Brilliant (NASDAQ:BRLI) has entered into a definitive agreement to combine with payments platform Nukkleus at a pre-money enterprise value of $140 million, or about 7x its 2021 revenue.

Jersey City, New Jersey-based Nukkleus provides software to process exchanges of crypto and foreign currencies as well as contracts for differences (CFDs) for these assets.

The combined company is expected to trade on the Nasdaq under the symbol “NUKK” once the deal is completed in the second or third quarter of 2022.

Transaction Overview

Brilliant is funding the deal with $46 million from its current trust and has not supplemented this with a PIPE. The parties have not yet circulated an investor presentation and so details on the deal remain scant. But Brilliant’s profile page will be updated once additional information is made available.

As a part of the merger, Nukkleus will effectuate a reverse stock split at a ratio of 1:26.227  for its 352,024,371 total outstanding plus 15,151,515 new shares it has agreed to issue as compensation for its acquisition of Digiclear equity. This would  consolidate this total equity into about 14,000,000 shares. Brilliant must maintain at least $10 million in cash available in order for the deal to close.

Both parties have agreed to a two-year lockup but may be released as much as one year early should the combined company’s share price trade above $12.50 for 20 of 30 days.

Brilliant’s units already contained one full warrant and a 1/10 right, and non-redeeming shareholders are also to receive a pro rata portion of a backstop pool at close. This will be made up of the lower of 506,000 shares or 20% of the aggregate number of Brilliant’s total outstanding shares and rights at close.

Quick Takes: We’ve seen SPAC transactions designed to serve as an up-list for companies on more minor exchanges before, but these have mostly been international companies listed abroad. In this case, we have a US-based and US-listed company moving up from an OTC exchange.

It is unclear what the environment for redemptions will be by the time this deal closes, but even in a zero-redemption scenario much of Brilliant’s trust would have likely been consumed by transaction expenses. This raises the question, therefore, if a SPAC deal was really the best option for Nukkleus to hop up to the Nasdaq.

As a trading platform that includes crypto, Nukkleus may believe the SPAC path as an easier route, but this is dubious given the long reviews other crypto-related mergers have faced. But, it also has made a series of transactions over the past year using company stock. So, the prospect of consolidating upwards with a small cash infusion and more attractively Nasdaq-listed shares may be the simplest way to keep that strategy going.

Last year, it acquired Match Financial Limited in exchange for 100,000,000 shares, giving Nukkleus the technology and platform to convert fiat currencies to cryptocurrencies and vice versa. It also closed a deal in December 2021 to acquire 5% of Jacobi Asset Management in exchange for 20,000,000 Nukkleus shares. Jacobi is a digital asset management firm that has recently received regulatory approval to launch a tier one Bitcoin ETF.

All of that was before the aforementioned merger with Digiclear for 15,151,515 more newly-issued shares.

Through these moves, Nukkleus aims to position itself as a finance and crypto technology aggregator bringing a full suite of services to institutional clients. But, according to its last 10-K, it serves one sole institution – Triton Capital Management (TCM).

As a part of their agreement, TCM must pay Nukkleus a minimum of $1.6 million per month for the use of its platform. Nukkleus then turns around and pays FXDirectDealer LLC a minimum of $1,575,000 per month for technical support, marketing, accounting and other functions. Max Q Investments meanwhile owns 79% of FXDirectDealer and is the sole owner of TCM.

If you’re still keeping up, that all makes Nukkleus something of a middleman between two subsidiaries of the same Delaware-incorporated LLC, Max Q, about which there is very little information publicly available.

In theory, Nukkleus could make fees far above the minimums in this contract with TCM. But, in its last 10-Q, it reported generating exactly three months-worth of the minimum for $4.8 million in Q4 of 2021. This is exactly what it generated over the four preceding quarters, and presumably handed nearly all of it back to the other Max Q entity. It did add to this $329,015 in financial services income which appears to have come entirely from Match Financial’s acquired currency conversion business.

So, the long and short of it is that it will be very interesting to see Nukkleus’ business plan is moving forward in an investor presentation if we get one. But for now, this deal will remain a bit of a headscratcher.

ADVISORS

• ClearThink Capital LLC is acting as a financial advisor to Nukkleus.
• Schiff Hardin LLP is acting as a legal advisor to Nukkleus.
• RedEight Capital Limited, Axiom Capital Management, Inc., and EarlyBird Capital Inc. are acting as financial advisors to Brilliant.
• Loeb & Loeb LLP is acting as legal advisor to Brilliant.