Nukkleus Inc

Previous wording

The following discussion and analysis of our financial condition and results of operations for the three and six months ended March 31, 2024 and 2023 should be read in conjunction with our condensed consolidated financial statements and related notes to those condensed consolidated financial statements that are included elsewhere in this report.

Current wording

The following discussion and analysis of our financial condition and results of operations for the three and nine months ended June 30, 2024 and 2023 should be read in conjunction with our condensed consolidated financial statements and related notes to those condensed consolidated financial statements that are included elsewhere in this report.

Previous wording

Through our Digital RFQ subsidiary, we aim to provide cross-border payment and transactions solutions to institutional investors, and offer blockchain-enabled financial services solutions to institutional investors in a secure, compliant and globally accessible manner. The blockchain-enabled payment gateway we have developed has the capability to deliver global cross-border transfers of fiat currencies using blockchain rails. Digital RFQ currently offers payment and settlement services, including those utilizing blockchain networks, but does not provide custody or wallet services with respect to digital assets, and does not hold digital assets, reducing the risks and regulatory burden on its business. In future, Digital RFQ plans to offer a white-labelled digital bank with end-to-end digital banking solutions for international business. We are uncertain as to when we will be able to offer these products and intend to evaluate potential strategic opportunities for DigiClear which may include the sale of the assets or a joint venture, of which there is no guarantee. Our competitors in this product category are banks and other financial institutions, and we intend to compete by offering faster and more reliable products using more advanced technology. Products and services offered by Digital RFQ are distributed through our website.

Current wording

Through our Digital RFQ subsidiary, we aim to provide cross-border payment and transactions solutions to institutional investors, and offer blockchain enabled financial services solutions to institutional investors in a secure, compliant and globally accessible manner. The blockchain-enabled payment gateway we have developed has the capability to deliver global cross-border transfers of fiat currencies using blockchain rails. Digital RFQ currently offers payment and settlement services, including those utilizing blockchain networks, but does not provide custody or wallet services with respect to digital assets, and does not hold digital assets, reducing the risks and regulatory burden on its business. In the future, Digital RFQ plans to offer a white labelled digital bank with end-to-end digital banking solutions for international business. We are uncertain as to when we will be able to offer these products and intend to evaluate potential strategic opportunities for DigiClear which may include the sale of the assets or a joint venture, of which there is no guarantee. Our competitors in this product category are banks and other financial institutions, and we intend to compete by offering faster and more reliable products using more advanced technology. Products and services offered by Digital RFQ are distributed through our website.

Previous wording

Trading volume is measured by number of trades and represents aggregate notional value of all trades.

Current wording

Trading volume ismeasured by number of trades and represents aggregate notional value of all trades.

Previous wording

Financial services income (loss) is measured as financial services revenue, less costs incurred associated with delivery of our services. For the three and six months ended March 31, 2023, cost of financial services includes amortization of intangible assets which consist of license and banking infrastructure acquired on Match acquisition, introducing broker fees, banking, and trading fees incurred associated with delivery of our services.

Current wording

Financial services profit (loss) is measured as financial services revenue, less costs incurred associated with delivery of our services. For the three and nine months ended June 30, 2023, cost of financial services includes amortization of intangible assets which consist of license and banking infrastructure acquired on Match acquisition, introducing broker fees, banking, and trading fees incurred associated with delivery of our services.

Previous wording

In September 2023, we assessed our intangible assets which were solely related to the Match acquisition (which consisted of license and banking infrastructure) for any impairment and concluded that there were indicators of impairment as of September 30, 2023. We calculated that the estimated undiscounted cash flows related to our intangible assets were less than their carrying amounts. We have not been able to realize the financial projections provided by Match at the time of the intangible assets purchase and have decided to impair the intangible assets to zero. Therefore, for the three and six months ended March 31, 2024, cost of financial services only includes introducing broker fees, banking, and trading fees incurred associated with delivery of our services. We had a financial services income for the six months ended March 31, 2024 as compared to financial services loss for the six months ended March 31, 2023.

Current wording

In September 2023, we assessed our intangible assets which were solely related to the Match acquisition (which consisted of license and banking infrastructure) for any impairment and concluded that there were indicators of impairment as of September 30, 2023. We calculated that the estimated undiscounted cash flows related to our intangible assets were less than their carrying amounts. We have not been able to realize the financial projections provided by Match at the time of the intangible assets purchase and have decided to impair the intangible assets to zero. Therefore, for the three and nine months ended June 30, 2024, cost of financial services only includes introducing broker fees, banking, and trading fees incurred associated with delivery of our services. We had a financial services profit for the three and nine months ended June 30, 2024 as compared to financial services loss for the three and nine months ended June 30, 2023.

Previous wording

Active clients for the three months ended March 31, 2024 and 2023 was 45 and 70, respectively. Active clients for the six months ended March 31, 2024 and 2023 was 66 and 127, respectively.

Current wording

Active clients for the three months ended June 30, 2024 and 2023 was 47 and 45, respectively. Active clients for the nine months ended June 30, 2024 and 2023 was 75 and 172, respectively.

Previous wording

Significant estimates during the three and six months ended March 31, 2024 and 2023 include the allowance for doubtful accounts, the useful life of intangible assets, the assumptions used in assessing impairment of long-term assets, the valuation of deferred tax assets and associated valuation allowances, the valuation of stock-based compensation, and the fair value of customer digital currency assets and liabilities.

Current wording

Significant estimates during the three and nine months ended June 30, 2024 and 2023 include the allowance for doubtful accounts, the useful life of intangible assets, the assumptions used in assessing impairment of long-term assets, the valuation of deferred tax assets and associated valuation allowances, the valuation of stock-based compensation, the fair value of customer digital currency assets and liabilities, and assumptions used to determine fair value of warrants, beneficial conversion feature and embedded conversion features of convertible note payable.

Previous wording

For the Three and Six Months Ended March 31, 2024 Versus the Three and Six Months Ended March 31, 2023

Current wording

For the Three and Nine Months Ended June 30, 2024 Versus the Three and Nine Months Ended June 30, 2023

Previous wording

For the three months ended March 31, 2024, we had revenue from general support services rendered to TCM under a GSA of $0, as compared to $4,800,000 for the three months ended March 31, 2023, a decrease of $4,800,000, or 100.0%. For the six months ended March 31, 2024, we had revenue from general support services rendered to TCM under a GSA of $4,800,000, as compared to $9,600,000 for the six months ended March 31, 2023, a decrease of $4,800,000, or 50.0%. Due to non-payment by TCM under the GSA, the Company had advised TCM that the GSA has been terminated effective January 1, 2024. The Company has historically generated substantially most of its revenue through the services rendered under the GSA to TCM, the sole customer in our general support services segment. We did not have any other customers in the three months ended March 31, 2024. We do not expect any revenue from general support services until we are successful in retaining other customers.

Current wording

For the three months ended June 30, 2024, we had revenue from general support services rendered to TCM under a GSA of $0, as compared to $4,800,000 for the three months ended June 30, 2023, a decrease of $4,800,000, or 100.0%. For the nine months ended June 30, 2024, we had revenue from general support services rendered to TCM under a GSA of $4,800,000, as compared to $14,400,000 for the nine months ended June 30, 2023, a decrease of $9,600,000, or 66.7%. Due to non-payment by TCM under the GSA, the Company had advised TCM that the GSA has been terminated effective January 1, 2024. The Company has historically generated substantially most of its revenue through the services rendered under the GSA to TCM, the sole customer in our general support services segment. We did not have any other customers in the three months ended June 30, 2024. We do not expect any revenue from general support services until we are successful in retaining other customers.

Previous wording

For the three months ended March 31, 2024, we had revenue from financial services of $259,757, as compared to $833,944 for the three months ended March 31, 2023, a decrease of $574,187, or 68.9%. For the six months ended March 31, 2024, we had revenue from financial services of $702,148, as compared to $1,410,332 for the six months ended March 31, 2023, a decrease of $708,184, or 50.2%. The decrease was primarily attributable to the closure of our primary USD Banking rails when Signature and Silvergate closed in March 2023. We expect that our revenue from financial services will remain at its current quarterly level with minimal increase in the near future.

Current wording

For the three months ended June 30, 2024, we had revenue from financial services of $175,214, as compared to $412,056 for the three months ended June 30, 2023, a decrease of $236,842, or 57.5%. For the nine months ended June 30, 2024, we had revenue from financial services of $877,362, as compared to $1,822,388 for the nine months ended June 30, 2023, a decrease of $945,026, or 51.9%. The decrease was primarily attributable to the closure of our primary USD Banking rails when Signature and Silvergate closed in March 2023. We expect that our revenue from financial services will remain at its current quarterly level with minimal increase in the near future.

Previous wording

For the three months ended March 31, 2024, our cost of general support services, which represented amount incurred for services rendered by FXDIRECT under a GSA, amounted to $0, as compared to $4,725,000 for the three months ended March 31, 2023, a decrease of $4,725,000, or 100.0%. For the six months ended March 31, 2024, our cost of general support services, which represented amount incurred for services rendered by FXDIRECT under a GSA, amounted to $4,650,000, as compared to $9,450,000 for the six months ended March 31, 2023, a decrease of $4,800,000, or 50.8%. The decrease was attributable to the decrease in our revenue from general support services, and, effective May 1, 2023, the amount payable by us to FXDIRECT for services under a GSA was reduced from $1,575,000 per month to $1,550,000 per month.

Current wording

For the three months ended June 30, 2024, our cost of general support services, which represented amount incurred for services rendered by FXDIRECT under a GSA, amounted to $0, as compared to $4,675,000 for the three months ended June 30, 2023, a decrease of $4,675,000, or 100.0%. For the nine months ended June 30, 2024, our cost of general support services, which represented amount incurred for services rendered by FXDIRECT under a GSA, amounted to $4,650,000, as compared to $14,125,000 for the nine months ended June 30, 2023, a decrease of $9,475,000, or 67.1%. The decrease was attributable to the decrease in our revenue from general support services, and, effective May 1, 2023, the amount payable by us to FXDIRECT for services under a GSA was reduced from $1,575,000 per month to $1,550,000 per month.

Previous wording

For the three and six months ended March 31, 2023, cost of financial services includes amortization of intangible assets which consist of license and banking infrastructure acquired on Match acquisition, introducing broker fees, banking, and trading fees incurred associated with delivery of our services.

Current wording

For the three and nine months ended June 30, 2023, cost of financial services includes amortization of intangible assets which consist of license and banking infrastructure acquired on Match acquisition, introducing broker fees, banking, and trading fees incurred associated with delivery of our services.

Previous wording

In September 2023, we assessed our intangible assets which were solely related to the Match acquisition (which consisted of license and banking infrastructure) for any impairment and concluded that there were indicators of impairment as of September 30, 2023. We calculated that the estimated undiscounted cash flows related to our intangible assets were less than their carrying amounts. We have not been able to realize the financial projections provided by Match at the time of the intangible assets purchase and have decided to impair the intangible assets to zero. Therefore, for the three and six months ended March 31, 2024, cost of financial services only includes introducing broker fees, banking, and trading fees incurred associated with delivery of our services.

Current wording

In September 2023, we assessed our intangible assets which were solely related to the Match acquisition (which consisted of license and banking infrastructure) for any impairment and concluded that there were indicators of impairment as of September 30, 2023. We calculated that the estimated undiscounted cash flows related to our intangible assets were less than their carrying amounts. We have not been able to realize the financial projections provided by Match at the time of the intangible assets purchase and have decided to impair the intangible assets to zero. Therefore, for the three and nine months ended June 30, 2024, cost of financial services only includes introducing broker fees, banking, and trading fees incurred associated with delivery of our services.

Previous wording

For the three months ended March 31, 2024, cost of financial services amounted to $63,196, as compared to $760,982 for the three months ended March 31, 2023, a decrease of $697,786, or 91.7%. For the six months ended March 31, 2024, cost of financial services amounted to $196,887, as compared to $1,467,243 for the six months ended March 31, 2023, a decrease of $1,270,356, or 86.6%. The significant decrease was primarily attributable to decreased amount of amortization of intangible assets which consist of license and banking infrastructure acquired on Match acquisition in the three and six months ended March 31, 2024.

Current wording

For the three months ended June 30, 2024, cost of financial services amounted to $49,738, as compared to $695,074 for the three months ended June 30, 2023, a decrease of $645,336, or 92.8%. For the nine months ended June 30, 2024, cost of financial services amounted to $246,625, as compared to $2,162,317 for the nine months ended June 30, 2023, a decrease of $1,915,692, or 88.6%. The significant decrease was primarily attributable to decreased amount of amortization of intangible assets which consist of license and banking infrastructure acquired on Match acquisition in the three and nine months ended June 30, 2024.

Previous wording

Our gross profit from general support services for the three months ended March 31, 2024 was $0, as compared to $75,000 for the three months ended March 31, 2023, a decrease of $75,000, or 100.0%. Our gross profit from general support services for both the six months ended March 31, 2024 and 2023 was $150,000. Gross margin increased to 3.1% for the six months ended March 31, 2024 from 1.6% for the six months ended March 31, 2023. The increase in our gross margin for the general support services segment for the six months ended March 31, 2024 as compared to the corresponding period of 2023 was attributed to the decrease in our cost of general support services as described above.

Current wording

Our gross profit from general support services for the three months ended June 30, 2024 was $0, as compared to $125,000 for the three months ended June 30, 2023, a decrease of $125,000, or 100.0%. Our gross profit from general support services for the nine months ended June 30, 2024 was $150,000, as compared to $275,000 for the nine months ended June 30, 2023, a decrease of $125,000, or 45.5%. Gross margin increased to 3.1% for the nine months ended June 30, 2024 from 1.9% for the nine months ended June 30, 2023. The increase in our gross margin for the general support services segment for the nine months ended June 30, 2024 as compared to the corresponding period of 2023 was attributed to the decrease in our cost of general support services as described above.

Previous wording

Gross profit from financial services for the three months ended March 31, 2024 was $196,561, as compared to $72,962 for the three months ended March 31, 2023, an increase of $123,599, or 169.4%. Gross margin increased to 75.7% for the three months ended March 31, 2024 from 8.7% for the three months ended March 31, 2023. Gross profit from financial services for the six months ended March 31, 2024 was $505,261, as compared to gross loss of $56,911 for the six months ended March 31, 2023, a decrease of $562,172, or 987.8%. Gross margin increased to 72.0% for the six months ended March 31, 2024 from (4.0)% for the six months ended March 31, 2023. The increase in our gross margin for the financial services segment for the three and six months ended March 31, 2024 as compared to the comparable periods of 2023 was primarily attributed to the decrease in cost for financial services driven by decreased amount of amortization of intangible assets which consist of license and banking infrastructure acquired on Match acquisition. We expect that our gross margin for the financial services segment will remain in its current quarterly level with minimal increase in the near future.

Current wording

Gross profit from financial services for the three months ended June 30, 2024 was $125,476, as compared to gross loss of $283,018 for the three months ended June 30, 2023, a decrease of $408,494, or 144.3%. Gross margin increased to 71.6% for the three months ended June 30, 2024 from (68.7)% for the three months ended June 30, 2023. Gross profit from financial services for the nine months ended June 30, 2024 was $630,737, as compared to gross loss of $339,929 for the nine months ended June 30, 2023, a decrease of $970,666, or 285.5%. Gross margin increased to 71.9% for the nine months ended June 30, 2024 from (18.7)% for the nine months ended June 30, 2023. The increase in our gross margin for the financial services segment for the three and nine months ended June 30, 2024 as compared to the comparable periods of 2023 was primarily attributed to the decrease in cost for financial services driven by decreased amount of amortization of intangible assets which consist of license and banking infrastructure acquired on Match acquisition. We expect that our gross margin for the financial services segment will remain in its current quarterly level with minimal increase in the near future.

Previous wording

For the three months ended March 31, 2024, advertising and marketing expense increased by $20,273, or 6,872.2%, as compared to the three months ended March 31, 2023. The increase was primarily attributable to our increased advertising and marketing activities in the three months ended March 31, 2024. For the six months ended March 31, 2024, advertising and marketing expense decreased by $7,831, or 15.8%, as compared to the six months ended March 31, 2023. The decrease was primarily attributable to our decreased advertising and marketing activities in the six months ended March 31, 2024. We expect that our advertising and marketing expense will remain in its current quarterly level with minimal increase in the near future.

Current wording

For the three months ended June 30, 2024, advertising and marketing expense increased by $685, or 41.0%, as compared to the three months ended June 30, 2023. The increase was primarily attributable to our increased advertising and marketing activities in the three months ended June 30, 2024. For the nine months ended June 30, 2024, advertising and marketing expense decreased by $7,146, or 14.0%, as compared to the nine months ended June 30, 2023. The decrease was primarily attributable to our decreased advertising and marketing activities in the nine months ended June 30, 2024. We expect that our advertising and marketing expense will remain in its current quarterly level with minimal increase in the near future.

Previous wording

Professional fees primarily consisted of audit fees, legal service fees, advisory fees, and consulting fees. For the three months ended March 31, 2024, professional fees increased by $1,472,071, or 259.9%, as compared to the three months ended March 31, 2023. The increase was primarily attributable to a significant increase in advisory service fees of approximately $1,348,000 due to common stock granted to advisor of $750,000 and the increase of approximately $598,000 mainly driven by increased advisory service providers, and an increase in legal service fee of approximately $276,000 resulting from the increase in legal service providers, offset by a decrease in consulting fees of approximately $155,000 mainly due to the decrease in consulting service providers. For the six months ended March 31, 2024, professional fees increased by $3,657,078, or 294.1%, as compared to the six months ended March 31, 2023. The increase was primarily attributable to a significant increase in advisory service fees of approximately $3,641,000 due to common stock granted to advisors of approximately $2,766,000 and the increase of approximately $875,000 mainly driven by increased advisory service providers, and an increase in other miscellaneous items of approximately $16,000. We expect that our professional fees will decrease in the near future.

Current wording

Professional fees primarily consisted of audit fees, legal service fees, advisory fees, and consulting fees. For the three months ended June 30, 2024, professional fees increased by $537,554, or 94.0%, as compared to the three months ended June 30, 2023. The increase was primarily attributable to an increase in consulting fees of approximately $623,000 mainly due to the increase in consulting service related to our general business development, offset by a decrease in other miscellaneous items of approximately $85,000. For the nine months ended June 30, 2024, professional fees increased by $4,194,632, or 231.1%, as compared to the nine months ended June 30, 2023. The increase was primarily attributable to a significant increase in advisory service fees of approximately $3,641,000, due to the increase in stock-based compensation of approximately $2,766,000 which reflected the value of common stock granted to advisors and the increase in advisory service fees of approximately $875,000, which were mainly driven by increased advisory service related to our business combination that was completed in December 2023 and related to capital market advice, an increase in legal service fee of approximately $234,000 resulting from the increase in legal service providers, and an increase in consulting fees of approximately $337,000 mainly due to the increase in consulting service related to our general business development, offset by a decrease in other miscellaneous items of approximately $17,000. We expect that our professional fees will decrease in the near future.

Previous wording

For the three months ended March 31, 2024, our compensation and related benefits increased by $72,316, or 36.6%, as compared to the three months ended March 31, 2023. For the six months ended March 31, 2024, our compensation and related benefits increased by $165,892, or 46.4%, as compared to the six months ended March 31, 2023. The increase was mainly attributable to increased management in our financial services segment. We expect that our compensation and related benefits will remain in its current quarterly level with minimal increase in the near future.

Current wording

For the three months ended June 30, 2024, our compensation and related benefits decreased by $13,980 or 6.0%, as compared to the three months ended June 30, 2023. For the nine months ended June 30, 2024, our compensation and related benefits increased by $151,912, or 25.7%, as compared to the nine months ended June 30, 2023. The increase was mainly attributable to increased management in our financial services segment. We expect that our compensation and related benefits will remain in its current quarterly level with minimal increase in the near future.

Previous wording

For the three months ended March 31, 2024 and 2023, our did not record any allowance for doubtful account. For the six months ended March 31, 2024, our had bad debt expense of $6,145,942. In December 2023, due to non-payment by TCM under the GSA, we had advised TCM that the GSA has been terminated effective January 1, 2024. We made an allowance for doubtful account for the related party’s receivable in the amount of $6,145,942 in December 2023. We did not record any allowance for doubtful account for the six months ended March 31, 2023.

Current wording

For the three months ended June 30, 2024 and 2023, our did not record any allowance for doubtful account. For the nine months ended June 30, 2024, our had bad debt expense of $6,145,942. In December 2023, due to non-payment by TCM under the GSA, we had advised TCM that the GSA has been terminated effective January 1, 2024. We made an allowance for doubtful account for the related party’s receivable in the amount of $6,145,942 in December 2023. We did not record any allowance for doubtful account for the nine months ended June 30, 2023.

Previous wording

Other general and administrative expenses primarily consisted of rent, filing fees, amortization of intangible assets, travel and entertainment, and other miscellaneous items.

Current wording

Other general and administrative expenses primarily consisted of rent, stock transfer agent service fees, amortization of intangible assets, travel and entertainment, and other miscellaneous items.

Previous wording

For the three months ended March 31, 2024, total other general and administrative expenses increased by $97,424, or 51.2%, as compared to the three months ended March 31, 2023. The increase was mainly due to an increase in filing fees of approximately $191,000 resulting from our merger completed in December 2023, offset by a decrease in amortization of intangible assets of approximately $63,000 since we impaired our intangible assets acquired on Match acquisition in September 2023, and a decrease in other miscellaneous items of approximately $31,000 driven by our efforts at stricter controls on corporate expenditure. For the six months ended March 31, 2024, total other general and administrative expenses increased by $25,310,, or 6.6%, as compared to the six months ended March 31, 2023. The increase was mainly due to an increase in filing fees of approximately $244,000 resulting from our merger completed in December 2023, offset by a decrease in amortization of intangible assets of approximately $126,000 since we impaired our intangible assets acquired on Match acquisition in September 2023, and a decrease in other miscellaneous items of approximately $93,000 driven by our efforts at stricter controls on corporate expenditure. We expect that other general and administrative expenses will remain in its current quarterly level with minimal decrease in the near future.

Current wording

For the three months ended June 30, 2024, total other general and administrative expenses decreased by $61,919, or 25.0%, as compared to the three months ended June 30, 2023. The decrease was mainly due to a decrease in amortization of intangible assets of approximately $63,000 since we impaired our intangible assets acquired on Match acquisition in September 2023, and a decrease in stock transfer agent service fees of approximately $44,000, offset by and an increase in other miscellaneous items of approximately $45,000. For the nine months ended June 30, 2024, total other general and administrative expenses decreased by $36,609, or 5.8%, as compared to the nine months ended June 30, 2023. The decrease was mainly due to a decrease in amortization of intangible assets of approximately $189,000 since we impaired our intangible assets acquired on Match acquisition in September 2023, and a decrease in other miscellaneous items of approximately $48,000 driven by our efforts at stricter controls on corporate expenditure, offset by an increase in stock transfer agent service fees of approximately $200,000 resulting from our business combination which was completed in December 2023. We expect that other general and administrative expenses will remain in its current quarterly level with minimal decrease in the near future.

Previous wording

Other (expense) income includes related parties’ interest expense and other miscellaneous income.

Current wording

Other (expense) income includes third party and related party interest expense, loss on debts settlement, and other miscellaneous income.

Previous wording

As a result of the factors described above, our net loss was $2,429,417, or $0.17 per share (basic and diluted), for the three months ended March 31, 2024, as compared to $805,649, or $0.08 per share (basic and diluted), for the three months ended March 31, 2023, an increase of $1,623,768 or 201.5%.

Current wording

As a result of the factors described above, our net loss was $1,616,241, or $0.11 per share (basic and diluted), for the three months ended June 30, 2024, as compared to $1,209,744, or $0.12 per share (basic and diluted), for the three months ended June 30, 2023, an increase of $406,497 or 33.6%.

Previous wording

As a result of the factors described above, our net loss was $11,357,512, or $0.92 per share (basic and diluted), for the six months ended March 31, 2024, as compared to $1,939,571, or $0.19 per share (basic and diluted), for the six months ended March 31, 2023, an increase of $9,417,941 or 485.6%.

Current wording

As a result of the factors described above, our net loss was $12,973,753, or $1.00 per share (basic and diluted), for the nine months ended June 30, 2024, as compared to $3,149,315, or $0.31 per share (basic and diluted), for the nine months ended June 30, 2023, an increase of $9,824,438 or 312.0%.

Previous wording

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. The financial statements of our subsidiaries whose functional currency is the GBP or Euro or CAD are translated to U.S. dollars using period end rates of exchange for assets and liabilities, average rate of exchange for revenues, costs, and expenses and cash flows, and at historical exchange rates for equity. Net gains and losses resulting from foreign exchange transactions are included in the results of operations. As a result of foreign currency translations, which are a non-cash adjustment, we reported a foreign currency translation gain of $26,582 and a foreign currency translation loss of $2,721 for the three months ended March 31, 2024 and 2023, respectively. As a result of foreign currency translations, which are a non-cash adjustment, we reported a foreign currency translation loss of $36,731 and $30,704 for the six months ended March 31, 2024 and 2023, respectively. This non-cash gain/loss had the effect of decreasing/increasing our reported comprehensive loss.

Current wording

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. The financial statements of our subsidiaries whose functional currency is the GBP or Euro or CAD are translated to U.S. dollars using period end rates of exchange for assets and liabilities, average rate of exchange for revenues, costs, and expenses and cash flows, and at historical exchange rates for equity. Net gains and losses resulting from foreign exchange transactions are included in the results of operations. As a result of foreign currency translations, which are a non-cash adjustment, we reported a foreign currency translation loss of $5,608 and $20,859 for the three months ended June 30, 2024 and 2023, respectively. As a result of foreign currency translations, which are a non-cash adjustment, we reported a foreign currency translation loss of $42,339 and $51,563 for the nine months ended June 30, 2024 and 2023, respectively. This non-cash loss had the effect of increasing our reported comprehensive loss.

Previous wording

As a result of our foreign currency translation adjustment, we had comprehensive loss of $2,402,835 and $808,370 for the three months ended March 31, 2024 and 2023, respectively.

Current wording

As a result of our foreign currency translation adjustment, we had comprehensive loss of $1,621,849 and $1,230,603 for the three months ended June 30, 2024 and 2023, respectively.

Previous wording

As a result of our foreign currency translation adjustment, we had comprehensive loss of $11,394,243 and $1,970,275 for the six months ended March 31, 2024 and 2023, respectively.

Current wording

As a result of our foreign currency translation adjustment, we had comprehensive loss of $13,016,092 and $3,200,878 for the nine months ended June 30, 2024 and 2023, respectively.

Previous wording

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, 2024 and September 30, 2023, we had cash of approximately $306,000 and $19,000, respectively, exclusive of customer custodial cash. We had working capital deficit of approximately $10,984,000 as of March 31, 2024. In addition, the current cash balance cannot be projected to cover our operating expenses for the next twelve months from the release date of this report. These matters raise substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent on our ability to raise additional capital, implement our business plan, and generate sufficient revenues. There are no assurances that we will be successful in our efforts to generate sufficient revenues, maintain sufficient cash balance or report profitable operations or to continue as a going concern. As described below, we have raised additional capital through the sale of equity and debt and we plan to raise additional capital in the future through the sale of equity or debt to implement our business plan. However, there is no assurance these plans will be realized and that any additional financings will be available to us on satisfactory terms and conditions, if at all.

Current wording

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 June 30, 2024 and September 30, 2023, we had cash of approximately $6,000 and $19,000, respectively, exclusive of customer custodial cash. We had working capital deficit of approximately $11,421,000 as of June 30, 2024. In addition, the current cash balance cannot be projected to cover our operating expenses for the next twelve months from the release date of this report. These matters raise substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent on our ability to raise additional capital, implement our business plan, and generate sufficient revenues. There are no assurances that we will be successful in our efforts to generate sufficient revenues, maintain sufficient cash balance or report profitable operations or to continue as a going concern. As described below, we have raised additional capital through the sale of equity and debt and we plan to raise additional capital in the future through the sale of equity or debt to implement our business plan. However, there is no assurance these plans will be realized and that any additional financings will be available to us on satisfactory terms and conditions, if at all.

Previous wording

Our working capital deficit increased by $4,788,493 to $10,983,550 at March 31, 2024 from $6,195,057 at September 30, 2023. The increase in working capital deficit was primarily attributable to a decrease in customer custodial cash of approximately $327,000 due to the decrease in cash maintained in our bank accounts held for the benefit of our customers, a significant decrease in due from affiliates of approximately $1,989,000 which was primarily attributable to our receivable from TCM was written off after exhaustive efforts at collection in the six months ended March 31, 2024, a decrease in note receivable – related parties, net, of approximately $128,000 driven by repayments received from note receivable – related parties in the six months ended March 31, 2024, an increase in accounts payable of approximately $172,000, an increase in due to affiliates of approximately $1,176,000 driven by the payments received from our affiliates and expenses paid by our affiliates on behalf of us in the six months ended March 31, 2024, an increase in short-term loan payable – related parties of approximately $732,000 resulting from issuance of loans to related parties to fund our working capital needs, and an increase in accrued professional fees of approximately $1,089,000 mainly due to the increase in professional services providers, offset by an increase in cash of approximately $286,000, and a decrease in customer custodial cash liabilities of approximately $561,000 resulting from fulfillment of our direct obligations to our customers.

Current wording

Our working capital deficit increased by $5,225,618 to $11,420,675 at June 30, 2024 from $6,195,057 at September 30, 2023. The increase in working capital deficit was primarily attributable to a decrease in customer custodial cash of approximately $140,000 due to the decrease in cash maintained in our bank accounts held for the benefit of our customers, a significant decrease in due from affiliates of approximately $2,021,000 which was primarily attributable to our receivable from TCM was written off after exhaustive efforts at collection in the nine months ended June 30, 2024, a decrease in note receivable – related parties, net, of approximately $163,000 driven by repayments received from note receivable – related parties in the nine months ended June 30, 2024, an increase in accounts payable of approximately $205,000, an increase in due to affiliates of approximately $1,135,000 driven by the payments received from our affiliates and expenses paid by our affiliates on behalf of us in the nine months ended June 30, 2024, an increase in short term loan payable – related parties of approximately $681,000 resulting from issuance of loans to related parties to fund our working capital needs, an increase in accrued payroll liability and directors’ compensation of approximately $150,000 resulting from increased management in our financial services segment, and an increase in accrued professional fees of approximately $1,285,000 mainly due to the increase in professional services related to our business combination which was completed in December 2023, offset by an increase in other current assets of approximately $103,000 mainly due to the increase in prepaid directors and officers’ liability insurance premium and prepaid NASDAQ listing fee, and a decrease in customer custodial cash liabilities of approximately $560,000 resulting from fulfillment of our direct obligations to our customers.

Previous wording

Cash Flow for the Six Months Ended March 31, 2024 Compared to the Six Months Ended March 31, 2023

Current wording

Cash Flow for the Nine Months Ended June 30, 2024 Compared to the Nine Months Ended June 30, 2023

Previous wording

The following summarizes the key components of our cash flows for the six months ended March 31, 2024 and 2023:

Current wording

The following summarizes the key components of our cash flows for the nine months ended June 30, 2024 and 2023:

Previous wording

Net cash flow used in operating activities for the six months ended March 31, 2024 was $1,878,608, which primarily reflected our consolidated net loss of approximately $11,358,000, and the changes in operating assets and liabilities, primarily consisting of a significant increase in due from affiliates of approximately $4,149,000 due to the payments made to our affiliates and monies that we paid on behalf of our affiliates in the six months ended March 31, 2024, and a decrease in customer custodial cash liabilities of approximately $608,000 driven by fulfillment of our direct obligations to our customers in the six months ended March 31, 2024, offset by an increase in accounts payable of approximately $166,000, a significant increase in due to affiliates of approximately $3,887,000 driven by the payments received from our affiliates and expenses paid by our affiliates on behalf of us in the six months ended March 31, 2024, andan increase in accrued professional fees of approximately $1,089,000 mainly due to the increase in professional services providers, and the non-cash items adjustment primarily consisting of stock-based compensation and service expense of approximately $2,915,000, and provision for bad debt of approximately $6,146,000.

Current wording

Net cash flow used in operating activities for the nine months ended June 30, 2024 was $2,619,117, which primarily reflected our consolidated net loss of approximately $12,974,000, and the changes in operating assets and liabilities, primarily consisting of a significant increase in due from affiliates of approximately $4,129,000 due to the payments made to our affiliates and monies that we paid on behalf of our affiliates in the nine months ended June 30, 2024, an increase in other current assets of approximately $103,000 mainly due to the increase in prepaid directors and officers’ liability insurance premium and prepaid NASDAQ listing fee, and a decrease in customer custodial cash liabilities of approximately $610,000 driven by fulfillment of our direct obligations to our customers in the nine months ended June 30, 2024, offset by an increase in accounts payable of approximately $198,000, a significant increase in due to affiliates of approximately $3,846,000 driven by the payments received from our affiliates and expenses paid by our affiliates on behalf of us in the nine months ended June 30, 2024, an increase in accrued payroll liability and directors’ compensation of approximately $148,000 resulting from increased management in our financial services segment, and an increase in accrued professional fees of approximately $1,609,000 mainly due to the increase in professional services related to our business combination which was completed in December 2023, and the non-cash items adjustment primarily consisting of stock-based compensation and service expense of approximately $2,990,000, a loss on debts settlement of approximately $176,000, and provision for bad debt of approximately $6,146,000.

Previous wording

Net cash flow used in operating activities for the six months ended March 31, 2023 was $1,882,501, which primarily reflected our consolidated net loss of approximately $1,940,000, and the changes in operating assets and liabilities, primarily consisting of an increase in customer digital currency assets of approximately $114,000 due to the increase in customer digital currency controlled by us in the six months ended March 31, 2023, a decrease in customer custodial cash liabilities of approximately $1,935,000 driven by fulfillment of our direct obligations to our customers in the six months ended March 31, 2023, and a decrease in accrued liabilities and other payables of approximately $216,000 mainly due to the decrease in unearned revenue of approximately $203,000, offset by a decrease in due from affiliates of approximately $677,000 resulting from the payments received from our affiliates in the six months ended March 31, 2023, an increase in customer digital currency liabilities of approximately $114,000 due to the increase in customer digital currency controlled by us in the six months ended March 31, 2023, and an increase in accrued payroll liability and directors’ compensation of approximately $97,000, and the non-cash items adjustment primarily consisting of amortization of intangible assets of approximately $1,186,000, and stock-based compensation and service expense of approximately $222,000.

Current wording

Net cash flow used in operating activities for the nine months ended June 30, 2023 was $626,716, which primarily reflected our consolidated net loss of approximately $3,149,000, and the changes in operating assets and liabilities, primarily consisting of a decrease in customer custodial cash liabilities of approximately $577,000 driven by fulfillment of our direct obligations to our customers in the nine months ended June 30, 2023, a decrease in customer digital currency liabilities of approximately $270,000 due to the decrease in customer digital currency controlled by us in the nine months ended June 30, 2023, a decrease in accrued professional fees of approximately $111,000 resulting from payments made to professional service providers in the nine months ended June 30, 2023, and a decrease in accrued liabilities and other payables of approximately $234,000 mainly due to the decrease in unearned revenue of approximately $203,000, offset by a decrease in customer digital currency assets of approximately $270,000 due to the decrease in customer digital currency controlled by us in the nine months ended June 30, 2023, a decrease in due from affiliates of approximately $648,000 resulting from the payments received from our affiliates in the nine months ended June 30, 2023, an increase in due to affiliates of approximately $506,000 driven by the payments received from our affiliates and expenses paid by our affiliates on behalf of us in the nine months ended June 30, 2023, and an increase in accrued payroll liability and directors’ compensation of approximately $126,000 due to our business expansion, and the non-cash items adjustment primarily consisting of amortization of intangible assets of approximately $1,779,000, and stock-based compensation and service expense of approximately $296,000.

Previous wording

Net cash flow provided by investing activities was $131,492 for the six months ended March 31, 2024 as compared to net cash flow used in investing activities of $195,395 for the six months ended March 31, 2023. During the six months ended March 31, 2024, we received proceeds from note receivable – related parties of approximately $131,000. During the six months ended March 31, 2023, we made payment for investment in note receivable of approximately $154,000 and payment for purchase of intangible asset of approximately $41,000.

Current wording

Net cash flow provided by investing activities was $131,740 for the nine months ended June 30, 2024 as compared to net cash flow used in investing activities of $195,856 for the nine months ended June 30, 2023. During the nine months ended June 30, 2024, we received proceeds from note receivable – related parties of approximately $132,000. During the nine months ended June 30, 2023, we made payment for investment in note receivable of approximately $154,000 and payment for purchase of intangible asset of approximately $42,000.

Previous wording

Net cash flow provided by financing activities was $1,666,098 for the six months ended March 31, 2024. During the six months ended March 31, 2024, we received cash in reverse recapitalization of approximately $150,000 and received proceeds from loans payable from third party and related party of approximately $1,699,000, offset by repayments made for loans payable to third party and related party of approximately $183,000.

Current wording

Net cash flow provided by financing activities was $2,296,823 for the nine months ended June 30, 2024. During the nine months ended June 30, 2024, we received cash in reverse recapitalization of approximately $150,000, received proceeds from loan payable from third party and related party of approximately $1,952,000, received proceeds from issuance of convertible debt and warrants of $300,000, and received proceeds from issuance of debt and warrants of $78,000, offset by repayments made for loan payable to third party and related party of approximately $183,000.

Previous wording

There was no financing activity during the six months ended March 31, 2023.

Current wording

There was no financing activity during the nine months ended June 30, 2023.

Previous wording

A portion of our operations are in United Kingdom. Thus, a portion of our revenues and operating results may be impacted by exchange rate fluctuations between GBP and US dollars. For the three months ended March 31, 2024 and 2023, we had an unrealized foreign currency translation gain of approximately $27,000 and an unrealized foreign currency translation loss of approximately $3,000, respectively, because of changes in the exchange rates. For the six months ended March 31, 2024 and 2023, we had an unrealized foreign currency translation loss of approximately $37,000 and $31,000, respectively, because of changes in the exchange rates.

Current wording

A portion of our operations are in United Kingdom. Thus, a portion of our revenues and operating results may be impacted by exchange rate fluctuations between GBP and US dollars. For the three months ended June 30, 2024 and 2023, we had an unrealized foreign currency translation loss of approximately $6,000 and $21,000, respectively, because of changes in the exchange rates. For the nine months ended June 30, 2024 and 2023, we had an unrealized foreign currency translation loss of approximately $42,000 and $52,000, respectively, because of changes in the exchange rates.