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 DecemberMarch 31, 20172023

OR

☐ TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission file number: 333-192647000-55922

Nukkleus Inc.

(Exact name of registrant as specified in its charter)

525 Washington Boulevard, Jersey City, New Jersey 07310

 (Address(Address of principal executive offices, including zip code)

212-791-4663

(Issuer’sRegistrant’s telephone number)number, including area code)

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

Securities registered under Section 12(g) of the Exchange Act: Common Stock, par value $0.0001

Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ☒ No ☐

Yes ☐ No ☐

(Does not currently apply to the Registrant)

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.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

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

NUKKLEUS INC.

FORM 10-Q

DecemberMarch 31, 20172023

TABLE OF CONTENTS

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.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-0330.1-800-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.prospects.

Unless otherwise indicated, references in this report to the “Company”, “Nukkleus”, “we”, “us”, or “our” refer to Nukkleus Inc. and its consolidated subsidiary.subsidiaries.

PART I - FINANCIAL INFORMATION

Item 1. Interim Financial Statements.

NUKKLEUS INC. AND SUBSIDIARYSUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

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

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

NUKKLEUS INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the Three and Six Months Ended March 31, 2023

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

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

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.

On February 5, 2016, Charms Investments, Ltd (“Charms”), the former majority shareholder of theThe Company sold 146,535,140 shares of common stock to Currency Mountain Holdings Bermuda, Limited (“CMH”), the parent of the Company. CMH is wholly-owned by an entity thata financial technology company which is owned by Emil Assentato, the Company’s Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”) and Chairman. In addition,focused on the same date, CMH acquired 3,937,000 shares of common stock from another non-affiliated company. The aggregate purchase price paid by CMH was $347,500.

On May 24, 2016, Nukkleus, its wholly-owned subsidiary, Nukkleus Limited, a Bermuda limited company (the “Subsidiary”), Charms, the former majority shareholder, and CMH entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”), pursuant to which the Company purchased from CMH certain intellectual property, hardware,providing software and other assets (collectively,technology solutions for the “Assets”) in consideration of 48,400,000 shares of common stock of the Company. The Asset Purchase Agreement closed on May 24, 2016. As a result of such acquisition, the Company’s operations are now focused on the operation of aworldwide retail foreign exchange (“FX”) trading business utilizing the assets acquired from CMH.

On May 24, 2016, the Subsidiary entered into a General Service Agreement to provideindustry. The Company primarily provides its software, technology, customer sales and marketing and risk management technology hardware and software solutions package to FML MaltaTriton Capital Markets Ltd. In December 2017, the Subsidiary, FML Malta Ltd. and(“TCM”), formerly known as FXDD Malta Limited (“FXDD Malta”) entered into a letter agreement providing that there was an error in drafting. The FXDD brand (e.g., see FXDD.com) is the General Service Agreement and acknowledging that the correct counter-party to Subsidiarybrand 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 ServiceServices Agreement is FXDD Malta. Accordingly, all references(“GSA”) to FML Malta Ltd. have been replaced with FXDD Malta. FXDD MaltaTCM. TCM is a private limited liability company formed under the laws of Malta. The General Service Agreement entered with FXDD MaltaGSA provides that FXDD MaltaTCM will pay the SubsidiaryNukkleus Limited at minimum $2,000,000 per month. On October 17, 2017, the Subsidiary entered into an amendment of the General Service Agreement with FXDD Malta. In accordance with the amendment, which was effective as of October 1, 2017, the minimum amount payable by FXDD Malta to the Subsidiary for services was reduced from $2,000,000 per month to $1,600,000 per month. Emil Assentato is also the majority member of Max Q Investments LLC (“Max Q”), which is managed by Derivative Marketing Associates Inc. (“DMA”). Mr. Assentato, 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 FXDD Malta.TCM.

In addition, on May 24, 2016, in order to appropriately service FXDD Malta, the SubsidiaryTCM, Nukkleus Limited entered into a General Service AgreementGSA with FXDirectDealer LLC (“FXDIRECT”), which provides that the SubsidiaryNukkleus Limited will pay FXDIRECT a minimum of $1,975,000$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. On October 17, 2017, the Subsidiary entered into an amendment of the General Service Agreement with FXDIRECT. Pursuant to the amendment, which was effective as of October 1, 2017, the minimum amount payable by the Subsidiary to FXDIRECT for services was reduced from $1,975,000 per month to $1,575,000 per month. Currency Mountain Holdings LLC is the sole shareholder of FXDIRECT. Max Q is the majority shareholder of Currency Mountain Holdings LLC.

On May 27, 2016,In July 2018, the Company incorporated Nukkleus Malta Holding Ltd., which is a wholly-owned subsidiary. In July 2018, Nukkleus Malta Holding Ltd. incorporated Markets Direct Technology Group Ltd (“MDTG”), formerly known as Nukkleus Exchange Malta Ltd. MDTG was exploring potentially obtaining a license to operate an electronic exchange whereby it would facilitate the buying and selling of various digital assets as well as traditional currency pairs used in FX Trading. During the fourth quarter of fiscal 2020, management made the decision to exit the exchange business and to no longer pursue the regulatory licensing necessary to operate an exchange in Malta.

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

In fiscal year 2021, the Company completed its acquisition of Match Financial Limited, a private limited company formed in England and Wales (“Match”) and its subsidiaries. Match, through its Digital RFQ Limited (“Digital RFQ”) subsidiary, is engaged in providing payment services from one fiat currency to another or to digital assets.

On October 20, 2021, the Company and the shareholders (the “Original Shareholders”) of Jacobi Asset Management Holdings Limited (“Jacobi”) entered into a Stock Purchase and Sale Agreement (“SPA”(the “Jacobi Agreement”) pursuant to which the Company agreed to acquire from IBIH Limited, a BVI corporation (“IBIH”) 2,200 issued and outstanding common stock for $1,000,000, representing 9.9% of IBIH. In addition, the Company acquired 100%5.0% of the issued and outstanding ordinary shares of GVS Limited (“Iron BVI”), which is the parent corporationJacobi in consideration of GVS (AU) Pty Ltd. (“Iron Australia”) for 24,156,00020,000,000 shares of common stock of the Company (“First Closing”).

The Company agreed to acquire the remaining 20,000 shares of IBIH for 219,844,000 shares of its common stock, subject to IBIH obtaining regulatory approvals from the Financial Conduct Authority in the United Kingdom (“London FCA”) and from the regulators in Cyprus (“Second Closing”(the “Jacobi Transaction”). The Second Closing was subject toOn December 15, 2021, the Company, signingthe 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 option agreement with FXDD Malta and FXDD Trading Limited operating units (the “Option”), which are affiliates through common ownership, providingAmendment to Stock Purchase Agreement agreeing that the Company may acquire both entities for $1. These transactions were subject to regulatory approval, where applicable.

The terms of the Agreement stipulated that if the Second Closing did not occur before November 28, 2016, the $1,000,000 wouldJacobi Transaction will be returned toentered between the Company and the First Closing would be unwound. AsNew Jacobi Shareholders. The Jacobi Transaction closed on December 15, 2021. Jacobi is a resultcompany focused on digital asset management that has received regulatory approval to launch the world’s first tier one Bitcoin exchange-traded fund (“ETF”). Jamal Khurshid and Nicholas Gregory own, directly and indirectly, approximately 40% and 10% of Jacobi, respectively. Jamal Khurshid is the First Closing being contingent onCompany’s chief operating officer and director and Nicholas Gregory is the Second Closing,Company’s director. The transactions contemplated by the $1,000,000 cash paidJacobi Agreement constituted a “related-party transaction” as defined in Item 404 of Regulation S-K because of Mr. Khurshid’s and valueMr. Gregory’s position as beneficial owner of the 24,156,000 shares issued was recorded as a “deposit on potential acquisition”, which was repaid toone or more Original Shareholders and returned to the Company in the first fiscal quarter of 2018 (See next paragraph), and the 24,156,000 shares was recorded as “contingent common stock” due to the uncertainty of the closing of the transaction.New Jacobi Shareholders.

NUKKLEUS INC. AND SUBSIDIARY

SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – THE COMPANY HISTORY AND NATURE OF THE BUSINESS (continued)

On November 17, 2017,December 30, 2021, the Company IBIH, Terra (FX) Offshore Limited, Ludico Investments Limited, Currency Mountain Holdings LLC and the IBIH Shareholdersshareholder (the “Digiclear Shareholder”) of Digiclear Ltd. (“Digiclear”) entered into a SettlementPurchase and Sale Agreement and Mutual Release (the “Iron Settlement“Digiclear Agreement”) pursuant to which the Stock Purchase Agreement was terminated, all differences between the parties were resolved and settled and the parties fully released the other parties from any liability. Pursuant to the Iron Settlement Agreement, the Company agreed to (i) haveacquire 5,400,000 of the registered office of Iron Australia changed, (ii) have its director designees resign as directors of Iron Australia, (iii) appoint Markos Kashiouris, Petros Economidesissued and Yun Ma as directors of Iron Australia; (iv) and make all required changes with the Australian Securities and Investments Commission. With respect to Iron BVI, pursuant to the Iron Settlement Agreement, the Company agreed to (i) have the registered office of Iron BVI changed, (ii) have its director designee resign as a director of Iron BVI, (iii) appoint Cymora Limited as director of Iron BVI; (iv) and make all required changes with the BVI Registrar of Companies. Further, the Company agreed to return the 2,200outstanding ordinary shares of capital stockDigiclear in consideration of IBIH to the IBIH Shareholders and return 100% of its interest in Iron BVI to IBIH. IBIH agreed to return the 24,156,00015,151,515 shares of common stock of the Company (valued at $5,000,000 based on the market price of the Company’s common stock on the acquisition date) (the “Digiclear Transaction”). In addition to, if and when the Company is acquired by a Special Purpose Acquisition Company (“SPAC”), the Company will fund and capitalize Digiclear with a minimum of $1,000,000 operating capital in exchange for 4.545% of additional shares of Digiclear’s capital stock. Digiclear shall retain the right to unwind the transaction and to have the Company return the 5,400,000 ordinary shares of Digiclear share in return for Digiclear returning to the Company for cancellation and to paythe 15,151,515 of Company common shares. Digiclear can only unwind the transaction if the Company $1,000,000. Further, Markos Kashiouris, Petros Economidesis no longer under contract to be acquired by a SPAC (See Note 15 – Merger). The Digiclear Transaction closed on March 17, 2022. Digiclear is a company developing a custody and Efstathios Christophi resignedsettlement utility operating system.

Liquidity and capital resources

Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations and otherwise operate on an ongoing basis. At March 31, 2023 and September 30, 2022, the Company had cash of $246,650 and $364,023, respectively, exclusive of customer custodial cash.

The unaudited condensed consolidated financial statements have been prepared using accounting principles generally accepted in the United States of America applicable for a going concern, which assumes that the Company will realize its assets and discharge its liabilities in the ordinary course of business. The Company had a working capital deficit of approximately $4,391,000 at March 31, 2023 and incurred a net loss and generated negative cash flow from operating activities of approximately $1,940,000 and $1,883,000 for the six months ended March 31, 2023, respectively. These are indicators of substantial doubt as directorsto the Company’s ability to continue as a going concern for at least one year from issuance of these financial statements. The Company’s ability to continue as a going concern is dependent upon the management of expenses and ability to obtain necessary financing to meet its obligations and pay its liabilities arising from normal business operations when they come due, and upon profitable operations.

The Company cannot be certain that such necessary capital through equity or debt financings will be available to it or whether such capital will be available on terms that are acceptable to it. Any such financing likely would be dilutive to existing stockholders and could result in significant financial operating covenants that would negatively impact the Company business. In the event that there are any unforeseen delays or obstacles in obtaining funds through the aforementioned sources, TCM, which is wholly-owned by an entity that is majority-owned by Mr. Assentato, has committed to inject capital into the Company in order to maintain the ongoing operations of the Company and waived any directorship fees payable to them under their letter of appointment dated August 1, 2016. The $1,000,000 has been paid tobusiness.

Based on the Company, net of approximately $70,000 of legal expenses, in the first fiscal quarter of 2018 and IBIH has returned the certificate representing the 24,156,000 shares of common stockforegoing, management believes that its current financial resources, as of the Companydate of the issuance of these financial statements, are sufficient to fund its current twelve-month operating budget, alleviating any concerns by its historical operating results and satisfying its estimated liquidity needs for the shares have been cancelled bytwelve months from the Company.issuance of these financial statements.

NOTE 2 – BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION

These interim condensed consolidated financial statements of the Company and its wholly-owned subsidiarysubsidiaries 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 (“U.S. GAAP”)of America (U.S. GAAP).

The Company’s unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary.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, 20172022 filed with the Securities and Exchange Commission on December 27, 2017.April 10, 2023. The consolidated balance sheet as of September 30, 20172022 contained herein has been derived from the audited consolidated financial statements as of September 30, 2017,2022, but does not include all disclosures required by the generally accepted accounting principles in the 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 generally accepted accounting principles in the United States of AmericaU.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. ActualChanges in these estimates and assumptions may have a material impact on the unaudited condensed consolidated financial statements and accompanying notes. Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the financial statements, which management considered in formulating its estimate, could change in the near term due to one or more future confirming events. Accordingly, the actual results could differ significantly from thesethose estimates.

Significant estimates during the three and six months ended DecemberMarch 31, 20172023 and 20162022 include the useful life of intangible assets, assumptions used in assessing impairment of long-term assets, valuation of deferred tax assets and the associated valuation allowances.allowances, valuation of stock-based compensation, and fair value of customer digital currency assets and liabilities.

FairCash and cash equivalents

At March 31, 2023 and September 30, 2022, the Company’s cash balances by geographic area were as follows:

Management has determined that Digital RFQ has control of the customer digital currency assets and records these assets on its balance sheet with a corresponding liability. Digital RFQ recognizes customer digital currency liabilities and corresponding customer digital currency assets, on initial recognition and at each reporting date, at fair value of financial instruments

Thethe customer digital currency assets. Subsequent changes in fair value are adjusted to the carrying amounts reportedamount of these customer digital currency assets, with changes in fair value recorded in other general and administrative expense in the unaudited condensed consolidated balance sheetsstatements of operations and comprehensive loss.

Any loss, theft, or other misuse would impact the measurement of customer digital currency assets. The Company classifies the customer digital currency assets as current based on their purpose and availability to fulfill the Company’s direct obligations to its customers.

Fair value of financial instruments and fair value measurements

The Company adopted the guidance of Accounting Standards Codification (“ASC”) 820 for cash, prepaid expense, deposit on potential acquisition,fair value measurements which clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:

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

Assets and liabilities measured at fair value on a recurring basis. Customer digital currency assets and accrued liabilities – related party approximate their fair market value based on the short-term maturity of these instruments. The Company did not have any non-financial assets or liabilities that are measured at fair value on a recurring basisbasis. These assets and liabilities are measured at fair value on an ongoing basis.

The following table provides these assets and liabilities carried at fair value, measured as of DecemberMarch 31, 20172023:

The following table provides these assets and liabilities carried at fair value, measured as of September 30, 2017.2022:

Customer digital currency assets and liabilities represent the Company’s obligation to safeguard customers’ digital assets. Accordingly, the Company has valued the assets and liabilities using quoted market prices for the underlying digital assets which is based on Level 2 inputs.

NUKKLEUS INC. AND SUBSIDIARY

SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Fair value of financial instruments and fair value measurements (continued)

ASC 825-10 “Financial Instruments”, allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses for that instrument should be reported in earnings at each subsequent reporting date. The Company did not elect to apply the fair value option to any outstanding instruments.

ConcentrationCredit risk and uncertainties

The ramifications of credit riskthe outbreak of the novel strain of COVID-19, reported to have started in December 2019 and spread globally, are filled with uncertainty and changing quickly. Our operations have continued during the COVID-19 pandemic and we have not had significant disruption.

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

The Company maintains a portion of its cash in bank and financial institution deposits within U.S. that at times may exceed federally insured limits.Asfederally-insured limits of December 31, 2017 and September 30, 2017, the Company’s$250,000. The Company manages this credit risk by concentrating its cash balances, including customer custodial cash, in bank accounts had approximately $650,000high quality financial institutions and $0 in excessby periodically evaluating the credit quality of the federally-insured limits, respectively.primary financial institutions holding such deposits. The Company may also hold cash at digital asset trading platforms and performs a regular assessment of these digital asset trading platforms as part of its risk management process. The Company has not experienced any losses in itssuch bank accounts through and asbelieves it is not exposed to any risks on its cash in bank accounts. At March 31, 2023, there were no balances in excess of the datefederally-insured limits.

We may maintain our cash assets at financial institutions in the U.S. in amounts that may be in excess of this report.the Federal Deposit Insurance Corporation (“FDIC”) insurance limit of $250,000. Actual events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions, transactional counterparties or other companies in the financial services industry or the financial services industry generally, or concerns or rumors about any events of these kinds or other similar risks, have in the past and may in the future lead to market-wide liquidity problems. For example, in response to the rapidly declining financial condition of regional banks Silicon Valley Bank (“SVB”) and Signature Bank (“Signature”), the California Department of Financial Protection and Innovation and the New York State Department of Financial Services closed SVB and Signature on March 10, 2023 and March 12, 2023, respectively, and the FDIC was appointed as receiver for SVB and Signature. In the event of a failure or liquidity issues of or at any of the financial institutions where we maintain our deposits or other assets, we may incur a loss to the extent such loss exceeds the FDIC insurance limitation, which could have a material adverse effect upon our liquidity, financial condition and our results of operations. Similarly, if our customers experience liquidity issues as a result of financial institution defaults or non-performance where they hold cash assets, their ability to pay us may become impaired and could have a material adverse effect on our results of operations, including the collection of accounts receivable and cash flows.

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

Digital assets

The following table summarizes customer revenue concentrations:digital assets held by the Company are accounted for as intangible assets with indefinite useful lives, and are initially measured at cost. Digital assets accounted for as intangible assets are subject to impairment losses if the fair value of digital assets decreases below the carrying value at any time during the period. The fair value is measured using the quoted price of the digital asset at the time its fair value is being measured. Impairment expense is reflected in other general and administrative expense in the unaudited condensed consolidated statements of operations and comprehensive loss. The Company assigns costs to transactions on a first-in, first-out basis.

NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Other current assets

Other current assets primarily consist of security deposit, prepaid professional fee, and prepaid OTC Markets listing fees. As of March 31, 2023 and September 30, 2022, other current assets amounted to $37,789 and $15,617, respectively.

Revenue recognition

The following table summarizes vendor expense concentrations:

Prepaid expense

Prepaid expense represents cash paid in advance for professional service charge. The amount is recognized as expense over the related service periods. At both December 31, 2017 and September 30, 2017, prepaid expense amounted $750.

Software development costs

At December 31, 2017, software development costs totaled $50,000, which represents software development that management expects to complete and place in service in June 2018. Projected capitalized costs of this software development is approximately $200,000. Capitalized costs related to the software under development are treated as an asset until the development is completed. The Company will amortize the software costs on a straight-line basis over the estimated life of the software, commencing when the software is put into productive use.

Revenuedetermines revenue recognition

Because the Company provides its applications as services, it follows the provisions of Securities and Exchange Commission Staff Accounting Bulletin (“SAB”) No. 104; Revenue Recognition. The Company recognizes revenue when all of from contracts with customers through the following conditions are met:steps:

The Company records revenues and expenses relatedRevenue is recognized when control of the promised goods or services is transferred to the General Service Agreements at gross ascustomers, in an amount that reflects the consideration the Company is deemedexpects to be a principalentitled to in the transactions. Revenuesexchange for those goods or services. The Company’s revenues are recognized when the services are completed and expenses are recognized as incurred. derived from providing:

Income taxes

The Company recorded no income tax expense for the three months ended December 31, 2017 and 2016 because the estimated annual effective tax rate was zero. As of December 31, 2017, the Company continues to provide a valuation allowance against its net deferred tax assets since the Company believes it is more likely than not its deferred tax assets will not be realized.

In December 2017, the United States Government passed new tax legislation that, among other provisions, will lower the corporate tax rate from 35% to 21%. In addition to applying the new lower corporate tax rate in 2018 and thereafter to any taxable income the Company may have, the legislation affects the way the Company can use and carryforward net operating losses previously accumulated and results in a revaluation of deferred tax assets and liabilities recorded on the balance sheet. Given that current deferred tax assets are offset by a full valuation allowance, these changes will have no net impact on the balance sheet. However, when the Company becomes profitable, the Company will receive a reduced benefit from such deferred tax assets.

6

NUKKLEUS INC. AND SUBSIDIARY

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:

In the following table, revenues are disaggregated by segment for the three and six months ended March 31, 2023 and 2022:

Per share data

ASC Topic 260, “EarningsEarnings per Share,” requires presentation of both basic and diluted earnings per share (“EPS”) with a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.

Basic net earnings per share are computed by dividing net earnings available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted net earnings per share is computed by dividing net earnings applicable to common stockholders by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. Diluted earnings per share reflectsFor the potential dilution that could occur if securities were exercised or converted intothree and six months ended March 31, 2023 and 2022, potentially dilutive common stock or other contracts to issueshares consist of the common stock resulting inshares issuable upon the issuanceexercise of common stock that would then shareoptions (using the treasury stock method). Common stock equivalents are not included in the Company’s earnings subject to anti-dilution limitations.calculation of diluted net loss per share if their effect would be anti-dilutive. In a period in which the Company has a net loss, all potentially dilutive securities are excluded from the computation of diluted shares outstanding as they would have an anti-dilutive impact. For the three months ended December 31, 2017 and 2016, potentially dilutive common shares consist of common stock issuable upon the conversion of Series A preferred stock (using the if-converted method).

The following table presents a reconciliation of basic and diluted net loss per share:

During the three months ended December 31, 2017 and 2016, all potentially dilutive securities are excluded from the computation of diluted weighted average number of shares of common stock outstanding as they would have had an anti-dilutive impact.

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

Reclassification

The Company has reclassified certainCertain prior period amounts in the accompanying unaudited condensed consolidated statements of operations in orderhave been reclassified to be consistent withconform to the current period presentation. These reclassifications hadhave no effect on the previously reported financial position, results of operations.operations and cash flows.

Recently issued accounting pronouncements

In May 2014,June 2016, the FASB issued Accounting Standards UpdateASU 2016-13, Financial Instruments - Credit Losses (“ASU”Topic 326”) No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 will eliminate transaction- and industry-specific revenue recognition guidance under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will requireintroduces a new accounting model, the Current Expected Credit Losses model (“CECL”), which requiresearlier recognition of credit losses and additional disclosure aboutdisclosures related to credit risk. The CECL model utilizes a lifetime expected credit loss measurement objective for the nature, amount, timing and uncertaintyrecognition of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtaincredit losses at the time the financial asset is originated or fulfill a contract.acquired. ASU 2014-092016-13 is effective for interim and annual periodsperiod beginning after December 15, 2017 (quarter ending December 31, 2018 for the Company). Early adoption is permitted only in2022, including interim reporting periods within those annual reporting periods beginning after December 15, 2016, including interim periods therein. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption.periods. The Company is currently evaluating the effects of adopting ASU 2014-09 and the implementation approach to be used, but as of the date of this filing,expects that the adoption iswill not expected to have a material impact on the Company’sits unaudited condensed consolidated financial statements.

NUKKLEUS INC. AND SUBSIDIARY

SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Recently issued accounting pronouncements (continued)

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842): Amendments to the Leases Analysis, which modified lease accounting for both lessees and lessors to increase transparency and comparability by recognizing lease assets and lease liabilities by lessees for those leases classified as operating leases under previous accounting standards and disclosing key information about leasing arrangements. This pronouncement is effective for reporting periods beginning after December 15, 2018 including interim periods within those annual reporting periods (quarter ending December 31, 2019 for the Company) using a modified retrospective adoption method. The Company is currently evaluating the impact of adopting the new lease standard on its consolidated financial statements, but the adoption is not expected to have a significant impact as of the filing of this report.

In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. The amendments add further guidance on identifying performance obligations and also improve the operability and understandability of the licensing implementation guidance. The amendments do not change the core principle of the guidance in Topic 606. This pronouncement has the same effective date as the new revenue standard, which is effective for annual reporting periods, including interim periods within those annual reporting periods, beginning after December 15, 2017 (quarter ending December 31, 2018 for the Company). The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements, but the adoption is not expected to have a significant impact as of the filing of this report.

In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. The amendments, among other things: (1) clarify the objective of the collectability criterion for applying paragraph 606-10-25-7; (2) permit an entity to exclude amounts collected from customers for all sales (and other similar) taxes from the transaction price; (3) specify that the measurement date for noncash consideration is contract inception; (4) provide a practical expedient that permits an entity to reflect the aggregate effect of all modifications that occur before the beginning of the earliest period presented when identifying the satisfied and unsatisfied performance obligations, determining the transaction price, and allocating the transaction price to the satisfied and unsatisfied performance obligations; (5) clarify that a completed contract for purposes of transition is a contract for which all (or substantially all) of the revenue was recognized under legacy GAAP before the date of initial application, and (6) clarify that an entity that retrospectively applies the guidance in Topic 606 to each prior reporting period is not required to disclose the effect of the accounting change for the period of adoption. The effective date of these amendments is at the same date that Topic 606 is effective. The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements, but the adoption is not expected to have a significant impact as of the filing of this report.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This ASU addresses the classification of certain specific cash flow issues including debt prepayment or extinguishment costs, settlement of certain debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of certain insurance claims and distributions received from equity method investees. This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years (quarter ending December 31, 2018 for the Company), with early adoption permitted. An entity that elects early adoption must adopt all of the amendments in the same period. The Company is currently evaluating the impact it may have on its consolidated financial statements, but the adoption is not expected to have a significant impact as of the filing of this report.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The ASU clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for acquisitions (or disposals) of assets or business. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual reporting periods (quarter ending December 31, 2018 for the Company). The Company is currently evaluating the impact of adopting ASU 2017-01 on its consolidated financial statements.

In May 2017, the FASB issued ASU No. 2017-09, Compensation – Stock Compensation: Scope of Modification Accounting. The guidance clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. Entities will apply the modification accounting guidance if the value, vesting conditions or classification of the award changes. This guidance is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2017 (quarter ending December 31, 2018 for the Company). Early adoption is permitted. The Company is currently evaluating the impact it may have on its consolidated financial statements, but the adoption is not expected to have a significant impact as of the filing of this report.

NUKKLEUS INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Recently issued accounting pronouncements (continued)

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

NOTE 4 – ACCRUED- CUSTOMER ASSETS AND LIABILITIES

At December 31, 2017 and September 30, 2017, accrued liabilities consisted of the following:

NOTE 5 – SHARE CAPITAL

Authorized shares

The Company is authorized to issue 900,000,000 shares of common stock at par value of $0.0001includes customer funds in the condensed consolidated balance sheets as customer custodial cash and 15,000,000 shares of Series A preferred stock at par value of $0.0001.also includes such a corresponding liability reflected as customer custodial cash liabilities in the condensed consolidated balance sheets.

Common stock issued for Stock Purchase AgreementThe following table presents customers’ cash and digital positions:

As described in Note 1, on May 27, 2016, the Company acquired 100% of the issued and outstanding shares of Iron BVI for 24,156,000 shares of common stock of the Company. The shares were valued at $.0023 per share. As a result of the First Closing being contingent on the Second Closing, the 24,156,000 shares for the purchase of IBIH was recorded as “contingent common stock” due to the uncertainty of the closing of the transaction.

On November 17, 2017, the Company entered into the Iron Settlement Agreement. As a result, IBIH has returned the certificate representing the 24,156,000 shares of common stock of the Company and the shares have been cancelled by the Company.

Common stock and Series A preferred stock sold for cash

The Company agreedcontrols digital assets for its customers in digital wallets and digital token identifiers necessary to sell to CMH 30,900,000 sharesaccess digital assets on digital asset trading platforms. The Company maintains a record of common stockall assets in digital wallets held on digital asset trading platforms as well as the private keys, which are maintained on behalf of customers. The Company records the assets and 200,000 shares of Series A preferred stock for $2,000,000 in two equal installments. The first close occurredliabilities, on June 7, 2016. Originally, the second closing was to occur withinitial recognition and at each reporting date, at the closingfair value of the Company’s acquisitiondigital assets which it controls for its customers. Any loss or theft would impact the measurement of IBIH. Since the acquisition of IBIH transaction was terminated,customer digital currency assets. During the second closingthree and six months ended March 31, 2023 and 2022, no losses have been incurred in connection with CMH will not proceed.customer digital currency assets. The Company also controls the bank accounts holding the customer custodial cash, as reflected on the accompanying condensed consolidated balance sheets.

The Series A preferred stock hasfollowing table sets forth the following key terms:fair market value of customer digital currency assets, as shown in the condensed consolidated balance sheets, as customer digital currency assets and customer digital currency liabilities, as of March 31, 2023 and September 30, 2022:

During the first close, 15,450,000 shares of common stock and 100,000 shares of Series A preferred stock were issued and were recorded as equity and as a long-term liability, respectively. The $1,000,000 of proceeds received was allocated to the common stock and Series A preferred stock according to their relative fair values determined at the time of issuance, and as a result, the Company recorded a total discount of $45,793 on the Series A preferred stock, which is being amortized to interest expense to the date of redemption. For the three months ended December 31, 2017 and 2016, amortization of debt discount amounted to $2,290 and $2,289, respectively.

NUKKLEUS INC. AND SUBSIDIARY

SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 – SHARE CAPITAL (continued)DIGITAL ASSETS

Common stock and Series A preferred stock sold for cash (continued)

The termsfollowing table summarizes the Company’s digital asset holdings as of March 31, 2023:

The following table summarizes the Series A preferred stock issued represent mandatory redeemable shares,Company’s digital asset holdings as of September 30, 2022:

The Company recorded impairment expense of $133 and $0 for the three months ended March 31, 2023 and 2022, respectively. The Company recorded impairment expense of $7,743 and $0 for the six months ended March 31, 2023 and 2022, respectively.

NOTE 6 – NOTE RECEIVABLE

As of March 31, 2023, the Company made loans with an aggregate principal of $154,150 to Brilliant. The principal shall be payable promptly after the date on which Brilliant consummates an initial business combination with a target business. The principal may be prepaid at any time. These loans bear a fixed redemption date (in 5 years)interest rate of 0% per annum. These loans shall not be convertible into any securities of Brilliant, and the Company shall have no recourse with respect to Brilliant’s ability to convert these loans into any securities of Brilliant (See Note 15 – Merger).

NOTE 7 – COST METHOD INVESTMENT

At March 31, 2023, cost method investment amounted to $6,602,000. The investment represents the Company’s minority interest in Jacobi, a private company focused on digital asset management that has a choice of redeemingreceived regulatory approval to launch the instrument either in cash or a variable number ofworld’s first tier one Bitcoin ETF.

On December 15, 2021, the Company issued 20,000,000 shares of its common stock basedto Jacobi’s shareholders for acquisition of 5.0% equity interest of Jacobi. These shares were valued at $6,602,000 ($0.3301 per share), the fair market value on a formulathe 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 certificatenon-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 designation.this investment as of March 31, 2023. 

NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 – EQUITY METHOD INVESTMENT

As of both March 31, 2023 and September 30, 2022, the equity method investment amounted to $0. The conversion price hasinvestment represents the Company’s interest in Digiclear. Digiclear was incorporated on July 13, 2021 in United Kingdom. The company and the other unrelated party accounted for 50% and 50% of the total ownership, respectively. Digiclear is a floorcompany developing a custody and settlement utility operating system.

The Company accounts for the investment in Digiclear under the equity method of $0.20 per share. As such, all dividends accrued and/or paidaccounting. 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 accretions are classifiedimpairment loss relating to the investment.

In September 2022, the Company assessed its equity method investment for any impairment and concluded that there were indicators of impairment as part of interest expense. September 30, 2022. The impairment is due to the Company’s conclusion that it will be unable to recover the carrying amount of the investment due to the investee’s a series of operating losses and global economic environment. The Company calculated that the estimated undiscounted cash flows were less than the carrying amount related to the equity method investment. The Company has recognized an impairment loss of $4,310,745 related to the equity method investment for the year ended September 30, 2022, which reduced the investment value to zero.

NOTE 9 – INTANGIBLE ASSETS

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

At March 31, 2023 and September 30, 2022, intangible assets consisted of the following:

For the three months ended DecemberMarch 31, 20172023 and 2016, dividends on redeemable preferred stock2022, amortization expense amounted to $3,750. $592,891 and $592,891, respectively, of which, $526,601 and $526,601 was included in cost of revenue – financial services, and $66,290 and $66,290 was included in operating expenses, respectively.