NUKKLEUS INC. The following discussion and analysis of our financial condition and results of operations for the years endedSeptember 30, 2019 and 2018 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.
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. The FXDD brand (e.g., see FXDD.com) is the brand utilized in the
retail forex trading industry by FXDD Malta.
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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 FXDIRECT, we
provide turnkey software and technology solutions for FXDD.com. We offer the
customers of FXDD 24 hours, five days a week direct access to the global over
the counter ("OTC") FX market, which is a decentralized market in which
participants trade directly with one another, rather than through a central
exchange.
In an FX trade, participants effectively buy one currency and simultaneously
sell another currency, with the two currencies that make up the trade being
referred to as a "currency pair". Our software and technology solutions enable
FXDD to present its customers with price quotations on over the counter
tradeable instruments, including over the counter currency pairs, and also
provide our customers the ability to trade FX derivative contracts on currency
pairs through a product referred to as Contracts for Difference ("CFD"). Our
software solutions also offer other CFD products, including CFDs on metals, such
as gold, and on futures linked to other products.
In July 2018 , we incorporated Nukkleus Malta Holding Ltd. , which is a
wholly-owned subsidiary. In July 2018 , Nukkleus Malta Holding Ltd. incorporated
Nukkleus Exchange Malta Ltd. For Nukkleus Exchange Malta Ltd. , we are currently
exploring obtaining a license to operate an electronic exchange whereby it
facilitates the buying and selling of various digital assets as well as
traditional currency pairs used in FX Trading. Our affiliates have created the
electronic exchange that may be used by Nukkleus Exchange Malta Ltd. , however,
as we do not believe obtaining a license to operate the exchange will be
feasible, the affiliates are searching for alternate uses for the exchange and
as such have not sold or transferred the exchange to us.
On October 29, 2019 , we entered into a LOI with XT and Stanley Hutton Rumbough .
The purpose of the LOI is to outline a proposed transaction pursuant to which
XT, among other items, will acquire all intellectual properties of EF Hutton,
including its trademark "EF Hutton", held by Mr. Hutton Rumbough and acquire all
of the issued and outstanding shares of common stock of us in consideration of
11 million shares of XT. The purpose of the transactions is to establish XT in
two areas of activity of energy and energy related services and financial
services and financial technology. Following the closing of the transactions, we
will become a wholly-owned subsidiary of XT, and XT will change its name to "EF
Hutton Group Inc. ". As of the report date, the parties are in discussions and
have not executed a definitive agreement. No assurance can be given that the
transactions herein contemplated will close.
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements in conformity with accounting principles generally accepted inthe United States requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expense, and related disclosure of contingent assets and liabilities. When making these estimates and assumptions, we consider our historical experience, our knowledge of economic and market factors and various other factors that we believe to be reasonable under the circumstances. Actual results may differ under different estimates and assumptions. The accounting estimates and assumptions discussed in this section are those that we consider to be the most critical to an understanding of our consolidated financial statements because they inherently involve significant judgments
and uncertainties. Revenue recognition EffectiveOctober 1, 2018 , the Company adopted ASU No. 2014-09, Revenue from Contracts with Customers ("ASU 2014-09") and other associated standards. Under the new standard, the Company recognizes revenue when a customer obtains control of promised services or goods in an amount that reflects the consideration to which the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts. The Company evaluated the new guidance and its adoption did not have a significant impact on the Company's financial statements and a cumulative effect adjustment under the modified retrospective method of adoption was not necessary. There is no change to the Company's accounting policies. Prior to the adoption of ASU 2014-09, the Company recognized revenue when persuasive evidence of an arrangement existed, delivery occurred, the fee was fixed or determinable, and collectability was reasonably assured. In general, the Company applies the following steps when recognizing revenue from contracts with customers: (i) identify the contract, (ii) identify the performance obligations, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations and (v) recognize revenue when a performance obligation is satisfied. The nature of the Company's contract with its customer relates to the Company's services performed for a related party under a GSA. The transaction price is determined in accordance with the terms of the GSA and payments are due on a monthly basis. 16 Recognition of revenue is driven by satisfaction of the performance obligations using one of two methods: revenue is either recognized over time or at a point in time. Contracts containing multiple performance obligations classify those performance obligations into separate units of accounting either as standalone or combined units of accounting. For those performance obligations treated as a standalone unit of accounting, revenue is generally recognized based on the method appropriate for each standalone unit. For those performance obligations treated as a combined unit of accounting, revenue is generally recognized as the performance obligations are satisfied, which generally occurs when control of the goods or services have been transferred to the customer or client or once the client or customer is able to direct the use of those goods and/ or services as well as obtaining substantially all of its benefits. As such, revenue for a combined unit of accounting is generally recognized based on the method appropriate for the last delivered item but due to the specific nature of certain project and contract items, management may determine an alternative revenue recognition method as appropriate, such as a contract whereby one deliverable in the arrangement clearly comprises the overwhelming majority of the value of the overall combined unit of accounting. Under this circumstance, management may determine revenue recognition for the combined unit of accounting based on the revenue recognition guidance otherwise applicable to the predominant deliverable. There are multiple services provided under the GSA and these performance obligations are combined into a single unit of accounting. Fees are recognized as revenue over time as the services are rendered under the terms of the GSA. Revenue is recorded at gross as the Company is deemed to be a principal in
the transactions.
Investment - digital currency
The Company holds investments in digital currency, consisting of Bitcoins and Ethereum. The fair value of the investment in digital currency is determined using the equivalency rate of the digital currency to USD and is included in current assets. The equivalency rates obtained represent a generally well recognized quoted price in an active market for Bitcoin and Ethereum, The Company initially records its investments at cost, revalues such assets at every reporting period, and recognizes gain or loss as unrealized gain on digital currency, net, on the consolidated statements of operations that are attributable to the change in the fair value of the digital currency. The current guidance inU.S. GAAP does not directly address the accounting for
cryptocurrencies.
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Results of Operations
Summary of Key Results
For the year ended
Revenue and Cost of Revenue
Revenue for both of the years ended
Cost of revenue for both of the years ended
Operating Expenses
Operating expenses consist of compensation and related benefits, bad debt expense, and other general and administrative expense.
Compensation and related benefits
Compensation and related benefits for the year endedSeptember 30, 2019 versus the year endedSeptember 30, 2018 , were$302,593 and$70,000 , respectively. The significant increase was primarily attributable to an increase in compensation and related benefits incurred for employees who we hired in fiscal 2019. Bad debt expense
For the year ended
In the first quarter of fiscal 2018, we signed an agreement with a third-party for the customization and development of a trading platform to be used by us. In accordance with the signed agreement, we made a deposit on software development of$50,000 . The project was cancelled in the third quarter of fiscal 2018 and we received a subsequent reimbursement of$10,000 of the deposit. During the fiscal 2019, we evaluated the collectability. In evaluating the collectability, we consider many factors, including the age of the balance, payment history and the third party's current credit-worthiness. The balance of$40,000 was written off after exhaustive efforts at collection.
Other general and administrative expenses
Other general and administrative expenses were mainly third party and related party professional fees and travel expense.
Total other general and administrative expenses for the year endedSeptember 30, 2019 versus the year endedSeptember 30, 2018 , were$713,200 versus$406,801 , respectively. The increase was mainly due to the increase in use of professional services providers. Other Income (Expense) Other income (expense), net, includes interest expense on redeemable preferred stock, amortization of debt discount, and unrealized gain recognized from investment - digital currency. Total other income, net, for the year endedSeptember 30, 2019 versus total other expense, net, for the year endedSeptember 30, 2018 , was$25,680 versus$(35,386) , respectively. The change for the year endedSeptember 30, 2019 as compared to the year endedSeptember 30, 2018 was due to the unrealized gain recognized from digital currency asset of approximately$32,000 , a decrease in interest expense on redeemable preferred stock of approximately$4,000 , and a decrease in amortization of debt discount of approximately$25,000 . As a result of the termination of the IBIH transaction, we and CMH have agreed to enter into that certain Stock Redemption Agreement datedFebruary 13, 2018 providing that 75,000 CMH Preferred Shares were redeemed and cancelled in consideration of$750,000 which occurred onFebruary 13, 2018 . Therefore, our interest expense on redeemable preferred stock and amount from amortization of debt discount for the year endedSeptember 30, 2019 decreased as compared to the year endedSeptember 30, 2018 . Net Loss As a result of the factors described above, our net loss was$730,113 , or$0.00 per common share (basic and diluted), for the year endedSeptember 30, 2019 . Our net loss was$212,187 , or$0.00 per common share (basic and diluted), for the year endedSeptember 30, 2018 . 18
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. AtSeptember 30, 2019 and 2018, we had cash balances of$23,514 and$257,637 , respectively.
For the year ended
Our ability to continue as a going concern is dependent upon the management of expenses and our ability to obtain the necessary financing to meet our obligations and pay our liabilities arising from normal business operations when they come due, and upon profitable operations. We need to either borrow funds or raise additional capital through equity or debt financings. However, we cannot be certain that such capital (from our stockholders or third parties) will be available to us or whether such capital will be available on terms that are acceptable to us. Any such financing likely would be dilutive to existing stockholders and could result in significant financial operating covenants that would negatively impact our business. In the event that there are any unforeseen delays or obstacles in obtaining funds through the aforementioned sources, CMH has committed to inject capital into the Company in order to maintain the ongoing operations of the business.
Cash Flow for the Year Ended
Net cash flow used in operating activities was$138,431 for the year endedSeptember 30, 2019 . These included$730,113 in net loss. Cash flows used in operating activities included non-cash items mainly consisting of unrealized gain on digital currency of approximately$32,000 , offset the add back of bad debt expense of$40,000 , and changes in operating assets and liabilities totaling approximately$581,000 for the year endedSeptember 30, 2019 . Net cash flow used in operating activities was$1,005 for the year endedSeptember 30, 2018 . These included$212,187 in net loss, offset by changes in operating assets and liabilities totaling$183,650 for the year endedSeptember 30, 2018 .
Net cash flow used in investing activities was
Net cash flow provided by investing activities was$960,000 for the year endedSeptember 30, 2018 . During the year endedSeptember 30, 2018 , we received proceeds of$1,000,000 from the termination of a potential acquisition in accordance with a Settlement Agreement and Mutual Release signed onNovember 17, 2017 , offset by a deposit made for software development of$50,000 , and subsequent reimbursement of$10,000 of the deposit.
There was no financing activity during the year ended
Net cash flow used in financing activities was
Our operations will require additional funding for the foreseeable future.
Unless and until we are able to generate a sufficient amount of revenue and
reduce our costs, we expect to finance future cash needs through public and/or
private offerings of equity securities and/or debt financings. We do not
currently have any committed future funding. To the extent we raise additional
capital by issuing equity securities, our stockholders could at that time
experience substantial dilution. Any debt financing we are able to obtain may
involve operating covenants that restrict our business. Our capital requirements
for the next twelve months primarily relate to mergers, acquisitions and the
development of business opportunities. In addition, we expect to use cash to pay
fees related to professional services and pay salary. 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.
We need to either borrow funds or raise additional capital through equity or
debt financings. However, we cannot be certain that such capital (from our
stockholders or third parties) will be available to us or whether such capital
will be available on terms that are acceptable to us. Any such financing likely
would be dilutive to existing stockholders and could result in significant
financial operating covenants that would negatively impact our business. If we
are unable to raise sufficient additional capital on acceptable terms, we will
have insufficient funds to operate our business or pursue our planned growth.
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Consistent with Section 144 of the Delaware General Corporation Law, it is our current policy that all transactions between us and our officers, directors and their affiliates will be entered into only if such transactions are approved by a majority of the disinterested directors, are approved by vote of the stockholders, or are fair to us as a corporation as of the time it is authorized, approved or ratified by the board. We will conduct an appropriate review of all related party transactions on an ongoing basis.
Contractual Obligations and Off-Balance Sheet Arrangements
Contractual Obligations
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 ofSeptember 30, 2019 , and the effect these obligations are expected to have on our liquidity and cash flows in future periods. Payments Due by Period Less than 1 Contractual obligations: Total year 1-3 years 3-5 years 5+ years Redeemable preferred stock (stated value)$ 250,000 $ -$ 250,000 $ - $ - Accrued interest for redeemable preferred stock 31,479 31,479 - - - Total$ 281,479 $ 31,479 $ 250,000 $ - $ -
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.
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