Company History and Business Overview Nukkleus Inc. (NUKK) is a diversified financial technology company that has undergone a strategic transformation in recent years, expanding its focus beyond its traditional cryptocurrency and foreign exchange (forex) offerings into the rapidly growing defense sector. With a history dating back to 2013, Nukkleus has established itself as a prominent player in the global fintech space, providing innovative software and technology solutions to the worldwide retail forex trading industry.
Nukkleus was founded on July 29, 2013, in the state of Delaware as a for-profit company, initially focusing on providing software and technology solutions for the global retail forex trading industry. The company's primary offering was its software, technology, customer sales and marketing, and risk management technology hardware and software solutions package, which it provided to Triton Capital Markets Ltd. (TCM), formerly known as FXDD Malta Limited. The FXDD brand is utilized in the retail forex trading industry by TCM.
In July 2018, the company incorporated Nukkleus Malta Holding Ltd., a wholly-owned subsidiary, and Markets Direct Technology Group Ltd (MDTG), formerly known as Nukkleus Exchange Malta Ltd. MDTG was initially exploring the possibility of obtaining a license to operate an electronic exchange for digital assets and traditional currency pairs. However, during the fourth quarter of fiscal 2020, management decided to exit the exchange business and no longer pursue the necessary regulatory licensing in Malta.
Expanding into New Verticals In fiscal year 2021, Nukkleus completed the acquisition of Match Financial Limited, a private company based in England and Wales, which was engaged in providing payment services from one fiat currency to another. This strategic move marked the company's initial foray into the financial services sector beyond its core forex business.
The company further diversified its portfolio in late 2021 through two significant transactions. First, on October 20, 2021, Nukkleus entered into a Purchase and Sale Agreement with the shareholders of Jacobi Asset Management Holdings Limited to acquire a 5% equity interest in exchange for 20 million shares of Nukkleus common stock. The transaction closed on December 15, 2021. Jacobi is a company focused on digital asset management that had received regulatory approval to launch the world's first tier-one Bitcoin exchange-traded fund (ETF).
Then, on December 30, 2021, Nukkleus entered into another Purchase and Sale Agreement with the shareholder of Digiclear Ltd. to acquire 5.4 million shares of Digiclear in exchange for 15.15 million shares of Nukkleus common stock, valued at $5.0 million based on the market price of the company's common stock on the acquisition date. This transaction closed on March 17, 2022. Digiclear is a company developing a custody and settlement utility operating system.
Shift Towards the Defense Sector Most notably, in 2022, Nukkleus began to shift its strategic focus towards the defense sector, recognizing the significant growth opportunities in this rapidly evolving industry. The company entered into an agreement to acquire a controlling stake in Star 26 Capital Inc., a defense-focused acquisition company that holds a 95% ownership interest in RIMON, a leading Israeli supplier of components for the Iron Dome missile defense system and other defense and tactical solutions.
This acquisition, which is still pending, represents a transformative move for Nukkleus as it positions the company to capitalize on the growing global demand for advanced defense technologies. The company has also appointed Brigadier General (Ret.) Mark Beesley as a strategic advisor to the board, focusing on defense sector acquisitions, further strengthening its expertise and capabilities in this new business vertical.
Business Segments Nukkleus operates in two reportable business segments: General Support Services and Financial Services.
General Support Services Segment The company's primary business is providing software, technology, customer sales and marketing, and risk management technology hardware and software solutions to Triton Capital Markets Ltd. (TCM), which operates the FXDD brand in the retail foreign exchange (FX) trading industry. Through its wholly-owned subsidiary Nukkleus Limited, the company provides these services to TCM under a General Services Agreement (GSA). Under the GSA, Nukkleus Limited is contractually obligated to provide the full suite of software, technology, and support services to enable TCM to conduct its retail FX business. In return, TCM pays Nukkleus Limited a minimum of $1.6 million per month.
To appropriately service TCM, Nukkleus Limited has also entered into a GSA with FXDirectDealer LLC (FXDIRECT), which provides that Nukkleus Limited will pay FXDIRECT a minimum of $1.55 million per month in consideration of FXDIRECT providing personnel and support services such as operational and technical support, marketing, sales support, accounting, risk monitoring, documentation processing, and customer care. The company's revenue from the general support services segment is recognized on a monthly basis as the services are rendered under the terms of the GSA with TCM.
Financial Services Segment Nukkleus also operates a financial services segment through its subsidiaries, primarily Match Financial Limited and its subsidiary Digital RFQ. This segment provides payment services, facilitating the conversion of fiat currencies and the movement of funds, including digital assets, on behalf of customers. Digital RFQ maintains customer digital currency assets and liabilities on its balance sheet, recording them at fair value.
Revenue in the financial services segment is recognized at the point in time when the payment services are rendered. Key performance indicators for this segment include trading volume, which grew 230.9% year-over-year to $359.73 million for the nine months ended June 30, 2023, financial services revenue, which grew 87.8% year-over-year to $1.82 million for the same period, and gross margin, which improved from 104.9% to 18.7% as the company scaled its operations.
Financials Financial Performance Nukkleus' financial performance has been mixed in recent years, with the company reporting net losses in its 2022 and 2023 fiscal years. For the fiscal year ended September 30, 2022, the company reported a net loss of $11.85 million, compared to a net loss of $936,846 in the prior fiscal year. Revenue for the 2022 fiscal year was $21.51 million, up from $19.29 million in the 2021 fiscal year.
In the most recent quarter ended June 30, 2023, Nukkleus reported revenue of $5.21 million, representing a 1.16% increase compared to the same quarter in the prior year. This growth was primarily driven by an 87.8% increase in revenue from the financial services segment due to business expansion. However, the company still reported a net loss of $1.21 million for the quarter.
Liquidity and Capital Resources The company's liquidity position has been a concern, with a working capital deficit of $3.79 million as of September 30, 2022. To address this, Nukkleus has taken steps to enhance its financial flexibility, including the reduction of liabilities and the termination of agreements that placed a financial burden on the company. Additionally, the company has announced a $10 million private placement with a single New York-based family office investor, which is expected to provide the necessary capital to finance the proposed acquisition of Star 26 Capital Inc. and support the company's ongoing operations.
As of June 30, 2023, Nukkleus had $142,340 in cash, excluding $1.71 million in customer custodial cash. The company's current ratio and quick ratio both stand at 0.33, indicating potential liquidity challenges. The debt-to-equity ratio is negative due to the company's net liability position.
Cash Flow For the fiscal year ended September 30, 2022, Nukkleus reported operating cash flow and free cash flow of $1.62 million. However, cash flow figures for the most recent quarter are not available.
Geographic Markets Nukkleus operates primarily in the United States, United Kingdom, and Malta. However, the company does not provide detailed breakdowns of revenue or performance by geographic market.
Regulatory Challenges and Shareholder Dilution Nukkleus has faced some regulatory challenges in recent years, including a threatened delisting from the Nasdaq Stock Market due to non-compliance with certain listing requirements. While the company has since regained compliance, these types of regulatory hurdles can pose a significant risk to the business and investor confidence.
Furthermore, the company's expansion strategy, which has included several equity-based acquisitions, has resulted in shareholder dilution. Nukkleus has issued millions of shares of its common stock to facilitate these transactions, potentially reducing the value for existing shareholders.
Outlook and Conclusion Nukkleus' recent strategic pivot towards the defense sector represents a significant opportunity for the company, as global defense budgets continue to rise and the demand for advanced technologies like the Iron Dome system remains strong. However, the company will need to navigate the complexities of this new industry, as well as address its ongoing financial and regulatory challenges, in order to effectively capitalize on this growth potential.
The proposed acquisition of Star 26 Capital Inc. and the appointment of Brigadier General (Ret.) Mark Beesley as a strategic advisor are positive steps in this direction, but Nukkleus will need to demonstrate its ability to successfully integrate and execute on these defense-focused initiatives. Additionally, the company will need to continue to improve its financial position and address any regulatory concerns to maintain investor confidence and drive long-term shareholder value.
The company's two business segments provide complementary services to the global foreign exchange and payments industries. The general support services segment generates stable, recurring revenue, while the financial services segment offers higher-growth potential as the company expands its payments capabilities. The recent growth in the financial services segment, particularly the significant increase in trading volume and revenue, is a positive sign for the company's diversification efforts.
Overall, Nukkleus' transition from a fintech-focused company to a diversified financial technology and defense conglomerate represents a bold and ambitious strategy. However, the road ahead will undoubtedly be challenging, and the company's ability to navigate these complexities will be key to its future success. The company's focus on leveraging its technology and industry expertise to serve customers in its target markets, combined with its strategic moves into the defense sector, position it for potential growth, but ongoing financial challenges and the need for successful integration of new acquisitions remain critical factors to monitor.