |
5 Years | |
| 10,300,774 | | |
| 10,300,774 | |
Software | |
3 Years | |
| 11,237 | | |
| 11,237 | |
| |
| |
| 11,276,674 | | |
| 11,235,008 | |
Less: accumulated amortization | |
| |
| (4,345,686 | ) | |
| (3,159,903 | ) |
| |
| |
$ | 6,930,988 | | |
$ | 8,075,105 | |
For the three months ended March 31, 2023 and
2022, amortization expense amounted to $592,891 and $592,891, respectively, of which, $526,601 and $526,601 was included
in cost of revenue – financial services, and $66,290 and $66,290 was included in operating expenses, respectively.
For the six months ended March 31, 2023 and 2022,
amortization expense amounted to $1,185,783 and $1,504,834, respectively, of which, $1,053,202 and $1,373,190 was included
in cost of revenue – financial services, and $132,581 and $131,644 was included in operating expenses, respectively.
Amortization of intangible assets attributable
to future periods is as follows:
For the Twelve-month Period Ending March 31: | |
Amortization amount | |
2024 | |
$ | 2,385,455 | |
2025 | |
| 2,128,130 | |
2026 | |
| 2,074,044 | |
2027 | |
| 343,359 | |
2028 and thereafter | |
| - | |
| |
$ | 6,930,988 | |
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 – ACCRUED LIABILITIES AND OTHER PAYABLES
At March 31, 2023 and September 30, 2022, accrued liabilities and
other payables consisted of the following:
| |
March 31, 2023 | | |
September 30,
2022 | |
Unearned revenue | |
$ | - | | |
$ | 203,222 | |
Others | |
| 33,689 | | |
| 29,133 | |
Total | |
$ | 33,689 | | |
$ | 232,355 | |
NOTE 11 – SHARE CAPITAL
Preferred stock
The Company’s Board of Directors is authorized
to issue, at any time, without further stockholder approval, up to 15,000,000 shares of preferred stock. The Board of Directors
has the authority to fix and determine the voting rights, rights of redemption and other rights and preferences of preferred stock.
Options
The following table summarizes the shares of
the Company’s common stock issuable upon exercise of options outstanding at March 31, 2023:
|
Options Outstanding | | |
| Options Exercisable | |
|
Range of Exercise Price | | |
| Number Outstanding at March 31, 2023 | | |
| Weighted Average Remaining Contractual Life (Years) | | |
| Weighted Average Exercise Price | | |
| Number Exercisable at March 31, 2023 | | |
| Weighted Average Exercise Price | |
$ |
0.09 – 0.45 | | |
| 3,350,000 | | |
| 3.76 | | |
$ | 0.13 | | |
| 1,150,000 | | |
$ | 0.13 | |
|
2.50 | | |
| 1,000,000 | | |
| 3.47 | | |
| 2.50 | | |
| 1,000,000 | | |
| 2.50 | |
$ |
0.09 – 2.50 | | |
| 4,350,000 | | |
| 3.69 | | |
$ | 0.67 | | |
| 2,150,000 | | |
$ | 1.23 | |
Stock option activities
for the six months ended March 31, 2023 were as follows:
| |
Number of Options | | |
Weighted Average Exercise Price | |
Outstanding at October 1, 2022 | |
| 5,850,000 | | |
$ | 0.67 | |
Granted | |
| - | | |
| - | |
Expired | |
| (1,500,000 | ) | |
| (0.67 | ) |
Outstanding at March 31, 2023 | |
| 4,350,000 | | |
$ | 0.67 | |
Options exercisable at March 31, 2023 | |
| 2,150,000 | | |
$ | 1.23 | |
Options expected to vest | |
| 2,200,000 | | |
$ | 0.12 | |
The aggregate intrinsic value of both stock options
outstanding and stock options exercisable at March 31, 2023 was $0.
For the three months ended March 31, 2023 and
2022, stock-based compensation expense associated with stock options granted amounted to $74,667 and $525,622, respectively, which
was recorded as professional fees on the accompanying unaudited condensed consolidated statements of operations and comprehensive loss.
For the six months ended March 31, 2023 and 2022,
stock-based compensation expense associated with stock options granted amounted to $221,543 and $904,368, respectively, which was recorded
as professional fees on the accompanying unaudited condensed consolidated statements of operations and comprehensive loss.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 – SHARE
CAPITAL (continued)
A summary of the status
of the Company’s nonvested stock options granted as of March 31, 2023 and changes during the six months ended March 31, 2023 is
presented below:
| |
Number of Options | | |
Weighted Average Exercise Price | |
Nonvested at October 1, 2022 | |
| 3,800,000 | | |
$ | 0.35 | |
Granted | |
| - | | |
| - | |
Vested | |
| (1,600,000 | ) | |
| (0.65 | ) |
Nonvested at March 31, 2023 | |
| 2,200,000 | | |
$ | 0.12 | |
NOTE 12 – RELATED PARTY TRANSACTIONS
Services provided by related parties
From time to time, Oliver Worsley, a shareholder
of the Company, provides consulting services to the Company. As compensation for professional services provided, the Company recognized
consulting expenses of $14,506 and $0 for the three months ended March 31, 2023 and 2022, respectively, which have been included in professional
fees on the accompanying unaudited condensed consolidated statements of operations and comprehensive loss. As compensation for professional
services provided, the Company recognized consulting expenses of $25,063 and $0 for the six months ended March 31, 2023 and 2022, respectively,
which have been included in professional fees on the accompanying unaudited condensed consolidated statements of operations and comprehensive
loss. As of March 31, 2023 and September 30, 2022, the accrued and unpaid services charge related to Oliver Worsley amounted to $0 and
$16,691, respectively, which have been included in accounts payable and accrued liabilities on the accompanying condensed consolidated
balance sheets.
From time to time, Craig Vallis, a shareholder
of the Company, provides consulting services to the Company. As compensation for professional services provided, the Company recognized
consulting expenses of $51,708 and $40,864 for the three months ended March 31, 2023 and 2022, respectively, which have been included
in professional fees on the accompanying unaudited condensed consolidated statements of operations and comprehensive loss. As compensation
for professional services provided, the Company recognized consulting expenses of $73,995 and $41,538 for the six months ended March
31, 2023 and 2022, respectively, which have been included in professional fees on the accompanying unaudited condensed consolidated statements
of operations and comprehensive loss.
The Company uses affiliate employees for various
services such as the use of accountants to record the books and accounts of the Company at no charge to the Company, which are considered
immaterial.
Office space from related parties
The Company uses office space of affiliate
companies, free of rent, which is considered immaterial.
Revenue from related party and cost of revenue from related party
The Company’s general support services
operate under a GSA with TCM providing personnel and technical support, marketing, accounting, risk monitoring, documentation processing
and customer care and support. The minimum monthly amount received is $1,600,000.
The Company’s general support services
operate under a GSA with FXDIRECT receiving personnel and technical support, marketing, accounting, risk monitoring, documentation processing
and customer care and support. The minimum monthly amount payable is $1,575,000.
Both of the above entities are affiliates through
common ownership.
During the three and six months ended March 31,
2023 and 2022, general support services provided to the related party, which was recorded as revenue – general support services
- related party on the accompanying unaudited condensed consolidated statements of operations and comprehensive loss were as follows:
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 – RELATED PARTY TRANSACTIONS
(continued)
Revenue from related party and cost of revenue from related party
(continued)
| |
Three Months Ended March 31, | | |
Six Months Ended March 31, | |
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
Service provided to: | |
| | |
| | |
| | |
| |
TCM | |
$ | 4,800,000 | | |
$ | 4,800,000 | | |
$ | 9,600,000 | | |
$ | 9,600,000 | |
| |
$ | 4,800,000 | | |
$ | 4,800,000 | | |
$ | 9,600,000 | | |
$ | 9,600,000 | |
During the three
and six months ended March 31, 2023 and 2022, services received from the related party, which was recorded as cost of revenue –
general support services - related party on the accompanying unaudited condensed consolidated statements of operations and comprehensive
loss were as follows:
| |
Three Months Ended March 31, | | |
Six Months Ended March 31, | |
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
Service received from: | |
| | |
| | |
| | |
| |
FXDIRECT | |
$ | 4,725,000 | | |
$ | 4,725,000 | | |
$ | 9,450,000 | | |
$ | 9,450,000 | |
| |
$ | 4,725,000 | | |
$ | 4,725,000 | | |
$ | 9,450,000 | | |
$ | 9,450,000 | |
During the three months ended March 31, 2023
and 2022, Digital RFQ earned revenue from related parties in the amount of $53,772 and $5,002, respectively, which was included in revenue
– financial services on the accompanying unaudited condensed consolidated statements of operations and comprehensive loss.
During the six months ended March 31, 2023 and
2022, Digital RFQ earned revenue from related parties in the amount of $78,516 and $10,265, respectively, which was included in revenue
– financial services on the accompanying unaudited condensed consolidated statements of operations and comprehensive loss.
Due from affiliates
At March 31, 2023 and September 30, 2022, due
from affiliates consisted of the following:
| |
March 31,
2023 | | |
September 30,
2022 | |
Digiclear | |
$ | 229,838 | | |
$ | 35,762 | |
Jacobi | |
| 23,723 | | |
| - | |
FXDD Mauritius (1) | |
| 1,854 | | |
| - | |
TCM | |
| - | | |
| 895,374 | |
Total | |
$ | 255,415 | | |
$ | 931,136 | |
| (1) | FXDD Mauritius is controlled by Emil Assentato, the Company’s chief executive officer, chief financial officer and chairman. |
The balance due from Digiclear represents advances
made to Digiclear and monies that the Company paid on behalf of Digiclear. The balances due from Jacobi and FXDD Mauritius represent
monies that the Company paid on behalf of Jacobi and FXDD Mauritius. The balance due from TCM represents unsettled funds due related
to the General Services Agreement and monies that the Company paid on behalf of TCM.
Management believes that the related parties’
receivables are fully collectable. Therefore, no allowance for doubtful account is deemed to be required on its due from related parties
at March 31, 2023 and September 30, 2022. The Company historically has not experienced uncollectible receivable from the related parties.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 – RELATED PARTY TRANSACTIONS
(continued)
Due to affiliates
At March 31, 2023 and September 30, 2022, due
to affiliates consisted of the following:
| |
March 31, 2023 | | |
September 30,
2022 | |
Forexware LLC (1) | |
$ | 1,125,591 | | |
$ | 1,079,229 | |
FXDIRECT | |
| 2,909,501 | | |
| 3,042,101 | |
Currency Mountain Holdings Bermuda, Limited (“CMH”) | |
| 42,000 | | |
| 42,000 | |
TCM | |
| 91,749 | | |
| - | |
FXDD Trading (1) | |
| 268,608 | | |
| 242,113 | |
Markets Direct Payments (1) | |
| 2,346 | | |
| 2,114 | |
Match Fintech Limited (2) | |
| 66,449 | | |
| 106,506 | |
Total | |
$ | 4,506,244 | | |
$ | 4,514,063 | |
(1) | Forexware LLC, FXDD Trading, and Markets Direct Payments are controlled by Emil Assentato, the Company’s chief executive officer, chief financial officer and chairman. |
(2) | Match Fintech Limited is controlled by affiliates of the Company. |
The balances due to affiliates represents expenses
paid by Forexware LLC, FXDIRECT, TCM, FXDD Trading, Markets Direct Payments, and Match Fintech Limited on behalf of the Company and advances
from CMH. The balance due to FXDIRECT may also include unsettled funds due related to the General Service Agreement.
Amounts due to affiliates are short-term in nature,
non-interest bearing, unsecured and repayable on demand.
Customer digital currency assets and liabilities
– related parties
At March 31, 2023 and September 30, 2022, related
parties’ digital currency, which was controlled by Digital RFQ, amounted to $393,045 and $248,214, respectively, which was included
in customer digital currency assets and liabilities on the accompanying condensed consolidated balance sheets.
Note receivable –
related party
The Company originated a note receivable to a
shareholder in the principal amount of $35,000 on September 1, 2022. The note shall mature with respect to $17,500 on March 1, 2023 and
with respect to $17,500 on September 1, 2023. The note bears a fixed interest rate of 5.0% per annum. Currently, this loan is in default.
For the three months ended March 31, 2023, the
interest income related to this note amounted to $455 and has been included in other income on the accompanying unaudited condensed consolidated
statements of operations and comprehensive loss. For the six months ended March 31, 2023, the interest income related to this note amounted
to $894 and has been included in other income on the accompanying unaudited condensed consolidated statements of operations and comprehensive
loss.
As of March 31, 2023 and September 30, 2022,
the outstanding interest balance related to this note was $1,079 and $159, respectively, and was included in other current assets on
the accompanying condensed consolidated balance sheets.
Letter agreement with ClearThink
Nukkleus is party to a letter agreement with
ClearThink dated as of November 22, 2021, pursuant to which ClearThink was engaged by Nukkleus in connection with the Business Combination
(See Note 15 - White lion stock purchase agreement).
Craig Marshak, a member of the Board of Directors
of the Company, is a managing director of ClearThink, a transaction advisory firm. ClearThink has been engaged by the Company to serve
as the exclusive transactional financial advisor, and finder with respect to the Business Combination, to advise the Company with respect
to the Business Combination. As of March 31, 2023, the Company has paid ClearThink $140,000, and upon closing of the Business Combination
the Company is obligated to pay ClearThink 1.2% of the total transaction value plus reimbursable expenses less the $140,000 paid to ClearThink
as of March 31, 2023.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 13 – CONCENTRATIONS
Customers
The following table sets forth information as
to each customer that accounted for 10% or more of the Company’s revenues for the three and six months ended March 31, 2023 and
2022.
| |
Three Months Ended March 31, | | |
Six Months Ended March 31, | |
Customer | |
2023 | | |
2022 | | |
2023 | | |
2022 | |
A – related party | |
| 85.2 | % | |
| 94.3 | % | |
| 87.2 | % | |
| 94.0 | % |
One related party customer, whose outstanding
receivable accounted for 10% or more of the Company’s total outstanding due from affiliates at March 31, 2023, accounted for 90.0%
of the Company’s total outstanding due from affiliates at March 31, 2023.
One related party customer, whose outstanding
receivable accounted for 10% or more of the Company’s total outstanding due from affiliates at September 30, 2022, accounted for
96.2% of the Company’s total outstanding due from affiliates at September 30, 2022.
Suppliers
The following table sets forth information as
to each supplier that accounted for 10% or more of the Company’s costs of revenues for the three and six months ended March
31, 2023 and 2022.
| |
Three Months Ended March 31, | | |
Six Months Ended March 31, | |
Supplier | |
2023 | | |
2022 | | |
2023 | | |
2022 | |
A – related party | |
| 86.1 | % | |
| 89.6 | % | |
| 86.6 | % | |
| 86.9 | % |
Two related party suppliers, whose outstanding
payables accounted for 10% or more of the Company’s total outstanding accounts payable and due to affiliates at March 31,
2023, accounted for 78.1% of the Company’s total outstanding accounts payable and due to affiliates at March 31, 2023.
Two related party suppliers, whose outstanding
payables accounted for 10% or more of the Company’s total outstanding accounts payable and due to affiliates at September
30, 2022, accounted for 79.2% of the Company’s total outstanding accounts payable and due to affiliates at September 30, 2022.
NOTE 14 – SEGMENT INFORMATION
For the three and six months ended March 31,
2023 and 2022, the Company operated in two reportable business segments - (1) the general support services segment, in which we provide
software, technology, customer sales and marketing and risk management technology hardware and software solutions package under a GSA
to a related party; and (2) the financial services segment, in which we provide payment services from one fiat currency to another. The
Company’s reportable segments are strategic business units that offer different services and products. They are managed separately
based on the fundamental differences in their operations.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 14 – SEGMENT INFORMATION
(continued)
Information with respect to these reportable
business segments for the three and six months ended March 31, 2023 and 2022 was as follows:
| |
Three Months Ended March 31, | | |
Six Months Ended March 31, | |
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
| |
| | |
(as restated) | | |
| | |
(as restated) | |
Revenues | |
| | |
| | |
| | |
| |
General support services | |
$ | 4,800,000 | | |
$ | 4,800,000 | | |
$ | 9,600,000 | | |
$ | 9,600,000 | |
Financial services | |
| 833,944 | | |
| 289,017 | | |
| 1,410,332 | | |
| 618,032 | |
Total | |
| 5,633,944 | | |
| 5,089,017 | | |
| 11,010,332 | | |
| 10,218,032 | |
| |
| | | |
| | | |
| | | |
| | |
Costs of revenues | |
| | | |
| | | |
| | | |
| | |
General support services | |
| 4,725,000 | | |
| 4,725,000 | | |
| 9,450,000 | | |
| 9,450,000 | |
Financial services | |
| 760,982 | | |
| 547,719 | | |
| 1,467,243 | | |
| 1,421,924 | |
Total | |
| 5,485,982 | | |
| 5,272,719 | | |
| 10,917,243 | | |
| 10,871,924 | |
| |
| | | |
| | | |
| | | |
| | |
Gross profit (loss) | |
| | | |
| | | |
| | | |
| | |
General support services | |
| 75,000 | | |
| 75,000 | | |
| 150,000 | | |
| 150,000 | |
Financial services | |
| 72,962 | | |
| (258,702 | ) | |
| (56,911 | ) | |
| (803,892 | ) |
Total | |
| 147,962 | | |
| (183,702 | ) | |
| 93,089 | | |
| (653,892 | ) |
| |
| | | |
| | | |
| | | |
| | |
Operating expenses | |
| | | |
| | | |
| | | |
| | |
Financial services | |
| 543,688 | | |
| 420,697 | | |
| 1,037,727 | | |
| 956,978 | |
Corporate/Other | |
| 410,638 | | |
| 1,249,323 | | |
| 998,221 | | |
| 2,186,475 | |
Total | |
| 954,326 | | |
| 1,670,020 | | |
| 2,035,948 | | |
| 3,143,453 | |
| |
| | | |
| | | |
| | | |
| | |
Other income (expense) | |
| | | |
| | | |
| | | |
| | |
Financial services | |
| 715 | | |
| (1,185 | ) | |
| 3,288 | | |
| (2,401 | ) |
Corporate/Other | |
| - | | |
| (71,707 | ) | |
| - | | |
| (71,707 | ) |
Total | |
| 715 | | |
| (72,892 | ) | |
| 3,288 | | |
| (74,108 | ) |
| |
| | | |
| | | |
| | | |
| | |
Net income (loss) | |
| | | |
| | | |
| | | |
| | |
General support services | |
| 75,000 | | |
| 75,000 | | |
| 150,000 | | |
| 150,000 | |
Financial services | |
| (470,011 | ) | |
| (680,584 | ) | |
| (1,091,350 | ) | |
| (1,763,271 | ) |
Corporate/Other | |
| (410,638 | ) | |
| (1,321,030 | ) | |
| (998,221 | ) | |
| (2,258,182 | ) |
Total | |
| (805,649 | ) | |
| (1,926,614 | ) | |
| (1,939,571 | ) | |
| (3,871,453 | ) |
| |
| | | |
| | | |
| | | |
| | |
Amortization | |
| | | |
| | | |
| | | |
| | |
Financial services | |
| 591,954 | | |
| 591,955 | | |
| 1,183,910 | | |
| 1,503,898 | |
Corporate/Other | |
| 937 | | |
| 936 | | |
| 1,873 | | |
| 936 | |
Total | |
$ | 592,891 | | |
$ | 592,891 | | |
$ | 1,185,783 | | |
$ | 1,504,834 | |
Total assets at March 31, 2023 and September 30, 2022 | |
March 31, 2023 | | |
September 30, 2022 | |
Financial services | |
$ | 7,753,029 | | |
$ | 10,768,309 | |
Corporate/Other | |
| 7,190,764 | | |
| 7,596,595 | |
Total | |
$ | 14,943,793 | | |
$ | 18,364,904 | |
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 15 – COMMITMENTS AND
CONTINGENCIES
Digital asset wallets
Digital RFQ has committed to safeguard all digital
assets and digital token identifiers on behalf of its customers. As such, Digital RFQ may be liable to its customers for losses arising
from theft or loss of customer private keys. Digital RFQ has no reason to believe it will incur any expense associated with such potential
liability because (i) it has no known or historical experience of claims to use as a basis of measurement, (ii) it accounts for and continually
verifies the amount of digital assets within its control, and (iii) it engages third parties, which are digital asset trading platforms,
to provide certain custodial services, including holding its customers’ digital token identifiers, securing its customers’
digital assets, and protecting them from loss or theft, including indemnification against certain types of losses such as theft. Its
third-party digital asset trading platforms hold the digital assets in accounts in Digital RFQ’s name for the benefit of Digital
RFQ’s customers.
Merger
On February 22, 2022, the Company entered into
an Agreement and Plan of Merger (as it may be amended, supplemented or otherwise modified from time to time, the “Merger Agreement”),
by and among the Company and Brilliant Acquisition Corporation, a British Virgin Islands company (“Brilliant”). The Merger
Agreement has been approved by the Company’s boards of directors. On January 20, 2023, parties to the Merger Agreement entered
into an Amendment No. 3 to the Merger Agreement (the “Amendment”) solely to extend the Outside Closing Date (as defined in
the Merger Agreement), to June 23, 2023 (following the approval by Brilliant’s shareholders of the extension of the life of the
SPAC pursuant to Brilliant’s organizational documents, which was granted on April 20, 2023). The transactions contemplated by the
Merger Agreement are expected to close in the third quarter of fiscal year 2023, provided however there is no guarantee that the transaction
will close.
White lion stock purchase agreement
On May 17, 2022, the Company entered into a Stock
Purchase Agreement (the “White Lion Agreement”) with White Lion Capital Partners, LLC a California-based investment fund
(“White Lion”). Under the terms of the White Lion Agreement, the Company has the right, but not the obligation, to require
White Lion to purchase shares of its common stock up to a maximum amount of $75,000,000 or such lower amount as may be required
pursuant to the rules of the market on which shares of its common stock trades at such time. Pursuant to terms of the White Lion Agreement
and the Registration Rights Agreement (as defined below), the Company is required to use its commercially reasonable efforts to file
with the SEC a registration statement covering the shares to be acquired by White Lion within sixty days following the closing of the
previously announced business combination with Brilliant Acquisition Corporation described in its Current Report on Form 8-K filed with
the SEC on February 23, 2022 (the “Business Combination”).
The term of the White Lion Agreement commences
on the effective date of the registration statement and shall end on December 31, 2024, or, if earlier, the date on which White
Lion has purchased the maximum number of shares of the Company’s common stock provided under the White Lion Agreement, in each
case on the terms and subject to the conditions set forth in the White Lion Agreement. White Lion’s purchase price will be 96%
of the dollar- volume weighted average price of the Company’s common stock over the two consecutive trading days immediately following
receipt of the Company’s notice of its intent to make a draw. As of March 31, 2023, the White Lion Agreement is not yet effective.
During the term of the White Lion Agreement,
on the terms and subject to the conditions set forth therein, the Company may draw up to the lesser of (i) the number of shares
of the Company’s common stock which would result in beneficial ownership by White Lion of more than 4.99% of the outstanding shares
of the Company’s common stock, (ii) the number of shares of the Company’s common stock equal to 30% of the average daily
trading volume of the Company’s common stock over the five consecutive trading days immediately following the notice date, or (iii) the
number of the Company’s common stock obtained by dividing $1,500,000 by the closing sale price of the Company’s common stock
on the notice date.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 15 – COMMITMENTS AND CONTINGENCIES
(continued)
White lion stock purchase agreement (continued)
The Company is not entitled to draw on the White
Lion Agreement if the closing sale price of the Company’s common stock on the trading day immediately preceding the notice date
is less than $1.00 (following the reverse stock split proposed in connection with the closing of the Business Combination and described
in the Company’s Current Report on Form 8-K filed with the SEC on February 23, 2022, but adjusted for any other reorganization,
recapitalization, non-cash dividend, stock split or other similar transaction). The Company is not entitled to draw on the White Lion
Agreement unless each of the following additional conditions is satisfied: (i) each of the Company’s representations and warranties
set forth in the White Lion Agreement is true and correct (subject to qualifications as to materiality set forth therein) in all respects
as of such time; (ii) a registration statement is and remains effective for the resale of securities in connection with the White
Lion Agreement; (iii) the trading of the Company’s common stock shall not have been suspended by the SEC, the applicable trading
market or FINRA, or otherwise halted for any reason; (iv) the Company shall have complied with its obligations and shall not otherwise
be in breach or default of any agreement set forth in the White Lion Agreement; (v) no statute, regulation, order, guidance, decree,
writ, ruling or injunction shall have been enacted, entered, promulgated, threatened or endorsed by any federal, state, local or foreign
court or governmental authority of competent jurisdiction, including, without limitation, the SEC, which prohibits the consummation of
or which would materially modify or delay any of the transactions contemplated by the White Lion Agreement; (vi) all reports, schedules,
registrations, forms, statements, information and other documents required to have been filed by us with the SEC pursuant to the reporting
requirements of the Exchange Act of 1934 (other than Forms 8-K) shall have been filed with the SEC within the applicable time periods
prescribed for such filings; (vii) to the extent the issuance of the put shares requires shareholder approval under the listing
rules of the applicable national exchange or principal quotation system for the Company’s common stock, the Company has or will
seek such approval; and (viii) certain other conditions as set forth in the White Lion Agreement.
In addition to the shares to be issued under
the White Lion Agreement, the Company will include in its registration statement additional shares of the Company’s common stock
in the amount of $750,000 being issued to White Lion in connection with the execution of the White Lion Agreement.
White lion registration rights agreement
In connection with the Company’s entry
into the White Lion Agreement, the Company entered into a Registration Rights Agreement with White Lion (the “Registration Rights
Agreement”). Pursuant to the terms of the Registration Rights Agreement, the Company has agreed to use its commercially reasonable
efforts to file a registration statement under the Securities Act registering the resale of the shares sold under the White Lion Agreement
within sixty days of the closing of the Business Combination. The Registration Rights Agreement also provides that the Company is required
to use its commercially reasonable efforts to keep the registration effective and to prepare and file with the SEC such amendments and
supplements if the foregoing registration statement is not then in effect, and the Company proposes to file certain types of registration
statements under as may be necessary to keep the registration statement effective.
NOTE 16 – SUBSEQUENT
EVENTS
The Company evaluated
subsequent events and transactions that occurred after the balance sheet date up to the date that the financial statements were issued.
Based upon this review, other than as described below, the Company did not identify any subsequent events that would have required adjustment
or disclosure in the financial statements.
The Company made loans
with an aggregate principal of $32,450 to Brilliant in subsequent period.