NUKKLEUS INC. AND SUBSIDIARY
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.
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 (“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 (“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
.
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 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. Both entities would be regulated by the
Malta Financial Services Authority.
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 nine months ended June 30, 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, prepaid expense and other current assets,
deposit on software development, 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 June 30, 2018 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. The Company has not experienced any losses
in such accounts through June 30, 2018. There were no balances in excess of the federally-insured limits at June 30, 2018
and September 30, 2017.
The following
table summarizes customer revenue concentrations:
|
|
Three Months
Ended
June 30, 2018
|
|
|
Three Months Ended
June 30, 2017
|
|
|
Nine Months
Ended
June 30, 2018
|
|
|
Nine Months
Ended
June 30, 2017
|
|
FXDD Malta - related party
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
The following
table summarizes vendor expense concentrations:
|
|
Three Months
Ended
June 30, 2018
|
|
|
Three Months Ended
June 30, 2017
|
|
|
Nine Months
Ended
June 30, 2018
|
|
|
Nine Months
Ended
June 30, 2017
|
|
FXDIRECT - related party
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
Prepaid expense
and other current assets
At June 30, 2018 and September 30, 2017, prepaid expense and
other current assets consisted of the following:
|
|
June 30, 2018
|
|
|
September 30, 2017
|
|
Prepaid professional service charge
|
|
$
|
750
|
|
|
$
|
750
|
|
Prepaid annual listing fee
|
|
|
7,333
|
|
|
|
—
|
|
Other
|
|
|
4,229
|
|
|
|
—
|
|
|
|
$
|
12,312
|
|
|
$
|
750
|
|
These
amounts of prepaid professional service charge and prepaid annual listing fee are recognized as expenses over the related service
periods and the related listing periods.
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. Originally, the Company expected the project to be completed and the platform to be placed in service in August 2018.
As of June 30, 2018, there has not been any delivery. The project will not be moved forward. Therefore, the deposit on software
development of $50,000 is to be refunded to the Company in full by August 15, 2018.
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
.
NUKKLEUS INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 3 –
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income taxes
The Company recorded
no income tax expense for the three and nine months ended June 30, 2018 and 2017 because the estimated annual effective tax rate
was zero. As of June 30, 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.
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 nine months ended June 30, 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
is a reconciliation of the basic and diluted net income (loss) per share computations for the three and nine months ended June
30, 2018 and 2017:
Basic net income
(loss) per share
|
|
Three
|
|
|
Three
|
|
|
Nine
|
|
|
Nine
|
|
|
|
Months
|
|
|
Months
|
|
|
Months
|
|
|
Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Net income (loss) available to common stockholders for basic net income (loss) per share of common stock
|
|
$
|
4,315
|
|
|
$
|
(17,778
|
)
|
|
$
|
(192,844
|
)
|
|
$
|
(153,516
|
)
|
Weighted average common stock outstanding - basic
|
|
|
230,485,100
|
|
|
|
254,641,100
|
|
|
|
234,732,309
|
|
|
|
254,641,100
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.00
|
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
NUKKLEUS INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 3 –
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Per share data
(continued)
Diluted net
income (loss) per share
|
|
Three
|
|
|
Three
|
|
|
Nine
|
|
|
Nine
|
|
|
|
Months
|
|
|
Months
|
|
|
Months
|
|
|
Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Net income (loss) available to common stockholders for basic net income (loss) per share of common stock
|
|
$
|
4,315
|
|
|
$
|
(17,778
|
)
|
|
$
|
(192,844
|
)
|
|
$
|
(153,516
|
)
|
Add: interest expense for redeemable preferred stock
|
|
|
938
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Subtract: unamortized debt discount for redeemable preferred stock
|
|
|
(6,697
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net loss available to common stockholders for diluted net loss per share of common stock
|
|
$
|
(1,444
|
)
|
|
$
|
(17,778
|
)
|
|
$
|
(192,844
|
)
|
|
$
|
(153,516
|
)
|
Weighted average common stock outstanding - basic
|
|
|
230,485,100
|
|
|
|
254,641,100
|
|
|
|
234,732,309
|
|
|
|
254,641,100
|
|
Effect of dilutive debenture:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A preferred stock
|
|
|
1,250,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Weighted average common stock outstanding - diluted
|
|
|
231,735,100
|
|
|
|
254,641,100
|
|
|
|
234,732,309
|
|
|
|
254,641,100
|
|
Net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
During
the nine months ended June 30, 2018 and the three and nine months ended June 30, 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
segregated prior period related party general and administrative expenses 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 adoption
of this guidance will not 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 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
adoption of this guidance will not have a material impact on the Company’s consolidated financial statements.
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 adoption of this guidance will not have a material impact on the Company’s consolidated
financial statements.
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 will evaluate the effects of adopting this guidance if and when it is deemed to be applicable.
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 will evaluate the effects of adopting this guidance if and when it is deemed to be applicable.
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 will evaluate the effects of adopting this
guidance if and when it is deemed to be applicable.
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.
NUKKLEUS INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 4 –
ACCRUED LIABILITIES
At June 30, 2018 and September 30, 2017, accrued liabilities
consisted of the following:
|
|
June 30, 2018
|
|
|
September 30, 2017
|
|
Professional fees
|
|
$
|
9,025
|
|
|
$
|
2,525
|
|
Directors’ compensation
|
|
|
55,000
|
|
|
|
—
|
|
Interest payable
|
|
|
26,792
|
|
|
|
19,875
|
|
|
|
$
|
90,817
|
|
|
$
|
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.
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 closing 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 June 30, 2018 and 2017, amortization of debt discount amounted to $572 and $2,290, respectively.
For the nine months ended June 30, 2018 and 2017, amortization of debt discount amounted to $26,960 and $6,869, 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 June 30, 2018 and 2017, dividends on redeemable
preferred stock amounted to $938 and $3,750, respectively. For the nine months ended June 30, 2018 and 2017, dividends on
redeemable preferred stock amounted to $6,917 and $11,250, 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)
As a result of
the termination of the IBIH transaction, the Company and CMH have agreed to enter into that certain Stock Redemption Agreement
dated February 13, 2018 providing that 75,000 CMH Preferred Shares were redeemed and cancelled in consideration of $750,000 which
occurred on February 13, 2018.
At June 30, 2018
and September 30, 2017, Series A redeemable preferred stock consisted of the following:
|
|
June 30, 2018
|
|
|
September 30, 2017
|
|
Redeemable preferred stock (stated value)
|
|
$
|
250,000
|
|
|
$
|
1,000,000
|
|
Less: unamortized debt discount
|
|
|
(6,697
|
)
|
|
|
(33,657
|
)
|
Redeemable preferred stock, net
|
|
$
|
243,303
|
|
|
$
|
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 are paid to Triple Eight Markets.
As
compensation for professional services provided,
the Company recognized consulting expenses of $0 and $30,000 for the
three months ended June 30, 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 $95,000 for
the nine months ended June 30, 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 June 30, 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.
The Company uses
affiliate employees for various services such as the use of accountants to record the books and accounts of the Company at no charge
to those affiliates, which are considered immaterial.
Office space
from related parties
The Company uses
office space of affiliate companies, free of rent, which is considered immaterial.
Revenue from related party and cost
of revenue from related party
On May 24, 2016,
the Company entered into a General Service Agreement with FXDD Malta, a related party. The Company is to invoice FXDD Malta a minimum
of $2,000,000 per month in consideration for providing personnel and technical support, marketing, accounting, risk monitoring,
documentation processing and customer care and support.
On October 17, 2017, the Company
entered into an amendment of the General Service Agreement with FXDD Malta. In accordance with the amendment, which was effective
as of October 1, 2017, the minimum amount payable by FXDD Malta to the Company for services was reduced from $2,000,000 per month
to $1,600,000 per month. Emil Assentato is also the majority member of Max Q Investments LLC (“Max Q”), which is managed
by Derivative Marketing Associates Inc. (“DMA”). Mr. Assentato is the sole owner and manager of DMA. Max Q owns 79%
of Currency Mountain Malta LLC, which in turn is the sole shareholder of FXDD Malta.
In addition, on
May 24, 2016, the Company entered into a General Service Agreement with FXDIRECT to pay a minimum of $1,975,000 per month for receiving
personnel and technical support, marketing, accounting, risk monitoring, documentation processing and customer care and support.
On
October 17, 2017, the Company entered into an amendment of the General Service Agreement with FXDIRECT. Pursuant to the amendment,
which was effective as of October 1, 2017, the minimum amount payable by the Company to FXDIRECT for services was reduced from
$1,975,000 per month to $1,575,000 per month. Currency Mountain Holdings LLC is the sole shareholder of FXDIRECT. Max Q is the
majority shareholder of Currency Mountain Holdings LLC.
Both of the above
entities are affiliates through common ownership.
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
and nine months ended June 30, 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
June 30, 2018
|
|
|
Three Months Ended
June 30, 2017
|
|
|
Nine Months
Ended
June 30, 2018
|
|
|
Nine Months Ended
June 30, 2017
|
|
Service provided to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FXDD Malta
|
|
$
|
4,800,000
|
|
|
$
|
6,000,000
|
|
|
$
|
14,400,000
|
|
|
$
|
18,000,000
|
|
|
|
$
|
4,800,000
|
|
|
$
|
6,000,000
|
|
|
$
|
14,400,000
|
|
|
$
|
18,000,000
|
|
During
the three and nine months ended June 30, 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
June 30, 2018
|
|
|
Three Months Ended
June 30, 2017
|
|
|
Nine Months
Ended
June 30, 2018
|
|
|
Nine Months Ended
June 30, 2017
|
|
Service received from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FXDIRECT
|
|
$
|
4,725,000
|
|
|
$
|
5,925,000
|
|
|
$
|
14,175,000
|
|
|
$
|
17,775,000
|
|
|
|
$
|
4,725,000
|
|
|
$
|
5,925,000
|
|
|
$
|
14,175,000
|
|
|
$
|
17,775,000
|
|
Due to affiliates
At June 30, 2018
and September 30, 2017, due to related parties consisted of the following:
|
|
June 30, 2018
|
|
|
September 30, 2017
|
|
Forexware LLC
|
|
$
|
299,782
|
|
|
$
|
403,994
|
|
FXDIRECT
|
|
|
180,737
|
|
|
|
—
|
|
|
|
$
|
480,519
|
|
|
$
|
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 June 30, 2018 that require adjustment to or disclosure in the unaudited condensed consolidated
financial statements.