The following discussion and analysis of our financial condition and results of operations for the years ended
September 30, 2020and 2019 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.
Impact of COVID-19 on our Operations
The ramifications of the outbreak of the novel strain of COVID-19, reported to have started in
December 2019and spread globally, are filled with uncertainty and changing quickly. Our operations have continued during the COVID-19 pandemic and we have not had significant disruption. Beginning in June 2020, the Company experienced payment interruption from TCM, and subsequent to September 30, 2020, TCM has been making additional payments to reduce the balance due under the GSA. TCM has experienced increases in revenues and activity and no collection problems are expected. The Company is operating in a rapidly changing environment so the extent to which COVID-19 impacts its business, operations and financial results from this point forward will depend on numerous evolving factors that the Company cannot accurately predict. Those factors include the following: the duration and scope of the pandemic; governmental, business and individuals' actions that have been and continue to be taken in response to the pandemic; and the development of widespread testing or a vaccine. 13 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 TCM. The FXDD brand (e.g., see FXDD.com) is the brand utilized in the retail forex trading industry by TCM. We have ownership of FOREXWARE, the primary software suite and technology solution which powers the FXDD brand globally today. We also have ownership of the FOREXWARE brand name. We have also acquired ownership of the customer interface and other software trading solutions being used by FXDD.com. By virtue of our relationship with TCM 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, the Company incorporated Nukkleus Malta Holding Ltd., which is a wholly-owned subsidiary. In July 2018, Nukkleus Malta Holding Ltd.incorporated MDTG, formerly known as Nukkleus Exchange Malta Ltd.MDTG was exploring potentially obtaining a license to operate an electronic exchange whereby it would facilitate the buying and selling of various digital assets as well as traditional currency pairs used in FX Trading. During the fourth quarter of fiscal 2020, management made the decision to exit the exchange business and to no longer pursue the regulatory licensing necessary to operate an exchange
Malta. On August 27, 2020, the Company renamed Nukkleus Exchange Malta Ltd.to Markets Direct Technology Group Ltd("MDTG"). MDTG will manage the technology and IP behind the Markets Direct brand (which is operated by TCM). MDTG will hold all the IP addresses and all the software licenses in its name, and it will hold all the IP rights to the brands like Markets Direct and TCM. MDTG will then lease out the rights to use these names/brands licenses to the appropriate entities. Management estimates that MDTG will become operational during the second quarter of fiscal 2021.
Acceptance and/or widespread use of cryptocurrency is uncertain.
Currently, there is a relatively limited use of any cryptocurrency in the retail and commercial marketplace, thus contributing to price volatility that could adversely affect our investment in digital currency. Banks and other established financial institutions may refuse to process funds for cryptocurrency transactions, process wire transfers to or from cryptocurrency exchanges, cryptocurrency-related companies or service providers, or maintain accounts for persons or entities transacting in cryptocurrency. Conversely, a significant portion of cryptocurrency demand is generated by investors seeking a long-term store of value or speculators seeking to profit from the short- or long-term holding of the asset. Price volatility undermines any cryptocurrency's role as a medium of exchange, as retailers are much less likely to accept it as a form of payment. Market capitalization for a cryptocurrency as a medium of exchange and payment method may always be low. The relative lack of acceptance of cryptocurrencies in the retail and commercial marketplace, or a reduction of such use, limits the ability of end users to use them to pay for goods and services. Such lack of acceptance or decline in acceptances could have an adverse effect on the value of our Bitcoin and/or Ethereum.
The price of cryptocurrencies may be affected by the sale of such
cryptocurrencies by other vehicles investing in cryptocurrencies or tracking
The global market for cryptocurrency is characterized by supply constraints that differ from those present in the markets for commodities or other assets such as gold and silver. The mathematical protocols under which certain cryptocurrencies are mined permit the creation of a limited, predetermined amount of currency, while others have no limit established on total supply. To the extent that other vehicles investing in cryptocurrencies or tracking cryptocurrency markets form and come to represent a significant proportion of the demand for cryptocurrencies, large redemptions of the securities of those vehicles and the subsequent sale of cryptocurrencies by such vehicles could negatively affect cryptocurrency prices and therefore affect the value of the cryptocurrency we hold. Such events could have an adverse effect on the value of our Bitcoin and/or Ethereum.
The decentralized nature of cryptocurrency systems may lead to slow or
inadequate responses to crises, which may negatively affect our investment in
The decentralized nature of the governance of cryptocurrency systems may lead to ineffective decision making that slows development or prevents a network from overcoming emergent obstacles. Governance of many cryptocurrency systems is by voluntary consensus and open competition with no clear leadership structure or authority. To the extent lack of clarity in corporate governance of cryptocurrency systems leads to ineffective decision making that slows development and growth of such cryptocurrencies, the value of our Bitcoin and/or Ethereum may be adversely affected. 14
There is a lack of liquid markets, and possible manipulation of
Cryptocurrencies that are represented and trade on a ledger-based platform may not necessarily benefit from viable trading markets. Stock exchanges have listing requirements and vet issuers; requiring them to be subjected to rigorous listing standards and rules, and monitor investors transacting on such platform for fraud and other improprieties. These conditions may not necessarily be replicated on a distributed ledger platform, depending on the platform's controls and other policies. The laxer a distributed ledger platform is about vetting issuers of cryptocurrency assets or users that transact on the platform, the higher the potential risk for fraud or the manipulation of the ledger due to a control event. These factors may decrease liquidity or volume or may otherwise increase volatility of assets trading on a ledger-based system, which may adversely affect us. Such circumstances could have an adverse effect on the value of our Bitcoin and/or Ethereum.
The development and acceptance of competing blockchain platforms or technologies
may cause consumers to use alternative distributed ledgers or other
The development and acceptance of competing blockchain platforms or technologies may cause consumers to use alternative distributed ledgers or an alternative to distributed ledgers altogether. Our business utilizes presently existent digital ledgers and blockchains and we could face difficulty adapting to emergent digital ledgers, blockchains, or alternatives thereto. This may adversely affect us and our exposure to various blockchain technologies and prevent us from realizing the anticipated profits from our investment in digital currency. Such circumstances could have an adverse effect on the value of our Bitcoin and/or Ethereum.
Regulatory changes or restrict the use of cryptocurrencies in a manner that
adversely affects our investment in digital currency.
As cryptocurrencies have grown in both popularity and market size, governments around the world have reacted differently to cryptocurrencies; certain governments have deemed them illegal, and others have allowed their use and trade without restriction, while in some jurisdictions, such as in the
U.S., subject to extensive, and in some cases overlapping, unclear and evolving regulatory requirements. Ongoing and future regulatory actions could have an adverse effect on the value of our Bitcoin and Ethereum.
The impact of geopolitical and economic events on the supply and demand for
cryptocurrencies is uncertain.
Geopolitical crises may motivate large-scale purchases of bitcoin and other cryptocurrencies, which could increase the price of bitcoin and other cryptocurrencies rapidly. This may increase the likelihood of a subsequent price decrease as crisis-driven purchasing behavior dissipates, adversely affecting the value of our investment in digital currency following such downward adjustment. Such risks are similar to the risks of purchasing commodities in general uncertain times, such as the risk of purchasing, holding or selling gold. Alternatively, as an emerging asset class with limited acceptance as a payment system or commodity, global crises and general economic downturn may discourage investment in cryptocurrencies as investors focus their investment on less volatile asset classes as a means of hedging their investment risk. As an alternative to fiat currencies that are backed by central governments, cryptocurrencies, which are relatively new, are subject to supply and demand forces. How such supply and demand will be impacted by geopolitical events is largely uncertain but could be harmful to us. Political or economic crises may motivate large-scale acquisitions or sales of cryptocurrencies either globally or locally. Such events could have an adverse effect on the value of our Bitcoin and/or Ethereum.
We rely on third party service providers to exchange our cryptocurrencies who
may be at risks to cyber-security and malicious activity.
Trading platforms and third-party service providers may be vulnerable to hacking or other malicious activities which we cannot control. If one or more malicious actor(s) obtains control of sufficient consensus nodes on the Blockchain, or, other means of alteration, then a Blockchain may be altered. While the Blockchain is decentralized, there is increasing evidence of concentration and techniques that may increase the risk that one or several actors could control the Blockchain on which we conduct business. Cryptocurrencies may be traded on numerous online platforms, through third party service providers and as peer-to-peer transactions between parties. Many marketplaces simply bring together counterparties without providing any clearing or intermediary services and without being regulated. In such cases, we assume all risks. Cryptocurrency trading platforms, largely unregulated and providing only limited transparency with respect to their operations, have come under increasing scrutiny due to cases of fraud, business failure or security breaches, where we may not be compensated for losses caused by such activities. Although one does not need a trading platform or an exchange to trade cryptocurrencies, such platforms are often used to convert fiat currency into cryptocurrency or to trade one cryptocurrency for another.
We may face risks of Internet disruptions, which could have an adverse effect on
the price of cryptocurrencies.
A disruption of the Internet may affect the use of cryptocurrencies. Generally, cryptocurrencies are dependent upon the Internet. A significant disruption in Internet connectivity could disrupt a currency's network operations until the disruption is resolved and have an adverse effect on the price of cryptocurrencies. 15
Because there has been limited precedent set for financial accounting of
investment in digital currency, the determination that we have made for how to
account for cryptocurrency assets transactions may be subject to change.
Because there has been limited precedent set for the financial accounting of cryptocurrencies and related revenue recognition and no official guidance has yet been provided by the
Financial Accounting Standards Boardor the SEC, it is unclear how companies may in the future be required to account for cryptocurrency transactions and assets and related revenue recognition. A change in regulatory or financial accounting standards could result in the necessity to change our accounting methods and/or restate our financial statements.
Our cryptocurrencies may be subject to loss, theft or restriction on access.
There is a risk that some or all of our cryptocurrencies could be lost or stolen. Cryptocurrencies are stored in cryptocurrency sites commonly referred to as "wallets" by holders of cryptocurrencies which may be accessed to exchange a holder's cryptocurrency assets. Access to our cryptocurrency assets could also be restricted by cybercrime (such as a denial of service attack) against a service at which we maintain a hosted wallet. Hackers or malicious actors may launch attacks to steal, compromise or secure cryptocurrencies, such as by attacking the cryptocurrency network source code, exchange miners, third-party platforms, storage locations or software, or by other means. We may be in control and possession of one of the more substantial holdings of cryptocurrency. Any of these events may adversely affect our Bitcoin and Ethereum. The loss or destruction of a private key required to access our digital wallets may be irreversible and we may be denied access for all time to our cryptocurrency holdings or the holdings of others held in those compromised wallets. Our loss of access to our private keys or our experience of a data loss relating to our digital wallets could adversely affect our investment in digital currency.
Cryptocurrencies are controllable only by the possessor of both the unique public and private keys relating to the local or online digital wallet in which they are held, which wallet's public key or address is reflected in the network's public blockchain. We need to safeguard the private keys relating to such digital wallets. To the extent such private keys are lost, destroyed or otherwise compromised, we will be unable to access our cryptocurrency and such private keys may not be capable of being restored by any network. If the private key is acquired by a third party, then this third party may be able to gain access to our cryptocurrencies. Any loss of private keys relating to digital wallets used to store our cryptocurrencies could have an adverse effect on the value of our Bitcoin and/or Ethereum. The further development and acceptance of blockchain technologies, which are part of a new and rapidly changing industry, are subject to a variety of factors that are difficult to evaluate. The slowing or stopping of the development or acceptance of blockchain technologies or assets would have an adverse effect on our investment in digital currency. The growth of the blockchain industry in general is subject to a high degree of uncertainty. The factors affecting the further development of the blockchain industry and networks, include, without limitation:
? worldwide growth in the adoption and use of blockchain and distributed ledger
technologies, including cryptocurrencies, cryptosecurities and digital tokens;
? government and quasi-government regulation of blockchain assets, including
cryptocurrencies, and their use, or restrictions on or regulation of access to
and operation of blockchain networks or similar systems;
? the maintenance and development of the open-source software protocol of
? changes in consumer demographics and public tastes and preferences;
? general economic conditions and the regulatory environment relating to
? a decline in the popularity or acceptance of blockchain-based technologies,
including cryptocurrencies and tokens. The blockchain industry as a whole is in its infancy and has been characterized by rapid changes and innovations. Although it has experienced significant growth in recent years, the slowing or stopping of the development, general acceptance and adoption and usage of blockchain networks and blockchain assets may adversely affect the value of our Bitcoin and/or Ethereum.
Critical Accounting Policies
Use of Estimates
The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in
the United Statesrequires 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 could differ from these estimates. Significant estimates during the years ended September 30, 2020and 2019 include valuation of deferred tax assets and the associated valuation allowances. 16 Revenue recognition
We account for revenue under the provisions of ASC Topic 606. The nature of our contract with our customer relates to our services performed for a related
party under a GSA.
The transaction price is determined in accordance with the terms of the GSA and payments are due on a monthly basis. There are multiple services provided under the GSA and these performance obligations are combined into a single unit of accounting. Fees are recognized as revenue over time as the services are rendered under the terms of the GSA.
Revenue is recorded at gross as we are deemed to be a principal in the
Investment - digital currency The Company held investments in digital currency, consisting of Bitcoins and Ethereum. The Company initially recorded its investments at cost, and then revalued such assets at every reporting period and recognizes gain or loss as unrealized gain (loss) on digital currency that were attributable to the change in the fair value of the digital currency. Unrealized gains and losses and realized gains and losses recognized upon the sale or transfer of the investments in digital currency were netted and recognized within gain on digital currency on the consolidated statements of operations. The fair value of the investment in digital currency was determined using the equivalency rate of the digital currency to USD and is included in current assets. The equivalency rates obtained represented a generally well recognized quoted price in active markets for Bitcoin and Ethereum. The current guidance in
U.S.GAAP does not directly address the accounting for cryptocurrencies.
As of the date of this report, we no longer hold any investment in the digital
currency and do not plan to purchase and hold investments in digital currency.
Results of Operations Summary of Key Results
For the year ended
Revenue and Cost of Revenue
Revenue for both of the years ended
and was from general support services rendered to TCM under a GSA.
Cost of revenue for both of the years ended
rendered by FXDIRECT under a GSA.
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 ended
September 30, 2020versus the year ended September 30, 2019, were $154,179and $302,593, respectively. The significant decrease was primarily attributable to the resignation of the director of crypto management on December 15, 2019. Bad debt expense
For the years ended
Other general and administrative expenses
Other general and administrative expenses were mainly third party and related
party professional fees.
Total other general and administrative expenses for the year ended
September 30, 2020versus the year ended September 30, 2019, were $258,936versus $713,200, respectively. The significant decrease was mainly due to a decrease in professional fees of approximately $162,000, a decrease in related party consulting fees of approximately $144,000, a decrease in travel expense of approximately $82,000, and a decrease in other miscellaneous items of approximately $66,000, as a result of a focus on reducing expenses. Other Income (Expense) Other income (expense) includes interest expense on redeemable preferred stock, amortization of debt discount, and gain recognized from investment - digital currency. 17 Total other income, net, for the year ended September 30, 2020versus the year ended September 30, 2019, was $12,553versus $25,680, respectively. The change for the year ended September 30, 2020as compared to the year ended September 30, 2019was due to the gain recognized from digital currency asset. Net Loss As a result of the factors described above, our net loss was $100,562, or $0.00per common share (basic and diluted), for the year ended September 30, 2020. Our net loss was $730,113, or $0.00per common share (basic and diluted), for the year ended September 30, 2019.
Liquidity and Capital Resources
Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations and otherwise operate on an ongoing basis. At
September 30, 2020and 2019, we had cash balances of $82,849and $23,514, respectively.
For the year ended
from operations due to a net increase in due to affiliates.
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 provided by operating activities was
$59,335for the year ended September 30, 2020. These included changes in operating assets and liabilities totaling approximately $176,000, offset by consolidated net loss of approximately $101,000and the non-cash item mainly consisting of a gain on digital currency of approximately $19,000.
Net cash flow used in operating activities was
operating activities included non-cash items mainly consisting of gain on
digital currency of approximately
There was no investing activity during the year ended
Net cash flow used in investing activities was
digital currency of
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. 18
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
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, 2020, and the effect these obligations are expected to have on our liquidity and cash flows in future periods. Payments Due by Period Less than Contractual obligations: Total 1 year 1-3 years 3-5 years 5+ years Redeemable preferred stock (stated value) $ 250,000 $ 250,000$ - $ - $ - Accrued interest for redeemable preferred stock 35,229 35,229 - - - Total $ 285,229 $ 285,229$ - $ - $ -
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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