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, 20192020
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.date.
| Class | Outstanding August | |
| Common Stock, $0.0001 par value per share | 230,485,100 shares |
NUKKLEUS INC.
FORM 10-Q
June 30, 20192020
TABLE OF CONTENTS
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.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 | ||||
| As of | ||||||||
| June 30, 2020 | September 30, 2019 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | 55,207 | $ | 23,514 | ||||
| Prepaid expense | 17,065 | 6,664 | ||||||
| Due from affiliates | 921,992 | 3,880 | ||||||
| Investment - digital currency | 703 | 168,943 | ||||||
| TOTAL CURRENT ASSETS | 994,967 | 203,001 | ||||||
| TOTAL ASSETS | $ | 994,967 | $ | 203,001 | ||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Due to affiliates | $ | 1,932,919 | $ | 1,042,987 | ||||
| Accrued liabilities | 205,470 | 197,494 | ||||||
| Accrued liabilities - related party | - | 10,000 | ||||||
| Series A redeemable preferred stock liability at $10 stated value; 200,000 shares authorized; 25,000 shares issued and outstanding ($250,000 less discount of $2,118) at June 30, 2020 | 247,882 | - | ||||||
| TOTAL CURRENT LIABILITIES | 2,386,271 | 1,250,481 | ||||||
| OTHER LIABILITIES: | ||||||||
| Series A redeemable preferred stock liability at $10 stated value; 200,000 shares authorized; 25,000 shares issued and outstanding ($250,000 less discount of $3,835) at September 30, 2019 | - | 246,165 | ||||||
| TOTAL LIABILITIES | 2,386,271 | 1,496,646 | ||||||
| CONTINGENCY - (Note 8) | ||||||||
| STOCKHOLDERS’ DEFICIT: | ||||||||
| Preferred stock ($0.0001 par value; 14,800,000 shares authorized; 0 share issued and outstanding at June 30, 2020 and September 30, 2019) | - | - | ||||||
| Common stock ($0.0001 par value; 900,000,000 shares authorized; 230,485,100 shares issued and outstanding at June 30, 2020 and September 30, 2019) | 23,049 | 23,049 | ||||||
| Additional paid-in capital | 141,057 | 141,057 | ||||||
| Accumulated deficit | (1,555,410 | ) | (1,457,751 | ) | ||||
| TOTAL STOCKHOLDERS’ DEFICIT | (1,391,304 | ) | (1,293,645 | ) | ||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT | $ | 994,967 | $ | 203,001 | ||||
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
| For the Three Months | For the Three Months | For the Nine Months | For the Nine Months | For the Three Months | For the Three Months | For the Nine Months | For the Nine Months | |||||||||||||||||||||||||
| Ended | Ended | Ended | Ended | Ended | Ended | Ended | Ended | |||||||||||||||||||||||||
| June 30, 2019 | June 30, 2018 | June 30, 2019 | June 30, 2018 | June 30, 2020 | June 30, 2019 | June 30, 2020 | June 30, 2019 | |||||||||||||||||||||||||
| REVENUE | ||||||||||||||||||||||||||||||||
| Revenue | $ | - | $ | - | $ | -�� | $ | - | ||||||||||||||||||||||||
| Revenue - related party | 4,800,000 | 4,800,000 | 14,400,000 | 14,400,000 | $ | 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 | 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 | 75,000 | 75,000 | 225,000 | 225,000 | ||||||||||||||||||||||||
| OPERATING EXPENSES: | ||||||||||||||||||||||||||||||||
| Compensation and related benefits | 108,751 | 15,000 | 235,104 | 55,000 | 10,000 | 108,751 | 144,179 | 235,104 | ||||||||||||||||||||||||
| Bad debt expense | - | - | 40,000 | - | - | - | - | 40,000 | ||||||||||||||||||||||||
| Other general and administrative | 97,953 | 54,175 | 303,815 | 322,967 | 52,222 | 97,953 | 192,062 | 303,815 | ||||||||||||||||||||||||
| Other general and administrative - related party | 30,000 | - | 123,500 | 6,000 | - | 30,000 | - | 123,500 | ||||||||||||||||||||||||
| Total operating expenses | 236,704 | 69,175 | 702,419 | 383,967 | 62,222 | 236,704 | 336,241 | 702,419 | ||||||||||||||||||||||||
| (LOSS) INCOME FROM OPERATIONS | (161,704 | ) | 5,825 | (477,419 | ) | (158,967 | ) | |||||||||||||||||||||||||
| INCOME (LOSS) FROM OPERATIONS | 12,778 | (161,704 | ) | (111,241 | ) | (477,419 | ) | |||||||||||||||||||||||||
| OTHER EXPENSE: | ||||||||||||||||||||||||||||||||
| OTHER INCOME (EXPENSE): | ||||||||||||||||||||||||||||||||
| Interest expense on redeemable preferred stock | (937 | ) | (938 | ) | (2,812 | ) | (6,917 | ) | (938 | ) | (937 | ) | (2,813 | ) | (2,812 | ) | ||||||||||||||||
| Amortization of debt discount | (572 | ) | (572 | ) | (1,717 | ) | (26,960 | ) | (572 | ) | (572 | ) | (1,717 | ) | (1,717 | ) | ||||||||||||||||
| Unrealized gain on digital currency | 94,297 | - | 62,229 | - | ||||||||||||||||||||||||||||
| Gain on digital currency | 224 | 94,297 | 18,112 | 62,229 | ||||||||||||||||||||||||||||
| Total other income (expense), net | 92,788 | (1,510 | ) | 57,700 | (33,877 | ) | ||||||||||||||||||||||||||
| Total other (expense) income, net | (1,286 | ) | 92,788 | 13,582 | 57,700 | |||||||||||||||||||||||||||
| (LOSS) INCOME BEFORE INCOME TAXES | (68,916 | ) | 4,315 | (419,719 | ) | (192,844 | ) | |||||||||||||||||||||||||
| INCOME (LOSS) BEFORE INCOME TAXES | 11,492 | (68,916 | ) | (97,659 | ) | (419,719 | ) | |||||||||||||||||||||||||
| INCOME TAXES | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| NET (LOSS) INCOME | $ | (68,916 | ) | $ | 4,315 | $ | (419,719 | ) | $ | (192,844 | ) | |||||||||||||||||||||
| NET INCOME (LOSS) | $ | 11,492 | $ | (68,916 | ) | $ | (97,659 | ) | $ | (419,719 | ) | |||||||||||||||||||||
| NET (LOSS) INCOME PER COMMON SHARE: | ||||||||||||||||||||||||||||||||
| NET INCOME (LOSS) PER COMMON SHARE: | ||||||||||||||||||||||||||||||||
| Basic | $ | (0.00 | ) | $ | 0.00 | $ | (0.00 | ) | $ | (0.00 | ) | $ | 0.00 | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.00 | ) | ||||||||||
| Diluted | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.00 | ) | $ | 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 | 230,485,100 | 230,485,100 | 230,485,100 | 230,485,100 | ||||||||||||||||||||||||
| Diluted | 230,485,100 | 231,735,100 | 230,485,100 | 234,732,309 | 231,735,100 | 230,485,100 | 230,485,100 | 230,485,100 | ||||||||||||||||||||||||
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’ DEFICIT
For the Three and Nine Months Ended June 30, 2020 and 2019
| Preferred Stock | Common Stock | Additional | Total | |||||||||||||||||||||||||
| Number of | Number of | Paid-in | Accumulated | Stockholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||||||||
| Balance as of October 1, 2019 | - | $ | - | 230,485,100 | $ | 23,049 | $ | 141,057 | $ | (1,457,751 | ) | $ | (1,293,645 | ) | ||||||||||||||
| Net loss for the three months ended December 31, 2019 | - | - | - | - | - | (45,301 | ) | (45,301 | ) | |||||||||||||||||||
| Balance as of December 31, 2019 | - | $ | - | 230,485,100 | $ | 23,049 | $ | 141,057 | $ | (1,503,052 | ) | $ | (1,338,946 | ) | ||||||||||||||
| Net loss for the three months ended March 31, 2020 | - | - | - | - | - | (63,850 | ) | (63,850 | ) | |||||||||||||||||||
| Balance as of March 31, 2020 | - | $ | - | 230,485,100 | $ | 23,049 | $ | 141,057 | $ | (1,566,902 | ) | $ | (1,402,796 | ) | ||||||||||||||
| Net income for the three months ended June 30, 2020 | - | - | - | - | - | 11,492 | 11,492 | |||||||||||||||||||||
| Balance as of June 30, 2020 | - | $ | - | $ | 230,485,100 | $ | 23,049 | $ | 141,057 | $ | (1,555,410 | ) | $ | (1,391,304 | ) | |||||||||||||
| Preferred Stock | Common Stock | Additional | Total | |||||||||||||||||||||||||
| Number of | Number of | Paid-in | Accumulated | Stockholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||||||||
| Balance as of October 1, 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 as of 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 as of 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 as of June 30, 2019 | - | $ | - | $ | 230,485,100 | $ | 23,049 | $ | 141,057 | $ | (1,147,357 | ) | $ | (983,251 | ) | |||||||||||||
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’ DEFICITCASH FLOWS
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 | ) | ||||||||||||||
| For the Nine Months | For the Nine Months | |||||||
| Ended | Ended | |||||||
| June 30, 2020 | June 30, 2019 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (97,659 | ) | $ | (419,719 | ) | ||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
| Amortization of debt discount | 1,717 | 1,717 | ||||||
| Gain on digital currency | (18,112 | ) | (62,229 | ) | ||||
| Bad debt expense | - | 40,000 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Prepaid expense | (10,401 | ) | (1 | ) | ||||
| Due from affiliates | (714,563 | ) | (150,360 | ) | ||||
| Due to affiliates | 872,735 | 414,392 | ||||||
| Accrued liabilities | 7,976 | 21,395 | ||||||
| Accrued liabilities - related party | (10,000 | ) | - | |||||
| Net cash provided by (used in) operating activities | 31,693 | (154,805 | ) | |||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of digital currency | - | (94,000 | ) | |||||
| Net cash used in investing activities | - | (94,000 | ) | |||||
| NET INCREASE (DECREASE) IN CASH | 31,693 | (248,805 | ) | |||||
| Cash - beginning of period | 23,514 | 257,637 | ||||||
| Cash - end of period | $ | 55,207 | $ | 8,832 | ||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
| Cash paid for: | ||||||||
| Interest | $ | - | $ | - | ||||
| Income taxes | $ | - | $ | - | ||||
| NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
| Investment - digital currency received from affiliate | $ | 17,197 | $ | - | ||||
| Investment - digital currency transferred to affiliate | $ | 203,549 | $ | 3,880 | ||||
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
| 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.
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 theThe 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 thata financial technology company which is owned by Emil Assentato, the Company’s Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”) and Chairman. In addition,focused 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,providing software and other assets (collectively,technology solutions for 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 aworldwide retail foreign exchange (“FX”) trading business utilizing the assets acquired from CMH.
On May 24, 2016, Nukkleus Limited entered into a General Service Agreement to provideindustry. The Company primarily provides 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. The FXDD brand (e.g., see FXDD.com) is the brand utilized in drafting the General Service Agreement and acknowledging that the correct counter-party to retail forex trading industry by FXDD Malta.
Nukkleus Limited, ina wholly-owned subsidiary of the Company, provides its software, technology, customer sales and marketing and risk management technology hardware and software solutions package under a General ServiceServices Agreement is FXDD Malta. Accordingly, all references(“GSA”) 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 AgreementGSA 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, who is our Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”) and chairman, 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 AgreementGSA with FXDirectDealer LLC (“FXDIRECT”), which provides that Nukkleus Limited will pay FXDIRECT a minimum of $1,975,000$1,575,000 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 SUBSIDIARIESNOTES 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., which is 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 creatingcurrently exploring obtaining a license to operate 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,Trading. The Company’s affiliates have created the electronic exchange that may be used by Nukkleus Exchange Malta Ltd. is in, however, as 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 ofCompany does not believe obtaining a license to operate the exchange will be feasible, the affiliates are searching for alternate uses for the exchange and as such have not sold or transferred the exchange to the Company upon completion. Both entities would be regulated by the Malta Financial Services Authority.Company.
The unaudited condensed 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 a net loss for the nine months ended June 30, 20192020 of $419,719$97,659, and had an accumulated deficit and a working capital deficit of $737,659$1,555,410 and $1,391,304, respectively, at June 30, 2019. Our2020. The Company’s 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.
In March 2020, the World Health Organization declared the outbreak of a novel coronavirus (“COVID-19”) as a pandemic, which continues to spread throughout the United States. The ultimate extent of the impact of COVID-19 on the financial performance of the Company will depend on future developments, including the duration and spread of COVID-19, and the overall economy, all of which are highly uncertain and cannot be predicted. If the financial markets and/or the overall economy are impacted for an extended period, the Company’s operating results may be materially and adversely affected.
We need to either borrow funds or raise additionalcannot be certain that such necessary capital through equity or debt financings. However, we cannot be certain that such capital (from our shareholders or third parties)financings 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 weIn the event that there are unableany unforeseen delays or obstacles in obtaining funds through the aforementioned sources, Currency Mountain Holdings Bermuda, Limited (“CMH”), which is wholly-owned by an entity that is majority-owned by Mr. Assentato, has committed to raise sufficient additionalinject capital on acceptable terms, we will have insufficient fundsinto the Company in order to operate our business or pursue our planned growth.maintain the ongoing operations of the business.
5
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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”)of America (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, 20182019 filed with the Securities and Exchange Commission on December 20, 2018.January 14, 2020. The consolidated balance sheet as of September 30, 20182019 contained herein has been derived from the audited consolidated financial statements as of September 30, 2018,2019, but does not include all disclosures required by U.S. GAAP.
NUKKLEUS INC. AND SUBSIDIARIESNOTES 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, 2020 and 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 and 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 reportedCompany holds investments in digital currency, consisting of Bitcoins and Ethereum. The Company initially records its investments at cost, and then revalues such assets at every reporting period and recognizes gain or loss as unrealized gain (loss) on digital currency that are attributable to the change in the fair value of the digital currency. Unrealized gains and losses and realized gains and losses recognized upon the sale or transfer of the investments in digital currency are netted and recognized within gain on digital currency on the unaudited 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 naturestatements of these assets and liabilities.
operations. 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 assetsUSD and areis included in current assets. The Company revalues such assets at every reporting periodequivalency rates obtained represent a generally well recognized quoted price in active markets for Bitcoin and recognizes gain or loss as unrealized gain on digital currency, net, onEthereum. The current guidance in U.S. GAAP does not directly address the consolidated statementsaccounting for cryptocurrencies.
6
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Fair value of operations that are attributable to the change in thefinancial instruments and fair value of the digital currency.measurements (continued)
The following table providestables provide the financial assets measured on a recurring basis and reported at fair value on the balance sheetsheets as of June 30, 2020 and September 30, 2019:
| Fair value measurement using | ||||||||||||||||||||
| Carrying value | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
| Investment - digital currency | $ | 152,349 | $ | 152,349 | $ | - | $ | - | $ | 152,349 | ||||||||||
| Fair value measurement using | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total at June 30, 2020 | |||||||||||||
| Investment - digital currency | $ | 703 | $ | - | $ | - | $ | 703 | ||||||||
| Fair value measurement using | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total at September 30, 2019 | |||||||||||||
| Investment - digital currency | $ | 168,943 | $ | - | $ | - | $ | 168,943 | ||||||||
The investment in digital currency hashad a cost of $90,120$137,223 net of fee, unrealizedfees, and a fair value of $168,943 at September 30, 2019. The Company recognized a gain of $224 and $94,297 for the three months ended June 30, 2020 and 2019, respectively. The Company recognized a gain of $18,112 and $62,229 for the nine months ended June 30, 2020 and 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.respectively. During the nine months ended June 30, 2019,first quarter of fiscal 2020, the Company transferred $3,880substantially all of its investment in digital currency to aaffiliates related party. through common ownership.
The Company did not have any financial asset measured atcarrying values of cash, prepaid expense, due from affiliates, due to affiliates, and accrued liabilities in the Company’s condensed consolidated balance sheets approximated their fair value on a recurring basis on the balance sheetvalues as of June 30, 2020 and September 30, 2018.
2019 due to their short-term nature.
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, 20192020 and September 30, 2018,2019, the Company’s cash balances accounts had approximately $0 and $8,000were not 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 SUBSIDIARIESNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSlimits.
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,For all periods presented, the Company signed an agreement with a third-party for the customizationearned 100% of its revenue from FXDD Malta and developmentincurred 100% of a trading platform to be used by it. In accordance with the signed agreement, the Company made a deposit on software developmentits cost of $50,000. The project was cancelled in the third quarter of fiscal 2018revenue from FXDIRECT. Both FXDD Malta 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.FXDIRECT are related parties.
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 adjustmentaccounts for revenue under the modified retrospective methodprovisions 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.ASC Topic 606. The nature of the Company’s contractscontract with customersits customer relates to the Company’s services performed for a related party under a General Service Agreement (“GSA”).GSA.
The transaction price is determined in accordance with the terms of the GSA and payments are due on a monthly basis. 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 whenover time as the services are completedrendered 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 SUBSIDIARIESNOTES 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, 20192020 and 2018,2019, 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 | ) | |||||
97
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Per share data (continued)
The following is a reconciliation of the basic and diluted net income (loss) per share computations for the three and nine months ended June 30, 2020 and 2019:
Basic net income (loss) per share
| Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Nine Months Ended June 30, 2020 | Nine Months Ended June 30, 2019 | |||||||||||||
| Net income (loss) available to common stockholders for basic net income (loss) per share of common stock | $ | 11,492 | $ | (68,916 | ) | $ | (97,659 | ) | $ | (419,719 | ) | |||||
| Weighted average common stock outstanding - basic | 230,485,100 | 230,485,100 | 230,485,100 | 230,485,100 | ||||||||||||
| Net income (loss) per share: | ||||||||||||||||
| Basic | $ | 0.00 | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.00 | ) | |||||
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 | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Nine Months Ended June 30, 2020 | Nine Months Ended June 30, 2019 | |||||||||||||||||||||||||
| 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 | ) | |||||||||||||||||||||
| Net income (loss) available to common stockholders for basic net income (loss) per share of common stock | $ | 11,492 | $ | (68,916 | ) | $ | (97,659 | ) | $ | (419,719 | ) | |||||||||||||||||||||
| Add: interest expense for redeemable preferred stock | - | 938 | - | - | 938 | - | - | - | ||||||||||||||||||||||||
| Subtract: unamortized debt discount for redeemable preferred stock | - | (6,697 | ) | - | - | (2,118 | ) | - | - | - | ||||||||||||||||||||||
| Net loss available to common stockholders for diluted net loss per share of common stock | (68,916 | ) | (1,444 | ) | (419,719 | ) | (192,844 | ) | ||||||||||||||||||||||||
| Net income (loss) available to common stockholders for diluted net income (loss) per share of common stock | $ | 10,312 | $ | (68,916 | ) | $ | (97,695 | ) | $ | (419,719 | ) | |||||||||||||||||||||
| Weighted average common stock outstanding - basic | 230,485,100 | 230,485,100 | 230,485,100 | 234,732,309 | 230,485,100 | 230,485,100 | 230,485,100 | 230,485,100 | ||||||||||||||||||||||||
| Effect of dilutive securities: | ||||||||||||||||||||||||||||||||
| Series A preferred stock | - | 1,250,000 | - | - | 1,250,000 | - | - | - | ||||||||||||||||||||||||
| Weighted average common stock outstanding - diluted | 230,485,100 | 231,735,100 | 230,485,100 | 234,732,309 | 231,735,100 | 230,485,100 | 230,485,100 | 230,485,100 | ||||||||||||||||||||||||
| Net loss per common share – diluted | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.00 | ) | ||||||||||||||||||||
| Net income (loss) per share: | ||||||||||||||||||||||||||||||||
| Diluted | $ | 0.00 | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.00 | ) | |||||||||||||||||||||
For the nine months ended June 30, 2020 and 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.
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,Effective October 1, 2019, the FASB issuedCompany adopted ASU No. 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-BasedShare- 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. ThisThe adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (“Topic 326”). The ASU introduces a new accounting model, the Current Expected Credit Losses model (“CECL”), which requiresearlier recognition of credit losses and additional disclosures related to credit risk. The CECL model utilizes a lifetime expected credit loss measurement objective for the recognition of credit losses at the time the financial asset is originated or acquired. ASU 2016-13 is effective for fiscal yearsannual period beginning after December 15, 2018,2022, including interim reporting 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.annual reporting periods. The Company expects that the adoption will evaluate the effects of adopting ASU 2018-07 if and when it is deemed to be applicable.not have a material impact on its consolidated financial statements.
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, 20192020 and September 30, 2018,2019, accrued liabilities consisted of the following:
| June 30, 2019 | September 30, 2018 | June 30, 2020 | September 30, 2019 | |||||||||||||
| Professional fees | $ | 52,478 | $ | 44,728 | $ | 48,641 | $ | 73,478 | ||||||||
| Directors’ compensation | 80,537 | 70,000 | 120,538 | 90,537 | ||||||||||||
| Interest payable | 30,542 | 27,729 | 34,291 | 31,479 | ||||||||||||
| Other | 295 | - | 2,000 | 2,000 | ||||||||||||
| $ | 163,852 | $ | 142,457 | |||||||||||||
| Total | $ | 205,470 | $ | 197,494 | ||||||||||||
NOTE 5 – SHARE CAPITAL
Authorized sharesPreferred stock
The CompanyCompany’s Board of Directors is authorized to issue, 900,000,000 shares of common stock at par value of $0.0001 andany time, without further stockholder approval, up to 15,000,000 shares of Series A preferred stock at par valuestock. The Board of $0.0001.Directors has the authority to fix and determine the voting rights, rights of redemption and other rights and preferences of preferred stock.
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
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 |
| 4) | The Series A preferred stock is non-voting. However, without the affirmative vote of the holders of the shares of the Series A preferred stock then outstanding, the Company may not alter or change adversely the powers, preferences or rights given to the Series A preferred stock or alter or amend the Certificate of Designation except to the extent that such vote relates to the amendment of the Certificate of Designation; |
| 5) | The holders of the Series A preferred stock are not entitled to receive any preference upon the liquidation, dissolution or winding up of the business of the Company. Each holder of Series A preferred stock shall share ratably with the holders of the common stock of the Company. |
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 both the three months ended June 30, 20192020 and 2018,2019, amortization of debt discount amounted to $572 and $572, respectively.$572. For both the nine months ended June 30, 20192020 and 2018,2019, amortization of debt discount amounted to $1,717 and $26,960, respectively.
NUKKLEUS INC. AND SUBSIDIARIESNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 – SHARE CAPITAL (continued)
Common stock and Series A preferred stock sold for cash (continued)$1,717.
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, 20192020 and 2018,2019, dividends on redeemable preferred stock amounted to $937$938 and $938,$937, respectively. For the nine months ended June 30, 20192020 and 2018,2019, dividends on redeemable preferred stock amounted to $2,813 and $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, 20192020 and September 30, 2018,2019, 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 | ||||
NUKKLEUS INC. AND SUBSIDIARIESNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| June 30, 2020 | September 30, 2019 | |||||||
| Redeemable preferred stock (stated value) | $ | 250,000 | $ | 250,000 | ||||
| Less: unamortized debt discount | (2,118 | ) | (3,835 | ) | ||||
| Redeemable preferred stock, net | $ | 247,882 | $ | 246,165 | ||||
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$0 and $0$30,000 for the three months ended June 30, 20192020 and 2018,2019, respectively, which have been included in general and administrative expense – related party on the accompanying unaudited condensed consolidated statements of operations. The Company recognized consulting expenses of $123,500$0 and $6,000$123,500 for the nine months ended June 30, 20192020 and 2018,2019, respectively, which have been included in general and administrative expense – related party on the accompanying unaudited condensed consolidated statements of operations.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 – RELATED PARTY TRANSACTIONS (continued)
Services provided by related parties (continued)
As of June 30, 2020 and September 30, 2019, the accrued and unpaid services charge related to Craig Marshak amounted to $0 and $10,000, respectively, which have been included in accrued liabilities – related party on the accompanying condensed 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
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, theThe Company entered intooperates under a General Service AgreementGSA 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, theThe minimum monthly 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 Assentatoreceived 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.$1,600,000.
In addition, on May 24, 2016, theThe Company entered intooperates under a General Service AgreementGSA 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, theThe minimum monthly 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.$1,575,000.
Both of the above entities are affiliates through common ownership.
During the three and nine months ended June 30, 2020 and 2019, and 2018, serviceservices provided to the related party, which was recorded as revenue - related party on the accompanying unaudited condensed consolidated statements of operations waswere 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 | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Nine Months Ended June 30, 2020 | Nine Months Ended June 30, 2019 | |||||||||||||||||||||||||
| 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 | ||||||||||||||||
| $ | 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, 2020 and 2019, and 2018, serviceservices received from the related party, which was recorded as cost of revenue - related party on the accompanying unaudited condensed consolidated statements of operations waswere as follows:
| Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Nine Months Ended June 30, 2020 | Nine Months Ended June 30, 2019 | |||||||||||||
| 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 | |||||||||
��
11
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, 20192020 and September 30, 2018,2019, 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 | |||||
| June 30, 2020 | September 30, 2019 | |||||||
| NUKK Capital (*) | $ | 143,776 | $ | 3,880 | ||||
| FXDD Malta | 778,216 | - | ||||||
| $ | 921,992 | $ | 3,880 | |||||
| An entity controlled by Emil Assentato, the Company’s chief executive officer, |
The balances of due from NUKK Capital represent investment in digital currency transferred to NUKK Capital. The balance of due from FXDD Malta represent unsettled funds due related parties at June 30, 2019 amounted to $155,040, which represents investment – digital currency transferred to NUKK Capitalthe General Services Agreement 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 accountsaccount is deemed to be required on its due from related parties at June 30, 20192020 and September 30, 2018.2019. The Company historically has not experienced uncollectible receivablesreceivable from the related parties.
Due to affiliates
At June 30, 20192020 and September 30, 2018,2019, 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 | |||||
| June 30, 2020 | September 30, 2019 | |||||||
| Forexware LLC | $ | 570,271 | $ | 570,271 | ||||
| FXDIRECT | 1,320,177 | 67,056 | ||||||
| CMH | 42,000 | 42,000 | ||||||
| FXDD Malta | - | 320,129 | ||||||
| FXDD Trading (*) | 471 | 43,185 | ||||||
| FXMarkets (*) | - | 346 | ||||||
| Total | $ | 1,932,919 | $ | 1,042,987 | ||||
| (*) | FXDD Trading and FXMarkets are both controlled by Emil Assentato, the Company’s chief executive officer, chief financial officer and chairman. |
The balances of due to related parties represent expenses paid by Forexware LLC, FXDIRECT, FXDD Malta, FXDD Trading, and FXDIRECTFXMarkets on behalf of the Company and advances from CMH. The balances due to FXDIRECT and FXDD Malta may also include unsettled funds due related to the General Service Agreement. The balances due to Forexware LLCFXDD Malta and FXDD Trading also include costs for creation an electronic exchange paid by it.
the value of transferred digital assets.
The related parties’ payables are short-term in nature, non-interest bearing, unsecured and repayable on demand.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Costs for creation an electronic exchange paid by related partiesNOTE 7 – INCOME TAXES
The Company is creating an electronic exchange whereby it facilitatesrecorded no income tax expense for the buyingthree and selling of various digital assets as well as traditional currency pairs used in FX trading. Currently,nine months ended June 30, 2020 and 2019 because the Company is in the process of finalizing the exchange and such costs have been paid by Forexware LLC and FXDIRECT.estimated annual effective tax rate was zero. As of June 30, 2019, approximately $1.1 million has been incurred2020, 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.
NOTE 8 – CONTINGENCY
On April 16, 2020, the Company was named as a defendant in the Adversary Proceeding filed in the United States Bankruptcy Court for the District of Massachusetts (Case No. 15-10745-FJB; Adversary Proceeding No. 16-01178) titled In re: BT Prime Ltd (“BT Prime”). The Adversary Proceeding is brought by our related partiesBT Prime against Boston Technologies Powered by Forexware LLC f/k/a Forexware LLC (“Forexware”), Currency Mountain Holdings LLC, Currency Mountain Holdings Limited f/k/a Forexware Malta Holdings Ltd., FXDirectDealer, LLC, FXDD Malta Ltd., Nukkleus Inc., Nukkleus Bermuda Limited and ownershipCurrency Mountain Holdings Bermuda, Ltd. In the Amended Complaint, BT Prime is seeking, amongst other relief, a determination that the Company and the other defendants are liable for all of the exchange will bedebts of BT Prime stemming from its bankruptcy proceedings, and is seeking to recover certain amounts transferred to Forexware and FXDD Malta prior to the initiation of the bankruptcy case. In the sole claim asserted against the Company, upon completion.BT Prime alleges that the Company operated as a single business enterprise with no separate existence outside of its collective business relationship with certain of the other Defendants, is a continuation of the business of Forexware and is a successor-in-interest to Forexware. Based on this theory, BT Prime alleges that the Company should be jointly and severally liable for any liability attributable to Forexware or the other Defendants, should the Court eventually find any such liability. The Company maintains that there is no basis for BT Prime’s claim against it and intends to vigorously defend against the claim.
NOTE 79 – 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.
The following discussion and analysis of our financial condition and results of operations for the three and nine months ended June 30, 20192020 and 20182019 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 becauseOn March 11, 2020, the contextWorld Health Organization announced that infections of the statementcoronavirus COVID-19 had become pandemic, and on March 13, the U.S. President announced a National Emergency relating to the disease. There is a possibility of widespread infection in the United States and abroad. National, state and local authorities have imposed social distancing, quarantine and isolation measures on large portions of the population, including mandatory business closures. These measures, while intended to protect human life, are expected to have serious adverse impacts on domestic and foreign economies of uncertain severity and duration. The effectiveness of economic stabilization efforts, including government payments to affected citizens and industries, is uncertain.
The sweeping nature of the coronavirus pandemic makes it extremely difficult to predict how our business and operations will include words suchbe affected in the long term, though the likely overall economic impact of the pandemic is viewed as highly negative to the general economy. Although we “believe,” “anticipate,” “expect,” “estimate” or wordsare continuing to monitor and assess the effects of similar meaning. Similarly, statements that describethe coronavirus pandemic on our future plans, objectives or goals are also forward-looking statements. Such forward-looking statements arebusiness, the ultimate impact is highly uncertain and subject to certain risks and uncertainties which are described in close proximity tochange. The duration of any 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.impact cannot be predicted.
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”).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 acquiredWe have 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”),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.
In July 2018, the Companywe incorporated Nukkleus Malta Holding Ltd., which is 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 creatingwe are currently exploring obtaining a license to operate 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,Trading. Our affiliates have created the electronic exchange that may be used by 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, however, as we do not believe obtaining a license to operate the exchange will be feasible, the affiliates are searching for alternate uses for the exchange and as such have not sold or transferred the exchange to the Company upon completion. Both entities would be regulated by the Malta Financial Services Authority.us.
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.
CriticalThe accounting policiesestimates and assumptions discussed in this section are those that require applicationwe consider to be the most critical to an understanding of management’s most subjective or complexour unaudited condensed consolidated financial statements because they inherently involve significant 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.uncertainties.
Investment – digital currency
Digital currency consists of cryptocurrency denominated assets and are included in current assets. InvestmentThe Company holds investments in digital currency, is carriedconsisting of Bitcoins and Ethereum. The Company initially records its investments at fair market value. Unrealizedcost, and then revalues such assets at every reporting period and recognizes gain or loss resulting fromas unrealized gain (loss) on digital currency that are attributable to the change in the fair value of the digital currency. Unrealized gains and losses and realized gains and losses recognized upon the sale or transfer of the investments in digital currency is recorded in unrealizedare netted and recognized within gain on digital currency on the unaudited condensed 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.USD and is included in current assets. The Company revalues such asset at every reporting periodequivalency rates obtained represent a generally well recognized quoted price in active markets for Bitcoin and recognizes gain or loss as realized/unrealized gain/loss on digital currency onEthereum. The current guidance in U.S. GAAP does not directly address the consolidated statements of operations that are attributable to the change in the fair value of the digital currency.accounting for cryptocurrencies.
Results of Operations
Summary of Key Results
For the three and nine months ended June 30, 20192020 versus the three and nine months ended June 30, 20182019
Revenue and Cost of Revenue
Total revenueRevenue for both of the three months ended June 30, 20192020 and 20182019 was $4,800,000. Total revenueRevenue for both of the nine months ended June 30, 20192020 and 20182019 was $14,400,000. Revenue for the three and nine months ended June 30, 20192020 and 20182019 was from general support services rendered to a related party. FXDD Malta.
Cost of revenue for both of the three months ended June 30, 20192020 and 20182019 was $4,725,000. Cost of revenue for both of the nine months ended June 30, 20192020 and 20182019 was $14,175,000. Cost of revenue for the three and nine months ended June 30, 2020 and 2019 and 2018 representsrepresented amount incurred for general support services rendered by a related party. FXDIRECT.
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, 20192020 versus the three months ended June 30, 2018,2019 were $108,751$10,000 and $15,000,$108,751, respectively. Compensation and related benefits for the nine months ended June 30, 20192020 versus the nine months ended June 30, 2018,2019 were $235,104$144,179 and $55,000,$235,104, respectively. The significant increasesignature decrease was primarily attributable to an increase in compensation and related benefits incurred for an employee who we hireda decrease in the first quarternumber of fiscal 2019.our employees.
Bad debt expense
For the three months ended June 30, 2020 and 2019, we did not record any bad debt expense. For the nine months ended June 30, 2020 and 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-partythird party and related party professional fees and travel expense.fees.
Total other general and administrative expenses for the three months ended June 30, 20192020 versus the three months ended June 30, 2018,2019, were $127,953$52,222 versus $54,175,$127,953, respectively. Total other general and administrative expenses for the nine months ended June 30, 20192020 versus the nine months ended June 30, 2018,2019, were $427,315$192,062 versus $328,967,$427,315, respectively. The increasesignature decrease was mainly due to the increasedecrease in the use of third party and related party professional services providers.
Other ExpenseIncome (Expense)
Other (income) expense, net,income (expense) includes interest expense on redeemable preferred stock, amortization of debt discount, and unrealized gain recognized from investment -– digital currency.
Total other expense, net, for the three months ended June 30, 2020 versus total other income, net, for the three months ended June 30, 2019, was $(1,286) 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, 20192020 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$13,582 versus $57,700, respectively. The change for the three and nine months ended June 30, 2019 decreased2020 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 comparedwas mainly due to the three and nine months ended June 30, 2018.gain recognized from digital currency asset.
Net Loss
As a result of the factors described above, our net income was $11,492, or $0.00 per common share (basic and diluted), for the three months ended June 30, 2020. Our net loss was $68,916,$(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 $419,719,$(97,659), or $(0.00) per common share (basic and diluted), for the nine months ended June 30, 2019.2020. Our net loss was $192,844,$(419,719), or $(0.00) per common share (basic and diluted), for the nine months ended June 30, 2018.
2019.
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, 20192020 and September 30, 2018,2019, we had cash balances of $8,832$55,207 and $257,637,$23,514, respectively.
For the nine months ended June 30, 2019,2020, although we incurred a net loss of $419,719,$97,659, we had a net cash flow used inprovided by operating activities of $154,805.
$31,693.
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 shareholderCMH 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 inprovided by operating activities was $154,805$31,693 for the nine months ended June 30, 2019.2020. 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 inapproximately $146,000, offset by net loss offset by changes in operating assetsof approximately $98,000 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 purchasednon-cash item mainly consisting of a gain on digital currency of $94,000.approximately $18,000.
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.services. The following trends are reasonably likely to result in a material decrease in our liquidity over the near to long term:
| ● | The working capital requirements to finance our current business; |
| ● | The use of capital for mergers, acquisitions and the development of business opportunities; |
| ● | Addition of personnel as the business grows; and |
| ● | The cost of being a public company. |
We need to either borrow funds or raise additional capital through equity or debt financings. However, we cannot be certain that such capital (from our stockholders or third parties) will be available to us or whether such capital will be available on terms that are acceptable to us. Any such financing likely would be dilutive to existing stockholders and could result in significant financial operating covenants that would negatively impact our business. If we are unable to raise sufficient additional capital on acceptable terms, we will have insufficient funds to operate our business or pursue our planned growth.
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, 2019,2020, 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, 2018.2019.
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 toWe are a “smallersmaller reporting company”company as defined in Item 10(f)(1)Rule 12b-2 of SEC Regulation S-K.the Exchange Act and are not required to provide the information required under this item.
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, 2019,2020, 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”)CEO and our Chief Financial Officer (“CFO”)CFO is the same person.
During evaluation of disclosure controls and procedures as of June 30, 2019,2020, 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.
None.
From time to time, we are subject to ordinary routine litigation incidental to our normal business operations. We are not currently a party to any legal proceedings. Management is not aware of anymaterial 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 operatingexcept as set forth below.
On April 16, 2020, the Company was named as a defendant in the ordinary courseAdversary Proceeding filed in the United States Bankruptcy Court for the District of Massachusetts (Case No. 15-10745-FJB; Adversary Proceeding No. 16-01178) titled In re: BT Prime Ltd (“BT Prime”). The Adversary Proceeding is brought by BT Prime against Boston Technologies Powered by Forexware LLC f/k/a Forexware LLC (“Forexware”), Currency Mountain Holdings LLC, Currency Mountain Holdings Limited f/k/a Forexware Malta Holdings Ltd., FXDirectDealer, LLC, FXDD Malta Ltd., Nukkleus Inc., Nukkleus Bermuda Limited and Currency Mountain Holdings Bermuda, Ltd. In the Amended Complaint, BT Prime is seeking, amongst other relief, a determination that the Company and the other defendants are liable for all of the debts of BT Prime stemming from its bankruptcy proceedings, and is seeking to recover certain amounts transferred to Forexware and FXDD Malta prior to the initiation of the bankruptcy case. In the sole claim asserted against the Company, BT Prime alleges that the Company operated as a single business enterprise with no separate existence outside of its collective business relationship with certain of the other Defendants, is a continuation of the business of Forexware and is a successor-in-interest to Forexware. Based on this theory, BT Prime alleges that the Company should be jointly and severally liable for any liability attributable to Forexware or the other Defendants, should the Court eventually find any such liability. The Company maintains that there is no basis for BT Prime’s claim against it and intends to vigorously defend against the claim.
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.
None.
| 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 |
| Incorporated by reference to the Form 10Q Quarterly Report filed with the SEC on February 13, 2018. |
| Incorporated by reference to the Form 10Q Quarterly Report filed with the SEC on August 13, 2018. |
20
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 | By: | /s/ Emil Assentato |
| Emil Assentato | ||
| Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial and Accounting | ||
2221