Nukkleus(NUKK) - 2024 Q4 - Annual Report

Part I Business Nukkleus Inc. is undergoing a strategic transformation from a financial technology company to a defense sector focus, marked by the termination of its primary revenue agreement and the acquisition of Star 26 Capital Inc Overview and Strategic Shift Nukkleus Inc. has transitioned from financial technology to the defense sector, divesting its blockchain subsidiary and acquiring Star 26 Capital Inc., while terminating historical revenue-generating General Services Agreements - The company has shifted its business focus from financial technology to the defense sector[24] - On December 15, 2024, the Company agreed to acquire a 51% controlling interest in Star 26 Capital Inc., a defense acquisition company[22] - The company is selling its blockchain payment solutions subsidiary, Digital RFQ Limited (DRFQ), due to continuing net losses[23][34] - The General Services Agreements (GSA) with TCM and FXDD, historically the main source of revenue, were terminated effective January 1, 2024, with all outstanding obligations released[23][81] Recent Developments The company has undertaken significant corporate actions, including multiple financing rounds, a reverse stock split, and a $10 million private placement, to fund its strategic shift and the acquisition of Star 26 Capital Recent Financing and M&A Activities | Date | Activity | Details | | :--- | :--- | :--- | | Jun/Sep 2024 | X Group Financing | Issued Senior Unsecured Promissory Notes for total cash proceeds of $350,000. The debt was later converted to equity in Nov 2024 | | Aug 2024 | East Asia Financing | Issued a Senior Unsecured Promissory Note for $515,000 in principal for cash proceeds of $412,075 | | Oct 2024 | Reverse Stock Split | Executed a one-for-eight reverse stock split of its common stock | | Dec 2024 | Star 26 Capital Acquisition | Agreed to acquire 51% of Star for $15M (min $5M cash, balance in a note), 2,385,170 shares, and warrants | | Dec 2024 | Private Placement | Raised $10,000,000 through a private placement of 1,666,666 units at $6.00 per unit | | Dec 2024 | Equity Compensation | Issued 1,337,500 restricted stock grants to executive officers, directors, and consultants | Star 26 Capital Business Description Star 26 Capital Inc. is an acquisition holding company focused on undervalued small and medium-sized businesses, primarily in the defense sector, with its sole operating subsidiary being Israeli defense technology firm B. Rimon Agencies Ltd - Star's acquisition strategy targets small and medium businesses with enterprise values under $200 million, preferring the defense, industrial, and aerospace industries[46][54] - Star's sole operating subsidiary is B. Rimon Agencies Ltd., an Israeli defense technology company acquired in February 2024[47][71] - Rimon's primary business lines include exclusive distribution of defense-related equipment and engineering of special tactical vehicles for defense forces[40][72] - Star believes global conflicts, especially in Israel, are driving higher demand for defense products, creating acquisition and growth opportunities[55][57] Other Business Lines Prior to its strategic shift, Nukkleus operated Digital RFQ, a blockchain-enabled payment service now slated for sale, and historically derived primary revenue from General Services Agreements with related parties, which were terminated - Digital RFQ offers blockchain-enabled cross-border payment services using established stablecoins and is regulated by the UK's FCA, with the company planning its sale[75][76][77] - The General Services Agreements (GSAs) with related parties TCM and FXDIRECT, historically generating most revenue, were officially terminated as of January 1, 2024[81] Risk Factors The company faces significant risks from its business transformation, including acquisition failure, limited defense sector history, cybersecurity threats, financial losses, and complex regulatory compliance across financial services, data privacy, and defense - Failure to complete the Star acquisition could result in a $1.0 million termination fee and negatively impact stock price and operations[86][87] - The company has a limited operating history in its new defense-focused industry and legacy blockchain business, making future prospects difficult to evaluate[89] - Cyberattacks and security breaches pose a significant risk, potentially harming the brand, interrupting operations, and leading to regulatory fines and financial loss[105][107] - The business is subject to extensive and evolving laws and regulations, including financial services, AML, data privacy (GDPR, CCPA), and economic sanctions, with non-compliance risking significant penalties[192][219][224] - The historical business was highly concentrated, with the largest customer, TCM, accounting for 81.1% of revenue for the year ended September 30, 2024, an agreement which has since been terminated[127] - The company's ability to utilize its Net Operating Losses (NOLs) may be limited under Section 382 of the Internal Revenue Code due to ownership changes[169][170] Unresolved Staff Comments As a smaller reporting company, Nukkleus Inc. is not required to provide information regarding unresolved staff comments - The company is a smaller reporting company and is not required to provide information for this item[256] Cybersecurity The company's cybersecurity processes are currently informal and reactive, lacking specialized expertise, though plans are in place to develop a formal framework and no material incidents have occurred to date - The company currently lacks formal processes for managing cybersecurity risks, describing its approach as informal and reactive[257] - Current management and the Board of Directors lack in-depth cybersecurity expertise[258] - The company plans to develop a formal cybersecurity framework, engage experts, and provide employee training to improve its security posture[257] - No known cybersecurity incidents have materially affected the company's business, operations, or financial condition to date[259] Properties The company's headquarters are in Jersey City, New Jersey, utilizing rent-free office space from an affiliate, which management deems adequate - The Company uses office space from an affiliated company, FXDD, free of rent[260] Legal Proceedings The company is not currently a party to any material legal proceedings, though it is subject to routine litigation incidental to its business - The company is not currently a party to any material legal proceedings[262] Mine Safety Disclosures This item is not applicable to the company - Not applicable[263] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Nukkleus's common stock and warrants trade on NASDAQ, with the company not paying dividends, and recent activities include significant sales of unregistered securities, including a $10 million private placement and equity compensation - The company's common stock and warrants trade on NASDAQ under the symbols NUKK and NUKKW[265] - The company has not paid dividends and does not expect to declare or pay them in the foreseeable future[269] Recent Sales of Unregistered Securities | Date | Transaction | Details | | :--- | :--- | :--- | | Jun 2024 | X Group Note & Warrant | Issued a $312,500 promissory note and a warrant for 1,200,000 shares (pre-split) for $250,000 cash | | Aug 2024 | East Asia Note & Warrant | Issued a $515,000 promissory note and a warrant for 175,000 shares (post-split) for $412,075 cash | | Nov 2024 | Vallis/Worsley Settlement | Issued 125,000 and 75,000 shares of common stock to settle compensation claims | | Dec 2024 | Private Placement | Sold 1,666,666 units at $6.00/unit for gross proceeds of $10,000,000. Each unit consists of one share and one and a half warrants | | Dec 2024 | Equity Compensation | Issued 1,337,500 restricted stock grants to officers, directors, and consultants | Reserved This item is reserved and contains no information Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion highlights the company's strategic pivot to defense, a sharp revenue decline in FY2024 to $5.9 million, an improved net loss of $8.5 million, and liquidity management supported by a recent $10 million private placement Results of Operations For FY2024, total revenues significantly decreased to $5.9 million, while net loss improved to $8.5 million, driven by reduced impairment losses and a GSA termination gain, partially offset by increased bad debt and professional fees Consolidated Statements of Operations Summary (in thousands) | | FY 2024 | FY 2023 | Change (%) | | :--- | :--- | :--- | :--- | | Total Revenues | $5,913 | $21,298 | (72.2)% | | Revenue – general support services | $4,800 | $19,200 | (75.0)% | | Revenue – financial services | $1,113 | $2,098 | (46.9)% | | Total Cost of Revenues | $4,915 | $21,641 | (77.3)% | | Total Operating Expenses | $15,177 | $17,120 | (11.4)% | | Professional fees | $6,734 | $2,424 | 177.8% | | Bad debt expense – related parties | $6,141 | $1,180 | 420.5% | | Impairment loss | $391 | $11,914 | (96.7)% | | Net Loss | ($8,519) | ($17,428) | (51.1)% | - The 75% decrease in general support services revenue was due to the termination of the customer contract effective January 1, 2024[341] - Professional fees increased by 177.8% ($4.3 million) due to advisory, consulting, and legal fees associated with the December 2023 business combination[349] - Bad debt expense increased by 420.5% ($5.0 million) primarily due to the write-off of a significant receivable from the terminated GSA agreement[352] - Impairment loss decreased by 96.7% ($11.5 million) compared to the prior year, when significant impairments were recorded on an investment and acquired intangible assets[355] Liquidity and Capital Resources The company faces strained liquidity with a working capital deficit and recurring losses, but management believes a recent $10.0 million private placement will fund operations for the next twelve months - The company has a working capital deficit and recurring losses, but believes the $10.0 million raised in December 2024 will fund operations for the next 12 months[358][437][438] Cash Flow Summary (in US dollars) | | Year Ended Sep 30, 2024 | Year Ended Sep 30, 2023 | | :--- | :--- | :--- | | Net cash used in operating activities | $ (3,818,443) | $ (1,232,382) | | Net cash provided by (used in) investing activities | $ 132,826 | $ (1,109,936) | | Net cash provided by financing activities | $ 3,000,403 | $ 418,316 | - Net cash used in operating activities was $3.8 million in FY2024, reflecting a net loss of $8.5 million adjusted for significant non-cash items[362] - Net cash from financing activities was $3.0 million in FY2024, primarily from proceeds from related-party loans and debt issuances[365] Critical Accounting Estimates Critical accounting estimates involve significant judgment, including the valuation and impairment of intangible assets and investments, revenue recognition (principal vs. agent), stock-based compensation, warrant classification, deferred tax assets, and legal contingencies - Acquired Intangible Assets: In FY2023, the company recorded an impairment loss of $5.7 million, reducing their carrying value to zero, with no impairment in FY2024[371] - Investments: The company recorded impairment losses of $391,217 in FY2024 and $6,210,783 in FY2023 on privately-held investments, reducing their carrying value to zero[376] - Revenue Recognition: The company acts as a principal for general support services (gross revenue) and an agent for financial services (net revenue)[381] - Income Taxes: A full valuation allowance is established against deferred tax assets, and the use of Net Operating Loss (NOL) carry-forwards may be limited under IRC Section 382[388] Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, Nukkleus Inc. is not required to provide this information - The company is a smaller reporting company and is not required to provide this information[398] Financial Statements and Supplementary Data This section presents the consolidated financial statements for FY2024 and FY2023, including the auditor's 'going concern' opinion, reflecting the company's reverse recapitalization, and detailing liquidity, related-party transactions, and subsequent financing events - The independent auditor's report expresses substantial doubt about the Company's ability to continue as a going concern due to recurring losses and a working capital deficit[409] Key Balance Sheet and Income Statement Figures (in US dollars) | Metric | As of/For the Year Ended Sep 30, 2024 | As of/For the Year Ended Sep 30, 2023 | | :--- | :--- | :--- | | Total Assets | $984,999 | $3,352,625 | | Total Liabilities | $8,082,712 | $9,545,855 | | Total Stockholders' Deficit | $(7,097,713) | $(6,193,230) | | Total Revenues | $5,913,461 | $21,297,642 | | Net Loss | $(8,518,520) | $(17,428,428) | - The business combination with Brilliant was accounted for as a reverse recapitalization, and financial statements have been restated to reflect this and a 1-for-8 reverse stock split[430][433] - Subsequent to year-end, the company raised $10.0 million in a private placement, which management believes alleviates going concern uncertainty for the next twelve months[438][439] - One related-party customer (TCM) accounted for 81.2% of total revenues in FY2024 and 90.2% in FY2023, with the agreement terminated effective January 1, 2024[462][595] Part III Directors, Executive Officers and Corporate Governance The company's leadership includes CEO Menachem Shalom and a board with four independent directors, which has established Audit, Compensation, and Nominating and Corporate Governance Committees, with Reuven Yeganeh as the audit committee financial expert - Menachem Shalom serves as the Chief Executive Officer and a Director[657] - The Board of Directors has determined that four of its members are independent directors under Nasdaq rules[667] Board Committee Membership | Committee | Members | | :--- | :--- | | Audit Committee | David Rokach, Reuven Yeganeh (Chair, Financial Expert), Aviya Volodarsky | | Compensation Committee | David Rokach (Chair), Reuven Yeganeh, Aviya Volodarsky | | Nominating and Corporate Governance Committee | David Rokach, Reuven Yeganeh, Aviya Volodarsky (Chair) | Executive Compensation Executive compensation for FY2024 primarily went to former COO Jamal Khurshid ($439,212), with current CEO Menachem Shalom receiving $23,333, and non-employee directors receiving prorated cash compensation FY 2024 Summary Compensation Table (in US dollars) | Name and Principal Position | Salary ($) | Option Awards ($) | Total ($) | | :--- | :--- | :--- | :--- | | Menachem Shalom, CEO | 23,333 | - | 23,333 | | Emil Assentato, Former CEO | 16,667 | - | 16,667 | | Jamal "Jamie" Khurshid, COO | 232,020 | 207,192 | 439,212 | - Menachem Shalom's CEO consultancy agreement, effective September 1, 2024, entitles him to a monthly salary of $20,000 with scheduled increases[684] - Non-employee directors receive annual compensation of $20,000, prorated for partial service[665][692] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters As of January 7, 2025, officers and directors beneficially owned 28.6% of common shares, with significant beneficial owners including X Group (18.4%), Emil Assentato (14.0%), CEO Menachem Shalom (10.4%), and East Asia Technology Investments (7.4%) Security Ownership of Beneficial Owners (as of Jan 7, 2025) | Name / Group | Position | Percentage of Common Stock | | :--- | :--- | :--- | | All Officers and Directors (6 people) | - | 28.6% | | X Group Family of Funds Limited Partnership | 5% Stockholder | 18.4% | | Emil Assentato | 5% Stockholder | 14.0% | | Menachem Shalom | CEO and Director | 10.4% | | East Asia Technology Investments Limited | 5% Stockholder | 7.4% | - Director Anastasiia Kotaieva is the owner of X Group Family of Funds Limited Partnership, which holds an 18.4% stake[698][700] Certain Relationships and Related Transactions, and Director Independence The company has engaged in numerous significant related-party transactions, including the Star Agreement where the CEO is a controlling shareholder, debt conversion with X Group, and historical revenue from terminated General Services Agreements with former CEO-affiliated entities - The CEO and director, Menachem Shalom, is also a controlling shareholder, CEO, and director of Star 26 Capital Inc., the company Nukkleus has agreed to acquire[701] - The company's historical primary revenue and cost of revenue were derived from General Services Agreements with TCM and FXDIRECT, affiliated with former CEO Emil Assentato, which were terminated as of December 31, 2023[709][710][711] - In November 2024, the company converted $771,085 in debt owed to X Group (controlled by director Anastasiia Kotaieva) into common stock and warrants[704] - The board consists of six members, with four determined to be independent[742] Principal Accounting Fees and Services The company changed its independent registered public accounting firm twice in 2023, with total fees billed by principal accountants being $164,560 in FY2024 and $337,749 in FY2023, with higher fees in 2023 due to audit-related services - The company changed its independent registered public accounting firm twice in 2023, first to Gries and Associates, then to GreenGrowth CPAs[643][644] Principal Accountant Fees (in US dollars) | Fee Type | FY 2024 | FY 2023 | | :--- | :--- | :--- | | Audit Fees | $164,560 | $118,000 | | Audit-Related Fees | - | $219,749 | | Tax Fees | - | - | | All Other Fees | - | - | | Total | $164,560 | $337,749 | Part IV Exhibits, Financial Statement Schedules This section lists exhibits filed with the Annual Report on Form 10-K, including the merger agreement, corporate governance documents, various financing agreements, the Star 26 Capital acquisition agreement, and executive officer certifications - Key agreements filed as exhibits include the merger agreement with Brilliant, the acquisition agreement for Star 26 Capital, and various financing and equity plan documents[753]