DFNS

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2025, for Nukkleus Inc. (Ticker: NUKK). The Company is an emerging growth company and smaller reporting company. Historically a financial technology firm, Nukkleus has ceased its general support and payment services operations, classifying them as discontinued operations. The Company is currently pivoting to the defense sector pending the acquisition of a controlling 51% interest in Star 26 Capital Inc. ("Star"), an Israeli supplier of generators for "Iron Dome" launchers. The Company changed its fiscal year-end from September 30 to December 31 effective January 1, 2024.

Key Financial Metrics

Note: The significant net income in Q1 2025 is driven entirely by non-cash gains related to the change in fair value of liability-classified stock purchase warrants and embedded derivatives.

Material Changes vs. Prior Period

• Net Income Surge: The Company reported a net income of $102.96 million compared to a net loss of $2.43 million in the prior year. This is primarily due to a $104.28 million non-cash gain from the change in fair value of stock purchase warrant liabilities and a $567,413 gain from convertible note embedded derivatives.
• Liability Reduction: Total liabilities decreased significantly from $172.46 million to $65.82 million, largely due to the reclassification of warrant liabilities and the reduction in fair value of those liabilities.
• Operating Expenses: Total operating expenses decreased by 27.7% to $1.51 million, driven by a 47.9% reduction in professional fees (lower advisory and legal fees) offset by increases in compensation and general administrative costs.
• Cash Position: Cash and cash equivalents increased to $4.46 million from $5,985 in the prior year, though the Company utilized $1.34 million in cash for operating activities and $810,221 for investing activities (primarily advances to Star).

Outlook, Risks, and Contingencies

• Going Concern: Management has raised substantial doubt about the Company's ability to continue as a going concern for at least twelve months. The Company has a working capital deficit of approximately $56.2 million and relies on obtaining additional financing or the successful closing of the Star acquisition to meet obligations.
• Star Acquisition: The Company is pursuing the acquisition of Star 26 Capital Inc. for an aggregate investment of $21 million (cash, promissory note, stock, and warrants). The transaction is subject to shareholder approval and regulatory conditions. If the deal fails due to shareholder vote failure, the Company may owe damages of $1.8 million.
• Material Weaknesses: The Company identified material weaknesses in internal controls over financial reporting related to insufficient resources for evaluating intangible assets and cost-method investments. These weaknesses were not remediated as of March 31, 2025.
• Debt Obligations: The Company holds convertible notes and related party loans. The December 2024 Note includes complex conversion features and embedded derivatives that significantly impact financial results based on stock price volatility.

Investor Verification Checklist

• Non-Cash Income: Verify that the reported net income is non-cash and driven by fair value adjustments to warrant liabilities, not operational profitability.
• Liquidity Runway: Assess the sufficiency of the $4.46 million cash balance against the $56.2 million working capital deficit and ongoing operating burn rate.
• Star Deal Status: Confirm the status of the shareholder vote and regulatory approvals required to close the Star acquisition, which is critical to the Company's future business model.
• Warrant Liability Volatility: Monitor the fair value of the $57.4 million in stock purchase warrant liabilities, as fluctuations will continue to cause significant volatility in reported earnings.
• Internal Controls: Review the remediation plan for the identified material weaknesses in internal controls over financial reporting.