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.
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 the generally accepted accounting principles in the
U.S.
NOTE 3 –
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Use of estimates
The
preparation of the unaudited condensed consolidated financial statements in conformity with generally accepted accounting principles
in the United States of America 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 months ended December 31, 2017 and 2016 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, prepaid expense, deposit on potential acquisition, due
to affiliates, accrued liabilities, and accrued liabilities – related party 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 December 31, 2017 and September 30, 2017.
NUKKLEUS INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 –
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Concentration
of credit risk
The Company maintains
its cash in bank and financial institution deposits that at times may exceed federally insured limits.
As
of December 31, 2017 and September 30, 2017, the Company’s cash balances in bank accounts had approximately $650,000 and
$0 in excess of the federally-insured limits, respectively. The Company has not experienced any losses in its bank accounts through
and as of the date of this report.
The following
table summarizes customer revenue concentrations:
|
|
Three Months Ended
December 31, 2017
|
|
|
Three Months Ended
December 31, 2016
|
|
FXDD Malta - related party
|
|
|
100
|
%
|
|
|
100
|
%
|
The following
table summarizes vendor expense concentrations:
|
|
Three Months Ended
December 31, 2017
|
|
|
Three Months Ended
December 31, 2016
|
|
FXDIRECT - related party
|
|
|
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 both December 31, 2017 and September 30, 2017, prepaid expense amounted $750
.
Software development
costs
At December 31,
2017, software development costs totaled $50,000, which represents software development that management expects to complete and
place in service in June 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 months ended December 31, 2017 and 2016 because the estimated annual effective tax rate was
zero. As of December 31, 2017, 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.
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.
NUKKLEUS INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 –
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 months ended December 31, 2017 and 2016, 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
December 31, 2017
|
|
|
Three Months Ended
December 31, 2016
|
|
Net loss available to common stockholders for basic and diluted net loss per share of common stock
|
|
$
|
(169,988
|
)
|
|
$
|
(52,544
|
)
|
Weighted average common stock outstanding - basic
|
|
|
242,037,970
|
|
|
|
254,641,100
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Series A preferred stock
|
|
|
—
|
|
|
|
—
|
|
Weighted average common stock outstanding - diluted
|
|
|
242,037,970
|
|
|
|
254,641,100
|
|
Net loss per common share - basic
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
Net loss per common share - diluted
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
During
the three months ended December 31, 2017 and 2016, 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.
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.
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
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.
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 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.
NUKKLEUS INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 –
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recently issued accounting pronouncements
(continued)
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 December 31, 2017 and September 30, 2017, accrued liabilities
consisted of the following:
|
|
December 31, 2017
|
|
|
September 30, 2017
|
|
Professional fees
|
|
$
|
48,594
|
|
|
$
|
2,525
|
|
Directors’ compensation
|
|
|
25,000
|
|
|
|
—
|
|
Interest payable
|
|
|
23,625
|
|
|
|
19,875
|
|
|
|
$
|
97,219
|
|
|
$
|
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 in
Note 1, on May 27, 2016, the Company acquired 100% of the issued and outstanding shares of Iron BVI for 24,156,000 shares of common
stock of the Company. The shares were valued at $.0023 per share. As a result of the First Closing being contingent on the Second
Closing, the 24,156,000 shares for the purchase of IBIH was recorded as “contingent common stock” due to the uncertainty
of the closing of the transaction.
On November 17,
2017, the Company entered into the Iron Settlement Agreement. As a result, IBIH has returned the certificate representing the 24,156,000
shares of common stock of the Company and the shares have been cancelled by the Company.
Common stock and Series A preferred
stock sold for cash
The
Company agreed to sell to CMH 30,900,000 shares of common stock and 200,000 shares of Series A preferred stock for $2,000,000 in
two equal installments. The first 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 December 31, 2017 and 2016, amortization of debt discount amounted to $2,290 and $2,289, respectively.
NUKKLEUS INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 –
SHARE CAPITAL
(continued)
Common stock and Series A preferred
stock sold for cash (continued)
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 December 31, 2017 and 2016, dividends on
redeemable preferred stock amounted to $3,750.
On February 13, 2018,
the Company and CMH entered into a stock redemption agreement for 75,000 shares of preferred stock. See Note 7.
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 $6,000 and $50,000 for
the three months ended December 31, 2017 and 2016, respectively, which have been included in general and administrative expense
– related party on the accompanying unaudited condensed consolidated statements of operations. As of December 31, 2017 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.
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
months ended December 31, 2017 and 2016, 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
|
|
|
Three Months Ended
|
|
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
Service provided to:
|
|
|
|
|
|
|
|
|
FXDD Malta
|
|
$
|
4,800,000
|
|
|
$
|
6,000,000
|
|
|
|
$
|
4,800,000
|
|
|
$
|
6,000,000
|
|
NUKKLEUS INC. AND SUBSIDIARY
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)
During the three
months ended December 31, 2017 and 2016, 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
|
|
|
Three Months Ended
|
|
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
Service received from:
|
|
|
|
|
|
|
|
|
FXDIRECT
|
|
$
|
4,725,000
|
|
|
$
|
5,925,000
|
|
|
|
$
|
4,725,000
|
|
|
$
|
5,925,000
|
|
Due to affiliates
At December 31,
2017 and September 30, 2017, due to related parties consisted of the following:
|
|
December 31, 2017
|
|
|
September 30, 2017
|
|
Forexware LLC
|
|
$
|
299,781
|
|
|
$
|
403,994
|
|
FXDIRECT
|
|
|
175,561
|
|
|
|
—
|
|
|
|
$
|
475,342
|
|
|
$
|
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
Except
as set forth below, there were no events that occurred subsequent to December 31, 2017 that require adjustment to or disclosure
in the consolidated financial statements.
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.