Company Quick10K Filing
Quick10K
Nukkleus
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-Q 2018-12-31 Quarter: 2018-12-31
10-K 2018-09-30 Annual: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-Q 2017-12-31 Quarter: 2017-12-31
10-K 2017-09-30 Annual: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-Q 2016-12-31 Quarter: 2016-12-31
10-K 2016-09-30 Annual: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-Q 2015-12-31 Quarter: 2015-12-31
10-K 2015-09-30 Annual: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-Q 2014-12-31 Quarter: 2014-12-31
10-K 2014-09-30 Annual: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
8-K 2019-02-25 Officers
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ANCB Anchor Bancorp 64
EFSH 1847 Holdings 4
GRVE Groove Botanicals 3
SKAS Saker Aviation Services 0
XGN Exagen 0
MTII Monitronics International 0
ATK Simply Good Foods 0
ZETAI Zeta Acquisition I 0
PWON Powin Energy 0
NUKK 2019-06-30
Part I - Financial Information
Item 1. Interim Financial Statements.
Note 1 - The Company History and Nature of The Business
Note 2 - Basis of Presentation
Note 3 - Summary of Significant Accounting Policies
Note 4 - Accrued Liabilities
Note 5 - Share Capital
Note 6 - Related Party Transactions
Note 7 - Subsequent Events
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Item 5. Other
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 f10q0619ex31-1_nukkleus.htm
EX-32.1 f10q0619ex32-1_nukkleus.htm

Nukkleus Earnings 2019-06-30

NUKK 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 f10q0619_nukkleusinc.htm QUARTERLY REPORT

 

 

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 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)

 

Delaware   38-3912845
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)

 

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. Yes ☒ No ☐

 

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 ☒ No ☐

 

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 ☐ No ☒

 

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 August 19, 2019
Common Stock, $0.0001 par value per share   230,485,100 shares

  

 

 

 

 

 

 

NUKKLEUS INC.

FORM 10-Q

June 30, 2019

 

TABLE OF CONTENTS

 

    Page No.
PART I - FINANCIAL INFORMATION
Item 1. Interim Financial Statements  
  Condensed Consolidated Balance Sheets as of June 30, 2019 (Unaudited) and September 30, 2018 1
  Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended June 30, 2019 and 2018 2
  Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Deficit for the Nine Months Ended June 30, 2019 and 2018 3
  Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2019 and 2018 4
  Notes to Unaudited Condensed Consolidated Financial Statements 5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Item 4. Controls and Procedures 19
Item 5. Other 19
 
PART II - OTHER INFORMATION
     
Item 1. Legal Proceedings 20
Item 1A. Risk Factors 20
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Mine Safety Disclosures 20
Item 5. Other Information 20
Item 6. Exhibits 20
Signatures   22

 

i

 

 

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.

 

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

 

ii

 

  

PART I - FINANCIAL INFORMATION

 

Item 1. Interim Financial Statements.

 

NUKKLEUS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   As of
   June 30,
2019
  September 30,
2018
   (Unaudited)   
ASSETS      
       
CURRENT ASSETS:      
Cash  $8,832   $257,637 
Prepaid expense   7,334    7,333 
Deposit on software development   -      40,000 
Due from affiliates   155,040    800 
Investment - digital currency   152,349    -   
           
TOTAL CURRENT ASSETS   323,555    305,770 
           
TOTAL ASSETS  $323,555   $305,770 
           
LIABILITIES AND STOCKHOLDERS’ DEFICIT          
           
CURRENT LIABILITIES:          
Due to affiliates  $897,362   $482,970 
Accrued liabilities   163,852    142,457 
           
TOTAL CURRENT LIABILITIES   1,061,214    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 $4,408 and $6,125, respectively) at June 30, 2019 and September 30, 2018, respectively   245,592    243,875 
           
TOTAL LIABILITIES   1,306,806    869,302 
           
STOCKHOLDERS’ DEFICIT:          
Preferred stock ($0.0001 par value; 15,000,000 shares authorized; 0 share issued and outstanding at June 30, 2019 and September 30, 2018)   -      -   
Common stock ($0.0001 par value; 900,000,000 shares authorized; 230,485,100 shares issued and outstanding at June 30, 2019 and September 30, 2018)   23,049    23,049 
Additional paid-in capital   141,057    141,057 
Accumulated deficit   (1,147,357)   (727,638)
           
TOTAL STOCKHOLDERS’ DEFICIT   (983,251)   (563,532)
           
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT  $323,555   $305,770 

    

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

 

1

 

 

NUKKLEUS INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

   For the Three
Months
  For the Three
Months
  For the Nine
Months
  For the Nine
Months
   Ended  Ended  Ended  Ended
   June 30,
2019
  June 30,
2018
  June 30,
2019
  June 30,
2018
             
REVENUE            
Revenue  $-     $-     $-     $-   
Revenue - related party   4,800,000    4,800,000    14,400,000    14,400,000 
Total revenue   4,800,000    4,800,000    14,400,000    14,400,000 
                     
COST OF REVENUE                    
Cost of revenue   -      -      -      -   
Cost of revenue - related party   4,725,000    4,725,000    14,175,000    14,175,000 
Total cost of revenue   4,725,000    4,725,000    14,175,000    14,175,000 
                     
GROSS PROFIT   75,000    75,000    225,000    225,000 
                     
OPERATING EXPENSES:                    
Compensation and related benefits   108,751    15,000    235,104    55,000 
Bad debt expense   -      -      40,000    -   
                     
Other general and administrative   97,953    54,175    303,815    322,967 
Other general and administrative - related party   30,000    -      123,500    6,000 
                     
Total operating expenses   236,704    69,175    702,419    383,967 
                     
(LOSS) INCOME FROM OPERATIONS   (161,704)   5,825    (477,419)   (158,967)
                     
OTHER EXPENSE:                    
Interest expense on redeemable preferred stock   (937)   (938)   (2,812)   (6,917)
Amortization of debt discount   (572)   (572)   (1,717)   (26,960)
Unrealized gain on digital currency   94,297    -      62,229    -   
                     
Total other income (expense), net   92,788    (1,510)   57,700    (33,877)
                     
(LOSS) INCOME BEFORE INCOME TAXES   (68,916)   4,315    (419,719)   (192,844)
                     
INCOME TAXES   -      -      -      -   
                     
NET (LOSS) INCOME  $(68,916)  $4,315   $(419,719)  $(192,844)
                     
NET (LOSS) INCOME 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    230,485,100    230,485,100    234,732,309 
Diluted   230,485,100    231,735,100    230,485,100    234,732,309 

   

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

 

2

 

 

NUKKLEUS INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT

For the Nine Months Ended June 30, 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)
                                    
Net loss for the three months ended June 30, 2019   -    -    -    -    -    (68,916)   (68,916)
                                    
Balance, June 30, 2019   -   $-    230,485,100   $23,049   $141,057   $(1,147,357)  $(983,251)
                                    
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)
                                    
Net income for the three months ended June 30, 2018   -    -    -    -    -    4,315    4,315 
                                    
Balance, June 30, 2018   -   $-    230,485,100   $23,049   $141,057   $(708,295)  $(544,189)

 

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 Nine
Months
  For the Nine
Months
   Ended  Ended
   June 30,
2019
  June 30,
2018
CASH FLOWS FROM OPERATING ACTIVITIES:      
Net loss  $(419,719)  $(192,844)
Adjustments to reconcile net loss to net cash used in operating activities:          
Amortization of debt discount   1,717    26,960 
Unrealized gain on digital currency   (62,229)   -   
Bad debt expense   40,000    -   
Changes in operating assets and liabilities:          
Prepaid expense   (1)   (11,562)
Due from affiliates   (150,360)   -   
Due to affiliates   414,392    76,525 
Accrued liabilities   21,395    68,417 
Accrued liabilities - related party   -      (8,000)
           
Net cash used in operating activities   (154,805)   (40,504)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchase of digital currency   (94,000)   -   
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   (94,000)   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   (248,805)   159,496 
           
Cash - beginning of period   257,637    48,642 
           
Cash - end of period  $8,832   $208,138 
           
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.

 

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.

 

5

 

 

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

 

NOTE 1 – THE COMPANY HISTORY AND NATURE OF THE BUSINESS (continued)

 

On June 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 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 and 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.

 

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 nine months ended June 30, 2019 of $419,719 and had a working capital deficit of $737,659 at 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.

 

6

 

 

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 nine months ended 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:

 

·Level 1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.

 

·Level 2-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.

 

·Level 3-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 condensed consolidated balance sheets for cash, prepaid expense, due from affiliates, due to affiliates, and accrued liabilities approximate their fair market value based on the short-term nature of these assets and liabilities.

 

The fair 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 gain 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 June 30, 2019:

 

       Fair value measurement using 
   Carrying value   Level 1   Level 2   Level 3   Total 
Investment - digital currency  $152,349   $152,349   $-   $-   $152,349 

 

The investment in digital currency has a cost of $90,120 net of fee, unrealized gain of $62,229 for the nine months ended June 30, 2019, and a fair value of $152,349 at June 30, 2019. There is an unrealized gain of $94,297 for the three months ended 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.

 

Concentration of credit risk

 

The Company maintains its cash in bank and financial institution deposits that at times may exceed federally insured limits. At 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.

 

7

 

 

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,
2019
   Three Months
Ended
June 30,
2018
   Nine Months
Ended
June 30,
2019
   Nine Months
Ended
June 30,
2018
 
FXDD Malta - related party   100%   100%   100%   100%

 

The following table summarizes vendor expense concentrations:

 

   Three Months
Ended
June 30,
2019
   Three Months
Ended
June 30,
2018
   Nine Months
Ended
June 30,
2019
   Nine Months
Ended
June 30,
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. 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 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”) 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’s contracts with customers relates to the Company’s services performed for a related party under a General Service Agreement (“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.

 

8

 

 

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

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Income taxes

 

The Company recorded no income tax expense for the three and nine months ended June 30, 2019 and 2018 because the estimated annual effective tax rate was zero. As of 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.

 

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.

 

Per share data

 

ASC Topic 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.

 

Basic net 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 nine months ended 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).

 

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

 

Basic net (loss) income per share

 

   Three Months
Ended
June 30,
2019
  Three Months
Ended
June 30,
2018
  Nine Months
Ended
June 30,
2019
  Nine Months
Ended
June 30,
2018
Net (loss) income available to common stockholders for basic net (loss) income per share of common stock  $(68,916)  $4,315   $(419,719)  $(192,844)
Weighted average common stock outstanding - basic   230,485,100    230,485,100    230,485,100    234,732,309 
Net (loss) income per common share – basic  $(0.00)  $0.00   $(0.00)  $(0.00)

 

 

9

 

 

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

 

   Three Months
Ended
June 30,
2019
  Three Months
Ended
June 30,
2018
  Nine Months
Ended
June 30,
2019
  Nine Months
Ended
June 30,
2018
Net (loss) income available to common stockholders for basic net (loss) income per share of common stock  $(68,916)  $4,315   $(419,719)  $(192,844)
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   (68,916)   (1,444)   (419,719)   (192,844)
Weighted average common stock outstanding - basic   230,485,100    230,485,100    230,485,100    234,732,309 
Effect of dilutive securities:                    
Series A preferred stock   -      1,250,000    -      -   
Weighted average common stock outstanding - diluted   230,485,100    231,735,100    230,485,100    234,732,309 
Net loss per common share – diluted  $(0.00)  $(0.00)  $(0.00)  $(0.00)

  

For the three and nine months ended June 30, 2019, 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.

 

For the nine months ended June 30, 2018, a total of 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 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.

 

Recently issued accounting pronouncements

 

Effective October 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.

 

Effective October 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.

 

10

 

 

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

 

   June 30,
2019
   September 30,
2018
 
Professional fees  $52,478   $44,728 
Directors’ compensation   80,537    70,000 
Interest payable   30,542    27,729 
Other   295    - 
   $163,852   $142,457 

 

NOTE 5 – SHARE CAPITAL

 

Authorized shares

 

The Company 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 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: 

 

  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.

 

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, 2019 and 2018, amortization of debt discount amounted to $572 and $572, respectively. For the nine months ended June 30, 2019 and 2018, amortization of debt discount amounted to $1,717 and $26,960, respectively.

 

11

 

 

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)

 

The terms 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, 2019 and 2018, dividends on redeemable preferred stock amounted to $937 and $938, respectively. For the nine months ended June 30, 2019 and 2018, dividends on redeemable preferred stock amounted to $2,812 and $6,917, respectively. 

 

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 were redeemed and cancelled in consideration of $750,000 which occurred on February 13, 2018.

 

At June 30, 2019 and September 30, 2018, Series A redeemable preferred stock consisted of the following:

 

   June 30,
2019
   September 30,
2018
 
Redeemable preferred stock (stated value)  $250,000   $250,000 
Less: unamortized debt discount   (4,408)   (6,125)
Redeemable preferred stock, net  $245,592   $243,875 

  

12

 

 

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

 

NOTE 6 – RELATED PARTY TRANSACTIONS

 

Services provided by related parties

 

From time 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, Inc. All professional services fee payable to Craig Marshak are paid to Triple Eight Markets, Inc. As compensation for professional services provided, the Company recognized consulting expenses of $30,000 and $0 for the three months ended 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 $123,500 and $6,000 for the nine months ended 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 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

 

The Company uses office space of affiliate companies, free of rent, which is considered immaterial.

 

Revenue from related party and cost of revenue from related party

 

On May 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.

 

In addition, 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 nine months ended 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:

 

   Three Months
Ended
June 30,
2019
   Three Months
Ended
June 30,
2018
   Nine Months
Ended
June 30,
2019
   Nine Months
Ended
June 30,
2018
 
Service provided to:                
FXDD Malta  $4,800,000   $4,800,000   $14,400,000   $14,400,000 
   $4,800,000   $4,800,000   $14,400,000   $14,400,000 

 

During the three and nine months ended 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:

 

13

 

 

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)

 

   Three Months
Ended
June 30,
2019
   Three Months
Ended
June 30,
2018
   Nine Months
Ended
June 30,
2019
   Nine Months
Ended
June 30,
2018
 
Service received from:                
FXDIRECT  $4,725,000   $4,725,000   $14,175,000   $14,175,000 
   $4,725,000   $4,725,000   $14,175,000   $14,175,000 

 

Due from affiliates

 

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

 

   June 30,
2019
   September 30,
2018
 
FXDD Malta  $-   $800 
NUKK Capital (1)   3,880    - 

FXDIRECT

   

151,160

    - 
   $155,040   $800 

 

(1)An entity controlled by Emil Assentato, the Company’s chief executive officer and chief financial officer.

 

The balance of due from related parties at June 30, 2019 amounted to $155,040, which represents investment – digital currency transferred to NUKK Capital and monies that the Company paid on behalf of 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 June 30, 2019 and September 30, 2018. The Company historically has not experienced uncollectible receivables from related parties.

 

Due to affiliates

 

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

 

   June 30,
2019
  September 30,
2018
Forexware LLC  $550,816   $300,700 
FXDIRECT   -      182,270 
CMH   47,000    -   
FXDD Malta   299,546    -   
   $897,362   $482,970 

   

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 by Forexware LLC and FXDIRECT. As of June 30, 2019, approximately $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.

  

14

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following discussion and analysis of our financial condition and results of operations for the three and nine months ended 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.

 

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.

 

These forward-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.

 

This discussion 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.

 

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.

 

As part 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 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.

 

In an 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.

 

We currently 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.

 

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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 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 and 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.

 

Critical Accounting Policies and Estimates

 

The preparation 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 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.

 

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.

 

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 gain 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.

 

The fair 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 ended June 30, 2019 versus the three and nine months ended June 30, 2018

 

Revenue and Cost of Revenue

 

Total revenue for the three months ended June 30, 2019 and 2018 was $4,800,000. Total revenue for the nine months ended June 30, 2019 and 2018 was $14,400,000. Revenue for the three and nine months ended June 30, 2019 and 2018 was from general support services rendered to a related party. 

 

Cost of revenue for the three months ended June 30, 2019 and 2018 was $4,725,000. Cost of revenue for the nine months ended June 30, 2019 and 2018 was $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. 

 

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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 June 30, 2019 versus the three months ended June 30, 2018, were $108,751 and $15,000, respectively. Compensation and related benefits for nine months ended June 30, 2019 versus the nine months ended June 30, 2018, were $235,104 and $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.

 

Bad debt expense

 

For the three and nine months ended June 30, 2019, we recorded a bad debt expense of $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 June 30, 2019 versus the three months ended June 30, 2018, were $127,953 versus $54,175, respectively. Total other general and administrative expenses for the nine months ended June 30, 2019 versus the nine months ended June 30, 2018, were $427,315 versus $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 recognized from investment - digital currency. Total other income, net, for the three months ended June 30, 2019 versus total other expense, net, for the three months ended June 30, 2018, was $92,788 versus $(1,510), respectively. The change was primarily due to an increase in unrealized gain on digital currency of approximately $94,000.

 

Total other income, net, for the nine months ended June 30, 2019 versus total other expense, net, for the nine months ended June 30, 2018, was $57,700 versus $(33,877), respectively. The change for the nine months ended June 30, 2019 as compared to the nine months ended June 30, 2018 was primarily due to an increase in unrealized gain recognized from digital currency asset of approximately $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.

 

As a 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 nine months ended June 30, 2019 decreased as compared to the three and nine months ended June 30, 2018, and our amount from amortization of debt discount for the three and nine months ended June 30, 2019 decreased as compared to the three and nine months ended June 30, 2018.

 

Net Loss

 

As a result of the factors described above, our net loss was $68,916, or $(0.00) per common share (basic and diluted), for the three months ended June 30, 2019. We reported net income of $4,315 for the three months ended 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 $419,719, or $(0.00) per common share (basic and diluted), for the nine months ended June 30, 2019. Our net loss was $192,844, or $(0.00) per common share (basic and diluted), for the nine months ended June 30, 2018.

 

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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, 2019 and September 30, 2018, we had cash balances of $8,832 and $257,637, respectively.

 

For the nine months ended June 30, 2019, although we incurred a net loss of $419,719, we had a net cash flow used in operating activities of $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.

   

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 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.

 

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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.

 

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

 

At June 30, 2019, there have been no material changes to the contractual obligations as set forth in our Annual Report on Form 10-K for the year ended September 30, 2018.

 

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, 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, 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.  

 

Item 5. Other

 

None.

 

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Part II - Other Information

 

Item 1. Legal Proceedings

 

We are 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.

 

Item 1A. Risk Factors

 

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.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

Exhibit    
Number   Description
3.1   Certificate of Amendment to the Certificate of Incorporation filed June 3, 2016 (2)
     
3.2   Statement of Designation, Powers, Preferences and Rights of Series A Preferred Stock (2)
     
3.3   Amended and Restated By-laws of Nukkleus Inc. (3)
     
4.1   Securities Purchase Agreement between Nukkleus Inc. and Currency Mountain Holdings Bermuda, Limited dated June 3, 2016 (2)
     
10.1   Asset Purchase Agreement dated May 24, 2016, by and between Nukkleus Inc., its majority shareholder Charms Investments Ltd., and its wholly-owned subsidiary, Nukkleus Limited and Currency Mountain Holdings Bermuda, Limited (1)
     
10.2   General Service Agreement between Nukkleus Limited and FML Malta Limited dated May 24, 2016 (4)

 

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10.3   General Service Agreement between Nukkleus Limited and FXDirectDealer LLC dated May 24, 2016 (1)
     
10.4   Stock Purchase Agreement dated May 27, 2016 among Nukkleus Inc., IBIH Limited, the shareholders of IBIH Limited and Currency Mountain Holdings LLC (2)
     
10.5   Amendment No. 1 dated June 2, 2016 to the Asset Purchase Agreement by and between Nukkleus Inc., its majority shareholder Charms Investments Ltd., and its wholly-owned subsidiary, Nukkleus Limited and Currency Mountain Holdings Bermuda, Limited (2)
     
10.6   Amendment No. 1 dated June 3, 2016 to the General Service Agreement between Nukkleus Limited and FXDD Trading Limited (2)
     
10.7   Letter Agreement between Nukkleus Inc. and IBIH Limited dated June 3, 2016 (2)
     
10.8   Director Agreement by and between Nukkleus Inc. and Craig Marshak dated August 1, 2016 (3)
     
10.9   Amendment dated October 17, 2017 of that certain General Service Agreement between Nukkleus Limited and FML Malta Limited (5)
     
10.10   Amendment dated October 17, 2017 of that certain General Service Agreement between Nukkleus Limited and FXDirectDealer LLC (5)
     
10.11   Settlement Agreement and Mutual Release between Nukkleus Inc., IBIH Limited, Terra (FX) Offshore Limited, Ludico Investments Limited, Currency Mountain Holdings LLC and the IBIH Shareholders dated November 17, 2017 (6)
     
10.12   Letter Agreement entered between FML Malta Ltd., FXDD Malta Limited and Nukkleus Limited (7)
     
10.13   Stock Redemption Agreement dated February 13, 2018 between Nukkleus Inc. and Currency Mountain Holdings Bermuda, Limited (8)
     
21.1   List of Subsidiaries (9)
     
31.1*   Rule 13a-14(a) Certification of the Chief Executive and Financial Officer
     
32.1*   Section 1350 Certification of Chief Executive and Financial Officer

 

101.INS   XBRL Instance *
     
101.SCH   XBRL Taxonomy Extension Schema *
     
101.CAL   XBRL Taxonomy Extension Calculation *
     
101.DEF   XBRL Taxonomy Extension Definition *
     
101.LAB   XBRL Taxonomy Extension Labeled *
     
101.PRE   XBRL Taxonomy Extension Presentation *

 

*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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SIGNATURES

 

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: August 19, 2019 By: /s/ Emil Assentato
    Emil Assentato
    Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial and Accounting officer) and Chairman

 

 

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