The accompanying notes to unaudited condensed
consolidated financial statements are an integral part of these statements.
The accompanying notes to unaudited condensed
consolidated financial statements are an integral part of these statements.
The accompanying notes to unaudited condensed
consolidated financial statements are an integral part of these statements.
The accompanying notes to unaudited condensed
consolidated financial statements are an integral part of these statements.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1 –
THE COMPANY HISTORY
AND NATURE OF THE BUSINESS
Nukkleus
Inc. (f/k/a Compliance & Risk Management Solutions Inc.) (“Nukkleus” or the “Company”) was formed on
July 29, 2013 in the State of Delaware as a for-profit Company and established a fiscal year end of September 30.
On
February 5, 2016, Charms Investments, Ltd (“Charms”), the former majority shareholder of the Company, sold 146,535,140
shares of common stock to Currency Mountain Holdings Bermuda, Limited (“CMH”), the parent of the Company. CMH is wholly-owned
by an entity that is owned by Emil Assentato, the Company’s Chief Executive Officer (“CEO”), Chief Financial
Officer (“CFO”) and Chairman. In addition, on the same date, CMH acquired 3,937,000 shares of common stock from another
non-affiliated company. The aggregate purchase price paid by CMH was $347,500.
On
May 24, 2016, Nukkleus, its wholly-owned subsidiary, Nukkleus Limited, a Bermuda limited company (“Nukkleus Limited”),
Charms, the former majority shareholder, and CMH entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”),
pursuant to which the Company purchased from CMH certain intellectual property, hardware, software and other assets (collectively,
the “Assets”) in consideration of 48,400,000 shares of common stock of the Company. The Asset Purchase Agreement closed
on May 24, 2016. As a result of such acquisition, the Company’s operations are now focused on the operation of a foreign
exchange trading business utilizing the assets acquired from CMH.
On
May 24, 2016, Nukkleus Limited entered into a General Service Agreement to provide its software, technology, customer sales and
marketing and risk management technology hardware and software solutions package to FML Malta Ltd. In December 2017, Nukkleus Limited,
FML Malta Ltd. and FXDD Malta Limited (“FXDD Malta”) entered into a letter agreement providing that there was an error
in drafting the General Service Agreement and acknowledging that the correct counter-party to Nukkleus Limited in the General Service
Agreement is FXDD Malta. Accordingly, all references to FML Malta Ltd. have been replaced with FXDD Malta. FXDD Malta is a private
limited liability company formed under the laws of Malta. The General Service Agreement entered with FXDD Malta provides that FXDD
Malta will pay Nukkleus Limited at minimum $2,000,000 per month. On October 17, 2017, Nukkleus Limited entered into an amendment
of the General Service Agreement with FXDD Malta. In accordance with the amendment, which was effective as of October 1, 2017,
the minimum amount payable by FXDD Malta to Nukkleus Limited for services was reduced from $2,000,000 per month to $1,600,000 per
month. Emil Assentato is also the majority member of Max Q Investments LLC (“Max Q”), which is managed by Derivative
Marketing Associates Inc. (“DMA”). Mr. Assentato is the sole owner and manager of DMA. Max Q owns 79% of Currency Mountain
Malta LLC, which in turn is the sole shareholder of FXDD Malta
.
In
addition, on May 24, 2016, in order to appropriately service FXDD Malta, Nukkleus Limited entered into a General Service Agreement
with FXDirectDealer LLC (“FXDIRECT”), which provides that Nukkleus Limited will pay FXDIRECT a minimum of $1,975,000
per month in consideration of providing personnel engaged in operational and technical support, marketing, sales support, accounting,
risk monitoring, documentation processing and customer care and support. FXDIRECT may terminate this agreement upon providing 90
days’ written notice. On October 17, 2017, Nukkleus Limited entered into an amendment of the General Service Agreement with
FXDIRECT. Pursuant to the amendment, which was effective as of October 1, 2017, the minimum amount payable by Nukkleus Limited
to FXDIRECT for services was reduced from $1,975,000 per month to $1,575,000 per month. Currency Mountain Holdings LLC is the sole
shareholder of FXDIRECT. Max Q is the majority shareholder of Currency Mountain Holdings LLC.
On
May 27, 2016, the Company entered into a Stock Purchase Agreement (“SPA”) to acquire, from IBIH Limited, a BVI corporation
(“IBIH”) 2,200 issued and outstanding common stock for $1,000,000, representing 9.9% of IBIH. In addition, the Company
acquired 100% of the issued and outstanding shares of GVS Limited (“Iron BVI”), which is the parent corporation of
GVS (AU) Pty Ltd. (“Iron Australia”) for 24,156,000 shares of common stock of the Company. On November 17, 2017, the
Company, IBIH, Terra (FX) Offshore Limited, Ludico Investments Limited, Currency Mountain Holdings LLC and the IBIH Shareholders
entered into a Settlement Agreement and Mutual Release (the “Iron Settlement Agreement”) pursuant to which the SPA
was terminated, all differences between the parties were resolved and settled and the parties fully released the other parties
from any liability. Pursuant to the Iron Settlement Agreement, the Company agreed to (i) have the registered office of Iron Australia
changed, (ii) have its director designees resign as directors of Iron Australia, (iii) appoint Markos Kashiouris, Petros Economides
and Yun Ma as directors of Iron Australia; (iv) and make all required changes with the Australian Securities and Investments Commission.
With respect to Iron BVI, pursuant to the Iron Settlement Agreement, the Company agreed to (i) have the registered office of Iron
BVI changed, (ii) have its director designee resign as a director of Iron BVI, (iii) appoint Cymora Limited as director of Iron
BVI; (iv) and make all required changes with the BVI Registrar of Companies. Further, the Company agreed to return the 2,200 shares
of capital stock of IBIH to the IBIH Shareholders and return 100% of its interest in Iron BVI to IBIH. IBIH agreed to return the
24,156,000 shares of common stock of the Company to the Company for cancellation and to pay the Company $1,000,000. Further, Markos
Kashiouris, Petros Economides and Efstathios Christophi resigned as directors of the Company and waived any directorship fees payable
to them under their letter of appointment dated August 1, 2016. The $1,000,000 has been paid to the Company, net of approximately
$70,000 of legal expenses, in the first fiscal quarter of 2018 and IBIH has returned the certificate representing the 24,156,000
shares of common stock of the Company and the shares have been cancelled by the Company.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1 –
THE COMPANY HISTORY AND NATURE OF THE BUSINESS (continued)
On
June
3, 2016, the Company agreed to sell to Currency Mountain Holdings Bermuda, Limited (“CMH”) 30,900,000 shares of common
stock and 200,000 shares of Series A preferred stock for $2,000,000 in two equal installments. The first closing occurred on June
7, 2016. The second closing was to occur with the closing of the Company’s acquisition of IBIH. As the IBIH transaction has
been terminated, the second transaction with CMH will not proceed
.
In
July 2018, the Company incorporated Nukkleus Malta Holding Ltd., a wholly-owned subsidiary. In July 2018, Nukkleus Malta Holding
Ltd. incorporated Nukkleus Exchange Malta Ltd. and is in the processes of incorporating Nukkleus Payments Malta Ltd. For Nukkleus
Payments Malta Ltd., management is currently exploring obtaining an Electronic Money Institution license to facilitate customer
payment transactions. For Nukkleus Exchange Malta Ltd., the Company seeks to create an electronic exchange whereby it facilitates
the buying and selling of various digital assets as well as traditional currency pairs used in FX trading. Currently, Nukkleus
Exchange Malta Ltd., is in the process of finalizing the exchange and such costs have been paid for by related parties. Projected
costs of this exchange are approximately $900,000. As of March 31, 2019, approximately $811,000 has been incurred by our affiliates
and ownership of the exchange will be transferred to the Company upon completion. Both entities would be regulated by the Malta
Financial Services Authority.
The financial statements have been prepared
using accounting principles generally accepted in the United States of America applicable for a going concern, which assumes that
the Company will realize its assets and discharge its liabilities in the ordinary course of business. The Company
incurred net loss for the six months ended March 31, 2019 of $350,803 and had a working capital deficit of $669,315 at March 31,
2019. Our ability to continue as a going concern is dependent upon the management of expenses and ability of the
Company to obtain the necessary financing to meet its obligations and pay its liabilities arising from normal business operations
when they come due, and upon profitable operations.
We need to either borrow funds or raise
additional capital through equity or debt financings. However, we cannot be certain that such capital (from our shareholders
or third parties) will be available to us or whether such capital will be available on terms that are acceptable to us. Any
such financing likely would be dilutive to existing stockholders and could result in significant financial operating covenants
that would negatively impact our business. If we are unable to raise sufficient additional capital on acceptable terms, we will
have insufficient funds to operate our business or pursue our planned growth.
NOTE 2 –
BASIS
OF PRESENTATION
These
interim condensed consolidated financial statements of the Company and its subsidiaries are unaudited. In the opinion of management,
all adjustments (consisting of normal recurring accruals) and disclosures necessary for a fair presentation of these interim condensed
consolidated financial statements have been included. The results reported in the unaudited condensed consolidated financial statements
for any interim periods are not necessarily indicative of the results that may be reported for the entire year. The accompanying
unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities
and Exchange Commission and do not include all information and footnotes necessary for a complete presentation of financial statements
in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”).
The
Company’s unaudited condensed consolidated financial statements include the accounts of the Company and its consolidated
subsidiaries. These accounts were prepared under the accrual basis of accounting. All significant intercompany accounts and transactions
have been eliminated in consolidation.
Certain
information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with
U.S. GAAP have been condensed or omitted. These unaudited condensed consolidated financial statements should be read in conjunction
with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report
on Form 10-K for the year ended September 30, 2018 filed with the Securities and Exchange Commission on December 20, 2018. The
consolidated balance sheet as of September 30, 2018 contained herein has been derived from the audited consolidated financial statements
as of September 30, 2018, but does not include all disclosures required by U.S. GAAP.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 3 –
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Use of estimates
The
preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results
could differ from these estimates. Significant estimates during the three and six months ended March 31, 2019 and 2018 include
the fair value of the investment in digital currency, bad debt expense, valuation of deferred tax assets and the associated valuation
allowances.
Fair value of financial instruments
and fair value measurements
The
Company adopted the guidance of Accounting Standards Codification (“ASC”) 820 for fair value measurements which clarifies
the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the
inputs used in measuring fair value. Fair value is the price that would be received to sell an asset and paid to transfer a liability
in an orderly transaction between market participants at the measurement date. The Company utilizes valuation techniques to maximize
the use of observable inputs and minimize the use of unobservable inputs. Assets and liabilities are recorded at fair value are
categorized based upon the level of judgment associated with the inputs used to measure their value. Inputs are broadly defined
as assumptions market participants would use in pricing an asset or liability. The three levels of the fair value hierarchy are
as follows
:
|
·
|
Level
1-Inputs are unadjusted quoted prices in active markets
for identical assets or liabilities available at the measurement date.
|
|
·
|
Level
2-Inputs are unadjusted quoted prices for similar assets
and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active,
inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data.
|
|
·
|
Level
3-Inputs are unobservable inputs which reflect the
reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability
based on the best available information.
|
The
carrying amounts reported in the condensed consolidated balance sheets for cash, prepaid expense, due from affiliates, due to affiliates,
accrued liabilities, and accrued liabilities – related party approximate their fair market value based on the short-term
nature of these assets and liabilities.
The
fair
value of the investment in digital currency is determined using the equivalency rate of the digital currency to USD. Digital currency consists
of cryptocurrency denominated assets and are included in current assets. The Company revalues such assets at every reporting period
and recognizes gain or loss as unrealized loss on digital currency, net, on the consolidated statements of operations that are
attributable to the change in the fair value of the digital currency.
The following
table provides the financial assets measured on a recurring basis and reported at fair value on the balance sheet as of March 31,
2019:
|
|
|
|
|
Fair value measurement using
|
|
|
|
Carrying value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Investment - digital currency
|
|
$
|
58,003
|
|
|
$
|
58,003
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
58,003
|
|
The
investment
in digital currency has a cost of $90,071 net of fee, unrealized loss of $32,068 for the six months ended March 31, 2019, and a
fair value of $58,003 at March 31, 2019. There is an unrealized gain of $5,335 for the three months ended March 31, 2019. The Company
did not have any financial asset measured at fair value on a recurring basis on the balance sheet as of September 30, 2018
.
Concentration
of credit risk
The
Company maintains its cash in bank and financial institution deposits that at times may exceed federally insured limits. At March
31, 2019 and September 30, 2018, the Company’s cash balances accounts had approximately $0 and $8,000 in excess of the federally-insured
limits, respectively. The Company has not experienced any losses in such accounts through and as of the date of this report.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 3 –
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Concentration
of credit risk (continued)
The following
table summarizes customer revenue concentrations:
|
|
Three Months
Ended
March 31, 2019
|
|
|
Three Months
Ended
March 31, 2018
|
|
|
Six Months
Ended
March 31, 2019
|
|
|
Six Months
Ended
March 31, 2018
|
|
FXDD Malta - related party
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
The following
table summarizes vendor expense concentrations:
|
|
Three Months
Ended
March 31, 2019
|
|
|
Three Months
Ended
March 31, 2018
|
|
|
Six Months
Ended
March 31, 2019
|
|
|
Six Months
Ended
March 31, 2018
|
|
FXDIRECT - related party
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
Deposit on
software development
In
the first quarter of fiscal 2018, the Company signed an agreement with a third-party for the customization and development of a
trading platform to be used by it. In accordance with the signed agreement, the Company made a deposit on software development
of $50,000. The project was cancelled in the third quarter of fiscal 2018 and the Company received a subsequent reimbursement of
$10,000 of the deposit.
During the three
months ended March 31, 2019, the Company evaluated the collectability. In evaluating the collectability, the Company considers
many factors, including the age of the balance, payment history and the third party’s current credit-worthiness. The balance
of $40,000 was written off after exhaustive efforts at collection.
Revenue recognition
Effective October
1, 2018, the Company adopted ASU No. 2014-09, Revenue from Contracts with Customers ("ASU 2014-09") and other associated
standards. Under the new standard, the Company recognizes revenue when a customer obtains control of promised services or goods
in an amount that reflects the consideration to which the entity expects to receive in exchange for those goods or services. In
addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from
customer contracts. The Company evaluated the new guidance and its adoption did not have a significant impact on the Company’s
financial statements and a cumulative effect adjustment under the modified retrospective method of adoption was not necessary.
There is no change to the Company’s accounting policies. Prior to the adoption of ASU 2014-09, the Company recognized revenue
when persuasive evidence of an arrangement existed, delivery occurred, the fee was fixed or determinable, and collectability was
reasonably assured.
In general, the
Company applies the following steps when recognizing revenue from contracts with customers: (i) identify the contract, (ii) identify
the performance obligations, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations
and (v) recognize revenue when a performance obligation is satisfied. The nature of the Company's contracts with customers relates
to the Company's services performed for a related party under a General Service Agreement ("GSA"). There are multiple
services provided under the GSA and these performance obligations are combined into a single unit of accounting. Fees are recognized
as revenue when the services are completed under the terms of the GSA. Revenue is recorded at gross as the Company is deemed to
be a principal in the transactions.
Income taxes
The
Company
recorded no income tax expense for the three and six months ended March 31, 2019 and 2018 because the estimated annual effective
tax rate was zero. As of March 31, 2019, the Company continues to provide a valuation allowance against its net deferred tax assets
since the Company believes it is more likely than not that its deferred tax assets will not be realized
.
Reclassifications
The
Company has reclassified certain prior period amounts in the accompanying unaudited condensed consolidated statements of operations
in order to be consistent with the current period presentation. These reclassifications had no effect on the previously reported
results of operations.
NUKKLEUS INC. AND SUBSIDIARIES
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 and six months ended March 31, 2019 and 2018, potentially dilutive common shares consist
of common stock issuable upon the conversion of Series A preferred stock (using the if-converted method).
The
following
table presents a reconciliation of basic and diluted net loss per share
:
|
|
Three Months
Ended
March 31, 2019
|
|
|
Three Months
Ended
March 31, 2018
|
|
|
Six Months
Ended
March 31, 2019
|
|
|
Six Months
Ended
March 31, 2018
|
|
Net loss available to common stockholders for basic and diluted net loss per share of common stock
|
|
$
|
(230,901
|
)
|
|
$
|
(27,171
|
)
|
|
$
|
(350,803
|
)
|
|
$
|
(197,159
|
)
|
Weighted average common stock outstanding - basic
|
|
|
230,485,100
|
|
|
|
230,485,100
|
|
|
|
230,485,100
|
|
|
|
236,855,913
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A preferred stock
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Weighted average common stock outstanding - diluted
|
|
|
230,485,100
|
|
|
|
230,485,100
|
|
|
|
230,485,100
|
|
|
|
236,855,913
|
|
Net loss per common share – basic and diluted
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
For
the
three months ended March 31, 2019 and 2018, a total of 1,250,000 shares of common stock from the assumed redemption of the Series
A convertible redeemable preferred stock at the contractual floor of $0.20 per share have been excluded from the computation of
diluted weighted average number of shares of common stock outstanding as they would have had an anti-dilutive impact
.
For
the
six months ended March 31, 2019 and 2018, a total of 1,250,000 and 5,000,000 shares of common stock from the assumed redemption
of the Series A convertible redeemable preferred stock at the contractual floor of $0.20 per share, respectively, have been excluded
from the computation of diluted weighted average number of shares of common stock outstanding as they would have had an anti-dilutive
impact
.
Recently issued
accounting pronouncements
Effective
October
1, 2018, the Company adopted ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and
Cash Payments. This ASU addresses the classification of certain specific cash flow issues including debt prepayment or extinguishment
costs, settlement of certain debt instruments, contingent consideration payments made after a business combination, proceeds from
the settlement of certain insurance claims and distributions received from equity method investees. The adoption of this guidance
did not have a material impact on the Company’s consolidated financial statements
.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 3 –
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recently issued
accounting pronouncements (continued)
Effective
October
1, 2018, the Company adopted ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The ASU
clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions
should be accounted for acquisitions (or disposals) of assets or business. The definition of a business affects many areas of accounting
including acquisitions, disposals, goodwill, and consolidation. The adoption of this guidance did not have a material impact
on the Company’s consolidated financial statements.
Effective
October 1, 2018, the Company adopted ASU No. 2017-09, Compensation – Stock Compensation: Scope of Modification Accounting.
The guidance clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications.
Entities will apply the modification accounting guidance if the value, vesting conditions or classification of the award changes.
The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements
.
In
June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based
Payment Accounting. ASU No. 2018-07 expands the scope of Topic 718 to include share-based payment transactions for acquiring goods
and services from nonemployees. The guidance also specifies that Topic 718 applies to all share-based payment transactions in which
a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment
awards. This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal
years (quarter ending September 30, 2019 for the Company). Early adoption is permitted, but no earlier than an entity’s adoption
date of Topic 606. The Company will evaluate the effects of adopting ASU 2018-07 if and when it is deemed to be applicable.
Other
accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected
to have a material impact on the consolidated financial statements upon adoption. The Company does not discuss recent pronouncements
that are not anticipated to have an impact on or are unrelated to its consolidated financial condition, results of operations,
cash flows or disclosures.
NOTE 4 –
ACCRUED LIABILITIES
At March 31, 2019 and September 30, 2018, accrued liabilities
consisted of the following:
|
|
March 31, 2019
|
|
|
September 30, 2018
|
|
Professional fees
|
|
$
|
27,478
|
|
|
$
|
44,728
|
|
Directors’ compensation
|
|
|
70,537
|
|
|
|
70,000
|
|
Interest payable
|
|
|
29,604
|
|
|
|
27,729
|
|
Other
|
|
|
2,000
|
|
|
|
-
|
|
|
|
$
|
129,619
|
|
|
$
|
142,457
|
|
NOTE 5 –
SHARE CAPITAL
Authorized
shares
The
Company
is authorized to issue 900,000,000 shares of common stock at par value of $0.0001 and 15,000,000 shares of Series A preferred stock
at par value of $0.0001
.
Common stock and Series A preferred
stock sold for cash
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.
|
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 5 –
SHARE CAPITAL
(continued)
Common stock and Series A preferred
stock sold for cash (continued)
On
June 7, 2016, the Company sold to CMH 15,450,000 shares of common stock and 100,000 shares of Series A preferred stock for $1,000,000.
The common stock was recorded as equity and the Series A preferred stock was recorded as a long-term liability. The $1,000,000
of proceeds received was allocated to the common stock and Series A preferred stock according to their relative fair values determined
at the time of issuance, and as a result, the Company recorded a total discount of $45,793 on the Series A preferred stock, which
is being amortized to interest expense to the date of redemption. For the three months ended March 31, 2019 and 2018, amortization
of debt discount amounted to $573 and $24,098, respectively. For the six months ended March 31, 2019 and 2018, amortization of
debt discount amounted to $1,145 and $26,388, 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, 2019 and 2018, dividends on
redeemable preferred stock amounted to $937 and $2,229, respectively
.
For the
six months ended March 31, 2019 and 2018, dividends on redeemable preferred stock amounted to $1,875 and $5,979, 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, 2019
and September 30, 2018, Series A redeemable preferred stock consisted of the following:
|
|
March 31, 2019
|
|
|
September 30, 2018
|
|
Redeemable preferred stock (stated value)
|
|
$
|
250,000
|
|
|
$
|
250,000
|
|
Less: unamortized debt discount
|
|
|
(4,980
|
)
|
|
|
(6,125
|
)
|
Redeemable preferred stock, net
|
|
$
|
245,020
|
|
|
$
|
243,875
|
|
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 are paid to Triple Eight Markets. As compensation
for professional services provided, the Company recognized consulting expenses of $78,500 and $0 for the three months ended
March 31, 2019 and 2018, respectively, which have been included in general and administrative expense – related party on
the accompanying consolidated statements of operations. The Company recognized consulting expenses of $93,500 and $6,000 for the
six months ended March 31, 2019 and 2018, respectively, which have been included in general and administrative expense –
related party on the accompanying consolidated statements of operations.
As
of March 31, 2019 and September 30, 2018, the accrued and unpaid services charge related to Craig Marshak amounted to $10,000 and
$0, respectively, which have been included in accrued liabilities – related party on the accompanying consolidated balance
sheets.
The
Company uses affiliate employees for various services such as the use of accountants to record the books and accounts of the Company
at no charge to those affiliates, which are considered immaterial.
Office space
from related parties
The
Company
uses office space of affiliate companies, free of rent, which is considered immaterial
.
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 6 –
RELATED PARTY
TRANSACTIONS (continued)
Revenue from related party and cost
of revenue from related party
On
May
24, 2016, the Company entered into a General Service Agreement with FXDD Malta, a related party. The Company is to invoice FXDD
Malta a minimum of $2,000,000 per month in consideration for providing personnel and technical support, marketing, accounting,
risk monitoring, documentation processing and customer care and support. On October 17, 2017, the Company entered into an
amendment of the General Service Agreement with FXDD Malta. In accordance with the amendment, which was effective as of October
1, 2017, the minimum amount payable by FXDD Malta to the Company for services was reduced from $2,000,000 per month to $1,600,000
per month. Emil Assentato is also the majority member of Max Q Investments LLC (“Max Q”), which is managed by Derivative
Marketing Associates Inc. (“DMA”). Mr. Assentato is the sole owner and manager of DMA. Max Q owns 79% of Currency Mountain
Malta LLC, which in turn is the sole shareholder of FXDD Malta.
In
addition,
on May 24, 2016, the Company entered into a General Service Agreement with FXDIRECT to pay a minimum of $1,975,000 per month for
receiving personnel and technical support, marketing, accounting, risk monitoring, documentation processing and customer care and
support. On October 17, 2017, the Company entered into an amendment of the General Service Agreement with FXDIRECT. Pursuant
to the amendment, which was effective as of October 1, 2017, the minimum amount payable by the Company to FXDIRECT for services
was reduced from $1,975,000 per month to $1,575,000 per month. Currency Mountain Holdings LLC is the sole shareholder of FXDIRECT.
Max Q is the majority shareholder of Currency Mountain Holdings LLC.
Both
of the above entities are affiliates through common ownership.
During
the three and six months ended March 31, 2019 and 2018, service provided to related party which was recorded as revenue - related
party on the accompanying consolidated statements of operations was as follows
:
|
|
Three Months
Ended
March 31, 2019
|
|
|
Three Months
Ended
March 31, 2018
|
|
|
Six Months
Ended
March 31, 2019
|
|
|
Six Months
Ended
March 31, 2018
|
|
Service provided to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FXDD Malta
|
|
$
|
4,800,000
|
|
|
$
|
4,800,000
|
|
|
$
|
9,600,000
|
|
|
$
|
9,600,000
|
|
|
|
$
|
4,800,000
|
|
|
$
|
4,800,000
|
|
|
$
|
9,600,000
|
|
|
$
|
9,600,000
|
|
During the
three and six months ended March 31, 2019 and 2018, service received from related party which was recorded as cost of revenue -
related party on the accompanying consolidated statements of operations was as follows:
|
|
Three Months
Ended
March 31, 2019
|
|
|
Three Months
Ended
March 31, 2018
|
|
|
Six Months
Ended
March 31, 2019
|
|
|
Six Months
Ended
March 31, 2018
|
|
Service received from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FXDIRECT
|
|
$
|
4,725,000
|
|
|
$
|
4,725,000
|
|
|
$
|
9,450,000
|
|
|
$
|
9,450,000
|
|
|
|
$
|
4,725,000
|
|
|
$
|
4,725,000
|
|
|
$
|
9,450,000
|
|
|
$
|
9,450,000
|
|
Due from affiliates
At March 31, 2019
and September 30, 2018, due from related parties consisted of the following:
|
|
March 31, 2019
|
|
|
September 30, 2018
|
|
FXDD Malta
|
|
$
|
800
|
|
|
$
|
800
|
|
NUKK Capital (1)
|
|
|
3,880
|
|
|
|
-
|
|
|
|
$
|
4,680
|
|
|
$
|
800
|
|
|
(1)
|
An entity controlled by Emil Assentato, the Company’s
chief executive officer and chief financial officer.
|
NUKKLEUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 6 –
RELATED PARTY
TRANSACTIONS (continued)
Due from affiliates (continued)
The
balance of due from related parties at March 31, 2019 amounted to $4,680 and represents investment – digital
currency transferred to NUKK Capital and monies that the Company paid on behalf of FXDD Malta. The balance of due from
related parties at September 30, 2018 amounted to $800 and represents monies that the Company paid on behalf of FXDD Malta.
Management
believes that the related parties’ receivables are fully collectable. Therefore, no allowance for doubtful accounts is deemed
to be required on its due from related parties at March 31, 2019 and September 30, 2018. The Company historically has not experienced
uncollectible receivables from related parties.
Due to affiliates
At March 31, 2019
and September 30, 2018, due to related parties consisted of the following:
|
|
March 31, 2019
|
|
|
September 30, 2018
|
|
Forexware LLC
|
|
$
|
448,593
|
|
|
$
|
300,700
|
|
FXDIRECT
|
|
|
174,136
|
|
|
|
182,270
|
|
CMH
|
|
|
47,000
|
|
|
|
-
|
|
|
|
$
|
669,729
|
|
|
$
|
482,970
|
|
The
balances of due to related parties represent expenses paid by Forexware LLC and FXDIRECT on behalf of the Company and advances from CMH. The balances due to FXDIRECT may also include unsettled funds due related to the General
Service Agreement. The related parties’ payables are short-term in nature, non-interest bearing, unsecured and
repayable on demand.
Costs for creation an electronic exchange
paid by related parties
The Company is creating an electronic exchange
whereby it facilitates the buying and selling of various digital assets as well as traditional currency pairs used in FX trading.
Currently, the Company is in the process of finalizing the exchange and such costs have been paid for by Forexware LLC and FXDIRECT.
Projected costs of this exchange are approximately $900,000. As of March 31, 2019, approximately $811,000 has been incurred by
our related parties and ownership of the exchange will be transferred to the Company upon completion.
NOTE 7 –
SUBSEQUENT
EVENTS
Management
has evaluated subsequent events through the date of the filing.