Attached files
| file | filename |
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| EX-10.12 - EXHIBIT 10.12 - Nukkleus Inc. | s108518_ex10-12.htm |
| EX-32.1 - EXHIBIT 32.1 - Nukkleus Inc. | s108518_ex32-1.htm |
| EX-31.1 - EXHIBIT 31.1 - Nukkleus Inc. | s108518_ex31-1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2017 or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________________to ____________________
333-192647
Commission file number
Nukkleus Inc.
(Exact name of registrant as specified in its charter)
| Delaware | 38-3912845 | |
| (State
or other jurisdiction of incorporation or organization) |
(I.R.S.
Employer Identification No.) | |
| 525
Washington Boulevard, Jersey City, New Jersey |
07310 | |
| (Address
of principal executive offices) |
(Zip Code) |
212-791-4663
Registrant’s telephone number, including area code
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: None
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 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.
| Large accelerated filter ☐ | Accelerated filter ☐ |
Non-accelerated filter ☐ (Do not check if a smaller reporting company) Smaller reporting company ☒
| Emerging Growth Company ☒ |
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 ☒
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was approximately $1,415,000 as of March 31, 2017, based upon the closing stock price $0.09 per share reported for such date.
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date.
| Class | Outstanding December 27, 2017 | |
| Common Stock, $0.0001 par value per share | 230,485,100 shares |
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements that involve a number of risks and uncertainties. Although our forward-looking statements reflect the good faith judgment of our management, these statements can be based only on facts and factors of which we are currently aware. Consequently, forward-looking statements are inherently subject to risks and uncertainties. Actual results and outcomes may differ materially from results and outcomes discussed in the forward-looking statements.
Forward-looking statements can be identified by the use of forward-looking words such as “may,” “will,” “should,” “anticipate,” “believe,” “expect,” “plan,” “future,” “intend,” “could,” “estimate,” “predict,” “hope,” “potential,” “continue,” or the negative of these terms or other similar expressions. These statements include, but are not limited to, statements under the captions “Risk Factors,” “Management’s Discussion and Analysis or Plan of Operation” and “Description of Business,” as well as other sections in this report. Such forward-looking statements are based on our management’s current plans and expectations and are subject to risks, uncertainties and changes in plans that may cause actual results to differ materially from those anticipated in the forward-looking statements. You should be aware that, as a result of any of these factors materializing, the trading price of our common stock may decline. These factors include, but are not limited to, the following:
| ● | the availability and adequacy of capital to support and grow our business; | |
| ● | economic, competitive, business and other conditions in our local and regional markets; | |
| ● | actions taken or not taken by others, including competitors, as well as legislative, regulatory, judicial and other governmental authorities; | |
| ● | competition in our industry; | |
| ● | changes in our business and growth strategy, capital improvements or development plans; | |
| ● | the availability of additional capital to support development; and | |
| ● | other factors discussed elsewhere in this annual report. |
The cautionary statements made in this annual report are intended to be applicable to all related forward-looking statements wherever they may appear in this report.
We urge you not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. We undertake no obligation to publicly update any forward looking-statements, whether as a result of new information, future events or otherwise.
All references in this Form 10-K that refer to the “Company”, “Nukkleus”, “we,” “us” or “our” refer to Nukkleus Inc. and its consolidated subsidiary.
TABLE OF CONTENTS
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Item 1. Business.
Nukkleus Inc. (formerly known as, Compliance & Risk Management Solutions Inc.) (the “Company” or “Nukkleus”) 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.
Recent Developments
On February 5, 2016, Charms Investments, Ltd (“Charms”), a non-affiliated 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, Emil Assentato was appointed by the Company to serve as the Chief Executive Officer, Chief Financial Officer, President, Secretary and Treasurer as well as Chairman of the Board of Directors of the Company. Mr. Assentato also serves as Chairman of the Subsidiary. Peter Maddocks resigned as an executive officer and director on May 24, 2016.
On May 24, 2016, the Subsidiary entered into a General Service Agreement to provide its software, technology, customer sales and marketing and risk management technology hardware and software solutions package to FML Malta Ltd. In December 2017, the Subsidiary, FML Malta Ltd. and FXDD Malta Limited (“FXDD Malta”) entered into a letter agreement providing that there was an error in drafting the General Service Agreement and acknowledging that the correct counter-party to Subsidiary in the General Service Agreement is FXDD Malta. Accordingly, all references to FML Malta Ltd. have been replaced with FXDD Malta. FXDD Malta is a private limited liability company formed under the laws of Malta. The General Service Agreement entered with FXDD Malta provides that FXDD Malta will pay the Subsidiary at minimum $2,000,000 per month. On October 17, 2017, the Subsidiary entered into an amendment of the General Service Agreement with FXDD Malta. In accordance with the amendment, which was effective as of October 1, 2017, the minimum amount payable by FXDD Malta to the Subsidiary for services was reduced from $2,000,000 per month to $1,600,000 per month. Emil Assentato is also the majority member of Max Q Investments LLC (“Max Q”), which is managed by Derivative Marketing Associates Inc. (“DMA”). Mr. Assentato is the sole owner and manager of DMA. Max Q owns 79% of Currency Mountain Malta LLC, which in turn is the sole shareholder of FXDD Malta.
In addition, on May 24, 2016, in order to appropriately service FXDD Malta, the Subsidiary entered into a General Service Agreement with FXDirectDealer LLC (“FXDIRECT”), which provides that the Subsidiary will pay FXDIRECT a minimum of $1,975,000 per month in consideration of providing personnel engaged in operational and technical support, marketing, sales support, accounting, risk monitoring, documentation processing and customer care and support. FXDIRECT may terminate this agreement upon providing 90 days’ written notice. On October 17, 2017, the Subsidiary entered into an amendment of the General Service Agreement with FXDIRECT. Pursuant to the amendment, which was effective as of October 1, 2017, the minimum amount payable by the Subsidiary to FXDIRECT for services was reduced from $1,975,000 per month to $1,575,000 per month. Currency Mountain Holdings LLC is the sole shareholder of FXDIRECT. Max Q is the majority shareholder of Currency Mountain Holdings LLC.
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On May 27, 2016, the Company, IBIH Limited, a BVI corporation (“IBIH”) and the shareholders of IBIH (the “IBIH Shareholders”) entered into a Stock Purchase Agreement (the “Iron Purchase Agreement”) pursuant to which the Company acquired from IBIH 2,200 shares of capital stock of IBIH, representing 9.9% of the issued and outstanding capital stock of IBIH, and 100% of the issued and outstanding securities of GVS Limited (“Iron BVI”), which is the parent corporation of GVS (AU) Pty Ltd. (“Iron Australia”) in consideration of the payment of $1,000,000 and 24,156,000 shares of common stock of the Company. An initial payment of $175,000 was paid on May 27, 2016 and the balance of $825,000 was paid June 7, 2016. The Company agreed to acquire the remaining 20,000 outstanding shares of capital stock of IBIH from the IBIH Shareholders in consideration of 219,844,000 shares of common stock subject to IBIH and its subsidiaries obtaining the required approvals from the Financial Conduct Authority in the United Kingdom and the Cyprus Securities and Exchange Commission.
On November 17, 2017, the Company, IBIH, Terra (FX) Offshore Limited, Ludico Investments Limited, Currency Mountain Holdings LLC and the IBIH Shareholders entered into a Settlement Agreement and Mutual Release (the “Iron Settlement Agreement”) pursuant to which the Iron Purchase Agreement was terminated, all differences between the parties were resolved and settled and the parties fully released the other parties from any liability. Pursuant to the Iron Settlement Agreement, the Company agreed to (i) have the registered office of Iron Australia changed, (ii) have its director designees resign as directors of Iron Australia, (iii) appoint Markos Kashiouris, Petros Economides and Yun Ma as directors of Iron Australia; (iv) and make all required changes with the Australian Securities and Investments Commission. With respect to Iron BVI, pursuant to the Iron Settlement Agreement, the Company agreed to (i) have the registered office of Iron BVI changed, (ii) have its director designee resign as a director of Iron BVI, (iii) appoint Cymora Limited as director of Iron BVI; (iv) and make all required changes with the BVI Registrar of Companies. Further, the Company agreed to return the 2,200 shares of capital stock of IBIH to the IBIH Shareholders and return 100% of its interest in Iron BVI to IBIH. IBIH agreed to return the 24,156,000 shares of common stock of the Company to the Company for cancellation and to pay the Company $1,000,000. Further, Markos Kashiouris, Petros Economides and Efstathios Christophi resigned as directors of the Company and waived any directorship fees payable to them under their letter of appointment dated August 1, 2016. The $1,000,000 has been paid to the Company and IBIH has returned the certificate representing the 24,156,000 shares of common stock of the Company and the shares have been cancelled by the Company.
On June 3, 2016, the Company agreed to sell to CMH 30,900,000 shares of common stock and 200,000 shares of Series A preferred stock for $2,000,000 in two equal installments. The first close occurred on June 7, 2016. The second close was to occur with the closing of the Company’s acquisition of IBIH. As the IBIH transaction has been terminated, the second transaction with CMH will not proceed.
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. As discussed above, as a result of the Settlement Agreement, Messrs Kashiouris, Christophi and Economides resigned on November 17, 2017.
On October 10, 2017, Jack Lahav was removed as a member of the Board of Directors of the Company. In addition, on October 10, 2017, Donald P. Fewer was appointed as a member of the Board of Directors of the Company to fill the vacancy resulting from Mr. Lahav’s removal.
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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 today provides its software, technology, customer sales and marketing and risk management technology hardware and software solutions package to FXDD Malta Limited. The FXDD brand (e.g., see FXDD.com) is the brand utilized in the retail forex trading industry by FXDD Malta Limited.
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 FXDD Malta Limited 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 Market Opportunity
The FX market is a global, decentralized market for the trading of currencies. FX trading involves the simultaneous buying and selling of a currency pair for the purposes of hedging currency risk or to generate a profit. The FX market, once limited to large financial institutions, has expanded and matured over the past decade, and now captures a wide range of participants, including central banks, commercial banks, non-bank corporations, hedge funds, brokers and individual investors / traders. The market’s expansion has helped lead to a significant increase in trading activity. In addition to the increase in the breadth of market participants, key factors driving higher trading volumes include the adoption of electronic and high frequency trading, tighter trading spreads, rising volatility among currencies and enhanced access to FX trading markets – primarily through online brokers, such as FXDD – for retail investors.
FX trading, initially utilized primarily for hedging purposes, has evolved as investor sophistication levels have risen, trading costs have fallen, and as currencies have become increasingly viewed as a viable investment asset class. FX’s low, (or even negative) correlation among certain other portfolio assets, namely equities and fixed income, may help investors reduce overall portfolio volatility. As such, we believe that currencies are often viewed as an important portfolio diversification tool.
Fueled by the growing adoption of the internet, the retail segment of the FX market began to emerge in the late 1990s. Developing online brokerage firms provided individual investors with direct access to the global FX markets. Prior to the development of these trading platforms, individual retail investors were effectively locked out of the FX market as minimum trade sizes were typically too high for individual retail investors. Online FX brokers lowered the minimum volume barriers and transactions costs for retail trading, allowing individuals to establish trading accounts with much lower initial deposits. We believe the retail FX segment now represents the fastest growing portion of the overall FX market. We believe this growth will be driven by a handful of key market trends, including:
| ● | Increased investor demand for exposure to currencies | |
| ● | Increasing internet adoption across the globe | |
| ● | Growing engagement of the “offline” market |
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| ● | Development of emerging markets and the emergence of an affluent middle class | |
| ● | Increasing regulation resulting in greater confidence. |
Participants in the retail FX market are geographically dispersed. Retail FX brokers, such as FXDD are seeking to expand their presence in projected high growth regional areas, such as Asia and the Middle East
Systems and Services
Nukkleus provides its services in the following service categories:
Category One: Introducing Broker Dealer Network and the Introducing Broker Interface
Category Two: Chinese and Middle East customer desk support
Category Three: Bridging software to the Meta Trader (MT4 and MT 5) platforms
Category Four: Forex Market Liquidity Access
Category Five: Turnkey risk management support software and Risk Management Team
Category Six: Front End Software Retail Trading Platforms and Customer Application Systems
Category Seven: Back Office Systems management
Category One: Introducing Broker Dealer Network
Nukkleus, by arrangement pursuant to our services agreement with FXDD Malta Limited and FXDIRECT, provides to FXDD Malta Limited clients an introducing broker (IB) network spread across China, Japan and the Middle East. Our approach to the retail FX market is to focus on the development of relationships with independent local referring brokers who provide a recurring source of new customers. These referring brokers do not have an exclusive relationship with us, but are offered a competitive commission structure to deliver new customers to us. Our account managers primarily focus on building relationships with referring brokers, and master referring brokers (who refer other referring brokers to us), as well as with customers referred to us by referring brokers and acquired by us directly. We believe this approach, in contrast to retail FX brokers that focus solely or primarily on acquiring accounts through online marketing campaigns, has allowed us to provide services to FXDD Malta Limited, which allows entities to achieve strong levels of net trading income, and accounts, as well as lower up front customer acquisition costs and greater customer satisfaction. Referring brokers are typically either individuals who are current or former FX traders or individuals or companies active in the area of FX trading and education and investment services advisory business.
The Introducing Broker (IB) Interface: The Introducing Broker (“IB”) interface empowers our partners to view real time account data such as payouts, customer activity and reports.
Category Two: Asia, including Chinese and Middle East Customer Desk Support
Nukkleus, by arrangement pursuant to our services agreement, provides to FXDD Malta Limited customer desk support in multiple languages. A key element of the business strategy is the large, multi-lingual and multi-ethnic team of account managers at the headquarters in Jersey City, New Jersey, as well as in certain other locations such as Malta, Jakarta, Indonesia and Tokyo, Japan. We obtained the services of account managers by virtue of our services agreement with FXDirectDealer LLC. Account managers are compensated to a significant degree based on their performance, measured by net deposits inflows, new accounts funded and trading volume generated by customers. We believe that this compensation structure motivates our account managers and leads to more active communication with our referring brokers and customers, an improved customer trading experience, improved referring broker and customer retention and increased deposits.
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Category Three: Bridging Software to the Meta Trader (MT4 and MT5) platforms
Meta Trader 4 Bridge: The MT4 Bridge is a middleware product that connects the Meta Trader server with the XW Trading System. The Bridge passes both market data (i.e. quotes) and trading data (i.e. trade executions) between MT4 and the XW servers. By seamlessly integrating the two, the Bridge allows for real time trade execution, reduced slippage, and access to liquidity through the XW Liquidity Matrix.
Category Four: Forex Market Liquidity Access
XWare Liquidity Matrix: Dealers need access to as much liquidity as possible. Forexware’s liquidity aggregation technology supports API from most of the world’s largest liquidity providers, including banks, hedge funds and electronic communication networks (ECN). Our aggregation technology integrates seamlessly with customers’ existing infrastructure, providing the power to optimize trading processes, manage accounts and revealing the most relevant information to make effective trading decisions.
The XWare Liquidity Bridge: With the XWare liquidity bridge, brokers can automatically submit trade requests to the liquidity provider of choice and receive confirmation prior to sending an accept or reject message to the broker’s client. The XWare Liquidity Bridge was developed to improve liquidity processes, risk and availability by providing a direct line of communication to vital backend processes. Brokers can create unique price streams from aggregated liquidity with sophisticated control over liquidity sources, pricing models, execution models and risk management.
XWare Live Rate Feed: The XWare Live Rate Feed provides customers with streaming liquidity and prices in real time that integrate seamlessly with existing trading platforms. The Quote Aggregator identifies outliers and bad ticks to ensure our clients capture accurate and reliable pricing to protect them from price fluctuations and anomalies that frequently occur with Liquidity Providers.
Category Five: Turnkey Risk Management Support Software, and Risk Management Team.
Nukkleus, by arrangement pursuant to our services agreement with FXDIRECT, fields a risk management team of seasoned professionals who constantly monitor liquidity flows and manage the hedging of transactions on a 24 / 7 basis, with three eight-hour shifts. This service is provided both to the FXDD Malta Limited clients, as well as to third party clients who request this service.
XWare Risk Monitor: The XWare Risk Manager is an essential component of the Forexware’s turnkey Xware suite, offered to new brokers entering the market, or existing brokers looking to replace their existing systems. Our management is of the belief that the Risk Manager software suite is the most vigorous and advanced risk management system available in the market today providing customers the power to customize risk management settings at their fingertips.
Category Six: Front End Software Retail Trading Platforms and Customer Application Systems
XWare Trader is a proprietary platform for retail and institutional traders. It offers fully customizable layouts including colors, layout manager and undocking of windows. Advanced charting, 1 click trading, and automated execution for Algo Traders are all embedded in a modern interface.
Swordfish Trader: Swordfish Trader is a proprietary platform for retail and institutional traders. It offers fully customizable layouts including colors, layout manager, and undocking of windows. Advanced charting, 1- click trading, and automated execution for Algo Traders are all embedded in a modern interface. Swordfish further offers risk management monitors unique from other trading platforms. Nukkleus has also acquired the right to apply for a US federal copyright in relation to Swordfish Trader.
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Category Seven: Back Office Systems Management:
XWare Apptracker: Xware Apptracker is a data workflow system designed to automate and manage new customer applications and account information in a centralized location. Xware App Tracker provides customers easy to use tools that save time, organize and track customer application information and manage new customer contract details for fast and efficient review and approval.
Reporting System: This complex and proprietary application generates customized reports, with numerous data queries pre-loaded to run in addition to those a client to choose to customize. It is designed to pull any number of named, defined data fields from both local databases and those from third party run databases, such as Oracle Financials.
Intellectual Property
We have several registered trademarks and service marks (US and foreign) and software assets. We also intend to pursue additional foreign trademark registrations. Nukkleus has been assigned various registrations and trademarks relating to:
| ● | Forexware |
| ● | MTXTREME |
| ● | Total Broker Solution |
| ● | Extreme Spreads |
| ● | When the News Breaks, Be there to Trade it |
| ● | Swordfish |
Nukkleus has further acquired Patent Number 8799142 in relation to Forexware Patent. This relates to a method of displaying information associated with currency exchange transactions in real time.
Corporate Office
Our principal executive office is 525 Washington Blvd, 14th Floor, Jersey City, New Jersey 07310. Our main telephone number is 212-720-7200. Annual Reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports are available free of charge through the Securities and Exchange Commission’s website at www.sec.gov as soon as reasonably practicable after those reports are electronically filed with or furnished to the SEC.
Employees
As of the date of this filing, we currently employ one (1) full-time employee. Through our relationship with FXDIRECT, we have access to approximately 70 account managers who speak over 10 different languages, and FXDIRECT has contractual relationships with hundreds of referring brokers in at least twenty different countries. It also has contracts with various independent contractors and consultants to fulfill additional needs, including investor relations, exploration, development, permitting, and other administrative functions, and may staff further with employees as it expands activities and brings new projects on line.
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Risks Relating to Our Company
Although we commenced operations in May 2016, we rely on FXDD Malta Limited as our significant customer, and the loss of FXDD Malta Limited would substantially reduce our revenues.
We are a financial technology company which is focused on providing software and technology solutions for the worldwide retail FX trading industry. Nukkleus primarily today provides its software, technology, customer sales and marketing and risk management technology hardware and software solutions package to FXDD Malta Limited, a related party, which provides that FXDD Malta Limited will pay the Subsidiary at minimum, $1,600,000 per month. The FXDD brand (e.g., see FXDD.com) is the brand utilized in the retail forex trading industry by FXDD Malta Limited. In addition, in order to appropriately service FXDD Malta Limited, the Subsidiary entered into a General Service Agreement with FXDIRECT, a related party, which provides that the Subsidiary will pay FXDIRECT at minimum $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. We will derive a significant amount of our revenues under our agreement with FXDD Malta Limited. A significant decrease in business from or loss of any of FXDD Malta Limited business could harm our financial condition by causing a significant decline in revenues attributable to FXDD Malta Limited, which will have a material adverse impact on the Company.
Our Principal client, FXDD Malta Limited, has its net trading income and profitability influenced by, among other things, the general level of trading activity in the FX market and by currency volatility, both of which are beyond our control.
Like other financial services firms, our business and profitability are directly affected by factors that are beyond our control, such as economic and political conditions, broad trends in business and finance, changes in the volume of foreign currency transactions, changes in supply and demand for currencies, movements in currency exchange rates and interest rates, changes in the financial strength of market participants, legislative and regulatory changes, changes in the markets in which such transactions occur, changes in how such transactions are processed and disruptions due to terrorism, war or extreme weather events. In particular, the net trading income and operating results of our principal client, FXDD Malta Limited, are influenced by the general level of trading activity in the FX market and by currency volatility and may vary significantly from period to period due to movements and trends in the world’s currency markets and to fluctuations in trading levels. We have generally experienced greater trading volume and higher net trading income in periods of volatile currency markets. Accordingly, a decline in currency volatility or lower levels of trading volume, whether or not attributable to any such decline, as well as any of the foregoing other external factors, could have a material adverse effect on our business, financial condition, results of operations and cash flows. As a result, period to period comparisons of our operating results may not be meaningful and our future operating results may be subject to significant fluctuations or declines.
Our limited operating history makes it difficult for us to evaluate our future business prospects and make decisions based on those estimates of our future performance.
Although the FXDD brand has been in existence since in 2006, we have not commenced operations under Nukkleus as a financial technology services company until May 2016. As a consequence, it is difficult, if not impossible, to forecast our future results based upon our historical data. Reliance on the historical results may not be representative of the results we will achieve, particularly in our combined form. Because of the uncertainties related to our lack of historical operations, we may be hindered in our ability to anticipate and timely adapt to increases or decreases in revenues or expenses. If we make poor budgetary decisions as a result of unreliable historical data, we could be less profitable or incur losses, which may result in a decline in our stock price.
Our business requires substantial capital, and if we are unable to maintain adequate financing sources our profitability and financial condition will suffer and jeopardize our ability to continue operations.
We require substantial capital to support our operations. If we are unable to maintain adequate financing or other sources of capital are not available, we could be forced to suspend, curtail or reduce our operations, which could harm our revenues, profitability, financial condition and business prospects.
We may not be able to protect our intellectual property rights or may be prevented from using intellectual property necessary for our business.
Our ability to implement our business plan successfully depends in part on our ability to further build brand recognition using our trademarks, service marks and other proprietary intellectual property, including our name and logos. We have registered or applied to register a number of our trademarks in many jurisdictions, some of which have been refused. We cannot be certain that our trademark applications will be approved. Further, third parties may copy or otherwise obtain and use our proprietary technology without authorization or otherwise infringe on our rights. We may also face claims of infringement that could interfere with our ability to use technology that is material to our business operations. In the future, we may have to rely on litigation to enforce our intellectual property rights, protect our trade secrets, determine the validity and scope of the proprietary rights of others or defend against claims of infringement or invalidity. Any such litigation, whether successful or unsuccessful, could result in substantial costs and the diversion of resources and the attention of management, any of which could negatively affect our business.
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Our computer infrastructure may be vulnerable to security breaches. Any such problems could jeopardize confidential information transmitted over the Internet, cause interruptions in our operations or give rise to liabilities to third parties.
Our computer infrastructure is potentially vulnerable to physical or electronic computer break-ins, viruses, distributed denial-of-service attacks and similar disruptive problems and security breaches. Any such problems or security breaches could give rise to liabilities to one or more third parties, including our customers, and disrupt our operations. A party able to circumvent our security measures could misappropriate proprietary information or customer information, jeopardize the confidential nature of information we transmit over the Internet or cause interruptions in our operations. Concerns over the security of Internet transactions and the safeguarding of confidential personal information could also inhibit the use of our systems to conduct FX transactions over the Internet. To the extent that our activities involve the storage and transmission of proprietary information and personal financial information or other personally identifiable information, security breaches could expose us to a risk of financial loss, litigation, regulatory penalties, loss of customers and other liabilities. Our current insurance policies may not protect us against all such losses and liabilities. Any of these events, particularly if they result in a loss of confidence in our services, could have a material adverse effect on our business, financial condition, results of operations and cash flows.
We rely on information technology to receive and properly process internal and external data. We may not be able to keep up with the rapidly changing technology, evolving industry standards and changing trading systems, practices and techniques that characterize the retail FX market.
We rely on technology to receive and properly process internal and external data. Any disruption for any reason in the proper functioning of our software or erroneous or corrupted data may cause us to make erroneous trades, accept customers from jurisdictions where we do not possess the proper licenses, authorizations or permits, or require us to suspend our services and could have a material adverse effect on our business, financial condition, results of operations and cash flows. For example, we rely on tools that we have developed in-house to monitor customer exposure and facilitate our ability to manage risk by transferring higher risk customers to agency accounts. In order to remain competitive, we continuously develop and refine our proprietary technology. In doing so, there is an ongoing risk that failures may occur and result in service interruptions or other negative consequences, such as slower trade execution, erroneous trades, or inaccurate risk management information. Moreover, if our competitors develop more advanced technologies, we may be required to devote additional resources to the development of more advanced technologies in order to remain competitive, which could adversely impact our profitability. We may not be able to keep up with the rapidly changing technology, evolving industry standards and changing trading systems, practices and techniques that characterize the retail FX market
We rely on computer systems and services from third-party providers and licenses to third-party software.
We rely on computer systems and services from third-party providers and licenses to third-party trading platforms, back-office systems, Internet service providers and communications facilities. Any interruption in these third-party products or services, or deterioration in their performance or quality, could adversely affect our business. If our arrangement with any such third party is terminated, we may not be able to obtain alternative products or services on a timely basis or on commercially reasonable terms. This could have a material adverse effect on our business, financial condition, results of operations and cash flows. For example, we and most of our customers access and make use of our FX trading and related online trading services through the MetaTrader 4 and MetaTrader 5 trading platforms. The MetaTrader 4 and MetaTrader 5 trading platforms are owned by MetaQuotes Software Corp. (“MetaQuotes”), an independent third party. Nukkleus pays fees to FXDIRECT, in part to access the Meta Quotes licenses and software which those companies possess and is indirectly made available to us. In the future, MetaQuotes could cease to license its trading platforms to us or may cease to adequately support such software on commercially reasonable terms or at all. Furthermore, in the future a superior trading platform may be developed by a competitor to us or a competitor to MetaQuotes and we may be unable to license any such trading platform. If we are unable to continue to use the MetaTrader 4 trading platform or if we are unable to use any superior trading platform that may be developed in the future, we may lose customers to our competitors, in which case our business, financial condition, results of operations and cash flows may be materially adversely affected.
10
System failures could cause interruptions in our services or decreases in the responsiveness of our services which could harm our business.
If our systems fail to perform, we could experience disruptions in operations, slower response times or decreased customer service and customer satisfaction. Our ability to facilitate transactions successfully and provide high quality customer service depends on the efficient and uninterrupted operation of our computer and communications hardware and software systems. Our systems also are vulnerable to damage or interruption from human error, natural disasters, power loss, telecommunication failures, break-ins, sabotage, hacker attacks, computer viruses, intentional acts of vandalism and similar events. Although we have multiple location redundancy, we do not have fully redundant capabilities. While we currently maintain a disaster recovery plan, which is intended to minimize service interruptions and secure data integrity, such plan may not work effectively during an emergency. Any system failure that causes an interruption in our services, decreases the responsiveness of our services or affects access to our services could impair our reputation, damage our brand, cause customers to stop using our services or materially adversely affect our business, financial condition, results of operations and cash flows.
A systemic market event could impact the various market participants with whom we interact.
In January 2015, the global retail forex market experienced a one time “black swan” event when the Swiss National Bank failed to maintain a fixed exchange rate between the Swiss Franc and other major currencies. A number of major competitors and retail forex brokers experienced large sustained capital losses as a result on that day. We may interact directly and indirectly with various market participants. If a systemic event in the financial system were to occur that were to result in a failure of any of our counterparties to be able continue to perform, this could have a material adverse effect on our business, financial condition, results of operations and cash flows.
In the current environment facing financial services firms, a firm’s reputation is critically important. If our reputation is harmed, or the reputation of the online financial services industry as a whole or retail FX industry specifically is harmed, our business, financial condition, results of operations and cash flows may be materially adversely affected.
Our ability to attract and retain customers and employees may be adversely affected if our reputation is damaged. If we fail, or appear to fail, to deal with issues that may give rise to reputation risk, our business prospects could be harmed. These issues include, but are not limited to, appropriately dealing with potential conflicts of interest, legal and regulatory requirements, ethical issues, money-laundering, privacy, customer data protection, record-keeping, solicitation, sales and trading practices, and the proper identification of the legal, credit, liquidity, operational and market risks inherent in our business. Failure to appropriately address these issues could also give rise to additional legal risk to us, which could, in turn, increase the size and number of claims and damages asserted against us or subject us to regulatory enforcement actions, fines and penalties. Any such sanction could materially adversely affect our reputation, thereby reducing our ability to attract and retain customers, referring brokers and employees.
In addition, our ability to attract and retain customers may be adversely affected if the reputation of the online financial services industry as a whole or retail FX industry is damaged. In recent years, a number of financial services firms have suffered significant damage to their reputations from highly publicized incidents that in turn resulted in significant and in some cases irreparable harm to their business. The perception of instability within the online financial services industry could materially adversely affect our ability to attract and retain customers, referring brokers and employees.
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Our client, FXDD Malta Limited, has relationships with independent referring brokers who direct new customers to us, which is our principal source of new customers for FXDD Malta Limited. Failure to maintain these relationships could have a material adverse effect on our business, financial condition, results of operations and cash flows and, in turn, negatively impact our company.
Our primary client, FXDD Malta Limited, maintains relationships with independent referring brokers who direct new customers to us and provide marketing and other services to these customers. FXDD Malta Limited relationships with referring brokers are non-exclusive and may be terminated by the brokers on short notice. A referring broker does not forfeit previously earned commissions upon termination. In addition, under its agreements with referring brokers, they have no obligation to provide FXDD Malta Limited with new customers or minimum levels of transaction volume. Its failure to maintain its relationships with referring brokers, the failure of the referring brokers to provide FXDD Malta Limited with customers or its failure to create new relationships with referring brokers could result in a loss of net trading income, which could have a material adverse effect on our business, financial condition, results of operations and cash flows. To the extent any of its competitors offers more attractive compensation terms to any of its referring brokers, FXDD Malta Limited could lose the referring broker’s services or be required to increase the compensation it pays to retain the referring broker. In addition, it may agree to set the compensation for one or more referring brokers at a level where, based on the transaction volume generated by customers directed to it by such brokers, it would have been more economically attractive to seek to acquire the customers directly rather than through the referring broker. To the extent it does not enter into economically attractive relationships with referring brokers, its referring brokers may terminate their relationship with FXDD Malta Limited or its referring brokers fail to provide us with customers, our business, financial condition, results of operations and cash flows could be materially adversely affected.
Any regulation of referring brokers and their activities could disrupt our business model.
FXDD Malta Limited depends on referring brokers to acquire most of our customers. If a jurisdiction were to impose regulations restricting referring brokers’ ability to solicit, acquire or interact with customers, we may be unable to continue to acquire customers or do business in that jurisdiction. Any such regulation could have a material adverse effect on our business, financial condition, results of operations and cash flows.
The loss of members of our senior management could compromise our ability to effectively manage our business and pursue our growth strategy.
We rely on members of our senior management to execute our existing business plans and to identify and pursue new opportunities. In particular, we rely on Mr. Emil Assentato, our Chairman, Chief Executive Officer and Chief Financial Officer. Other members of our management team are also important to our business and have significant experience in the FX industry. Our continued success is dependent upon the retention of these and other key executive officers and employees, as well as the services provided by our trading staff, technology and programming specialists and a number of other key managerial, marketing, planning, financial, technical and operations personnel. The loss of key personnel could have a material adverse effect on our business, financial condition, results of operations and cash flows.
The regulatory environment in which we operate is subject to continual change. Adverse changes in the regulatory environment could have a material adverse effect on our business, financial condition, results of operations and cash flows.
The legislative and regulatory environment in which we operate has undergone significant changes in the recent past and there may be future regulatory changes in our industry. The financial services industry in general has been subject to increasing regulatory oversight in recent years. The governmental bodies and self-regulatory organizations that regulate our business have proposed and may consider additional legislative and regulatory initiatives and may adopt new or revised laws and regulations. As a result, in the future, we may become subject to new regulations that may affect the way in which we conduct our business and may make our business less profitable. For example, a regulatory body may reduce the levels of leverage we are allowed to offer to our customers, which could significantly adversely impact our business, financial condition, results of operations and cash flows. Changes in the interpretation or enforcement of existing laws and regulations by those entities may also adversely affect our business, financial condition, results of operations and cash flows
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Providing online services to customers may require us to comply with the laws and regulations of each country in which such services are available. Failure to comply with such laws may negatively impact our financial results.
Because our services are available online in foreign countries and FXDD Malta Limited has customers residing in foreign countries, foreign jurisdictions may require FXDD Malta Limited or us to qualify to do business in such countries. We are required to comply with the laws and regulations of each country in which we conduct business, including laws and regulations currently in place or which may be enacted related to online services available to their citizens from service providers located elsewhere, including the laws and regulations of Japan and China. We are exposed to the risk that we are currently operating in non-compliance with local laws and regulations in certain of the jurisdictions where we accept customers. Any failure to develop effective compliance and reporting systems could result in regulatory penalties in the applicable jurisdiction, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
The FX market has only been widely available to retail investors since 1996. Our limited operating history and the limited history of the industry may make our growth and future prospects uncertain and difficult to evaluate.
Furthermore, the FX market has only become accessible to retail investors relatively recently. Prior to 1996, retail investors generally did not directly trade in the FX market, and we believe most current retail FX traders only recently started viewing currency trading as a practical alternative investment class. We will continue to encounter risks and difficulties frequently experienced by companies and industries at a similar stage of development, including our potential inability to implement our business model and strategy and adapt and modify them as needed or to manage our expanding operations, including the integration of any future acquisitions.
We have not voluntarily implemented various corporate governance measures, in the absence of which, shareholders may have more limited protections against interested director transactions, conflicts of interest and similar matters.
Recent federal legislation, including the Sarbanes-Oxley Act of 2002, has resulted in the adoption of various corporate governance measures designed to promote the integrity of the corporate management and the securities markets. Some of these measures have been adopted in response to legal requirements. Others have been adopted by companies in response to the requirements of national securities exchanges, such as the NYSE or The NASDAQ Stock Market, on which their securities are listed. Among the corporate governance measures that are required under the rules of national securities exchanges and NASDAQ are those that address board of directors’ independence, audit committee oversight and the adoption of a code of ethics. Our Board of Directors has not yet adopted any of the above mentioned corporate governance measures and, since our securities are not listed on a national securities exchange or NASDAQ, we are not required to do so. It is possible that if we were to adopt some or all of these corporate governance measures, shareholders would benefit from somewhat greater assurances that internal corporate decisions were being made by disinterested directors and that policies had been implemented to define responsible conduct. For example, in the absence of audit, nominating and compensation committees comprised of at least a majority of independent directors, decisions concerning matters such as compensation packages to our senior officers and recommendations for director nominees may be made by a majority of directors who have an interest in the outcome of the matters being decided. Prospective investors should bear in mind our current lack of corporate governance measures in formulating their investment decisions.
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Difficulties we may encounter managing our growth could adversely affect our results of operations.
As our business needs expand, we may need to hire a significant number of employees. This expansion may place a significant strain on our managerial and financial resources. To manage the potential growth of our operations and personnel, we will be required to:
| ● | improve existing, and implement new, operational, financial and management controls, reporting systems and procedures; | |
| ● | install enhanced management information systems; and | |
| ● | train, motivate and manage our employees. |
We may not be able to install adequate management information and control systems in an efficient and timely manner, and our current or planned personnel, systems, procedures and controls may not be adequate to support our future operations. If we are unable to manage growth effectively, our business would be seriously harmed.
Any future acquisitions may result in significant transaction expenses, integration and consolidation risks and we may be unable to profitably operate our combined company.
We may in the future selectively pursue acquisitions of other financial technology companies or retail FX brokers. Any future acquisitions may result in significant transaction expenses and present new risks in integrating the acquired companies and to the extent the acquired company operates in different markets or offers different products associated with entering additional markets. Because we have not historically made acquisitions, we do not have experience in successfully completing acquisitions. We may not have sufficient management, financial and other resources to integrate companies we acquire or to successfully operate new businesses and we may be unable to profitably operate our combined company. Additionally, any new businesses that we may acquire, once integrated with our existing operations, may not produce expected or intended results
Risks Associated with Our Common Stock in General
Trading on the Over the Counter markets may be volatile and sporadic, which could depress the market price of our common stock and make it difficult for our stockholders to resell their shares.
Our common stock is quoted on the OTC PINK Current Marketplace owned and operated by the OTC Markets Group Inc. and the OTC Pink Sheet service of the Financial Industry Regulatory Authority (“FINRA”) under the symbol NUKK. Trading in stock quoted on over the counter markets is often thin, volatile, and characterized by wide fluctuations in trading prices due to many factors that may have little to do with our operations or business prospects. This volatility could depress the market price of our common stock for reasons unrelated to operating performance. Moreover, the over the counter markets are not a stock exchange, and trading of securities on the over the counter markets is often more sporadic than the trading of securities listed on other stock exchanges such as the NASDAQ Stock Market, New York Stock Exchange or American Stock Exchange. Accordingly, our shareholders may have difficulty reselling any of their shares.
Our stock is a penny stock. Trading of our stock may be restricted by the SEC’s penny stock regulations and the FINRA’s sales practice requirements, which may limit a stockholder’s ability to buy and sell our stock.
Our stock is a penny stock. The SEC has adopted Rule 15g-9 which generally defines penny stock to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our securities are covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and accredited investors. The term accredited investor refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer must also provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customers’ account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules; the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability or willingness of broker-dealers to trade our securities. We believe that the penny stock rules discourage broker-dealer and investor interest in, and limit the marketability of, our common stock.
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Our common stock may be affected by limited trading volume and price fluctuation which could adversely impact the value of our common stock.
There has been limited trading in our common stock and there can be no assurance that an active trading market in our common stock will either develop or be maintained. Our common stock has experienced, and is likely to experience in the future, significant price and volume fluctuations which could adversely affect the market price of our common stock without regard to our operating performance. In addition, we believe that factors such as quarterly fluctuations in our financial results and changes in the overall economy or the condition of the financial markets could cause the price of our common stock to fluctuate substantially. These fluctuations may also cause short sellers to periodically enter the market in the belief that we will have poor results in the future. We cannot predict the actions of market participants and, therefore, can offer no assurances that the market for our common stock will be stable or appreciate over time.
FINRA sales practice requirements may also limit a stockholder’ s ability to buy and sell our stock.
In addition to the penny stock rules promulgated by the SEC, which are discussed in the immediately preceding risk factor, FINRA rules require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit the ability to buy and sell our stock and have an adverse effect on the market value for our shares.
Because the SEC imposes additional sales practice requirements on brokers who deal in shares of penny stocks, some brokers may be unwilling to trade our securities. This means that you may have difficulty reselling your shares, which may cause the value of your investment to decline.
Our shares are classified as penny stocks and are covered by Section 15(g) of the Securities Exchange Act of 1934 (the “Exchange Act”) which imposes additional sales practice requirements on broker-dealers who sell our securities in this offering or in the aftermarket. For sales of our securities, broker-dealers must make a special suitability determination and receive a written agreement prior from you to making a sale on your behalf. Because of the imposition of the foregoing additional sales practices, it is possible that broker-dealers will not want to make a market in our common stock. This could prevent you from reselling your shares and may cause the value of your investment to decline.
15
A decline in the price of our common stock could affect our ability to raise further working capital, it may adversely impact our ability to continue operations and we may go out of business.
A prolonged decline in the price of our common stock could result in a reduction in the liquidity of our common stock and a reduction in our ability to raise capital. Because we may attempt to acquire a significant portion of the funds we need in order to conduct our planned operations through the sale of equity securities, or convertible debt instruments, a decline in the price of our common stock could be detrimental to our liquidity and our operations because the decline may cause investors to not choose to invest in our stock. If we are unable to raise the funds we require for all our planned operations, we may be forced to reallocate funds from other planned uses and may suffer a significant negative effect on our business plan and operations, including our ability to develop new products and continue our current operations. As a result, our business may suffer, and not be successful and we may go out of business. We also might not be able to meet our financial obligations if we cannot raise enough funds through the sale of our common stock and we may be forced to go out of business.
Our stock price may be volatile.
The stock market in general has experienced volatility that often has been unrelated to the operating performance of any specific public company. The market price of our common stock is likely to be highly volatile and could fluctuate widely in price in response to various factors, many of which are beyond our control, including the following:
| ● | changes in our industry; | |
| ● | competitive pricing pressures; | |
| ● | our ability to obtain working capital financing; | |
| ● | additions or departures of key personnel; | |
| ● | limited “public float” in the hands of a small number of persons who sales or lack of sales could result in positive or negative pricing pressure on the market prices of our common stock; | |
| ● | sales of our common stock; | |
| ● | our ability to execute our business plan; | |
| ● | operating results that fall below expectations; | |
| ● | loss of any strategic relationship; | |
| ● | regulatory developments; | |
| ● | economic and other external factors; and | |
| ● | period-to-period fluctuations in our financial results. |
In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our common stock.
We have never paid a cash dividend on our common stock and we do not anticipate paying any in the foreseeable future.
We have not paid a cash dividend on our common stock to date, and we do not intend to pay cash dividends in the foreseeable future. Our ability to pay dividends will depend on our ability to successfully develop one or more properties and generate revenue from operations. Notwithstanding, we will likely elect to retain any earnings, if any, to finance our growth. Future dividends may also be limited by bank loan agreements or other financing instruments that we may enter into in the future. The declaration and payment of dividends will be at the discretion of our Board of Directors.
Future issuances of our common or preferred shares may cause a dilution in your shareholding.
We may raise additional funding to meet our working capital, capital expenditure requirements for our planned long-term capital needs, or to fund future acquisitions. If such funding is raised through issuance of new equity or equity-linked securities, it may cause a dilution in the percentage ownership of our then existing shareholders.
Our certificate of incorporation authorizes the issuance of 300,000,000 shares of common stock and 15,000,000 shares of blank check preferred stock without the need for shareholder approval. 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. We may issue a substantial number of additional shares, which may significantly dilute the equity interests of our existing shareholders.
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We cannot predict our future capital needs. As a result, we may need to raise significant amounts of additional capital. We may be unable to obtain any necessary capital if we need it on acceptable terms, if at all.
Our business requires adequate funding for operations. Historically, we have satisfied these needs from internally generated funds. We currently anticipate that our cash from operations will be sufficient to meet our presently anticipated working capital and capital expenditure requirements, including our current expansion plans, for at least the next 12 months. We may need to raise additional funds to, among other things:
| ● | support more rapid expansion; | |
| ● | develop new or enhanced services and products; | |
| ● | respond to competitive pressures; | |
| ● | address additional regulatory capital requirements; | |
| ● | acquire complementary businesses, products or technologies; or | |
| ● | respond to unanticipated requirements. |
Additional financing may not be available when needed or may not be available on terms favorable to us. If funding requirements are met by way of additional debt financing, we may have restrictions placed on us through such debt financing arrangements which may:
| ● | limit our ability to pay dividends or require us to seek consents for the payment of dividends; | |
| ● | increase our vulnerability to general adverse economic and industry conditions; | |
| ● | limit our ability to pursue our business strategies; | |
| ● | require us to dedicate a substantial portion of our cash flow from operations to service our debt, thereby reducing the availability of our cash flow to fund capital expenditure, working capital requirements and other general corporate purposes; and | |
| ● | limit our flexibility in planning for, or reacting to, changes in our business and our industry |
Offers or availability for sale of a substantial number of shares of our common stock may cause the price of our common stock to decline.
If our stockholders sell substantial amounts of our common stock in the public market upon the expiration of any statutory holding period, under Rule 144, it could create a circumstance commonly referred to as an “overhang” and in anticipation of which the market price of our common stock could fall. The existence of an overhang, whether or not sales have occurred or are occurring, also could make more difficult our ability to raise additional financing through the sale of equity or equity related securities in the future at a time and price that we deem reasonable or appropriate.
Item 1B. Unresolved Staff Comments.
None
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The Company’s headquarters are located in Jersey City, New Jersey. The Company uses office space of FXDD, an affiliated company, free of rent, which is considered immaterial.
We believe our facilities are adequate for our current and planned business operations.
We are currently not a party to any legal or administrative proceedings and are not aware of any pending or threatened legal or administrative proceedings against us in all material aspects. We may from time to time become a party to various legal or administrative proceedings arising in the ordinary course of our business.
Item 4. Mine Safety Disclosures
Not applicable
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
LIMITED PUBLIC MARKET FOR COMMON STOCK
A symbol was assigned for our securities so that our securities may be quoted for trading on the OTC Pink Sheets under symbol “NUKK”. Minimal trading occurred through the date of this Annual Report based on a limited float. There can be no assurance that a liquid market for our securities will ever develop. Transfer of our common stock may also be restricted under the securities or blue-sky laws of various states and foreign jurisdictions. Consequently, investors may not be able to liquidate their investments and should be prepared to hold the common stock for an indefinite period of time.
| Quarterly ended | Low Price | High Price | |||||||
| December 31, 2015 | $ | 0.25 | $ | 0.25 | |||||
| March 31, 2016 | $ | 0.25 | $ | 1.01 | |||||
| June 30, 2016 | $ | 0.88 | $ | 1.01 | |||||
| September 30, 2016 | $ | 0.39 | $ | 1.01 | |||||
| December 31, 2016 | $ | 0.03 | $ | 0.51 | |||||
| March 31, 2017 | $ | 0.09 | $ | 0.12 | |||||
| June 30, 2017 | $ | 0.08 | $ | 0.09 | |||||
| September 30, 2017 | $ | 0.08 | $ | 0.08 | |||||
Holders of Our Common Stock
As of December 27, 2017, there were 48 holders of record of our common stock. This number does not include shares held by brokerage clearing houses, depositories or others in unregistered form.
Stock Option Grants
To date, we have not granted any stock options.
Transfer Agent and Registrar
The transfer agent for our common stock is Issuer Direct Corporation, 500 Perimeter Park Drive, Suite D, Morrisville, NC 27560, telephone: (919) 481-4000.
Dividends
To date, we have not paid dividends on shares of our common stock and we do not expect to declare or pay dividends on shares of our common stock in the foreseeable future. The payment of any dividends will depend upon our future earnings, if any, our financial condition, and other factors deemed relevant by our Board of Directors.
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Recent Sales of Unregistered Securities
The Company has not sold unregistered securities during the fiscal year ended September 30, 2017 and through the date hereof.
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Stock-Based Compensation:
The Company did not grant or issue stock based compensation during the year ended September 30, 2017.
Item 6. Selected Financial Data
As a smaller reporting company, the Company is not required to file selected financial data.
Item 7. 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 years ended September 30, 2017 and 2016 should be read in conjunction with our consolidated financial statements and related notes to those 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-K involve risks and uncertainties, including statements as to:
| ● | our future operating results; | |
| ● | our business prospects; | |
| ● | any contractual arrangements and relationships with third parties; | |
| ● | the dependence of our future success on the general economy; | |
| ● | any possible financings; and | |
| ● | the adequacy of our cash resources and working capital. |
This Form 10-K contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. For this purpose, any statements contained in this Form 10-K that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, words such as “may”, “will”, “expect”, “believe”, “anticipate”, “estimate” or “continue” or comparable terminology are intended to identify forward-looking statements. These statements by their nature involve substantial risks and uncertainties, and actual results may differ materially depending on a variety of factors, many of which are not within our control. These factors include by are not limited to economic conditions generally and in the industries in which we may participate; competition within our chosen industry, including competition from much larger competitors; technological advances and failure to successfully develop business relationships.
Unless otherwise indicated, references to the “Company”, “us” or “we” refer to Nukkleus Inc. and its consolidated subsidiary.
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.
As part of the Assets acquired, we acquired 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 FXDirectDealer LLC (“FXDIRECT”), we provide turnkey software and technology solutions for FXDD.com. We offer 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”. 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.
As mentioned in elsewhere in this report, on May 27, 2016, we acquired a 9.9% shareholder stake in IBIH and acquired 100% of GVS Limited (“Iron BVI”). The acquisition of a 9.9% shareholder stake in IBIH, as well as the acquisition of Iron BVI. is just a first intended step towards our 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 us. It is the stated intention of our 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. We terminated the acquisition of IBIH and Iron BVI on November 17, 2017.
We currently plan to seek for other acquisitions that bring shareholder value both in the short term and long term. Our 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.
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Critical Accounting Policies and Estimates
The preparation of our 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 expenses, 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 consolidated financial statements because they inherently involve significant judgments and uncertainties.
Revenue Recognition
Because we provide our applications as services, we follow the provisions of Securities and Exchange Commission Staff Accounting Bulletin (“SAB”) No. 104; Revenue Recognition. We recognize revenue when all of the following conditions are met:
| ● | there is persuasive evidence of an arrangement; | |
| ● | the service has been provided to the customer; | |
| ● | the collection of the fees is reasonably assured; and | |
| ● | the amount of fees to be paid by the customer is fixed or determinable. |
We record revenues and expenses related to the General Service Agreement at gross as we are deemed to be a principal in the transactions. Revenues are recognized when the services are completed and expenses are recognized as incurred.
Stock-based Compensation
Stock-based compensation is accounted for based on the requirements of the Share-Based Payment Topic of Accounting Standards Codification (“ASC”) 718 which requires recognition in the financial statements of the cost of employee and director services received in exchange for an award of equity instruments over the period the employee or director is required to perform the services in exchange for the award (presumptively, the vesting period). The ASC also requires measurement of the cost of employee and director services received in exchange for an award based on the grant-date fair value of the award.
We account for equity instruments issued in exchange for the receipt of goods or services from other than employees in accordance with Financial Accounting Standards Board (“FASB”) ASC 505, “Equity” (“ASC 505”). Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably measurable. The value of equity instruments issued for consideration other than employee services is determined on the earlier of a performance commitment or completion of performance by the provider of goods or services as defined by ASC 505.
Results of Operations
Summary of Key Results
For the year ended September 30, 2017 versus the year ended September 30, 2016
Revenue and Cost of Revenue
Total revenue for the year ended September 30, 2017 versus the year ended September 30, 2016 was $24,000,000 and $9,700,000, respectively. Revenue for the years ended September 30, 2017 and 2016 was from general support services rendered to a related party. The significant increase in revenue was due to revenue derived from the service agreement, which commenced in May 2016.
Cost of revenue for the year ended September 30, 2017 versus the year ended September 30, 2016 was $23,700,000 and $9,578,750, respectively. Cost of revenue represents amount incurred for general support services rendered by a related party. The significant increase in cost of revenue was due to expenses incurred as a result of the General Service Agreement, which commenced in May 2016.
Operating Expenses
Total operating expenses for the year ended September 30, 2017 versus the year ended September 30, 2016, were $412,693 versus $373,665, respectively. These operating expenses were primarily third-party and related party professional fees. The increase in operating expenses was mainly due to the increase in use of professional services providers.
Other Expense
Other expense includes interest expense on redeemable preferred stock and amortization of debt discount. Other expense totaled $24,158 for the year ended September 30, 2017, as compared to $7,852 for the year ended September 30, 2016, a change of $16,306, which was attributable to an increase in interest expense on redeemable preferred stock of approximately $10,126 since we commenced to accrue dividends for redeemable preferred stock in June 2016, and an increase in amortization of debt discount of approximately $6,180 since we commenced to amortize the debt discount in June 2016.
21
Net Loss
As a result of the factors describe above, our net loss was $136,851, or (0.00) per common share (basic and diluted), for the year ended September 30, 2017. Our net loss was $260,267, or (0.00) per common share (basic and diluted), for the year ended September 30, 2016.
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 September 30, 2017 and 2016, we had cash balances of $48,642 and $0, respectively.
Cash at September 30, 2017 was provided by operating activities.
We had an accumulated deficit and a total stockholders’ deficit of $515,451 and $351,345, respectively, as of September 30, 2017. For the year ended September 30, 2017, we recorded a net loss of $136,851. We may incur losses for an indeterminate period and may never sustain profitability. We may be unable to achieve and maintain profitability on a quarterly or annual basis. An extended period of losses may prevent us from successfully operating and expanding our business.
Management is currently seeking additional capital through private placements or public offerings of its securities. In addition, we may seek to raise additional capital through public or private debt or equity financings in order to fund our operations, potential mergers or acquisitions, and the development of our business plan.
Cash Flow for the Year Ended September 30, 2017 Compared to the Year Ended September 30, 2016
Net cash flow provided by operating activities was $48,642 for the year ended September 30, 2017. These include $136,851 in net loss. Cash flows provided by operating activities included changes in operating assets and liabilities totaling $176,335 for the year ended September 30, 2017.
We had $0 in net cash provided by operating activities for the year ended September 30, 2016. These include $260,267 in net loss. Cash flows provided by operating activities included changes in operating assets and liabilities totaling $257,059 for the year ended September 30, 2016.
We did not incur any investing activity during the year ended September 30, 2017.
For the year ended September 30, 2016, we had $1,000,000 of net cash used by investing activities for the deposit on the potential acquisition discussed elsewhere in this report.
We did not incur any financing activity during the year ended September 30, 2017.
We had $1,000,000 of net cash provided by financing activities for the year ended September 30, 2016. We received such proceeds from the sale of our preferred and common stock, as discussed elsewhere in this report.
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:
| ● | The working capital requirements to finance our current business; |
| ● | The use of capital for mergers, acquisitions and the development of business opportunities; |
| ● | Addition of personnel as the business grows; and |
| ● | The cost of being a public company. |
In October 2017, we received the $1,000,000 from IBIH in according to the Iron Settlement Agreement described elsewhere in this report. We will use the fund to support our operations and to provide working capital for our ongoing operations and obligations. We believe that our current cash will be sufficient to meet our anticipated cash requirements for the next twelve months.
Although we estimate that our current cash will be sufficient to meet our anticipated cash requirements for the next twelve months, we need to either borrow funds or raise additional capital through equity or debt financings in order to support our future mergers or acquisition and the development of our business opportunities. 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.
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.
22
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.
Contractual Obligations and Off-Balance Sheet Arrangements
Contractual Obligations
We have certain fixed contractual obligations and commitments that include future estimated payments. Changes in our business needs, cancellation provisions, and other factors may result in actual payments differing from the estimates. We cannot provide certainty regarding the timing and amounts of payments. We have presented below a summary of the most significant assumptions used in our determination of amounts presented in the tables, in order to assist in the review of this information within the context of our consolidated financial position, results of operations, and cash flows. The following tables summarize our contractual obligations as of September 30, 2017, and the effect these obligations are expected to have on our liquidity and cash flows in future periods.
| Payments Due by Period | ||||||||||||||||||||
| Contractual obligations: | Total | Less than 1 year | 1-3 years | 3-5 years | 5+ years | |||||||||||||||
| Redeemable preferred stock (stated value) | $ | 1,000,000 | $ | — | $ | — | $ | 1,000,000 | $ | — | ||||||||||
| Accrued interest for redeemable preferred stock | 19,875 | 19,875 | — | — | — | |||||||||||||||
| Total | $ | 1,019,875 | $ | 19,875 | $ | — | $ | 1,000,000 | $ | — | ||||||||||
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 Consolidated Financial Statements appearing elsewhere in this report.
Item 7A. 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.
23
Item 8. Financial Statements and Supplementary Data.
NUKKLEUS INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017 and 2016
24
NUKKLEUS INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017 and 2016
CONTENTS
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Nukkleus Inc.
We have audited the accompanying consolidated balance sheets of Nukkleus Inc. and Subsidiary (the “Company”) as of September 30, 2017 and 2016, and the related consolidated statements of operations, changes in stockholders’ deficit and cash flows for the years then ended. The consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of September 30, 2017 and 2016, and the results of its operations and cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
/s/ Rotenberg Meril Solomon Bertiger & Guttilla, P.C.
Saddle Brook, New Jersey
December 27, 2017
F-2
NUKKLEUS INC. AND SUBSIDIARY
| As of | ||||||||
| September 30, 2017 | September 30, 2016 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | 48,642 | $ | — | ||||
| Prepaid expense | 750 | — | ||||||
| Deposit on potential acquisition | 1,055,559 | 1,055,559 | ||||||
| Due from affiliate | — | 121,250 | ||||||
| TOTAL CURRENT ASSETS | 1,104,951 | 1,176,809 | ||||||
| TOTAL ASSETS | $ | 1,104,951 | $ | 1,176,809 | ||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Due to affiliate | $ | 403,994 | $ | 317,796 | ||||
| Due to former stockholder | — | 21,882 | ||||||
| Accrued taxes | — | 250 | ||||||
| Accrued liabilities | 22,400 | 60,513 | ||||||
| Accrued liabilities - related party | 8,000 | — | ||||||
| TOTAL CURRENT LIABILITIES | 434,394 | 400,441 | ||||||
| Series A redeemable preferred stock liability at $10 stated value; | ||||||||
| 100,000 shares issued and outstanding ($1,000,000 less discount of $33,657 and $42,815, respectively) | 966,343 | 957,185 | ||||||
| TOTAL LIABILITIES | 1,400,737 | 1,357,626 | ||||||
| Contingent common stock (24,156,000 shares issued and outstanding) | 55,559 | 55,559 | ||||||
| STOCKHOLDERS’ DEFICIT: | ||||||||
| Preferred stock ($0.0001 par value; 15,000,000 shares authorized; | ||||||||
| 0 share issued and outstanding at September 30, 2017 and 2016) | — | — | ||||||
| Common stock ($0.0001 par value; 900,000,000 shares authorized; | ||||||||
| 230,485,100 shares issued and outstanding at September 30, 2017 and 2016) | 23,049 | 23,049 | ||||||
| Additional paid-in capital | 141,057 | 119,175 | ||||||
| Accumulated deficit | (515,451 | ) | (378,600 | ) | ||||
| TOTAL STOCKHOLDERS’ DEFICIT | (351,345 | ) | (236,376 | ) | ||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT | $ | 1,104,951 | $ | 1,176,809 | ||||
The accompanying notes to consolidated financial statements are an integral part of these statements.
F-3
NUKKLEUS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
| For the Year Ended | For the Year Ended | |||||||
| September 30, 2017 | September 30, 2016 | |||||||
| REVENUE | ||||||||
| Revenue | $ | — | $ | — | ||||
| Revenue - related party | 24,000,000 | 9,700,000 | ||||||
| Total revenue | 24,000,000 | 9,700,000 | ||||||
| COST OF REVENUE | ||||||||
| Cost of revenue | — | — | ||||||
| Cost of revenue - related party | 23,700,000 | 9,578,750 | ||||||
| Total cost of revenue | 23,700,000 | 9,578,750 | ||||||
| GROSS PROFIT | 300,000 | 121,250 | ||||||
| OPERATING EXPENSES: | ||||||||
| General and administrative | 289,693 | 287,165 | ||||||
| General and administrative - related parties | 123,000 | 86,500 | ||||||
| Total operating expenses | 412,693 | 373,665 | ||||||
| LOSS FROM OPERATIONS | (112,693 | ) | (252,415 | ) | ||||
| OTHER EXPENSE: | ||||||||
| Interest expense on redeemable preferred stock | (15,000 | ) | (4,874 | ) | ||||
| Amortization of debt discount | (9,158 | ) | (2,978 | ) | ||||
| Total other expense | (24,158 | ) | (7,852 | ) | ||||
| LOSS BEFORE INCOME TAXES | (136,851 | ) | (260,267 | ) | ||||
| INCOME TAXES | — | — | ||||||
| NET LOSS | $ | (136,851 | ) | $ | (260,267 | ) | ||
| NET LOSS PER COMMON SHARE: | ||||||||
| Basic and diluted | $ | (0.00 | ) | $ | (0.00 | ) | ||
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: | ||||||||
| Basic and diluted | 254,641,100 | 197,437,150 | ||||||
| The accompanying notes to consolidated financial statements are an integral part of these statements. | ||||||||
F-4
NUKKLEUS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
For the Years Ended September 30, 2017 and 2016
| Preferred Stock | Common Stock | Additional | Total | |||||||||||||||||||||||||
| Number of | Number of | Paid-in | Accumulated | Stockholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||||||||
| Balance, September 30, 2015 | — | $ | — | 166,535,100 | $ | 16,654 | $ | 79,547 | $ | (118,333 | ) | $ | (22,132 | ) | ||||||||||||||
| Common stock issued to CMH | — | — | 15,450,000 | 1,545 | 44,248 | — | 45,793 | |||||||||||||||||||||
| Assets purchase | — | — | 48,400,000 | 4,840 | (4,840 | ) | — | — | ||||||||||||||||||||
| Issuance to non-employee | — | — | 100,000 | 10 | 220 | — | 230 | |||||||||||||||||||||
| Net loss for the year | — | — | — | — | — | (260,267 | ) | (260,267 | ) | |||||||||||||||||||
| Balance, September 30, 2016 | — | — | 230,485,100 | 23,049 | 119,175 | (378,600 | ) | (236,376 | ) | |||||||||||||||||||
| Write-off of the amount due to former stockholder | — | — | — | — | 21,882 | — | 21,882 | |||||||||||||||||||||
| Net loss for the year | — | — | — | — | — | (136,851 | ) | (136,851 | ) | |||||||||||||||||||
| Balance, September 30, 2017 | — | $ | — | 230,485,100 | $ | 23,049 | $ | 141,057 | $ | (515,451 | ) | $ | (351,345 | ) | ||||||||||||||
The accompanying notes to consolidated financial statements are an integral part of these statements.
F-5
NUKKLEUS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the Year Ended | For the Year Ended | |||||||
| September 30, 2017 | September 30, 2016 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (136,851 | ) | $ | (260,267 | ) | ||
| Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
| Amortization of debt discount | 9,158 | 2,978 | ||||||
| Stock-based compensation | — | 230 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Prepaid expense | (750 | ) | — | |||||
| Due from affiliate | 121,250 | (121,250 | ) | |||||
| Due to affiliate | 86,198 | 317,796 | ||||||
| Accrued taxes | (250 | ) | — | |||||
| Accrued liabilities | (38,113 | ) | 60,513 | |||||
| Accrued liabilities - related party | 8,000 | — | ||||||
| Net cash provided by operating activities | 48,642 | — | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Deposit on potential acquisition | — | (1,000,000 | ) | |||||
| Net cash used in investing activities | — | (1,000,000 | ) | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Issuance of common stock | — | 45,793 | ||||||
| Issuance of preferred stock | — | 954,207 | ||||||
| Net cash provided by financing activities | — | 1,000,000 | ||||||
| NET INCREASE IN CASH | 48,642 | — | ||||||
| Cash - beginning of year | — | — | ||||||
| Cash - end of year | $ | 48,642 | $ | — | ||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
| Cash paid for: | ||||||||
| Interest | $ | — | $ | — | ||||
| Income taxes | $ | — | $ | — | ||||
| NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
| Issuance of contingent common stock for potential acquisition | $ | — | $ | 55,559 | ||||
The accompanying notes to consolidated financial statements are an integral part of these statements.
F-6
NUKKLEUS
INC. AND SUBSIDIARY
NOTES TO 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 the Company purchased from CMH certain intellectual property, hardware, software and other assets (collectively, the “Assets”) in consideration of 48,400,000 shares of common stock of the Company. The Asset Purchase Agreement closed on May 24, 2016 (the “Closing”). As a result of such acquisition, the Company’s operations are now focused on the operation of a foreign exchange trading business utilizing the assets acquired from CMH.
On May 24, 2016, the Subsidiary entered into a General Service Agreement to provide its software, technology, customer sales and marketing and risk management technology hardware and software solutions package to FML Malta Ltd. In December 2017, the Subsidiary, FML Malta Ltd. and FXDD Malta Limited (“FXDD Malta”) entered into a letter agreement providing that there was an error in drafting the General Service Agreement and acknowledging that the correct counter-party to Subsidiary in the General Service Agreement is FXDD Malta. Accordingly, all references to FML Malta Ltd. have been replaced with FXDD Malta. FXDD Malta is a private limited liability company formed under the laws of Malta. The General Service Agreement entered with FXDD Malta provides that FXDD Malta will pay the Subsidiary at minimum $2,000,000 per month. On October 17, 2017, the Subsidiary entered into an amendment of the General Service Agreement with FXDD Malta. In accordance with the amendment, which was effective as of October 1, 2017, the minimum amount payable by FXDD Malta to the Subsidiary for services was reduced from $2,000,000 per month to $1,600,000 per month. Emil Assentato is also the majority member of Max Q Investments LLC (“Max Q”), which is managed by Derivative Marketing Associates Inc. (“DMA”). Mr. Assentato is the sole owner and manager of DMA. Max Q owns 79% of Currency Mountain Malta LLC, which in turn is the sole shareholder of FXDD Malta.
In addition, on May 24, 2016, in order to appropriately service FXDD Malta, the Subsidiary entered into a General Service Agreement with FXDirectDealer LLC (“FXDIRECT”), which provides that the Subsidiary will pay FXDIRECT a minimum of $1,975,000 per month in consideration of providing personnel engaged in operational and technical support, marketing, sales support, accounting, risk monitoring, documentation processing and customer care and support. FXDIRECT may terminate this agreement upon providing 90 days’ written notice. On October 17, 2017, the Subsidiary entered into an amendment of the General Service Agreement with FXDIRECT. Pursuant to the amendment, which was effective as of October 1, 2017, the minimum amount payable by the Subsidiary to FXDIRECT for services was reduced from $1,975,000 per month to $1,575,000 per month. Currency Mountain Holdings LLC is the sole shareholder of FXDIRECT. Max Q is the majority shareholder of Currency Mountain Holdings LLC.
On May 27, 2016, the Company entered into a Stock Purchase Agreement (“SPA”) to acquire, from IBIH Limited, a BVI corporation (“IBIH”) 2,200 issued and outstanding common stock for $1,000,000, representing 9.9% of IBIH. In addition, the Company acquired 100% of the issued and outstanding shares of GVS Limited (“Iron BVI”), which is the parent corporation of GVS (AU) Pty Ltd. (“Iron Australia”) for 24,156,000 shares of common stock of the Company (“First Closing”).
The Company agreed to acquire the remaining 20,000 shares of IBIH for 219,844,000 shares of its common stock, subject to IBIH obtaining regulatory approvals from the Financial Conduct Authority in the United Kingdom (“London FCA”) and from the regulators in Cyprus (“Second Closing”). The Second Closing was subject to the Company signing an option agreement with FXDD Malta and FXDD Trading Limited operating units (the “Option”), which are affiliates through common ownership, providing that the Company may acquire both entities for $1. These transactions were subject to regulatory approval, where applicable.
The terms of the Agreement stipulated that if the Second Closing did not occur before November 28, 2016, the $1,000,000 would be returned to the Company and the First Closing would be unwound. As a result of the First Closing being contingent on the Second Closing, the $1,000,000 cash paid and value of the 24,156,000 shares issued was recorded as a “deposit on potential acquisition”, and the 24,156,000 shares was recorded as “contingent common stock” due to the uncertainty of the closing of the transaction.
F-7
NUKKLEUS
INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – THE COMPANY HISTORY AND NATURE OF THE BUSINESS (continued)
On November 17, 2017, the Company, IBIH, Terra (FX) Offshore Limited, Ludico Investments Limited, Currency Mountain Holdings LLC and the IBIH Shareholders entered into a Settlement Agreement and Mutual Release (the “Iron Settlement Agreement”) pursuant to which the Stock Purchase Agreement was terminated, all differences between the parties were resolved and settled and the parties fully released the other parties from any liability. Pursuant to the Iron Settlement Agreement, the Company agreed to (i) have the registered office of Iron Australia changed, (ii) have its director designees resign as directors of Iron Australia, (iii) appoint Markos Kashiouris, Petros Economides and Yun Ma as directors of Iron Australia; (iv) and make all required changes with the Australian Securities and Investments Commission. With respect to Iron BVI, pursuant to the Iron Settlement Agreement, the Company agreed to (i) have the registered office of Iron BVI changed, (ii) have its director designee resign as a director of Iron BVI, (iii) appoint Cymora Limited as director of Iron BVI; (iv) and make all required changes with the BVI Registrar of Companies. Further, the Company agreed to return the 2,200 shares of capital stock of IBIH to the IBIH Shareholders and return 100% of its interest in Iron BVI to IBIH. IBIH agreed to return the 24,156,000 shares of common stock of the Company to the Company for cancellation and to pay the Company $1,000,000. Further, Markos Kashiouris, Petros Economides and Efstathios Christophi resigned as directors of the Company and waived any directorship fees payable to them under their letter of appointment dated August 1, 2016. The $1,000,000 has been paid to the Company, net of approximately $70,000 of legal expenses, in the first fiscal quarter of 2018 and IBIH has returned the certificate representing the 24,156,000 shares of common stock of the Company and the shares have been cancelled by the Company.
As part of the above-mentioned transaction involving the acquisition with IBIH and Iron BVI, the parties had entered into an engagement agreement with Bentley Associates L.P. (“Bentley”). The Company engaged Bentley to act as the Company’s exclusive financial advisor (the “Bentley Engagement”) in consideration of a transaction fee equal to $600,000 in cash and stock of the Company (the “Transaction Fee”). This transaction fee was payable upon the consummation of the acquisition transaction related to the SPA and 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 Bentley Engagement agreement was terminated by both parties in December 2017 since the related acquisition was terminated.
The Company agreed to sell to CMH 30,900,000 shares of common stock and 200,000 shares of Series A preferred stock for $2,000,000 in two equal installments. The first close occurred on June 7, 2016. Originally, the second closing was to occur with the closing of the Company’s acquisition of IBIH. Since the acquisition of IBIH transaction was terminated, the second closing with CMH will not proceed.
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.
NOTE 2 – BASIS OF PRESENTATION
The accompanying consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) and with the rules and regulations of the U.S. Securities and Exchange Commission for financial information.
The Company’s consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. These accounts were prepared under the accrual basis of accounting. All intercompany accounts and transactions have been eliminated in consolidation.
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of estimates
The preparation of the consolidated financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Significant estimates during the years ended September 30, 2017 and 2016 include the valuation of deferred tax assets and the associated valuation, accruals for taxes due, and the value of stock-based compensation.
F-8
NUKKLEUS
INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Fair value of financial instruments
The carrying amounts reported in the consolidated balance sheets for cash, prepaid expense, deposit on potential acquisition, due from affiliate, due to affiliate, due to former stockholder, accrued taxes, accrued liabilities, and accrued liabilities – related party approximate their fair market value based on the short-term maturity of these instruments. The Company did not have any non-financial assets or liabilities that are measured at fair value on a recurring basis as of September 30, 2017 and 2016.
Concentration of credit risk
The Company maintains its cash in bank and financial institution deposits that at times may exceed federally insured limits. The Company has not experienced any losses in such accounts through September 30, 2017. There were no balances in excess of Federal Deposit Insurance Corporation insured levels at September 30, 2017 and 2016.
The following table summarizes customer revenue concentrations:
| Year Ended September 30, 2017 | Year Ended September 30, 2016 | |||||||
| FXDD Malta - related party | 100 | % | 100 | % | ||||
The following table summarizes vendor expense concentrations:
| Year Ended September 30, 2017 | Year Ended September 30, 2016 | |||||||
| FXDIRECT - related party | 100 | % | 100 | % | ||||
Prepaid expense
Prepaid expense represents cash paid in advance for professional service charge. The amount is recognized as expense over the related service periods. At September 30, 2017 and 2016, prepaid expense amounted $750 and $0, respectively.
Revenue recognition
Because the Company provides its applications as services, it follows the provisions of Securities and Exchange Commission Staff Accounting Bulletin (“SAB”) No. 104; Revenue Recognition. The Company recognizes revenue when all of the following conditions are met:
| ● | there is persuasive evidence of an arrangement; | |
| ● | the service has been provided to the customer; | |
| ● | the collection of the fees is reasonably assured; and | |
| ● | the amount of fees to be paid by the customer is fixed or determinable. |
The Company records revenues and expenses related to the General Service Agreements at gross as the Company is deemed to be a principal in the transactions. Revenues are recognized when the services are completed and expenses are recognized as incurred.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Stock-based compensation
Stock-based compensation is accounted for based on the requirements of the Share-Based Payment Topic of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 718 which requires recognition in the financial statements of the cost of employee and director services received in exchange for an award of equity instruments over the period the employee or director is required to perform the services in exchange for the award (presumptively, the vesting period). The ASC also requires measurement of the cost of employee and director services received in exchange for an award based on the grant-date fair value of the award.
The Company accounts for equity instruments issued in exchange for the receipt of goods or services from other than employees in accordance with FASB ASC 505, “Equity” (“ASC 505”). Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably measurable. The value of equity instruments issued for consideration other than employee services is determined on the earlier of a performance commitment or completion of performance by the provider of goods or services as defined by ASC 505.
Income taxes
The Company accounts for income taxes pursuant to FASB ASC 740. Deferred tax assets and liabilities are determined based on temporary differences between the bases of certain assets and liabilities for income tax and financial reporting purposes. The deferred tax assets and liabilities are classified according to the financial statement classification of the assets and liabilities generating the differences.
The Company maintains a valuation allowance with respect to deferred tax assets. The Company establishes a valuation allowance based upon the potential likelihood of realizing the deferred tax asset and taking into consideration the Company’s financial position and results of operations for the current period. Future realization of the deferred tax benefit depends on the existence of sufficient taxable income within the carry-forward period under the Federal tax laws. Changes in circumstances, such as the Company generating taxable income, could cause a change in judgment about the realizability of the related deferred tax asset. Any change in the valuation allowance will be included in income in the year of the change in estimate.
The Company follows the provisions of FASB ASC 740-10 “Uncertainty in Income Taxes” (ASC 740-10). Certain recognition thresholds must be met before a tax position is recognized in the financial statements. An entity may only recognize or continue to recognize tax positions that meet a “more-likely-than-not” threshold. As of September 30, 2017 and 2016, the Company does not believe it has any uncertain tax positions that would require either recognition or disclosure in the accompanying consolidated financial statements. Tax years that remain subject to examination are the years ended September 30, 2017, 2016 and 2015. The Company recognizes interest and penalties related to uncertain income tax positions in other expense. However, no such interest and penalties were recorded as of September 30, 2017 and 2016.
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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Per share data (continued)
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 years ended September 30, 2017 and 2016, potentially dilutive common shares consist of common stock issuable upon the conversion of Series A preferred stock (using the if-converted method). The following table presents a reconciliation of basic and diluted net loss per share:
| Year Ended September 30, 2017 | Year Ended September 30, 2016 | |||||||
| Net loss available to common stockholders for basic and diluted net loss per share of common stock | $ | (136,851 | ) | $ | (260,267 | ) | ||
| Weighted average common stock outstanding - basic | 254,641,100 | 197,437,150 | ||||||
| Effect of dilutive securities: | ||||||||
| Series A preferred stock | — | — | ||||||
| Weighted average common stock outstanding - diluted | 254,641,100 | 197,437,150 | ||||||
| Net loss per common share - basic | $ | (0.00 | ) | $ | (0.00 | ) | ||
| Net loss per common share - diluted | $ | (0.00 | ) | $ | (0.00 | ) | ||
During the years ended September 30, 2017 and 2016, all potentially dilutive securities are excluded from the computation of diluted weighted average number of shares of common stock outstanding as they would have had an anti-dilutive impact.
Reclassifications
The Company has reclassified certain prior fiscal year amounts in the accompanying consolidated statements of operations in order to be consistent with the current fiscal year presentation. These reclassifications had no effect on the previously reported results of operations.
Recently issued accounting pronouncements
In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 will eliminate transaction- and industry-specific revenue recognition guidance under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2017 (quarter ending December 31, 2018 for the Company). Early adoption is permitted only in annual reporting periods beginning after December 15, 2016, including interim periods therein. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. The Company is currently evaluating the effects of adopting ASU 2014-09 and the implementation approach to be used, but as of the date of this filing, the adoption is not expected to have a material impact on the Company’s consolidated financial statements.
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entities Ability to Continue as a Going Concern (ASU 2014-15). The guidance in ASU 2014-15 sets forth management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern as well as required disclosures. ASU 2014-15 indicates that, when preparing financial statements for interim and annual financial statements, management should evaluate whether conditions or events, in the aggregate, raise substantial doubt about the entity’s ability to continue as a going concern for one year from the date the financial statements are issued or are available to be issued. This evaluation should include consideration of conditions and events that are either known or are reasonably knowable at the date the financial statements are issued or are available to be issued, as well as whether it is probable that management’s plans to address the substantial doubt will be implemented and, if so, whether it is probable that the plans will alleviate the substantial doubt. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and interim periods and annual periods thereafter. Early application is permitted. Effective July 1, 2017, the Company adopted this guidance and it did not have a significant impact on the Company’s consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recently issued accounting pronouncements (continued)
In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, which requires deferred income tax liabilities and assets to be classified as noncurrent on the balance sheet rather than being separated into current and noncurrent. The guidance is effective for public entities for annual periods beginning after December 15, 2016 (quarter ending December 31, 2017 for the Company), and interim periods within those annual periods with early adoption being 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.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842): Amendments to the Leases Analysis, which modified lease accounting for both lessees and lessors to increase transparency and comparability by recognizing lease assets and lease liabilities by lessees for those leases classified as operating leases under previous accounting standards and disclosing key information about leasing arrangements. This pronouncement is effective for reporting periods beginning after December 15, 2018 including interim periods within those annual reporting periods (quarter ending December 31, 2019 for the Company) using a modified retrospective adoption method. The Company is currently evaluating the impact of adopting the new lease standard on its consolidated financial statements, but the adoption is not expected to have a significant impact as of the filing of this report.
In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. The amendments add further guidance on identifying performance obligations and also improve the operability and understandability of the licensing implementation guidance. The amendments do not change the core principle of the guidance in Topic 606. The effective date and transition requirements for the amendments are the same as the effective date and transition requirements in Topic 606. The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements, but the adoption is not expected to have a significant impact as of the filing of this report.
In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. The amendments, among other things: (1) clarify the objective of the collectability criterion for applying paragraph 606-10-25-7; (2) permit an entity to exclude amounts collected from customers for all sales (and other similar) taxes from the transaction price; (3) specify that the measurement date for noncash consideration is contract inception; (4) provide a practical expedient that permits an entity to reflect the aggregate effect of all modifications that occur before the beginning of the earliest period presented when identifying the satisfied and unsatisfied performance obligations, determining the transaction price, and allocating the transaction price to the satisfied and unsatisfied performance obligations; (5) clarify that a completed contract for purposes of transition is a contract for which all (or substantially all) of the revenue was recognized under legacy GAAP before the date of initial application, and (6) clarify that an entity that retrospectively applies the guidance in Topic 606 to each prior reporting period is not required to disclose the effect of the accounting change for the period of adoption. The effective date of these amendments is at the same date that Topic 606 is effective. The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements, but the adoption is not expected to have a significant impact as of the filing of this report.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This ASU addresses the classification of certain specific cash flow issues including debt prepayment or extinguishment costs, settlement of certain debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of certain insurance claims and distributions received from equity method investees. This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years (quarter ending December 31, 2018 for the Company), with early adoption permitted. An entity that elects early adoption must adopt all of the amendments in the same period. The Company is currently evaluating the impact it may have on its consolidated financial statements, but the adoption is not expected to have a significant impact as of the filing of this report.
Effective October 1, 2016, the Company adopted ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recently issued accounting pronouncements (continued)
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The ASU clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for acquisitions (or disposals) of assets or business. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual reporting periods (quarter ending December 31, 2018 for the Company). The Company is currently evaluating the impact of adopting ASU 2017-01 on its consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09, Compensation – Stock Compensation: Scope of Modification Accounting. The guidance clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. Entities will apply the modification accounting guidance if the value, vesting conditions or classification of the award changes. This guidance is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2017 (quarter ending December 31, 2018 for the Company). Early adoption is permitted. The Company is currently evaluating the impact it may have on its consolidated financial statements, but the adoption is not expected to have a significant impact as of the filing of this report.
Other accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption. The Company does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to its consolidated financial condition, results of operations, cash flows or disclosures.
NOTE 4 – ACCRUED LIABILITIES
At September 30, 2017 and 2016, accrued liabilities consisted of the following:
| September 30, 2017 | September 30, 2016 | |||||||
| Professional fees | $ | 2,525 | $ | 55,636 | ||||
| Interest payable | 19,875 | 4,877 | ||||||
| $ | 22,400 | $ | 60,513 | |||||
NOTE 5 – SHARE CAPITAL
Authorized shares
The Company was authorized to issue 300,000,000 shares of common stock at par value of $0.0001 and 15,000,000 shares of Series A preferred stock at par value of $0.0001. On May 26, 2016, the Company increased its authorized common shares to 900,000,000.
Common stock issued for assets purchase
On May 24, 2016, CMH sold the Assets to the Company in consideration of 48,400,000 shares of common stock of the Company. As the acquisition was from an entity under common control, the Company recorded the Assets at CMH’s carrying values, which were zero.
Common stock issued for Stock Purchase Agreement
As described in Note 1, on May 27, 2016, the Company acquired 100% of the issued and outstanding shares of Iron BVI for 24,156,000 shares of common stock of the Company. The shares were valued at $.0023 per share. As a result of the First Closing being contingent on the Second Closing, the 24,156,000 shares for the purchase of IBIH was recorded as “contingent common stock” due to the uncertainty of the closing of the transaction.
On November 17, 2017, the Company entered into the Iron Settlement Agreement. As a result, IBIH has returned the certificate representing the 24,156,000 shares of common stock of the Company and the shares have been cancelled by the Company.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 – SHARE CAPITAL (continued)
Common stock and Series A preferred stock sold for cash
The Company agreed to sell to CMH 30,900,000 shares of common stock and 200,000 shares of Series A preferred stock for $2,000,000 in two equal installments. The first close occurred on June 7, 2016. Originally, the second closing was to occur with the closing of the Company’s acquisition of IBIH. Since the acquisition of IBIH transaction was terminated, the second closing with CMH will not proceed.
The Series A preferred stock has the following key terms:
| 1) | A stated value of $10 per share; |
| 2) | The holder is entitled to receive cumulative dividends at the annual rate of 1.5% of stated value payable semi-annually on June 30 and December 31; |
| 3) | The preferred stock must be redeemed at the stated value plus any unpaid dividends in 5 years. |
During the first close, 15,450,000 shares of common stock and 100,000 shares of Series A preferred stock were issued and were recorded as equity and as a long-term liability, respectively. The $1,000,000 of proceeds received was allocated to the common stock and Series A preferred stock according to their relative fair values determined at the time of issuance, and as a result, the Company recorded a total discount of $45,793 on the Series A preferred stock, which is being amortized to interest expense to the date of redemption. For the years ended September 30, 2017 and 2016, amortization of debt discount amounted to $9,158 and $2,978, respectively.
The terms of the Series A preferred stock issued represent mandatory redeemable shares, with a fixed redemption date (in 5 years) and the Company has a choice of redeeming the instrument either in cash or a variable number of shares of common stock based on a formula in the certificate of designation. The conversion price has a floor of $0.20 per share. As such, all dividends accrued and/or paid and any accretions are classified as part of interest expense. For the years ended September 30, 2017 and 2016, dividends on redeemable preferred stock amounted to $15,000 and $4,874, respectively.
Common stock issued for services
In August 2016, the Company granted an outside attorney 100,000 shares of restricted common stock for professional services. The total fair value of these shares on the date of grant was $230 and was recorded within general and administrative expenses on the accompanying consolidated statements of operations.
NOTE 6 – INCOME TAXES
The provision for income taxes for the years ended September 30, 2017 and 2016 was as follows (assuming a 15% effective tax rate):
| Year Ended | Year Ended | |||||||
| September 30, 2017 | September 30, 2016 | |||||||
| Current Tax Provision: | ||||||||
| Federal - State - Local | $ | — | $ | — | ||||
| Total current tax provision | $ | — | $ | — |
| Year Ended | Year Ended | |||||||
| September 30, 2017 | September 30, 2016 | |||||||
| Deferred Tax Provision: | ||||||||
| Federal | $ | — | $ | — | ||||
| Loss carry-forwards | 20,528 | 39,040 | ||||||
| Change in valuation allowance | (20,528 | ) | (39,040 | ) | ||||
| Total deferred tax provision | $ | — | $ | — | ||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 – INCOME TAXES (continued)
The Company’s net deferred tax assets and total losses since inception as of September 30, 2017 and 2016 were as follows:
| September 30, 2017 | September 30, 2016 | |||||||
| Deferred tax assets: | ||||||||
| Loss carry-forwards | $ | 77,318 | $ | 56,790 | ||||
| valuation allowance | (77,318 | ) | (56,790 | ) | ||||
| Total net deferred tax assets | $ | — | $ | — | ||||
| Total losses since inception: | $ | 515,451 | $ | 378,600 | ||||
The Company provided a valuation allowance equal to the deferred income tax assets for years ended September 30, 2017 and 2016 because it is not presently known whether future taxable income will be sufficient to utilize the loss carry-forwards.
As of September 30, 2017, the Company had $515,451 in net operating loss carry-forwards that can be utilized in future periods to reduce taxable income. However, due to changes in stock ownership, the use of the U.S. net operating loss carry-forwards is limited under Section 382 of the Internal Revenue Code. The potential tax benefit arising from the loss carry-forwards will expire in fiscal years 2033 through 2037.
The Company did not identify any material uncertain tax positions. The Company did not recognize any interest or penalties for unrecognized tax benefits. The federal and state income tax returns of the Company are subject to examination by the Internal Revenue Service (“IRS”) and state tax authorities, generally for three years after they are filed. The Company’s 2015, 2016 and 2017 Corporate Income Tax Returns are subject to IRS and state examination.
NOTE 7 – RELATED PARTY TRANSACTIONS
Services provided and to be provided by related parties
On May 23, 2016, the Company engaged Bentley to act as the Company’s exclusive financial advisor (the “Bentley Engagement”) in connection with the acquisition with IBIH and Iron BVI related to the SPA in consideration of a transaction fee equal to $600,000 in cash and stock of the Company (the “Transaction Fee”). This transaction fee was payable upon the consummation of the acquisition transaction related to the SPA and following the closing of a financing transaction in excess of $2,500,000, subject to the terms and conditions contained in the engagement agreement. As part of the Bentley Engagement, Mr. Craig Marshak, a director, acted as a sub-advisor to Bentley and was entitled to a portion of the Transaction Fee. As of September 30, 2017, the Company has not paid or recorded any fees in connection with the Bentley Engagement, as the Transaction Fee was a contingent liability and was to be recorded upon consummation of the related transactions. The Bentley Engagement agreement was terminated in December 2017 by both parties since the acquisition transaction related to the SPA was terminated on November 17, 2017.
On or about May 23, 2016, the Company and IBIH each agreed to pay an amount of $25,000 to Triple Eight Markets as a consulting fee for an aggregate fee of $50,000. The fee was paid in the quarter ended June 30, 2016. In the same agreement, the Company also agreed to retain Craig Marshak, a director of the Company and 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 recognized consulting expenses of $123,000 and $86,500 for the years ended September 30, 2017 and 2016, respectively, which have been included in general and administrative expense – related parties on the accompanying consolidated statements of operations. As of September 30, 2017 and 2016, the accrued and unpaid business and financial service charge and other services charge related to Triple Eight Markets amounted to $8,000 and $0, respectively, which have been recorded as accrued liabilities – related party on the accompanying consolidated balance sheets. Craig Marshak performs work for the Company on a case-by-case basis commencing on the agreement expiring date.
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.
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INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 – RELATED PARTY TRANSACTIONS (continued)
Assets purchased from related party
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.
Revenue from related party and cost for revenue from related party
On May 24, 2016, the Company entered into a General Service Agreement with FXDD Malta, a related party. The Company is to invoice FXDD Malta a minimum of $2,000,000 per month in consideration for providing personnel and technical support, marketing, accounting, risk monitoring, documentation processing and customer care and support. On October 17, 2017, the Company entered into an amendment of the General Service Agreement with FXDD Malta. In according to the amendment, which was effective as of October 1, 2017, the minimum amount payable by FXDD Malta to the Company for services was reduced from $2,000,000 per month to $1,600,000 per month. Emil Assentato is also the majority member of Max Q Investments LLC (“Max Q”), which is managed by Derivative Marketing Associates Inc. (“DMA”). Mr. Assentato is the sole owner and manager of DMA. Max Q owns 79% of Currency Mountain Malta LLC, which in turn is the sole shareholder of FXDD Malta.
In addition, on May 24, 2016, the Company entered into a General Service Agreement with FXDIRECT to pay a minimum of $1,975,000 per month for receiving personnel and technical support, marketing, accounting, risk monitoring, documentation processing and customer care and support. On October 17, 2017, the Company entered into an amendment of the General Service Agreement with FXDIRECT. Pursuant to the amendment, which was effective as of October 1, 2017, the minimum amount payable by the Company to FXDIRECT for services was reduced from $1,975,000 per month to $1,575,000 per month. Currency Mountain Holdings LLC is the sole shareholder of FXDIRECT. Max Q is the majority shareholder of Currency Mountain Holdings LLC.
FXDD Malta made direct payments to FXDIRECT in satisfaction of the amounts due the Company, resulting in a receivable of $0 and $121,250 as of September 30, 2017 and 2016, respectively.
Both of the above entities are affiliates through common ownership.
During the years ended September 30, 2017 and 2016, service provided to related party which was recorded as revenue - related party on the accompanying consolidated statements of operations was as follows:
| Year Ended | Year Ended | |||||||
| September 30, 2017 | September 30, 2016 | |||||||
| Service provided to: | ||||||||
| FXDD Malta | $ | 24,000,000 | $ | 9,700,000 | ||||
| $ | 24,000,000 | $ | 9,700,000 | |||||
During the years ended September 30, 2017 and 2016, service received from related party which was recorded as cost of revenue - related party on the accompanying consolidated statements of operations was as follows:
| Year Ended | Year Ended | |||||||
| September 30, 2017 | September 30, 2016 | |||||||
| Service received from: | ||||||||
| FXDIRECT | $ | 23,700,000 | $ | 9,578,750 | ||||
| $ | 23,700,000 | $ | 9,578,750 | |||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 – RELATED PARTY TRANSACTIONS (continued)
Due from affiliate
At September 30, 2017 and 2016, due from related party consisted of the following:
| September 30, 2017 | September 30, 2016 | |||||||
| FXDIRECT | $ | — | $ | 121,250 | ||||
| $ | — | $ | 121,250 | |||||
The balance of due from related party represents monies that FXDD Malta paid to FXDIRECT on behalf of the Company. Management believes that the related party receivable is fully collectable. Therefore, no allowance for doubtful accounts is deemed to be required on its due from related party at September 30, 2017 and 2016. The Company historically has not experienced uncollectible receivable from related party.
Due to affiliate
At September 30, 2017 and 2016, due to related party consisted of the following:
| September 30, 2017 | September 30, 2016 | |||||||
| Forexware LLC | $ | 403,994 | $ | 317,796 | ||||
| $ | 403,994 | $ | 317,796 | |||||
The balance of due to related party represents expenses paid by Forexware, LLC on behalf of the Company. The related party payable is short-term in nature, non-interest bearing, unsecured and repayable on demand.
Due to former stockholder
As of September 30, 2017 and 2016, due to former stockholder amounted to $0 and $21,882, respectively. The due to former stockholder balance of $21,882 as of September 30, 2016 principally consisted of professional and various filings fees borne by Charms, the majority former stockholder of the Company. The write-off of the amount due to the former stockholder was classified as an increase to additional paid-in capital.
NOTE 8 – SUBSEQUENT EVENTS
Management has evaluated subsequent events through the date of the filing.
F-17
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
In connection with the preparation of our Annual Report on Form 10-K, an evaluation was carried out by management, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (Exchange Act) as of September 30, 2017. Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified, and that such information is accumulated and communicated to management, including the CEO and CFO, to allow timely decisions regarding required disclosure. The CEO and the CFO is the same person.
During evaluation of disclosure controls and procedures as of September 30, 2017 conducted as part of our annual audit and preparation of our annual financial statements, the 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.
25
Management’s Report on Internal Control over Financial Reporting
Management is responsible for the preparation and fair presentation of the financial statements included in this annual report. The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and reflect management’s judgment and estimates concerning effects of events and transactions that are accounted for or disclosed.
Management is also responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting includes those policies and procedures that pertain to our ability to record, process, summarize and report reliable data. Management recognizes that there are inherent limitations in the effectiveness of any internal control over financial reporting, including the possibility of human error and the circumvention or overriding of internal control. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement presentation. Further, because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time.
In order to ensure that our internal control over financial reporting is effective, management regularly assesses controls and did so most recently for its financial reporting as of September 30, 2017. This assessment was based on criteria for effective internal control over financial reporting described in the Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission. Based on this assessment, management has concluded that our internal control over financial reporting was effective as of September 30, 2017.
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 internal control over financial reporting was effective.
Steps taken during fiscal 2017 to remediate its material weakness were:
| ● | Improved the coordination and communication between the Company and its outsourced accounting consultants (“accountants”) regarding the financial reporting process and internal controls over the accounting for non-routine, complex transactions; |
| ● | Developed written policies and procedures, and tested the controls to ascertain that the controls are being satisfactorily followed. |
Management believes the changes discussed above are sufficient to mitigate the material weakness identified.
Changes in Internal Control over Financial Reporting
Other than described above, there were no changes in our internal control over financial reporting, as such term is defined in Rules 13a-15(f) under the Exchange Act, during the quarter ended September 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Attestation Report of the Registered Public Accounting Firm
This Annual Report on Form 10-K does not include an attestation report by our independent registered public accounting firm, regarding internal control over financial reporting. As a smaller reporting company, our internal control over financial reporting was not subject to audit by our independent registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit us to provide only management’s report.
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PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The following table sets forth the names and ages of the Companies officers and directors as of the date hereof. Our executive officers are elected annually by our board of directors. Our executive officers hold their offices until they resign, are removed by the Board, or his successor is elected and qualified.
Directors and Executive Officers
| Name | Age | Position | ||
| Emil Assentato | 68 | Chief Executive Officer, Chief Financial Officer and Chairman | ||
| Craig Marshak | 58 | Director | ||
| Donald Fewer | 54 | Director |
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. As discussed above, as a result of the Settlement Agreement, Messrs Kashiouris, Christophi and Economides resigned on November 17, 2017.
On October 10, 2017, Jack Lahav was removed as a member of the Board of Directors of the Company. In addition, on October 10, 2017, Donald P. Fewer was appointed as a member of the Board of Directors of the Company to fill the vacancy resulting from Mr. Lahav’s removal.
Set forth below is a brief description of the background and business experience of our current executive officers or directors.
Emil Assentato was previously the Chief Executive Officer of Tradition North America, one of the leading inter-dealer brokers in the world, and a subsidiary of Compagnie Financiere Tradition, a leading global brand in inter-dealer broking listed on the Swiss Stock Exchange. He continues today as Chairman of Tradition North America. His career spans over 30 years of Wall Street leadership in Institutional Sales, Marketing and Senior Management. Mr. Assentato and his team were the founding shareholders of FXDD in 2002, and pioneered the brand in the early days of the retail forex industry. Having lead a management buyout of the brand from Tradition, and whilst keeping Tradition as a minority equity partner, Mr. Assentato in recent years, re-focused the brand strategy on Asian markets.
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Craig Marshak has over twenty years of experience in financial services. From 2010 to 2014, he was a founding partner of Israel Venture Partners, and a Managing Director at Cross Point Capital Advisors. From 2007 to 2010, Mr. Marshak headed the London office of Trafalgar Capital, a $200 million mezzanine capital fund headquartered in Luxemburg. Prior to that, he was a managing director and co-head of Nomura merchant banking technology growth fund. Prior to that, he was a managing director at Robertson Stephens. Prior to that, he was an executive at Wertheim Schroder and its affiliates in New York and London. He commenced his Wall Street career at Morgan Stanley. He received his bachelor’s degree from Duke University, and a JD from Harvard Law School.
Donald Fewer serves as a Senior Managing Director of Standard Credit Group and member of the executive board at Compagnie Financiere Tradition from 2008 through 2015. Mr. Fewer served as senior managing Director of GFI Group Inc. from June 2000 to April 2008, its head of North America brokerage operations from June 2000 to 2008 and head of credit product brokerage business in North America from January 2007 to April 2008. Mr. Fewer joined GFI Group Inc. in 1996 to establish its global credit derivatives brokerage services. Mr. Fewer served as a Director of GFI Group Inc. since from November 2001 to 2008. Mr. Fewer served as a senior vice president in structured products group of Garvin Guy Butler Corp. Mr. Fewer served as a senior vice president of Prebon-Yamane (U.S.A.) Inc., where he headed its treasury group and was responsible for all non-trading floor operations. Mr. Fewer served as a director of The Clearing Corporation. Mr. Fewer graduated from Pace University and holds a Bachelor of Business Administration. He is a member of Omicron Delta Epsilon - International Economic Honor Society.
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Board of Directors
The minimum number of directors we are authorized to have is one and the maximum is six. In no event may we have less than one director. Although we anticipate appointing additional directors in the future, as of the date hereof we have three directors.
Directors on our Board of Directors are elected for one-year terms and serve until the next annual security holders’ meeting or until their death, resignation, retirement, removal, disqualification, or until a successor has been elected and qualified. All officers are appointed annually by the Board of Directors and serve at the discretion of the Board. Currently, directors receive no compensation for their services on our Board.
All directors will be reimbursed by us for any accountable expenses incurred in attending directors meetings provided that we have the resources to pay these fees. We will consider applying for officers and directors liability insurance at such time when we have the resources to do so.
Committees of the Board of Directors
Concurrent with having sufficient members and resources, our Board of Directors intends to establish an audit committee and a compensation committee. The audit committee will review the results and scope of the audit and other services provided by the independent auditors and review and evaluate the system of internal controls. The compensation committee will review and recommend compensation arrangements for the officers and employees. No final determination has yet been made as to the memberships of these committees or when we will have sufficient members to establish committees. We believe that we will need a minimum of three independent directors to have effective committee systems.
As of the date hereof, we have not established any Board committees.
Family Relationships
No family relationship exists between any director, executive officer, or any person contemplated to become such.
Section 16(A) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), requires executive officers and directors, and persons who beneficially own more than ten percent of the Company’s common stock, to file initial reports of ownership and reports of changes in ownership with the SEC for Companies registered under Section 12 of the Exchange Act (“Section 12”). Since we are not registered under Section 12, the executive officers, directors and greater than ten percent beneficial owners were not required by SEC regulations to file forms under 16(a).
Director Independence
We currently do not have any independent directors serving on our board of directors.
Possible Potential Conflicts
The OTCPink on which we plan to have our shares of common stock quoted does not currently have any director independence requirements.
No member of management will be required by us to work on a full time basis. Accordingly, certain conflicts of interest may arise between us and our officer(s) and director(s) in that they may have other business interests in the future to which they devote their attention, and they may be expected to continue to do so although management time must also be devoted to our business. As a result, conflicts of interest may arise that can be resolved only through their exercise of such judgment as is consistent with each officer’s understanding of his/her fiduciary duties to us.
We cannot provide assurances that our efforts to eliminate the potential impact of conflicts of interest will be effective.
Involvement in Certain Legal Proceedings
None of our directors or executive officers has, during the past ten years:
| ● | had any bankruptcy petition filed by or against any business of which he was a general partner or executive officer, either at the time of the bankruptcy or within two years prior to that time; | |
| ● | been convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other minor offences); |
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| ● | been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities, futures, commodities or banking activities; | |
| ● | been found by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated; | |
| ● | been subject or a party to or any other disclosable event required by Item 401(f) of Regulation S-K. |
Code of Business Conduct and Ethics
We currently do not have a Code of Business Conduct and Ethics.
Item 11. Executive Compensation.
There has been no cash or non-cash compensation awarded to, earned by or paid to any of our officers for the year ended September 30, 2017. We do not intend to pay salaries in the next twelve months. We do not currently have a stock option plan, non-equity incentive plan or pension plan.
Director Compensation
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. As discussed above, as a result of the Settlement Agreement, Messrs Kashiouris, Christophi and Economides resigned on November 17, 2017 and waived rights to any fees.
On October 10, 2017, Jack Lahav was removed as a member of the Board of Directors of the Company. In addition, on October 10, 2017, Donald P. Fewer was appointed as a member of the Board of Directors of the Company to fill the vacancy resulting from Mr. Lahav’s removal.
Except for Mr. Craig Marshak, we do not have any agreements or formal plan for compensating our current directors for their service in their capacity as directors.
All directors will be reimbursed for their reasonable out-of-pocket expenses incurred in connection with attending board of director meetings.
Director service fees earned by our directors for the year ended September 30, 2017 amounted to $10,000.
Employment Agreement
Except as described below, we currently have no employment agreements with any of our executive officers and directors, nor any compensatory plans or arrangements resulting from the resignation, retirement or any other termination of any of our executive officers and directors, from a change-in-control, or from a change in any executive officer’s and directors’ responsibilities following a change-in-control.
Agreement with Craig Marshak
On August 1, 2016, Mr. Craig Marshak entered into a letter agreement with us pursuant to which he was appointed as our director in consideration of an annual fee of $20,000. The annual fee was deferred for one (1) year until August 1, 2017.
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Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table sets forth certain information as of December 20, 2017 with respect to the beneficial ownership of our common stock, the sole outstanding class of our voting securities, by (i) any person or group owning more than 5% of each class of voting securities, (ii) each director, (iii) each executive officer named in the Summary Compensation Table in the section entitled “Executive Compensation” above and (iv) all executive officers and directors as a group. As of December 20, 2017, we had 230,485,100 shares of common stock issued and outstanding, and 100,000 shares of Series A preferred stock issued and outstanding.
Beneficial ownership is determined under the rules of the Securities and Exchange Commission and generally includes voting or investment power over securities. Except in cases where community property laws apply or as indicated in the footnotes to this table, we believe that each stockholder identified in the table possesses sole voting and investment power over all shares of common stock shown as beneficially owned by the stockholder.
Shares of common stock subject to options or warrants that are currently exercisable or exercisable within 60 days of the date of this report are considered outstanding and beneficially owned by the person holding the options for the purpose of computing the percentage ownership of that person but are not treated as outstanding for the purpose of computing the percentage ownership of any other person.
| Name and Address | Beneficially Owned | Percentage Owned | ||||||
| Currency Mountain Holdings Bermuda, Limited * | 215,785,140 | (2) | 91.6 | % | ||||
| Emil Assentato** | 215,785,140 | (1) | 91.6 | % | ||||
| Craig Marshak** | 482,080 | ***— | ||||||
| Donald Fewer** | — | — | ||||||
| All executive officers and directors as a group (3 people) | 216,267,220 | 91.8 | % | |||||
* The address is c/o Nukkleus Inc., 525 Washington Blvd., Jersey City 07310.
** Officer and/or director of the Company. The address is c/o Nukkleus Inc., 525 Washington Blvd., Jersey City 07310.
*** Less than 1%.
| (1) | CMH is wholly-owned by an entity that is majority-owned by Emil Assentato, the Company’s CEO, CFO and Chairman. | |
| (2) | Comprised of 210,785,140 shares of common stock and 5,000,000 shares of common stock for the assumed redemption of the Series A preferred stock at the contractual floor of $0.20 per share. |
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Item 13. Certain Relationships and Related Transactions, and Director Independence.
On February 5, 2016, Charms sold 146,535,140 shares of common stock to CMH. CMH is wholly-owned by an entity that is owned by Emil Assentato. 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, the Subsidiary, Charms, and CMH entered into 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.
On May 24, 2016, the Subsidiary entered into a General Service Agreement to provide its software, technology, customer sales and marketing and risk management technology hardware and software solutions package to FXDD Malta Limited (“FXDD Malta”), a private limited liability company formed under the laws of Malta. The General Service Agreement entered with FXDD Malta provides that FXDD Malta will pay the Subsidiary at minimum $2,000,000 per month. On October 17, 2017, the Subsidiary entered into an amendment of the General Service Agreement with FXDD Malta. In accordance with the amendment, which was effective as of October 1, 2017, the minimum amount payable by FXDD Malta to the Subsidiary for services was reduced from $2,000,000 per month to $1,600,000 per month. Emil Assentato is also the majority member of Max Q Investments LLC (“Max Q”), which is managed by Derivative Marketing Associates Inc. (“DMA”). Mr. Assentato is the sole owner and manager of DMA. Max Q owns 79% of Currency Mountain Malta LLC, which in turn is the sole shareholder of FXDD Malta.
In addition, on May 24, 2016, in order to appropriately service FXDD Malta, the Subsidiary entered into a General Service Agreement with FXDirectDealer LLC (“FXDIRECT”), which provides that the Subsidiary will pay FXDIRECT a minimum of $1,975,000 per month in consideration of providing personnel engaged in operational and technical support, marketing, sales support, accounting, risk monitoring, documentation processing and customer care and support. FXDIRECT may terminate this agreement upon providing 90 days’ written notice. On October 17, 2017, the Subsidiary entered into an amendment of the General Service Agreement with FXDIRECT. Pursuant to the amendment, which was effective as of October 1, 2017, the minimum amount payable by the Subsidiary to FXDIRECT for services was reduced from $1,975,000 per month to $1,575,000 per month. Currency Mountain Holdings LLC is the sole shareholder of FXDIRECT. Max Q is the majority shareholder of Currency Mountain Holdings LLC.
On May 27, 2016, the Company, IBIH Limited, a BVI corporation (“IBIH”) and the shareholders of IBIH (the “IBIH Shareholders”) entered into a Stock Purchase Agreement (the “Iron Purchase Agreement”) pursuant to which the Company acquired from IBIH 2,200 shares of capital stock of IBIH, representing 9.9% of the issued and outstanding capital stock of IBIH, and 100% of the issued and outstanding securities of GVS Limited (“Iron BVI”), which is the parent corporation of GVS (AU) Pty Ltd. (“Iron Australia”) in consideration of the payment of $1,000,000 and 24,156,000 shares of common stock of the Company. An initial payment of $175,000 was paid on May 27, 2016 and the balance of $825,000 was paid June 7, 2016. The Company agreed to acquire the remaining 20,000 outstanding shares of capital stock of IBIH from the IBIH Shareholders in consideration of 219,844,000 shares of common stock subject to IBIH and its subsidiaries obtaining the required approvals from the Financial Conduct Authority in the United Kingdom and the Cyprus Securities and Exchange Commission.
On November 17, 2017, the Company, IBIH, Terra (FX) Offshore Limited, Ludico Investments Limited, Currency Mountain Holdings LLC and the IBIH Shareholders entered into a Settlement Agreement and Mutual Release (the “Iron Settlement Agreement”) pursuant to which the Iron Purchase Agreement was terminated, all differences between the parties were resolved and settled and the parties fully released the other parties from any liability. Pursuant to the Iron Settlement Agreement, the Company agreed to (i) have the registered office of Iron Australia changed, (ii) have its director designees resign as directors of Iron Australia, (iii) appoint Markos Kashiouris, Petros Economides and Yun Ma as directors of Iron Australia; (iv) and make all required changes with the Australian Securities and Investments Commission. With respect to Iron BVI, pursuant to the Iron Settlement Agreement, the Company agreed to (i) have the registered office of Iron BVI changed, (ii) have its director designee resign as a director of Iron BVI, (iii) appoint Cymora Limited as director of Iron BVI; (iv) and make all required changes with the BVI Registrar of Companies. Further, the Company agreed to return the 2,200 shares of capital stock of IBIH to the IBIH Shareholders and return 100% of its interest in Iron BVI to IBIH. IBIH agreed to return the 24,156,000 shares of common stock of the Company to the Company for cancellation and to pay the Company $1,000,000. Further, Markos Kashiouris, Petros Economides and Efstathios Christophi resigned as directors of the Company and waived any directorship fees payable to them under their letter of appointment dated August 1, 2016. The $1,000,000 has been paid to the Company, net of approximately $70,000 of legal expenses, and IBIH has returned the certificate representing the 24,156,000 shares of common stock of the Company and the shares have been cancelled by the Company.
On June 3, 2016, the Company agreed to sell to CMH 30,900,000 shares of common stock and 200,000 shares of Series A preferred stock for $2,000,000 in two equal installments. The first close occurred on June 7, 2016. Originally, the second close will occur with the closing of the Company’s acquisition of IBIH. Since the acquisition of IBIH transaction was terminated, the second close with CMH will not proceed.
On May 23, 2016, the Company engaged Bentley to act as the Company’s exclusive financial advisor (the “Bentley Engagement”) in connection with the acquisition with IBIH and Iron BVI related to the SPA in consideration of a transaction fee equal to $600,000 in cash and stock of the Company (the “Transaction Fee”). This transaction fee was payable upon the consummation of the acquisition transaction related to the SPA and following the closing of a financing transaction in excess of $2,500,000, subject to the terms and conditions contained in the engagement agreement. As part of the Bentley Engagement, Mr. Craig Marshak, a director, acted as a sub-advisor to Bentley and was entitled to a portion of the Transaction Fee. As of September 30, 2017, the Company has not paid or recorded any fees in connection with the Bentley Engagement, as the Transaction fee was a contingent liability and was to be recorded upon consummation of the related transactions. The Bentley Engagement agreement was terminated in December 2017 by both parties since the acquisition transaction related to the SPA was terminated on November 17, 2017.
On or about May 23, 2016, Nukkleus and IBIH, the parent company of IronFX, Limited, each agreed to pay an amount of $25,000 to Triple Eight Markets as a consulting fee for an aggregate fee of $50,000. The fee was paid in the quarter ended June 30, 2016. In the same agreement, Nukkleus also 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 recognized consulting expenses of $123,000 and $86,500 for the years ended September 30, 2017 and 2016, respectively, which have been included in general and administrative expense – related parties on the accompanying consolidated statements of operations. As of September 30, 2017 and 2016, the accrued and unpaid business and financial service charge and other services charge related to Triple Eight Markets amounted to $8,000 and $0, respectively, which have been recorded as accrued liabilities – related party on the accompanying consolidated balance sheets. Craig Marshak performs work for the Company on a case-by-case basis commencing on the agreement expiring date.
We believe that the foregoing transactions were in our best interests. 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, and, where appropriate, we will utilize our audit committee for the review of potential conflicts of interest.
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Except as set forth above, none of the following persons has any direct or indirect material interest in any transaction to which we are a party since our incorporation or in any proposed transaction to which we are proposed to be a party:
| (A) | Any of our directors or officers; | |
| (B) | Any proposed nominee for election as our director; | |
| (C) | Any person who beneficially owns, directly or indirectly, shares carrying more than 10% of the voting rights attached to our common stock; or | |
| (D) | Any relative or spouse of any of the foregoing persons, or any relative of such spouse, who has the same house as such person or who is a director or officer of any parent or subsidiary of our company. |
Item 14. Principal Accounting Fees and Services.
We do not have an audit committee. Our Board of Directors pre-approves all services, including both audit and non-audit services, provided by our independent accountants. For audit services, each year the independent auditor provides our board of directors with an engagement letter outlining the scope of the audit services proposed to be performed during the year, which must be formally accepted by the board of directors before the audit commences.
The independent auditor also submits an audit services fee proposal, which also must be approved by the board of directors before the audit commences.
We had the following independent registered public accounting firms:
| ● | For the year ended 2015 and through March 31, 2016, our principal independent auditor was Rosenberg Rich Baker Berman & Co.; and | |
| ● | Thereafter, we engaged Rotenberg Meril Solomon Bertiger & Guttilla, P.C. |
The following table indicates the fees billed to us for services performed for the:
| Year Ended September 30, 2017 | Year Ended September 30, 2016 | |||||||
| Audit Fees | $ | 83,135 | $ | 48,475 | ||||
| Audit Related Fees | — | — | ||||||
| Tax Fees | 5,000 | 10,000 | ||||||
| All Other Fees | — | — | ||||||
| Total | $ | 88,135 | $ | 58,475 | ||||
Audit fees. Consists of fees billed for the audit of our annual financial statements, review of our Form 10-K, review of our interim financial statements included in our Form 10-Q and services that are normally provided by the accountant in connection with year-end statutory and regulatory filings or engagements.
Audit-related fees. Consists of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements and are not reported under “Audit Fees”, review of our Forms 8-K filings and services that are normally provided by the accountant in connection with non-year-end statutory and regulatory filings or engagements.
Tax fees. Consists of professional services rendered by our accountants for tax compliance, tax advice, tax planning and the preparation of income tax returns.
Other fees. The services provided by our accountants within this category consisted of advice and other services relating to SEC matters, registration statement review, accounting issues and client conferences.
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PART IV
Item 15. Exhibits, Financial Statement Schedules.
The following exhibits are incorporated into this Form 10-K Annual Report:
| 101.INS | XBRL Instance* | |
| 101.SCH | XBRL Taxonomy Extension Schema* | |
| 101.CAL | XBRL Taxonomy Extension Calculation* | |
| 101.DEF | XBRL Taxonomy Extension Definition* | |
| 101.LAB | XBRL Taxonomy Extension Labeled* | |
| 101.PRE | XBRL Taxonomy Extension Presentation* |
| * | Filed along with this document |
| (1) | Incorporated by reference to the Form 8K Current Report filed with the SEC on May 31, 2016. | |
| (2) | Incorporated by reference to the Form 8K Current Report filed with the SEC on June 3, 2016. | |
| (3) | Incorporated by reference to the Form 8K Current Report filed with the SEC on August 9, 2016. | |
(4) (5) (6) |
Incorporated by reference to the Form 8K Current Report filed with the SEC on October 25, 2016. Incorporated by reference to the Form 8K Current Report filed with the SEC on October 19, 2017. Incorporated by reference to the Form 8K Current Report filed with the SEC on December 5, 2017. |
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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.
| NUKKLEUS INC. | ||
| Dated: December 27, 2017 | By: | /s/Emil Assentato |
| Emil Assentato | ||
| Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial and Accounting Officer) and Chairman | ||
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.
| Signature | Title | Date | ||
| /s/Emil Assentato | Chief Executive Officer (Principal Executive Officer) and | December 27, 2017 | ||
| Chief Financial Officer (Principal Financial Officer) |
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