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

For the quarterly period ended March 31,June 30, 2019

OR

☐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)

525 Washington Boulevard, Jersey City, New 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. Yesx ☒ Noo ☐

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). Yesx ☒ Noo ☐

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.

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). Yeso ☐ Nox ☒

Securities registered pursuant to Section 12(b) of the Act: Not applicable.

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date.date.

NUKKLEUS INC.

FORM 10-Q

March 31,June 30, 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.

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.

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.prospects.

Unless otherwise indicated, references in this report to the “Company”, “Nukkleus”, “we”, “us”, or “our” refer to Nukkleus Inc. and its consolidated subsidiaries.

PART I - FINANCIAL INFORMATION

Item 1. Interim Financial Statements.

NUKKLEUS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

The accompanying notes to unaudited condensed consolidated financial statements are an integral part of these statements.

NUKKLEUS INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

The accompanying notes to unaudited condensed consolidated financial statements are an integral part of these statements.

NUKKLEUS INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'STOCKHOLDERS’ DEFICIT

For the Three and SixNine Months Ended March 31,June 30, 2019 and 2018

The accompanying notes to unaudited condensed consolidated financial statements are an integral part of these statements.

NUKKLEUS INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

The accompanying notes to unaudited condensed consolidated financial statements are an integral part of these statements.

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. 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 SPA 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.

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.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 createis 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, 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,June 30, 2019, approximately $811,000$1.1 million has been incurred by ourout 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 sixnine months ended March 31,June 30, 2019 of $350,803$419,719 and had a working capital deficit of $669,315$737,659 at March 31,June 30, 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 subsidiaries 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 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, 2018 filed with the Securities and Exchange Commission on December 20, 2018. The consolidated balance sheet as of September 30, 2018 contained herein has been derived from the audited consolidated financial statements as of September 30, 2018, but does not include all disclosures required by U.S. GAAP.

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 sixnine months ended March 31,June 30, 2019 and 2018 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:follows:

The carrying amounts reported in the condensed consolidated balance sheets for cash, prepaid expense, due from affiliates, due to affiliates, accrued liabilities, and accrued liabilities – related party approximate their fair market value based on the short-term nature of these 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 lossgain 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,June 30, 2019:

Theinvestment in digital currency has a cost of $90,071$90,120 net of fee, unrealized lossgain of $32,068$62,229 for the sixnine months ended March 31,June 30, 2019, and a fair value of $58,003$152,349 at March 31,June 30, 2019. There is an unrealized gain of $5,335$94,297 for the three months ended March 31,June 30, 2019. During the nine months ended June 30, 2019, the Company transferred $3,880 of its investment in digital currency to a related party. The Company did not have any financial asset measured at fair value on a recurring basis on the balance sheet as of September 30, 2018.2018.

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,June 30, 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 and as of the date of this report.

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:

The following table summarizes vendor expense concentrations:

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. The project was cancelled in the third quarter of fiscal 2018 and the Company received a subsequent reimbursement of $10,000 of the deposit.

During the three months ended March 31,second quarter of fiscal 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 third party’s current credit-worthiness. The balance of $40,000 was written off after exhaustive efforts at collection.

Revenue recognition

Effective October 1, 2018, the Company adopted ASU No. 2014-09, Revenue from Contracts with Customers ("(“ASU 2014-09"2014-09”) and other associated standards. Under the new standard, the Company recognizes revenue when a 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 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 Company applies 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'sCompany’s contracts with customers relates to the Company'sCompany’s services performed for a related party under a General Service Agreement ("GSA"(“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.

NUKKLEUS INC. AND SUBSIDIARIES
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 sixnine months ended March 31,June 30, 2019 and 2018 because the estimated annual effective tax rate was zero. As of March 31,June 30, 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.

Reclassifications

The Company has reclassified certain prior period amounts in the accompanying unaudited condensed consolidated statements of operations in order to be consistent with the current period presentation. These reclassifications had no effect on the previously reported results of operations.

NUKKLEUS INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Per share data

ASCTopic 260, “EarningsEarnings 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 sixnine months ended March 31,June 30, 2019 and 2018, potentially dilutive common shares consist of common stock issuable upon the conversion of Series A preferred stock (using the if-converted method) and the exercise of common stock options (using the treasury stock method).

Thefollowing table presentsis a reconciliation of the basic and diluted net loss(loss) income per share: computations for the three and nine months ended June 30, 2019 and 2018:

Basic net (loss) income per share

NUKKLEUS INC. AND SUBSIDIARIES
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

Forthe three and nine months ended March 31,June 30, 2019, and 2018, 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 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.

Forthe sixnine months ended March 31, 2019 andJune 30, 2018, a total of 1,250,000 and 5,000,000 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 respectively, 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.

Recently issued accounting pronouncements

EffectiveOctober 1, 2018, the Company 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. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

NUKKLEUS INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Recently issued accounting pronouncements (continued)statements.

EffectiveOctober 1, 2018, the Company 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 adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

Effective October 1, 2018, the Company 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. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.statements.

NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Recently issued accounting pronouncements (continued)

In June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. ASU No. 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.

NOTE 4 – ACCRUED LIABILITIES

At March 31,June 30, 2019 and September 30, 2018, accrued liabilities consisted of the following:

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.$0.0001.

Common stock and Series A preferred stock sold for cash

On June 7, 2016, the Company sold to CMH 15,450,000 shares of common stock and 100,000 shares of Series A preferred stock for $1,000,000. The common stock was recorded as equity and the Series A preferred stock was recorded as a long-term liability.

The Series A preferred stock has the following key terms: 

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 Company sold to CMH 15,450,000 shares of common stock and 100,000 shares of Series A preferred stock for $1,000,000. The common stock was recorded as equity and the Series A preferred stock was recorded as a long-term 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 March 31,June 30, 2019 and 2018, amortization of debt discount amounted to $573$572 and $24,098,$572, respectively. For the sixnine months ended March 31,June 30, 2019 and 2018, amortization of debt discount amounted to $1,145$1,717 and $26,388,$26,960, respectively.

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)

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 March 31,June 30, 2019 and 2018, dividends on redeemable preferred stock amounted to $937 and $2,229, respectively. $938, respectively. For the sixnine months ended March 31,June 30, 2019 and 2018, dividends on redeemable preferred stock amounted to $1,875$2,812 and $5,979, respectively.$6,917, 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 March 31,June 30, 2019 and September 30, 2018, Series A redeemable preferred stock consisted of the following:

NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.Markets, Inc. All professional services fee payable to Craig Marshak are paid to Triple Eight Markets.Markets, Inc. As compensation for professional services provided, the Company recognized consulting expenses of $78,500$30,000 and $0 for the three months ended March 31,June 30, 2019 and 2018, respectively, which have been included in general and administrative expense – related party on the accompanying consolidated statements of operations. The Company recognized consulting expenses of $93,500$123,500 and $6,000 for the sixnine months ended March 31,June 30, 2019 and 2018, respectively, which have been included in general and administrative expense – related party on the accompanying consolidated statements of operations.

As of March 31, 2019 and September 30, 2018, the accrued and unpaid services charge related to Craig Marshak amounted to $10,000 and $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.

NUKKLEUS INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 – RELATED PARTY TRANSACTIONS (continued)immaterial.

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 sixnine months ended March 31,June 30, 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:follows:

During the three and sixnine months ended March 31,June 30, 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:

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 (continued)

Due from affiliates

At March 31,June 30, 2019 and September 30, 2018, due from related parties consisted of the following:

NUKKLEUS INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 – RELATED PARTY TRANSACTIONS (continued)

Due from affiliates (continued)

The balance of due from related parties at March 31,June 30, 2019 amounted to $4,680 and$155,040, which represents investment – digital currency transferred to NUKK Capital and monies that the Company paid on behalf of FXDD Malta.FXDIRECT. The balance of due from related parties at September 30, 2018 amounted to $800 and represents monies that the Company paid on behalf of FXDD Malta.

Management believes that the related parties’ receivables are fully collectable. Therefore, no allowance for doubtful accounts is deemed to be required on its due from related parties at March 31,June 30, 2019 and September 30, 2018. The Company historically has not experienced uncollectible receivables from related parties.

Due to affiliates

At March 31,June 30, 2019 and September 30, 2018, due to related parties consisted of the following:

The balances of due to related parties represent expenses paid by Forexware LLC, FXDD Malta, and FXDIRECT on behalf of the Company and advances from CMH. The balances due to FXDIRECT may also include unsettled funds due related to the General Service Agreement. The balances due to Forexware LLC also include costs for creation an electronic exchange paid by it.

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,June 30, 2019, approximately $811,000$1.1 million has been incurred by our related parties and ownership of the exchange will be transferred to the Company upon completion.

NOTE 7 – SUBSEQUENT EVENTS

Management has evaluated subsequent events through the date of the filing.

Management is not aware of any significant events that occurred subsequent to the balance sheet date that would have a material effect on the financial statements and would require adjustment or disclosure thereto.

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 sixnine months ended March 31,June 30, 2019 and 2018 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:

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 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,hours, 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.

InJuly 2018, wethe Company incorporated Nukkleus Malta Holding Ltd., a wholly-owned subsidiary. In July 2018, Nukkleus Malta Holding Ltd. incorporated Nukkleus Exchange Malta Ltd. and we areis 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 createthe 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, Nukkleus Exchange Malta Ltd., is in the process of finalizing the exchange which hasand such costs have been paid for by related parties. As of June 30, 2019, approximately $1.1 million has been incurred by out 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. 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,expense, 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, 2018, except as discussed below.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 lossgain 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.currency.

Results of Operations

Summary of Key Results

For the three and sixnine ended March 31,June 30, 2019 versus the three and sixnine months ended March 31,June 30, 2018

Revenue and Cost of Revenue

Totalrevenue for the three months ended March 31,June 30, 2019 and 2018 was $4,800,000.Totalrevenue for the sixnine months ended March 31,June 30, 2019 and 2018 was $9,600,000.$14,400,000. Revenue for the three and sixnine months ended March 31,June 30, 2019 and 2018 was from general support services rendered to a related party.party. 

Costof revenue for the three months ended March 31,June 30, 2019 and 2018 was $4,725,000.Costof revenue for the sixnine months ended March 31,June 30, 2019 and 2018 was $9,450,000.$14,175,000. Cost of revenue for the three and nine months ended June 30, 2019 and 2018 represents amount incurred for general support services rendered by a related party. Cost of revenue represents amount incurred for general support services rendered by a related party.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 the three months ended March 31,June 30, 2019 versus the three months ended March 31,June 30, 2018, were $78,019$108,751 and $15,000, respectively. Compensation and related benefits for sixnine months ended March 31,June 30, 2019 versus the sixnine months ended March 31,June 30, 2018, were $126,353$235,104 and $40,000,$55,000, respectively. The significant 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 2019.2019.

Bad debt expense

For the three and sixnine months ended March 31,June 30, 2019, we recorded a bad debt expense of $40,000.$0 and $40,000, respectively.

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 travel expense.

Total other general and administrative expenses for the three months ended March 31,June 30, 2019 versus the three months ended March 31,June 30, 2018, were $191,707$127,953 versus $60,844,$54,175, respectively. Total other general and administrative expenses for the sixnine months ended March 31,June 30, 2019 versus the sixnine months ended March 31,June 30, 2018, were $299,362$427,315 versus $274,792,$328,967, respectively. The increase was mainly due to the increase in use of professional services providers.

Other Expense

Other (income) expense, net, includes interest expense on redeemable preferred stock, amortization of debt discount, and unrealized gain (loss) recognized from investment - digital currency, and miscellaneous other expense.currency. Total other income, net, for the three months ended March 31,June 30, 2019 versus total other expense, net, for the three months ended March 31,June 30, 2018, was $3,825$92,788 versus $(26,327)$(1,510), respectively. The change was 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.$94,000.

Total other expenseincome, net, for the sixnine months ended March 31,June 30, 2019 versus the six months ended March 31, 2018, was $35,088 versus $32,367, respectively. The increase in total other expense, net, for the sixnine months ended March 31,June 30, 2018, was $57,700 versus $(33,877), respectively. The change for the nine months ended June 30, 2019 as compared to the sixnine months ended March 31,June 30, 2018 was primarily due to an increase in unrealized lossgain recognized from digital currency asset of approximately $32,000, offset by$62,000, 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 sixnine months ended March 31,June 30, 2019 decreased as compared to the three and sixnine months ended March 31,June 30, 2018, and our amount from amortization of debt discount for the three and sixnine months ended March 31,June 30, 2019 decreased as compared to the three and sixnine months ended March 31, 2018.June 30, 2018.

Net Loss

As a result of the factors described above, our net loss was $230,901,$68,916, or $(0.00) per common share (basic and diluted), for the three months ended March 31,June 30, 2019. OurWe reported net loss was $27,171, or $(0.00) per common share (basic and diluted),income of $4,315 for the three months ended March 31,June 30, 2018. This translated to basic net income per common share of $0.00 and diluted net loss per common share of $(0.00) for the three months ended June 30, 2018.

As a result of the factors described above, our net loss was $350,803,$419,719, or $(0.00) per common share (basic and diluted), for the sixnine months ended March 31,June 30, 2019. Our net loss was $197,159,$192,844, or $(0.00) per common share (basic and diluted), for the sixnine months ended March 31,June 30, 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 March 31,June 30, 2019 and September 30, 2018, we had cash balances of $74,017$8,832 and $257,637, respectively.

For the sixnine months ended March 31,June 30, 2019, although we incurred a net loss of $350,803,$419,719, we had a net cash flow used in operating activities of $89,669.$154,805.

Our ability to continue as a going concern is dependent upon the management of expenses and our ability to obtain the necessary financing to meet our obligations and pay our liabilities arising from normal business operations when they come due, and upon profitable operations.

Currently,

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.In the event that there are any unforeseen delays or obstacles in obtaining funds through the aforementioned sources, the majority shareholder has committed to inject capital into the Company in order to maintain the ongoing operations of the business.

Cash Flow for the Nine Months Ended June 30, 2019 Compared to the Nine Months Ended June 30, 2018

Net cash flow used in operating activities was $154,805 for the nine months ended June 30, 2019. These included $419,719 in net loss. Cash flows used in operating activities included non-cash items mainly consisting of unrealized gain on digital currency of approximately $62,000, offset the add back of bad debt expense of approximately $40,000, and changes in operating assets and liabilities totaling $285,426 for the nine months ended June 30, 2019.

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.

Net cash flow used in investing activities was $94,000 for the nine months ended June 30, 2019. During the nine months ended June 30, 2019, we purchased digital currency of $94,000.

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.

We did not incur any financing activity during the nine months ended June 30, 2019.

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.

Our operations will require additional funding for the foreseeable future. Unless and until we are able to generate a sufficient amount of revenue and reduce our costs, we expect to finance future cash needs through public and/or private offerings of equity securities and/or debt financings. We do not currently have any committed future funding. To the extent we raise additional capital by issuing equity securities, our stockholders could at that time experience substantial dilution. Any debt financing we are able to obtain may involve operating covenants that restrict our business. 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 and pay salary. The following trends are reasonably likely to result in a material decrease in our liquidity over 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 transferrednear to us upon completion.long term:

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.

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:

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.