Nukkleus Inc. - Quarter Report: 2022 March (Form 10-Q)

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 March 31, 2022

☐ 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)

Securities registered under Section 12(b) of the Exchange Act: None

Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ 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

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date.

Class		Outstanding May 23, 2022
Common Stock, $0.0001 par value per share		367,175,886 shares

NUKKLEUS INC.

FORM 10-Q

March 31, 2022

TABLE OF CONTENTS

		Page No.
PART I - FINANCIAL INFORMATION
Item 1.	Interim Financial Statements
	Condensed Consolidated Balance Sheets as of March 31, 2022 (Unaudited) and September 30, 2021	1
	Unaudited Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income for the Three and Six Months Ended March 31, 2022 and 2021	2
	Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the Three and Six Months Ended March 31, 2022 and 2021	3
	Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2022 and 2021	5
	Notes to Unaudited Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29
Item 4.	Controls and Procedures	29
Item 5.	Other	29
PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	30
Item 1A.	Risk Factors	30
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	30
Item 3.	Defaults Upon Senior Securities	30
Item 4.	Mine Safety Disclosures	30
Item 5.	Other Information	30
Item 6.	Exhibits	32
Signatures		34

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.

PART I - FINANCIAL INFORMATION

Item 1. Interim Financial Statements.

NUKKLEUS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	As of
	March 31, 2022			September 30, 2021
	(Unaudited)
ASSETS

CURRENT ASSETS:
Cash	$	50,444		$	355,673
Accounts receivable		55,892			57,953
Due from affiliates		1,479,413			2,617,873
Other current assets		26,627			12,221

TOTAL CURRENT ASSETS		1,612,376			3,043,720

NON-CURRENT ASSETS:
Cost method investment		6,602,000			-
Equity method investment		4,929,381			-
Intangible assets, net		9,260,888			13,616,116

TOTAL NON-CURRENT ASSETS		20,792,269			13,616,116

TOTAL ASSETS	$	22,404,645		$	16,659,836

LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES:
Due to affiliates	$	4,026,354		$	4,257,792
Accounts payable and accrued liabilities		561,460			380,721

TOTAL CURRENT LIABILITIES		4,587,814			4,638,513

TOTAL LIABILITIES		4,587,814			4,638,513

CONTINGENCY - (Note 13)

STOCKHOLDERS’ EQUITY:
Preferred stock ($0.0001 par value; 15,000,000 shares authorized; 0 share issued and outstanding at March 31, 2022 and September 30, 2021)		-			-
Common stock ($0.0001 par value; 900,000,000 shares authorized; 367,175,886 and 332,024,371 shares issued and outstanding at March 31, 2022 and September 30, 2021, respectively)		36,718			33,203
Additional paid-in capital		24,127,298			14,474,839
Accumulated deficit		(6,366,612	)		(2,495,159	)
Accumulated other comprehensive income - foreign currency translation adjustment		19,427			8,440

TOTAL STOCKHOLDERS’ EQUITY		17,816,831			12,021,323

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	22,404,645		$	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) INCOME

	For the Three Months Ended March 31,						For the Six Months Ended March 31,
	2022			2021			2022			2021

REVENUES
Revenue - general support services - related party	$	4,800,000		$	4,800,000		$	9,600,000		$	9,600,000
Revenue - financial services		289,017			-			618,032			-
Total revenues		5,089,017			4,800,000			10,218,032			9,600,000

COSTS OF REVENUES
Cost of revenue - general support services - related party		4,725,000			4,725,000			9,450,000			9,450,000
Cost of revenue - financial services		163,583			-			324,425			-
Total costs of revenues		4,888,583			4,725,000			9,774,425			9,450,000

GROSS PROFIT
Gross profit - general support services - related party		75,000			75,000			150,000			150,000
Gross profit - financial services		125,434			-			293,607			-
Total gross profit		200,434			75,000			443,607			150,000

OPERATING EXPENSES:
Advertising and marketing		163,427			-			198,649			-
Professional fees		1,066,816			51,500			1,988,548			138,272
Amortization of intangible assets		592,891			-			1,504,834			-
Other general and administrative		231,022			21,941			548,921			62,254

Total operating expenses		2,054,156			73,441			4,240,952			200,526

(LOSS) INCOME FROM OPERATIONS		(1,853,722	)		1,559			(3,797,345	)		(50,526	)

OTHER EXPENSE:
Loss from equity method investment		(70,619	)		-			(70,619	)		-
Other expense		(2,273	)		(1,510	)		(3,489	)		(3,020	)

Total other expense		(72,892	)		(1,510	)		(74,108	)		(3,020	)

(LOSS) INCOME BEFORE INCOME TAXES		(1,926,614	)		49			(3,871,453	)		(53,546	)

INCOME TAXES		-			-			-			-

NET (LOSS) INCOME	$	(1,926,614	)	$	49		$	(3,871,453	)	$	(53,546	)

COMPREHENSIVE (LOSS) INCOME:
NET (LOSS) INCOME	$	(1,926,614	)	$	49		$	(3,871,453	)	$	(53,546	)
OTHER COMPREHENSIVE INCOME
Unrealized foreign currency translation gain		13,214			-			10,987			-
COMPREHENSIVE (LOSS) INCOME	$	(1,913,400	)	$	49		$	(3,860,466	)	$	(53,546	)

NET (LOSS) INCOME PER COMMON SHARE:
Basic	$	(0.01	)	$	0.00		$	(0.01	)	$	(0.00	)
Diluted	$	(0.01	)	$	0.00		$	(0.01	)	$	(0.00	)

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic		354,549,624			230,485,100			345,031,364			230,485,100
Diluted		354,549,624			231,735,100			345,031,364			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’ EQUITY

For the Three and Six Months Ended March 31, 2022

															Accumulated
	Preferred Stock				Common Stock				Additional						Other			Total
	Number of				Number of				Paid-in			Accumulated			Comprehensive			Stockholders’
	Shares		Amount		Shares		Amount		Capital			Deficit			Income			Equity

Balance as of October 1, 2021		-	$	-		332,024,371	$	33,203	$	14,474,839		$	(2,495,159	)	$	8,440		$	12,021,323

Adjustment for asset 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

Common stock issued in connection with equity method investment		-		-		15,151,515		1,515		4,998,485			-			-			5,000,000

Stock options issued for the purchase of an intangible asset		-		-		-		-		11,237			-			-			11,237

Stock-based compensation		-		-		-		-		525,622			-			-			525,622

Net loss for the three months ended March 31, 2022		-		-		-		-		-			(1,926,614	)		-			(1,926,614	)

Foreign currency translation adjustment		-		-		-		-		-			-			13,214			13,214

Balance as of March 31, 2022		-	$	-		367,175,886	$	36,718	$	24,127,298		$	(6,366,612	)	$	19,427		$	17,816,831

The accompanying notes to unaudited condensed consolidated financial statements are an integral part of these statements.

NUKKLEUS INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT

For the Three and Six Months Ended March 31, 2021

	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	)

Net income for the three months ended March 31, 2021		-		-		-		-		-		49			49

Balance as of March 31, 2021		-	$	-		230,485,100	$	23,049	$	141,057	$	(1,611,859	)	$	(1,447,753	)

The accompanying notes to unaudited condensed consolidated financial statements are an integral part of these statements.

NUKKLEUS INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the Six Months Ended March 31,
	2022			2021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(3,871,453	)	$	(53,546	)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Amortization of debt discount		-			1,145
Amortization of intangible assets		1,504,834			-
Stock-based compensation and service expense		904,368			-
Provision for bad debt		-			12
Loss on equity method investment		70,619			-
Changes in operating assets and liabilities:
Accounts receivable		667			-
Other current assets		(14,943	)		(334	)
Due from affiliates		1,138,460			791,899
Due to affiliates		(224,287	)		(770,730	)
Accounts payable and accrued liabilities		187,364			48,202

Net cash (used in) provided by operating activities		(304,371	)		16,648

EFFECT OF EXCHANGE RATE ON CASH		(858	)		-

NET (DECREASE) INCREASE IN CASH		(305,229	)		16,648

Cash - beginning of period		355,673			82,849

Cash - end of period	$	50,444		$	99,497

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest	$	-		$	-
Income taxes	$	-		$	-

NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued in connection with cost method investment	$	6,602,000		$	-
Common stock issued in connection with equity method investment	$	5,000,000		$	-
Stock options issued for the purchase of an intangible asset	$	11,237		$	-

The accompanying notes to unaudited condensed consolidated financial statements are an integral part of these statements.

NUKKLEUS INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – THE COMPANY HISTORY AND NATURE OF THE BUSINESS

Nukkleus Inc. (f/k/a Compliance & Risk Management Solutions Inc.) (“Nukkleus” or the “Company”) was formed on July 29, 2013 in the State of Delaware as a for-profit Company and established a fiscal year end of September 30.

The Company is a financial technology company which is focused on providing software and technology solutions for the worldwide retail foreign exchange (“FX”) trading industry. The Company primarily provides its software, technology, customer sales and marketing and risk management technology hardware and software solutions package to Triton Capital Markets Ltd. (“TCM”), formerly known as FXDD Malta Limited (“FXDD Malta”). The FXDD brand (e.g., see FXDD.com) is the brand utilized in the retail forex trading industry by TCM.

Nukkleus Limited, a wholly-owned subsidiary of the Company, provides its software, technology, customer sales and marketing and risk management technology hardware and software solutions package under a General Services Agreement (“GSA”) to TCM. TCM is a private limited liability company formed under the laws of Malta. The GSA provides that TCM will pay Nukkleus Limited at minimum $1,600,000 per month. Emil Assentato is also the majority member of Max Q Investments LLC (“Max Q”), which is managed by Derivative Marketing Associates Inc. (“DMA”). Mr. Assentato, who is our Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”) and chairman, is the sole owner and manager of DMA. Max Q owns 79% of Currency Mountain Malta LLC, which in turn is the sole shareholder of TCM.

In addition, in order to appropriately service TCM, Nukkleus Limited entered into a GSA with FXDirectDealer LLC (“FXDIRECT”), which provides that Nukkleus Limited will pay FXDIRECT a minimum of $1,575,000 per month in consideration of providing personnel engaged in operational and technical support, marketing, sales support, accounting, risk monitoring, documentation processing and customer care and support. FXDIRECT may terminate this agreement upon providing 90 days’ written notice. Currency Mountain Holdings LLC is the sole shareholder of FXDIRECT. Max Q is the majority shareholder of Currency Mountain Holdings LLC.

In July 2018, the Company incorporated Nukkleus Malta Holding Ltd., which is a wholly-owned subsidiary. In July 2018, Nukkleus Malta Holding Ltd. incorporated Markets Direct Technology Group Ltd (“MDTG”), formerly known as Nukkleus Exchange Malta Ltd. MDTG was exploring potentially obtaining a license to operate an electronic exchange whereby it would facilitate the buying and selling of various digital assets as well as traditional currency pairs used in FX Trading. During the fourth quarter of fiscal 2020, management made the decision to exit the exchange business and to no longer pursue the regulatory licensing necessary to operate an exchange in Malta.

On August 27, 2020, the Company renamed Nukkleus Exchange Malta Ltd. to Markets Direct Technology Group Ltd (“MDTG”). MDTG manages the technology and IP behind the Markets Direct brand (which is operated by TCM). MDTG holds all the IP addresses and all the software licenses in its name, and it holds all the IP rights to the brands such as Markets Direct and TCM. MDTG then leases out the rights to use these names/brands licenses to the appropriate entities.

On May 24, 2021, the Company and the shareholders of Match Financial Limited (the “Match Shareholders”), a private limited company formed in England and Wales (“Match”), entered into a Purchase and Sale Agreement (the “Match Agreement”), pursuant to which the Company, on May 28, 2021, acquired 1,152 ordinary shares of Match representing 70% of the issued and outstanding ordinary shares of Match in consideration of 70,000,000 shares of common stock of the Company (the “Initial Transaction”). On August 30, 2021, the Company exercised its option pursuant to which it acquired from the Match Shareholders the balance of 493 ordinary shares of Match representing 30% of the issued and outstanding ordinary shares of Match for an additional 30,000,000 shares of common stock of the Company. Match is engaged in providing 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 closed on March 17, 2022. Digiclear is a company focused on digital asset custody and settlement.

The unaudited condensed consolidated financial statements have been prepared using accounting principles generally accepted in the United States of America applicable for a going concern, which assumes that the Company will realize its assets and discharge its liabilities in the ordinary course of business. The Company incurred a net loss and generated negative cash flow from operating activities for the six months ended March 31, 2022 of $3,871,453 and $304,371, respectively, and had a working capital deficit of $2,975,438 at March 31, 2022. The Company’s ability to continue as a going concern is dependent upon the management of expenses and ability to obtain necessary financing to meet its obligations and pay its liabilities arising from normal business operations when they come due, and upon profitable operations.

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.

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.

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, 2021 filed with the Securities and Exchange Commission on December 29, 2021. The consolidated balance sheet as of September 30, 2021 contained herein has been derived from the audited consolidated financial statements as of September 30, 2021, but does not include all disclosures required by U.S. GAAP.

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 and six months ended March 31, 2022 and 2021 include the useful life of intangible assets, assumptions used in assessing impairment of long-term assets, valuation of deferred tax assets and the associated valuation allowances, and valuation of stock-based compensation.

Cash and cash equivalents

At March 31, 2022 and September 30, 2021, the Company’s cash balances by geographic area were as follows:

Country:	March 31, 2022				September 30, 2021
United States	$	3,005	6.0	%	$	327,443	92.1	%
United Kingdom		47,265	93.7	%		28,056	7.9	%
Malta		174	0.3	%		174	0.0	%
Total cash	$	50,444	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 March 31, 2022 and September 30, 2021.

Fair value of financial instruments and fair value measurements

The fair value of the Company’s assets and liabilities, which qualify as financial instruments under ASC Topic 820, “Fair Value Measurement,” approximates the carrying amounts represented in the accompanying condensed consolidated financial statements, primarily due to their short-term nature.

Credit risk and uncertainties

The Company maintains a portion of its cash in bank and financial institution deposits within U.S. that at times may exceed federally-insured limits of $250,000. The Company manages this credit risk by concentrating its cash balances in high quality financial institutions and by periodically evaluating the credit quality of the primary financial institutions holding such deposits. The Company has not experienced any losses in such bank accounts and believes it is not exposed to any risks on its cash in bank accounts. At March 31, 2022, the Company’s cash balances in United States bank accounts were not in excess of the federally-insured limits.

Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of trade accounts receivable. A portion of the Company’s sales are credit sales which is to the customer whose ability to pay is dependent upon the industry economics prevailing in these areas; however, concentrations of credit risk with respect to trade accounts receivable is limited due to short-term payment terms. The Company also performs ongoing credit evaluations of its customers to help further reduce credit risk.

Accounts receivable and allowance for doubtful accounts

Accounts receivable are presented net of an allowance for doubtful accounts. The Company maintains allowances for doubtful accounts for estimated losses. The Company reviews the accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances, the Company considers many factors, including the age of the balance, a customer’s payment history, its current credit-worthiness and current economic trends. Accounts are written off after exhaustive efforts at collection. Management believes that the accounts receivable are fully collectable. Therefore, no allowance for doubtful accounts is deemed to be required on its accounts receivable at March 31, 2022 and September 30, 2021. The Company historically has not experienced significant uncollectible accounts receivable.

NUKKLEUS INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Other current assets

Other current assets primarily consist of prepaid professional service fees and prepaid OTC Markets listing fees. As of March 31, 2022 and September 30, 2021, other current assets amounted to $26,627 and $12,221, respectively.

Investments

Investments in which the Company does not have the ability to exercise significant influence over operating and financial matters are accounted for using the cost method. Under the cost method, investment is recorded at cost, with gains and losses recognized as of the sale date, and income recorded when received. The Company periodically evaluates its cost method investment for impairment due to decline considered to be other than temporary. If the Company determines that a decline in fair value is other than temporary, then a charge to earnings is recorded in “Other income (expense), net” in the accompanying unaudited condensed consolidated statements of operations and comprehensive (loss) income, and a new basis in the investment is established.

The Company uses the equity method of accounting for its investments in, and earning or loss of, a company that it does not control but over which it does exert significant influence. The Company considers whether the fair value of its equity method investment has declined below its carrying value whenever adverse events or changes in circumstances indicate that recorded value may not be recoverable. If the Company considers any decline to be other than temporary (based on various factors, including historical financial results and the overall health of the investee), then a write-down would be recorded to estimated fair value.

Intangible assets

Intangible assets consist of trade names, regulatory licenses, technology and software, which are being amortized on a straight-line method over the estimated useful life of 3 - 5 years.

Impairment of long-lived assets

In accordance with ASC Topic 360, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable, or at least annually. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book value. There were no triggering events requiring assessment of impairment as of March 31, 2022 and September 30, 2021. For the three and six months ended March 31, 2022 and 2021, no impairment of long-lived assets was recognized.

Revenue recognition

The Company accounts for revenue under the provisions of ASC Topic 606.

The Company’s revenues are derived from providing:

	●	General support services under a GSA to a related party. The transaction price is determined in accordance with the terms of the GSA and payments are due on a monthly basis. There are multiple services provided under the GSA and these performance obligations are combined into a single unit of accounting. Fees are recognized as revenue over time as the services are rendered under the terms of the GSA. Revenue is recorded at gross as the Company is deemed to be a principal in the transactions.

	●	Financial services to its customers. Revenue related to its financial services offerings are recognized at a point in time when service is rendered.

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 and six months ended March 31, 2022 and 2021:

	Three Months Ended March 31,				Six Months Ended March 31,
Revenue Stream	2022		2021		2022		2021
General support services	$	4,800,000	$	4,800,000	$	9,600,000	$	9,600,000
Financial services		289,017		-		618,032		-
Total revenues	$	5,089,017	$	4,800,000	$	10,218,032	$	9,600,000

Advertising and marketing costs

All costs related to advertising and marketing are expensed as incurred. For the three and six months ended March 31, 2022, advertising and marketing costs amounted to $163,427 and $198,649, respectively, which was included in operating expenses on the accompanying unaudited condensed consolidated statements of operations and comprehensive (loss) income. For the three and six months ended March 31, 2021, the Company did not incur any advertising and marketing costs.

Stock-based compensation

The Company accounts for its stock-based compensation awards in accordance with ASC Topic 718, Compensation—Stock Compensation (“ASC 718”). ASC 718 requires all stock-based payments to employees and non-employees including grants of stock options, to be recognized as expense in the statements of operations based on their grant date fair values. The Company estimates the grant date fair value of each option award using the Black-Scholes option-pricing model.

Income taxes

The Company accounts for income taxes pursuant to Financial Accounting Standards Board (“FASB”) ASC 740, Income Taxes. Deferred tax assets and liabilities are determined based on temporary differences between the bases of certain assets and liabilities for income tax and financial reporting purposes. The deferred tax assets and liabilities are classified according to the financial statement classification of the assets and liabilities generating the differences.

The Company maintains a valuation allowance with respect to deferred tax assets. The Company establishes a valuation allowance based upon the potential likelihood of realizing the deferred tax asset and taking into consideration the Company’s financial position and results of operations for the current period. Future realization of the deferred tax benefit depends on the existence of sufficient taxable income within the carry-forward period under the Federal and foreign tax laws. Changes in circumstances, such as the Company generating taxable income, could cause a change in judgment about the realizability of the related deferred tax asset. Any change in the valuation allowance will be included in income in the period of the change in estimate.

The Company follows the provisions of FASB ASC 740-10 Uncertainty in Income Taxes (ASC 740-10). Certain recognition thresholds must be met before a tax position is recognized in the financial statements. An entity may only recognize or continue to recognize tax positions that meet a “more-likely-than-not” threshold.

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. For the three and six months ended March 31, 2022 and 2021, potentially dilutive common shares consist of the common shares issuable upon the exercise of common stock options (using the treasury stock method) and the conversion of Series A preferred stock (using the if-converted method). Common stock equivalents are not included in the calculation of diluted net loss per share if their effect would be anti-dilutive. In a period in which the Company has a net loss, all potentially dilutive securities are excluded from the computation of diluted shares outstanding as they would have had an anti-dilutive impact. The following is a reconciliation of the basic and diluted net (loss) income per share computations for the three and six months ended March 31, 2022 and 2021:

Basic net (loss) income per share

	Three Months Ended March 31, 2022			Three Months Ended March 31, 2021		Six Months Ended March 31, 2022			Six Months Ended March 31, 2021
Net (loss) income available to common stockholders for basic net (loss) income per share of common stock	$	(1,926,614	)	$	49	$	(3,871,453	)	$	(53,546	)
Weighted average common stock outstanding - basic		354,549,624			230,485,100		345,031,364			230,485,100
Net (loss) income per share:
Basic	$	(0.01	)	$	0.00	$	(0.01	)	$	(0.00	)

Diluted net (loss) income per share

	Three Months Ended March 31, 2022			Three Months Ended March 31, 2021			Six Months Ended March 31, 2022			Six Months Ended March 31, 2021
Net (loss) income available to common stockholders for basic net (loss) income per share of common stock	$	(1,926,614	)	$	49		$	(3,871,453	)	$	(53,546	)
Add: interest expense for redeemable preferred stock		-			937			-			-
Subtract: unamortized debt discount for redeemable preferred stock		-			(401	)		-			-
Net (loss) income available to common stockholders for diluted net (loss) income per share of common stock	$	(1,926,614	)	$	585		$	(3,871,453	)	$	(53,546	)
Weighted average common stock outstanding - basic		354,549,624			230,485,100			345,031,364			230,485,100
Effect of dilutive securities:
Series A preferred stock		-			1,250,000			-			-
Weighted average common stock outstanding - diluted		354,549,624			231,735,100			345,031,364			230,485,100
Net (loss) income per share:
Diluted	$	(0.01	)	$	0.00		$	(0.01	)	$	(0.00	)

NUKKLEUS INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Per share data (continued)

The following table summarizes the securities that were excluded from the diluted per share calculation because the effect of including these potential shares was antidilutive:

	Three Months Ended March 31,				Six Months Ended March 31,
	2022		2021		2022		2021
Stock options		5,850,000		-		5,850,000		-
Convertible preferred stock		-		-		-		1,250,000
Potentially dilutive securities		5,850,000		-		5,850,000		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 March 31, 2022 and September 30, 2021 were translated at 0.7611 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 six months ended March 31, 2022 was 0.7439 GBP to $1.00. Cash flows from the Company’s operations are calculated based upon the local currencies using the average translation rate.

Comprehensive (loss) income

Comprehensive (loss) income is comprised of net (loss) income 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) income for the three and six months ended March 31, 2022 and 2021 consisted of net (loss) income and unrealized gain from foreign currency translation adjustment.

Segment reporting

The Company uses “the management approach” in determining reportable operating segments. The management approach considers the internal organization and reporting used by the Company’s chief operating decision maker for making operating decisions and assessing performance as the source for determining the Company’s reportable segments. The Company’s chief operating decision maker is its Chief Executive Officer (“CEO”), who reviews operating results to make decisions about allocating resources and assessing performance for the entire company. The Company has determined that it has two reportable business segments: general support services segment and financial services segment. These reportable segments offer different types of services and products, have different types of revenue, and are managed separately as each requires different operating strategies and management expertise.

NUKKLEUS INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Recently issued accounting pronouncements

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (“Topic 326”). The ASU introduces a new accounting model, the Current Expected Credit Losses model (“CECL”), which requires earlier recognition of credit losses and additional disclosures related to credit risk. The CECL model utilizes a lifetime expected credit loss measurement objective for the recognition of credit losses at the time the financial asset is originated or acquired. ASU 2016-13 is effective for annual period beginning after December 15, 2022, including interim reporting periods within those annual reporting periods. The Company expects that the adoption will not have a material impact on its unaudited condensed consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurements (“ASU 2018-13”), which aims to improve the overall usefulness of disclosures to financial statement users and reduce unnecessary costs to companies when preparing fair value measurement disclosures. ASU 2018-13 is effective for annual and interim periods in the fiscal years beginning after December 15, 2019. Early adoption is permitted. Retrospective adoption is required, except for certain disclosures, which will be required to be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. The adoption of this guidance as of October 1, 2020 did not have a material impact on the Company’s unaudited condensed consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes by removing certain exceptions to the general principles in the existing guidance for income taxes and making other minor improvements. The amendments in the ASU are effective for the Company on October 1, 2021. The adoption of this guidance as of October 1, 2021 did not have a material impact on the Company’s unaudited condensed consolidated financial statements.

Other accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the unaudited condensed consolidated financial statements upon adoption. The Company does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to its unaudited condensed consolidated financial condition, results of operations, cash flows or disclosures.

Reclassifications

Reclassifications occurred to certain prior year amounts in order to confirm to the current year presentation. The reclassifications had no effect on the previously reported net loss.

NOTE 4 – COST METHOD INVESTMENT

At March 31, 2022, cost method investment amounted to $6,602,000. The investment represents the Company’s minority interest in Jacobi Asset Management Holdings Limited (“Jacobi”), a private company focused on digital asset management that has received regulatory approval to launch the world’s first tier one Bitcoin ETF.

On December 15, 2021, the Company issued 20,000,000 shares of its common stock to Jacobi’s shareholders for acquisition of 5.0% equity interest of Jacobi. These shares were valued at $6,602,000, the fair market value on the grant date using the reported closing share price of the Company on the date of grant.

In accordance with ASC Topic 321, the Company elected to use the measurement alternative to measure such investments at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer, if any. The Company monitors its investment in the non-marketable security and will recognize, if ever existing, a loss in value which is deemed to be other than temporary. The Company determined that there was no impairment of this investment as of March 31, 2022.

NOTE 5 – EQUITY METHOD INVESTMENT

As of March 31, 2022, the equity method investment amounted to $4,929,381. The investment represents the Company’s interest in Digiclear Inc. (“Digiclear”). Digiclear was incorporated on July 13, 2021 in United Kingdom. The company and the other unrelated party accounted for 50% and 50% of the total ownership, respectively. Digiclear is focused on digital asset custody and settlement.

The Company accounts for the investment in Digiclear under the equity method of accounting. Under the equity method, the investment is initially recorded at cost, adjusted for any excess of the Company’s share of the incorporated-date fair values of the investee’s identifiable net assets over the cost of the investment (if any). Thereafter, the investment is adjusted for the post incorporation change in the Company’s share of the investee’s net assets and any impairment loss relating to the investment.

For the period from March 17, 2022 (date of investment) through March 31, 2022, the Company’s share of Digiclear’s net loss of $30,320 and the adjustment for allocated amortization of intangible asset of $40,299 were included in loss from equity method investment in the accompanying condensed consolidated statements of operations and comprehensive (loss) income.

NUKKLEUS INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 – EQUITY METHOD INVESTMENT (continued)

The tables below present the summarized unaudited financial information, as provided to the Company by the investee, for the unconsolidated company:

	March 31, 2022
Current assets	$	290,515
Noncurrent assets		46,601
Current liabilities		70,116
Noncurrent liabilities		-
Equity		267,000

	For the Period from March 17, 2022 (Date of Investment) through March 31, 2022
Net revenue	$	-
Gross profit		-
Loss from operations		60,641
Net loss		60,641

NOTE 6 – INTANGIBLE ASSETS

Intangible assets primarily consist of the valuation of identifiable intangible assets acquired, representing trade names, regulatory licenses, and technology. The straight-line method of amortization represents the Company’s best estimate of the distribution of the economic value of the identifiable intangible assets.

At March 31, 2022 and September 30, 2021, intangible assets consisted of the following:

	Useful Life	March 31, 2022			September 30, 2021
Licenses and banking infrastructure (1)	10 Years	$	-		$	14,085,402
Trade names	3 Years		784,246			-
Regulatory licenses	3 Years		138,751			-
Technology	5 Years		10,300,774			-
Software	3 Years		11,237			-
			11,235,008			14,085,402
Less: accumulated amortization			(1,974,120	)		(469,286	)
		$	9,260,888		$	13,616,116

(1)

In February 2022, a third party valuation report in connection with the acquisition of Match was completed. As a result, the Company adjusted the previous estimated allocation to reflect the results of the third party valuation. The Company decreased its cost of intangible assets of $2,861,631 and adjusted the estimated useful life of trade names and regulatory licenses from 10 years to 3 years and the estimated useful life of technology from 10 years to 5 years. This change in accounting estimate was effective in the first quarter of fiscal year 2022.

NUKKLEUS INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 – INTANGIBLE ASSETS (continued)

For the three and six months ended March 31, 2022, amortization expense amounted to $592,891 and $1,504,834, respectively. There was no comparable amortization for the three and six months ended March 31, 2021. Amortization of intangible assets attributable to future periods is as follows:

For the Twelve-month Period Ending March 31:	Amortization Amount
2023	$	2,371,566
2024		2,371,566
2025		2,114,241
2026		2,060,155
2027 and thereafter		343,360
	$	9,260,888

NOTE 7 – ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

At March 31, 2022 and September 30, 2021, accounts payable and accrued liabilities consisted of the following:

	March 31, 2022		September 30, 2021
Directors’ compensation	$	190,538	$	170,538
Professional fees		255,388		125,697
Accounts payable		110,000		54,831
Others		5,534		29,655
Total	$	561,460	$	380,721

NOTE 8 – SHARE CAPITAL

Preferred stock

The Company’s Board of Directors is authorized to issue, at any time, without further stockholder approval, up to 15,000,000 shares of preferred stock. The Board of Directors has the authority to fix and determine the voting rights, rights of redemption and other rights and preferences of preferred stock.

Common stock issued for cost method investment

On December 15, 2021, the Company issued 20,000,000 shares of its common stock to Jacobi Asset Management Holdings Limited’s shareholders as consideration of acquisition of 5.0% of the issued and outstanding ordinary shares of Jacobi. These shares were valued at $6,602,000, the fair market value on the grant date using the reported closing share price of the Company on the date of grant, and the Company recorded cost method investment of $6,602,000 (see Note 4).

Common stock issued for equity method investment

On March 17, 2022, the Company issued 15,151,515 shares of its common stock to Digiclear Shareholder for acquisition of 50% equity interest of Digiclear. These shares were valued at $5,000,000, the fair market value on the grant date using the reported closing share price on the date of grant.

NUKKLEUS INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 – SHARE CAPITAL (continued)

Options

The following table summarizes the shares of the Company’s common stock issuable upon exercise of options outstanding at March 31, 2022:

		Options Outstanding						Options Exercisable
Range of Exercise Price		Number Outstanding at March 31, 2022		Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price		Number Exercisable at March 31, 2022		Weighted Average Exercise Price
$	0.09 – 1.00		4,850,000		3.52	$	0.29		50,000	$	0.40
	2.50		1,000,000		4.47		2.50		-		-
$	0.09 – 2.50		5,850,000		3.68	$	0.67		50,000	$	0.40

Stock option activities for the six months ended March 31, 2022 were as follows:

	Number of Options		Weighted Average Exercise Price
Outstanding at October 1, 2021		1,000,000	$	2.50
Granted		4,850,000		0.29
Terminated / Exercised / Expired		-		-
Outstanding at March 31, 2022		5,850,000	$	0.67
Options exercisable at March 31, 2022		50,000	$	0.40
Options expected to vest		5,800,000	$	0.67

The aggregate intrinsic value of stock options outstanding and stock options exercisable at March 31, 2022 was $300,000 and $0, respectively.

The fair values of options granted during the six months ended March 31, 2022 were estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions: volatility of 188.87% - 317.02%, risk-free rate of 0.39% - 1.26%, annual dividend yield of 0% and expected life of 1.00 - 5.00 years. The aggregate fair value of the options granted during the six months ended March 31, 2022 was $1,057,958.

For the three and six months ended March 31, 2022, stock-based compensation expense associated with stock options granted amounted to $525,622 and $904,368, respectively, which was recorded as professional fees on the accompanying unaudited condensed consolidated statements of operations and comprehensive (loss) income. There was no comparable stock-based compensation expense associated with stock options for the three and six months ended March 31, 2021.

In January 2022, the Company issued 50,000 stock options for software purchase. The fair value of 50,000 stock options granted was $11,237 which was recorded as the cost of software. For the three and six months ended March 31, 2022, amortization in connection with the software amounted to $936, which was included in amortization of intangible assets on the accompanying unaudited condensed consolidated statements of operations and comprehensive (loss) income.

A summary of the status of the Company’s nonvested stock options granted as of March 31, 2022 and changes during the six months ended March 31, 2022 is presented below:

	Number of Options			Weighted Average Exercise Price
Nonvested at October 1, 2021		1,000,000		$	2.50
Granted		4,850,000			0.29
Vested		(50,000	)		(0.40	)
Nonvested at March 31, 2022		5,800,000		$	0.67

NUKKLEUS INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9 – RELATED PARTY TRANSACTIONS

Services provided by related parties

The Company uses affiliate employees for various services such as the use of accountants to record the books and accounts of the Company at no charge to the Company, which are considered immaterial.

Office space from related parties

The Company uses office space of affiliate companies, free of rent, which is considered immaterial.

Revenue from related party and cost of revenue from related party

The Company’s general support services operate under a GSA with TCM providing personnel and technical support, marketing, accounting, risk monitoring, documentation processing and customer care and support. The minimum monthly amount received is $1,600,000.

The Company’s general support services operate under a GSA with FXDIRECT receiving personnel and technical support, marketing, accounting, risk monitoring, documentation processing and customer care and support. The minimum monthly amount payable is $1,575,000.

Both of the above entities are affiliates through common ownership.

During the three and six months ended March 31, 2022 and 2021, general support services provided to the related party, which was recorded as revenue – general support services - related party on the accompanying unaudited condensed consolidated statements of operations and comprehensive (loss) income were as follows:

	Three Months Ended March 31, 2022		Three Months Ended March 31, 2021		Six Months Ended March 31, 2022		Six Months Ended March 31, 2021
Service provided to:
TCM	$	4,800,000	$	4,800,000	$	9,600,000	$	9,600,000
	$	4,800,000	$	4,800,000	$	9,600,000	$	9,600,000

During the three and six months ended March 31, 2022 and 2021, services received from the related party, which was recorded as cost of revenue – general support services - related party on the accompanying unaudited condensed consolidated statements of operations and comprehensive (loss) income were as follows:

	Three Months Ended March 31, 2022		Three Months Ended March 31, 2021		Six Months Ended March 31, 2022		Six Months Ended March 31, 2021
Service received from:
FXDIRECT	$	4,725,000	$	4,725,000	$	9,450,000	$	9,450,000
	$	4,725,000	$	4,725,000	$	9,450,000	$	9,450,000

Due from affiliates

At March 31, 2022 and September 30, 2021, due from related parties consisted of the following:

	March 31, 2022		September 30, 2021
NUKK Capital (*)	$	-	$	144,696
TCM		1,479,413		2,473,177
Total	$	1,479,413	$	2,617,873

(*)

An entity controlled by Emil Assentato, the Company’s chief executive officer, chief financial officer and chairman.

NUKKLEUS INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9 – RELATED PARTY TRANSACTIONS (continued)

Due from affiliates (continued)

The balance of due from NUKK Capital represent the Company’s prior investment in digital currency that was transferred to NUKK Capital in March 2019. The balance of due from TCM represent unsettled funds due related to the General Services Agreement and monies that the Company paid on behalf of TCM.

Management believes that the related parties’ receivables are fully collectable. Therefore, no allowance for doubtful account is deemed to be required on its due from related parties at March 31, 2022 and September 30, 2021. The Company historically has not experienced uncollectible receivable from the related parties.

Due to affiliates

At March 31, 2022 and September 30, 2021, due to related parties consisted of the following:

	March 31, 2022		September 30, 2021
Forexware LLC (*)	$	924,229	$	579,229
FXDIRECT		2,772,606		3,341,893
CMH		42,000		42,000
FXDD Trading (*)		287,519		294,670
Total	$	4,026,354	$	4,257,792

(*) Forexware LLC and FXDD Trading are both controlled by Emil Assentato, the Company’s chief executive officer, chief financial officer and chairman.

The balances of due to related parties represent expenses paid by Forexware LLC, FXDIRECT, and FXDD Trading on behalf of the Company and advances from CMH. The balance due to FXDIRECT may also include unsettled funds due related to the General Service Agreement.

The related parties’ payables are short-term in nature, non-interest bearing, unsecured and repayable on demand.

NOTE 10 – INCOME TAXES

The Company recorded no income tax expense for the three and six months ended March 31, 2022 and 2021 because the estimated annual effective tax rate was zero. As of March 31, 2022, the Company continues to provide a valuation allowance against its net deferred tax assets since the Company believes it is more likely than not that its deferred tax assets will not be realized.

NOTE 11 – CONCENTRATIONS

Customers

The following table sets forth information as to each customer that accounted for 10% or more of the Company’s revenues for the three and six months ended March 31, 2022 and 2021.

	Three Months Ended March 31,						Six Months Ended March 31,
Customer	2022			2021			2022			2021
A – related party		94.3	%		100	%		94.0	%		100	%

One related party customer, whose outstanding receivable accounted for 10% or more of the Company’s total outstanding accounts receivable, and accounts receivable – related party (which is included in due from affiliates on the accompanying consolidated balance sheets) at March 31, 2022, accounted for 96.4% of the Company’s total outstanding accounts receivable, and accounts receivable – related party at March 31, 2022.

One related party customer, whose outstanding receivable accounted for 10% or more of the Company’s total outstanding accounts receivable, and accounts receivable – related party (which is included in due from affiliates on the accompanying consolidated balance sheets) at September 30, 2021, accounted for 97.8% of the Company’s total outstanding accounts receivable, and accounts receivable – related party at September 30, 2021.

NUKKLEUS INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11 – CONCENTRATIONS (continued)

Suppliers

The following table sets forth information as to each supplier that accounted for 10% or more of the Company’s costs of revenues for the three and six months ended March 31, 2022 and 2021.

	Three Months Ended March 31,						Six Months Ended March 31,
Supplier	2022			2021			2022			2021
A – related party		96.7	%		100	%		96.7	%		100	%

One related party supplier, whose outstanding payable accounted for 10% or more of the Company’s total outstanding accounts payable, and accounts payable – related party (which is included in due to affiliates on the accompanying consolidated balance sheets) at March 31, 2022, accounted for 96.2% of the Company’s total outstanding accounts payable, and accounts payable – related party at March 31, 2022.

One related party supplier, whose outstanding payable accounted for 10% or more of the Company’s total outstanding accounts payable, and accounts payable – related party (which is included in due to affiliates on the accompanying consolidated balance sheets) at September 30, 2021, accounted for 98.8% of the Company’s total outstanding accounts payable, and accounts payable – related party at September 30, 2021.

NOTE 12 – SEGMENT INFORMATION

For the three and six months ended March 31, 2022, the Company operated in two reportable business segments - (1) the general support services segment, in which we provide software, technology, customer sales and marketing and risk management technology hardware and software solutions package under a GSA to a related party; and (2) the financial services segment, in which we provide financial services to enable conversion of fiat currencies to cryptocurrencies and vice versa. For the three and six months ended March 31, 2021, 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.

NUKKLEUS INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 12 – SEGMENT INFORMATION (continued)

Information with respect to these reportable business segments for the three and six months ended March 31, 2022 and 2021 was as follows:

	Three Months Ended March 31,						Six Months Ended March 31,
	2022			2021			2022			2021
Revenues
General support services	$	4,800,000		$	4,800,000		$	9,600,000		$	9,600,000
Financial services		289,017			-			618,032			-
Total		5,089,017			4,800,000			10,218,032			9,600,000

Costs of revenues
General support services		4,725,000			4,725,000			9,450,000			9,450,000
Financial services		163,583			-			324,425			-
Total		4,888,583			4,725,000			9,774,425			9,450,000

Gross profit
General support services		75,000			75,000			150,000			150,000
Financial services		125,434			-			293,607			-
Total		200,434			75,000			443,607			150,000

Operating expenses
Financial services		804,833			-			2,054,477			-
Corporate/Other		1,249,323			73,441			2,186,475			200,526
Total		2,054,156			73,441			4,240,952			200,526

Other expense
Financial services		1,185			-			2,401			-
Corporate/Other		71,707			1,510			71,707			3,020
Total		72,892			1,510			74,108			3,020

Net income (loss)
General support services		75,000			75,000			150,000			150,000
Financial services		(680,584	)		-			(1,763,271	)		-
Corporate/Other		(1,321,030	)		(74,951	)		(2,258,182	)		(203,546	)
Total		(1,926,614	)		49			(3,871,453	)		(53,546	)

Amortization
Financial services		591,955			-			1,503,898			-
Corporate/Other		936			-			936			-
Total	$	592,891		$	-		$	1,504,834		$	-

Total assets at March 31, 2022 and September 30, 2021	March 31, 2022		September 30, 2021
Financial services	$	9,376,915	$	13,703,140
Corporate/Other		13,027,730		2,956,696
Total	$	22,404,645	$	16,659,836

NUKKLEUS INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13 – 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. It 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 at trial, the date for which has not yet been set.

NOTE 14 – SUBSEQUENT EVENTS

The Company evaluated subsequent events and transactions that occurred after the balance sheet date up to the date that the financial statements were issued. Based upon this review, other than as described below, the Company did not identify any subsequent events that would have required adjustment or disclosure in the financial statements.

Merger

On February 22, 2022, the Company entered into an Agreement and Plan of Merger (as it may be amended, supplemented or otherwise modified from time to time, the “Merger Agreement”), by and among the Company and Brilliant Acquisition Corporation, a British Virgin Islands company (“Brilliant”). The Merger Agreement has been approved by the Company’s boards of directors. The transaction is expected to close in the third quarter of fiscal year 2022 provided however there is no guarantee that the transaction will close.

White Lion Stock Purchase Agreement

On May 17, 2022, the Company entered into a Stock Purchase Agreement (the “White Lion Agreement”) with White Lion Capital Partners, LLC a California-based investment fund (“White Lion”). Under the terms of the White Lion Agreement, the Company has the right, but not the obligation, to require White Lion to purchase shares of its common stock up to a maximum amount of $75,000,000 or such lower amount as may be required pursuant to the rules of the market on which shares of its common stock trades at such time. Pursuant to terms of the White Lion Agreement and the Registration Rights Agreement (as defined below), the Company is required to use its commercially reasonable efforts to file with the SEC a registration statement covering the shares to be acquired by White Lion within sixty days following the closing of the previously announced business combination with Brilliant Acquisition Corporation described in its Current Report on Form 8-K filed with the SEC on February 23, 2022 (the “Business Combination”).

The term of the White Lion Agreement commences on the effective date of the registration statement and shall end on December 31, 2024, or, if earlier, the date on which White Lion has purchased the maximum number of shares of the Company’s common stock provided under the White Lion Agreement, in each case on the terms and subject to the conditions set forth in the White Lion Agreement. White Lion’s purchase price will be 96% of the dollar- volume weighted average price of the Company’s common stock over the two consecutive trading days immediately following receipt of the Company’s notice of its intent to make a draw.

During the term of the White Lion Agreement, on the terms and subject to the conditions set forth therein, the Company may draw up to the lesser of (i) the number of shares of the Company’s common stock which would result in beneficial ownership by White Lion of more than 4.99% of the outstanding shares of the Company’s common stock, (ii) the number of shares of the Company’s common stock equal to 30% of the average daily trading volume of the Company’s common stock over the five consecutive trading days immediately following the notice date, or (iii) the number of the Company’s common stock obtained by dividing $1,500,000 by the closing sale price of the Company’s common stock on the notice date.

NUKKLEUS INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14 – SUBSEQUENT EVENTS (continued)

White Lion Stock Purchase Agreement (continued)

The Company is not entitled to draw on the White Lion Agreement if the closing sale price of the Company’s common stock on the trading day immediately preceding the notice date is less than $1.00 (following the reverse stock split proposed in connection with the closing of the Business Combination and described in the Company’s Current Report on Form 8-K filed with the SEC on February 23, 2022, but adjusted for any other reorganization, recapitalization, non-cash dividend, stock split or other similar transaction). The Company is not entitled to draw on the White Lion Agreement unless each of the following additional conditions is satisfied: (i) each of the Company’s representations and warranties set forth in the White Lion Agreement is true and correct (subject to qualifications as to materiality set forth therein) in all respects as of such time; (ii) a registration statement is and remains effective for the resale of securities in connection with the White Lion Agreement; (iii) the trading of the Company’s common stock shall not have been suspended by the SEC, the applicable trading market or FINRA, or otherwise halted for any reason; (iv) the Company shall have complied with its obligations and shall not otherwise be in breach or default of any agreement set forth in the White Lion Agreement; (v) no statute, regulation, order, guidance, decree, writ, ruling or injunction shall have been enacted, entered, promulgated, threatened or endorsed by any federal, state, local or foreign court or governmental authority of competent jurisdiction, including, without limitation, the SEC, which prohibits the consummation of or which would materially modify or delay any of the transactions contemplated by the White Lion Agreement; (vi) all reports, schedules, registrations, forms, statements, information and other documents required to have been filed by us with the SEC pursuant to the reporting requirements of the Exchange Act of 1934 (other than Forms 8-K) shall have been filed with the SEC within the applicable time periods prescribed for such filings; (vii) to the extent the issuance of the put shares requires shareholder approval under the listing rules of the applicable national exchange or principal quotation system for the Company’s common stock, the Company has or will seek such approval; and (viii) certain other conditions as set forth in the White Lion Agreement.

In addition to the shares to be issued under the White Lion Agreement, the Company will include in its registration statement additional shares of the Company’s common stock in the amount of $750,000 being issued to White Lion in connection with the execution of the White Lion Agreement.

White Lion Registration Rights Agreement

In connection with the Company’s entry into the White Lion Agreement, the Company entered into a Registration Rights Agreement with White Lion (the “Registration Rights Agreement”). Pursuant to the terms of the Registration Rights Agreement, the Company has agreed to use its commercially reasonable efforts to file a registration statement under the Securities Act registering the resale of the shares sold under the White Lion Agreement within sixty days of the closing of the Business Combination. The Registration Rights Agreement also provides that the Company is required to use its commercially reasonable efforts to keep the registration effective and to prepare and file with the SEC such amendments and supplements if the foregoing registration statement is not then in effect, and the Company proposes to file certain types of registration statements under as may be necessary to keep the registration statement effective.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations for the three and six months ended March 31, 2022 and 2021 should be read in conjunction with our unaudited condensed consolidated financial statements and related notes to those unaudited condensed consolidated financial statements that are included elsewhere in this report.

Certain matters discussed herein are forward-looking statements. Such forward-looking statements contained in this Form 10-Q involve risks and uncertainties, including statements as to:

●

our future operating results;

●

our business prospects;

●

any contractual arrangements and relationships with third parties;

●

the dependence of our future success on the general economy;

●

any possible financings; and

●

the adequacy of our cash resources and working capital.

Impact of COVID-19 on Our Operations

The Company is operating in a rapidly changing environment so the extent to which COVID-19 impacts its business, operations and financial results from this point forward will depend on numerous evolving factors that the Company cannot accurately predict. Those factors include the following: the duration and scope of the pandemic, and governmental, business and individuals’ actions that have been and continue to be taken in response to the pandemic.

Overview

We are a financial technology company which is focused on providing software and technology solutions for the worldwide retail foreign exchange (“FX”) trading industry. We primarily provide our software, technology, customer sales and marketing and risk management technology hardware and software solutions package to TCM. The FXDD brand (e.g., see FXDD.com) is the brand utilized in the retail forex trading industry by TCM.

We have ownership of FOREXWARE, the primary software suite and technology solution which powers the FXDD brand globally today. We also have ownership of the FOREXWARE brand name. We have also acquired ownership of the customer interface and other software trading solutions being used by FXDD.com. By virtue of our relationship with TCM and FXDIRECT, we provide turnkey software and technology solutions for FXDD.com. We offer the customers of FXDD 24 hours, five days a week direct access to the global over the counter (“OTC”) FX market, which is a decentralized market in which participants trade directly with one another, rather than through a central exchange.

In an FX trade, participants effectively buy one currency and simultaneously sell another currency, with the two currencies that make up the trade being referred to as a “currency pair”. Our software and technology solutions enable FXDD to present its customers with price quotations on over the counter tradeable instruments, including over the counter currency pairs, and also provide our customers the ability to trade FX derivative contracts on currency pairs through a product referred to as Contracts for Difference (“CFD”). Our software solutions also offer other CFD products, including CFDs on metals, such as gold, and on futures linked to other products.

In July 2018, the Company incorporated Nukkleus Malta Holding Ltd., which is a wholly-owned subsidiary. In July 2018, Nukkleus Malta Holding Ltd. incorporated MDTG, formerly known as Nukkleus Exchange Malta Ltd. MDTG was exploring potentially obtaining a license to operate an electronic exchange whereby it would facilitate the buying and selling of various digital assets as well as traditional currency pairs used in FX Trading. During the fourth quarter of fiscal 2020, management made the decision to exit the exchange business and to no longer pursue the regulatory licensing necessary to operate an exchange in Malta.

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 closed on March 17, 2022. Digiclear is a company focused on digital asset custody and settlement.

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 and six months ended March 31, 2022 and 2021 include the useful life of intangible assets, assumptions used in assessing impairment of long-term assets, valuation of deferred tax assets and the associated valuation allowances, and valuation of stock-based compensation.

Investment, at Cost

Investment in which the Company does not have the ability to exercise significant influence over operating and financial matters is accounted for using the cost method. Under the cost method, investment is recorded at cost, with gains and losses recognized as of the sale date, and income recorded when received. The Company periodically evaluates its cost method investment for impairment due to decline considered to be other than temporary. If the Company determines that a decline in fair value is other than temporary, then a charge to earnings is recorded in “Other income (expense), net” in the accompanying unaudited condensed consolidated statements of operations and comprehensive (loss) income, and a new basis in the investment is established.

Investment in Unconsolidated Company – Digiclear Inc.

The Company uses the equity method of accounting for its investment in, and earning or loss of, company that it does not control but over which it does exert significant influence. The Company considers whether the fair value of its equity method investment has declined below its carrying value whenever adverse events or changes in circumstances indicate that recorded value may not be recoverable. If the Company considers any decline to be other than temporary (based on various factors, including historical financial results and the overall health of the investee), then a write-down would be recorded to estimated fair value.

Intangible Assets

Intangible assets consist of trade names, regulatory licenses, technology and software, which are being amortized on a straight-line method over the estimated useful life of 3 - 5 years.

Impairment of Long-lived Assets

In accordance with ASC Topic 360, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable, or at least annually. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book value. There were no triggering events requiring assessment of impairment as of March 31, 2022. For the three and six months ended March 31, 2022 and 2021, no impairment of long-lived assets was recognized.

Revenue Recognition

The Company accounts for revenue under the provisions of ASC Topic 606.

The Company’s revenues are derived from providing:

●

General support services under a GSA to a related party. The transaction price is determined in accordance with the terms of the GSA and payments are due on a monthly basis. There are multiple services provided under the GSA and these performance obligations are combined into a single unit of accounting. Fees are recognized as revenue over time as the services are rendered under the terms of the GSA. Revenue is recorded at gross as the Company is deemed to be a principal in the transactions.

●

Financial services to its customers. Revenue related to its financial services offerings are recognized at a point in time when service is rendered.

Stock-based Compensation

Results of Operations

Summary of Key Results

For the three and six months ended March 31, 2022 versus the three and six months ended March 31, 2021

Revenues

For both of the three months ended March 31, 2022 and 2021, we had revenue from general support services rendered to TCM under a GSA of $4,800,000. For both of the six months ended March 31, 2022 and 2021, we had revenue from general support services rendered to TCM under a GSA of $9,600,000.

We had revenue from financial services commencing in May 2021. For the three and six months ended March 31, 2022, we had revenue from financial services of $289,017 and $618,032, respectively. We expect that our revenue from financial services will increase in the near future.

Costs of Revenues

For both of the three months ended March 31, 2022 and 2021, our cost of general support services was $4,725,000, which represented amount incurred for services rendered by FXDIRECT under a GSA. For both of the six months ended March 31, 2022 and 2021, our cost of general support services was $9,450,000, which represented amount incurred for 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 $163,583 and $324,425 for the three and six months ended March 31, 2022, respectively. There was no comparable revenue nor cost of revenue from our financial services operations for the three and six months ended March 31, 2021.

Gross Profit

For both of the three months ended March 31, 2022 and 2021, our gross profit from general support services was $75,000, representing gross margin of 1.6%. For both of the six months ended March 31, 2022 and 2021, our gross profit from general support services was $150,000, representing gross margin of 1.6%.

For the three and six months ended March 31, 2022, our gross profit from financial services was $125,434 and $293,607, representing gross margin of 43.4% and 47.5%, respectively.

Operating Expenses

Operating expenses consisted of advertising and marketing, professional fees, amortization of intangible assets, and other general and administrative expenses.

Advertising and marketing

For the three and six months ended March 31, 2022, advertising and marketing expense amounted to $163,427 and $198,649, respectively. In the first half of fiscal year 2022, we incurred advertising and marketing activities to enhance the visibility and marketability of our services and to improve brand recognition and awareness. We did not have any advertising and marketing costs during the three and six months ended March 31, 2021.

Professional fees

Professional fees primarily consisted of accounting fees, audit fees, legal service fees, and advisory fees. Professional fees for the three months ended March 31, 2022 versus the three months ended March 31, 2021, were $1,066,816 and $51,500, respectively. Professional fees for the six months ended March 31, 2022 versus the three months ended March 31, 2021, were $1,988,548 and $138,272, respectively. The increase was primarily attributable to an increase in advisory service fees mainly due to increased advisory service related to our potential merger.

Amortization of intangible assets

For the three and six months ended March 31, 2022, our amortization of intangible assets amounted to $592,891 and $1,504,834, respectively. There was no comparable amortization for the three and six months ended March 31, 2021.

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 March 31, 2022 versus the three months ended March 31, 2021, were $231,022 versus $21,941, respectively. The increase was mainly due to an increase in compensation and related benefits of approximately $120,000, an increase in rent expense of approximately $40,000, and an increase in other miscellaneous items of approximately $50,000, resulting from our business expansion.

Total other general and administrative expenses for the six months ended March 31, 2022 versus the six months ended March 31, 2021, were $548,921 versus $62,254, respectively. The increase was mainly due to an increase in compensation and related benefits of approximately $235,000, an increase in rent expense of approximately $78,000, and an increase in other miscellaneous items of approximately $173,000, resulting from our business expansion.

Other Expense

Other expense includes loss from equity method investment and other miscellaneous expense.

Other expense totaled $72,892 for the three months ended March 31, 2022, as compared to $1,510 for the three months ended March 31, 2021, a change of $71,382, which was attributable to an increase in loss from equity method investment of approximately $71,000, and an increase in other miscellaneous expense of approximately $1,000.

Other expense totaled $74,108 for the six months ended March 31, 2022, as compared to $3,020 for the six months ended March 31, 2021, a change of $71,088, which was primarily attributable to an increase in loss from equity method investment of approximately $71,000.

Net Loss

As a result of the factors described above, our net loss was $(1,926,614), or $(0.01) per share (basic and diluted), for the three months ended March 31, 2022, as compared with a net income of $49, or $0.00 per share (basic and diluted), for the three months ended March 31, 2021, a change of $1,926,663.

As a result of the factors described above, our net loss was $(3,871,453), or $(0.01) per share (basic and diluted), for the six months ended March 31, 2022, as compared with $(53,546), or $(0.00) per share (basic and diluted), for the six months ended March 31, 2021, a change of $3,817,907.

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 gain of $13,214 and $0 for the three months ended March 31, 2022 and 2021, respectively. As a result of foreign currency translations, which are a non-cash adjustment, we reported a foreign currency translation gain of $10,987 and $0 for the six months ended March 31, 2022 and 2021, respectively. This non-cash gain had the effect of decreasing our reported comprehensive loss.

Comprehensive Loss

As a result of our foreign currency translation adjustment, we had comprehensive loss of $(1,913,400) and comprehensive income of $49 for the three months ended March 31, 2022 and 2021, respectively.

As a result of our foreign currency translation adjustment, we had comprehensive loss of $(3,860,466) and $(53,546) for the six months ended March 31, 2022 and 2021, 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 March 31, 2022 and September 30, 2021, we had cash balances of $50,444 and $355,673, respectively. We had working capital deficit of $2,975,438 as of March 31, 2022.

Our ability to continue as a going concern is dependent upon the management of expenses and our ability to obtain the necessary financing to meet our obligations and pay our liabilities arising from normal business operations when they come due, and upon profitable operations.

We need to either borrow funds or raise additional capital through equity or debt financings. However, we cannot be certain that such capital (from our stockholders or third parties) will be available to us or whether such capital will be available on terms that are acceptable to us. Any such financing likely would be dilutive to existing stockholders and could result in significant financial operating covenants that would negatively impact our business. In the event that there are any unforeseen delays or obstacles in obtaining funds through the aforementioned sources, CMH has committed to inject capital into the Company in order to maintain the ongoing operations of the business.

The following table sets forth a summary of changes in our working capital from September 30, 2021 to March 31, 2022:

	March 31,			September 30,			Changes in
	2022			2021			Amount			Percentage
Working capital deficit:
Total current assets	$	1,612,376		$	3,043,720		$	(1,431,344	)		(47.0	)%
Total current liabilities		4,587,814			4,638,513			(50,699	)		(1.1	)%
Working capital deficit	$	(2,975,438	)	$	(1,594,793	)	$	(1,380,645	)		86.6	%

Our working capital deficit increased by $1,380,645 to $2,975,438 at March 31, 2022 from $1,594,793 at September 30, 2021. The increase in working capital deficit was primarily attributable to a decrease in cash of approximately $305,000, a decrease in due from affiliates of approximately $1,138,000, and an increase in accounts payable and accrued liabilities of approximately $181,000, offset by a decrease in due to affiliates of approximately $231,000.

Because the exchange rate conversion is different for the condensed consolidated balance sheets and the condensed consolidated statements of cash flows, the changes in assets and liabilities reflected on the condensed consolidated statements of cash flows are not necessarily identical with the comparable changes reflected on the condensed consolidated balance sheets.

Cash Flow for the Six Months Ended March 31, 2022 Compared to the Six Months Ended March 31, 2021

Net cash flow used in operating activities for the six months ended March 31, 2022 was $304,371, which primarily reflected our consolidated net loss of approximately $3,871,000, and the changes in operating assets and liabilities, primarily consisting of a decrease in due to affiliates of approximately $224,000, offset by a decrease in due from affiliates of approximately $1,138,000, and an increase in accounts payable and accrued liabilities of approximately $187,000, and the non-cash items adjustment primarily consisting of amortization of intangible assets of approximately $1,505,000, and stock-based compensation and service expense of approximately $904,000.

Net cash flow provided by operating activities was $16,648 for the six months ended March 31, 2021. These included changes in operating assets and liabilities totaling approximately $69,000, offset by consolidated net loss of approximately $54,000.

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 March 31, 2022, we had no material contractual obligations other than: FXDirectDealer LLC receives a minimum of $1,575,000 per month and such obligation may be terminated by the 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 March 31, 2022, our management, including our principal executive officer and principal financial officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures, which are defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our CEO and our CFO is the same person.

During evaluation of disclosure controls and procedures as of March 31, 2022, 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.

Part II - Other Information

Item 1. Legal Proceedings

From time to time, we are subject to ordinary routine litigation incidental to our normal business operations. We are not currently a party to any material legal proceedings, except as set forth below.

Item 1A. Risk Factors

Not applicable to a “smaller reporting company” as defined in Item 10(f)(1) of SEC Regulation S-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

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.

Item 5. Other Information

Merger

On February 22, 2022, the Company, entered into an Agreement and Plan of Merger (as it may be amended, supplemented or otherwise modified from time to time, the “Merger Agreement”), by and among the Company and Brilliant Acquisition Corporation, a British Virgin Islands company (“Brilliant”). Upon consummation of the transactions contemplated by the Merger Agreement, Nukkleus would become the Nasdaq-listed parent company of Brilliant. The merger is expected to close in the third quarter of fiscal year 2022, following the receipt of the required approvals by Nukkleus’s and Brilliant’s shareholders, respectively, and the fulfillment or waiver of other closing conditions, of which there is no guarantee.

White Lion Stock Purchase Agreement

The term of the White Lion Agreement commences on the effective date of the registration statement and shall end on December 31, 2024, or, if earlier, the date on which White Lion has purchased the maximum number of shares of the Company’s Common Stock provided under the White Lion Agreement, in each case on the terms and subject to the conditions set forth in the White Lion Agreement. White Lion’s purchase price will be 96% of the dollar- volume weighted average price of the Company’s common stock over the two consecutive trading days immediately following receipt of the Company’s notice of its intent to make a draw.

White Lion Registration Rights Agreement

Item 6. Exhibits

The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q.

Exhibit Number		Description
2.1		Agreement and Plan of Merger, dated as of February 22, 2022, by and among Nukkleus Inc. and Brilliant Acquisition Corporation (12)

3.1		Certificate of Amendment to the Certificate of Incorporation filed June 3, 2016 (2)

3.2		Statement of Designation, Powers, Preferences and Rights of Series A Preferred Stock (2)

3.3		Amended and Restated By-laws of Nukkleus Inc. (3)

4.1		Securities Purchase Agreement between Nukkleus Inc. and Currency Mountain Holdings Bermuda, Limited dated June 3, 2016 (2)

10.1		Purchase and Sale Agreement by and between Nukkleus, Inc. and Michael Stephen Greenacre; Nicholas Aaron Gregory; Jamal Khurshid; Travers David Lee; Azam Shah; Craig Iain Vallis; Bertram Bartholomew Worsley; and Oliver James Worsley dated May 24, 2021 (10)

10.2		General Service Agreement between Nukkleus Limited and FML Malta Limited dated May 24, 2016 (4)

10.3		General Service Agreement between Nukkleus Limited and FXDirectDealer LLC dated May 24, 2016 (1)

10.4		Stock Purchase Agreement dated May 27, 2016 among Nukkleus Inc., IBIH Limited, the shareholders of IBIH Limited and Currency Mountain Holdings LLC (2)

10.5		Amendment No. 1 dated June 2, 2016 to the Asset Purchase Agreement by and between Nukkleus Inc., its majority shareholder Charms Investments Ltd., and its wholly-owned subsidiary, Nukkleus Limited and Currency Mountain Holdings Bermuda, Limited (2)

10.6		Amendment No. 1 dated June 3, 2016 to the General Service Agreement between Nukkleus Limited and FXDD Trading Limited (2)

10.7		Letter Agreement between Nukkleus Inc. and IBIH Limited dated June 3, 2016 (2)

10.8		Director Agreement by and between Nukkleus Inc. and Craig Marshak dated August 1, 2016 (3)

10.9		Amendment dated October 17, 2017 of that certain General Service Agreement between Nukkleus Limited and FML Malta Limited (5)

10.10		Amendment dated October 17, 2017 of that certain General Service Agreement between Nukkleus Limited and FXDirectDealer LLC (5)

10.11		Settlement Agreement and Mutual Release between Nukkleus Inc., IBIH Limited, Terra (FX) Offshore Limited, Ludico Investments Limited, Currency Mountain Holdings LLC and the IBIH Shareholders dated November 17, 2017 (6)

10.12		Letter Agreement entered between FML Malta Ltd., FXDD Malta Limited and Nukkleus Limited (7)

10.13		Stock Redemption Agreement dated February 13, 2018 between Nukkleus Inc. and Currency Mountain Holdings Bermuda, Limited (8)

10.14		Form of Support Agreement, dated as of February 22, 2022 among Brilliant Acquisition Corporation and the investors party thereto (12)

10.15		Form of Registration Rights Agreement (12)

10.15		Form of Lock-Up Agreement (12)

21.1		List of Subsidiaries (11)

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

101.INS*		Inline XBRL Instance Document.

101.SCH*		Inline XBRL Taxonomy Extension Schema Document.

101.CAL*		Inline XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF*		Inline XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB*		Inline XBRL Taxonomy Extension Label Linkbase Document.

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 28, 2020.
(10)	Incorporated by reference to the Form 8K Current Report filed with the SEC on June 3, 2021.
(11)	Incorporated by reference to the Form 10K Annual Report filed with the SEC on December 29, 2021.
(12)	Incorporated by reference to the Form 8K Current Report filed with the SEC on February 23, 2022.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	NUKKLEUS INC.
	(Registrant)

Date: May 23, 2022	By:	/s/ Emil Assentato
		Emil Assentato
		Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial and Accounting Officer) and Chairman