Nukkleus Inc. - Quarter Report: 2020 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

☒ QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2020

OR

☐ TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission file number: 000-55922

Nukkleus Inc.

(Exact name of registrant in its charter)

525 Washington Boulevard, Jersey City, New Jersey 07310

(Address of principal executive offices, including zip code)

212-791-4663

(Issuer’s telephone number)

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

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

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐

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

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 ☒

Securities registered pursuant to Section 12(b) of the Act: Not applicable.

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

NUKKLEUS INC.

FORM 10-Q

March 31, 2020

TABLE OF CONTENTS

FORWARD LOOKING STATEMENTS

This report contains forward-looking statements regarding our business, financial condition, results of operations and prospects. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not deemed to represent an all-inclusive means of identifying forward-looking statements as denoted in this report. Additionally, statements concerning future matters are forward-looking statements.

Although forward-looking statements in this report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those specifically addressed under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our annual report on Form 10-K, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-Q and information contained in other reports that we file with the SEC. You are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this report.

We file reports with the SEC. The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us. You can also read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this report, except as required by law. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this quarterly report, which are designed to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.

Unless otherwise indicated, references in this report to the “Company”, “Nukkleus”, “we”, “us”, or “our” refer to Nukkleus Inc. and its consolidated subsidiaries.

PART I - FINANCIAL INFORMATION

Item 1. Interim Financial Statements.

NUKKLEUS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

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

NUKKLEUS INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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

NUKKLEUS INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT

For the Six Months Ended March 31, 2020 and 2019

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

NUKKLEUS INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

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

NUKKLEUS INC. AND SUBSIDIARIES

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.

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

Nukkleus Limited, a wholly-owned subsidiary of the Company, provides its software, technology, customer sales and marketing and risk management technology hardware and software solutions package under a General Services Agreement (“GSA”) to FXDD Malta Limited (“FXDD Malta”). FXDD Malta is a private limited liability company formed under the laws of Malta. The GSA entered with FXDD Malta provides that FXDD Malta will pay Nukkleus Limited at minimum $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, who is our Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”) and chairman, 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, in order to appropriately service FXDD Malta, Nukkleus Limited entered into a GSA with FXDirectDealer LLC (“FXDIRECT”), which provides that Nukkleus Limited will pay FXDIRECT a minimum of $1,575,000 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.

In July 2018, the Company incorporated Nukkleus Malta Holding Ltd., which is a wholly-owned subsidiary. In July 2018, Nukkleus Malta Holding Ltd. incorporated Nukkleus Exchange Malta Ltd. For Nukkleus Exchange Malta Ltd., the Company is currently exploring obtaining a license to operate an electronic exchange whereby it facilitates the buying and selling of various digital assets as well as traditional currency pairs used in FX Trading. The Company’s affiliates have created the electronic exchange that may be used by Nukkleus Exchange Malta Ltd., however, as the Company does not believe obtaining a license to operate the exchange will be feasible, the affiliates are searching for alternate uses for the exchange and as such have not sold or transferred the exchange to the Company.

On October 29, 2019, the Company entered into a Non-Binding Letter of Intent (“LOI”) with XT Energy Group Inc. (OTCQB: XTEG) (“XT”) and Stanley Hutton Rumbough. The purpose of the LOI was to outline a proposed transaction pursuant to which XT, among other items, would acquire all intellectual properties of EF Hutton, including its trademark “EF Hutton,” held by Mr. Hutton Rumbough and acquire all of the issued and outstanding shares of common stock of the Company in consideration of 11 million shares of XT. The purpose of the transactions was to establish XT in two areas of activity of energy and energy related services and financial services and financial technology. Following the closing of the transactions, the Company would become a wholly-owned subsidiary of XT, and XT would change its name to “EF Hutton Group Inc.” The LOI expired in January 2020 and no agreement was reached.

The unaudited condensed 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 a net loss for the six months ended March 31, 2020 of $109,151, and had an accumulated deficit and a working capital deficit of $1,566,902 and $1,155,487, respectively, at March 31, 2020. The Company’s ability to continue as a going concern is dependent upon the management of expenses and ability to obtain necessary financing to meet its obligations and pay its liabilities arising from normal business operations when they come due, and upon profitable operations.

In March 2020, the World Health Organization declared the outbreak of a novel coronavirus (“COVID-19”) as a pandemic, which continues to spread throughout the United States.  The ultimate extent of the impact of COVID-19 on the financial performance of the Company will depend on future developments, including the duration and spread of COVID-19, and the overall economy, all of which are highly uncertain and cannot be predicted.  If the financial markets and/or the overall economy are impacted for an extended period, the Company’s operating results may be materially and adversely affected.

We cannot be certain that such necessary capital through equity or debt financings 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. In the event that there are any unforeseen delays or obstacles in obtaining funds through the aforementioned sources, Currency Mountain Holdings Bermuda, Limited (“CMH”), which is wholly-owned by an entity that is majority-owned by Mr. Assentato, has committed to inject capital into the Company in order to maintain the ongoing operations of the business.

NUKKLEUS INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 of America (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, 2019 filed with the Securities and Exchange Commission on January 14, 2020. The consolidated balance sheet as of September 30, 2019 contained herein has been derived from the audited consolidated financial statements as of September 30, 2019, but does not include all disclosures required by U.S. GAAP.

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of estimates

The preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Significant estimates during the three and six months ended March 31, 2020 and 2019 include 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 and 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:

The Company holds investments in digital currency, consisting of Bitcoins and Ethereum. The Company initially records its investments at cost, and then revalues such assets at every reporting period and recognizes gain or loss as unrealized gain (loss) on digital currency that are attributable to the change in the fair value of the digital currency. Unrealized gains and losses and realized gains and losses recognized upon the sale or transfer of the investments in digital currency are netted and recognized within gain (loss) on digital currency on the unaudited condensed consolidated statements of operations. The fair value of the investment in digital currency is determined using the equivalency rate of the digital currency to USD and is included in current assets. The equivalency rates obtained represent a generally well recognized quoted price in active markets for Bitcoin and Ethereum. The current guidance in U.S. GAAP does not directly address the accounting for cryptocurrencies.

NUKKLEUS INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Fair value of financial instruments and fair value measurements (continued)

The following tables provide the financial assets measured on a recurring basis and reported at fair value on the balance sheets as of March 31, 2020 and September 30, 2019:

The investment in digital currency had a cost of $137,223 net of fees, and a fair value of $168,943 at September 30, 2019. The Company recognized a gain of $0 and $5,335 for the three months ended March 31, 2020 and 2019, respectively. The Company recognized a gain of $17,888 and a loss of $32,068 for the six months ended March 31, 2020 and 2019, respectively. During the first quarter of fiscal 2020, the Company transferred substantially all of its investment in digital currency to affiliates related through common ownership.

The carrying values of cash, prepaid expense, due from affiliate, due to affiliates, and accrued liabilities in the Company’s condensed consolidated balance sheets approximated their fair values as of March 31, 2020 and September 30, 2019 due to their short-term nature.

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, 2020 and September 30, 2019, the Company’s cash balances accounts were not in excess of the federally-insured limits.

For all periods presented, the Company earned 100% of its revenue from FXDD Malta and incurred 100% of its cost of revenue from FXDIRECT. Both FXDD Malta and FXDIRECT are related parties.

Revenue recognition

The Company accounts for revenue under the provisions of ASC Topic 606. The nature of the Company’s contract with its customer relates to the Company’s services performed for a related party under a GSA.

The transaction price is determined in accordance with the terms of the GSA and payments are due on a monthly basis. 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 over time as the services are rendered under the terms of the GSA.

Revenue is recorded at gross as the Company is deemed to be a principal in the transactions.

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, 2020 and 2019, 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:

For the three and six months ended March 31, 2020 and 2019, 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.

Recently issued accounting pronouncements

Effective October 1, 2019, the Company adopted 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. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

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 SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 – ACCRUED LIABILITIES

At March 31, 2020 and September 30, 2019, accrued liabilities consisted of the following:

NOTE 5 – SHARE CAPITAL

Preferred stock

The Company’s Board of Directors is authorized to issue, at any time, without further stockholder approval, up to 15,000,000 shares of preferred stock. The Board of Directors has the authority to fix and determine the voting rights, rights of redemption and other rights and preferences of preferred stock.

Common stock and Series A preferred stock sold for cash

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 Series A preferred stock has the following key terms:

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 both the three months ended March 31, 2020 and 2019, amortization of debt discount amounted to $573. For both the six months ended March 31, 2020 and 2019, amortization of debt discount amounted to $1,145.

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 both the three months ended March 31, 2020 and 2019, dividends on redeemable preferred stock amounted to $937. For both the six months ended March 31, 2020 and 2019, dividends on redeemable preferred stock amounted to $1,875.

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)

At March 31, 2020 and September 30, 2019, Series A redeemable preferred stock consisted of the following:

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, Inc. All professional services fee payable to Craig Marshak are paid to Triple Eight Markets, Inc. As compensation for professional services provided, the Company recognized consulting expenses of $0 and $78,500 for the three months ended March 31, 2020 and 2019, respectively, which have been included in general and administrative expense – related party on the accompanying unaudited condensed consolidated statements of operations. The Company recognized consulting expenses of $0 and $93,500 for the six months ended March 31, 2020 and 2019, respectively, which have been included in general and administrative expense – related party on the accompanying unaudited condensed consolidated statements of operations.

As of March 31, 2020 and September 30, 2019, the accrued and unpaid services charge related to Craig Marshak amounted to $0 and $10,000, respectively, which have been included in accrued liabilities – related party on the accompanying condensed 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

The Company operates under a GSA with FXDD Malta providing personnel and technical support, marketing, accounting, risk monitoring, documentation processing and customer care and support. The minimum monthly amount received is $1,600,000.

The Company operates under a GSA with FXDIRECT receiving personnel and technical support, marketing, accounting, risk monitoring, documentation processing and customer care and support. The minimum monthly amount payable is $1,575,000.

Both of the above entities are affiliates through common ownership.

During the three and six months ended March 31, 2020 and 2019, services provided to the related party, which was recorded as revenue - related party on the accompanying unaudited condensed consolidated statements of operations were as follows:

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 (continued)

During the three and six months ended March 31, 2020 and 2019, services received from the related party, which was recorded as cost of revenue - related party on the accompanying unaudited condensed consolidated statements of operations were as follows:

Due from affiliate

At March 31, 2020 and September 30, 2019, due from related party consisted of the following:

The balance of due from related party represents investment – digital currency transferred to NUKK Capital.

Management believes that the related party receivable is fully collectable. Therefore, no allowance for doubtful account is deemed to be required on its due from related party at March 31, 2020 and September 30, 2019. The Company historically has not experienced uncollectible receivable from the related party.

Due to affiliates

At March 31, 2020 and September 30, 2019, due to related parties consisted of the following:

The balances of due to related parties represent expenses paid by Forexware LLC, FXDIRECT, FXDD Malta, FXDD Trading, and FXMarkets on behalf of the Company and advances from CMH. The balances due to FXDIRECT and FXDD Malta may also include unsettled funds due related to the General Service Agreement. The balances due to FXDD Malta and FXDD Trading also include the value of transferred digital assets.

The related parties’ payables are short-term in nature, non-interest bearing, unsecured and repayable on demand.

NOTE 7 – INCOME TAXES

The Company recorded no income tax expense for the three and six months ended March 31, 2020 and 2019 because the estimated annual effective tax rate was zero. As of March 31, 2020, 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.

NOTE 8 – CONTINGENCY

On April 16, 2020, the Company was named as a defendant in the Adversary Proceeding filed in the United States Bankruptcy Court District Of Massachusetts (Case No. 15-10745-FJB; Adversary Proceeding No. 16-01178) titled In re: BT Prime Ltd (“BT Prime”). The Adversary Proceeding is brought by BT Prime against Boston Technologies Powered by Forexware LLC f/k/a Forexware LLC (“Forexware”), Currency Mountain Holdings LLC, Currency Mountain Holdings Limited f/k/a Forexware Malta Holdings Ltd., FXDIRECT, FXDD Malta, Nukkleus Inc., Nukkleus Bermuda Limited and CMH. In the Amended Complaint, BT Prime is seeking a determination that the Company and the defendants are liable for all of the debts and liabilities of BT Prime stemming from its bankruptcy proceedings. Further, in the sole claim against the Company, BT Prime alleges that the Company operated as a single business enterprise with no separate existence outside of their collective business relationship with other Defendants, is a continuation of the business of Forexware and is successors-in-interest to Forexware. Based on this theory, BT Prime alleges that the Company should be jointly and severally liable for any liability attributable to other Defendants, should the Court eventually find any such liability. The Company maintains that there is no basis in BT Prime’s claims against it and intends to vigorously defend against it, including by moving to dismiss it.

NOTE 9 – SUBSEQUENT EVENTS

Management has evaluated subsequent events through the date of the filing.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations for the three and six months ended March 31, 2020 and 2019 should be read in conjunction with our unaudited condensed consolidated financial statements and related notes to those unaudited condensed consolidated financial statements that are included elsewhere in this report.

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

On March 11, 2020, the World Health Organization announced that infections of the coronavirus COVID-19 had become pandemic, and on March 13, the U.S. President announced a National Emergency relating to the disease. There is a possibility of widespread infection in the United States and abroad. National, state and local authorities have imposed social distancing, quarantine and isolation measures on large portions of the population, including mandatory business closures. These measures, while intended to protect human life, are expected to have serious adverse impacts on domestic and foreign economies of uncertain severity and duration. The effectiveness of economic stabilization efforts, including government payments to affected citizens and industries, is uncertain.

The sweeping nature of the coronavirus pandemic makes it extremely difficult to predict how our business and operations will be affected in the long term, though the likely overall economic impact of the pandemic is viewed as highly negative to the general economy. Although we are continuing to monitor and assess the effects of the coronavirus pandemic on our business, the ultimate impact is highly uncertain and subject to change. The duration of any such impact cannot be predicted.

Overview

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

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

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

In July 2018, we incorporated Nukkleus Malta Holding Ltd., which is a wholly-owned subsidiary. In July 2018, Nukkleus Malta Holding Ltd. incorporated Nukkleus Exchange Malta Ltd. For Nukkleus Exchange Malta Ltd., we are currently exploring obtaining a license to operate an electronic exchange whereby it facilitates the buying and selling of various digital assets as well as traditional currency pairs used in FX Trading. Our affiliates have created the electronic exchange that may be used by Nukkleus Exchange Malta Ltd., however, as we do not believe obtaining a license to operate the exchange will be feasible, the affiliates are searching for alternate uses for the exchange and as such have not sold or transferred the exchange to us.

On October 29, 2019, we entered into a LOI with XT and Stanley Hutton Rumbough. The purpose of the LOI was to outline a proposed transaction pursuant to which XT, among other items, would acquire all intellectual properties of EF Hutton, including its trademark “EF Hutton,” held by Mr. Hutton Rumbough and acquire all of the issued and outstanding shares of common stock of us in consideration of 11 million shares of XT. The purpose of the transactions was to establish XT in two areas of activity of energy and energy related services and financial services and financial technology. Following the closing of the transactions, we would become a wholly-owned subsidiary of XT, and XT would change its name to “EF Hutton Group Inc.”. The LOI expired in January 2020 and no agreement was reached.

Critical Accounting Policies and Estimates

The preparation of our unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expense, and related disclosure of contingent assets and liabilities. When making these estimates and assumptions, we consider our historical experience, our knowledge of economic and market factors and various other factors that we believe to be reasonable under the circumstances. Actual results may differ under different estimates and assumptions.

The accounting estimates and assumptions discussed in this section are those that we consider to be the most critical to an understanding of our unaudited condensed consolidated financial statements because they inherently involve significant judgments and uncertainties.

Investment – digital currency

The Company holds investments in digital currency, consisting of Bitcoins and Ethereum. The Company initially records its investments at cost, and then revalues such assets at every reporting period and recognizes gain or loss as unrealized gain (loss) on digital currency that are attributable to the change in the fair value of the digital currency. Unrealized gains and losses and realized gains and losses recognized upon the sale or transfer of the investments in digital currency are netted and recognized within gain (loss) on digital currency on the unaudited condensed consolidated statements of operations. The fair value of the investment in digital currency is determined using the equivalency rate of the digital currency to USD and is included in current assets. The equivalency rates obtained represent a generally well recognized quoted price in active markets for Bitcoin and Ethereum. The current guidance in U.S. GAAP does not directly address the accounting for cryptocurrencies.

Results of Operations

Summary of Key Results

For the three and six months ended March 31, 2020 versus the three and six months ended March 31, 2019

Revenue and Cost of Revenue

Revenue for both of the three months ended March 31, 2020 and 2019 was $4,800,000. Revenue for both of the six months ended March 31, 2020 and 2019 was $9,600,000. Revenue for the three and six months ended March 31, 2020 and 2019 was from general support services rendered to FXDD Malta.

Cost of revenue for both of the three months ended March 31, 2020 and 2019 was $4,725,000. Cost of revenue for both of the six months ended March 31, 2020 and 2019 was $9,450,000. Cost of revenue for the three and six months ended March 31, 2020 and 2019 represented amount incurred for general support services rendered by FXDirectDealer, LLC (“FXDIRECT”).

Operating Expenses

Operating expenses consist of compensation and related benefits, bad debt expense, and other general and administrative expense.

Compensation and related benefits

Compensation and related benefits for the three months ended March 31, 2020 versus the three months ended March 31, 2019 were $68,853 and $78,019, respectively. The decrease was primarily attributable to a decrease in the number of our employees.

Compensation and related benefits for the six months ended March 31, 2020 versus the six months ended March 31, 2019 were $134,179 and $126,353, respectively. The increase was primarily attributable to a severance package incurred for an employee.

Bad debt expense

For the three and six months ended March 31, 2020, we did not record any bad debt expense. While, for the three and six months ended March 31, 2019, we recorded a bad debt expense of $40,000.

Other general and administrative expenses

Other general and administrative expenses were mainly third party and related party professional fees.

Total other general and administrative expenses for the three months ended March 31, 2020 versus the three months ended March 31, 2019, were $68,487 versus $191,707, respectively. Total other general and administrative expenses for the six months ended March 31, 2020 versus the six months ended March 31, 2019, were $139,840 versus $299,362, respectively. The decrease was mainly due to the decrease in the use of third party and related party professional services providers.

Other Income (Expense)

Other income (expense) includes interest expense on redeemable preferred stock, amortization of debt discount, and gain (loss) recognized from investment – digital currency.

Total other expense, net, for the three months ended March 31, 2020 versus total other income, net, for the three months ended March 31, 2019, was $(1,510) versus $3,825, respectively. Total other income, net, for the six months ended March 31, 2020 versus total other expense, net, for the six months ended March 31, 2019, was $14,868 versus $(35,088), respectively. The change for the three and six months ended March 31, 2020 as compared to the three and six months ended March 31, 2019 was due to the gain (loss) recognized from digital currency asset.

Net Loss

As a result of the factors described above, our net loss was $63,850, or $0.00 per common share (basic and diluted), for the three months ended March 31, 2020. Our net loss was $230,901, or $0.00 per common share (basic and diluted), for the three months ended March 31, 2019.

As a result of the factors described above, our net loss was $109,151, or $0.00 per common share (basic and diluted), for the six months ended March 31, 2020. Our net loss was $350,803, or $0.00 per common share (basic and diluted), for the six months ended March 31, 2019.

Liquidity and Capital Resources

Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations and otherwise operate on an ongoing basis. At March 31, 2020 and September 30, 2019, we had cash balances of $19,386 and $23,514, respectively.

For the six months ended March 31, 2020, although we incurred a net loss of $109,151, we had a net cash flow used in operating activities of $4,128.

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. In the event that there are any unforeseen delays or obstacles in obtaining funds through the aforementioned sources, CMH has committed to inject capital into the Company in order to maintain the ongoing operations of the business.

Net cash flow used in operating activities was $4,128 for the six months ended March 31, 2020. These included $109,151 in net loss, and the non-cash items mainly consisting of a gain on digital currency of approximately $18,000, offset by changes in operating assets and liabilities totalling approximately $122,000 for the six months ended March 31, 2020.

Our operations will require additional funding for the foreseeable future. Unless and until we are able to generate a sufficient amount of revenue and reduce our costs, we expect to finance future cash needs through public and/or private offerings of equity securities and/or debt financings. We do not currently have any committed future funding. To the extent we raise additional capital by issuing equity securities, our stockholders could at that time experience substantial dilution. Any debt financing we are able to obtain may involve operating covenants that restrict our business. Our capital requirements for the next twelve months primarily relate to mergers, acquisitions and the development of business opportunities. In addition, we expect to use cash to pay fees related to professional services. The following trends are reasonably likely to result in a material decrease in our liquidity over the near to long term:

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.

Contractual Obligations and Off-Balance Sheet Arrangements

Contractual Obligations

At March 31, 2020, there have been no material changes to the contractual obligations as set forth in our Annual Report on Form 10-K for the year ended September 30, 2019.

Off-Balance Sheet Arrangements

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

Recently Issued Accounting Pronouncements

For information about recently issued accounting standards, refer to Note 3 to our Unaudited Condensed Consolidated Financial Statements appearing elsewhere in this report.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are a smaller reporting company as defined in Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in reports filed or submitted under the Securities Exchange Act of 1934, as amended (“Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed under the Exchange Act is accumulated and communicated to management, including the principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.

In connection with the preparation of the quarterly report on Form 10-Q for the quarter ended March 31, 2020, our management, including our principal executive officer and principal financial officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures, which are defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our CEO and our CFO is the same person.

During evaluation of disclosure controls and procedures as of March 31, 2020, our CEO/CFO conducted an evaluation of the effectiveness of the design and operations of our disclosure controls and procedures and concluded that our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the most recently completed fiscal quarter that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.

Item 5. Other

None.

Part II - Other Information

Item 1. Legal Proceedings

From time to time, we are subject to ordinary routine litigation incidental to our normal business operations. We are not currently a party to any material legal proceedings, except as set forth below. 

On April 16, 2020, the Company was named as a defendant in the Adversary Proceeding filed in the United States Bankruptcy Court District Of Massachusetts (Case No. 15-10745-FJB; Adversary Proceeding No. 16-01178) titled In re: BT Prime Ltd (“BT Prime”). The Adversary Proceeding is brought by BT Prime against Boston Technologies Powered by Forexware LLC f/k/a Forexware LLC (“Forexware”), Currency Mountain Holdings LLC, Currency Mountain Holdings Limited f/k/a Forexware Malta Holdings Ltd., FXDIRECT, FXDD Malta, Nukkleus Inc., Nukkleus Bermuda Limited and CMH.  In the Amended Complaint, BT Prime is seeking a determination that the Company and the defendants are liable for all of the debts and liabilities of BT Prime stemming from its bankruptcy proceedings.  Further, in the sole claim against the Company, BT Prime alleges that the Company operated as a single business enterprise with no separate existence outside of their collective business relationship with other Defendants, is a continuation of the business of Forexware and is successors-in-interest to Forexware. Based on this theory, BT Prime alleges that the Company should be jointly and severally liable for any liability attributable to other Defendants, should the Court eventually find any such liability.  The Company maintains that there is no basis in BT Prime’s claims against it and intends to vigorously defend against it, including by moving to dismiss it.

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. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information

None.

Item 6. Exhibits

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

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