UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
☒ QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
| x | QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2018March 31, 2019
OR
☐ TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
| o | TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________ to __________
Commission file number: 000-55922
Nukkleus Inc.
(Exact name of registrant in its charter)
| Delaware | 38-3912845 |
| (State or other jurisdiction of | (I.R.S. Employer |
| incorporation or organization) | Identification No.) |
525 Washington Boulevard, Jersey City, NJNew Jersey 07310
(Address of principal executive offices, including zip code)
212-791-4663
(Issuer’s telephone number)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock, par value $0.0001
Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒x No ☐o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ☐x No ☒o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | Accelerated filer | ||
| Non-accelerated filer | Smaller reporting company | ||
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐o No ☒x
Securities registered pursuant to Section 12(b) of the Act: Not applicable.
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||
| Not applicable. |
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date.
| Class | Outstanding | |
| Common Stock, $0.0001 par value per share | 230,485,100 shares |
NUKKLEUS INC.
FORM 10-Q
June 30, 2018March 31, 2019
TABLE OF CONTENTS
FORWARD LOOKING STATEMENTS
This report contains forward-looking statements regarding our business, financial condition, results of operations and prospects. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not deemed to represent an all-inclusive means of identifying forward-looking statements as denoted in this report. Additionally, statements concerning future matters are forward-looking statements.
Although forward-looking statements in this report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those specifically addressed under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our annual report on Form 10-K, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-Q and information contained in other reports that we file with the SEC. You are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this report.report.
We file reports with the SEC. The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us. You can also read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.1-800-SEC-0330.
We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this report, except as required by law. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this quarterly report, which are designed to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.
Unless otherwise indicated, references in this report to the “Company”, “Nukkleus”, “we”, “us”, or “our” refer to Nukkleus Inc. and its consolidated subsidiary.subsidiaries.
PART I - FINANCIAL INFORMATION
Item 1. Interim Financial Statements.
NUKKLEUS INC. AND SUBSIDIARYSUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| As of | ||||||||
| June 30, 2018 | September 30, 2017 | |||||||
| ( Unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | 208,138 | $ | 48,642 | ||||
| Prepaid expense and other current assets | 12,312 | 750 | ||||||
| Deposit on potential acquisition | — | 1,055,559 | ||||||
| Deposit on software development | 50,000 | — | ||||||
| TOTAL CURRENT ASSETS | 270,450 | 1,104,951 | ||||||
| TOTAL ASSETS | $ | 270,450 | $ | 1,104,951 | ||||
| LIABILITIES AND STOCKHOLDERS' DEFICIT | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Due to affiliates | $ | 480,519 | $ | 403,994 | ||||
| Accrued liabilities | 90,817 | 22,400 | ||||||
| Accrued liabilities - related party | — | 8,000 | ||||||
| TOTAL CURRENT LIABILITIES | 571,336 | 434,394 | ||||||
| OTHER LIABILITIES: | ||||||||
| Series A redeemable preferred stock liability at $10 stated value; | ||||||||
| 25,000 and 100,000 shares issued and outstanding ($250,000 and $1,000,000 less discount of $6,697 and $33,657, respectively) at June 30, 2018 and September 30, 2017, respectively | 243,303 | 966,343 | ||||||
| TOTAL LIABILITIES | 814,639 | 1,400,737 | ||||||
| Contingent common stock (0 and 24,156,000 shares issued and outstanding at June 30, 2018 and September 30, 2017, respectively) | — | 55,559 | ||||||
| STOCKHOLDERS' DEFICIT: | ||||||||
| Preferred stock ($0.0001 par value; 15,000,000 shares authorized; | ||||||||
| 0 share issued and outstanding at June 30, 2018 and September 30, 2017) | — | — | ||||||
| Common stock ($0.0001 par value; 900,000,000 shares authorized; | ||||||||
| 230,485,100 shares issued and outstanding at June 30, 2018 and September 30, 2017) | 23,049 | 23,049 | ||||||
| Additional paid-in capital | 141,057 | 141,057 | ||||||
| Accumulated deficit | (708,295 | ) | (515,451 | ) | ||||
| TOTAL STOCKHOLDERS' DEFICIT | (544,189 | ) | (351,345 | ) | ||||
| TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT | $ | 270,450 | $ | 1,104,951 | ||||
The accompanying notes to unaudited condensed consolidated financial statements are an integral part of these statements.
NUKKLEUS INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
| For the Three Months Ended | For the Three Months Ended | For the Nine Months Ended | For the Nine Months Ended | |||||||||||||||||
| June 30, 2018 | June 30, 2017 | June 30, 2018 | June 30, 2017 | |||||||||||||||||
| REVENUE | ||||||||||||||||||||
| Revenue | $ | — | $ | — | $ | — | $ | — | ||||||||||||
| Revenue - related party | 4,800,000 | 6,000,000 | 14,400,000 | 18,000,000 | ||||||||||||||||
| Total revenue | 4,800,000 | 6,000,000 | 14,400,000 | 18,000,000 | ||||||||||||||||
| COST OF REVENUE | ||||||||||||||||||||
| Cost of revenue | — | — | — | — | ||||||||||||||||
| Cost of revenue - related party | 4,725,000 | 5,925,000 | 14,175,000 | 17,775,000 | ||||||||||||||||
| Total cost of revenue | 4,725,000 | 5,925,000 | 14,175,000 | 17,775,000 | ||||||||||||||||
| GROSS PROFIT | 75,000 | 75,000 | 225,000 | 225,000 | ||||||||||||||||
| OPERATING EXPENSES: | ||||||||||||||||||||
| General and administrative | 69,175 | 56,738 | 377,967 | 265,397 | ||||||||||||||||
| General and administrative - related party | — | 30,000 | 6,000 | 95,000 | ||||||||||||||||
| Total operating expenses | 69,175 | 86,738 | 383,967 | 360,397 | ||||||||||||||||
| INCOME (LOSS) FROM OPERATIONS | 5,825 | (11,738 | ) | (158,967 | ) | (135,397 | ) | |||||||||||||
| OTHER EXPENSE: | ||||||||||||||||||||
| Interest expense on redeemable preferred stock | (938 | ) | (3,750 | ) | (6,917 | ) | (11,250 | ) | ||||||||||||
| Amortization of debt discount | (572 | ) | (2,290 | ) | (26,960 | ) | (6,869 | ) | ||||||||||||
| Total other expense | (1,510 | ) | (6,040 | ) | (33,877 | ) | (18,119 | ) | ||||||||||||
| INCOME (LOSS) BEFORE INCOME TAXES | 4,315 | (17,778 | ) | (192,844 | ) | (153,516 | ) | |||||||||||||
| INCOME TAXES | — | — | — | — | ||||||||||||||||
| NET INCOME (LOSS) | $ | 4,315 | $ | (17,778 | ) | $ | (192,844 | ) | $ | (153,516 | ) | |||||||||
| NET INCOME (LOSS) PER COMMON SHARE: | ||||||||||||||||||||
| Basic | $ | 0.00 | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.00 | ) | |||||||||
| Diluted | (0.00 | ) | (0.00 | ) | (0.00 | ) | (0.00 | ) | ||||||||||||
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: | ||||||||||||||||||||
| Basic | 230,485,100 | 254,641,100 | 234,732,309 | 254,641,100 | ||||||||||||||||
| Diluted | 231,735,100 | 254,641,100 | 234,732,309 | 254,641,100 | ||||||||||||||||
| As of | ||||||||
| March 31, 2019 | September 30, 2018 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | 74,017 | $ | 257,637 | ||||
| Prepaid expense | 3,333 | 7,333 | ||||||
| Deposit on software development | - | 40,000 | ||||||
| Due from affiliates | 4,680 | 800 | ||||||
| Investment - digital currency | 58,003 | - | ||||||
| TOTAL CURRENT ASSETS | 140,033 | 305,770 | ||||||
| TOTAL ASSETS | $ | 140,033 | $ | 305,770 | ||||
| LIABILITIES AND STOCKHOLDERS' DEFICIT | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Due to affiliates | $ | 669,729 | $ | 482,970 | ||||
| Accrued liabilities | 129,619 | 142,457 | ||||||
| Accrued liabilities - related party | 10,000 | - | ||||||
| TOTAL CURRENT LIABILITIES | 809,348 | 625,427 | ||||||
| OTHER LIABILITIES: | ||||||||
| Series A redeemable preferred stock liability at $10 stated value; 25,000 and 25,000 shares issued and outstanding ($250,000 and $250,000 less discount of $4,980 and $6,125, respectively) at March 31, 2019 and September 30, 2018, respectively | 245,020 | 243,875 | ||||||
| TOTAL LIABILITIES | 1,054,368 | 869,302 | ||||||
| STOCKHOLDERS' DEFICIT: | ||||||||
| Preferred stock ($0.0001 par value; 15,000,000 shares authorized; 0 share issued and outstanding at March 31, 2019 and September 30, 2018) | - | - | ||||||
| Common stock ($0.0001 par value; 900,000,000 shares authorized; 230,485,100 shares issued and outstanding at March 31, 2019 and September 30, 2018) | 23,049 | 23,049 | ||||||
| Additional paid-in capital | 141,057 | 141,057 | ||||||
| Accumulated deficit | (1,078,441 | ) | (727,638 | ) | ||||
| TOTAL STOCKHOLDERS' DEFICIT | (914,335 | ) | (563,532 | ) | ||||
| TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT | $ | 140,033 | $ | 305,770 | ||||
The accompanying notes to unaudited condensed consolidated financial statements are an integral part of these statements.
| 1 |
NUKKLEUS INC. AND SUBSIDIARYSUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSOPERATIONS
| For the Nine Months Ended | For the Nine Months Ended | |||||||
| June 30, 2018 | June 30, 2017 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (192,844 | ) | $ | (153,516 | ) | ||
| Adjustments to reconcile net loss to net cash | ||||||||
| (used in) provided by operating activities: | ||||||||
| Amortization of debt discount | 26,960 | 6,869 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Prepaid expense | (11,562 | ) | — | |||||
| Due from affiliate | — | 121,250 | ||||||
| Due to affiliates | 76,525 | 321,635 | ||||||
| Accrued liabilities | 68,417 | 34,531 | ||||||
| Accrued liabilities - related party | (8,000 | ) | — | |||||
| Net cash (used in) provided by operating activities | (40,504 | ) | 330,769 | |||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Proceeds received from termination of potential acquisition | 1,000,000 | — | ||||||
| Deposit made for software development | (50,000 | ) | — | |||||
| Net cash provided by investing activities | 950,000 | — | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Redemption of preferred stock | (750,000 | ) | — | |||||
| Net cash used in financing activities | (750,000 | ) | — | |||||
| NET INCREASE IN CASH | 159,496 | 330,769 | ||||||
| Cash - beginning of period | 48,642 | — | ||||||
| Cash - end of period | $ | 208,138 | $ | 330,769 | ||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
| Cash paid for: | ||||||||
| Interest | $ | — | $ | — | ||||
| Income taxes | $ | — | $ | — | ||||
| NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
| Cancellation of contingent common stock | $ | 55,559 | $ | — | ||||
| For the Three Months | For the Three Months | For the Six Months | For the Six Months | |||||||||||||
| Ended | Ended | Ended | Ended | |||||||||||||
| March 31, 2019 | March 31, 2018 | March 31, 2019 | March 31, 2018 | |||||||||||||
| REVENUE | ||||||||||||||||
| Revenue | $ | - | $ | - | $ | - | $ | - | ||||||||
| Revenue - related party | 4,800,000 | 4,800,000 | 9,600,000 | 9,600,000 | ||||||||||||
| Total revenue | 4,800,000 | 4,800,000 | 9,600,000 | 9,600,000 | ||||||||||||
| COST OF REVENUE | ||||||||||||||||
| Cost of revenue | - | - | - | - | ||||||||||||
| Cost of revenue - related party | 4,725,000 | 4,725,000 | 9,450,000 | 9,450,000 | ||||||||||||
| Total cost of revenue | 4,725,000 | 4,725,000 | 9,450,000 | 9,450,000 | ||||||||||||
| GROSS PROFIT | 75,000 | 75,000 | 150,000 | 150,000 | ||||||||||||
| OPERATING EXPENSES: | ||||||||||||||||
| Compensation and related benefits | 78,019 | 15,000 | 126,353 | 40,000 | ||||||||||||
| Bad debt expense | 40,000 | - | 40,000 | - | ||||||||||||
| Other general and administrative | 113,207 | 60,844 | 205,862 | 268,792 | ||||||||||||
| Other general and administrative - related party | 78,500 | - | 93,500 | 6,000 | ||||||||||||
| Total operating expenses | 309,726 | 75,844 | 465,715 | 314,792 | ||||||||||||
| LOSS FROM OPERATIONS | (234,726 | ) | (844 | ) | (315,715 | ) | (164,792 | ) | ||||||||
| OTHER EXPENSE: | ||||||||||||||||
| Interest expense on redeemable preferred stock | (937 | ) | (2,229 | ) | (1,875 | ) | (5,979 | ) | ||||||||
| Amortization of debt discount | (573 | ) | (24,098 | ) | (1,145 | ) | (26,388 | ) | ||||||||
| Unrealized gain (loss) on digital currency | 5,335 | - | (32,068 | ) | - | |||||||||||
| Total other income (expense) | 3,825 | (26,327 | ) | (35,088 | ) | (32,367 | ) | |||||||||
| LOSS BEFORE INCOME TAXES | (230,901 | ) | (27,171 | ) | (350,803 | ) | (197,159 | ) | ||||||||
| INCOME TAXES | - | - | - | - | ||||||||||||
| NET LOSS | $ | (230,901 | ) | $ | (27,171 | ) | $ | (350,803 | ) | $ | (197,159 | ) | ||||
| NET LOSS PER COMMON SHARE: | ||||||||||||||||
| Basic and diluted | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.00 | ) | ||||
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: | ||||||||||||||||
| Basic and diluted | 230,485,100 | 230,485,100 | 230,485,100 | 236,855,913 | ||||||||||||
The accompanying notes to unaudited condensed consolidated financial statements are an integral part of these statements.
| 2 |
NUKKLEUS INC. AND SUBSIDIARYSUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
For the Three and Six Months Ended March 31, 2019 and 2018
| Preferred Stock | Common Stock | Additional | Total | |||||||||||||||||||||||||
| Number of | Number of | Paid-in | Accumulated | Stockholders' | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||||||||
| Balance, September 30, 2018 | - | $ | - | 230,485,100 | $ | 23,049 | $ | 141,057 | $ | (727,638 | ) | $ | (563,532 | ) | ||||||||||||||
| Net loss for the three months ended December 31, 2018 | - | - | - | - | - | (119,902 | ) | (119,902 | ) | |||||||||||||||||||
| Balance, December 31, 2018 | - | $ | - | 230,485,100 | $ | 23,049 | $ | 141,057 | $ | (847,540 | ) | $ | (683,434 | ) | ||||||||||||||
| Net loss for the three months ended March 31, 2019 | - | - | - | - | - | (230,901 | ) | (230,901 | ) | |||||||||||||||||||
| Balance, March 31, 2019 | - | $ | - | 230,485,100 | $ | 23,049 | $ | 141,057 | $ | (1,078,441 | ) | $ | (914,335 | ) | ||||||||||||||
| Balance, September 30, 2017 | - | $ | - | 230,485,100 | $ | 23,049 | $ | 141,057 | $ | (515,451 | ) | $ | (351,345 | ) | ||||||||||||||
| Net loss for the three months ended December 31, 2017 | - | - | - | - | - | (169,988 | ) | (169,988 | ) | |||||||||||||||||||
| Balance, December 31, 2017 | - | $ | - | 230,485,100 | $ | 23,049 | $ | 141,057 | $ | (685,439 | ) | $ | (521,333 | ) | ||||||||||||||
| Net loss for the three months ended March 31, 2018 | - | - | - | - | - | (27,171 | ) | (27,171 | ) | |||||||||||||||||||
| Balance, March 31, 2018 | - | $ | - | 230,485,100 | $ | 23,049 | $ | 141,057 | $ | (712,610 | ) | $ | (548,504 | ) | ||||||||||||||
The accompanying notes to unaudited condensed consolidated financial statements are an integral part of these statements.
| 3 |
NUKKLEUS INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the Six Months | For the Six Months | |||||||
| Ended | Ended | |||||||
| March 31, 2019 | March 31, 2018 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (350,803 | ) | $ | (197,159 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Amortization of debt discount | 1,145 | 26,388 | ||||||
| Unrealized loss on digital currency | 32,068 | - | ||||||
| Bad debt expense | 40,000 | |||||||
| Changes in operating assets and liabilities: | ||||||||
| Prepaid expense | 4,000 | 750 | ||||||
| Due to affiliates | 186,759 | 76,115 | ||||||
| Accrued liabilities | (12,838 | ) | 53,729 | |||||
| Accrued liabilities - related party | 10,000 | (8,000 | ) | |||||
| Net cash used in operating activities | (89,669 | ) | (48,177 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of digital currency | (93,951 | ) | - | |||||
| Proceeds received from termination of potential acquisition | - | 1,000,000 | ||||||
| Deposit made for software development | - | (50,000 | ) | |||||
| Net cash (used in) provided by investing activities | (93,951 | ) | 950,000 | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Redemption of preferred stock | - | (750,000 | ) | |||||
| Net cash used in financing activities | - | (750,000 | ) | |||||
| NET (DECREASE) INCREASE IN CASH | (183,620 | ) | 151,823 | |||||
| Cash - beginning of period | 257,637 | 48,642 | ||||||
| Cash - end of period | $ | 74,017 | $ | 200,465 | ||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
| Cash paid for: | ||||||||
| Interest | $ | - | $ | - | ||||
| Income taxes | $ | - | $ | - | ||||
| NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
| Cancellation of contingent common stock | $ | - | $ | 55,559 | ||||
| Exchange investment - digital currency for due from affiliate | $ | 3,880 | $ | - | ||||
The accompanying notes to unaudited condensed consolidated financial statements are an integral part of these statements.
| 4 |
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 –THE COMPANY HISTORY AND NATURE OF THE BUSINESS
Nukkleus Inc. (f/k/a Compliance & Risk Management Solutions Inc.) (“Nukkleus” or the “Company”) was formed on July 29, 2013 in the State of Delaware as a for-profit Company and established a fiscal year end of September 30.
On February 5, 2016, Charms Investments, Ltd (“Charms”), the former majority shareholder of the Company, sold 146,535,140 shares of common stock to Currency Mountain Holdings Bermuda, Limited (“CMH”), the parent of the Company. CMH is wholly-owned by an entity that is owned by Emil Assentato, the Company’s Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”) and Chairman. In addition, on the same date, CMH acquired 3,937,000 shares of common stock from another non-affiliated company. The aggregate purchase price paid by CMH was $347,500.
On May 24, 2016, Nukkleus, its wholly-owned subsidiary, Nukkleus Limited, a Bermuda limited company (“Nukkleus Limited”), Charms, the former majority shareholder, and CMH entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”), pursuant to which the Company purchased from CMH certain intellectual property, hardware, software and other assets (collectively, the “Assets”) in consideration of 48,400,000 shares of common stock of the Company. The Asset Purchase Agreement closed on May 24, 2016. As a result of such acquisition, the Company’s operations are now focused on the operation of a foreign exchange trading business utilizing the assets acquired from CMH.
On May 24, 2016, Nukkleus Limited entered into a General Service Agreement to provide its software, technology, customer sales and marketing and risk management technology hardware and software solutions package to FML Malta Ltd. In December 2017, Nukkleus Limited, FML Malta Ltd. and FXDD Malta Limited (“FXDD Malta”) entered into a letter agreement providing that there was an error in drafting the General Service Agreement and acknowledging that the correct counter-party to Nukkleus Limited in the General Service Agreement is FXDD Malta. Accordingly, all references to FML Malta Ltd. have been replaced with FXDD Malta. FXDD Malta is a private limited liability company formed under the laws of Malta. The General Service Agreement entered with FXDD Malta provides that FXDD Malta will pay Nukkleus Limited at minimum $2,000,000 per month. On October 17, 2017, Nukkleus Limited entered into an amendment of the General Service Agreement with FXDD Malta. In accordance with the amendment, which was effective as of October 1, 2017, the minimum amount payable by FXDD Malta to Nukkleus Limited for services was reduced from $2,000,000 per month to $1,600,000 per month. Emil Assentato is also the majority member of Max Q Investments LLC (“Max Q”), which is managed by Derivative Marketing Associates Inc. (“DMA”). Mr. Assentato is the sole owner and manager of DMA. Max Q owns 79% of Currency Mountain Malta LLC, which in turn is the sole shareholder of FXDD Malta.Malta.
In addition, on May 24, 2016, in order to appropriately service FXDD Malta, Nukkleus Limited entered into a General Service Agreement with FXDirectDealer LLC (“FXDIRECT”), which provides that Nukkleus Limited will pay FXDIRECT a minimum of $1,975,000 per month in consideration of providing personnel engaged in operational and technical support, marketing, sales support, accounting, risk monitoring, documentation processing and customer care and support. FXDIRECT may terminate this agreement upon providing 90 days’ written notice. On October 17, 2017, Nukkleus Limited entered into an amendment of the General Service Agreement with FXDIRECT. Pursuant to the amendment, which was effective as of October 1, 2017, the minimum amount payable by Nukkleus Limited to FXDIRECT for services was reduced from $1,975,000 per month to $1,575,000 per month. Currency Mountain Holdings LLC is the sole shareholder of FXDIRECT. Max Q is the majority shareholder of Currency Mountain Holdings LLC.
On May 27, 2016, the Company entered into a Stock Purchase Agreement (“SPA”) to acquire, from IBIH Limited, a BVI corporation (“IBIH”) 2,200 issued and outstanding common stock for $1,000,000, representing 9.9% of IBIH. In addition, the Company acquired 100% of the issued and outstanding shares of GVS Limited (“Iron BVI”), which is the parent corporation of GVS (AU) Pty Ltd. (“Iron Australia”) for 24,156,000 shares of common stock of the Company (“First Closing”).
The Company agreed to acquire the remaining 20,000 shares of IBIH for 219,844,000 shares of its common stock, subject to IBIH obtaining regulatory approvals from the Financial Conduct Authority in the United Kingdom (“London FCA”) and from the regulators in Cyprus (“Second Closing”). The Second Closing was subject to the Company signing an option agreement with FXDD Malta and FXDD Trading Limited operating units (the “Option”), which are affiliates through common ownership, providing that the Company may acquire both entities for $1. These transactions were subject to regulatory approval, where applicable.
The terms of the Agreement stipulated that if the Second Closing did not occur before November 28, 2016, the $1,000,000 would be returned to the Company and the First Closing would be unwound. As a result of the First Closing being contingent on the Second Closing, the $1,000,000 cash paid and value of the 24,156,000 shares issued was recorded as a “deposit on potential acquisition”, which was repaid to and returned to the Company in the first fiscal quarter of 2018 (See next paragraph), and the 24,156,000 shares was recorded as “contingent common stock” due to the uncertainty of the closing of the transaction.
NUKKLEUS INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – THE COMPANY HISTORY AND NATURE OF THE BUSINESS (continued)
Company. On November 17, 2017, the Company, IBIH, Terra (FX) Offshore Limited, Ludico Investments Limited, Currency Mountain Holdings LLC and the IBIH Shareholders entered into a Settlement Agreement and Mutual Release (the “Iron Settlement Agreement”) pursuant to which the Stock Purchase AgreementSPA was terminated, all differences between the parties were resolved and settled and the parties fully released the other parties from any liability. Pursuant to the Iron Settlement Agreement, the Company agreed to (i) have the registered office of Iron Australia changed, (ii) have its director designees resign as directors of Iron Australia, (iii) appoint Markos Kashiouris, Petros Economides and Yun Ma as directors of Iron Australia; (iv) and make all required changes with the Australian Securities and Investments Commission. With respect to Iron BVI, pursuant to the Iron Settlement Agreement, the Company agreed to (i) have the registered office of Iron BVI changed, (ii) have its director designee resign as a director of Iron BVI, (iii) appoint Cymora Limited as director of Iron BVI; (iv) and make all required changes with the BVI Registrar of Companies. Further, the Company agreed to return the 2,200 shares of capital stock of IBIH to the IBIH Shareholders and return 100% of its interest in Iron BVI to IBIH. IBIH agreed to return the 24,156,000 shares of common stock of the Company to the Company for cancellation and to pay the Company $1,000,000. Further, Markos Kashiouris, Petros Economides and Efstathios Christophi resigned as directors of the Company and waived any directorship fees payable to them under their letter of appointment dated August 1, 2016. The $1,000,000 has been paid to the Company, net of approximately $70,000 of legal expenses, in the first fiscal quarter of 2018 and IBIH has returned the certificate representing the 24,156,000 shares of common stock of the Company and the shares have been cancelled by the Company.
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NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 –THE COMPANY HISTORY AND NATURE OF THE BUSINESS (continued)
OnJune 3, 2016, the Company agreed to sell to Currency Mountain Holdings Bermuda, Limited (“CMH”) 30,900,000 shares of common stock and 200,000 shares of Series A preferred stock for $2,000,000 in two equal installments. The first closing occurred on June 7, 2016. The second closing was to occur with the closing of the Company’s acquisition of IBIH. As the IBIH transaction has been terminated, the second transaction with CMH will not proceed.
In July 2018, the Company incorporated Nukkleus Malta Holding Ltd., a wholly-owned subsidiary. In July 2018, Nukkleus Malta Holding Ltd. incorporated Nukkleus Exchange Malta Ltd. and is in the processes of incorporating Nukkleus Payments Malta Ltd. For Nukkleus Payments Malta Ltd., management is currently exploring obtaining an Electronic Money Institution license to facilitate customer payment transactions. For Nukkleus Exchange Malta Ltd., the Company seeks to create an electronic exchange whereby it facilitates the buying and selling of various digital assets as well as traditional currency pairs used in FX trading. Currently, Nukkleus Exchange Malta Ltd., is in the process of finalizing the exchange and such costs have been paid for by related parties. Projected costs of this exchange are approximately $900,000. As of March 31, 2019, approximately $811,000 has been incurred by our affiliates and ownership of the exchange will be transferred to the Company upon completion. Both entities would be regulated by the Malta Financial Services Authority.
The financial statements have been prepared using accounting principles generally accepted in the United States of America applicable for a going concern, which assumes that the Company will realize its assets and discharge its liabilities in the ordinary course of business. The Company incurred net loss for the six months ended March 31, 2019 of $350,803 and had a working capital deficit of $669,315 at March 31, 2019. Our ability to continue as a going concern is dependent upon the management of expenses and ability of the Company to obtain the necessary financing to meet its obligations and pay its liabilities arising from normal business operations when they come due, and upon profitable operations.
We need to either borrow funds or raise additional capital through equity or debt financings. However, we cannot be certain that such capital (from our shareholders or third parties) will be available to us or whether such capital will be available on terms that are acceptable to us. Any such financing likely would be dilutive to existing stockholders and could result in significant financial operating covenants that would negatively impact our business. If we are unable to raise sufficient additional capital on acceptable terms, we will have insufficient funds to operate our business or pursue our planned growth.
NOTE 2 – BASIS OF PRESENTATION
These interim condensed consolidated financial statements of the Company and its wholly-owned subsidiarysubsidiaries are unaudited. In the opinion of management, all adjustments (consisting of normal recurring accruals) and disclosures necessary for a fair presentation of these interim condensed consolidated financial statements have been included. The results reported in the unaudited condensed consolidated financial statements for any interim periods are not necessarily indicative of the results that may be reported for the entire year. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission and do not include all information and footnotes necessary for a complete presentation of financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”).
The Company’s unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary.consolidated subsidiaries. These accounts were prepared under the accrual basis of accounting. All significant intercompany accounts and transactions have been eliminated in consolidation.
Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended September 30, 20172018 filed with the Securities and Exchange Commission on December 27, 2017.20, 2018. The consolidated balance sheet as of September 30, 20172018 contained herein has been derived from the audited consolidated financial statements as of September 30, 2017,2018, but does not include all disclosures required by U.S. GAAP.
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NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of estimates
The preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Significant estimates during the three and ninesix months ended June 30,March 31, 2019 and 2018 and 2017 include the fair value of the investment in digital currency, bad debt expense, valuation of deferred tax assets and the associated valuation allowances.
Fair value of financial instruments and fair value measurements
The Company adopted the guidance of Accounting Standards Codification (“ASC”) 820 for fair value measurements which clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value. Fair value is the price that would be received to sell an asset and paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company utilizes valuation techniques to maximize the use of observable inputs and minimize the use of unobservable inputs. Assets and liabilities are recorded at fair value are categorized based upon the level of judgment associated with the inputs used to measure their value. Inputs are broadly defined as assumptions market participants would use in pricing an asset or liability. The three levels of the fair value hierarchy are as follows:
| · | Level1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date. |
| · | Level2-Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data. |
| · | Level3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information. |
The carrying amounts reported in the unaudited condensed consolidated balance sheets for cash, prepaid expense, and other current assets, deposit on software development,due from affiliates, due to affiliates, accrued liabilities, and accrued liabilities – related party approximate their fair market value based on the short-term maturitynature of these instruments.assets and liabilities.
Thefair value of the investment in digital currency is determined using the equivalency rate of the digital currency to USD. Digital currency consists of cryptocurrency denominated assets and are included in current assets. The Company revalues such assets at every reporting period and recognizes gain or loss as unrealized loss on digital currency, net, on the consolidated statements of operations that are attributable to the change in the fair value of the digital currency.
The following table provides the financial assets measured on a recurring basis and reported at fair value on the balance sheet as of March 31, 2019:
| Fair value measurement using | ||||||||||||||||||||
| Carrying value | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
| Investment - digital currency | $ | 58,003 | $ | 58,003 | $ | - | $ | - | $ | 58,003 | ||||||||||
Theinvestment in digital currency has a cost of $90,071 net of fee, unrealized loss of $32,068 for the six months ended March 31, 2019, and a fair value of $58,003 at March 31, 2019. There is an unrealized gain of $5,335 for the three months ended March 31, 2019. The Company did not have any non-financial assets or liabilities that arefinancial asset measured at fair value on a recurring basis on the balance sheet as of JuneSeptember 30, 2018 and September 30, 2017.
NUKKLEUS INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Concentration of credit risk
The Company maintains its cash in bank and financial institution deposits that at times may exceed federally insured limits. At March 31, 2019 and September 30, 2018, the Company’s cash balances accounts had approximately $0 and $8,000 in excess of the federally-insured limits, respectively. The Company has not experienced any losses in such accounts through June 30, 2018. There were no balances in excessand as of the federally-insured limits at June 30, 2018 and September 30, 2017.date of this report.
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NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Concentration of credit risk (continued)
The following table summarizes customer revenue concentrations:
| Three Months Ended June 30, 2018 | Three Months Ended June 30, 2017 | Nine Months Ended June 30, 2018 | Nine Months Ended June 30, 2017 | |||||||||||||
| FXDD Malta - related party | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||
| Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | Six Months Ended March 31, 2019 | Six Months Ended March 31, 2018 | |||||||||||||
| FXDD Malta - related party | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||
The following table summarizes vendor expense concentrations:
| Three Months Ended June 30, 2018 | Three Months Ended June 30, 2017 | Nine Months Ended June 30, 2018 | Nine Months Ended June 30, 2017 | |||||||||||||
| FXDIRECT - related party | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||
Prepaid expense and other current assets
At June 30, 2018 and September 30, 2017, prepaid expense and other current assets consisted of the following:
| June 30, 2018 | September 30, 2017 | |||||||
| Prepaid professional service charge | $ | 750 | $ | 750 | ||||
| Prepaid annual listing fee | 7,333 | — | ||||||
| Other | 4,229 | — | ||||||
| $ | 12,312 | $ | 750 | |||||
These amounts of prepaid professional service charge and prepaid annual listing fee are recognized as expenses over the related service periods and the related listing periods.
| Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | Six Months Ended March 31, 2019 | Six Months Ended March 31, 2018 | |||||||||||||
| FXDIRECT - related party | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||
Deposit on software development
In the first quarter of fiscal 2018, the Company signed an agreement with a third-party for the customization and development of a trading platform to be used by it. In accordance with the signed agreement, the Company made a deposit on software development of $50,000. Originally,The project was cancelled in the third quarter of fiscal 2018 and the Company expectedreceived a subsequent reimbursement of $10,000 of the project to be completeddeposit.
During the three months ended March 31, 2019, the Company evaluated the collectability. In evaluating the collectability, the Company considers many factors, including the age of the balance, payment history and the platform to be placed in service in August 2018. Asthird party’s current credit-worthiness. The balance of June 30, 2018, there has not been any delivery. The project will not be moved forward. Therefore, the deposit on software development of $50,000 is to be refunded to the Company in full by August 15, 2018.$40,000 was written off after exhaustive efforts at collection.
Revenue recognition
BecauseEffective October 1, 2018, the Company provides its applications as services, it followsadopted ASU No. 2014-09, Revenue from Contracts with Customers ("ASU 2014-09") and other associated standards. Under the provisions of Securities and Exchange Commission Staff Accounting Bulletin (“SAB”) No. 104; Revenue Recognition. Thenew standard, the Company recognizes revenue when alla customer obtains control of promised services or goods in an amount that reflects the consideration to which the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the following conditions are met:nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts. The Company evaluated the new guidance and its adoption did not have a significant impact on the Company’s financial statements and a cumulative effect adjustment under the modified retrospective method of adoption was not necessary. There is no change to the Company’s accounting policies. Prior to the adoption of ASU 2014-09, the Company recognized revenue when persuasive evidence of an arrangement existed, delivery occurred, the fee was fixed or determinable, and collectability was reasonably assured.
In general, the | ||
The Company records revenues and expenses relatedapplies the following steps when recognizing revenue from contracts with customers: (i) identify the contract, (ii) identify the performance obligations, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations and (v) recognize revenue when a performance obligation is satisfied. The nature of the Company's contracts with customers relates to the Company's services performed for a related party under a General Service AgreementsAgreement ("GSA"). There are multiple services provided under the GSA and these performance obligations are combined into a single unit of accounting. Fees are recognized as revenue when the services are completed under the terms of the GSA. Revenue is recorded at gross as the Company is deemed to be a principal in the transactions. Revenues are recognized when the services are completed and expenses are recognized as incurred.
NUKKLEUS INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income taxes
TheCompany recorded no income tax expense for the three and ninesix months ended June 30,March 31, 2019 and 2018 and 2017 because the estimated annual effective tax rate was zero. As of June 30, 2018,March 31, 2019, the Company continues to provide a valuation allowance against its net deferred tax assets since the Company believes it is more likely than not that its deferred tax assets will not be realized.realized.
In December 2017,Reclassifications
The Company has reclassified certain prior period amounts in the United States Government passed new tax legislation that, among other provisions, will loweraccompanying unaudited condensed consolidated statements of operations in order to be consistent with the corporate tax rate from 35% to 21%. In addition to applying the new lower corporate tax rate in 2018 and thereafter to any taxable income the Company may have, the legislation affects the way the Company can use and carryforward net operating losses previously accumulated and results in a revaluation of deferred tax assets and liabilities recordedcurrent period presentation. These reclassifications had no effect on the balance sheet. Given that current deferred tax assets are offset by a full valuation allowance, these changes will have no net impact on the balance sheet. However, when the Company becomes profitable, the Company will receive a reduced benefit from such deferred tax assets.previously reported results of operations.
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NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Per share data
ASCTopic 260 “Earnings per Share,” requires presentation of both basic and diluted earnings per share (“EPS”) with a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.entity.
Basicnet earnings per share are computed by dividing net earnings available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted net earnings per share is computed by dividing net earnings applicable to common stockholders by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. Diluted earnings per share reflects the potential dilution that could occur if securities were exercised or converted into common stock or other contracts to issue common stock resulting in the issuance of common stock that would then share in the Company’s earnings subject to anti-dilution limitations. In a period in which the Company has a net loss, all potentially dilutive securities are excluded from the computation of diluted shares outstanding as they would have an anti-dilutive impact. For the three and ninesix months ended June 30,March 31, 2019 and 2018, and 2017, potentially dilutive common shares consist of common stock issuable upon the conversion of Series A preferred stock (using the if-converted method).
Thefollowing istable presents a reconciliation of the basic and diluted net income (loss)loss per share computations for :
| Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | Six Months Ended March 31, 2019 | Six Months Ended March 31, 2018 | |||||||||||||
| Net loss available to common stockholders for basic and diluted net loss per share of common stock | $ | (230,901 | ) | $ | (27,171 | ) | $ | (350,803 | ) | $ | (197,159 | ) | ||||
| Weighted average common stock outstanding - basic | 230,485,100 | 230,485,100 | 230,485,100 | 236,855,913 | ||||||||||||
| Effect of dilutive securities: | ||||||||||||||||
| Series A preferred stock | - | - | - | - | ||||||||||||
| Weighted average common stock outstanding - diluted | 230,485,100 | 230,485,100 | 230,485,100 | 236,855,913 | ||||||||||||
| Net loss per common share – basic and diluted | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.00 | ) | ||||
Forthe three and nine months ended June 30,March 31, 2019 and 2018, and 2017:
Basic net income (loss)a total of 1,250,000 shares of common stock from the assumed redemption of the Series A convertible redeemable preferred stock at the contractual floor of $0.20 per share
| Three | Three | Nine | Nine | |||||||||||||
| Months | Months | Months | Months | |||||||||||||
| Ended | Ended | Ended | Ended | |||||||||||||
| June 30, | June 30, | June 30, | June 30, | |||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||
| Net income (loss) available to common stockholders for basic net income (loss) per share of common stock | $ | 4,315 | $ | (17,778 | ) | $ | (192,844 | ) | $ | (153,516 | ) | |||||
| Weighted average common stock outstanding - basic | 230,485,100 | 254,641,100 | 234,732,309 | 254,641,100 | ||||||||||||
| Net income (loss) per share: | ||||||||||||||||
| Basic | $ | 0.00 | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.00 | ) | |||||
NUKKLEUS INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Per share data (continued)
Diluted net income (loss) per share
| Three | Three | Nine | Nine | |||||||||||||
| Months | Months | Months | Months | |||||||||||||
| Ended | Ended | Ended | Ended | |||||||||||||
| June 30, | June 30, | June 30, | June 30, | |||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||
| Net income (loss) available to common stockholders for basic net income (loss) per share of common stock | $ | 4,315 | $ | (17,778 | ) | $ | (192,844 | ) | $ | (153,516 | ) | |||||
| Add: interest expense for redeemable preferred stock | 938 | — | — | — | ||||||||||||
| Subtract: unamortized debt discount for redeemable preferred stock | (6,697 | ) | — | — | — | |||||||||||
| Net loss available to common stockholders for diluted net loss per share of common stock | $ | (1,444 | ) | $ | (17,778 | ) | $ | (192,844 | ) | $ | (153,516 | ) | ||||
| Weighted average common stock outstanding - basic | 230,485,100 | 254,641,100 | 234,732,309 | 254,641,100 | ||||||||||||
| Effect of dilutive debenture: | ||||||||||||||||
| Series A preferred stock | 1,250,000 | — | — | — | ||||||||||||
| Weighted average common stock outstanding - diluted | 231,735,100 | 254,641,100 | 234,732,309 | 254,641,100 | ||||||||||||
| Net loss per share: | ||||||||||||||||
| Diluted | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.00 | ) | ||||
During the nine months ended June 30, 2018 and the three and nine months ended June 30, 2017, all potentially dilutive securities are have been excluded from the computation of diluted weighted average number of shares of common stock outstanding as they would have had an anti-dilutive impact.impact.
Reclassifications
The Company has segregated prior period related party generalForthe six months ended March 31, 2019 and administrative expenses in2018, a total of 1,250,000 and 5,000,000 shares of common stock from the accompanying unaudited condensed consolidated statementsassumed redemption of operations in order to be consistent with the current period presentation. These reclassificationsSeries A convertible redeemable preferred stock at the contractual floor of $0.20 per share, respectively, have been excluded from the computation of diluted weighted average number of shares of common stock outstanding as they would have had no effect on the previously reported results of operations.an anti-dilutive impact.
Recently issued accounting pronouncements
EffectiveIn May 2014,October 1, 2018, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 will eliminate transaction- and industry-specific revenue recognition guidance under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2017 (quarter ending December 31, 2018 for the Company). Early adoption is permitted only in annual reporting periods beginning after December 15, 2016, including interim periods therein. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption.The adoption of this guidance will not have a material impact on the Company’s consolidated financial statements.
NUKKLEUS INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recently issued accounting pronouncements (continued)
In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. The amendments add further guidance on identifying performance obligations and also improve the operability and understandability of the licensing implementation guidance. The amendments do not change the core principle of the guidance in Topic 606. This pronouncement has the same effective date as the new revenue standard, which is effective for annual reporting periods, including interim periods within those annual reporting periods, beginning after December 15, 2017 (quarter ending December 31, 2018 for the Company). The adoption of this guidance will not have a material impact on the Company’s consolidated financial statements.
In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. The amendments, among other things: (1) clarify the objective of the collectability criterion for applying paragraph 606-10-25-7; (2) permit an entity to exclude amounts collected from customers for all sales (and other similar) taxes from the transaction price; (3) specify that the measurement date for noncash consideration is contract inception; (4) provide a practical expedient that permits an entity to reflect the aggregate effect of all modifications that occur before the beginning of the earliest period presented when identifying the satisfied and unsatisfied performance obligations, determining the transaction price, and allocating the transaction price to the satisfied and unsatisfied performance obligations; (5) clarify that a completed contract for purposes of transition is a contract for which all (or substantially all) of the revenue was recognized under legacy GAAP before the date of initial application, and (6) clarify that an entity that retrospectively applies the guidance in Topic 606 to each prior reporting period is not required to disclose the effect of the accounting change for the period of adoption. The effective date of these amendments is at the same date that Topic 606 is effective. The adoption of this guidance will not have a material impact on the Company’s consolidated financial statements.
In August 2016, the FASB issuedCompany adopted ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This ASU addresses the classification of certain specific cash flow issues including debt prepayment or extinguishment costs, settlement of certain debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of certain insurance claims and distributions received from equity method investees. This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years (quarter ending December 31, 2018 for the Company), with earlyThe adoption permitted. An entity that elects early adoption must adopt all of the amendments in the same period.The Company will evaluate the effects of adopting this guidance if and when it is deemed to be applicable.did not have a material impact on the Company’s consolidated financial statements.
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NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In January 2017,NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recently issued accounting pronouncements (continued)
EffectiveOctober 1, 2018, the FASB issuedCompany adopted ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The ASU clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for acquisitions (or disposals) of assets or business. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual reporting periods (quarter ending December 31, 2018 for the Company). The Company will evaluate the effectsadoption of adopting this guidance if and when it is deemed to be applicable.did not have a material impact on the Company’s consolidated financial statements.
In May 2017,Effective October 1, 2018, the FASB issuedCompany adopted ASU No. 2017-09, Compensation – Stock Compensation: Scope of Modification Accounting. The guidance clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. Entities will apply the modification accounting guidance if the value, vesting conditions or classification of the award changes. This guidance is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2017 (quarter ending December 31, 2018 for the Company). EarlyThe adoption is permitted. The Company will evaluate the effects of adopting this guidance if and when it is deemed to be applicable.did not have a material impact on the Company’s consolidated financial statements.
In June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. ASU NoNo. 2018-07 expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The guidance also specifies that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (quarter ending September 30, 2019 for the Company). Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606. The Company will evaluate the effects of adopting ASU 2018-07 if and when it is deemed to be applicable.
Other accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption. The Company does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to its consolidated financial condition, results of operations, cash flows or disclosures.
NUKKLEUS INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 – ACCRUED LIABILITIES
At June 30, 2018March 31, 2019 and September 30, 2017,2018, accrued liabilities consisted of the following:
| June 30, 2018 | September 30, 2017 | March 31, 2019 | September 30, 2018 | |||||||||||||
| Professional fees | $ | 9,025 | $ | 2,525 | $ | 27,478 | $ | 44,728 | ||||||||
| Directors’ compensation | 55,000 | — | 70,537 | 70,000 | ||||||||||||
| Interest payable | 26,792 | 19,875 | 29,604 | 27,729 | ||||||||||||
| Other | 2,000 | - | ||||||||||||||
| $ | 90,817 | $ | 22,400 | $ | 129,619 | $ | 142,457 | |||||||||
NOTE 5 – SHARE CAPITAL
Authorized shares
TheCompany is authorized to issue 900,000,000 shares of common stock at par value of $0.0001 and 15,000,000 shares of Series A preferred stock at par value of $0.0001.
Common stock issued for Stock Purchase Agreement
As described elsewhere in this report, on May 27, 2016, the Company acquired 100% of the issued and outstanding shares of Iron BVI for 24,156,000 shares of common stock of the Company. The shares were valued at $.0023 per share. As a result of the First Closing being contingent on the Second Closing, the 24,156,000 shares for the purchase of IBIH was recorded as “contingent common stock” due to the uncertainty of the closing of the transaction.
On November 17, 2017, the Company entered into the Iron Settlement Agreement. As a result, IBIH has returned the certificate representing the 24,156,000 shares of common stock of the Company and the shares have been cancelled by the Company.
Common stock and Series A preferred stock sold for cash
The Company agreed to sell to CMH 30,900,000 shares of common stock and 200,000 shares of Series A preferred stock for $2,000,000 in two equal installments. The first closing occurred on June 7, 2016. Originally, the second closing was to occur with the closing of the Company’s acquisition of IBIH. Since the acquisition of IBIH transaction was terminated, the second closing with CMH will not proceed.
The Series A preferred stock has the following key terms:
| 1) | A stated value of $10 per share; |
| 2) | The holder is entitled to receive cumulative dividends at the annual rate of 1.5% of stated value payable semi-annually on June 30 and December 31; |
| 3) | The preferred stock must be redeemed at the stated value plus any unpaid dividends in 5 years. |
| 10 |
During
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 – SHARE CAPITAL (continued)
Common stock and Series A preferred stock sold for cash (continued)
On June 7, 2016, the first close,Company sold to CMH 15,450,000 shares of common stock and 100,000 shares of Series A preferred stock were issued and werefor $1,000,000. The common stock was recorded as equity and the Series A preferred stock was recorded as a long-term liability, respectively.liability. The $1,000,000 of proceeds received was allocated to the common stock and Series A preferred stock according to their relative fair values determined at the time of issuance, and as a result, the Company recorded a total discount of $45,793 on the Series A preferred stock, which is being amortized to interest expense to the date of redemption. For the three months ended June 30,March 31, 2019 and 2018, and 2017, amortization of debt discount amounted to $572$573 and $2,290,$24,098, respectively. For the ninesix months ended June 30,March 31, 2019 and 2018, and 2017, amortization of debt discount amounted to $26,960$1,145 and $6,869,$26,388, respectively.
Theterms of the Series A preferred stock issued represent mandatory redeemable shares, with a fixed redemption date (in 5 years) and the Company has a choice of redeeming the instrument either in cash or a variable number of shares of common stock based on a formula in the certificate of designation. The conversion price has a floor of $0.20 per share. As such, all dividends accrued and/or paid and any accretions are classified as part of interest expense. For the three months ended June 30,March 31, 2019 and 2018, and 2017, dividends on redeemable preferred stock amounted to $938$937 and $3,750, respectively. $2,229, respectively. For the ninesix months ended June 30,March 31, 2019 and 2018, and 2017, dividends on redeemable preferred stock amounted to $6,917$1,875 and $11,250, respectively.
NUKKLEUS INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 – SHARE CAPITAL (continued)
Common stock and Series A preferred stock sold for cash (continued)$5,979, respectively.
Asa result of the termination of the IBIH transaction, the Company and CMH have agreed to enter into that certain Stock Redemption Agreement dated February 13, 2018 providing that 75,000 CMH Preferred Shares were redeemed and cancelled in consideration of $750,000 which occurred on February 13, 2018.2018.
At June 30, 2018March 31, 2019 and September 30, 2017,2018, Series A redeemable preferred stock consisted of the following:
| June 30, 2018 | September 30, 2017 | March 31, 2019 | September 30, 2018 | |||||||||||||
| Redeemable preferred stock (stated value) | $ | 250,000 | $ | 1,000,000 | $ | 250,000 | $ | 250,000 | ||||||||
| Less: unamortized debt discount | (6,697 | ) | (33,657 | ) | (4,980 | ) | (6,125 | ) | ||||||||
| Redeemable preferred stock, net | $ | 243,303 | $ | 966,343 | $ | 245,020 | $ | 243,875 | ||||||||
NOTE 6 – RELATED PARTY TRANSACTIONS
Services provided by related parties
Fromtime to time, Craig Marshak, a director of the Company, provides consulting services to the Company. Mr. Craig Marshak is a principal of Triple Eight Markets. All professional services fee payable to Craig Marshak are paid to Triple Eight Markets. As compensation for professional services provided, the Company recognized consulting expenses of $0$78,500 and $30,000$0 for the three months ended June 30,March 31, 2019 and 2018, and 2017, respectively, which have been included in general and administrative expense – related party on the accompanying unaudited condensed consolidated statements of operations.As compensation for professional services provided, the The Company recognized consulting expenses of $6,000$93,500 and $95,000$6,000 for the ninesix months ended June 30,March 31, 2019 and 2018, and 2017, respectively, which have been included in general and administrative expense – related party on the accompanying unaudited condensed consolidated statements of operations.
As of June 30, 2018March 31, 2019 and September 30, 2017,2018, the accrued and unpaid services charge related to Craig Marshak amounted to $0$10,000 and $8,000,$0, respectively, which have been included in accrued liabilities – related party on the accompanying consolidated balance sheets.
The Company uses affiliate employees for various services such as the use of accountants to record the books and accounts of the Company at no charge to those affiliates, which are considered immaterial.
Office space from related parties
TheCompany uses office space of affiliate companies, free of rent, which is considered immaterial.immaterial.
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NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 – RELATED PARTY TRANSACTIONS (continued)
Revenue from related party and cost of revenue from related party
OnMay 24, 2016, the Company entered into a General Service Agreement with FXDD Malta, a related party. The Company is to invoice FXDD Malta a minimum of $2,000,000 per month in consideration for providing personnel and technical support, marketing, accounting, risk monitoring, documentation processing and customer care and support. On October 17, 2017, the Company entered into an amendment of the General Service Agreement with FXDD Malta. In accordance with the amendment, which was effective as of October 1, 2017, the minimum amount payable by FXDD Malta to the Company for services was reduced from $2,000,000 per month to $1,600,000 per month. Emil Assentato is also the majority member of Max Q Investments LLC (“Max Q”), which is managed by Derivative Marketing Associates Inc. (“DMA”). Mr. Assentato is the sole owner and manager of DMA. Max Q owns 79% of Currency Mountain Malta LLC, which in turn is the sole shareholder of FXDD Malta.
Inaddition, on May 24, 2016, the Company entered into a General Service Agreement with FXDIRECT to pay a minimum of $1,975,000 per month for receiving personnel and technical support, marketing, accounting, risk monitoring, documentation processing and customer care and support. On October 17, 2017, the Company entered into an amendment of the General Service Agreement with FXDIRECT. Pursuant to the amendment, which was effective as of October 1, 2017, the minimum amount payable by the Company to FXDIRECT for services was reduced from $1,975,000 per month to $1,575,000 per month. Currency Mountain Holdings LLC is the sole shareholder of FXDIRECT. Max Q is the majority shareholder of Currency Mountain Holdings LLC.
Both of the above entities are affiliates through common ownership.
During the three and six months ended March 31, 2019 and 2018, service provided to related party which was recorded as revenue - related party on the accompanying consolidated statements of operations was as follows:
| Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | Six Months Ended March 31, 2019 | Six Months Ended March 31, 2018 | |||||||||||||
| Service provided to: | ||||||||||||||||
| FXDD Malta | $ | 4,800,000 | $ | 4,800,000 | $ | 9,600,000 | $ | 9,600,000 | ||||||||
| $ | 4,800,000 | $ | 4,800,000 | $ | 9,600,000 | $ | 9,600,000 | |||||||||
During the three and six months ended March 31, 2019 and 2018, service received from related party which was recorded as cost of revenue - related party on the accompanying consolidated statements of operations was as follows:
| Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | Six Months Ended March 31, 2019 | Six Months Ended March 31, 2018 | |||||||||||||
| Service received from: | ||||||||||||||||
| FXDIRECT | $ | 4,725,000 | $ | 4,725,000 | $ | 9,450,000 | $ | 9,450,000 | ||||||||
| $ | 4,725,000 | $ | 4,725,000 | $ | 9,450,000 | $ | 9,450,000 | |||||||||
Due from affiliates
At March 31, 2019 and September 30, 2018, due from related parties consisted of the following:
| March 31, 2019 | September 30, 2018 | |||||||
| FXDD Malta | $ | 800 | $ | 800 | ||||
| NUKK Capital (1) | 3,880 | - | ||||||
| $ | 4,680 | $ | 800 | |||||
| (1) | An entity controlled by Emil Assentato, the Company’s chief executive officer and chief financial officer. |
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NUKKLEUS INC. AND SUBSIDIARYSUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 – RELATED PARTY TRANSACTIONS (continued)
RevenueDue from related party and cost of revenue from related partyaffiliates (continued)
DuringThe balance of due from related parties at March 31, 2019 amounted to $4,680 and represents investment – digital currency transferred to NUKK Capital and monies that the three and nine months ended JuneCompany paid on behalf of FXDD Malta. The balance of due from related parties at September 30, 2018 amounted to $800 and 2017, service provided to related party which was recorded as revenue - related partyrepresents monies that the Company paid on the accompanying unaudited condensed consolidated statementsbehalf of operations was as follows:FXDD Malta.
| Three Months Ended June 30, 2018 | Three Months Ended June 30, 2017 | Nine Months Ended June 30, 2018 | Nine Months Ended June 30, 2017 | |||||||||||||
| Service provided to: | ||||||||||||||||
| FXDD Malta | $ | 4,800,000 | $ | 6,000,000 | $ | 14,400,000 | $ | 18,000,000 | ||||||||
| $ | 4,800,000 | $ | 6,000,000 | $ | 14,400,000 | $ | 18,000,000 | |||||||||
DuringManagement believes that the three and nine months ended June 30, 2018 and 2017, service receivedrelated parties’ receivables are fully collectable. Therefore, no allowance for doubtful accounts is deemed to be required on its due from related party which was recorded as cost of revenue -parties at March 31, 2019 and September 30, 2018. The Company historically has not experienced uncollectible receivables from related party on the accompanying unaudited condensed consolidated statements of operations was as follows:parties.
| Three Months Ended June 30, 2018 | Three Months Ended June 30, 2017 | Nine Months Ended June 30, 2018 | Nine Months Ended June 30, 2017 | |||||||||||||
| Service received from: | ||||||||||||||||
| FXDIRECT | $ | 4,725,000 | $ | 5,925,000 | $ | 14,175,000 | $ | 17,775,000 | ||||||||
| $ | 4,725,000 | $ | 5,925,000 | $ | 14,175,000 | $ | 17,775,000 | |||||||||
Due to affiliates
At June 30, 2018March 31, 2019 and September 30, 2017,2018, due to related parties consisted of the following:
| June 30, 2018 | September 30, 2017 | March 31, 2019 | September 30, 2018 | |||||||||||||
| Forexware LLC | $ | 299,782 | $ | 403,994 | $ | 448,593 | $ | 300,700 | ||||||||
| FXDIRECT | 180,737 | — | 174,136 | 182,270 | ||||||||||||
| CMH | 47,000 | - | ||||||||||||||
| $ | 480,519 | $ | 403,994 | $ | 669,729 | $ | 482,970 | |||||||||
The balances of due to related parties represent expenses paid by Forexware LLC and FXDIRECT on behalf of the Company.Company and advances from CMH. The balances due to FXDIRECT may also include unsettled funds due related to the General Service Agreement. The related parties’ payables are short-term in nature, non-interest bearing, unsecured and repayable on demand.
Costs for creation an electronic exchange paid by related parties
The Company is creating an electronic exchange whereby it facilitates the buying and selling of various digital assets as well as traditional currency pairs used in FX trading. Currently, the Company is in the process of finalizing the exchange and such costs have been paid for by Forexware LLC and FXDIRECT. Projected costs of this exchange are approximately $900,000. As of March 31, 2019, approximately $811,000 has been incurred by our related parties and ownership of the exchange will be transferred to the Company upon completion.
NOTE 7 – SUBSEQUENT EVENTS
There were noManagement has evaluated subsequent events that occurred subsequent to June 30, 2018 that require adjustment to or disclosure inthrough the unaudited condensed consolidated financial statements.date of the filing.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Thefollowing discussion and analysis of our financial condition and results of operations for the three and ninesix months ended June 30,March 31, 2019 and 2018 and 2017 should be read in conjunction with our unaudited condensed consolidated financial statements and related notes to those unaudited condensed consolidated financial statements that are included elsewhere in this report.report.
Certain matters discussed herein are forward-looking statements. Such forward-looking statements contained in this Form 10-Q involve risks and uncertainties, including statements as to:
| ● | our future operating results; |
| ● | our business prospects; |
| ● | any contractual arrangements and relationships with third parties; |
| ● | the dependence of our future success on the general economy; |
| ● | any possible financings; and |
| ● | the adequacy of our cash resources and working capital. |
Theseforward-looking statements can generally be identified as such because the context of the statement will include words such as we “believe,” “anticipate,” “expect,” “estimate” or words of similar meaning. Similarly, statements that describe our future plans, objectives or goals are also forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties which are described in close proximity to such statements and which could cause actual results to differ materially from those anticipated as of the date of filing of this Form 10-Q. Shareholders, potential investors and other readers are urged to consider these factors in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included herein are only made as of the date of filing of this Form 10-Q, and we undertake no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.circumstances.
Thisdiscussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results may differ materially from those anticipated in these forward-looking statements.statements.
Unless otherwise indicated, references to the “Company”, “us”, or “we” refer to Nukkleus Inc. and its consolidated subsidiary.subsidiaries.
Overview
We are a financial technology company which is focused on providing software and technology solutions for the worldwide retail foreign exchange (“FX”) trading industry. We primarily provide our software, technology, customer sales and marketing and risk management technology hardware and software solutions package to FXDD Malta Limited (“FXDD Malta”). The FXDD brand (e.g., see FXDD.com) is the brand utilized in the retail forex trading industry by FXDD Malta.Malta.
Aspart of the Assets acquired, we acquired ownership of FOREXWARE, the primary software suite and technology solution which powers the FXDD brand globally today. We also have ownership of the FOREXWARE brand name. We have also acquired ownership of the customer interface and other software trading solutions being used by FXDD.com. By virtue of our relationship with FXDD Malta and FXDirectDealer LLC (“FXDIRECT”), we provide turnkey software and technology solutions for FXDD.com. We offer the customers of FXDD 24 hour, five days a week direct access to the global over the counter (“OTC”) FX market, which is a decentralized market in which participants trade directly with one another, rather than through a central exchange.exchange.
Inan FX trade, participants effectively buy one currency and simultaneously sell another currency, with the two currencies that make up the trade being referred to as a “currency pair”. Our software and technology solutions enable FXDD to present its customers with price quotations on over the counter tradeable instruments, including over the counter currency pairs, and also provide our customers the ability to trade FX derivative contracts on currency pairs through a product referred to as Contracts for Difference (“CFD”). Our software solutions also offer other CFD products, including CFDs on metals, such as gold, and on futures linked to other products.products.
Wecurrently plan to seek for acquisitions that bring shareholder value both in the short term and long term. Our goal is to create an industry leading sector consolidated platform, combining strong global retail and institutional trading flows covering FX, commodities, futures, CFD and equities, with a cutting edge technological product suite, turnkey software and technological development capabilities.capabilities.
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InJuly 2018, we incorporated Nukkleus Malta Holding Ltd. In July 2018, Nukkleus Malta Holding Ltd. incorporated Nukkleus Exchange Malta Ltd. and we are in the processes of incorporating Nukkleus Payments Malta Ltd. For Nukkleus Payments Malta Ltd., management is currently exploring obtaining an Electronic Money Institution license to facilitate customer payment transactions. For Nukkleus Exchange Malta Ltd., we seek to create an electronic exchange whereby it facilitates the buying and selling of various digital assets as well as traditional currency pairs used in FX trading. Currently, Nukkleus Exchange Malta Ltd., is in the process of finalizing the exchange, which has been paid for by related parties. Both entities would be regulated by the Malta Financial Services Authority. For a further discussion, see Liquidity and Capital Resources.
Critical Accounting Policies and Estimates
Thepreparation of our unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. When making these estimates and assumptions, we consider our historical experience, our knowledge of economic and market factors and various other factors that we believe to be reasonable under the circumstances. Actual results may differ under different estimates and assumptions.assumptions.
Critical accounting policies are those that require application of management’s most subjective or complex judgments, often as a result of matters that are inherently uncertain and may change in subsequent periods. There have been no material changes to the critical accounting policies and estimates as discussed in our Annual Report on Form 10-K for the year ended September 30, 2017.2018, except as discussed below.
Investment – digital currency
Digital currency consists of cryptocurrency denominated assets and are included in current assets. Investment in digital currency is carried at fair market value. Unrealized gain or loss resulting from change the value of the digital currency is recorded in unrealized loss on digital currency on the consolidated statements of operations. Gain and loss realized upon sale of the investment in digital currency will be recorded in realized gain/loss on digital currency on the consolidated statement of operations.
Thefair value of the investment in digital currency is determined using the equivalency rate of the digital currency to USD. The Company revalues such asset at every reporting period and recognizes gain or loss as realized/unrealized gain/loss on digital currency on the consolidated statements of operations that are attributable to the change in the fair value of the digital currency.
Results of Operations
Summary of Key Results
For the three and nine monthssix ended June 30, 2018March 31, 2019 versus the three and ninesix months ended June 30, 2017March 31, 2018
Revenue and Cost of Revenue
Totalrevenue for the three months ended June 30,March 31, 2019 and 2018 versus the three months ended June 30, 2017 was $4,800,000 and $6,000,000, respectively. $4,800,000.Totalrevenue for the ninesix months ended June 30,March 31, 2019 and 2018 versus the nine months ended June 30, 2017 was $14,400,000 and $18,000,000, respectively.$9,600,000. Revenue for the three and ninesix months ended June 30,March 31, 2019 and 2018 and 2017 was from general support services rendered to a related party. On October 17, 2017, we entered into an amendment of General Service Agreement with FXDD Malta. In accordance with the amendment, which was effective as of October 1, 2017, the minimum amount payable by FXDD Malta to us for services was reduced from $2,000,000 per month to $1,600,000 per month. Therefore, our revenue for the three and nine months ended June 30, 2018 was significantly decreased as compared to the three and nine months ended June 30, 2017.party.
Costof revenue for the three months ended June 30,March 31, 2019 and 2018 versus the three months ended June 30, 2017 was $4,725,000 and $5,925,000, respectively. $4,725,000.Costof revenue for the ninesix months ended June 30,March 31, 2019 and 2018 versus the nine months ended June 30, 2017 was $14,175,000 and $17,775,000, respectively.$9,450,000. Cost of revenue represents amount incurred for general support services rendered by a related party.party. On October 17, 2017, we entered into an amendment of General Service Agreement with FXDIRECT. Pursuant to the amendment, which was effective as of October 1, 2017, the minimum amount payable by us to FXDIRECT for services was reduced from $1,975,000 per month to $1,575,000 per month. Therefore, our costCost of revenue represents amount incurred for the three and nine months ended June 30, 2018 was significantly decreased as compared to the three and nine months ended June 30, 2017.general support services rendered by a related party.
Operating Expenses
Operating expenses consist of compensation and related benefits, bad debt expense, and other general and administrative expense.
Compensation and related benefits
Compensation and related benefits for three months ended March 31, 2019 versus the three months ended March 31, 2018, were $78,019 and $15,000, respectively. Compensation and related benefits for six months ended March 31, 2019 versus the six months ended March 31, 2018, were $126,353 and $40,000, respectively. The increase was primarily attributable to an increase in compensation and related benefits incurred for an employee who we hired in the first quarter of fiscal 2019.
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Bad debt expense
For the three and six months ended March 31, 2019, we recorded a bad debt expense of $40,000.
In the first quarter of fiscal 2018, we signed an agreement with a third-party for the customization and development of a trading platform to be used by us. In accordance with the signed agreement, we made a deposit on software development of $50,000. The project was cancelled in the third quarter of fiscal 2018 and we received a subsequent reimbursement of $10,000 of the deposit.During the second quarter of fiscal 2019, we evaluated the collectability. In evaluating the collectability, we consider many factors, including the age of the balance, payment history and the third party’s current credit-worthiness. The balance of $40,000 was written off after exhaustive efforts at collection.
Other general and administrative expenses
Other general and administrative expenses were mainly third-party and related party professional fees and directors’ compensation.travel expense.
Total operatingother general and administrative expenses for the three months ended June 30, 2018March 31, 2019 versus the three months ended June 30, 2017,March 31, 2018, were $69,175$191,707 versus $86,738,$60,844, respectively. The decrease in operatingTotal other general and administrative expenses for the threesix months ended June 30, 2018 as compared toMarch 31, 2019 versus the threesix months ended June 30, 2017 was primarily due to the decrease in use of professional services providers. Total operating expenses for the nine months ended June 30,March 31, 2018, were $299,362 versus the nine months ended June 30, 2017, were $383,967 versus $360,397,$274,792, respectively. The increase in operating expenses for the nine months ended June 30, 2018 as compared to the nine months ended June 30, 2017 was mainly due to the increase in directors’ compensation and offset by the decrease in use of professional services providers.providers.
Other Expense
Other expense includes interest expense on redeemable preferred stock, and amortization of debt discount.discount, unrealized gain (loss) recognized from investment - digital currency, and miscellaneous other expense. Total other income for the three months ended March 31, 2019 versus total other expense for the three months ended June 30,March 31, 2018, was $3,825 versus the three months ended June 30, 2017,$(26,327), respectively. The change was $1,510 versus $6,040, respectively. primarily due to a decrease in interest expense on redeemable preferred stock of approximately $1,000, a decrease in amortization of debt discount of approximately $24,000, and an increase in unrealized gain on digital currency of approximately $5,000.
Total other expense for the ninesix months ended June 30, 2018March 31, 2019 versus the ninesix months ended June 30, 2017,March 31, 2018, was $33,877$35,088 versus $18,119,$32,367, respectively. The increase in total other expense for the six months ended March 31, 2019 as compared to the six months ended March 31, 2018 was primarily due to an increase in unrealized loss recognized from digital currency asset of approximately $32,000, offset by a decrease in interest expense on redeemable preferred stock of approximately $4,000, and a decrease in amortization of debt discount of approximately $25,000.
Asa result of the termination of the IBIH transaction, we and CMH have agreed to enter into that certain Stock Redemption Agreement dated February 13, 2018 providing that 75,000 CMH Preferred Shares were redeemed and cancelled in consideration of $750,000 which occurred on February 13, 2018. Therefore, our interest expense on redeemable preferred stock for the three and ninesix months ended June 30, 2018March 31, 2019 decreased as compared to the three and ninesix months ended June 30, 2017,March 31, 2018, and our amount from amortization of debt discount for the three and six months ended June 30, 2018March 31, 2019 decreased as compared to the three and six months ended June 30, 2017, and our amount from amortization of debt discount for the nine months ended June 30,March 31, 2018 significantly increased as compared to the nine months ended June 30, 2017..
Net Income (Loss)Loss
As a result of the factors described above, we reported net income of $4,315 for the three months ended June 30, 2018 as compared to net loss of $17,778 for the three months ended June 30, 2017. This translated to basic net income per common share of $0.00 and basic net loss per common share of $(0.00), and diluted net loss per common share of $(0.00) and $(0.00), for the three months ended June 30, 2018 and 2017, respectively.
As a result of the factors described above, our net loss was $192,844,$230,901, or $(0.00) per common share (basic and diluted), for the ninethree months ended June 30, 2018.March 31, 2019. Our net loss was $153,516,$27,171, or $(0.00) per common share (basic and diluted), for the ninethree months ended June 30, 2017.March 31, 2018.
As a result of the factors described above, our net loss was $350,803, or $(0.00) per common share (basic and diluted), for the six months ended March 31, 2019. Our net loss was $197,159, or $(0.00) per common share (basic and diluted), for the six months ended March 31, 2018.
Liquidity and Capital Resources
Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations and otherwise operate on an ongoing basis. At June 30, 2018March 31, 2019 and September 30, 2017,2018, we had cash balances of $208,138$74,017 and $48,642,$257,637, respectively.
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Cash at June 30, 2018 was provided by proceeds received from termination of potential acquisition after deducting cash paid for the preferred stock redemption as described elsewhere in this report.
We had an accumulated deficit, a total stockholders’ deficit, and a working capital deficit of $708,295, $544,189, and $300,886, respectively, as of June 30, 2018. For the ninesix months ended June 30, 2018,March 31, 2019, although we recordedincurred a net loss of $192,844 and$350,803, we had a net cash flow used in operating activities of $40,504. We may incur losses for an indeterminate period and may never sustain profitability. We may be unable to achieve and maintain profitability on a quarterly or annual basis. An extended period of losses may prevent us from successfully operating and expanding our business.$89,669.
We estimate thatOur ability to continue as a going concern is dependent upon the management of expenses and our working capital is sufficientability to fundobtain the necessary financing to meet our currentobligations and pay our liabilities arising from normal business operations for the next 12 months.Management is currently seeking additional capital through private placements or public offerings of our securities. In addition, we may seek to raise additional capital through public or private debt or equity financings in order to fund our operations, potential mergers or acquisitions,when they come due, and the development of our business plan.upon profitable operations.
Cash Flow for the Nine Months Ended June 30, 2018 Compared to the Nine Months Ended June 30, 2017
Net cash flow used in operating activities was $40,504 for the nine months ended June 30, 2018. These included $192,844 in net loss, offset by changes in operating assets and liabilities totaling $125,380 for the nine months ended June 30, 2018.
We had $330,769 in net cash provided by operating activities for the nine months ended June 30, 2017. These included changes in operating assets and liabilities totaling $477,416 for the nine months ended June 30, 2017, offset by net loss of $153,516.
Net cash flow provided by investing activities was $950,000 for the nine months ended June 30, 2018. During the nine months ended June 30, 2018, we received proceeds of $1,000,000 from termination of potential acquisition in accordance with a Settlement Agreement and Mutual Release signed on November 17, 2017 as described elsewhere in this report, and we made a deposit for software development of $50,000, which is to be refunded to the Company in full.
We did not incur any investing activity during the nine months ended June 30, 2017.
Net cash flow used in financing activities was $750,000 for the nine months ended June 30, 2018. During the nine months ended June 30, 2018, we paid $750,000 for the preferred stock redemption as described elsewhere in this report.
We did not incur any financing activity during the nine months ended June 30, 2017.
Our capital requirements for the next twelve months primarily relate to mergers, acquisitions and the development of business opportunities. In addition, we expect to use cash to pay fees related to professional services. The following trends are reasonably likely to result in a material decrease in our liquidity over the near to long term:
Currently, we useare in the process of finalizing the creation an electronic exchange whereby it facilitates the buying and selling of various digital assets as well as traditional currency pairs used in FX trading, which has been paid by related parties. Projected costs of this exchange is approximately $900,000. As of March 31, 2019, approximately $811,000 has already been spent by our cash to support our operationsaffiliates and to provide working capital for our ongoing operations and obligations. We believe that our current cashownership of the exchange will be sufficienttransferred to meet our anticipated cash requirements for the next twelve months. us upon completion.
Although we estimate that our current cash will be sufficient to meet our anticipated cash requirements for the next twelve months, weWe need to either borrow funds or raise additional capital through equity or debt financings in order to support our future mergers or acquisitions and the development of our business opportunities.financings. However, we cannot be certain that such capital (from our stockholders or third parties) will be available to us or whether such capital will be available on terms that are acceptable to us. Any such financing likely would be dilutive to existing stockholders and could result in significant financial operating covenants that would negatively impact our business. If we are unable to raise sufficient additional capital on acceptable terms, we will have insufficient funds to operate our business or pursue our planned growth.
Cash Flow for the Six Months Ended March 31, 2019 Compared to the Six Months Ended March 31, 2018
Net cash flow used in operating activities was $89,669 for the six months ended March 31, 2019. These included $350,803 in net loss. Cash flows used in operating activities included changes in operating assets and liabilities totaling $187,921 for the six months ended March 31, 2019, offset by the add-back of non-cash items mainly consisting of unrealized loss on digital currency of approximately $32,000 and bad debt expense of approximately $40,000.
Net cash flow used in operating activities was $48,177 for the six months ended March 31, 2018. These include $197,159 in net loss. Cash flows used in operating activities included changes in operating assets and liabilities totaling $122,594 for the six months ended March 31, 2018.
Net cash flow used in investing activities was $93,951 for the six months ended March 31, 2019. During the six months ended March 31, 2019, we purchased digital currency of $93,951.
Net cash flow provided by investing activities was $950,000 for the six months ended March 31, 2018. During the six months ended March 31, 2018, we received proceeds of $1,000,000 from termination of potential acquisition in accordance with a Settlement Agreement and Mutual Release signed on November 17, 2017 as described elsewhere in this report, and we made a payment for software development costs of $50,000.
We did not incur any financing activity during the six months ended March 31, 2019.
Net cash flow used in financing activities was $750,000 for the six months ended March 31, 2018. During the six months ended March 31, 2018, we paid $750,000 for the preferred stock redemption as described elsewhere in this report.
Our capital requirements for the next twelve months primarily relate to mergers, acquisitions and the development of business opportunities. In addition, we expect to use cash to pay fees related to professional services. Currently, we are in the process of finalizing the creation an electronic exchange whereby it facilitates the buying and selling of various digital assets as well as traditional currency pairs used in FX trading, which has been paid by related parties. Projected costs of this exchange is approximately $900,000. As of March 31, 2019, approximately $811,000 has already been spent by our affiliates and ownership of the exchange will be transferred to us upon completion. The following trends are reasonably likely to result in a material decrease in our liquidity over the near to long term:
| ● | The working capital requirements to finance our current business; |
| ● | The use of capital for mergers, acquisitions and the development of business opportunities; |
| ● | Addition of personnel as the business grows; and |
| ● | The cost of being a public company. |
We need to either borrow funds or raise additional capital through equity or debt financings. However, we cannot be certain that such capital (from our stockholders or third parties) will be available to us or whether such capital will be available on terms that are acceptable to us. Any such financing likely would be dilutive to existing stockholders and could result in significant financial operating covenants that would negatively impact our business. If we are unable to raise sufficient additional capital on acceptable terms, we will have insufficient funds to operate our business or pursue our planned growth.
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Consistent with Section 144 of the Delaware General Corporation Law, it is our current policy that all transactions between us and our officers, directors and their affiliates will be entered into only if such transactions are approved by a majority of the disinterested directors, are approved by vote of the stockholders, or are fair to us as a corporation as of the time it is authorized, approved or ratified by the board. We will conduct an appropriate review of all related party transactions on an ongoing basis.
Contractual Obligations and Off-Balance Sheet Arrangements
Contractual Obligations
WeAtMarch 31, 2019, there have certain fixed contractual obligations and commitments that include future estimated payments. Changes in our business needs, cancellation provisions, and other factors may result in actual payments differing frombeen no material changes to the estimates. We cannot provide certainty regarding the timing and amounts of payments. We have presented below a summary of the most significant assumptions used in our determination of amounts presented in the tables, in order to assist in the review of this information within the context of our consolidated financial position, results of operations, and cash flows. The following tables summarize our contractual obligations as of Juneset forth in our Annual Report on Form 10-K for the year ended September 30, 2018 and the effect these obligations are expected to have on our liquidity and cash flows in future periods..
| Payments Due by Period | ||||||||||||||||||||
| Contractual obligations: | Total | Less than 1 year | 1-3 years | 3-5 years | 5+ years | |||||||||||||||
| Redeemable preferred stock (stated value) | $ | 250,000 | $ | — | $ | 250,000 | $ | — | $ | — | ||||||||||
| Accrued interest for redeemable preferred stock | 26,792 | 26,792 | — | — | — | |||||||||||||||
| Total | $ | 276,792 | $ | 26,792 | $ | 250,000 | $ | — | $ | — | ||||||||||
Off-Balance Sheet Arrangements
We had no outstanding derivative financial instruments, off-balance sheet guarantees, interest rate swap transactions or foreign currency contracts. We do not engage in trading activities involving non-exchange traded contracts.
Recently Issued Accounting Pronouncements
For information about recently issued accounting standards, refer to Note 3 to our Unaudited Condensed Consolidated Financial Statements appearing elsewhere in this report.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable to a “smaller reporting company” as defined in Item 10(f)(1) of SEC Regulation S-K.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in reports filed or submitted under the Securities Exchange Act of 1934, as amended (“Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed under the Exchange Act is accumulated and communicated to management, including the principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.
In connection with the preparation of the quarterly report on Form 10-Q for the quarter ended June 30, 2018,March 31, 2019, our management, including our principal executive officer and principal financial officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures, which are defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”) is the same person.
During evaluation of disclosure controls and procedures as of June 30, 2018,March 31, 2019, our CEO/CFO conducted an evaluation of the effectiveness of the design and operations of our disclosure controls and procedures and concluded that our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the most recently completed fiscal quarter that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.
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None.
Weare not a party to any legal proceedings. Management is not aware of any legal proceedings proposed to be initiated against us. However, from time to time, we may become subject to claims and litigation generally associated with any business venture operating in the ordinary course.course.
Not applicable to a “smaller reporting company” as defined in Item 10(f)(1) of SEC Regulation S-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not Applicable.
On June 3, 2016, the Company agreed to sell to CMH 30,900,000 shares of common stock and 200,000 shares of Series A preferred stock for $2,000,000 in two equal installments with the first closing occurring on June 7, 2016 resulting in the issuance of 100,000 shares of Series A Preferred Stock to CMH (the “CMH Preferred Shares”). CMH is wholly-owned by an entity that is owned by Emil Assentato, the Company’s CEO, CFO and Chairman. The second close was to occur with the closing of the Company’s acquisition of IBIH. On November 17, 2017, the Company entered into a Settlement Agreement and Mutual Release terminating the Company’s acquisition of IBIH and, as a result, the second closing of the CMH financing was also terminated. As a result of the termination of the IBIH transaction, the Company and CMH have agreed to enter into that certain Stock Redemption Agreement dated February 13, 2018 providing that 75,000 CMH Preferred Shares shall be redeemed and cancelled in consideration of $750,000 which occurred on February 13, 2018.None.
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| XBRL | ||
| XBRL | ||
| XBRL | ||
| XBRL | ||
| XBRL | ||
| XBRL |
| * | Filed along with this document |
| (1) | Incorporated by reference to the Form 8K Current Report filed with the SEC on May 31, 2016. |
| (2) | Incorporated by reference to the Form 8K Current Report filed with the SEC on June 3, 2016. |
| (3) | Incorporated by reference to the Form 8K Current Report filed with the SEC on August 9, 2016. |
| (4) | Incorporated by reference to the Form 8K Current Report filed with the SEC on October 25, 2016. |
| (5) | Incorporated by reference to the Form 8K Current Report filed with the SEC on October 19, 2017. |
| (6) | Incorporated by reference to the Form 8K Current Report filed with the SEC on December 5, 2017. |
| (7) | Incorporated by reference to the Form 10K Annual Report filed with the SEC on December 27, 2017. |
| (8) | Incorporated by reference to the Form 10Q Quarterly Report filed with the SEC on February 13, 2018. |
| (9) | Incorporated by reference to the Form 10Q Quarterly Report filed with the SEC on August 13, 2018. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| NUKKLEUS INC. | |||
| (Registrant) | |||
| Date: | By: | /s/ Emil Assentato | |
| Emil Assentato | |||
| Chief Executive Officer (Principal Executive Officer) | |||
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