Overview

Nukkleus Inc. (the “Company”) was historically focused on providing software, technology solutions, customer sales and marketing, and risk management technology hardware and software solutions packages for the worldwide retail foreign exchange (“FX”) trading industry and payment services from one fiat currency to another or to digital assets.

In January 2024, the Company ceased providing its general support services to customers, terminating its existing customer and supplier contracts with a related party, and shifted its focus to its payment services business. In November 2024, the Company entered into a Settlement Agreement and Release to sell the subsidiary that operates the payment services business to a shareholder in consideration of GBP 1,000 (approximately $1,338 at September 30, 2024).

In December 2024, the Company entered into a Securities Purchase Agreement and Call Option with Star 26 Capital Inc. (“Star”), an Israeli corporation engaged as a supplier of generators for “iron dome” launchers and other defense products, to acquire a controlling 51% interest in Star. As a result of the Settlement Agreement and subject to the closing of the acquisition of Star, the Company’s business will be focused on the defense sector.

Recent Developments

Executive Change: The Company’s Chief Executive Officer resigned in July 2024, and a new CEO was appointed. The new CEO then resigned in September 2024, and another individual was appointed as the Current CEO.

Reverse stock split: Effective October 24, 2024, the Company implemented a one-for-eight reverse stock split and increased the number of authorized shares.

Conversion Agreement: On November 8, 2024, the Company entered into a Conversion Agreement to convert outstanding principal and interest totaling $771,085 payable under the Lender’s convertible notes payable into 319,952 shares of the Company’s common stock.

Sales of Securities: On November 8, 2024 and November 18, 2024, the Company sold 110,707 and 138,556 shares of common stock for aggregate gross proceeds of $231,882 and $246,145, respectively.

Disposition of Subsidiary: On November 8, 2024, the Company entered into a Settlement Agreement to sell a subsidiary that operates the payment services business to a shareholder in consideration of GBP 1,000 (approximately $1,338 at September 30, 2024).

Exit and Settlement Agreement: On November 8, 2024, the Company entered into an exit and settlement agreement with three directors, under which each director resigned, and the Company issued 46,700 fully vested shares of common stock to each former director.

Bylaws Amendment: On November 8, 2024, the Board approved an amendment to the Company’s Bylaws to decrease the quorum requirement from a majority to one-third of the voting power.

Standby Equity Purchase Agreement: On December 3, 2024, the Company entered into a Standby Equity Purchase Agreement with an investor, under which the Company had the right to sell up to $10 million of shares. This agreement was terminated on December 19, 2024.

Securities Purchase Agreement: On December 15, 2024, the Company entered into a Securities Purchase Agreement to acquire a controlling 51% interest in Star in exchange for an aggregate investment of $15,000,000.

Private Placement: On December 18, 2024, the Company entered into a Securities Purchase Agreement for a private placement, pursuant to which an investor agreed to purchase 1,666,666 units for an aggregate purchase price of $10,000,000.

Incentive Equity Grants: On December 16, 2024, the Company issued an aggregate of 1,337,500 restricted stock grants to various executive officers, directors and consultants.

Comparability of Financial Information

The Company’s historical operations and statements of assets and liabilities may not be comparable to its operations and statements of assets and liabilities as a result of the Business Combination and becoming a public company.

Business Combination and Public Company Costs

On December 22, 2023, the Company consummated the merger contemplated by the Business Combination, with Old Nukk surviving the merger as a wholly-owned subsidiary. Upon the closing of the Business Combination, the Company became a Nasdaq listed company, which will require the Company to hire additional personnel and implement procedures to address public company regulatory requirements and customary practices.

Key Business Metrics

The key performance indicators that provide management with the most immediate understanding of the drivers of business performance and tracking of financial targets are:

The decrease in trading volume, financial services revenue, and number of trades in 2024 was primarily due to the closure of the Company’s primary USD Banking rails when Signature and Silvergate closed in March 2023. The decrease in average cost per trade was due to the full amortization of intangible assets in the prior year.

Components of Results of Operations

Revenue consists of general support services revenue and financial services revenue. General support services revenue represents revenue earned from an affiliate for providing general support services. Financial services revenue represents transaction revenue earned from customers for payment processing services.

Cost of revenues consists of cost of revenue for general support services and financial services. Cost of revenue for general support services consists of costs paid to an affiliate that performs the general support services. Cost of revenue for financial services consists of costs of completing payment processing transactions, including broker fees, banking, and trading fees.

Operating expenses consist of advertising, professional fees, compensation and related benefits, amortization of intangible assets, bad debt expense - related parties, other general and administrative, and impairment loss.

Other (expense) income, net consists of interest expense, gain (loss) on extinguishment of liabilities, and other income.

Results of Operations

Comparison for the Year Ended September 30, 2024 Versus the Year Ended September 30, 2023:

Revenues:

• General support services revenue decreased by $14,400,000 or 75.0% due to the termination of the customer contract.
• Financial services revenue decreased by $984,181 or 46.9% due to the closure of the Company’s primary USD Banking rails.

Costs of Revenues:

• Cost of general support services decreased by $14,125,000 or 75.2% due to the termination of the supplier contract.
• Cost of financial services decreased by $2,600,838 or 90.8% primarily due to the full amortization of intangible assets in the prior year.

Gross Profit (Loss):

• Gross margin from general support services decreased by 64.7%, but the gross margin percentage increased to 3.1% from 2.2% due to the decrease in cost of general support services.
• Gross margin from financial services increased by 210.5%, with the gross margin percentage increasing to 76.2% from (36.6)% due to the decrease in cost of financial services.

Operating Expenses:

• Advertising expense decreased by 20.4% due to decreased advertising activities in the financial services segment.
• Professional fees increased by 177.8% primarily due to additional costs associated with the December 2023 business combination.
• Compensation and related benefits increased by 16.5% due to increased management and personnel in the financial services segment.
• Amortization of intangible assets decreased by 95.0% due to the impairment loss recorded in the prior year that reduced the carrying value to zero.
• Bad debt expense - related parties increased by 420.5% due to the write-off of a significant receivable related to the terminated GSA agreement.
• Other general and administrative expenses increased by 98.5% primarily due to additional costs associated with operating as a public company.
• Impairment loss decreased by 96.7% due to the significant impairment recorded in the prior year.

Other (Expense) Income:

• Other income, net increased by $5,624,697 or 16,166.2% primarily due to a gain on termination of the GSS GSA agreement with a related party.

Liquidity and Capital Resources

The Company believes its existing cash, exclusive of customer custodial cash, and the $10.0 million raised through the December 2024 private placement will be sufficient to meet its short-term and long-term cash requirements. The Company may seek additional equity or debt financing if current and anticipated future sources of liquidity are insufficient.

Cash Flows

• Net cash used in operating activities was $3,818,443 in 2024 compared to $1,232,382 in 2023, primarily due to the consolidated net loss.
• Net cash provided by (used in) investing activities was $132,826 in 2024 compared to $(1,109,936) in 2023, primarily due to the repayment of a note receivable from a related party.
• Net cash provided by financing activities was $3,000,403 in 2024 compared to $418,316 in 2023, primarily due to proceeds from loans, convertible debt, and the private placement.

Critical Accounting Estimates

The Company’s critical accounting estimates include:

• Acquired intangible assets
• Investments
• Revenue recognition
• Stock-based compensation
• Warrants
• Income taxes
• Legal and other contingencies

These estimates involve significant judgment, assumptions, and the use of unobservable inputs, which could materially impact the Company’s financial statements.