DFNS

Business Context and Reporting Period

Company: Nukkleus Inc. (NUKK)
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2025
Business Overview: Nukkleus is transitioning from a financial technology company to a defense sector entity. The Company ceased general support services in early 2024 and deconsolidated its financial services subsidiary (DRFQ) in July 2025. Current operations focus on drone payload distribution and aviation support, pending the closing of the acquisition of Star 26 Capital Inc. (Star), an Israeli defense supplier, which is expected to finalize in Q4 2025.

Key Financial Metrics

Note: The reported Net Income for the nine months ended Sept 30, 2025, is driven primarily by non-cash gains related to the change in fair value of liability-classified stock purchase warrants ($123.4M) and a gain on deconsolidation ($2.5M).

Material Changes vs. Prior Period

• Revenue: Continuing operations revenue remains at $0, consistent with the prior period, as the Company has no active revenue-generating operations pending the Star acquisition. Discontinued operations (DRFQ) generated $83,309 in revenue for the three months ended Sept 30, 2025, before deconsolidation.
• Operating Expenses: Increased significantly to $4.77M for the quarter (up 301% YoY) and $7.33M for the nine months (up 70% YoY). This is primarily due to a $3.76M increase in professional fees, largely attributed to the fair value of shares and warrants issued to Mandragola Ltd. for a new joint venture.
• Other Income/Expense: The nine-month period saw a massive swing to net income due to a $123.4M gain from the change in fair value of stock purchase warrant liabilities. This was partially offset by a $19.6M "day one loss" on a private placement and a $7.5M loss on debt extinguishment.
• Balance Sheet: Total liabilities decreased from $172.5M (Dec 31, 2024) to $43.7M (Sept 30, 2025), driven by the deconsolidation of DRFQ liabilities and the conversion/extinguishment of convertible notes.

Outlook, Risks, and Contingencies

• Going Concern: Management has expressed substantial doubt about the Company's ability to continue as a going concern for twelve months from the issuance date. This is due to a working capital deficit of ~$30.5M and a history of operating losses. Future success depends on raising additional capital or closing the Star acquisition.
• Acquisition Strategy: The Company is pursuing the acquisition of Star 26 Capital Inc. (100% interest) for ~$21M in cash/notes and equity. Closing is expected in Q4 2025. Additionally, the Company signed an agreement to acquire Tiltan Software Engineering Ltd. for ~$14M, subject to regulatory approval.
• Financing: The Company raised $10M in a private placement in September 2025 and entered into an Equity Line of Credit (ELOC) agreement allowing for up to $250M in future sales of common stock.
• Internal Controls: The Company identified material weaknesses in internal control over financial reporting, specifically regarding the review of complex accounting transactions. Remediation plans are underway.
• Legal/Regulatory: The Company paid $800,000 in penalties for late registration of a private placement. There are no material pending legal proceedings.

Investor Verification Checklist

• Revenue Timeline: Verify the expected closing date of the Star acquisition, as the Company currently has no revenue from continuing operations.
• Warrant Liability Volatility: Confirm the valuation assumptions (volatility, risk-free rate) used for the $40.7M stock purchase warrant liability, as changes in stock price significantly impact reported net income/loss.
• Cash Burn Rate: Assess the sufficiency of the $7.6M cash balance against the $30.5M working capital deficit and upcoming acquisition payments.
• Related Party Transactions: Review the $4.5M note receivable from Star and other related party loans totaling ~$1.6M.
• Internal Controls: Monitor progress on remediation of material weaknesses in financial reporting controls.