UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
☒ QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 20202021
OR
☐ TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number: 000-55922
Nukkleus Inc.
(Exact name of registrant as specified in its charter)
| Delaware | 38-3912845 | |
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) |
525 Washington Boulevard, Jersey City, New Jersey 07310
(Address of principal executive offices, including zip code)
212-791-4663
(Registrant’s telephone number, including area code)
212-791-4663
(Issuer’s telephone number)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock, par value $0.0001
Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |
| Non-accelerated filer | ☐ | Smaller reporting company | ☒ | |
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Securities registered pursuant to Section 12(b) of the Act: Not applicable.
| Title of each class | Trading symbol | Name of each exchange on which registered | ||
| Not applicable. |
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date.
| Class | Outstanding February | |
| Common Stock, $0.0001 par value per share |
NUKKLEUS INC.
FORM 10-Q
December 31, 20202021
TABLE OF CONTENTS
i
FORWARD LOOKING STATEMENTS
This report contains forward-looking statements regarding our business, financial condition, results of operations and prospects. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not deemed to represent an all-inclusive means of identifying forward-looking statements as denoted in this report. Additionally, statements concerning future matters are forward-looking statements.
Although forward-looking statements in this report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those specifically addressed under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our annual report on Form 10-K, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-Q and information contained in other reports that we file with the SEC. You are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this report.
We file reports with the SEC. The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us. You can also read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this report, except as required by law. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this quarterly report, which are designed to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.
Unless otherwise indicated, references in this report to the “Company”, “Nukkleus”, “we”, “us”, or “our” refer to Nukkleus Inc. and its consolidated subsidiaries.
ii
PART I - FINANCIAL INFORMATION
Item 1. Interim Financial Statements.
NUKKLEUS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| As of | ||||||||
| December 31, 2020 | September 30, 2020 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | 90,342 | $ | 82,849 | ||||
| Due from affiliates | 3,417,873 | 3,709,772 | ||||||
| Prepaid expense and other current assets | 4,873 | 7,010 | ||||||
| TOTAL CURRENT ASSETS | 3,513,088 | 3,799,631 | ||||||
| TOTAL ASSETS | $ | 3,513,088 | $ | 3,799,631 | ||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Due to affiliates | $ | 4,461,247 | $ | 4,732,977 | ||||
| Accrued liabilities | 250,616 | 212,406 | ||||||
| Series A redeemable preferred stock liability at $10 stated value; 200,000 shares authorized; 25,000 and 25,000 shares issued and outstanding ($250,000 and $250,000 less discount of $973 and $1,545, respectively) at December 31, 2020 and September 30, 2020, respectively | 249,027 | 248,455 | ||||||
| TOTAL CURRENT LIABILITIES | 4,960,890 | 5,193,838 | ||||||
| TOTAL LIABILITIES | 4,960,890 | 5,193,838 | ||||||
| CONTINGENCY - (Note 8) | ||||||||
| STOCKHOLDERS’ DEFICIT: | ||||||||
| Preferred stock ($0.0001 par value; 14,800,000 shares authorized; 0 share issued and outstanding at December 31, 2020 and September 30, 2020) | - | - | ||||||
| Common stock ($0.0001 par value; 900,000,000 shares authorized; 230,485,100 shares issued and outstanding at December 31, 2020 and September 30, 2020) | 23,049 | 23,049 | ||||||
| Additional paid-in capital | 141,057 | 141,057 | ||||||
| Accumulated deficit | (1,611,908 | ) | (1,558,313 | ) | ||||
| TOTAL STOCKHOLDERS’ DEFICIT | (1,447,802 | ) | (1,394,207 | ) | ||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT | $ | 3,513,088 | $ | 3,799,631 | ||||
| As of | ||||||||
| December 31, 2021 | September 30, 2021 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | 50,623 | $ | 355,673 | ||||
| Accounts receivable | 55,836 | 57,953 | ||||||
| Due from affiliates | 2,614,399 | 2,617,873 | ||||||
| Prepaid expense and other current assets | 12,588 | 12,221 | ||||||
| TOTAL CURRENT ASSETS | 2,733,446 | 3,043,720 | ||||||
| NON-CURRENT ASSETS: | ||||||||
| Investment, at cost | 6,602,000 | - | ||||||
| Intangible assets, net | 9,842,542 | 13,616,116 | ||||||
| TOTAL NON-CURRENT ASSETS | 16,444,542 | 13,616,116 | ||||||
| TOTAL ASSETS | $ | 19,177,988 | $ | 16,659,836 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Due to affiliates | $ | 4,405,265 | $ | 4,257,792 | ||||
| Accounts payable and accrued liabilities | 579,351 | 380,721 | ||||||
| TOTAL CURRENT LIABILITIES | 4,984,616 | 4,638,513 | ||||||
| TOTAL LIABILITIES | 4,984,616 | 4,638,513 | ||||||
| CONTINGENCY - (Note 12) | ||||||||
| STOCKHOLDERS’ EQUITY: | ||||||||
| Preferred stock ($0.0001 par value; 14,800,000 shares authorized; 0 share issued and outstanding at December 31, 2021 and September 30, 2021) | - | - | ||||||
| Common stock ($0.0001 par value; 900,000,000 shares authorized; 352,024,371 and 332,024,371 shares issued and outstanding at December 31, 2021 and September 30, 2021, respectively) | 35,203 | 33,203 | ||||||
| Additional paid-in capital | 18,591,954 | 14,474,839 | ||||||
| Accumulated deficit | (4,439,998 | ) | (2,495,159 | ) | ||||
| Accumulated other comprehensive income - foreign currency translation adjustment | 6,213 | 8,440 | ||||||
| TOTAL STOCKHOLDERS’ EQUITY | 14,193,372 | 12,021,323 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 19,177,988 | $ | 16,659,836 | ||||
The accompanying notes to unaudited condensed consolidated financial statements are an integral part of these statements.
NUKKLEUS INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
| For the Three Months Ended | For the Three Months Ended | |||||||
| December 31, | December 31, | |||||||
| 2020 | 2019 | |||||||
| REVENUE | ||||||||
| Revenue - related party | $ | 4,800,000 | $ | 4,800,000 | ||||
| COST OF REVENUE | ||||||||
| Cost of revenue - related party | 4,725,000 | 4,725,000 | ||||||
| GROSS PROFIT | 75,000 | 75,000 | ||||||
| OPERATING EXPENSES: | ||||||||
| Professional fees | 86,772 | 41,000 | ||||||
| Other general and administrative | 40,313 | 95,679 | ||||||
| Total operating expenses | 127,085 | 136,679 | ||||||
| LOSS FROM OPERATIONS | (52,085 | ) | (61,679 | ) | ||||
| OTHER INCOME (EXPENSE): | ||||||||
| Interest expense on redeemable preferred stock | (938 | ) | (938 | ) | ||||
| Amortization of debt discount | (572 | ) | (572 | ) | ||||
| Gain on digital currency | - | 17,888 | ||||||
| Total other (expense) income, net | (1,510 | ) | 16,378 | |||||
| LOSS BEFORE INCOME TAXES | (53,595 | ) | (45,301 | ) | ||||
| INCOME TAXES | - | - | ||||||
| NET LOSS | $ | (53,595 | ) | $ | (45,301 | ) | ||
| NET LOSS PER COMMON SHARE: | ||||||||
| Basic and diluted | $ | (0.00 | ) | $ | (0.00 | ) | ||
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: | ||||||||
| Basic and diluted | 230,485,100 | 230,485,100 | ||||||
| For the Three Months Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| REVENUES | ||||||||
| Revenue - general support services - related party | $ | 4,800,000 | $ | 4,800,000 | ||||
| Revenue - financial services | 329,015 | - | ||||||
| Total revenues | 5,129,015 | 4,800,000 | ||||||
| COSTS OF REVENUES | ||||||||
| Cost of revenue - general support services - related party | 4,725,000 | 4,725,000 | ||||||
| Cost of revenue - financial services | 160,842 | - | ||||||
| Total costs of revenues | 4,885,842 | 4,725,000 | ||||||
| GROSS PROFIT | ||||||||
| Gross profit - general support services - related party | 75,000 | 75,000 | ||||||
| Gross profit - financial services | 168,173 | - | ||||||
| Total gross profit | 243,173 | 75,000 | ||||||
| OPERATING EXPENSES: | ||||||||
| Professional fees | 921,732 | 86,772 | ||||||
| Amortization of intangible assets | 911,943 | - | ||||||
| Other general and administrative | 353,121 | 40,313 | ||||||
| Total operating expenses | 2,186,796 | 127,085 | ||||||
| LOSS FROM OPERATIONS | (1,943,623 | ) | (52,085 | ) | ||||
| OTHER EXPENSE: | ||||||||
| Other expense | (1,216 | ) | (1,510 | ) | ||||
| Total other expense | (1,216 | ) | (1,510 | ) | ||||
| LOSS BEFORE INCOME TAXES | (1,944,839 | ) | (53,595 | ) | ||||
| INCOME TAXES | - | - | ||||||
| NET LOSS | $ | (1,944,839 | ) | $ | (53,595 | ) | ||
| COMPREHENSIVE LOSS: | ||||||||
| NET LOSS | $ | (1,944,839 | ) | $ | (53,595 | ) | ||
| OTHER COMPREHENSIVE LOSS | ||||||||
| Unrealized foreign currency translation loss | (2,227 | ) | - | |||||
| COMPREHENSIVE LOSS | $ | (1,947,066 | ) | $ | (53,595 | ) | ||
| NET LOSS PER COMMON SHARE: | ||||||||
| Basic and diluted | $ | (0.00 | ) | $ | (0.00 | ) | ||
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: | ||||||||
| Basic and diluted | 335,720,023 | 230,485,100 | ||||||
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’ DEFICITEQUITY
For the Three Months Ended December 31, 2020 and 20192021
| Preferred Stock | Common Stock | Additional | Total | |||||||||||||||||||||||||
| Number of Shares | Amount | Number of Shares | Amount | Paid-in Capital | Accumulated Deficit | Stockholders’ Deficit | ||||||||||||||||||||||
| Balance as of October 1, 2020 | - | $ | - | 230,485,100 | $ | 23,049 | $ | 141,057 | $ | (1,558,313 | ) | $ | (1,394,207 | ) | ||||||||||||||
| Net loss for the three months ended December 31, 2020 | - | - | - | - | - | (53,595 | ) | (53,595 | ) | |||||||||||||||||||
| Balance as of December 31, 2020 | - | $ | - | 230,485,100 | $ | 23,049 | $ | 141,057 | $ | (1,611,908 | ) | $ | (1,447,802 | ) | ||||||||||||||
| 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 | $ | 14,474,839 | $ | (2,495,159 | ) | $ | 8,440 | $ | 12,021,323 | |||||||||||||||||
| Adjustment for assets acquisition | - | - | - | - | (2,861,631 | ) | - | - | (2,861,631 | ) | ||||||||||||||||||||||
| 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 | |||||||||||||||||
| Preferred Stock | Common Stock | Additional | Total | |||||||||||||||||||||||||
| Number of Shares | Amount | Number of Shares | Amount | Paid-in Capital | Accumulated Deficit | Stockholders’ Deficit | ||||||||||||||||||||||
| Balance as of October 1, 2019 | - | $ | - | 230,485,100 | $ | 23,049 | $ | 141,057 | $ | (1,457,751 | ) | $ | (1,293,645 | ) | ||||||||||||||
| Net loss for the three months ended December 31, 2019 | - | - | - | - | - | (45,301 | ) | (45,301 | ) | |||||||||||||||||||
| Balance as of December 31, 2019 | - | $ | - | 230,485,100 | $ | 23,049 | $ | 141,057 | $ | (1,503,052 | ) | $ | (1,338,946 | ) | ||||||||||||||
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 FLOWSCHANGES IN STOCKHOLDERS’ DEFICIT
For the Three Months Ended December 31, 2020
| For the Three Months Ended | For the Three Months Ended | |||||||
| December 31, | December 31, | |||||||
| 2020 | 2019 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (53,595 | ) | $ | (45,301 | ) | ||
| Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
| Amortization of debt discount | 572 | 572 | ||||||
| Gain on digital currency | - | (17,888 | ) | |||||
| Bad debt expense | 12 | - | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Prepaid expense and other current assets | 2,125 | (5,942 | ) | |||||
| Due from affiliates | 291,899 | - | ||||||
| Due to affiliates | (271,730 | ) | 68,318 | |||||
| Accrued liabilities | 38,210 | 24,150 | ||||||
| Accrued liabilities - related party | - | (10,000 | ) | |||||
| Net cash provided by operating activities | 7,493 | 13,909 | ||||||
| NET INCREASE IN CASH | 7,493 | 13,909 | ||||||
| Cash - beginning of period | 82,849 | 23,514 | ||||||
| Cash - end of period | $ | 90,342 | $ | 37,423 | ||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
| Cash paid for: | ||||||||
| Interest | $ | - | $ | - | ||||
| Income taxes | $ | - | $ | - | ||||
| NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
| Investment - digital currency received from affiliates | $ | - | $ | 17,197 | ||||
| Investment - digital currency transferred to affiliates | $ | - | $ | 203,549 | ||||
| Preferred Stock | Common Stock | Additional | Total | |||||||||||||||||||||||||
| Number of | Number of | Paid-in | Accumulated | Stockholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||||||||
| Balance as of October 1, 2020 | - | $ | - | 230,485,100 | $ | 23,049 | $ | 141,057 | $ | (1,558,313 | ) | $ | (1,394,207 | ) | ||||||||||||||
| Net loss for the three months ended December 31, 2020 | - | - | - | - | - | (53,595 | ) | (53,595 | ) | |||||||||||||||||||
| Balance as of December 31, 2020 | - | $ | - | 230,485,100 | $ | 23,049 | $ | 141,057 | $ | (1,611,908 | ) | $ | (1,447,802 | ) | ||||||||||||||
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 Three Months Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (1,944,839 | ) | $ | (53,595 | ) | ||
| Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | ||||||||
| Amortization of debt discount | - | 572 | ||||||
| Amortization of intangible assets | 911,943 | - | ||||||
| Stock-based compensation and service expense | 378,746 | - | ||||||
| Provision for bad debt | - | 12 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 2,397 | - | ||||||
| Prepaid expense and other current assets | (355 | ) | 2,125 | |||||
| Due from affiliates | 3,474 | 291,899 | ||||||
| Due to affiliates | 145,999 | (271,730 | ) | |||||
| Accounts payable and accrued liabilities | 197,371 | 38,210 | ||||||
| Net cash (used in) provided by operating activities | (305,264 | ) | 7,493 | |||||
| EFFECT OF EXCHANGE RATE ON CASH | 214 | - | ||||||
| NET (DECREASE) INCREASE IN CASH | (305,050 | ) | 7,493 | |||||
| Cash - beginning of period | 355,673 | 82,849 | ||||||
| Cash - end of period | $ | 50,623 | $ | 90,342 | ||||
| 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 | $ | - | ||||
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 will managemanages the technology and IP behind the Markets Direct brand (which is operated by TCM). MDTG will holdholds all the IP addresses and all the software licenses in its name, and it will holdholds all the IP rights to the brands likesuch as Markets Direct and TCM. MDTG will then leaseleases out the rights to use these names/brands licenses to the appropriate entities. Management estimates that MDTG will become operational during the rest of fiscal 2021.
On May 24, 2021, the Company and the shareholders of Match Financial Limited (the “Match Shareholders”), a private limited company formed in England and Wales (“Match”), entered into a Purchase and Sale Agreement (the “Match Agreement”), pursuant to which the Company, on May 28, 2021, acquired 1,152 ordinary shares of Match representing 70% of the issued and outstanding ordinary shares of Match in consideration of 70,000,000 shares of common stock of the Company (the “Initial Transaction”). On August 30, 2021, the Company exercised its option pursuant to which it acquired from the Match Shareholders the balance of 493 ordinary shares of Match representing 30% of the issued and outstanding ordinary shares of Match for an additional 30,000,000 shares of common stock of the Company. Match is engaged in providing financial services to enable conversion of fiat currencies to cryptocurrencies and vice versa.
On October 20, 2021, the Company and the shareholders (the “Original Shareholders”) of Jacobi Asset Management Holdings Limited (“Jacobi”) entered into a Purchase and Sale Agreement (the “Jacobi Agreement”) pursuant to which the Company agreed to acquire 5.0% of the issued and outstanding ordinary shares of Jacobi in consideration of 20,000,000 shares of common stock of the Company (the “Jacobi Transaction”). On December 15, 2021, the Company, the Original Shareholders and the shareholders of Jacobi that were assigned their interest in Jacobi by the Original Shareholders (the “New Jacobi Shareholders”) entered into an Amendment to Stock Purchase Agreement agreeing that the Jacobi Transaction will be entered between the Company and the New Jacobi Shareholders. The Jacobi Transaction closed on December 15, 2021. Jacobi is a company focused on digital asset management that has received regulatory approval to launch the world’s first tier one Bitcoin ETF.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – THE COMPANY HISTORY AND NATURE OF THE BUSINESS (continued)
On December 30, 2021, the Company and the shareholder (the “Digiclear Shareholder”) of Digiclear Ltd. (“Digiclear”) entered into a Purchase and Sale Agreement (the “Digiclear Agreement) pursuant to which the Company agreed to acquire 5,400,000 of the issued and outstanding ordinary shares of Digiclear in consideration of 15,151,515 shares of common stock of the Company (the “Digiclear Transaction”). The Digiclear Transaction is expected to close in March 2022.
The unaudited condensed consolidated financial statements have been prepared using accounting principles generally accepted in the United States of America applicable for a going concern, which assumes that the Company will realize its assets and discharge its liabilities in the ordinary course of business. The Company incurred a net loss for the three months ended December 31, 20202021 of $53,595,$1,944,839, and had an accumulated deficit and a working capital deficit of $1,611,908 and $1,447,802, respectively,$2,251,170 at December 31, 2020.2021. 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.
We cannot be certain that such necessary capital through equity or debt financings will be available to us or whether such capital will be available on terms that are acceptable to us. Any such financing likely would be dilutive to existing stockholders and could result in significant financial operating covenants that would negatively impact our business. In the event that there are any unforeseen delays or obstacles in obtaining funds through the aforementioned sources, Currency Mountain Holdings Bermuda, Limited (“CMH”), which is wholly-owned by an entity that is majority-owned by Mr. Assentato, has committed to inject capital into the Company in order to maintain the ongoing operations of the business.
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.
NUKKLEUS INC. AND SUBSIDIARIESNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – THE COMPANY HISTORY AND NATURE OF THE BUSINESS (continued)
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; and the development of widespread testing or a vaccine.pandemic.
NOTE 2 – BASIS OF PRESENTATION
These interim condensed consolidated financial statements of the Company and its subsidiaries are unaudited. In the opinion of management, all adjustments (consisting of normal recurring accruals) and disclosures necessary for a fair presentation of these interim condensed consolidated financial statements have been included. The results reported in the unaudited condensed consolidated financial statements for any interim periods are not necessarily indicative of the results that may be reported for the entire year. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission and do not include all information and footnotes necessary for a complete presentation of financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP).
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, 20202021 filed with the Securities and Exchange Commission on December 28, 2020.29, 2021. The consolidated balance sheet as of September 30, 20202021 contained herein has been derived from the audited consolidated financial statements as of September 30, 2020,2021, 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. Actual results could differ from these estimates. Significant estimates during the three months ended December 31, 2021 and 2020 and 2019 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.allowances, and valuation of stock-based compensation.
As described in Note 1, in fiscal year 2021, the Company completed its acquisition of Match in accordance with the terms of the Match Agreement. In February 2022, a third party valuation report in connection with the acquisition was completed. As a result, the Company adjusted the previous estimated allocation to reflect the results of the third party valuation. The Company decreased its cost of intangible assets by $2,861,631 and adjusted the estimated useful life of trade names and regulatory licenses from 10 years to 3 years and the estimated useful life of technology from 10 years to 5 years. This change in accounting estimate was effective in the first quarter of fiscal year 2022. Based on the carrying value of intangible assets as of September 30, 2021 and those adjustments during the three months ended December 31, 2021, the effect of this change in estimate was an increase in amortization expense of $559,802 and an increase in net loss of $559,802.
Cash and cash equivalents
At December 31, 2021 and September 30, 2021, the Company’s cash balances by geographic area were as follows:
| Country: | December 31, 2021 | September 30, 2021 | ||||||||||||||
| United States | $ | 6,005 | 11.9 | % | $ | 327,443 | 92.1 | % | ||||||||
| United Kingdom | 44,444 | 87.8 | % | 28,056 | 7.9 | % | ||||||||||
| Malta | 174 | 0.3 | % | 174 | 0.0 | % | ||||||||||
| Total cash | $ | 50,623 | 100.0 | % | $ | 355,673 | 100.0 | % | ||||||||
For purposes of the condensed consolidated statements of cash flows, the Company considers all highly liquid instruments with a maturity of three months or less when purchased and money market accounts to be cash equivalents. The Company had no cash equivalents at December 31, 2021 and September 30, 2021.
Fair value of financial instruments and fair value measurements
The investmentfair 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 digital currency as of September 30, 2020 is recorded with prepaid expense and other current assets on the accompanying condensed consolidated balance sheet. The carrying values of cash, prepaid expense, due from affiliates, due to affiliates, and accrued liabilities in the Company’s condensed consolidated balance sheets approximated their fair values as of December 31, 2020 and September 30, 2020financial statements, primarily due to their short-term nature.
Concentration of creditCredit risk and uncertainties
The Company maintains a portion of its cash in bank and financial institution deposits within U.S. that at times may exceed federally insured limits.federally-insured limits of $250,000. The Company manages this credit risk by concentrating its cash balances in high quality financial institutions and by periodically evaluating the credit quality of the primary financial institutions holding such deposits. The Company has not experienced any losses in such bank accounts and believes it is not exposed to any risks on its cash in bank accounts. At December 31, 2020 and September 30, 2020,2021, the Company’s cash balances in United States bank accounts were not in excess of the federally-insured limits.
For all periods presented, the Company earned 100% of its revenue from TCM and incurred 100% of its cost of revenue from FXDIRECT. Both TCM and FXDIRECT are related parties.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
Revenue recognitionAccounts receivable and allowance for doubtful accounts
Accounts receivable are presented net of an allowance for doubtful accounts. The Company maintains allowances for doubtful accounts for estimated losses. The Company reviews the accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances, the Company considers many factors, including the age of the balance, a customer’s payment history, its current credit-worthiness and current economic trends. Accounts are written off after exhaustive efforts at collection. Management believes that the accounts receivable are fully collectable. Therefore, no allowance for doubtful accounts is deemed to be required on its accounts receivable at December 31, 2021 and September 30, 2021. The Company historically has not experienced significant uncollectible accounts receivable.
Prepaid expense and other current assets
Prepaid expense and other current assets primarily consist of prepaid OTC Markets listing fees, which are recognized as expense over the related listing periods. As of December 31, 2021 and September 30, 2021, prepaid expense and other current assets amounted to $12,588 and $12,221, respectively.
Cost method investment
Investment in which the Company does not have the ability to exercise significant influence over operating and financial matters is accounted for using the cost method. Under the cost method, investment is recorded at cost, with gains and losses recognized as of the sale date, and income recorded when received. The Company periodically evaluates its cost method investment for impairment due to decline considered to be other than temporary. If the Company determines that a decline in fair value is other than temporary, then a charge to earnings is recorded in “Other income (expense), net” in the accompanying unaudited condensed consolidated statements of operations and comprehensive loss, and a new basis in the investment is established.
Intangible assets
Intangible assets consist of trade names, regulatory licenses and technology, which are being amortized on a straight-line method over the estimated useful life of 3 - 5 years.
Impairment of long-lived assets
In accordance with ASC Topic 360, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable, or at least annually. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book value. There were no triggering events requiring assessment of impairment as of December 31, 2021 and September 30, 2021. For the three months ended December 31, 2021 and 2020, no impairment of long-lived assets was recognized.
Revenue recognition
The Company accounts for revenue under the provisions of ASC Topic 606. The nature of the Company’s contract with its customer relates to the Company’s services performed for a related party under a GSA.
The Company’s revenues are derived from providing:
| ● | General support services under a GSA to a related party. The transaction price is determined in accordance with the terms of the GSA and payments are due on a monthly basis. There are multiple services provided under the GSA and these performance obligations are combined into a single unit of accounting. Fees are recognized as revenue over time as the services are rendered under the terms of the GSA. Revenue is recorded at gross as the Company is deemed to be a principal in the transactions. |
| ● | Financial services to its customers. Revenue related to its financial services offerings are recognized at a point in time when service is rendered. |
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 financial services to enable conversion of fiat currencies to cryptocurrencies and vice versa |
In the following table, revenues are disaggregated by segment for the three months ended December 31, 2021 and 2020:
| Three Months Ended December 31, | ||||||||
| Revenue Stream | 2021 | 2020 | ||||||
| General support services | $ | 4,800,000 | $ | 4,800,000 | ||||
| Financial services | 329,015 | - | ||||||
| Total revenues | $ | 5,129,015 | $ | 4,800,000 | ||||
Advertising and marketing costs
All costs related to advertising and marketing are expensed as incurred. For the three months ended December 31, 2021 and 2020, advertising and marketing costs amounted to $35,222 and $0, respectively, which was included in other general and administrative expense on the accompanying unaudited condensed consolidated statements of operations and comprehensive loss.
Stock-based compensation
The Company accounts for its stock-based compensation awards in accordance with ASC Topic 718, Compensation—Stock Compensation (“ASC 718”). ASC 718 requires all stock-based payments to employees and non-employees including grants of stock options, to be recognized as expense in the termsstatements of operations based on their grant date fair values. The Company estimates the grant date fair value of each option award using the Black-Scholes option-pricing model.
Income taxes
The Company accounts for income taxes pursuant to Financial Accounting Standards Board (“FASB”) ASC 740, Income Taxes. Deferred tax assets and liabilities are determined based on temporary differences between the bases of certain assets and liabilities for income tax and financial reporting purposes. The deferred tax assets and liabilities are classified according to the financial statement classification of the GSAassets and payments are dueliabilities 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 a monthly basis. There are multiple services providedthe existence of sufficient taxable income within the carry-forward period under the GSAFederal and these performance obligations are combined into a single unit of accounting. Fees are recognized as revenue over time as the services are rendered under the terms of the GSA.
Revenue is recorded at grossforeign tax laws. Changes in circumstances, such as the Company is deemed to begenerating taxable income, could cause a principalchange in judgment about the realizability of the related deferred tax asset. Any change in the transactions.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.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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. Diluted earnings per share reflectsFor the potential dilution that could occur if securities were exercised or converted intothree months ended December 31, 2021 and 2020, potentially dilutive common stock or other contracts to issueshares consist of the common stock resulting inshares issuable upon the issuanceexercise of common stock that would then shareoptions (using the treasury stock method) and the conversion of Series A preferred stock (using the if-converted method). Common stock equivalents are not included in the Company’s earnings subject to anti-dilution limitations.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. For
The following table summarizes the securities that were excluded from the diluted per share calculation because the effect of including these potential shares was antidilutive:
| Three Months Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Stock options | 1,000,000 | - | ||||||
| Convertible preferred stock | - | 1,250,000 | ||||||
| Potentially dilutive securities | 1,000,000 | 1,250,000 | ||||||
Foreign currency translation
The reporting currency of the Company is U.S. Dollars. The functional currency of the parent company, Nukkleus Inc., Nukkleus Limited, Nukkleus Malta Holding Ltd. and its subsidiaries, is the U.S. dollar and the functional currency of Match Financial Limited and its subsidiaries is the British Pound (“GBP”). Monetary assets and liabilities denominated in currencies other than the reporting currency are translated into the reporting currency at the rates of exchange prevailing at the balance sheet date. Revenue and expenses are translated using average rates during each reporting period, and shareholders’ equity is translated at historical exchange rates. Cash flows are also translated at average translation rates for the periods, therefore, amounts reported on the statements of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheets. Translation adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are included in determining comprehensive income/loss.
Transactions denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing on the transaction dates. Assets and liabilities denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing at the balance sheet date with any transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. Most of the Company’s revenue transactions are transacted in the functional currency of the Company. The Company does not enter into any material transaction in foreign currencies. Transaction gains or losses have not had, and are not expected to have, a material effect on the results of operations of the Company.
Asset and liability accounts at December 31, 2021 and September 30, 2021 were translated at 0.7389 GBP and 0.7426 GBP to $1.00, respectively, which were the exchange rates on the balance sheet dates. Equity accounts were stated at their historical rates. The average translation rate applied to the statement of operations for the three months ended December 31, 2020 and 2019, potentially dilutive common shares consist of common stock issuable2021 was 0.7422 GBP to $1.00. Cash flows from the Company’s operations are calculated based upon the conversion of Series A preferred stock (usinglocal currencies using the if-converted method).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 months ended December 31, 2021 and 2020 consisted of net loss and 2019, a total of 1,250,000 shares of common stockunrealized loss from the assumed redemption of the Series A convertible redeemable preferred stock at the contractual floor of $0.20 per share have been excluded from the computation of diluted weighted average number of shares of common stock outstanding as they would have had an anti-dilutive impact.foreign currency translation adjustment.
ReclassificationSegment 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.
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.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurements (“ASU 2018-13”), which aims to improve the overall usefulness of disclosures to financial statement users and reduce unnecessary costs to companies when preparing fair value measurement disclosures. ASU 2018-13 is effective for annual and interim periods in the fiscal years beginning after December 15, 2019. Early adoption is permitted. Retrospective adoption is required, except for certain disclosures, which will be required to be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. The Company does not expect the adoption of ASU 2018-13 willthis guidance as of October 1, 2020 did not have a material impact on itsthe Company’s unaudited condensed consolidated financial statements and will adopt the standard effective October 1, 2020.statements.
NUKKLEUS INC. AND SUBSIDIARIESNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recently issued accounting pronouncements (continued)
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes by removing certain exceptions to the general principles in the existing guidance for income taxes and making other minor improvements. The amendments in the ASU are effective for the Company on October 1, 2021. The Company does not expect the adoption of ASU 2019-12 willthis guidance as of October 1, 2021 did not have a material impact on itsthe Company’s unaudited condensed consolidated financial statements and will adopt the standard effective October 1, 2021.statements.
Other accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the unaudited condensed consolidated financial statements upon adoption. The Company does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to its unaudited condensed consolidated financial condition, results of operations, cash flows or disclosures.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 – ACCRUED LIABILITIESINVESTMENT, AT COST
At December 31, 20202021, cost method investment amounted to $6,602,000. The investment represents the Company’s minority interest in Jacobi Asset Management Holdings Limited (“Jacobi”), a private company focused on digital asset management that has received regulatory approval to launch the world’s first tier one Bitcoin ETF.
On December 15, 2021, the Company issued 20,000,000 shares of its common stock to Jacobi’s shareholders for acquisition of 5.0% equity interest of Jacobi. These shares were valued at $6,602,000, the fair market value on the grant date using the reported closing share price of the Company on the date of grant.
In accordance with ASC Topic 321, the Company elected to use the measurement alternative to measure such investments at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer, if any. The Company monitors its investment in the non-marketable security and will recognize, if ever existing, a loss in value which is deemed to be other than temporary. The Company determined that there was no impairment of this investment as of December 31, 2021.
NOTE 5 – INTANGIBLE ASSETS
Intangible assets 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 December 31, 2021 and September 30, 2020,2021, intangible assets consisted of the following:
| Useful Life | December 31, 2021 | September 30, 2021 | ||||||||
| Licenses and banking infrastructure (1) | 10 Years | $ | - | $ | 14,085,402 | |||||
| Trade names | 3 Years | 784,246 | - | |||||||
| Regulatory licenses | 3 Years | 138,751 | - | |||||||
| Technology | 5 Years | 10,300,774 | - | |||||||
| Less: accumulated amortization | (1,381,229 | ) | (469,286 | ) | ||||||
| $ | 9,842,542 | $ | 13,616,116 | |||||||
| (1) | In February 2022, a third party valuation report in connection with acquisition was completed. As a result, the Company adjusted the previous estimated allocation to reflect the results of the third party valuation. The Company decreased its cost of intangible assets of $2,861,631 and adjusted the estimated useful life of trade names and regulatory licenses from 10 years to 3 years and the estimated useful life of technology from 10 years to 5 years. This change in accounting estimate was effective in the first quarter of fiscal year 2022. |
For the three months ended December 31, 2021, amortization expense amounted to $911,943. There was no comparable amortization for the three months ended December 31, 2020. Amortization of intangible assets attributable to future periods is as follows:
| For the Twelve-month Period Ending December 31: | Amortization Amount | |||
| 2022 | $ | 2,367,821 | ||
| 2023 | 2,367,821 | |||
| 2024 | 2,188,349 | |||
| 2025 | 2,060,155 | |||
| 2026 and thereafter | 858,396 | |||
| $ | 9,842,542 | |||
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 – ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
At December 31, 2021 and September 30, 2021, accounts payable and accrued liabilities consisted of the following:
| December 31, 2020 | September 30, 2020 | |||||||
| Professional fees | $ | 70,141 | $ | 46,640 | ||||
| Directors’ compensation | 140,538 | 130,537 | ||||||
| Interest payable | 36,166 | 35,229 | ||||||
| Other | 3,771 | — | ||||||
| Total | $ | 250,616 | $ | 212,406 | ||||
| December 31, 2021 | September 30, 2021 | |||||||
| Directors’ compensation | $ | 180,538 | $ | 170,538 | ||||
| Professional fees | 295,719 | 125,697 | ||||||
| Accounts payable | 97,407 | 54,831 | ||||||
| Other | 5,687 | 29,655 | ||||||
| Total | $ | 579,351 | $ | 380,721 | ||||
NOTE 57 – SHARE CAPITAL
Preferred stock
The Company’s Board of Directors is authorized to issue, at any time, without further stockholder approval, up to 15,000,000 shares of preferred stock. The Board of Directors has the authority to fix and determine the voting rights, rights of redemption and other rights and preferences of preferred stock.
Common stock and Series A preferred stock soldissued for cashcost method investment
On June 7, 2016,December 15, 2021, the Company sold to CMH 15,450,000issued 20,000,000 shares of its common stock to Jacobi Asset Management Holdings Limited’s shareholders as consideration of acquisition of 5.0% of the issued and 100,000outstanding ordinary shares of Series A preferredJacobi. These shares were valued at $6,602,000, the fair market value on the grant date using the reported closing share price on the date of grant, and the Company recorded cost method investment of $6,602,000 (see Note 4).
Options
The following table summarizes the shares of the Company’s common stock issuable upon exercise of options outstanding at December 31, 2021:
| Options Outstanding | Options Exercisable | |||||||||||||||||
| Exercise Price | Number Outstanding at December 31, 2021 | Remaining Contractual Life (Years) | Number Exercisable at December 31, 2021 | Exercise Price | ||||||||||||||
| $ | 2.50 | 1,000,000 | 4.72 | 1,000,000 | $ | 2.50 | ||||||||||||
Stock option activities for $1,000,000. the three months ended December 31, 2021 were as follows:
| Number of Options | Exercise Price | |||||||
| Outstanding at October 1, 2021 | 1,000,000 | $ | 2.50 | |||||
| Granted | - | - | ||||||
| Terminated / Exercised / Expired | - | - | ||||||
| Outstanding at December 31, 2021 | 1,000,000 | $ | 2.50 | |||||
| Options exercisable at December 31, 2021 | 1,000,000 | $ | 2.50 | |||||
The commonaggregate intrinsic value of both stock options outstanding and stock options exercisable at December 31, 2021 was $0.
For the three months ended December 31, 2021, stock-based compensation expense associated with stock options granted amounted to $378,746, which was recorded as equityprofessional fees on the accompanying unaudited condensed consolidated statements of operations and comprehensive loss. There was no comparable stock-based compensation expense associated with stock options for the Series A preferred stock was recorded as a liability. On February 13, 2018, 75,000 of the preferred shares were redeemed and cancelled.three months ended December 31, 2020.
The Series A preferred stock has the following key terms:
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 57 – SHARE CAPITAL (continued)
CommonA summary of the status of the Company’s nonvested stock options granted as of December 31, 2021 and Series A preferred stock sold for cash (continued)
The $1,000,000 of proceeds received was allocated to the common stock and Series A preferred stock according to their relative fair values determined at the time of issuance, and as a result, the Company recorded a total discount of $45,793 on the Series A preferred stock, which is being amortized to interest expense to the date of redemption. For bothchanges during the three months ended December 31, 2020 and 2019, amortization of debt discount amounted to $572.2021 is presented below:
| Number of Options | Exercise Price | |||||||
| Nonvested at October 1, 2021 | 1,000,000 | $ | 2.50 | |||||
| Granted | - | - | ||||||
| Vested | (1,000,000 | ) | (2.50 | ) | ||||
| Nonvested at December 31, 2021 | - | $ | - | |||||
The terms of the Series A preferred stock issued represent mandatory redeemable shares, with a fixed redemption date (in 5 years) and the Company has a choice of redeeming the instrument either in cash or a variable number of shares of common stock based on a formula in the certificate of designation. The conversion price has a floor of $0.20 per share. As such, all dividends accrued and/or paid and any accretions are classified as part of interest expense. For both the three months ended December 31, 2020 and 2019, dividends on redeemable preferred stock amounted to $938.
At December 31, 2020 and September 30, 2020, Series A redeemable preferred stock consisted of the following:
| December 31, 2020 | September 30, 2020 | |||||||
| Redeemable preferred stock (stated value) | $ | 250,000 | $ | 250,000 | ||||
| Less: unamortized debt discount | (973 | ) | (1,545 | ) | ||||
| Redeemable preferred stock, net | $ | 249,027 | $ | 248,455 | ||||
NOTE 68 – RELATED PARTY TRANSACTIONS
Services provided by related parties
The Company uses affiliate employees for various services such as the use of accountants to record the books and accounts of the Company at no charge to those affiliates,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 operatesCompany’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 operatesCompany’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 months ended December 31, 2021 and 2020, and 2019,general support services provided to the related party, which was recorded as revenue – general support services - related party on the accompanying unaudited condensed consolidated statements of operations and comprehensive loss were as follows:
| Three Months Ended December 31, 2020 | Three Months Ended December 31, 2019 | |||||||
| Service provided to: | ||||||||
| TCM | $ | 4,800,000 | $ | 4,800,000 | ||||
| $ | 4,800,000 | $ | 4,800,000 | |||||
| Three Months Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Service provided to: | ||||||||
| TCM | $ | 4,800,000 | $ | 4,800,000 | ||||
| $ | 4,800,000 | $ | 4,800,000 | |||||
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 68 – RELATED PARTY TRANSACTIONS (continued)
Revenue from related party and cost of revenue from related party (continued)
During the three months ended December 31, 20202021 and 2019,2020, services received from the related party, which was recorded as cost of revenue – general support services - related party on the accompanying unaudited condensed consolidated statements of operations and comprehensive loss were as follows:
| Three Months Ended December 31, 2020 | Three Months Ended December 31, 2019 | |||||||
| Service received from: | ||||||||
| FXDIRECT | $ | 4,725,000 | $ | 4,725,000 | ||||
| $ | 4,725,000 | $ | 4,725,000 | |||||
| Three Months Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Service received from: | ||||||||
| FXDIRECT | $ | 4,725,000 | $ | 4,725,000 | ||||
| $ | 4,725,000 | $ | 4,725,000 | |||||
Due from affiliates
At December 31, 20202021 and September 30, 2020,2021, due from related parties consisted of the following:
| December 31, 2020 | September 30, 2020 | |||||||
| NUKK Capital (*) | $ | 144,696 | $ | 144,696 | ||||
| TCM | 3,273,177 | 3,565,076 | ||||||
| Total | $ | 3,417,873 | $ | 3,709,772 | ||||
| December 31, 2021 | September 30, 2021 | |||||||
| NUKK Capital (*) | $ | 144,696 | $ | 144,696 | ||||
| TCM | 2,469,703 | 2,473,177 | ||||||
| Total | $ | 2,614,399 | $ | 2,617,873 | ||||
| (*) | An entity controlled by Emil Assentato, the Company’s chief executive officer, chief financial officer and chairman. |
The balancesbalance of due from NUKK Capital represent the Company’s prior investment in digital currency that was transferred to NUKK Capital.Capital in March 2019. The balance of due from TCM represent unsettled funds due related to the General Services Agreement and monies that the Company paid on behalf of TCM.
Management believes that the related parties’ receivables are fully collectable. Therefore, no allowance for doubtful account is deemed to be required on its due from related parties at December 31, 20202021 and September 30, 2020.2021. The Company historically has not experienced uncollectible receivable from the related parties.
Due to affiliates
At December 31, 20202021 and September 30, 2020,2021, due to related parties consisted of the following:
| December 31, 2020 | September 30, 2020 | |||||||
| Forexware LLC (*) | $ | 579,229 | $ | 579,229 | ||||
| FXDIRECT | 3,839,547 | 4,111,277 | ||||||
| CMH | 42,000 | 42,000 | ||||||
| FXDD Trading (*) | 471 | 471 | ||||||
| Total | $ | 4,461,247 | $ | 4,732,977 | ||||
| December 31, 2021 | September 30, 2021 | |||||||
| Forexware LLC (*) | $ | 624,229 | $ | 579,229 | ||||
| FXDIRECT | 3,442,892 | 3,341,893 | ||||||
| CMH | 42,000 | 42,000 | ||||||
| FXDD Trading (*) | 296,144 | 294,670 | ||||||
| Total | $ | 4,405,265 | $ | 4,257,792 | ||||
| (*) | Forexware LLC and FXDD Trading are both controlled by Emil Assentato, the Company’s chief executive officer, chief financial officer and chairman. |
The balances of due to related parties represent expenses paid by Forexware LLC, FXDIRECT, and FXDD Trading on behalf of the Company and advances from CMH. The balance due to FXDIRECT may also include unsettled funds due related to the General Service Agreement. The balance due to FXDD Trading also includes the value of transferred digital assets.
The related parties’ payables are short-term in nature, non-interest bearing, unsecured and repayable on demand.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 79 – INCOME TAXES
The Company recorded no income tax expense for the three months ended December 31, 20202021 and 20192020 because the estimated annual effective tax rate was zero. As of December 31, 2020,2021, the Company continues to provide a valuation allowance against its net deferred tax assets since the Company believes it is more likely than not that its deferred tax assets will not be realized.
NOTE 810 – CONTINGENCYCONCENTRATIONS
OnCustomers
The following table sets forth information as to each customer that accounted for 10% or more of the Company’s revenues for the three months ended December 31, 2021 and 2020.
| Three Months Ended December 31, | ||||||||
| Customer | 2021 | 2020 | ||||||
| A – related party | 97.8 | % | 100 | % | ||||
One customer, whose outstanding receivable accounted for 10% or more of the Company’s total outstanding accounts receivable, and accounts receivable – related party (which is included in due from affiliates on the accompanying consolidated balance sheets) at December 31, 2021, accounted for 97.8% of the Company’s total outstanding accounts receivable, and accounts receivable – related party at December 31, 2021.
One customer, whose outstanding receivable accounted for 10% or more of the Company’s total outstanding accounts receivable, and accounts receivable – related party (which is included in due from affiliates on the accompanying consolidated balance sheets) at September 30, 2021, accounted for 97.8% of the Company’s total outstanding accounts receivable, and accounts receivable – related party at September 30, 2021.
Suppliers
The following table sets forth information as to each supplier that accounted for 10% or more of the Company’s costs of revenues for the three months ended December 31, 2021 and 2020.
| Three Months Ended December 31, | ||||||||
| Supplier | 2021 | 2020 | ||||||
| A – related party | 97.3 | % | 100 | % | ||||
One supplier, whose outstanding payable accounted for 10% or more of the Company’s total outstanding accounts payable, and accounts payable – related party (which is included in due to affiliates on the accompanying consolidated balance sheets) at December 31, 2021, accounted for 97.3% of the Company’s total outstanding accounts payable, and accounts payable – related party at December 31, 2021.
One supplier, whose outstanding payable accounted for 10% or more of the Company’s total outstanding accounts payable, and accounts payable – related party (which is included in due to affiliates on the accompanying consolidated balance sheets) at September 30, 2021, accounted for 98.8% of the Company’s total outstanding accounts payable, and accounts payable – related party at September 30, 2021.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 – SEGMENT INFORMATION
For the three months ended December 31, 2021, the Company operated in two reportable business segments - (1) the general support services segment, in which we provide software, technology, customer sales and marketing and risk management technology hardware and software solutions package under a GSA to a related party, and (2) the financial services segment, in which we provide financial services to enable conversion of fiat currencies to cryptocurrencies and vice versa. For the three months ended December 31, 2020, the Company operated in one reportable business segment – the general support services segment. The Company’s reportable segments are strategic business units that offer different services and products. They are managed separately based on the fundamental differences in their operations.
Information with respect to these reportable business segments for the three months ended December 31, 2021 and 2020 was as follows:
| Three Months Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Revenues | ||||||||
| General support services | $ | 4,800,000 | $ | 4,800,000 | ||||
| Financial services | 329,015 | - | ||||||
| Total | 5,129,015 | 4,800,000 | ||||||
| Costs of revenues | ||||||||
| General support services | 4,725,000 | 4,725,000 | ||||||
| Financial services | 160,842 | - | ||||||
| Total | 4,885,842 | 4,725,000 | ||||||
| Gross profit | ||||||||
| General support services | 75,000 | 75,000 | ||||||
| Financial services | 168,173 | - | ||||||
| Total | 243,173 | 75,000 | ||||||
| Operating expenses | ||||||||
| Financial services | 1,249,644 | - | ||||||
| Corporate/Other | 937,152 | 127,085 | ||||||
| Total | 2,186,796 | 127,085 | ||||||
| Other expense | ||||||||
| Financial services | (1,216 | ) | - | |||||
| Corporate/Other | - | (1,510 | ) | |||||
| Total | (1,216 | ) | (1,510 | ) | ||||
| Net income (loss) | ||||||||
| General support services | 75,000 | 75,000 | ||||||
| Financial services | (1,082,687 | ) | - | |||||
| Corporate/Other | (937,152 | ) | (128,595 | ) | ||||
| Total | (1,944,839 | ) | (53,595 | ) | ||||
| Amortization | ||||||||
| Financial services | 911,943 | - | ||||||
| Total | $ | 911,943 | $ | - | ||||
| Total assets at December 31, 2021 and September 30, 2021 | December 31, 2021 | September 30, 2021 | ||||||
| Financial services | $ | 9,945,454 | $ | 13,703,140 | ||||
| Corporate/Other | 9,232,534 | 2,956,696 | ||||||
| Total | $ | 19,177,988 | $ | 16,659,836 | ||||
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 – CONTINGENCY
In April 16, 2020, the Company was named as a defendant in the Adversary Proceeding filed in the United States Bankruptcy Court for the District of Massachusetts (Case No. 15-10745-FJB; Adversary Proceeding No. 16-01178) titled In re: BT Prime Ltd (“BT Prime”). The Adversary Proceeding is brought by BT Prime against Boston Technologies Powered by Forexware LLC f/k/a Forexware LLC (“Forexware”), Currency Mountain Holdings LLC, Currency Mountain Holdings Limited f/k/a Forexware Malta Holdings Ltd., FXDirectDealer, LLC, FXDD Malta Ltd., Nukkleus Inc., Nukkleus Bermuda Limited and Currency Mountain Holdings Bermuda, Ltd. In the Amended Complaint, BT Prime is seeking, amongst other relief, a determination that the Company and the other defendants are liable for all of the debts of BT Prime stemming from its bankruptcy proceedings, and is seeking to recover certain amounts transferred to Forexware and FXDD Malta prior to the initiation of the bankruptcy case. In the sole claim asserted against the Company, BT Prime alleges that the Company operated as a single business enterprise with no separate existence outside of its collective business relationship with certain of the other Defendants, is a continuation of the business of Forexware and is a successor-in-interest to Forexware. Based on this theory, BT Prime alleges that the Company should be jointly and severally liable for any liability attributable to Forexware or the other Defendants, should the Court eventually find any such liability. The Company maintainsIt is the Company’s position that there is no basis for BT Prime’s claim against it and intends to vigorously defend against the claim.claim at trial, the date for which has not yet been set.
NOTE 913 – SUBSEQUENT EVENTS
Management has evaluated subsequent events through the date of the filing.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations for the three months ended December 31, 20202021 and 20192020 should be read in conjunction with our unaudited condensed consolidated financial statements and related notes to those unaudited condensed consolidated financial statements that are included elsewhere in this report.
Certain matters discussed herein are forward-looking statements. Such forward-looking statements contained in this Form 10-Q involve risks and uncertainties, including statements as to:
| ● | our future operating results; |
| ● | our business prospects; |
| ● | any contractual arrangements and relationships with third parties; |
| ● | the dependence of our future success on the general economy; |
| ● | any possible financings; and |
| ● | the adequacy of our cash resources and working capital. |
Impact of COVID-19 on ourOur Operations
The ramifications of the outbreak of the novel strain of COVID-19, reported to have started in December 2019 and spread globally, are filled with uncertainty and changing quickly. Our operations have continued during the COVID-19 pandemic and we have not had significant disruption.
The Company is operating in a rapidly changing environment so the extent to which COVID-19 impacts its business, operations and financial results from this point forward will depend on numerous evolving factors that the Company cannot accurately predict. Those factors include the following: the duration and scope of the pandemic;pandemic, and governmental, business and individuals’ actions that have been and continue to be taken in response to the pandemic; and the development of widespread testing or a vaccine.pandemic.
Overview
We are a financial technology company which is focused on providing software and technology solutions for the worldwide retail foreign exchange (“FX”) trading industry. We primarily provide our software, technology, customer sales and marketing and risk management technology hardware and software solutions package to TCM. The FXDD brand (e.g., see FXDD.com) is the brand utilized in the retail forex trading industry by TCM.
We have ownership of FOREXWARE, the primary software suite and technology solution which powers the FXDD brand globally today. We also have ownership of the FOREXWARE brand name. We have also acquired ownership of the customer interface and other software trading solutions being used by FXDD.com. By virtue of our relationship with TCM and FXDIRECT, we provide turnkey software and technology solutions for FXDD.com. We offer the customers of FXDD 24 hours, five days a week direct access to the global over the counter (“OTC”) FX market, which is a decentralized market in which participants trade directly with one another, rather than through a central exchange.
In an FX trade, participants effectively buy one currency and simultaneously sell another currency, with the two currencies that make up the trade being referred to as a “currency pair”. Our software and technology solutions enable FXDD to present its customers with price quotations on over the counter tradeable instruments, including over the counter currency pairs, and also provide our customers the ability to trade FX derivative contracts on currency pairs through a product referred to as Contracts for Difference (“CFD”). Our software solutions also offer other CFD products, including CFDs on metals, such as gold, and on futures linked to other products.
In July 2018, the Company incorporated Nukkleus Malta Holding Ltd., which is a wholly-owned subsidiary. In July 2018, Nukkleus Malta Holding Ltd. incorporated MDTG, formerly known as Nukkleus Exchange Malta Ltd. MDTG was exploring potentially obtaining a license to operate an electronic exchange whereby it would facilitate the buying and selling of various digital assets as well as traditional currency pairs used in FX Trading. During the fourth quarter of fiscal 2020, management made the decision to exit the exchange business and to no longer pursue the regulatory licensing necessary to operate an exchange in Malta.
On August 27, 2020, the Company renamed Nukkleus Exchange Malta Ltd. to Markets Direct Technology Group Ltd (“MDTG”). MDTG will managemanages the technology and IP behind the Markets Direct brand (which is operated by TCM). MDTG will holdholds all the IP addresses and all the software licenses in its name, and it will holdholds all the IP rights to the brands likesuch as Markets Direct and TCM. MDTG will then leaseleases out the rights to use these names/brands licenses to the appropriate entities.
On May 24, 2021, the Company and the shareholders of Match Financial Limited (the “Match Shareholders”), a private limited company formed in England and Wales (“Match”), entered into a Purchase and Sale Agreement (the “Match Agreement”), pursuant to which the Company, on May 28, 2021, acquired 1,152 ordinary shares of Match representing 70% of the issued and outstanding ordinary shares of Match in consideration of 70,000,000 shares of common stock of the Company (the “Initial Transaction”). On August 30, 2021, the Company exercised its option pursuant to which it acquired from the Match Shareholders the balance of 493 ordinary shares of Match representing 30% of the issued and outstanding ordinary shares of Match for an additional 30,000,000 shares of common stock of the Company. Match is engaged in providing financial services to enable conversion of fiat currencies to cryptocurrencies and vice versa.
On October 20, 2021, the Company and the shareholders (the “Original Shareholders”) of Jacobi Asset Management estimatesHoldings 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 MDTGwere 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 become operational duringbe entered between the restCompany and the New Jacobi Shareholders. The Jacobi Transaction closed on December 15, 2021. Jacobi is a company focused on digital asset management that has received regulatory approval to launch the world’s first tier one Bitcoin ETF.
On December 30, 2021, the Company and the shareholder (the “Digiclear Shareholder”) of fiscal 2021.Digiclear Ltd. (“Digiclear”) entered into a Purchase and Sale Agreement (the “Digiclear Agreement) pursuant to which the Company agreed to acquire 5,400,000 of the issued and outstanding ordinary shares of Digiclear in consideration of 15,151,515 shares of common stock of the Company (the “Digiclear Transaction”). The Digiclear Transaction is expected to close in March 2022.
Critical Accounting Policies
Use of Estimates
The preparation of our unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expense, and related disclosure of contingent assets and liabilities. When making these estimates and assumptions, we consider our historical experience, our knowledge of economic and market factors and various other factors that we believe to be reasonable under the circumstances. Actual results could differ from these estimates. Significant estimates during the three months ended December 31, 2021 and 2020 and 2019 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.allowances, and valuation of stock-based compensation.
Intangible Assets
Intangible assets consist of trade names, regulatory licenses and technology, which are being amortized on a straight-line method over the estimated useful life of 3 - 5 years.
Impairment of Long-lived Assets
In accordance with ASC Topic 360, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable, or at least annually. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book value. There were no triggering events requiring assessment of impairment as of December 31, 2021. For the three months ended December 31, 2021 and 2020, no impairment of long-lived assets was recognized.
Revenue recognitionRecognition
We accountThe Company accounts for revenue under the provisions of ASC Topic 606. The nature of our contract with our customer relates to our services performed for a related party under a GSA.
The Company’s revenues are derived from providing:
| ● | General support services under a GSA to a related party. The transaction price is determined in accordance with the terms of the GSA and payments are due on a monthly basis. There are multiple services provided under the GSA and these performance obligations are combined into a single unit of accounting. Fees are recognized as revenue over time as the services are rendered under the terms of the GSA. Revenue is recorded at gross as the Company is deemed to be a principal in the transactions. |
| ● | Financial services to its customers. Revenue related to its financial services offerings are recognized at a point in time when service is rendered. |
Stock-based Compensation
The Company accounts for its stock-based compensation awards in accordance with the termsASC Topic 718, Compensation—Stock Compensation (“ASC 718”). ASC 718 requires all stock-based payments to employees and non-employees including grants of the GSA and payments are due on a monthly basis. There are multiple services provided under the GSA and these performance obligations are combined into a single unit of accounting. Fees arestock options, to be recognized as revenue over time as the services are rendered under the terms of the GSA.
Revenue is recorded at gross as we are deemed to be a principalexpense in the transactions.statements of operations based on their grant date fair values. The Company estimates the grant date fair value of each option award using the Black-Scholes option-pricing model.
Results of Operations
Summary of Key Results
For the three months ended December 31, 20202021 versus the three months ended December 31, 20192020
Revenue and Cost of RevenueRevenues
Revenue forFor both of the three months ended December 31, 2021 and 2020, and 2019 was $4,800,000, and waswe had revenue from general support services rendered to TCM under a GSA. GSA of $4,800,000.
CostWe had revenue from financial services commencing in May 2021. For the three months ended December 31, 2021, we had revenue from financial services of $329,015. We expect that our revenue forfrom financial services will increase in the near future.
Costs of Revenues
For both of the three months ended December 31, 2021 and 2020, and 2019our cost of general support services was $4,725,000, andwhich represented amount incurred for general support services rendered by FXDIRECT under a GSA.
Cost of financial services include consulting costs, banking, and trading fees incurred associated with delivery of our services.
Cost of financial services was $160,842 for the three months ended December 31, 2021. There was no comparable revenue nor cost of revenue from our financial services operations for the three months ended December 31, 2020.
Gross Profit
For both of the three months ended December 31, 2021 and 2020, our gross profit from general support services was $75,000, representing gross margin of 1.6%.
For the three months ended December 31, 2021, our gross profit from financial services was $168,173, representing gross margin of 51.1%.
Operating Expenses
Operating expenses consisted of professional fees, amortization of intangible assets, and other general and administrative expenses.
Professional fees
Professional fees primarily consisted of accounting fees, audit fees, legal service fees, and advisory fees. Professional fees for the three months ended December 31, 20202021 versus the three months ended December 31, 2019,2020, were $86,772$921,732 and $41,000,$86,772, respectively. The significant increase was primarily attributable to the increase in professional service providers.
Amortization of intangible assets
For the three months ended December 31, 2021, our amortization of intangible assets amounted to $911,943. There was no comparable amortization for the three months ended December 31, 2020.
Other general and administrative expenses
Other general and administrative expenses primarily consisted of compensation and related benefits, rent and other miscellaneous items.
Total other general and administrative expenses for the three months ended December 31, 20202021 versus the three months ended December 31, 2019,2020, were $40,313$353,121 versus $95,679,$40,313, respectively. The significant decreaseincrease was mainly due to the decreasean increase in compensation and related benefits of approximately $55,000$115,000, an increase in rent expense of approximately $39,000, and an increase in other miscellaneous items of approximately $159,000, resulting from the resignation of the director of crypto management on December 15, 2019.our business expansion.
Other Income (Expense)Expense
Other income (expense) included interest expense on redeemable preferred stock, amortization of debt discount, and gain recognized from investment – digital currency.
Total other expense, net,totaled $1,216 for the three months ended December 31, 2021, as compared to $1,510 for the three months ended December 31, 2020, versus total other income, net, for the three months ended December 31, 2019, was $(1,510) versus $16,378, respectively. Thea change for the three months ended December 31, 2020 as compared to the three months ended December 31, 2019 was due to the gain recognized from digital currency asset.of $294.
Net Loss
As a result of the factors described above, our net loss was $53,595,$1,944,839, or $0.00 per common share (basic and diluted), for the three months ended December 31, 2020. Our2021, as compared with a net loss was $45,301,of $53,595, or $0.00 per common share (basic and diluted), for the three months ended December 31, 2019.2020, a change of $1,891,244, or 3,528.8%.
Foreign Currency Translation Adjustment
The reporting currency of the Company is U.S. Dollars. The functional currency of the parent company, Nukkleus Inc., Nukkleus Limited, Nukkleus Malta Holding Ltd. and its subsidiaries, is the U.S. dollar and the functional currency of Match Financial Limited and its subsidiaries is the British Pound (“GBP”). The financial statements of our subsidiaries whose functional currency is the GBP are translated to U.S. dollars using period end rates of exchange for assets and liabilities, average rate of exchange for revenues, costs, and expenses and cash flows, and at historical exchange rates for equity. Net gains and losses resulting from foreign exchange transactions are included in the results of operations. As a result of foreign currency translations, which are a non-cash adjustment, we reported a foreign currency translation loss of $2,227 and $0 for the three months ended December 31, 2021 and 2020, respectively. This non-cash loss had the effect of increasing our reported comprehensive loss.
Comprehensive Loss
As a result of our foreign currency translation adjustment, we had comprehensive loss of $1,947,066 and $53,595 for the three months ended December 31, 2021 and 2020, respectively.
Liquidity and Capital Resources
Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations and otherwise operate on an ongoing basis. At December 31, 20202021 and September 30, 2020,2021, we had cash balances of $90,342$50,623 and $82,849,$355,673, respectively.
We had working capital deficit accumulated deficit, and total stockholders’ deficit of $1,447,802, $1,611,908 and $1,447,802, respectively,$2,251,170 as of December 31, 2020.2021.
Our ability to continue as a going concern is dependent upon the management of expenses and our ability to obtain the necessary financing to meet our obligations and pay our liabilities arising from normal business operations when they come due, and upon profitable operations.
We need to either borrow funds or raise additional capital through equity or debt financings. However, we cannot be certain that such capital (from our stockholders or third parties) will be available to us or whether such capital will be available on terms that are acceptable to us. Any such financing likely would be dilutive to existing stockholders and could result in significant financial operating covenants that would negatively impact our business. In the event that there are any unforeseen delays or obstacles in obtaining funds through the aforementioned sources, CMH has committed to inject capital into the Company in order to maintain the ongoing operations of the business.
Cash Flow for the Three Months Ended December 31, 20202021 Compared to the Three Months Ended December 31, 20192020
Net cash flow used in operating activities for the three months ended December 31, 2021 was $305,264, which primarily reflected our consolidated net loss of approximately $1,945,000, offset by the changes in operating assets and liabilities, primarily consisting of an increase in due to affiliates of approximately $146,000, and an increase in accounts payable and accrued liabilities of approximately $197,000, and the non-cash items adjustment consisting of amortization of intangible assets of approximately $912,000, and stock-based compensation and service expense of approximately $379,000.
Net cash flow provided by operating activities was $7,493 for the three months ended December 31, 2020. These included changes in operating assets and liabilities totaling approximately $61,000, offset by consolidated net loss of approximately $54,000.
Net cash flow provided by operating activities was $13,909 for the three months ended December 31, 2019. These included changes in operating assets and liabilities totaling approximately $77,000, offset by consolidated net loss of approximately $45,000 and the non-cash item mainly consisting of a gain on digital currency of approximately $18,000.
Our operations will require additional funding for the foreseeable future. Unless and until we are able to generate a sufficient amount of revenue and reduce our costs, we expect to finance future cash needs through public and/or private offerings of equity securities and/or debt financings. We do not currently have any committed future funding. To the extent we raise additional capital by issuing equity securities, our stockholders could at that time experience substantial dilution. Any debt financing we are able to obtain may involve operating covenants that restrict our business. Our capital requirements for the next twelve months primarily relate to mergers, acquisitions and the development of business opportunities. In addition, we expect to use cash to pay fees related to professional services. The following trends are reasonably likely to result in a material decrease in our liquidity over the near to long term:
| ● | The working capital requirements to finance our current business; |
| ● | The use of capital for mergers, acquisitions and the development of business opportunities; |
| ● | Addition of personnel as the business grows; and |
| ● | The cost of being a public company. |
We need to either borrow funds or raise additional capital through equity or debt financings. However, we cannot be certain that such capital (from our stockholders or third parties) will be available to us or whether such capital will be available on terms that are acceptable to us. Any such financing likely would be dilutive to existing stockholders and could result in significant financial operating covenants that would negatively impact our business. If we are unable to raise sufficient additional capital on acceptable terms, we will have insufficient funds to operate our business or pursue our planned growth. However, CMH has committed to inject capital into the Company in order to maintain the ongoing operations of the business.
Consistent with Section 144 of the Delaware General Corporation Law, it is our current policy that all transactions between us and our officers, directors and their affiliates will be entered into only if such transactions are approved by a majority of the disinterested directors, are approved by vote of the stockholders, or are fair to us as a corporation as of the time it is authorized, approved or ratified by the board. We will conduct an appropriate review of all related party transactions on an ongoing basis.
Contractual Obligations and Off-Balance Sheet Arrangements
Contractual Obligations
As of December 31, 2020, there have been2021, we had no material changes to the contractual obligations as set forth in our Annual Report on Form 10-K forother than: FXDirectDealer LLC receives a minimum of $1,575,000 per month and such obligation may be terminated by the year ended September 30, 2020.Company upon providing 90 days’ notice.
Off-Balance Sheet Arrangements
We had no outstanding derivative financial instruments, off-balance sheet guarantees, interest rate swap transactions or foreign currency contracts. We do not engage in trading activities involving non-exchange traded contracts.
Recently Issued Accounting Pronouncements
For information about recently issued accounting standards, refer to Note 3 to our Unaudited Condensed Consolidated Financial Statements appearing elsewhere in this report.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are a smaller reporting company as defined in Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in reports filed or submitted under the Securities Exchange Act of 1934, as amended (“Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed under the Exchange Act is accumulated and communicated to management, including the principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.
In connection with the preparation of the quarterly report on Form 10-Q for the quarter ended December 31, 2020,2021, our management, including our principal executive officer and principal financial officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures, which are defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our CEO and our CFO is the same person.
During evaluation of disclosure controls and procedures as of December 31, 2020,2021, our CEO/CFO conducted an evaluation of the effectiveness of the design and operations of our disclosure controls and procedures and concluded that our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the most recently completed fiscal quarter that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.
Item 5. Other
None.
None.
Part II - Other Information
From time to time, we are subject to ordinary routine litigation incidental to our normal business operations. We are not currently a party to any material legal proceedings, except as set forth below.
OnIn April 16, 2020, the Company was named as a defendant in the Adversary Proceeding filed in the United States Bankruptcy Court for the District of Massachusetts (Case No. 15-10745-FJB; Adversary Proceeding No. 16-01178) titled In re: BT Prime Ltd (“BT Prime”). The Adversary Proceeding is brought by BT Prime against Boston Technologies Powered by Forexware LLC f/k/a Forexware LLC (“Forexware”), Currency Mountain Holdings LLC, Currency Mountain Holdings Limited f/k/a Forexware Malta Holdings Ltd., FXDirectDealer, LLC, FXDD Malta Ltd., Nukkleus Inc., Nukkleus Bermuda Limited and Currency Mountain Holdings Bermuda, Ltd. In the Amended Complaint, BT Prime is seeking, amongst other relief, a determination that the Company and the other defendants are liable for all of the debts of BT Prime stemming from its bankruptcy proceedings, and is seeking to recover certain amounts transferred to Forexware and FXDD Malta prior to the initiation of the bankruptcy case. In the sole claim asserted against the Company, BT Prime alleges that the Company operated as a single business enterprise with no separate existence outside of its collective business relationship with certain of the other Defendants, is a continuation of the business of Forexware and is a successor-in-interest to Forexware. Based on this theory, BT Prime alleges that the Company should be jointly and severally liable for any liability attributable to Forexware or the other Defendants, should the Court eventually find any such liability. The Company maintainsIt is the Company’s position that there is no basis for BT Prime’s claim against it and intends to vigorously defend against the claim.claim at trial, the date for which has not yet been set.
Not applicable to a “smaller reporting company” as defined in Item 10(f)(1) of SEC Regulation S-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.On December 15, 2021, the Company issued 20,000,000 shares of its common stock to Jacobi Asset Management Holdings Limited’s shareholders as consideration of acquisition of 5.0% of the issued and outstanding ordinary shares of Jacobi. These shares were valued at $6,602,000, the fair market value on the grant date using the reported closing share price on the date of grant, and the Company recorded cost method investment of $6,602,000. All of the offers and sales of securities in connection with the acquisition of Jacobi were made to accredited investors and the Company relied upon the exemptions contained in Section 4(a)(2) of the Securities Act of 1933, as amended, with regard to those sales. No advertising or general solicitation was employed in offering the securities. The offers and sales were made to a limited number of persons, each of whom was an accredited investor and transfer of the securities issued was restricted by the Company in accordance with the requirements of the Securities Act of 1933, as amended.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not Applicable.
None.
None.
The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q.
| Exhibit Number | Description | |
| 21.1 | List of Subsidiaries | |
| 31.1* | Rule 13a-14(a) Certification of the Chief Executive and Financial Officer | |
| 32.1* | Section 1350 Certification of Chief Executive and Financial Officer |
| Inline XBRL | ||
| Inline XBRL Taxonomy Extension | ||
| Inline XBRL Taxonomy Extension | ||
| Inline XBRL Taxonomy Extension | ||
| Inline XBRL Taxonomy Extension | ||
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
| (1) | Incorporated by reference to the Form 8K Current Report filed with the SEC on May 31, 2016. |
| (2) | Incorporated by reference to the Form 8K Current Report filed with the SEC on June 3, 2016. |
| (3) | Incorporated by reference to the Form 8K Current Report filed with the SEC on August 9, 2016. |
| (4) | Incorporated by reference to the Form 8K Current Report filed with the SEC on October 25, 2016. |
| (5) | Incorporated by reference to the Form 8K Current Report filed with the SEC on October 19, 2017. |
| (6) | Incorporated by reference to the Form 8K Current Report filed with the SEC on December 5, 2017. |
| (7) | Incorporated by reference to the Form 10K Annual Report filed with the SEC on December 27, 2017. |
| (8) | Incorporated by reference to the Form 10Q Quarterly Report filed with the SEC on February 13, 2018. |
| (9) | Incorporated by reference to the Form 10K Annual Report filed with the SEC on December |
| (10) | Incorporated by reference to the Form 8K Current Report filed with the SEC on June 3, 2021 |
| (11) | Incorporated by reference to the Form 10K Annual Report filed with the SEC on December 29, 2021. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| NUKKLEUS INC. | ||
| (Registrant) | ||
| Date: February | By: | /s/ Emil Assentato |
| Emil Assentato | ||
| Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial and Accounting Officer) and Chairman | ||
2029