Executive Summary / Key Takeaways

• Nukkleus Inc. is undergoing a profound strategic transformation, divesting its legacy financial technology operations to pivot entirely into the high-growth defense technology sector through the acquisition of Star 26 Capital Inc.
• The company's future growth hinges on Star's specialized defense products, including generators for Iron Dome launchers and tactical vehicles, complemented by a strategic warrant agreement for Synthetic Darwin LLC's self-evolving AI network tokens, which promises a significant technological differentiator across defense, finance, and healthcare.
• Recent financial results reflect this transitional phase, showing no continuing operational revenue but substantial non-cash gains from warrant revaluations, alongside a critical working capital deficit of $53.46 million and a "substantial doubt" about its ability to continue as a going concern.
• The global defense market presents a robust tailwind, with spending reaching $2.46 trillion in 2024 and the anti-drone market projected to surge at a 26.53% CAGR to $11.12 billion by 2030, offering a compelling backdrop for NUKK's new focus.
• Successful closure of the Star acquisition, effective integration of AI capabilities, and securing necessary financing are critical for NUKK to overcome its current financial vulnerabilities and establish a profitable, competitive foothold in this new, capital-intensive industry.

A Bold New Direction: Nukkleus's Strategic Pivot to Defense

Nukkleus Inc., once a financial technology company founded in 2013, is undergoing a dramatic and high-stakes transformation. Historically, Nukkleus provided software and technology solutions for the retail foreign exchange (FX) trading industry and payment services, including fiat-to-digital asset conversions. This era saw the acquisition of Match Financial Limited in 2021, aimed at expanding its footprint in fintech and cryptocurrency.

A pivotal shift began in January 2024 when Nukkleus ceased its general support service operations, refocusing solely on payment services. This was a prelude to a more radical strategic reorientation. In November 2024, the company announced its intent to sell its financial services operating segment, including its subsidiary DRFQ, marking a clear exit from its foundational business.

Concurrently, in December 2024, Nukkleus unveiled its new strategic direction: the acquisition of a controlling 51% interest in Star 26 Capital Inc. (Star), an Israeli corporation specializing in defense products. This move signals a complete pivot, with Nukkleus's future business explicitly centered on the defense sector. The company's fiscal year end was also changed to December 31, effective January 1, 2024, to align with Star and enhance operational efficiency.

This strategic pivot positions Nukkleus within a rapidly expanding global defense market. Global defense spending surged to $2.46 trillion in 2024, a 7.4% real-terms increase driven by escalating geopolitical tensions. Significant opportunities are emerging, such as the Trump Administration's commitment to invest an initial $25 billion in a "Golden Dome" missile defense shield for the U.S., inspired by Israel's Iron Dome. Furthermore, the anti-drone market is projected to grow from $2.71 billion in 2024 to $11.12 billion by 2030, at a staggering compound annual growth rate (CAGR) of 26.53%, fueled by lessons from modern warfare.

In this new landscape, Nukkleus, through Star, aims to carve out a specialized niche. While it will compete with established defense contractors, Star's focus on critical components like generators for Iron Dome launchers and specialized tactical vehicles for defense forces and intelligence agencies offers a differentiated entry point. This strategy seeks to leverage specific, high-demand defense needs rather than attempting to compete broadly across the entire defense industrial base.

Technological Differentiators: The AI Edge in Defense

Nukkleus's investment thesis in the defense sector is not solely reliant on Star's existing product lines but is significantly bolstered by a forward-looking technological initiative. Star 26 Capital Inc. is an Israeli corporation engaged as a supplier of generators for Iron Dome launchers and other defense products. Its offerings extend to the engineering, design, production, integration, sale, and maintenance of special tactical vehicles and trailers, including reconnaissance vehicles, mobile command and control vehicles, firefighting trailers, energy and lighting trailers, and satellite broadcast mobility platforms. These products serve critical functions for special defense forces, intelligence agencies, and the Israeli Defense Forces, providing a foundation of specialized, proven technology.

Adding a layer of advanced differentiation, Nukkleus entered a warrant agreement in July 2025 with Synthetic Darwin LLC to acquire up to 200 million Darwin tokens. Darwin is described as a new class of self-evolving AI network tokens, functioning as a self-training and evolving AI. This technology is designed to test and simulate multiple scenarios across diverse fields, including finance, healthcare, and crucially, defense. The software's stated goal is to allow companies to run scenarios and find the best configurations for complex systems.

For investors, the "so what" of this AI initiative is profound. In the defense sector, Darwin AI could offer significant advantages by optimizing operational strategies, enhancing predictive capabilities for threat assessment, and improving the efficiency of defense systems. While specific quantifiable benefits or performance metrics for Darwin AI's application in defense are not yet publicly detailed, the strategic intent is to leverage this platform to allow Nukkleus and its future subsidiaries to gain a technological edge. This could translate into more effective defense solutions, potentially leading to higher contract values, improved operational margins through efficiency gains, and a stronger competitive moat against rivals who may lack such advanced simulation and optimization capabilities. This AI integration is a strategic force multiplier, aiming to position Nukkleus at the forefront of defense innovation.

Financial Performance Under Transformation: A Transitional Snapshot

Nukkleus's financial statements for the period ended June 30, 2025, paint a picture of a company in deep transition. The most striking aspect is the complete absence of revenue from continuing operations for both the three and six months ended June 30, 2025, and 2024. This reflects the discontinuation of its former financial services segment (DRFQ), which has been classified as held-for-sale.

The discontinued operations, while being divested, still reported revenue from financial services of $298,082 for the three months ended June 30, 2025, an increase from $175,214 in the prior year period. Gross profit from these operations also rose to $240,656 from $125,476. The net loss from discontinued operations decreased to $(217,952) for the three months ended June 30, 2025, compared to $(358,045) in the same period of 2024. It is important to note, however, that management relied on estimates for these figures due to difficulties in obtaining complete financial data from the subsidiary.

The reported net income from continuing operations of $3.24 million for the three months ended June 30, 2025, and $106.38 million for the six months ended June 30, 2025, is primarily a result of non-cash accounting adjustments. Specifically, a gain of approximately $109.41 million from changes in the fair value of liability-classified stock purchase warrants and derivative liabilities significantly inflated these figures, having no impact on the company's cash position. This highlights the current disconnect between reported income and operational profitability.

Operating expenses reflect the ongoing transition. Professional fees decreased by approximately $144,000, or 16.3%, for the three months ended June 30, 2025, primarily due to a reduction in one-time costs associated with the prior business combination. Conversely, compensation and related benefits increased by $46,000, or 186%, for the quarter, and other general and administrative expenses rose by $116,000, or 95.1%, driven by increased public company costs, D&O insurance, marketing, and new office rent in Israel and New York.

Liquidity remains a critical concern. As of June 30, 2025, Nukkleus held approximately $1.52 million in cash and reported a working capital deficit of $53.46 million. Cash flow used in operating activities from continuing operations amounted to approximately $2.98 million for the six months ended June 30, 2025. Significant cash outlays included $1.50 million in advance payments to Star and $800,000 in penalties for late registration of securities related to a December 2024 private placement.

A comparative analysis of TTM financial ratios underscores Nukkleus's transitional state. Its TTM Gross Profit Margin of 92.11% is highly distorted by the lack of continuing revenue and the non-cash gains, making it incomparable to profitable fintech rivals like Interactive Brokers (IBKR) at 0.89, CME Group (CME) at 0.86, or Coinbase (COIN) at 0.75.

Similarly, NUKK's deeply negative Operating Profit Margin of -3599.46% and Net Profit Margin of -21328.52% starkly contrast with the positive margins of its former industry peers (IBKR OPM 0.84, NPM 0.08; CME OPM 0.64, NPM 0.58; COIN OPM 0.35, NPM 0.39). The company's Price-to-Sales (P/S) ratio of 186.82 is also significantly higher than IBKR (2.05), CME (13.61), and COIN (9.36), reflecting its minimal current revenue base. This financial snapshot highlights the substantial challenges Nukkleus faces in establishing operational profitability and a stable financial footing in its new defense sector.

Outlook and Strategic Execution: Charting the Course Ahead

Nukkleus's immediate future is inextricably linked to the successful closing of the Star acquisition, which is anticipated near the end of the third quarter of 2025. Management expects to generate revenue immediately following this event, marking a pivotal moment for the company's financial trajectory. This revenue will stem from Star's established operations as a supplier of defense products.

The Star acquisition involves an aggregate investment of $21 million for a 51% controlling interest. This consideration includes a minimum of $5 million in cash, a $16 million promissory note, 2.39 million shares of Nukkleus common stock, and 6.91 million stock purchase warrants with an exercise price of $1.50 per share. An option exists to acquire the remaining 49% of Star for an additional $16.08 million, comprising cash, a promissory note, common stock, and warrants. The close relationship between Nukkleus and Star is further evidenced by Menachem Shalom, who serves as CEO and a director for both entities. Recent amendments to the Star Agreement, such as the conversion of Class B to Class A common stock, aim to streamline Star's equity structure.

Regarding cost structure, professional fees are expected to remain consistent in the near term, with a potential marginal increase leading up to the Star acquisition, followed by a slight decrease as one-time transition costs subside. Conversely, compensation and related benefits, along with other general and administrative expenses, are projected to increase post-acquisition as Nukkleus integrates Star's operations and incurs higher public company costs.

The deconsolidation of DRFQ, the former financial services subsidiary, is also expected in the third quarter of fiscal year 2025. This will formally conclude Nukkleus's exit from its legacy business, allowing for a clearer focus on its defense initiatives. The long-term vision for Nukkleus involves leveraging the synergies between Star's specialized defense manufacturing capabilities and the advanced simulation and optimization potential of Darwin AI. This technological roadmap aims to enhance existing defense products and potentially develop new, AI-driven solutions, strengthening Nukkleus's competitive position in a market ripe for innovation.

Key Risks and Investor Considerations

The ambitious strategic pivot undertaken by Nukkleus Inc. comes with significant risks that warrant careful consideration from investors. Foremost among these is the "substantial doubt" raised about the company's ability to continue as a going concern for at least one year from the financial statement issuance date. This is driven by its current working capital deficit of $53.46 million and negative cash flow from continuing operating activities. The company's ability to meet its obligations is highly dependent on managing expenses and securing additional financing, which may not be available on acceptable terms or at all.

The Star acquisition, while central to the new strategy, is subject to customary closing conditions, including regulatory and shareholder approvals. Should the agreement be canceled due to Nukkleus's failure to perform its covenants, the company could be liable for $3 million in damages. Furthermore, a clause in the Star Agreement stipulates that if Nukkleus's common stock is delisted from Nasdaq within 12 months of closing, Star has the right to exchange the Investment Note for all shares of Star held by Nukkleus, potentially altering the ownership structure and investment terms.

Operational challenges are also evident. The material weaknesses identified in internal control over financial reporting as of June 2025 could lead to financial misstatements, delayed filings, and a loss of investor confidence. The inability to obtain complete financial data from the discontinued DRFQ subsidiary highlights potential issues in financial oversight and control during periods of transition.

Investors must also be mindful of the significant impact of non-cash items on reported net income. The substantial gains or losses from changes in the fair value of liability-classified warrants will continue to heavily influence reported profitability, potentially obscuring the true operational performance of the nascent defense business. This volatility in reported earnings can make fundamental analysis challenging.

Finally, Nukkleus is entering a highly competitive defense market dominated by large, well-established players with deep pockets and extensive contracts. While Star offers specialized products and the Darwin AI initiative presents a technological differentiator, Nukkleus's smaller scale and current financial constraints could hinder its ability to compete effectively for larger contracts, invest in necessary R&D, or withstand market pressures. The success of this pivot hinges on flawless execution and the ability to rapidly scale its new defense operations.

Conclusion

Nukkleus Inc. stands at a critical juncture, having shed its fintech past for a future firmly rooted in defense technology. This strategic metamorphosis, anchored by the Star acquisition and bolstered by the innovative potential of Darwin AI, represents a bold, high-stakes gamble for the company. The global defense market's robust growth and specific opportunities in areas like missile defense and counter-drone technologies provide a compelling backdrop for this pivot.

However, the path forward is fraught with challenges. The company's current financial fragility, marked by a significant working capital deficit and reliance on non-cash accounting gains, necessitates successful financing and rapid operational profitability from its new defense ventures. The execution of the Star acquisition, the integration of cutting-edge AI, and the effective management of inherent risks will determine whether Nukkleus can transform its ambitious vision into sustainable shareholder value. For investors, Nukkleus represents a speculative opportunity on a company attempting to leverage specialized defense products and advanced AI to carve out a niche in a vital, growing industry. The coming quarters will be crucial in demonstrating the viability of this profound strategic shift.