Attached files
| file | filename |
|---|---|
| EX-32.1 - EXHIBIT 32.1 - Nukkleus Inc. | s110062_ex32-1.htm |
| EX-31.1 - EXHIBIT 31.1 - Nukkleus Inc. | s110062_ex31-1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
| ☒ | QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2018
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, NJ 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 ☐
(Does not currently apply to the Registrant)
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 | ☐ (Do not check if a smaller reporting company) | 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 ☒
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date.
| Class | Outstanding May 11, 2018 | |
| Common Stock, $0.0001 par value per share | 230,485,100 shares |
NUKKLEUS INC.
FORM 10-Q
March 31, 2018
TABLE OF CONTENTS
FORWARD LOOKING STATEMENTS
This report contains forward-looking statements regarding our business, financial condition, results of operations and prospects. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not deemed to represent an all-inclusive means of identifying forward-looking statements as denoted in this report. Additionally, statements concerning future matters are forward-looking statements.
Although forward-looking statements in this report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those specifically addressed under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our annual report on Form 10-K, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-Q and information contained in other reports that we file with the SEC. You are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this report.
We file reports with the SEC. The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us. You can also read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this report, except as required by law. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this quarterly report, which are designed to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.
Unless otherwise indicated, references in this report to the “Company”, “Nukkleus”, “we”, “us”, or “our” refer to Nukkleus Inc. and its consolidated subsidiary.
PART I - FINANCIAL INFORMATION
Item 1. Interim Financial Statements.
NUKKLEUS INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
| As of | ||||||||
| March 31, 2018 | September 30, 2017 | |||||||
| ( Unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | 200,465 | $ | 48,642 | ||||
| Prepaid expense | — | 750 | ||||||
| Deposit on potential acquisition | — | 1,055,559 | ||||||
| TOTAL CURRENT ASSETS | 200,465 | 1,104,951 | ||||||
| OTHER ASSETS: | ||||||||
| Software development costs | 50,000 | — | ||||||
| TOTAL ASSETS | $ | 250,465 | $ | 1,104,951 | ||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Due to affiliates | $ | 480,109 | $ | 403,994 | ||||
| Accrued liabilities | 76,129 | 22,400 | ||||||
| Accrued liabilities - related party | — | 8,000 | ||||||
| TOTAL CURRENT LIABILITIES | 556,238 | 434,394 | ||||||
| OTHER LIABILITIES: | ||||||||
| Series A redeemable preferred stock liability at $10 stated value; | ||||||||
| 25,000 and 100,000 shares issued and outstanding ($250,000 and $1,000,000 less discount of $7,269 and $33,657, respectively) at March 31, 2018 and September 30, 2017, respectively | 242,731 | 966,343 | ||||||
| TOTAL LIABILITIES | 798,969 | 1,400,737 | ||||||
| Contingent common stock (0 and 24,156,000 shares issued and outstanding at March 31, 2018 and September 30, 2017, respectively) | — | 55,559 | ||||||
| STOCKHOLDERS’ DEFICIT: | ||||||||
| Preferred stock ($0.0001 par value; 15,000,000 shares authorized; | ||||||||
| 0 share issued and outstanding at March 31, 2018 and September 30, 2017) | — | — | ||||||
| Common stock ($0.0001 par value; 900,000,000 shares authorized; | ||||||||
| 230,485,100 shares issued and outstanding at March 31, 2018 and September 30, 2017) | 23,049 | 23,049 | ||||||
| Additional paid-in capital | 141,057 | 141,057 | ||||||
| Accumulated deficit | (712,610 | ) | (515,451 | ) | ||||
| TOTAL STOCKHOLDERS’ DEFICIT | (548,504 | ) | (351,345 | ) | ||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT | $ | 250,465 | $ | 1,104,951 | ||||
The accompanying notes to unaudited condensed consolidated financial statements are an integral part of these statements.
| 1 |
NUKKLEUS INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
| For the Three Months Ended March 31, 2018 | For the Three Months Ended March 31, 2017 | For the Six Months Ended March 31, 2018 | For the Six Months Ended March 31, 2017 | |||||||||||||
| REVENUE | ||||||||||||||||
| Revenue | $ | — | $ | — | $ | — | $ | — | ||||||||
| Revenue - related party | 4,800,000 | 6,000,000 | 9,600,000 | 12,000,000 | ||||||||||||
| Total revenue | 4,800,000 | 6,000,000 | 9,600,000 | 12,000,000 | ||||||||||||
| COST OF REVENUE | ||||||||||||||||
| Cost of revenue | — | — | — | — | ||||||||||||
| Cost of revenue - related party | 4,725,000 | 5,925,000 | 9,450,000 | 11,850,000 | ||||||||||||
| Total cost of revenue | 4,725,000 | 5,925,000 | 9,450,000 | 11,850,000 | ||||||||||||
| GROSS PROFIT | 75,000 | 75,000 | 150,000 | 150,000 | ||||||||||||
| OPERATING EXPENSES: | ||||||||||||||||
| General and administrative | 75,844 | 137,154 | 308,792 | 208,659 | ||||||||||||
| General and administrative - related party | — | 15,000 | 6,000 | 65,000 | ||||||||||||
| Total operating expenses | 75,844 | 152,154 | 314,792 | 273,659 | ||||||||||||
| LOSS FROM OPERATIONS | (844 | ) | (77,154 | ) | (164,792 | ) | (123,659 | ) | ||||||||
| OTHER EXPENSE: | ||||||||||||||||
| Interest expense on redeemable preferred stock | (2,229 | ) | (3,750 | ) | (5,979 | ) | (7,500 | ) | ||||||||
| Amortization of debt discount | (24,098 | ) | (2,290 | ) | (26,388 | ) | (4,579 | ) | ||||||||
| Total other expense | (26,327 | ) | (6,040 | ) | (32,367 | ) | (12,079 | ) | ||||||||
| LOSS BEFORE INCOME TAXES | (27,171 | ) | (83,194 | ) | (197,159 | ) | (135,738 | ) | ||||||||
| INCOME TAXES | — | — | — | — | ||||||||||||
| NET LOSS | $ | (27,171 | ) | $ | (83,194 | ) | $ | (197,159 | ) | $ | (135,738 | ) | ||||
| NET LOSS PER COMMON SHARE: | ||||||||||||||||
| Basic and diluted | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.00 | ) | ||||
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: | ||||||||||||||||
| Basic and diluted | 230,485,100 | 254,641,100 | 236,855,913 | 254,641,100 | ||||||||||||
The accompanying notes to unaudited condensed consolidated financial statements are an integral part of these statements.
| 2 |
NUKKLEUS INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the Six Months Ended March 31, 2018 | For the Six Months Ended March 31, 2017 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (197,159 | ) | $ | (135,738 | ) | ||
| Adjustments to reconcile net loss to net cash | ||||||||
| used in operating activities: | ||||||||
| Amortization of debt discount | 26,388 | 4,579 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Prepaid expense | 750 | — | ||||||
| Due from affiliate | — | (150,000 | ) | |||||
| Due to affiliates | 76,115 | 236,584 | ||||||
| Accrued liabilities | 53,729 | 44,575 | ||||||
| Accrued liabilities - related party | (8,000 | ) | — | |||||
| Net cash used in operating activities | (48,177 | ) | — | |||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Proceeds received from termination of potential acquisition | 1,000,000 | — | ||||||
| Payment made for software development costs | (50,000 | ) | — | |||||
| Net cash provided by investing activities | 950,000 | — | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Redemption of preferred stock | (750,000 | ) | — | |||||
| Net cash used in financing activities | (750,000 | ) | — | |||||
| NET INCREASE IN CASH | 151,823 | — | ||||||
| Cash - beginning of period | 48,642 | — | ||||||
| Cash - end of period | $ | 200,465 | $ | — | ||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
| Cash paid for: | ||||||||
| Interest | $ | — | $ | — | ||||
| Income taxes | $ | — | $ | — | ||||
| NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
| Cancellation of contingent common stock | $ | 55,559 | $ | — | ||||
The accompanying notes to unaudited condensed consolidated financial statements are an integral part of these statements.
| 3 |
NUKKLEUS INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – THE COMPANY HISTORY AND NATURE OF THE BUSINESS
Nukkleus Inc. (f/k/a Compliance & Risk Management Solutions Inc.) (“Nukkleus” or the “Company”) was formed on July 29, 2013 in the State of Delaware as a for-profit Company and established a fiscal year end of September 30.
On February 5, 2016, Charms Investments, Ltd (“Charms”), the former majority shareholder of the Company, sold 146,535,140 shares of common stock to Currency Mountain Holdings Bermuda, Limited (“CMH”), the parent of the Company. CMH is wholly-owned by an entity that is owned by Emil Assentato, the Company’s Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”) and Chairman. In addition, on the same date, CMH acquired 3,937,000 shares of common stock from another non-affiliated company. The aggregate purchase price paid by CMH was $347,500.
On May 24, 2016, Nukkleus, its wholly-owned subsidiary, Nukkleus Limited, a Bermuda limited company (the “Subsidiary”), Charms, the former majority shareholder, and CMH entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”), pursuant to which the Company purchased from CMH certain intellectual property, hardware, software and other assets (collectively, the “Assets”) in consideration of 48,400,000 shares of common stock of the Company. The Asset Purchase Agreement closed on May 24, 2016. As a result of such acquisition, the Company’s operations are now focused on the operation of a foreign exchange trading business utilizing the assets acquired from CMH.
On May 24, 2016, the Subsidiary entered into a General Service Agreement to provide its software, technology, customer sales and marketing and risk management technology hardware and software solutions package to FML Malta Ltd. In December 2017, the Subsidiary, FML Malta Ltd. and FXDD Malta Limited (“FXDD Malta”) entered into a letter agreement providing that there was an error in drafting the General Service Agreement and acknowledging that the correct counter-party to Subsidiary in the General Service Agreement is FXDD Malta. Accordingly, all references to FML Malta Ltd. have been replaced with FXDD Malta. FXDD Malta is a private limited liability company formed under the laws of Malta. The General Service Agreement entered with FXDD Malta provides that FXDD Malta will pay the Subsidiary at minimum $2,000,000 per month. On October 17, 2017, the Subsidiary entered into an amendment of the General Service Agreement with FXDD Malta. In accordance with the amendment, which was effective as of October 1, 2017, the minimum amount payable by FXDD Malta to the Subsidiary for services was reduced from $2,000,000 per month to $1,600,000 per month. Emil Assentato is also the majority member of Max Q Investments LLC (“Max Q”), which is managed by Derivative Marketing Associates Inc. (“DMA”). Mr. Assentato is the sole owner and manager of DMA. Max Q owns 79% of Currency Mountain Malta LLC, which in turn is the sole shareholder of FXDD Malta.
In addition, on May 24, 2016, in order to appropriately service FXDD Malta, the Subsidiary entered into a General Service Agreement with FXDirectDealer LLC (“FXDIRECT”), which provides that the Subsidiary will pay FXDIRECT a minimum of $1,975,000 per month in consideration of providing personnel engaged in operational and technical support, marketing, sales support, accounting, risk monitoring, documentation processing and customer care and support. FXDIRECT may terminate this agreement upon providing 90 days’ written notice. On October 17, 2017, the Subsidiary entered into an amendment of the General Service Agreement with FXDIRECT. Pursuant to the amendment, which was effective as of October 1, 2017, the minimum amount payable by the Subsidiary to FXDIRECT for services was reduced from $1,975,000 per month to $1,575,000 per month. Currency Mountain Holdings LLC is the sole shareholder of FXDIRECT. Max Q is the majority shareholder of Currency Mountain Holdings LLC.
On May 27, 2016, the Company entered into a Stock Purchase Agreement (“SPA”) to acquire, from IBIH Limited, a BVI corporation (“IBIH”) 2,200 issued and outstanding common stock for $1,000,000, representing 9.9% of IBIH. In addition, the Company acquired 100% of the issued and outstanding shares of GVS Limited (“Iron BVI”), which is the parent corporation of GVS (AU) Pty Ltd. (“Iron Australia”) for 24,156,000 shares of common stock of the Company (“First Closing”).
The Company agreed to acquire the remaining 20,000 shares of IBIH for 219,844,000 shares of its common stock, subject to IBIH obtaining regulatory approvals from the Financial Conduct Authority in the United Kingdom (“London FCA”) and from the regulators in Cyprus (“Second Closing”). The Second Closing was subject to the Company signing an option agreement with FXDD Malta and FXDD Trading Limited operating units (the “Option”), which are affiliates through common ownership, providing that the Company may acquire both entities for $1. These transactions were subject to regulatory approval, where applicable.
The terms of the Agreement stipulated that if the Second Closing did not occur before November 28, 2016, the $1,000,000 would be returned to the Company and the First Closing would be unwound. As a result of the First Closing being contingent on the Second Closing, the $1,000,000 cash paid and value of the 24,156,000 shares issued was recorded as a “deposit on potential acquisition”, which was repaid to and returned to the Company in the first fiscal quarter of 2018 (See next paragraph), and the 24,156,000 shares was recorded as “contingent common stock” due to the uncertainty of the closing of the transaction.
| 4 |
NUKKLEUS INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – THE COMPANY HISTORY AND NATURE OF THE BUSINESS (continued)
On November 17, 2017, the Company, IBIH, Terra (FX) Offshore Limited, Ludico Investments Limited, Currency Mountain Holdings LLC and the IBIH Shareholders entered into a Settlement Agreement and Mutual Release (the “Iron Settlement Agreement”) pursuant to which the Stock Purchase Agreement 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.
NOTE 2 – BASIS OF PRESENTATION
These interim condensed consolidated financial statements of the Company and its wholly-owned subsidiary are unaudited. In the opinion of management, all adjustments (consisting of normal recurring accruals) and disclosures necessary for a fair presentation of these interim condensed consolidated financial statements have been included. The results reported in the unaudited condensed consolidated financial statements for any interim periods are not necessarily indicative of the results that may be reported for the entire year. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission and do not include all information and footnotes necessary for a complete presentation of financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”).
The Company’s unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. 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, 2017 filed with the Securities and Exchange Commission on December 27, 2017. The consolidated balance sheet as of September 30, 2017 contained herein has been derived from the audited consolidated financial statements as of September 30, 2017, but does not include all disclosures required by U.S. GAAP.
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 six months ended March 31, 2018 and 2017 include the valuation of deferred tax assets and the associated valuation allowances.
Fair value of financial instruments
The carrying amounts reported in the unaudited condensed consolidated balance sheets for cash, due to affiliates, and accrued liabilities approximate their fair market value based on the short-term maturity of these instruments. The Company did not have any non-financial assets or liabilities that are measured at fair value on a recurring basis as of March 31, 2018 and September 30, 2017.
| 5 |
NUKKLEUS INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Concentration of credit risk
The Company maintains its cash in bank and financial institution deposits that at times may exceed federally insured limits. The Company has not experienced any losses in such accounts through March 31, 2018. There were no balances in excess of the federally-insured limits at March 31, 2018 and September 30, 2017.
The following table summarizes customer revenue concentrations:
| Three Months Ended March 31, 2018 | Three Months Ended March 31, 2017 | Six Months Ended March 31, 2018 | Six Months Ended March 31, 2017 | |||||||||||||
| FXDD Malta - related party | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||
The following table summarizes vendor expense concentrations:
| Three Months Ended March 31, 2018 | Three Months Ended March 31, 2017 | Six Months Ended March 31, 2018 | Six Months Ended March 31, 2017 | |||||||||||||
| FXDIRECT - related party | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||
Prepaid expense
Prepaid expense represents cash paid in advance for professional service charge. The amount is recognized as expense over the related service periods. At March 31, 2018 and September 30, 2017, prepaid expense amounted $0 and $750, respectively.
Software development costs
At March 31, 2018, software development costs totaled $50,000, which represents software development that management expects to complete and place in service in August 2018. Projected capitalized costs of this software development is approximately $200,000. Capitalized costs related to the software under development are treated as an asset until the development is completed. The Company will amortize the software costs on a straight-line basis over the estimated life of the software, commencing when the software is put into productive use.
Revenue recognition
Because the Company provides its applications as services, it follows the provisions of Securities and Exchange Commission Staff Accounting Bulletin (“SAB”) No. 104; Revenue Recognition. The Company recognizes revenue when all of the following conditions are met:
| ● | there is persuasive evidence of an arrangement; | |
| ● | the service has been provided to the customer; | |
| ● | the collection of the fees is reasonably assured; and | |
| ● | the amount of fees to be paid by the customer is fixed or determinable. |
The Company records revenues and expenses related to the General Service Agreements at gross as the Company is deemed to be a principal in the transactions. Revenues are recognized when the services are completed and expenses are recognized as incurred.
Income taxes
The Company recorded no income tax expense for the three and six months ended March 31, 2018 and 2017 because the estimated annual effective tax rate was zero. As of March 31, 2018, the Company continues to provide a valuation allowance against its net deferred tax assets since the Company believes it is more likely than not its deferred tax assets will not be realized.
| 6 |
NUKKLEUS INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income taxes (continued)
In December 2017, the United States Government passed new tax legislation that, among other provisions, will lower the corporate tax rate from 35% to 21%. In addition to applying the new lower corporate tax rate in 2018 and thereafter to any taxable income the Company may have, the legislation affects the way the Company can use and carryforward net operating losses previously accumulated and results in a revaluation of deferred tax assets and liabilities recorded on the balance sheet. Given that current deferred tax assets are offset by a full valuation allowance, these changes will have no net impact on the balance sheet. However, when the Company becomes profitable, the Company will receive a reduced benefit from such deferred tax assets.
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 six months ended March 31, 2018 and 2017, potentially dilutive common shares consist of common stock issuable upon the conversion of Series A preferred stock (using the if-converted method).
The following table presents a reconciliation of basic and diluted net loss per share:
| Three Months Ended March 31, 2018 | Three Months Ended March 31, 2017 | Six Months Ended March 31, 2018 | Six Months Ended March 31, 2017 | |||||||||||||
| Net loss available to common stockholders for basic and diluted net loss per share of common stock | $ | (27,171 | ) | $ | (83,194 | ) | $ | (197,159 | ) | $ | (135,738 | ) | ||||
| Weighted average common stock outstanding - basic | 230,485,100 | 254,641,100 | 236,855,913 | 254,641,100 | ||||||||||||
| Effect of dilutive securities: | ||||||||||||||||
| Series A preferred stock | — | — | — | — | ||||||||||||
| Weighted average common stock outstanding - diluted | 230,485,100 | 254,641,100 | 236,855,913 | 254,641,100 | ||||||||||||
| Net loss per common share - basic | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.00 | ) | ||||
| Net loss per common share - diluted | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.00 | ) | ||||
During the three and six months ended March 31, 2018 and 2017, all potentially dilutive securities are excluded from the computation of diluted weighted average number of shares of common stock outstanding as they would have had an anti-dilutive impact.
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.
| 7 |
NUKKLEUS INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recently issued accounting pronouncements
In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 will eliminate transaction- and industry-specific revenue recognition guidance under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2017 (quarter ending December 31, 2018 for the Company). Early adoption is permitted only in annual reporting periods beginning after December 15, 2016, including interim periods therein. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. The Company is currently evaluating the effects of adopting ASU 2014-09 and the implementation approach to be used, but as of the date of this filing, the adoption is not expected to have a material impact on the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842): Amendments to the Leases Analysis, which modified lease accounting for both lessees and lessors to increase transparency and comparability by recognizing lease assets and lease liabilities by lessees for those leases classified as operating leases under previous accounting standards and disclosing key information about leasing arrangements. This pronouncement is effective for reporting periods beginning after December 15, 2018 including interim periods within those annual reporting periods (quarter ending December 31, 2019 for the Company) using a modified retrospective adoption method. The Company is currently evaluating the impact of adopting the new lease standard on its consolidated financial statements, but the adoption is not expected to have a significant impact as of the filing of this report.
In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. The amendments add further guidance on identifying performance obligations and also improve the operability and understandability of the licensing implementation guidance. The amendments do not change the core principle of the guidance in Topic 606. This pronouncement has the same effective date as the new revenue standard, which is effective for annual reporting periods, including interim periods within those annual reporting periods, beginning after December 15, 2017 (quarter ending December 31, 2018 for the Company). The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements, but the adoption is not expected to have a significant impact as of the filing of this report.
In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. The amendments, among other things: (1) clarify the objective of the collectability criterion for applying paragraph 606-10-25-7; (2) permit an entity to exclude amounts collected from customers for all sales (and other similar) taxes from the transaction price; (3) specify that the measurement date for noncash consideration is contract inception; (4) provide a practical expedient that permits an entity to reflect the aggregate effect of all modifications that occur before the beginning of the earliest period presented when identifying the satisfied and unsatisfied performance obligations, determining the transaction price, and allocating the transaction price to the satisfied and unsatisfied performance obligations; (5) clarify that a completed contract for purposes of transition is a contract for which all (or substantially all) of the revenue was recognized under legacy GAAP before the date of initial application, and (6) clarify that an entity that retrospectively applies the guidance in Topic 606 to each prior reporting period is not required to disclose the effect of the accounting change for the period of adoption. The effective date of these amendments is at the same date that Topic 606 is effective. The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements, but the adoption is not expected to have a significant impact as of the filing of this report.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This ASU addresses the classification of certain specific cash flow issues including debt prepayment or extinguishment costs, settlement of certain debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of certain insurance claims and distributions received from equity method investees. This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years (quarter ending December 31, 2018 for the Company), with early adoption permitted. An entity that elects early adoption must adopt all of the amendments in the same period. The Company is currently evaluating the impact it may have on its consolidated financial statements, but the adoption is not expected to have a significant impact as of the filing of this report.
| 8 |
NUKKLEUS INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recently issued accounting pronouncements (continued)
In January 2017, the FASB issued 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 as acquisitions (or disposals) of assets or business. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual reporting periods (quarter ending December 31, 2018 for the Company). The Company is currently evaluating the impact of adopting ASU 2017-01 on its consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09, Compensation – Stock Compensation: Scope of Modification Accounting. The guidance clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. Entities will apply the modification accounting guidance if the value, vesting conditions or classification of the award changes. This guidance is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2017 (quarter ending December 31, 2018 for the Company). Early adoption is permitted. The Company is currently evaluating the impact it may have on its consolidated financial statements, but the adoption is not expected to have a significant impact as of the filing of this report.
Other accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption. The Company does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to its consolidated financial condition, results of operations, cash flows or disclosures.
NOTE 4 – ACCRUED LIABILITIES
At March 31, 2018 and September 30, 2017, accrued liabilities consisted of the following:
| March 31, 2018 | September 30, 2017 | |||||||
| Professional fees | $ | 10,275 | $ | 2,525 | ||||
| Directors’ compensation | 40,000 | — | ||||||
| Interest payable | 25,854 | 19,875 | ||||||
| $ | 76,129 | $ | 22,400 | |||||
NOTE 5 – SHARE CAPITAL
Authorized shares
The Company is authorized to issue 900,000,000 shares of common stock at par value of $0.0001 and 15,000,000 shares of Series A preferred stock at par value of $0.0001.
Common stock issued for Stock Purchase Agreement
As described elsewhere in this report, on May 27, 2016, the Company acquired 100% of the issued and outstanding shares of Iron BVI for 24,156,000 shares of common stock of the Company. The shares were valued at $.0023 per share. As a result of the First Closing being contingent on the Second Closing, the 24,156,000 shares for the purchase of IBIH was recorded as “contingent common stock” due to the uncertainty of the closing of the transaction.
On November 17, 2017, the Company entered into the Iron Settlement Agreement. As a result, IBIH has returned the certificate representing the 24,156,000 shares of common stock of the Company and the shares have been cancelled by the Company.
| 9 |
NUKKLEUS INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 – SHARE CAPITAL (continued)
Common stock and Series A preferred stock sold for cash
The Company agreed to sell to CMH 30,900,000 shares of common stock and 200,000 shares of Series A preferred stock for $2,000,000 in two equal installments. The first close occurred on June 7, 2016. Originally, the second closing was to occur with the closing of the Company’s acquisition of IBIH. Since the acquisition of IBIH transaction was terminated, the second closing with CMH will not proceed.
The Series A preferred stock has the following key terms:
| 1) | A stated value of $10 per share; |
| 2) | The holder is entitled to receive cumulative dividends at the annual rate of 1.5% of stated value payable semi-annually on June 30 and December 31; |
| 3) | The preferred stock must be redeemed at the stated value plus any unpaid dividends in 5 years. |
During the first close, 15,450,000 shares of common stock and 100,000 shares of Series A preferred stock were issued and were recorded as equity and as a long-term liability, respectively. The $1,000,000 of proceeds received was allocated to the common stock and Series A preferred stock according to their relative fair values determined at the time of issuance, and as a result, the Company recorded a total discount of $45,793 on the Series A preferred stock, which is being amortized to interest expense to the date of redemption. For the three months ended March 31, 2018 and 2017, amortization of debt discount amounted to $24,098 and $2,290, respectively. For the six months ended March 31, 2018 and 2017, amortization of debt discount amounted to $26,388 and $4,579, respectively.
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 March 31, 2018 and 2017, dividends on redeemable preferred stock amounted to $2,229 and $3,750, respectively. For the six months ended March 31, 2018 and 2017, dividends on redeemable preferred stock amounted to $5,979 and $7,500, 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 March 31, 2018 and September 30, 2017, Series A redeemable preferred stock consisted of the following:
| March 31, 2018 | September 30, 2017 | |||||||
| Redeemable preferred stock (stated value) | $ | 250,000 | $ | 1,000,000 | ||||
| Less: unamortized debt discount | (7,269 | ) | (33,657 | ) | ||||
| Redeemable preferred stock, net | $ | 242,731 | $ | 966,343 | ||||
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. All professional services fee payable to Craig Marshak is paid to Triple Eight Markets. As compensation for professional services provided, the Company recognized consulting expenses of $0 and $15,000 for the three months ended March 31, 2018 and 2017, respectively, which have been included in general and administrative expense – related party on the accompanying unaudited condensed consolidated statements of operations. As compensation for professional services provided, the Company recognized consulting expenses of $6,000 and $65,000 for the six months ended March 31, 2018 and 2017, respectively, which have been included in general and administrative expense – related party on the accompanying unaudited condensed consolidated statements of operations. As of March 31, 2018 and September 30, 2017, the accrued and unpaid services charge related to Craig Marshak amounted to $0 and $8,000, respectively, which have been included in accrued liabilities – related party on the accompanying consolidated balance sheets.
| 10 |
NUKKLEUS INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 – RELATED PARTY TRANSACTIONS (continued)
Services provided by related parties (continued)
The Company uses affiliate employees for various services such as the use of accountants to record the books and accounts of the Company at no charge to those affiliates, which are considered immaterial.
Office space from related parties
The Company uses office space of affiliate companies, free of rent, which is considered immaterial.
Revenue from related party and cost of revenue from related party
On May 24, 2016, the Company entered into a General Service Agreement with FXDD Malta, a related party. The Company is to invoice FXDD Malta a minimum of $2,000,000 per month in consideration for providing personnel and technical support, marketing, accounting, risk monitoring, documentation processing and customer care and support. On October 17, 2017, the Company entered into an amendment of the General Service Agreement with FXDD Malta. In according to the amendment, which was effective as of October 1, 2017, the minimum amount payable by FXDD Malta to the Company for services was reduced from $2,000,000 per month to $1,600,000 per month. Emil Assentato is also the majority member of Max Q Investments LLC (“Max Q”), which is managed by Derivative Marketing Associates Inc. (“DMA”). Mr. Assentato is the sole owner and manager of DMA. Max Q owns 79% of Currency Mountain Malta LLC, which in turn is the sole shareholder of FXDD Malta.
In addition, on May 24, 2016, the Company entered into a General Service Agreement with FXDIRECT to pay a minimum of $1,975,000 per month for receiving personnel and technical support, marketing, accounting, risk monitoring, documentation processing and customer care and support. On October 17, 2017, the Company entered into an amendment of the General Service Agreement with FXDIRECT. Pursuant to the amendment, which was effective as of October 1, 2017, the minimum amount payable by the Company to FXDIRECT for services was reduced from $1,975,000 per month to $1,575,000 per month. Currency Mountain Holdings LLC is the sole shareholder of FXDIRECT. Max Q is the majority shareholder of Currency Mountain Holdings LLC.
Both of the above entities are affiliates through common ownership.
During the three and six months ended March 31, 2018 and 2017, service provided to related party which was recorded as revenue - related party on the accompanying unaudited condensed consolidated statements of operations was as follows:
| Three Months Ended March 31, 2018 | Three Months Ended March 31, 2017 | Six Months Ended March 31, 2018 | Six Months Ended March 31, 2017 | |||||||||||||
| Service provided to: | ||||||||||||||||
| FXDD Malta | $ | 4,800,000 | $ | 6,000,000 | $ | 9,600,000 | $ | 12,000,000 | ||||||||
| $ | 4,800,000 | $ | 6,000,000 | $ | 9,600,000 | $ | 12,000,000 | |||||||||
During the three and six months ended March 31, 2018 and 2017, service received from related party which was recorded as cost of revenue - related party on the accompanying unaudited condensed consolidated statements of operations was as follows:
| Three Months Ended March 31, 2018 | Three Months Ended March 31, 2017 | Six Months Ended March 31, 2018 | Six Months Ended March 31, 2017 | |||||||||||||
| Service received from: | ||||||||||||||||
| FXDIRECT | $ | 4,725,000 | $ | 5,925,000 | $ | 9,450,000 | $ | 11,850,000 | ||||||||
| $ | 4,725,000 | $ | 5,925,000 | $ | 9,450,000 | $ | 11,850,000 | |||||||||
| 11 |
NUKKLEUS INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 – RELATED PARTY TRANSACTIONS (continued)
Due to affiliates
At March 31, 2018 and September 30, 2017, due to related parties consisted of the following:
| March 31, 2018 | September 30, 2017 | |||||||
| Forexware LLC | $ | 299,782 | $ | 403,994 | ||||
| FXDIRECT | 180,327 | — | ||||||
| $ | 480,109 | $ | 403,994 | |||||
The balances of due to related parties represent expenses paid by Forexware LLC and FXDIRECT on behalf of the Company. The balances due to FXDIRECT may also include unsettled funds due related to the General Service Agreement. The related parties’ payables are short-term in nature, non-interest bearing, unsecured and repayable on demand.
NOTE 7 – SUBSEQUENT EVENTS
There were no events that occurred subsequent to March 31, 2018 that require adjustment to or disclosure in the unaudited condensed consolidated financial statements.
| 12 |
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 six months ended March 31, 2018 and 2017 should be read in conjunction with our unaudited condensed consolidated financial statements and related notes to those unaudited condensed consolidated financial statements that are included elsewhere in this report.
Certain matters discussed herein are forward-looking statements. Such forward-looking statements contained in this Form 10-Q involve risks and uncertainties, including statements as to:
| ● | our future operating results; |
| ● | our business prospects; |
| ● | any contractual arrangements and relationships with third parties; |
| ● | the dependence of our future success on the general economy; |
| ● | any possible financings; and |
| ● | the adequacy of our cash resources and working capital. |
These forward-looking statements can generally be identified as such because the context of the statement will include words such as we “believe,” “anticipate,” “expect,” “estimate” or words of similar meaning. Similarly, statements that describe our future plans, objectives or goals are also forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties which are described in close proximity to such statements and which could cause actual results to differ materially from those anticipated as of the date of filing of this Form 10-Q. Shareholders, potential investors and other readers are urged to consider these factors in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included herein are only made as of the date of filing of this Form 10-Q, and we undertake no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.
This discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results may differ materially from those anticipated in these forward-looking statements.
Unless otherwise indicated, references to the “Company”, “us”, or “we” refer to Nukkleus Inc. and its consolidated subsidiary.
Overview
We are a financial technology company which is focused on providing software and technology solutions for the worldwide retail foreign exchange (“FX”) trading industry. We primarily provide our software, technology, customer sales and marketing and risk management technology hardware and software solutions package to FXDD Malta Limited (“FXDD Malta”). The FXDD brand (e.g., see FXDD.com) is the brand utilized in the retail forex trading industry by FXDD Malta.
As part of the Assets acquired, we acquired ownership of FOREXWARE, the primary software suite and technology solution which powers the FXDD brand globally today. We also have ownership of the FOREXWARE brand name. We have also acquired ownership of the customer interface and other software trading solutions being used by FXDD.com. By virtue of our relationship with FXDD Malta and FXDirectDealer LLC (“FXDIRECT”), we provide turnkey software and technology solutions for FXDD.com. We offer the customers of FXDD 24 hour, five days a week direct access to the global over the counter (“OTC”) FX market, which is a decentralized market in which participants trade directly with one another, rather than through a central exchange.
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.
Recently, we signed an agreement with a third-party for the customization and development of a trading platform to be used by us. Management expects the project to be completed and the platform to be placed in service in August 2018. Projected capitalized costs of this software development is approximately $200,000.
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.
| 13 |
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 expenses, and related disclosure of contingent assets and liabilities. When making these estimates and assumptions, we consider our historical experience, our knowledge of economic and market factors and various other factors that we believe to be reasonable under the circumstances. Actual results may differ under different estimates and assumptions.
Critical accounting policies are those that require application of management’s most subjective or complex judgments, often as a result of matters that are inherently uncertain and may change in subsequent periods. There have been no material changes to the critical accounting policies and estimates as discussed in our Annual Report on Form 10-K for the year ended September 30, 2017.
Results of Operations
Summary of Key Results
For the three and six months ended March 31, 2018 versus the three and six months ended March 31, 2017
Revenue and Cost of Revenue
Total revenue for the three months ended March 31, 2018 versus the three months ended March 31, 2017 was $4,800,000 and $6,000,000, respectively. Total revenue for the six months ended March 31, 2018 versus the six months ended March 31, 2017 was $9,600,000 and $12,000,000, respectively. Revenue for the three and six months ended March 31, 2018 and 2017 was from general support services rendered to a related party. On October 17, 2017, we entered into an amendment of General Service Agreement with FXDD Malta. In accordance with the amendment, which was effective as of October 1, 2017, the minimum amount payable by FXDD Malta to us for services was reduced from $2,000,000 per month to $1,600,000 per month. Therefore, our revenue for the three and six months ended March 31, 2018 was significantly decreased as compared to the three and six months ended March 31, 2017.
Cost of revenue for the three months ended March 31, 2018 versus the three months ended March 31, 2017 was $4,725,000 and $5,925,000, respectively. Cost of revenue for the six months ended March 31, 2018 versus the six months ended March 31, 2017 was $9,450,000 and $11,850,000, respectively. Cost of revenue represents amount incurred for general support services rendered by a related party. On October 17, 2017, we entered into an amendment of General Service Agreement with FXDIRECT. Pursuant to the amendment, which was effective as of October 1, 2017, the minimum amount payable by us to FXDIRECT for services was reduced from $1,975,000 per month to $1,575,000 per month. Therefore, our cost of revenue for the three and six months ended March 31, 2018 was significantly decreased as compared to the three and six months ended March 31, 2017.
Operating Expenses
Total operating expenses for the three months ended March 31, 2018 versus the three months ended March 31, 2017, were $75,844 versus $152,154, respectively. These operating expenses were mainly third-party and related party professional fees. The decrease in operating expenses for the three months ended March 31, 2018 as compared to the three months ended March 31, 2017 was primarily due to the decrease in use of professional services providers. Total operating expenses for the six months ended March 31, 2018 versus the six months ended March 31, 2017, were $314,792 versus $273,659, respectively. These operating expenses were primarily third-party and related party professional fees. The increase in operating expenses for the six months ended March 31, 2018 as compared to the six months ended March 31, 2017 was mainly due to the increase in use of professional services providers.
Other Expense
Other expense includes interest expense on redeemable preferred stock and amortization of debt discount. Total other expense for the three months ended March 31, 2018 versus the three months ended March 31, 2017, was $26,327 versus $6,040, respectively. Total other expense for the six months ended March 31, 2018 versus the six months ended March 31, 2017, was $32,367 versus $12,079, respectively.
| 14 |
As a result of the termination of the IBIH transaction, we and CMH have agreed to enter into that certain Stock Redemption Agreement dated February 13, 2018 providing that 75,000 CMH Preferred Shares were redeemed and cancelled in consideration of $750,000 which occurred on February 13, 2018. Therefore, our interest expense on redeemable preferred stock for the three and six months ended March 31, 2018 decreased as compared to the three and six months ended March 31, 2017, and our amount from amortization of debt discount for the three and six months ended March 31, 2018 significantly increased as compared to the three and six months ended March 31, 2017.
Net Loss
As a result of the factors described above, our net loss was $27,171, or (0.00) per common share (basic and diluted), for the three months ended March 31, 2018. Our net loss was $83,194, or (0.00) per common share (basic and diluted), for the three months ended March 31, 2017.
As a result of the factors described above, our net loss was $197,159, or (0.00) per common share (basic and diluted), for the six months ended March 31, 2018. Our net loss was $135,738, or (0.00) per common share (basic and diluted), for the six months ended March 31, 2017.
Liquidity and Capital Resources
Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations and otherwise operate on an ongoing basis. At March 31, 2018 and September 30, 2017, we had cash balances of $200,465 and $48,642, respectively.
Cash at March 31, 2018 was provided by proceeds received from termination of potential acquisition after deducting cash paid for the preferred stock redemption as described elsewhere in this report.
We had an accumulated deficit and a total stockholders’ deficit of $712,610 and $548,504, respectively, as of March 31, 2018. For the six months ended March 31, 2018, we recorded a net loss of $197,159 and had a net cash flow used in operating activities of $48,177. We may incur losses for an indeterminate period and may never sustain profitability. We may be unable to achieve and maintain profitability on a quarterly or annual basis. An extended period of losses may prevent us from successfully operating and expanding our business.
We estimate that our working capital is sufficient to fund our current operations for the next 12 months. Management is currently seeking additional capital through private placements or public offerings of our securities. In addition, we may seek to raise additional capital through public or private debt or equity financings in order to fund our operations, potential mergers or acquisitions, and the development of our business plan.
Cash Flow for the Six Months Ended March 31, 2018 Compared to the Six Months Ended March 31, 2017
Net cash flow used in operating activities was $48,177 for the six months ended March 31, 2018. These include $197,159 in net loss. Cash flows used in operating activities included changes in operating assets and liabilities totaling $122,594 for the six months ended March 31, 2018.
We had $0 in net cash used in operating activities for the six months ended March 31, 2017. These include $135,738 in net loss. Cash flows used in operating activities included changes in operating assets and liabilities totaling $131,159 for the six months ended March 31, 2017.
Net cash flow provided by investing activities was $950,000 for the six months ended March 31, 2018. During the six months ended March 31, 2018, we received proceeds of $1,000,000 from termination of potential acquisition in accordance with a Settlement Agreement and Mutual Release signed on November 17, 2017 as described elsewhere in this report, and we made a payment for software development costs of $50,000.
We did not incur any investing activity during the six months ended March 31, 2017.
Net cash flow used in financing activities was $750,000 for the six months ended March 31, 2018. During the six months ended March 31, 2018, we paid $750,000 for the preferred stock redemption as described elsewhere in this report.
We did not incur any financing activity during the six months ended March 31, 2017.
| 15 |
Our capital requirements for the next twelve months primarily relate to mergers, acquisitions and the development of business opportunities. In addition, we expect to use cash to pay fees related to professional services. The following trends are reasonably likely to result in a material decrease in our liquidity over the near to long term:
| ● | 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. |
Currently, we use our cash to support our operations and to provide working capital for our ongoing operations and obligations. We believe that our current cash will be sufficient to meet our anticipated cash requirements for the next twelve months.
Although we estimate that our current cash will be sufficient to meet our anticipated cash requirements for the next twelve months, we need to either borrow funds or raise additional capital through equity or debt financings in order to support our future mergers or acquisitions and the development of our business opportunities. 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.
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
We have certain fixed contractual obligations and commitments that include future estimated payments. Changes in our business needs, cancellation provisions, and other factors may result in actual payments differing from the estimates. We cannot provide certainty regarding the timing and amounts of payments. We have presented below a summary of the most significant assumptions used in our determination of amounts presented in the tables, in order to assist in the review of this information within the context of our consolidated financial position, results of operations, and cash flows. The following tables summarize our contractual obligations as of March 31, 2018, and the effect these obligations are expected to have on our liquidity and cash flows in future periods.
| Payments Due by Period | ||||||||||||||||||||
| Contractual obligations: | Total | Less than 1 year | 1-3 years | 3-5 years | 5+ years | |||||||||||||||
| Redeemable preferred stock (stated value) | $ | 250,000 | $ | — | $ | — | $ | 250,000 | $ | — | ||||||||||
| Accrued interest for redeemable preferred stock | 25,854 | 25,854 | — | — | — | |||||||||||||||
| Total | $ | 275,854 | $ | 25,854 | $ | — | $ | 250,000 | $ | — | ||||||||||
Off-Balance Sheet Arrangements
We had no outstanding derivative financial instruments, off-balance sheet guarantees, interest rate swap transactions or foreign currency contracts. We do not engage in trading activities involving non-exchange traded contracts.
Recently Issued Accounting Pronouncements
For information about recently issued accounting standards, refer to Note 3 to our Unaudited Condensed Consolidated Financial Statements appearing elsewhere in this report.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable to a “smaller reporting company” as defined in Item 10(f)(1) of SEC Regulation S-K.
| 16 |
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 March 31, 2018, our management, including our principal executive officer and principal financial officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures, which are defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”) is the same person.
During evaluation of disclosure controls and procedures as of March 31, 2018, 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.
We are not a party to any legal proceedings. Management is not aware of any legal proceedings proposed to be initiated against us. However, from time to time, we may become subject to claims and litigation generally associated with any business venture operating in the ordinary course.
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.
| 17 |
On June 3, 2016, the Company agreed to sell to CMH 30,900,000 shares of common stock and 200,000 shares of Series A preferred stock for $2,000,000 in two equal installments with the first closing occurring on June 7, 2016 resulting in the issuance of 100,000 shares of Series A Preferred Stock to CMH (the “CMH Preferred Shares”). CMH is wholly-owned by an entity that is owned by Emil Assentato, the Company’s CEO, CFO and Chairman. The second close was to occur with the closing of the Company’s acquisition of IBIH. On November 17, 2017, the Company entered into a Settlement Agreement and Mutual Release terminating the Company’s acquisition of IBIH and, as a result, the second closing of the CMH financing was also terminated. As a result of the termination of the IBIH transaction, the Company and CMH have agreed to enter into that certain Stock Redemption Agreement dated February 13, 2018 providing that 75,000 CMH Preferred Shares shall be redeemed and cancelled in consideration of $750,000 which occurred on February 13, 2018.
| 18 |
| 31.1* | Rule 13a-14(a) Certification of the Chief Executive and Financial Officer | |
| 32.1* | Section 1350 Certification of Chief Executive and Financial Officer | |
| 101.INS* | XBRL INSTANCE DOCUMENT | |
| 101.SCH* | XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT | |
| 101.CAL* | XBRL TAXONOMY EXTENSION CALCULATION LINKBASE DOCUMENT | |
| 101.DEF* | XBRL TAXONOMY EXTENSION DEFINITION LINKBASE DOCUMENT | |
| 101.LAB* | XBRL TAXONOMY EXTENSION LABEL LINKBASE DOCUMENT | |
| 101.PRE* | XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE DOCUMENT |
| * | Filed along with this document |
| (1) | Incorporated by reference to the Form 8K Current Report filed with the SEC on May 31, 2016. |
| (2) | Incorporated by reference to the Form 8K Current Report filed with the SEC on June 3, 2016. |
| (3) | Incorporated by reference to the Form 8K Current Report filed with the SEC on August 9, 2016. |
| (4) | Incorporated by reference to the Form 8K Current Report filed with the SEC on October 25, 2016. |
| (5) | Incorporated by reference to the Form 8K Current Report filed with the SEC on October 19, 2017. |
| (6) | Incorporated by reference to the Form 8K Current Report filed with the SEC on December 5, 2017. |
| (7) | Incorporated by reference to the Form 10K Annual Report filed with the SEC on December 27, 2017. |
| (8) | Incorporated by reference to the Form 10Q Quarterly Report filed with the SEC on February 13, 2018. |
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: May 11, 2018 | By: | /s/ Emil Assentato |
| Emil Assentato | ||
| Chief Executive Officer (Principal Executive Officer), Chief Financial Officer (Principal Financial and Accounting officer), and Chairman | ||
19