| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | NOTE
3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Use
of estimates The
preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Changes in these estimates and assumptions
may have a material impact on the consolidated financial statements and accompanying notes. Making estimates requires management to exercise
significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances
that existed at the date of the financial statements, which management considered in formulating its estimate, could change in the near
term due to one or more future confirming events. Accordingly, the actual results could differ significantly from those estimates. Significant
estimates during the years ended September 30, 2023 and 2022 include the allowance for doubtful accounts, useful life of intangible assets,
assumptions used in assessing impairment of long-term assets, valuation of deferred tax assets and the associated valuation allowances,
valuation of stock-based compensation, and fair value of customer digital currency assets and liabilities. Reverse recapitalization Pursuant to the Merger Agreement, the merger between
Brilliant and Old Nukk was accounted for as a reverse recapitalization in accordance with US GAAP (the “Reverse Recapitalization”).
Accordingly, for accounting purposes, the Reverse Recapitalization was treated as the equivalent of Old Nukk issuing stock for the net
assets of Brilliant, accompanied by a recapitalization. The net assets of Brilliant are stated at historical cost, with no goodwill or
other intangible assets recorded. Old Nukk was determined to be the accounting acquirer
based on the following predominant factors:
● Old Nukk’s existing stockholders have the greatest
voting interest in the Combined Company;
● Old Nukk controls the majority of the board of directors
of the Combined Company and, given the board of directors election and retention provisions, Old Nukk holds the ability to maintain control
of the board of directors on a go-forward basis; and
● Old Nukk’s senior management is the senior management
of the Combined Company. The consolidated assets, liabilities, and
results of operations prior to the Reverse Recapitalization are those of Old Nukk. The shares and corresponding capital amounts and losses
per share, prior to the Reverse Recapitalization, have been retroactively restated based on shares reflecting the exchange ratio of 36.44532
established in the Business Combination. Cash
and cash equivalents At
September 30, 2023 and 2022, the Company’s cash balances by geographic area were as follows:
Country: September 30, 2023 September 30, 2022
United States $ 7,675 39.7 % $ 47,860 13.1 %
United Kingdom 11,469 59.4 % 315,989 86.8 %
Malta 174 0.9 % 174 0.1 %
Total cash $ 19,318 100.0 % $ 364,023 100.0 % For
purposes of the 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 September 30, 2023 and
2022. Cash and cash equivalents excludes customer legal tender, which is reported separately as Customer custodial cash in the accompanying
consolidated balance sheets. Refer to “customer custodial cash and customer custodial cash liabilities” below for further
details. Customer
custodial cash and customer custodial cash liabilities Customer
custodial cash represents cash and cash equivalents maintained in Company bank accounts that are controlled by the Company but held for
the benefit of customers. Customer custodial cash liabilities represent these cash deposits to be utilized for its contractual obligations
to its customers. The Company classifies the assets as current based on their purpose and availability to fulfill the Company’s
direct obligations to its customers. Customer
digital currency assets and liabilities At
certain times, Digital RFQ’s customers’ funds that Digital RFQ uses to make payments on behalf of its customers, remain in
the form of digital assets in its customers’ wallets at its digital asset trading platforms awaiting final conversion and/or transfer
to the customer’s payment final destination. These indirectly held digital assets, may consist of USDT (Stablecoin), Bitcoin, and
Ethereum (collectively, “Customer digital currency assets”). Digital RFQ maintains the internal recordkeeping of its customer
digital currency assets, including the amount and type of digital asset owned by each of its customers. Digital
RFQ has control of the private keys and knows the balances of all wallets with its digital asset trading platforms in order to be able
to successfully carry out the movement of digital assets for its client payment instruction. As part of its customer payment instruction,
Digital RFQ can execute withdrawals on the wallets in its digital asset trading platforms. Management
has determined that Digital RFQ has control of the customer digital currency assets and records these assets on its balance sheet with
a corresponding liability. Digital RFQ recognizes customer digital currency liabilities and corresponding customer digital currency assets,
on initial recognition and at each reporting date, at fair value of the customer digital currency assets. Subsequent changes in fair
value are adjusted to the carrying amount of these customer digital currency assets, with changes in fair value recorded in other general
and administrative expense in the consolidated statements of operations and comprehensive loss. Any
loss, theft, or other misuse would impact the measurement of customer digital currency assets. The Company classifies the customer digital
currency assets as current based on their purpose and availability to fulfill the Company’s direct obligations to its customers. Fair
value of financial instruments and fair value measurements The
Company adopted the guidance of Accounting Standards Codification (“ASC”) 820 for fair value measurements which clarifies
the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs
used in measuring fair value as follows :
● Level
1-Inputs are unadjusted quoted prices in active markets
for identical assets or liabilities available at the measurement date.
● Level
2-Inputs are unadjusted quoted prices for similar assets and liabilities in active markets,
quoted prices for identical or similar assets and liabilities in markets that are not active,
inputs other than quoted prices that are observable, and inputs derived from or corroborated
by observable market data.
● Level
3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions
on what assumptions the market participants would use in pricing the asset or liability based
on the best available information. The
fair value of the Company’s assets and liabilities, which qualify as financial instruments under ASC Topic 820, “Fair Value
Measurement,” approximates the carrying amounts represented in the accompanying consolidated financial statements, primarily due
to their short-term nature. Assets
and liabilities measured at fair value on a recurring basis. As
of September 30, 2023, the Company did not have any customer digital currency assets and liabilities. The
following table provides these assets and liabilities carried at fair value, measured as of September 30, 2022:
Quoted Price in Significant Other Significant Balance at
(Level 1) (Level 2) (Level 3) 2022
Customer digital currency assets $ - $ 248,214 $ - $ 248,214
Customer digital currency liabilities $ - $ 248,214 $ - $ 248,214 Customer
digital currency assets and liabilities represent the Company’s obligation to safeguard customers’ digital assets. Accordingly,
the Company has valued the assets and liabilities using quoted market prices for the underlying digital assets which is based on Level
2 inputs. Assets
and liabilities measured at fair value on a nonrecurring basis. Intangible assets Investments. ASC
825-10 “Financial Instruments”, allows entities to voluntarily choose to measure certain financial assets and liabilities
at fair value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable, unless
a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses for that instrument should
be reported in earnings at each subsequent reporting date. The Company did not elect to apply the fair value option to any outstanding
instruments. Credit
risk and uncertainties The
ramifications of the outbreak of the novel strain of COVID-19, reported to have started in December 2019 and spread globally, are filled
with uncertainty and changing quickly. Our operations have continued during the COVID-19 pandemic and we have not had significant disruption. The
Company is operating in a rapidly changing environment so the extent to which COVID-19 impacts its business, operations and financial
results from this point forward will depend on numerous evolving factors that the Company cannot accurately predict. Those factors include
the following: the duration and scope of the pandemic; governmental, business and individuals’ actions that have been and continue
to be taken in response to the pandemic. The
Company maintains a portion of its cash in bank and financial institution deposits within U.S. that at times may exceed federally-insured
limits of $250,000. The Company manages this credit risk by concentrating its cash balances, including customer custodial cash, in high
quality financial institutions and by periodically evaluating the credit quality of the primary financial institutions holding such deposits.
The Company may also hold cash at digital asset trading platforms and performs a regular assessment of these digital asset trading platforms
as part of its risk management process. The Company has not experienced any losses in such bank accounts and believes it is not exposed
to any risks on its cash in bank accounts. At September 30, 2023, the Company’s customer custodial cash balance had approximately
$317,000 in excess of the federally-insured limits. We
may maintain our cash assets at financial institutions in the U.S. in amounts that may be in excess of the Federal Deposit Insurance
Corporation (“FDIC”) insurance limit of $250,000. Actual events involving limited liquidity, defaults, non-performance or
other adverse developments that affect financial institutions, transactional counterparties or other companies in the financial services
industry or the financial services industry generally, or concerns or rumors about any events of these kinds or other similar risks,
have in the past and may in the future lead to market-wide liquidity problems. For example, in response to the rapidly declining financial
condition of regional banks Silicon Valley Bank (“SVB”) and Signature Bank (“Signature”), the California Department
of Financial Protection and Innovation and the New York State Department of Financial Services closed SVB and Signature on March 10,
2023 and March 12, 2023, respectively, and the FDIC was appointed as receiver for SVB and Signature. In the event of a failure or liquidity
issues of or at any of the financial institutions where we maintain our deposits or other assets, we may incur a loss to the extent such
loss exceeds the FDIC insurance limitation, which could have a material adverse effect upon our liquidity, financial condition and our
results of operations. Similarly, if our customers experience liquidity issues as a result of financial institution defaults or non-performance
where they hold cash assets, their ability to pay us may become impaired and could have a material adverse effect on our results of operations,
including the collection of accounts receivable and cash flows. Financial
instruments which potentially subject the Company to concentrations of credit risk consist principally of trade accounts receivable.
A portion of the Company’s sales are credit sales which is to the customer whose ability to pay is dependent upon the industry
economics prevailing in these areas; however, concentrations of credit risk with respect to trade accounts receivable is limited due
to short-term payment terms. The Company also performs ongoing credit evaluations of its customers to help further reduce credit risk. Digital
assets The
digital assets held by the Company are accounted for as intangible assets with indefinite useful lives, and are initially measured at
cost. Digital assets accounted for as intangible assets are subject to impairment losses if the fair value of digital assets decreases
below the carrying value at any time during the period. The fair value is measured using the quoted price of the digital asset at the
time its fair value is being measured. Impairment expense is reflected in other general and administrative expense in the consolidated
statements of operations and comprehensive loss. The Company assigns costs to transactions on a first-in, first-out basis. Note
receivable – related parties Note receivable – related parties is presented net of an allowance
for doubtful account. The Company maintains allowance for doubtful account for estimated loss. The Company reviews the note receivable
– related parties on a periodic basis and makes general and specific allowance when there is doubt as to the collectability of individual
balance. In evaluating the collectability of individual receivable balance, the Company considers many factors, including the age of the
balance, a borrower’s historical payment history, its current credit-worthiness and current economic trend. Note is written off
after exhaustive efforts at collection. At September 30, 2023 and 2022, the Company has established, based on a review of its outstanding
balances, an allowance for doubtful account in the amounts of $637,072 and $0, respectively, for its note receivable – related parties. Investments Investment
in which the Company does not have the ability to exercise significant influence over operating and financial matters are accounted for
using the cost method. Under the cost method, investment is recorded at cost, with gains and losses recognized as of the sale
date, and income recorded when received. The Company periodically evaluates its cost method investment for impairment due to decline
considered to be other than temporary. If the Company determines that a decline in fair value is other than temporary, then a charge to
earnings is recorded in “Operating expenses – Impairment loss” in the accompanying consolidated statements of operations
and comprehensive loss, and a new basis in the investment is established. Impairment of cost method investment amounted to $6,210,783
for the year ended September 30, 2023. The Company did not record any impairment charge for cost method investment for the year ended
September 30, 2022 as there was no impairment indicator noted. The
Company uses the equity method of accounting for its investment 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. No impairment of equity method investment
was recorded for the year ended September 30, 2023. Impairment of equity method investment amounted to $4,310,745 for the year ended
September 30, 2022. Variable interest entity (“VIE”) A VIE is an entity that either (i) has insufficient
equity to permit the entity to finance its activities without additional subordinated financial support or (ii) has equity investors who
lack the characteristics of a controlling financial interest. The primary beneficiary of a VIE is the party with both the power to direct
the activities of the VIE that most significantly impact the VIE’s economic performance and the obligation to absorb the losses
or the right to receive benefits that could potentially be significant to the VIE. To assess whether the Company has the power to
direct the activities of a VIE that most significantly impact its economic performance, the Company considers all the facts and circumstances
including its ongoing rights and responsibilities. This assessment includes identifying the activities that most significantly impact
the VIE’s economic performance and identifying which party, if any, has power over those activities. In general, the party that
makes the most significant decisions affecting the VIE is determined to have the power to direct the activities of the VIE. To assess
whether the Company has the obligation to absorb the losses or the right to receive benefits that could potentially be significant to
the VIE, the Company considers all of its economic interests, including debt and equity interests, and any other variable interests in
the VIE. If the Company determines that it is the party with the power to make the most significant decisions affecting the VIE, and the
Company has an obligation to absorb the losses or the right to receive benefits that could potentially be significant to the VIE, then
the Company consolidates the VIE. The Company analyzes its investment in Jacobi
to determine whether it is a VIE and, if so, whether the Company is the primary beneficiary in accordance with ASC 810 Consolidation.
The Company determines Jacobi is a VIE since it has insufficient equity to permit it to finance its activities without additional subordinated
financial support. In determining whether it is the primary beneficiary, the Company considers whether it has the power to direct the
activities of the VIE that most significantly impact the VIE’s economic performance. The Company also considers whether it has the obligation
to absorb losses of, or the right to receive benefits from, the VIE. The Company is not the primary beneficiary of Jacobi as it does not
have the power to direct the activities that most significantly impact the economic performance of Jacobi, due to Jacobi’ management
and board of directors’ structure. As a result, the variable interest entity is not consolidated. Creditors of the Company’s
variable interest entity do not have recourse against the general credit of the Company. The Company uses the cost method to account for
its investment in Jacobi in which the Company is not deemed to be the primary beneficiary. The Company’s investment in unconsolidated variable
interest entity is classified as cost method investment in the consolidated balance sheets. The Company’s assets and liabilities with
the variable interest entity are classified as due from/to affiliates. As of September 30, 2023 and 2022, the carrying
value of assets and liabilities recognized in the consolidated balance sheets related to the Company’s interest in the non-consolidated
VIE and the Company’s maximum exposure to loss relating to non-consolidated VIE were as follows:
September 30, September 30,
Cost method investment $ 391,217 $ 6,602,000
Due from affiliates 95,274 -
Total VIE assets $ 486,491 $ 6,602,000
Maximum exposure to loss $ 486,491 $ 6,602,000 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. In September
2023, the Company assessed its long-lived assets for any impairment and concluded that there were indicators of impairment as of September
30, 2023 and it calculated that the estimated undiscounted cash flows related to its intangible assets and cost method investment were
less than their carrying amounts. Based on its analysis, the Company recognized an impairment loss of $11,914,322 for the year
ended September 30, 2023. The Company did not record any impairment charge for its intangible assets and cost method investment for the
year ended September 30, 2022 as there was no impairment indicator noted. In September
2022, the Company assessed its long-lived assets for any impairment and concluded that there were indicators of impairment as of September
30, 2022 and it calculated that the estimated undiscounted cash flows related to its equity method investment were less than the carrying
amount of the equity method investment. Based on its analysis, the Company recognized an impairment loss of $4,310,745 for the
year ended September 30, 2022, which reduced the value of equity method investment to $0. Disaggregation
of revenues The
Company’s revenues stream detail are as follows:
Revenue Stream Revenue Stream Detail
General support services Providing software, technology, customer sales and marketing and risk management technology hardware and software solutions package under a GSA to a related party
Financial services Providing payment services from one fiat currency to another or to digital assets In
the following table, revenues are disaggregated by segment for the years ended September 30, 2023 and 2022:
Years Ended September 30,
Revenue Stream 2023 2022
General support services $ 19,200,000 $ 19,200,000
Financial services 2,097,642 2,313,474
Total revenues $ 21,297,642 $ 21,513,474 Revenue
recognition The
Company determines revenue recognition from contracts with customers through the following steps:
● Step 1: Identify the contract
with the customer
● Step 2: Identify the performance
obligations in the contract
● Step 3: Determine the transaction
price
● Step 4: Allocate the transaction
price to the performance obligations in the contract
● Step 5: Recognize revenue
when the company satisfies a performance obligation Revenue
is recognized when control of the promised goods or services is transferred to the customers, in an amount that reflects the consideration
the Company expects to be entitled to in exchange for those goods or services. The Company’s revenues are derived from providing:
● General support services under a GSA to a related party. The transaction price is determined in accordance with the terms of the GSA and payments are due on a monthly basis. There are multiple services provided under the GSA (including operational reporting and technical support infrastructure, website hosting and marketing solutions, accounting maintenance, risk monitoring services, new account processing and customer care and continued support) and these performance obligations are combined into a single unit of accounting. Fees are recognized as revenue over time as the services are rendered under the terms of the GSA. The Company recognizes the full contracted amount each period with no deferred revenue. The nature of the performance obligation is to provide the specified goods or services directly to the customer. The Company engages another party to satisfy the performance obligation on its behalf. The Company’s performance obligation is not to arrange for the provision of the specified good or service by another party. The Company is primarily responsible for fulfilling the promise to provide the specified good or service. Therefore, the Company is deemed to be a principal in the transaction and recognizes revenue for that performance obligation. The Company is a financial technology company which is focused on providing software and technology solutions for the worldwide retail foreign exchange (“FX”) trading industry. Under a GSA, the Company is contractually obligated to provide for the fulfillment software, technology, customer sales and marketing and risk management technology hardware and software solutions package to TCM. The Company provides these services, obtained from affiliate service provider FXDirect Dealer, LLC which is under common ownership, and controls the services of its service provider necessary to legally transfer of the services to TCM. Consequently, the Company is defined as the principal in the transaction. The Company, as principal, satisfies its obligation by providing ongoing service support enabling TCM to conduct its retail FX business without interruption. Upon satisfaction of its obligation, the Company recognizes revenue in the gross amount of consideration it is entitled to receive. The monthly GSA price is calculated by applying the Company’s approximately 2% mark-up to the costs of the services being provided by FXDirect Dealer, LLC.
● Financial
services to its customers. Revenue related to its financial services offerings are recognized
at a point in time when service is rendered. Prepayments, if any, received from customers
prior to the services being performed are recorded as advances from customers. In these cases,
when the services are performed, the appropriate portion of the amount recorded as advance
from customers is recognized as revenue. There are 4 distinct stages that each trade must
go through to be completed and must be converted from one currency into another. Where possible,
fees are taken in United States dollar (“USD”) and therefore if there is an agreed
fee with the client then this will be taken on the USD leg of the transaction regardless
of whether it is pre-conversion or post-conversion. The first stage is notification and there
is no real opportunity for us to realize revenue at this stage. The second stage is the funding
stage and it allows us to charge the agreed fee before any currency conversion, we call this
pre-trade revenue. The third stage of the transaction is conversion and we are able to realize
revenue in the spread between the price we pay for the conversion and the price we charge
the client for the conversion. The fourth opportunity for us to realize revenue (charge our
fee) is after the conversion has taken place (post-trade). Advertising
and marketing costs All
costs related to advertising and marketing are expensed as incurred. For the years ended September 30, 2023 and 2022, advertising and
marketing costs amounted to $55,889 and $420,186, respectively, which was included in operating expenses on the accompanying consolidated
statements of operations and comprehensive loss. Stock-based
compensation The
Company measures and recognizes compensation expense for all stock-based awards granted to non-employees, including stock options, based
on the grant date fair value of the award. The Company estimates the grant date fair value of each option award using the Black-Scholes
option-pricing model. For
non-employee stock-based awards, fair value is measured based on the value of the Company’s common stock on the date that the commitment
for performance by the counterparty has been reached or the counterparty’s performance is complete. The fair value of the equity
instrument is calculated and then recognized as compensation expense over the requisite performance period. Income
taxes The
Company accounts for income taxes pursuant to Financial Accounting Standards Board (“FASB”) ASC 740, Income Taxes. Deferred
tax assets and liabilities are determined based on temporary differences between the bases of certain assets and liabilities for income
tax and financial reporting purposes. The deferred tax assets and liabilities are classified according to the financial statement classification
of the assets and liabilities generating the differences. The
Company maintains a valuation allowance with respect to deferred tax assets. The Company establishes a valuation allowance based upon
the potential likelihood of realizing the deferred tax asset and taking into consideration the Company’s financial position and
results of operations for the current period. Future realization of the deferred tax benefit depends on the existence of sufficient taxable
income within the carry-forward period under the Federal and foreign tax laws. Changes in circumstances, such as the Company generating
taxable income, could cause a change in judgment about the realizability of the related deferred tax asset. Any change in the valuation
allowance will be included in income in the period of the change in estimate. The
Company follows the provisions of FASB ASC 740-10 Uncertainty in Income Taxes (ASC 740-10). Certain recognition thresholds must be met
before a tax position is recognized in the financial statements. An entity may only recognize or continue to recognize tax positions
that meet a “more-likely-than-not” threshold. Foreign
currency translation The
reporting currency of the Company is U.S. Dollars. The functional currency of the parent company, Nukkleus Inc., Nukkleus Limited, Nukkleus
Malta Holding Ltd. and its subsidiaries, is the U.S. dollar, the functional currency of Match Financial Limited and its subsidiary, Digital
RFQ, is the British Pound (“GBP”), the functional currency of Digital RFQ’s subsidiary, DRFQ Europe UAB, is Euro, and
the functional currency of Digital RFQ’s subsidiary, DRFQ Pay North America, is CAD. Monetary assets and liabilities denominated
in currencies other than the reporting currency are translated into the reporting currency at the rates of exchange prevailing at the
balance sheet date. Revenue and expenses are translated using average rates during each reporting period, and stockholders’ equity
is translated at historical exchange rates. Cash flows are also translated at average translation rates for the periods, therefore, amounts
reported on the statements of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheets.
Translation adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are included
in determining comprehensive income/loss. Transactions
denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing on the transaction dates.
Assets and liabilities denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing
at the balance sheet date with any transaction gains and losses that arise from exchange rate fluctuations on transactions denominated
in a currency other than the functional currency are included in the results of operations as incurred. Most of the Company’s revenue
transactions are transacted in the functional currency of the Company. The Company does not enter into any material transaction
in foreign currencies. Transaction gains or losses have not had, and are not expected to have, a material effect on the results of operations
of the Company. Asset
and liability accounts at September 30, 2023 and 2022 were translated at 0.8199 GBP and 0.8987 GBP to $1.00, respectively, which were
the exchange rates on the balance sheet dates. Asset and liability accounts at September 30, 2023 and 2022 were translated at 0.9446
EUR and 1.0221 EUR to $1.00, respectively, which were the exchange rates on the balance sheet dates. Asset and liability accounts at
September 30, 2023 were translated at 1.3591 CAD to $1.00, which was the exchange rate on the balance sheet date. Equity accounts were
stated at their historical rates. The average translation rate applied to the statement of operations for the years ended September 30,
2023 and 2022 was 0.8161 GBP and 0.7835 GBP to $1.00, respectively. The average translation rate applied to the statement of operations
for the year ended September 30, 2023 and for the period from January 12, 2022 through September 30, 2022 was 0.9368 EUR and 0.9440 EUR
to $1.00. The average translation rate applied to the statement of operations for the period from February 1 |
