Nukkleus Inc. - Quarter Report: 2017 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

For the quarterly period ended June 30, 2017.

OR

For the transition period from                  to                      .

Commission file number: 333-192647

Nukkleus Inc.

 (Exact name of registrant in its charter)

Issuer’s telephone number: 212-791-4663

Securities registered under Section 12(b) of the Exchange Act: None

Securities registered under Section 12(g) of the Exchange Act: Common Stock, par value $0.0001

Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 day. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ☐     No ☐

(Does not currently apply to the Registrant)

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 if the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date.

TABLE OF CONTENTS

PART I. Financial Information

Item 1. Interim Financial Statements.

NUKKLEUS INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF JUNE 30, 2017 (UNAUDITED) AND SEPTEMBER 30, 2016

The accompanying notes to condensed consolidated financial statements are an integral part of these statements.

NUKKLEUS INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS 

FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2017 AND 2016 (UNAUDITED)

The accompanying notes to condensed consolidated financial statements are an integral part of these statements.

NUKKLEUS INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED JUNE 30, 2017 AND 2016 (UNAUDITED)

The accompanying notes to condensed consolidated financial statements are an integral part of these statements.

NUKKLEUS INC. AND SUBSIDIARY

NOTES TO 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 CEO, 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 Nukkleus 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 Nukkleus. The Asset Purchase Agreement closed on May 24, 2016 (the “Closing”). As a result of such acquisition, our 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 Services Agreement to provide its software, technology, customer sales and marketing and risk management technology hardware and software solutions package to FML Malta, Ltd. (“FML Malta”), a private limited liability company formed under the laws of Malta. The General Services Agreement entered with FML Malta provides that FML Malta will pay the Subsidiary at minimum $2,000,000 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 FML Malta. In addition, in order to appropriately service FML Malta, the Subsidiary entered into a General Services 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. 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, a BVI corporation (“Iron Australia”) for 24,156,000 shares of common stock of the Company (‘first closing’). The cost of acquisition paid in cash has been recorded on the balance sheet as a “deposit on potential acquisition,” and the common stock as “contingent common stock” as the transaction is contingent upon future event(s) (see the following paragraph).

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 is subject to the Company signing an option agreement with FML 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 are subject to regulatory approval, where applicable. 

The terms of the Agreement stipulated that if the Second Closing does not occur before November 28, 2016, the $1,000,000 will be returned to the Company and the first closing will be unwound. 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. Prior to November 28, 2016, the Cyprus regulatory authority (“CYSEC”) granted all regulatory approvals for the transaction with Nukkleus to be consummated. Thereafter, additional submissions were made to the London FCA to commence the regulatory approval process in accordance with the terms of the SPA. Then, in December of 2016, the parties agreed to suspend the request for regulatory approval by the London FCA, and will be amending the SPA to reflect that no regulatory approval would be needed to complete the Second Closing, based on further contemplated changes to the transaction structure. The amended SPA will also reflect that there will be no firm date to complete the Second Closing.

As part of the above transaction, the parties have entered into an engagement agreement with Bentley Associates L.P. (“Bentley”) providing that Nukkleus will pay Bentley $600,000 in consideration of financial advisory services associated with the acquisition of IBIH. The fee may be paid in cash or stock but the cash portion may not be less than $400,000 and is to be paid following the closing of a financing transaction in excess of $2,500,000, subject to the terms and conditions contained in the engagement agreement.

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. The Second Closing will occur with the closing of the Company’s acquisition of IBIH.

Iron Australia has 100% ownership in GVS (AU) Pty Ltd (“GVS”). GVS was incorporated on April 15, 2010 as a company structured to operate in the financial services sector. It is authorized and regulated by the Australian Securities and Investments Commission (ASIC) and has an Australian Financial Services License (AFSL no. 417482) to allow for the provision of advice, deal and make a market in derivatives and foreign exchange contracts to retail and wholesale clients. GVS services wholesale and retail clients within Australia and the Asia Pacific region under the brand names used by IBIH. GVS currently deals as principal when dealing / issuing and acting as a market maker in derivatives and foreign exchange contracts. GVS provides, via its trading platform, its clients with direct access to the rates/prices at which GVS is prepared to deal. All clients’ transactions are executed with GVS and then automatically hedged on a back to back basis with its regulated affiliate counterparty, IronFX Global Limited, a subsidiary of IBIH. GVS has the necessary organizational functions/units as well as the required personnel in place to perform its operations. This includes an appointed Responsible Manager and additional staff such as a sales manager, certain number of account managers and outsourced professionals.

IBIH, which the Company presently owns 9.9% of the issued and outstanding capital stock, through its brand IronFX, is a leading online provider of retail foreign exchange (FX) trading and related online trading services with offices in eight countries around the world (but excluding the United States and U.S. territories). IronFX offers its customers 24-hour, five days a week direct access to the global over-the-counter (OTC) FX market, which is a decentralized market in which participants trade directly with one another rather than through a central exchange. In an FX trade, participants effectively buy one currency and simultaneously sell another currency, with the two currencies that make up the trade being referred to as a “currency pair.” IronFX presents customers with price quotations on over 200 tradable instruments, including over 120 currency pairs, and provides customers the ability to trade FX derivatives contracts on currency pairs through a product referred to as Contracts For Difference (CFD). IronFX also offers other CFD products, including CFDs on metals, such as gold, on European and U.S. listed stocks and on futures linked to other products. Since IronFX commenced operations in December 2010, it experienced rapid growth until 2014. From 2014, it commenced an overall restructuring program with a view to reduce costs in light of the market conditions following the Swiss National Bank event.

On June 3, 2016, the Company filed a Certificate of Amendment to its Certificate of Incorporation amending the first paragraph of the fourth article increasing its authorized shares of common stock to 900,000,000. The par value and preferred shares were not amended.

On August 1, 2016, the size of the Board of Directors of the Company was increased from one to six and Craig Marshak, Jacob Lahav, Markos A. Kashiouris, Efstathios Christophi and Petros G. Economides were appointed as directors of the Company.

The condensed consolidated 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. Since inception, the Company has incurred net losses of $532,116.

The Company’s ability to continue as a going concern is dependent upon the management of expenses and ability of the Company to obtain the necessary financing to meet its obligations and pay its liabilities arising from normal business operations when they come due, and upon profitable operations.

The Company either needs to borrow funds or raise additional capital through equity or debt financings. However, it cannot be certain that such capital (from its stockholders or third parties) will be available or whether such capital will be available on terms that are acceptable. Any such financing likely would be dilutive to existing stockholders and could result in significant financial operating covenants that would negatively impact its business. If the Company is unable to raise sufficient additional capital on acceptable terms, it will have insufficient funds to operate its business or pursue its planned growth.

Note 2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All significant intercompany transactions and balances have been eliminated in consolidation.

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The consolidated balance sheet at September 30, 2016 was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. The other information in these condensed consolidated financial statements is unaudited but, in the opinion of management, reflects all adjustments necessary for a fair presentation of the results for the periods covered. These condensed consolidated financial statements should be read in conjunction with the financial statements and additional information as contained in our annual report on Form 10-K for the year ended September 30, 2016.

Loss per Common Share

Basic loss per share is computed by dividing the net loss attributable to the common stockholders by the weighted average number of shares of common stock outstanding during the period. Fully diluted loss per share is computed similar to basic loss per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. There were no dilutive financial instruments issued or outstanding for the period ended June 30, 2017.

Revenue Recognition

Prior to February 13, 2015, the Company derived its revenue from the sale of general compliance and risk management consulting services (professional services revenue). The Company utilizes written contracts as the means to establish the terms and conditions of services sold to customers.

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:

The Company records revenues and expenses related to the Global 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.

Fair Value of Financial Instruments

The Company estimates the fair value of financial instruments using the available market information and valuation methods. Considerable judgment is required in estimating fair value. Accordingly, the estimates of fair value may not be indicative of the amounts the Company could realize in a current market exchange. As of June 30, 2017, the carrying value of accrued taxes, accrued liabilities, and due to/due from affiliates approximated fair value due to the short-term nature and maturity of these instruments. 

Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of June 30, 2017. Actual results could differ from those estimates made by management.

Recently Issued Accounting Pronouncements

ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” The objective of ASU 2014-09 is to require an entity to recognize the amount of revenue which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance under U.S. GAAP when it becomes effective. The amendments become effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual reporting periods (quarter ended December 31, 2018 for the Company). Early application is permitted for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The standard allows an entity to apply the amendments in ASU 2014-09 using either the retrospective or cumulative effect transition method. The Company is currently evaluating the effects of adopting ASU 2014-09 on its consolidated financial statements.

ASU 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” This ASU requires management to determine whether substantial doubt exists regarding the entity’s going concern presumption, which generally refers to an entity’s ability to meet its obligations as they become due. If substantial doubt exists, certain disclosures are required. As such, management will now have primary responsibility for the going concern assessment under U.S. GAAP. To date, this responsibility has rested principally with the independent auditor. The amendments in ASU 2014-15 apply to all entities, unless they have adopted the liquidation basis of accounting under Subtopic 205-30. The new standard applies prospectively to annual reporting periods beginning after December 15, 2016, including interim periods within those annual reporting periods (quarter ended December 31, 2017 for the Company). Early application is permitted. The Company is currently evaluating the effects of adopting ASU 2014-15 on its consolidated financial statements, but the adoption of ASU 2014-15 is not expected to have a significant impact.

ASU 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis.” Effective October 1, 2016, the Company adopted ASU 2015-02. The amendments in ASU 2015-02 change the analysis that the reporting entity must perform to determine whether it should consolidate certain types of legal entities. A reporting entity may apply the amendments in ASU 2015-02 using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption. A reporting entity also may apply the amendments retrospectively. The adoption of ASU 2015-02 did not have a significant impact on the Company’s consolidated financial statements.

ASU 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes.” In November 2015, the FASB issued (“ASU 2015-17”). ASU 2015-17 requires deferred tax assets and liabilities to be classified as noncurrent in the consolidated balance sheet. ASU 2015-17 becomes effective for annual reporting periods beginning after December 15, 2016, including interim periods within those annual reporting periods (quarter ended December 31, 2017 for the Company). Early adoption is permitted. A reporting entity should apply the amendment prospectively or retrospectively. The Company is currently evaluating the effects of adopting ASU 2015-17 on its consolidated financial statements but the adoption is not expected to have a significant impact as the Company continues to provide a full valuation allowance against its net deferred tax assets.

ASU 2016-01, “Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” This new guidance makes targeted improvements to existing U.S. GAAP by: (i) requiring equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (ii) requiring public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (iii) requiring separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; (iv) eliminating the requirement to disclose the fair value of financial instruments measured at amortized cost for organizations that are not public business entities; (v) eliminating the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; and (vi) requiring a reporting organization to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk (also referred to as “own credit”) when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. Public business entities must apply the new requirements for annual reporting periods beginning after December 15, 2017, including interim periods within those annual reporting periods (quarter ended December 31, 2018 for the Company). The Company is currently evaluating the effects of adopting ASU 2016-01 on its consolidated financial statements.

ASU 2016-02, “Leases (Topic 842).” Under this new guidance, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current U.S. GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current U.S. GAAP, which requires only capital leases to be recognized on the balance sheet, the new ASU will require both types of leases to be recognized on the balance sheet. The ASU also will require disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements. The ASU will take effect for public companies for annual reporting periods beginning after December 15, 2018, including interim periods within those annual reporting periods (quarter ended December 31, 2019 for the Company). Early adoption is permitted. The Company is currently evaluating the effects of adopting ASU 2016-02 on its consolidated financial statements, but the adoption is not expected to have a significant impact as of the filing of this report.

ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing (“ASU 2016-10”).” The amendments in ASU 2016-10 clarify the following two aspects of Topic 606: (a) Identifying performance obligations; and (b) 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 ended December 31, 2018 for the Company). The Company is currently evaluating the effects of adopting ASU 2016-10 on its consolidated financial statements.

ASU 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients (“ASU 2016-12”).” The amendments in ASU 2016-12 provide clarifying guidance in certain narrow areas and add some practical expedients. Specifically, the amendments in this update (1) clarify the objective of the collectability criterion in step 1, and provides additional clarification for when to recognize revenue for a contract that fails step 1, (2) permit an entity, as an accounting policy election, 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, and clarifies that the variable consideration guidance applies only to variability resulting from reasons other than the form of the consideration, (4) provide a practical expedients 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, (5) clarifies that a completed contract for purposes of transition is a contract for which all (or substantially all) of the revenues was recognized under legacy GAAP before the date of initial application. Further, accounting for elements of a contract that do not affect revenue under legacy GAAP are irrelevant to the assessment of whether a contract is complete. In addition, the amendments permit an entity to apply the modified retrospective transition method either to all contracts or only to contracts that are not completed contracts, and (6) clarifies 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. However, an entity is still required to disclose the effect of the changes on any prior periods retrospectively adjusted. The effective date and transition requirements for the amendments are the same as the effective date and transition requirements as Topic 606. The guidance will have the same effective date and transition requirements as the ASU 2014-09. The Company is currently evaluating the effects of adopting ASU 2016-12 on its consolidated financial statements.

ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”).” ASU 2016-15 eliminates the diversity in practice related to the classification of certain cash receipts and payments for debt prepayments or extinguishment costs, the maturing of a zero-coupon bond, the settlement of contingent liabilities arising from a business combination, proceeds from insurance settlements, distributions from certain equity method investees and beneficial interests obtained in a financial asset securitization. ASU 2016-15 designates the appropriate cash flow classification, including requirements to allocate certain components of these cash receipts and payments among operating, investing and financing activities. The guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual reporting periods (quarter ended December 31, 2018 for the Company). The Company is currently evaluating the effects of adopting ASU 2016-15 on its consolidated financial statements, but the adoption is not expected to have a significant impact as of the filing of this report. 

ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory (“ASU 2016-16”).” In October 2016, the FASB issued ASU 2016-16 with the objective to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. The new standard will require entities to recognize the income tax consequences of an intra-entity transfer of non-inventory asset when the transfer occurs. The guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual reporting periods (quarter ended December 31, 2018 for the Company). The Company is currently evaluating the effects of adopting ASU 2016-16 on its consolidated financial statements but the adoption is not expected to have a significant impact as of the filing of this report.

ASU 2016-17, “Consolidation (Topic 810): Interests Held through Related Parties That Are Under Common Control (“ASU 2016-17”).” In October 2016, the FASB issued ASU 2016-17 which amends the guidance issued with ASU 2015-02 in order to make it less likely that a single decision maker would individually meet the characteristics to be the primary beneficiary of a Variable Interest Entity (“VIE”). When a decision maker or service provider considers indirect interests held through related parties under common control, they perform two steps. The second step was amended with this guidance to say that the decision maker should consider interests held by these related parties on a proportionate basis when determining the primary beneficiary of the VIE rather than in their entirety as was called for in the previous guidance. This ASU will be effective for annual reporting periods beginning after December 15, 2016, including interim periods within those annual reporting periods (quarter ended December 31, 2017 for the Company). Early adoption is not permitted. The Company is currently evaluating the effects of adopting ASU 2016-17 on its consolidated financial statements but the adoption is not expected to have a significant impact as of the filing of this report.

ASU 2017-01, “Business Combinations (Topic 805) Clarifying the Definition of a Business (“ASU 2017-01”).” In January 2017, the FASB issued ASU 2017-01 to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. 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 ended December 31, 2018 for the Company). The Company is currently evaluating the impact of adopting ASU 2017-01 on its consolidated financial statements.

Management does not believe that any other recently issued, but not yet effective, accounting standard if currently adopted would have a material effect on the accompanying financial statements.

3. Share Capital

On May 27, 2016, the Company entered into a Stock Purchase Agreement (“SPA”) to acquire, from 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 Iron Australia for 24,156,000 shares of common stock of the Company (‘first closing’). The cost of acquisition paid in cash has been recorded on the balance sheet as a “deposit on potential acquisition,” and the common stock as “contingent common stock” as the transaction is contingent upon future event(s) (see the following paragraph). The shares were valued at $.0023 per share. The deposit on potential acquisition was moved to non-current assets as of December 31, 2016, due to the uncertainty of the timing of the Second Closing as noted below.

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 is subject to the Company signing an option agreement with FML Malta and FXDD Trading Limited, providing that the Company may acquire both entities for $1. The terms of the Agreement stipulated that if the Second Closing does not occur before November 28, 2016, the $1,000,000 will be returned to the Company and the first closing will be unwound. 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. Prior to November 28, 2016, the Cyprus regulatory authority (“CYSEC”) granted all regulatory approvals for the transaction with Nukkleus to be consummated. Thereafter, additional submissions were made to the London FCA to commence the regulatory approval process in accordance with the terms of the SPA. Then, in December of 2016, the parties agreed to suspend the request for regulatory approval by the London FCA, and will be amending the SPA to reflect that no regulatory approval would be needed to complete the Second Closing, based on further contemplated changes to the transaction structure. The amended SPA will also reflect that there will be no firm date to complete the Second Closing.

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. The Second Closing will occur with the closing of the Company’s acquisition of IBIH.

The Series A preferred stock has the following key terms:

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 discount on the Series A preferred stock, which is being amortized to interest expense to the date of redemption. 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.

4. Related-Party Transactions

On May 23, 2016, the Company engaged Bentley to act as the Company’s exclusive financial advisor (the “Bentley Engagement”) in connection with the IronFX transaction related to the SPA in consideration of a transaction fee equal to approximately $600,000 in cash and stock of the Company (the “Transaction Fee”). This transaction fee is payable upon the consummation of the IronFX transaction. As part of the Bentley Engagement, Mr. Craig Marshak, a director, acted as a sub-advisor to Bentley and is entitled to a portion of the Transaction Fee. The Company has not paid or recorded any fees as of June 30, 2017 in connection with the Bentley Engagement, as the Transaction Fee is a contingent liability and will be recorded upon consummation of the related transaction.

Nukkleus agreed to retain Craig Marshak, a principal of Triple Eight Markets, for a term of 18 months with a monthly fee of $7,000 to act as a business and financial advisor. Under this agreement and as compensation for other services provided, the Company has recognized an expense related to Triple Eight Markets, a total of $30,000 and $95,000 for the three and nine months period ended June 30, 2017, respectively.

Nukkleus 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. Also, the Company uses office space of affiliate companies, free of rent.

On May 24, 2016, the Company acquired selected technology assets from CMH. These assets were originally acquired by CMH from Forexware, LLC and FXDIRECT. All of these entities are related companies through common control. CMH agreed to permit Forexware, LLC and FXDIRECT a perpetual, irrevocable, non-assignable (except for such assignments resulting from a merger and/or acquisition), royalty-free, fully paid-up, worldwide non-exclusive, limited license to the Intellectual Property. As the acquisition was from an entity under common control, the Company recorded these assets at CMH’s carrying values, which were zero.

On May 24, 2016, the Company entered into a Global Service Agreement with FXDD Trading Limited. This service agreement was replaced by one with FML Malta, a related party, with substantially the same terms. The Company is to invoice FML 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.

In addition, the Company entered into a Global 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. Currency Mountain Holdings LLC is the sole shareholder of FXDIRECT. Max Q is the majority shareholder of Currency Mountain Holdings LLC.

FML Malta made direct payments to FXDIRECT in satisfaction of the amounts due Nukkleus, resulting in a receivable of $25,000, as of June 30, 2017.

Both of the above entities are affiliates through common ownership. As of June 30, 2017, the amount due from/to a related party is as follows:

The related-party receivable represents monies that FML Malta paid to FXDIRECT on behalf of Nukkleus.

The related-party payable represents expenses paid by Forexware, LLC and FXDIRECT on behalf of Nukkleus.

As of June 30, 2017, the due to former stockholder balance principally consisted of professional and various filings fees borne by the majority former stockholder of the Company.

5. Subsequent events

There were no events that occurred subsequent to June 30, 2017 that require adjustment to or disclosure in the financial statements.

Item 2. Management’s Discussion and Analysis or Plan of Operation.

FORWARD-LOOKING STATEMENTS

Certain matters discussed herein are forward-looking statements. Such forward-looking statements contained in this Form 10-Q involve risks and uncertainties, including statements as to:

These forward-looking statements can generally be identified as such because the context of the statement will include words such as we “believe,” “anticipate,” “expect,” “estimate” or words of similar meaning. Similarly, statements that describe our future plans, objectives or goals are also forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties which are described in close proximity to such statements and which could cause actual results to differ materially from those anticipated as of the date of filing of this Form 10-Q. Shareholders, potential investors and other readers are urged to consider these factors in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included herein are only made as of the date of filing of this Form 10-Q, and we undertake no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.

This discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results may differ materially from those anticipated in these forward-looking statements.

Overview

We are a financial technology company which is focused on providing software and technology solutions for the worldwide retail foreign exchange (“FX”) trading industry.  Nukkleus primarily provides its software, technology, customer sales and marketing and risk management technology hardware and software solutions package to FML Malta.   The FXDD brand (e.g., see FXDD.com) is the brand utilized in the retail forex trading industry by FML Malta.

As part of the Assets acquired, Nukkleus acquired ownership of FOREXWARE, the primary software suite and technology solution which powers the FXDD brand globally today.  Nukkleus also has ownership of the FOREXWARE brand name.  Nukkleus has also acquired ownership of the customer interface and other software trading solutions being used by FXDD.com.  By virtue of its relationship with FML Malta and FXDIRECT, Nukkleus provides turnkey software and technology solutions for FXDD.com   Nukkleus offers the customers of FXDD 24 hour, five days a week direct access to the global over the counter (“OTC”) FX market, which is a decentralized market in which participants trade directly with one another, rather than through a central exchange.

In an FX trade, participants effectively buy one currency and simultaneously sell another currency, with the two currencies that make up the trade being referred to as a “currency pair.” The Nukkleus software and technology solutions enables FXDD to present its customers with price quotations on over the counter tradeable instruments, including over the counter currency pairs, and also provide our customers the ability to trade FX derivative contracts on currency pairs through a product referred to as Contracts for Difference (“CFD”). The Nukkleus software solutions also offer other CFD products, including CFDs on metals, such as gold, and on futures linked to other products.

The acquisition of a 9.9% shareholder stake in IBIH, as well as the acquisition of GVS Ltd. is just a first intended step towards the Company’s long-term strategy of identifying leading retail forex brands from around the world as well as leading financial companies related to the industry, which can potentially be included and synergistically folded into the Company. It is the stated intention of the Company’s management to maintain the separate brand identity, operational autonomy, and segregated customer deposits for each individual retail forex brand it may potentially acquire in the future, while simultaneously capitalizing on efficiencies afforded by scale, shared backbones and optimized regulatory capital structure.

As a result of these above described transactions, which were entered in May 2016, as well as further contemplated transactions, the Company’s goal is to create an industry leading sector consolidated platform, combining strong global retail and institutional trading flows covering FX, commodities, futures, CFD and equities, with a cutting edge technological product suite, turnkey software and technological development capabilities. These contemplated transactions could potentially result in a global financial trading and financial technology group, with operations and clients, as well as one of the most comprehensive regulatory licenses coverage in the world. 

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 and from the regulators in Cyprus (“Second Closing”). The Second Closing is subject to the Company signing an option agreement with FML Malta, Ltd and FXDD Trading Limited, providing that the Company may acquire both entities for $1. The terms of the Agreement stipulated that if the Second Closing does not occur before November 28, 2016, the $1,000,000 will be returned to the Company and the first closing will be unwound. Prior to November 28, 2016, the Cyprus regulatory authority (“CYSEC”) granted all regulatory approvals for the transaction with Nukkleus to be consummated. Thereafter, additional submissions were made to the London FCA to commence the regulatory approval process in accordance with the terms of the SPA. Then, in December of 2016, the parties agreed to suspend the request for regulatory approval by the London FCA, and will be amending the SPA to reflect that no regulatory approval would be needed to complete the Second Closing, based on further contemplated changes to the transaction structure. The amended SPA will also reflect that there will be no firm date to complete the Second Closing. 

Results of Operations

Summary of Key Results

For the three months ended June 30, 2017 versus June 30, 2016

Revenues and Cost of Revenues

Total revenues for the three months ended June 30, 2017 versus June 30, 2016 were $6,000,000 and $2,400,000, respectively. Revenues are from general support services rendered to a related party. The significant increase is due to revenues derived from the service agreement, which commenced in May 2016.

Costs of revenues for the three months ended June 30, 2017 versus June 30, 2016 were $5,925,000 and $2,370,000, respectively.  Cost of revenue represents amount incurred for general support services rendered by a related party.  The significant increase in costs was due to expenses incurred as a result of the Global Services Agreement, which commenced in May 2016.

Operating Expenses

Total operating expenses for the three months ended June 30, 2017 versus June 30, 2016, were $86,738 versus $158,429, respectively.  These amounts were primarily third-party professional fees.

For the nine months ended June 30, 2017 versus June 30, 2016

Revenues and Cost of Revenues

Total revenues for the nine months ended June 30, 2017 versus June 30, 2016 were $18,000,000 and $2,400,000, respectively. Revenues are from general support services rendered to a related party. The significant increase is due to revenues derived from the service agreement, which commenced in May 2016.

Costs of revenues for the nine months ended June 30, 2017 versus June 30, 2016 were $17,775,000 and $2,370,000, respectively.  Cost of revenue represents amount incurred for general support services rendered by a related party.  The significant increase in costs was due to expenses incurred as a result of the Global Services Agreement, which commenced in May 2016.

Operating Expenses

Total operating expenses for the nine months ended June 30, 2017 versus June 30, 2016, were $360,397 versus $168,429 respectively.   These amounts were primarily third-party professional fees.

Liquidity and Capital Resources

At June 30, 2017, we had cash of $330,769 versus $0 as of September 30, 2016. Cash at June 30, 2017 was provided by operating activities.

There were no investing or financing activities for the nine months ended June 30, 2017.

Our ability to continue as a going concern is dependent upon the management of expenses and our ability to obtain the necessary financing to meet our obligations and pay our liabilities arising from normal business operations when they come due, and upon profitable operations.

We need to either borrow funds or raise additional capital through equity or debt financings.  However, we cannot be certain that such capital (from our stockholders or third parties) will be available to us or whether such capital will be available on terms that are acceptable to us.   Any such financing likely would be dilutive to existing stockholders and could result in significant financial operating covenants that would negatively impact our business. If we are unable to raise sufficient additional capital on acceptable terms, we will have insufficient funds to operate our business or pursue our planned growth.

Consistent with Section 144 of the Delaware General Corporation Law, it is our current policy that all transactions between us and our officers, directors and their affiliates will be entered into only if such transactions are approved by a majority of the disinterested directors, are approved by vote of the stockholders, or are fair to us as a corporation as of the time it is authorized, approved or ratified by the board. We will conduct an appropriate review of all related party transactions on an ongoing basis.

With respect to shares issued for services, the shares authorized to be issued by the board of directors are recorded at the fair value of the services received, or the fair value of the shares, whichever is more reliably measurable.

Off-Balance Sheet Arrangements

We had no outstanding derivative financial instruments, off-balance sheet guarantees, interest rate swap transactions or foreign currency contracts. We do not engage in trading activities involving non-exchange traded contracts.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not applicable to a “smaller reporting company” as defined in Item 10(f)(1) of SEC Regulation S-K.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

Our Chief Executive Officer /Chief Financial Officer is responsible for establishing and maintaining disclosure controls and procedures for the Company.

In the Form 10-K filed by the Company for the year ended September 30, 2016 and the Form 10-Q filed for the three months ended December 31, 2016, we identified a material weakness in our internal control over financial reporting related to the lack of segregation of duties due to the Company’s small size. During the evaluation of disclosure controls and procedures as of June 30, 2017, management conducted an evaluation of the effectiveness of the design and operations of our disclosure controls and procedures, and concluded that our disclosure controls and procedures were effective.

Steps taken during fiscal 2017 to remediate its material weakness were:

Management believes the changes discussed above are sufficient to mitigate the material weakness identified.

(b) Changes in the Company’s Internal Controls over Financial Reporting

Other than described above, there have been no changes in the Company’s internal control over financial reporting during the most recently completed fiscal quarter that have materially affected or are reasonably likely to materially affect, the Company’s internal control over financial reporting.  

Item 5. Other

None

Part II- Other Information

Item 1. Legal Proceedings

We are not a party to any legal proceedings. Management is not aware of any legal proceedings proposed to be initiated against us. However, from time to time, we may become subject to claims and litigation generally associated with any business venture operating in the ordinary course.

Item 1A. Risk Factors

Not applicable to a “smaller reporting company” as defined in Item 10(f)(1) of SEC Regulation S-K

Item 2. Recent Sale of Unregistered Securities

None

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information

None.

Item 6. Exhibits

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated.