Nukkleus Inc. Warrant

Company Overview

Business Model: Nukkleus Inc. is a financial technology company that historically provided software and technology solutions for the worldwide retail foreign exchange trading industry and payment services. Following a business combination on December 22, 2023, the Company has operated as a full-service transactions technology and advisory business, offering an advanced transactions platform for dealing and risk management with global liquidity. The Company is undergoing a strategic pivot, with plans to divest its blockchain payment solutions subsidiary, Digital RFQ Limited, and acquire a controlling interest in Star 26 Capital Inc., a defense acquisition company. This will shift the Company's primary focus to the defense sector.

Market Position: Historically, Nukkleus Inc. generated most of its revenue from services to the retail foreign exchange trading industry, with Triton Capital Markets Ltd. being a primary customer. In its financial services segment, the Company offered blockchain-enabled payment and settlement services to institutional investors. The planned acquisition of Star 26 Capital Inc. will position Nukkleus Inc. in the defense technology market, particularly in Israel, where Star 26 Capital Inc.'s operating subsidiary, B. Rimon Agencies Ltd., is an established supplier of generators, masts, lighting solutions, and special tactical vehicles to defense, security, and military clients, including the Israeli Ministry of Defense and major Israeli defense companies.

Recent Strategic Developments:

• Business Combination: On December 22, 2023, Brilliant Acquisition Corporation completed a merger with Old Nukk, with Old Nukk surviving as a wholly-owned subsidiary and Brilliant changing its name to Nukkleus Inc.
• Acquisition of Star 26 Capital Inc.: On December 15, 2024, Nukkleus Inc. entered into an agreement to acquire a controlling 51% interest in Star 26 Capital Inc., a defense acquisition company that holds 95% of B. Rimon Agencies Ltd., an Israeli defense technology company. The consideration includes a minimum of $5,000,000 in cash, a $10,000,000 promissory note, 2,385,170 shares of common stock, and 6,907,859 stock purchase warrants.
• Divestiture of Digital RFQ Limited: On November 8, 2024, Nukkleus Inc. entered into a settlement agreement to sell Digital RFQ Limited, its blockchain payment solutions subsidiary, for £1,000, subject to shareholder approval. This divestiture is driven by Digital RFQ Limited's continuing net losses.
• Termination of GSA Agreements: Effective January 1, 2024, the General Services Agreement (GSA) with Triton Capital Markets Ltd. and the General Services Agreement with FXDirectDealer LLC were terminated. These agreements historically generated substantially most of the Company's revenue.
• Recent Financing Activities:
  • X Group Fund of Funds: Issued senior unsecured promissory notes totaling $437,500 in principal ($350,000 cash proceeds) and warrants in June and September 2024. In November 2024, $771,085 of outstanding principal and interest was converted into 319,952 shares of common stock and 351,424 warrants.
  • East Asia Technology Investments Limited: Issued a senior unsecured promissory note for $515,000 in principal ($412,075 cash proceeds) and 175,000 stock purchase warrants in August 2024.
  • Private Placement: On December 18, 2024, Nukkleus Inc. closed a private placement for 1,666,666 units at $6.00 per unit, raising $10,000,000 in aggregate gross proceeds. Each unit consisted of one share of common stock and a warrant to purchase 1.5 shares.
• Reverse Stock Split: A one-for-eight reverse stock split of the Company’s common stock became effective on October 24, 2024. All share and per-share data in this summary reflect this adjustment.

Geographic Footprint: Nukkleus Inc.'s principal executive office is in New York, New York, with office space in Jersey City, New Jersey. Historically, its general support services were provided to a customer in Malta, and financial services revenue was generated from various countries in Europe, Dubai, Sub-Saharan Africa, and Asia. The planned acquisition of Star 26 Capital Inc. will establish a significant operational presence in Israel, with future intentions to expand into the United States defense industry.

Financial Performance

Revenue Analysis

Profitability Metrics (2024):

• Gross Margin: 16.9%
• Operating Margin: -240.0%
• Net Margin: -144.1%

Investment in Growth:

• R&D Expenditure: Not explicitly disclosed.
• Capital Expenditures: Not explicitly disclosed.
• Strategic Investments: The Company plans an aggregate investment of $15,000,000 (cash and promissory note) for a 51% controlling interest in Star 26 Capital Inc.

Business Segment Analysis

General Support Services

Financial Performance:

• Revenue: $4.80 million (-75.0% YoY)
• Gross Profit: $0.15 million (-64.7% YoY)
• Gross Margin: 3.1% (vs. 2.2% in prior year)
• Key Growth Drivers: The significant decrease in revenue and gross profit was primarily due to the termination of the General Services Agreement with Triton Capital Markets Ltd. effective January 1, 2024. The increase in gross margin percentage was attributed to a $25,000 monthly decrease in the cost of general support services, effective May 1, 2023.

Product Portfolio:

• Provided 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.

Market Dynamics:

• This segment historically served the worldwide retail foreign exchange trading industry, with a single primary customer, Triton Capital Markets Ltd., an affiliate. The termination of the GSA marks a strategic exit from this business line.

Financial Services

Financial Performance:

• Revenue: $1.11 million (-46.9% YoY)
• Gross Profit: $0.85 million (+210.5% YoY)
• Gross Margin: 76.2% (vs. -36.6% in prior year)
• Operating Expenses: $1.92 million (for financial services segment only)
• Key Growth Drivers: The decrease in revenue was primarily due to a significant decrease in trading volume (50.0% YoY decrease to $216.03 million) resulting from the closure of primary USD banking rails (Signature and Silvergate) in March 2023. The substantial improvement in gross profit and gross margin was mainly due to the non-recurrence of $2.11 million in amortization expense of acquired intangible assets, which were fully amortized in the prior year, and a slight decrease in introducing broker fees.

Product Portfolio:

• Digital RFQ Limited: Offered blockchain-enabled payment and settlement services for cross-border transfers of fiat currencies using blockchain rails (Bitcoin, Ethereum, Tron networks). Did not provide custody or wallet services for digital assets.
• DigiClear: Planned to develop technology for a custody and settlement utility operating system for automated post-trade solutions, aiming to secure client assets and facilitate rapid transfers. The Company is uncertain when these products will be offered and is evaluating strategic opportunities, including sale or joint venture.

Market Dynamics:

• Competes with banks, other financial institutions (including those using SWIFT), and smaller financial technology companies. The Company aimed to compete by offering faster and more reliable products using more advanced technology. This segment is subject to rapid changes and intense competition. The Company plans to dispose of this segment.

Capital Allocation Strategy

Shareholder Returns:

• Share Repurchases: Not disclosed.
• Dividend Payments: Nukkleus Inc. has not paid dividends on its common stock and does not expect to declare or pay dividends in the foreseeable future.
• Future Capital Return Commitments: Not disclosed.

Balance Sheet Position (as of September 30, 2024):

• Cash and Equivalents: $3,678 (excluding customer custodial funds of $31,781)
• Total Debt: $4.33 million (Convertible notes payable, net: $0.63 million; Note payable, net: $0.05 million; Loans payable - related parties: $3.31 million; Interest payable - related parties: $0.22 million; Interest payable: $0.03 million; Accrued professional fees: $0.97 million; Accrued payroll liability and directors’ compensation: $0.64 million; Unearned revenue: $0.17 million; Others: $0.19 million)
• Net Cash Position: $(4.32) million (Cash of $3,678 minus Total Debt of $4.33 million)
• Credit Rating: Not disclosed.
• Debt Maturity Profile:
  • Loans payable - related parties: $2.35 million due in 2025, $0.97 million due in 2026.
  • April 2024 Loan: $54,198 due on April 30, 2025.
  • Convertible notes payable (June, August, September 2024 Notes): Due six months after issuance.

Cash Flow Generation (Year Ended September 30, 2024):

• Operating Cash Flow: $(3.82) million
• Free Cash Flow: Not explicitly stated, but given negative operating cash flow and no significant capital expenditures disclosed, it would also be negative.
• Cash Conversion Metrics: Not explicitly disclosed.

Operational Excellence

Production & Service Model:

• Historical Fintech: Provided software and technology solutions for FX trading and blockchain-enabled payment processing. Digital RFQ Limited utilized advanced-stage, fully tested, well-established, and fully collateralized stablecoins on Bitcoin, Ethereum, and Tron networks for cross-border transfers.
• Future Defense (B. Rimon Agencies Ltd.): Operates in two primary lines:
  1. Purchase and sale of generators, masts, and lightning products and solutions, acquired through exclusive distributorship agreements.
  2. Engineering, design, production, integration, and maintenance of special tactical vehicles and trailers (e.g., reconnaissance, mobile command and control, firefighting, energy and lighting, mobile bank branches, satellite broadcast mobility platforms).

Supply Chain Architecture:

• B. Rimon Agencies Ltd.: Acquires generators, masts, and lightning products through exclusive distributorship agreements with key third-party suppliers.

Key Suppliers & Partners:

• Historical Fintech: FXDirectDealer LLC (terminated), various financial institutions for banking services.
• Defense (B. Rimon Agencies Ltd.): Key third-party suppliers for generators, masts, and lightning products. Major customers include Refeal, Israel Aviation Industries, Elbit Systems, the Israeli Ministry of Defense, and the Israeli Police.
• Financing Partners: X Group Fund of Funds, East Asia Technology Investments Limited, YA II PN, LTD (terminated SEPA but holds a note), Dawson James Securities Inc. (placement agent).

Facility Network:

• Headquarters: 575 Fifth Ave, 14th Floor, New York, New York 10017.
• Office Space: Uses office space of FXDD, an affiliated company, free of rent, in Jersey City, New Jersey.
• Rimon Operations: Located in Israel.

Operational Metrics:

• Trading Volume (Financial Services): $216.03 million (2024) vs. $432.11 million (2023), a 50.0% decrease.
• Number of Trades (Financial Services): 1,555 (2024) vs. 5,696 (2023).
• Active Clients (Financial Services): 88 (2024) vs. 217 (2023).
• Average Cost per Trade (Financial Services): $170 (2024) vs. $503 (2023), a significant decrease due to zero amortization of intangible assets in 2024.
• Average Trade (Financial Services): $138,929 (2024) vs. $75,863 (2023).

Market Access & Customer Relationships

Go-to-Market Strategy:

• B. Rimon Agencies Ltd.: Markets products through websites and an internal sales team offering off-the-shelf or tailor-made solutions. Future plans include digital marketing across social media, Web3 reservation systems, and various advertisements.
• Digital RFQ Limited (Historical): Products and services were distributed through its website.

Distribution Channels:

• Direct Sales: B. Rimon Agencies Ltd. primarily sells to special defense forces, intelligence agencies, the Israeli Defense Forces, municipalities, and other governmental and security-focused clients.
• Digital Platforms: Historically used for Digital RFQ Limited's payment processing.

Customer Portfolio:

• Enterprise Customers (B. Rimon Agencies Ltd.): Defense, security, and military clients in Israel, including Refeal, Israel Aviation Industries, Elbit Systems, the Israeli Ministry of Defense, and the Israeli Police.
• Institutional Customers (Digital RFQ Limited - Historical): Institutional investors for cross-border payment and transaction solutions.
• Customer Concentration: Historically, Triton Capital Markets Ltd. (an affiliate) accounted for 81.1% of total revenue in 2024 and 90.2% in 2023. This agreement was terminated effective January 1, 2024.

Geographic Revenue Distribution (2024):

• Malta: $4.80 million (General Support Services)
• Rest of the world: $1.11 million (Financial Services)

Competitive Intelligence

Market Structure & Dynamics

Industry Characteristics:

• Fintech/Blockchain: A rapidly changing and highly competitive industry with evolving technology. Digital asset markets have a limited performance record and are subject to significant volatility and regulatory uncertainty.
• Defense Sector: The global defense sector is experiencing growth and transformation, driven by increasing violent conflicts worldwide and a need for advanced technologies. The Israeli defense market, in particular, is a heavyweight, accounting for 2.3% of global military exports (2018-2022), with an estimated compound annual growth rate for the defense technology market of approximately 15.9% from 2022 to 2027 in the U.S.

Competitive Positioning Matrix:

Direct Competitors

Primary Competitors:

• Fintech/Payment Processing (Historical): Payment platforms, banks and non-bank financial institutions (including SWIFT), foreign exchange and derivative transfer processors.
• Defense (B. Rimon Agencies Ltd.): Not explicitly named, but operates in a market with major Israeli defense companies like Refeal, Israel Aviation Industries, and Elbit Systems, which are also customers.

Emerging Competitive Threats:

• New entrants and early-stage companies in fintech.
• Disruptive technologies in blockchain.
• Competitors from more established industries (e.g., traditional financial services) with greater resources and lobbying power.

Competitive Response Strategy:

• Strategic Pivot: Shifting focus to the defense sector through the acquisition of Star 26 Capital Inc. and divestiture of Digital RFQ Limited.
• Acquisition Strategy: Focus on acquiring small and medium-sized businesses (enterprise value < $200 million) in the defense sector, particularly in the U.S. and Israel, providing capitalization and leadership.
• Competitive Strengths (Star 26 Capital Inc.): Specialization in military and defense, international and sector-specific expertise (Menachem Shalom's experience in Israel), and a flexible value proposition for business owners (complete exit or incumbent management retention).

Risk Assessment Framework

Strategic & Market Risks

Market Dynamics:

• Limited Operating History: Nukkleus Inc. has a limited operating history in an evolving and highly volatile industry, making future prospects difficult to evaluate.
• Growth Management: Failure to effectively manage current and future growth, including expanding IT, financial, operating, and administrative systems, could adversely impact the business.
• Intense Competition: Operates in a rapidly changing and highly competitive industry, facing established enterprises and early-stage companies with greater resources.
• Brand and Reputation: Unfavorable media coverage or actions by executives could harm reputation.
• Environmental Impacts of Blockchain: Concerns about energy usage and environmental impact of blockchain technology could negatively affect usage and perception.

Operational & Execution Risks

Supply Chain Vulnerabilities:

• Reliance on Third Parties: Dependence on financial institutions for payment processing and third-party blockchain networks for platforms creates risks of service interruptions, breaches, or non-renewal of agreements.
• Banking Relationship Concentration: Banking relationships for transaction processing are concentrated in a small number of partners, posing a risk if these relationships deteriorate.
• Illegal Activity Exploitation: Products and services may be exploited for fraud, money laundering, or other illegal activities, leading to liability and reputational harm.
• Compliance and Risk Management: Methods might not be effective, leading to adverse outcomes, especially given reliance on third parties for KYC and other compliance obligations.
• Remote-First Operations: As a remote-first company, Nukkleus Inc. is subject to heightened operational and cybersecurity risks due to potentially less robust home/shared office security systems.

Financial & Regulatory Risks

Market & Financial Risks:

• Profitability Uncertainty: No assurance of maintaining profitability or that new revenue and business models will be successful.
• Tax Law Changes: Changes in U.S. and foreign tax laws, or their application, could adversely impact financial position and operating results.
• Accounting Estimates: Reliance on complex accounting estimates and assumptions (e.g., revenue recognition, intangible asset valuation, investments, stock-based compensation, income taxes) could lead to adverse effects if incorrect.
• Financial Reporting Standards: Changes in financial reporting standards or policies could materially affect reported results.
• Internal Controls: Material weaknesses in internal control over financial reporting have been identified, and failure to remediate could adversely affect investor confidence.
• Additional Capital: May require additional capital to support business growth, which might not be available or could be dilutive.
• Foreign Exchange: Fluctuations in currency exchange rates could harm financial condition and results of operations.

Regulatory & Compliance Risks:

• Evolving Regulatory Environment: Subject to various laws and regulations (financial services, banking, securities, money transmission, blockchain, privacy, data protection, sanctions, anti-bribery, AML/CTF) that are complex, evolving, and subject to inconsistent interpretation.
• Licensing Requirements: Inability to maintain existing or obtain additional regulatory licenses, certifications, and approvals in various jurisdictions could lead to fines, revocations, or operational restrictions.
• Data Privacy: Processing large amounts of sensitive customer data subjects the Company to complex privacy laws (e.g., GDPR, CCPA, CPRA), with non-compliance risking reputational harm, fines, and litigation.
• Legal Proceedings: Subject to litigation, regulatory investigations, and other legal proceedings that are inherently uncertain and could result in substantial payments, fines, or operational changes.

Geopolitical & External Risks

Geopolitical Exposure:

• Geopolitical Events: Adverse effects from natural disasters, pandemics, war, or terrorism, which could disrupt business operations. The conflict in Israel is noted as a factor creating opportunities in the defense industry.
• Trade Relations: Impact of trade tensions and policy changes, including sanctions and export controls.

Innovation & Technology Leadership

Research & Development Focus:

• Core Technology Areas (Historical Fintech): Focused on blockchain-enabled payment gateway for cross-border transfers using stablecoins on Bitcoin, Ethereum, and Tron networks.
• Innovation Pipeline (Historical Fintech): Planned to offer a white-labelled digital bank and develop DigiClear, a custody and settlement utility operating system for automated post-trade solutions.
• Core Technology Areas (Future Defense - B. Rimon Agencies Ltd.): Engineering, design, production, integration, and maintenance of special tactical vehicles and trailers.

Intellectual Property Portfolio:

• Patent Strategy: Not explicitly detailed, but general risk of third-party infringement claims is acknowledged.
• Licensing Programs: Not explicitly detailed.
• IP Litigation: Risk of lawsuits for alleged infringement of proprietary rights is noted.

Technology Partnerships:

• Relies on connectivity to blockchain networks (Bitcoin, Ethereum, Tron) for its payment processing platforms.

Leadership & Governance

Executive Leadership Team

Leadership Continuity: The Company experienced changes in its Chief Executive Officer position in July and September 2024. Menachem Shalom was appointed CEO in September 2024. Board Composition: The Board of Directors consists of six members. David Rokach, Tomer Nagar, Aviya Volodarsky, and Reuven Yeganeh are considered independent directors under Nasdaq listing rules. Reuven Yeganeh qualifies as an "audit committee financial expert." The Board has an Audit Committee, a Compensation Committee, and a Nominating and Corporate Governance Committee.

Human Capital Strategy

Workforce Composition:

• Total Employees: Approximately 12 employees (11 for Digital RFQ Limited, 1 for Nukkleus Inc.).
• Geographic Distribution: Not explicitly detailed beyond general locations.
• Skill Mix (B. Rimon Agencies Ltd.): 14 employees, including three technicians, two engineers, two assembly workers, three sales employees, one customer support employee, one financial bookkeeper, and two management employees.

Talent Management:

• Acquisition & Retention: The Company faces intense competition for highly skilled and technical personnel, particularly in executive talent, engineering, risk management, and financial regulatory expertise. Significant costs are incurred for salaries, benefits, and equity incentives to attract and retain key personnel.

Diversity & Development:

• Not explicitly detailed.

Environmental & Social Impact

Environmental Commitments:

• Climate Strategy: The Company acknowledges concerns about the energy usage and environmental impact of blockchain technology (particularly proof of work mining) as a risk factor, but no specific emissions targets, carbon neutrality commitments, or renewable energy strategies are disclosed.

Supply Chain Sustainability:

• Not explicitly detailed.

Social Impact Initiatives:

• Not explicitly detailed.

Business Cyclicality & Seasonality

Demand Patterns:

• Seasonal Trends: Not explicitly detailed.
• Economic Sensitivity: Performance is subject to general economic conditions, their impact on foreign exchange transfer and payments markets, and the blockchain economy. Geopolitical developments (e.g., trade wars, foreign exchange limitations) can increase unpredictability and volatility.
• Industry Cycles (Defense): The Company believes the defense sector is poised for significant growth due to increasing violent conflicts worldwide, leading to higher-than-average demand for defense products and services.

Planning & Forecasting:

• The rapidly evolving nature of the markets in which the Company operates, and substantial uncertainty concerning how these markets may develop, reduce the ability to accurately forecast quarterly or annual revenue.

Regulatory Environment & Compliance

Regulatory Framework:

• Industry-Specific Regulations:
  • Fintech (Digital RFQ Limited - Historical): Regulated in the United Kingdom by the Financial Conduct Authority as an Electronic Money Directive Agent. Subject to Anti-Money Laundering (AML) and Counter Terrorist Finance (CTF) regulations, including the European Union 5th and 6th Money Laundering Directives, The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer), Regulation 2017, Proceeds of Crime Act 2002, Terrorism Act 2000, Counter Terrorism Act 2008, Fraud Act 2006, and Bribery Act 2010.
  • Defense (B. Rimon Agencies Ltd.): Subject to governmental approval for acquisitions of local defense companies by foreign entities (e.g., CFIUS in the U.S.), procurement regulations (e.g., integrity, conflicts of interest, anti-corruption, cybersecurity, human trafficking, counterfeit parts), anti-bribery/corruption regulations (e.g., Israel Penal Code, FCPA, UK Bribery Act), cybersecurity and data privacy regulations (e.g., GDPR, Israeli legislation), and audit regulations (e.g., Israeli Ministry of Defense, U.S. government audit agencies).
• International Compliance: Plans to expand operations to other countries, including Dubai and Lithuania, which will subject the Company to additional regulations in those jurisdictions.
• Data Privacy: Subject to complex and evolving privacy laws (e.g., GDPR, UK Data Protection Act, CCPA, CPRA) in various markets.

Trade & Export Controls:

• The defense sector is subject to trade restrictions, sanctions, and export controls, which could impact business limitations and compliance requirements.

Legal Proceedings:

• The Company is subject to ordinary routine litigation incidental to its normal business operations. It is not currently a party to any material legal proceedings.

Tax Strategy & Considerations

Tax Profile:

• Effective Tax Rate: 0.0% for the years ended September 30, 2024, and 2023, due to a full valuation allowance against deferred tax assets.
• Geographic Tax Planning: As a multinational business, the Company has subsidiaries that engage in intercompany transactions in various tax jurisdictions.
• Tax Reform Impact: The Company has U.S. federal net operating loss carry-forwards, but their use is limited under Section 382 of the Internal Revenue Code due to changes in stock ownership. The Company has not performed a study to determine the extent of these limitations.

Insurance & Risk Transfer

Risk Management Framework:

• Insurance Coverage: The Company maintains insurance coverage believed to be adequate for its business, but acknowledges it may be insufficient to protect against all losses and costs from security breaches, cyberattacks, or other unlawful activity.
• Risk Transfer Mechanisms: Not explicitly detailed, but the Company engages third-party licensed trust companies for custodial services for customer digital assets, including indemnification against certain types of losses like theft.