Nukkleus files Q2 financials including update on acquisitions of IronFX, FXDD, Forexware
LeapRate Staff
August 22, 2016 11:57 am
Our coverage of the planned merger between publicly traded shell company Nukkleus Inc (OTCMKTS:NUKK) and regulated retail forex brokers IronFX and FXDD (as well as FX platform provider Forexware) has been met with a little bit of puzzlement and misunderstanding by our audience.
Which is understandable.
Mergers, reverse takeovers of public companies, technology licensing, and multi-stage transactions are all fairly complicated issues to understand on their own. And they are all part of what is happening with Nukkleus, IronFX, FXDD and Forexware.
LeapRate has learned that Nukkleus has recently filed its Q2 financials (in the form of a 10-Q filing) with the U.S. Securities and Exchange Commission, and it provides a little more insight into the planned transaction. We’ll summarize some of the key parts, as well as give some more background on the transaction and what is likely to happen in the coming months.
FX and motorsport enthusiast Emil Assentato
FX and motorsport enthusiast Emil Assentato
First, who is behind what is going on.
That, actually, is fairly simple to explain. One person effectively controls three of the four entities mentioned above (all except IronFX) – Emil Assentato. Mr. Assentato is former Chairman of Tradition North America, the U.S. arm of Swiss interdealer broker Compagnie Financiere Tradition SA (SWX:CFT). Mr. Assentato has an effective 80% interest in both FXDD and Forexware via Currency Mountain Holdings which he controls (Tradition owns the other 20% in each), and he fully owns Nukkleus heading into the planned transaction.
Second, what is planned by Mr. Assentato for the companies he controls.
Mr. Assentato’s plan is multi-step:
1. merge Nukkleus with IronFX in a reverse takeover, which will give IronFX’s owners part ownership of the merged entity (already partially completed).
2. acquire rights to use and resell Forexware’s technology platform (already completed).
3. acquire all of Forexware (to come).
4. acquire FXDD (to come).
5. acquire and consolidate other brands in the Forex industry.
Steps 1 and 4 will require the approval of the regulators which license IronFX (primarily the FCA in the UK and CySEC in Cyprus) and FXDD (MFSA in Malta). We understand that the IronFX regulatory approvals process is well underway, with CySEC having approved the transaction and the FCA’s response still pending. The FXDD approvals will be sought at a later stage, after Steps 1-3 have been completed.
As a result of Step 2, Nukkleus disclosed in its Q2 filing that it already has an agreement with FXDD to provide a variety of services and technology to FXDD, in return for a $2 million per month payment.
We’d also note that the planned merger(s) does not mean that all the businesses and brands will take on one name, or even be folded under one management group. While that’s a decision for the company further down the road, we believe that the companies and brands – IronFX, FXDD and the Forexware platform business – will continue to have separate names and brands, separate management teams, and will keep their individual regulatory licenses.
They will just be owned by the same corporate entity (Nukkleus Inc), instead of separately by Mr. Assentato’s various holding companies.
There will probably be some behind-the-scenes pooling of resources where it makes sense between the aforementioned companies, but otherwise we see Nukkleus as an umbrella organization that plans to acquire and rationalize these as well as other FX industry brands, over time. Being a public company, Nukkleus should also have access to capital and acquisition currency which a private entity just doesn’t have.
Nukkleus Inc’s complete 10-Q filing for Q2 can be seen here.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q/A
(Amendment No. 1)
x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2016.
OR
¨ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission file number: 333-192647
Nukkleus Inc.
(Exact name of registrant in its charter)
Delaware 38-3912845
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
525 Washington Blvd, Jersey City, NJ 07310
(Address of principal executive offices) (Zip Code)
Issuer’s telephone number: 212-791-4663
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock, par value $0.0001
Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 day. x 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” and “smaller reporting company” in Rule 12b-2 if the Exchange Act.
Large accelerated filter ¨ Accelerated filter ¨
Non-accelerated filter ¨ Smaller reporting company x
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date.
Class Outstanding August 15, 2016
Common Stock, $0.0001 par value per share 254,541,100 shares
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION 3
ITEM 1. INTERIM FINANCIAL STATEMENTS (Unaudited) 3
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 4
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 6
ITEM 4. CONTROLS AND PROCEDURES 6
ITEM 5. OTHER 6
PART II OTHER INFORMATION 7
ITEM 1. LEGAL PROCEEDINGS 7
ITEM 1A. RISK FACTORS 7
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 7
ITEM 3 DEFAULTS UPON SENIOR SECURITIES 8
ITEM 4 MINE SAFETY DISCLOSURES 8
ITEM 5 OTHER INFORMATION 8
ITEM 6 EXHIBITS 9
SIGNATURES 10
2
PART I. Financial Information
Item 1. Interim Financial Statements.
Condensed Consolidated Balance Sheets as of June 30, 2016 (unaudited) and September 30, 2015 F-1
Condensed Consolidated Statements of Operations for the three and nine months ended June 30, 2016 and June 30, 2015 (unaudited) F-2
Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 2016 and June 30, 2015 (unaudited) F-3
Notes to Condensed Consolidated Financial Statements (unaudited) F-4
3
NUKKLEUS INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
As of June 30, 2016 (UNAUDITED) and September 30, 2015
6/30/2016 9/30/2015
ASSETS
CURRENT ASSETS:
Cash $ - $ -
Deposit on potential acquisition 1,055,559 -
Due from affiliate 2,400,000 -
TOTAL CURRENT ASSETS 3,455,559 -
TOTAL ASSETS $ 3,455,559 $ -
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
CURRENT LIABILITIES:
Due to affiliate $ 2,370,000 $ -
Due to stockholder 170,310 21,882
Accrued taxes 250 250
Accrued liabilities 20,011 -
TOTAL CURRENT LIABILITIES 2,560,571 22,132
Series A redeemable preferred stock liability at $10 stated value; 100,000 shares issued and outstanding ($1,000,000 less discount of $45,105) 954,895 -
TOTAL LIABILITIES 3,515,466 22,132
Contingent Common Stock (24,156,000 shares issued and outstanding) 55,559 -
STOCKHOLDERS' (DEFICIT):
Preferred stock, $.0001 par value, 15,000,000 shares authorized, 0 shares issued and outstanding - -
Common stock, $.0001 par value, 900,000,000 shares authorized; 230,385,100 shares issued and outstanding, and 300,000,000 shares authorized, 166,535,100 shares issued and outstanding, as of June 30, 2016 and September 30, 2015, respectively 23,039 16,654
Additional paid-in capital 118,955 79,547
Retained (deficit) (257,460 ) (118,333 )
TOTAL STOCKHOLDERS' (DEFICIT) (115,466 ) (22,132 )
TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) $ 3,455,559 $ -
The accompanying notes to condensed consolidated financial statements are
an integral part of these statements.
F-1
NUKKLEUS INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED
June 30, 2016 AND 2015 (UNAUDITED)
Three
Months
Ended June
30, 2016 Three
Months
Ended June
30, 2015 Nine Months
Ended June
30, 2016 Nine Months
Ended June
30, 2015
Revenues:
Service revenues from related parties $ 2,400,000 $ - $ 2,400,000 $ -
Professional service revenues - - - 30,500
Client expense reimbursement - - - 1,969
Total Revenues 2,400,000 - 2,400,000 32,469
Cost of revenues from a related party 2,370,000 - 2,370,000 14,500
Cost of revenues - other - - - 165
Gross Profit 30,000 - 30,000 17,804
Operating expenses:
General and administrative 158,429 8,297 168,429 35,568
General and administrative costs from a related party - - - 13,827
Total operating expenses 158,429 8,297 168,429 49,395
(Loss) from operations (128,429 ) (8,297 ) (138,429 ) (31,591 )
Interest expense on preferred stock (11 ) - (11 ) -
Amortization of debt discount (687 ) - (687 ) -
Net (loss) $ (129,127 ) $ (8,297 ) $ (139,127 ) $ (31,591 )
Net (loss) per share - basic and diluted $ (0.00 ) $ (0.00 ) $ (0.00 ) $ (0.01 )
Weighted number of shares outstanding -
Basic and diluted 201,893,825 4,230,000 178,261,208 4,230,000
The accompanying notes to condensed consolidated financial statements are
an integral part of these statements.
F-2
NUKKLEUS INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED June 30, 2016 AND 2015 (UNAUDITED)
Nine Months
Ended June 30,
2016 Nine Months
Ended June
30,
2015
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net (loss) $ (139,127 ) $ (31,591 )
Amortization of debt discount 687 -
Adjustment to reconcile net (loss) to net cash used in operating activities:
Due to affiliates 2,370,000
Due from affiliates (2,400,000 )
Accounts payable and accrued expenses 20,012 (6,014 )
Net cash used in operating activities (148,428 ) (37,605 )
CASH FLOW FROM INVESTING ACTIVITIES:
Deposit on potential acquisition. (1,000,000 ) -
Net cash used in investing activities (1,000,000 ) -
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock 45,792
Issuance of preferred stock 954,208
Due to stockholder 148,428 24,701
Net cash provided by financing activities 1,148,428 24,701
NET DECREASE IN CASH - (12,904 )
CASH at beginning of period - 12,904
CASH at end of period $ - $ -
Supplemental disclosure of cash flow information
Cash paid for:
Interest $ - $ -
Income Taxes - -
Supplemental schedule of non-cash investing and financing activities
Issuance of contingent common stock for potential acquisition $ 55,559 $ -
Forgiveness of loan from stockholder - 24,701
The accompanying notes to condensed consolidated financial statements are
an integral part of these statements.
F-3
NUKKLEUS INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. The Company History and Nature of the Business
Nukkleus Inc. (formerly Compliance & Risk Management Solutions Inc.) (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 25, 2015, John Nettlefold closed a transaction in which he purchased a total of 3,500,000 shares of restricted stock of the Company, representing 88% of the shares in the Company from Mountain Laurel Holdings. At the same time, Mr. Christopher Neuert, the former Director resigned his position at that time and the shareholders of the Company elected Mr. Nettlefold as Director of the Company.
Subsequent to the change in control on February 25, 2015, the new Director John Nettlefold decided to transition the company from business technology to advertising technology. To this effect, on May 22, 2015, Mr. Nettlefold undertook a Merger between Nukkleus Inc., a Nevada entity and Compliance Risk & Management Solutions, Inc., a Delaware entity & former name of this Company
On July 2, 2015 the State of Delaware approved an Amendment of the Articles to increase the Authorized shares of the Company to 300,000,000. On July 6, 2015, the state of Delaware approved the forward stock split at the ratio of 39.37:1. FINRA gave final approval for this forward stock split, name change and ticker symbol change from CRMV to the current NUKK on July 24, 2015.
By late July, management had decided that many of the underlying factors of Mr. Nettlefold’s business would not be feasible as presented. As such, on July 26, 2015, the previous Merger Agreement was rescinded.
On July 27, 2015, Charms Investments, Inc. closed a transaction in which it acquired the majority restricted block from the Director John Nettlefold, representing 88% of the company’s shares, as seen on the 8K filed July 27, 2015.
On August 17, 2015, Mr. Nettlefold resigned as Director of the Company, and on the same day the majority of the shareholders elected Mr. Peter Maddocks as Director of the Company. Since this transition, the Company has been conducting due diligence and reviewing several possibilities within the technology arena.
On February 5, 2016, Charms Investments, Ltd, 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 the Company’s sole officer and director. 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, the Company acquired selected technology assets from CMH. As the acquisition was from an entity under common control, the Company recorded these assets at CMH’s carrying values, which were zero.
On May 27, 2016, the Company obtained a 9.9% shareholder stake in IBIH Limited (parent company of IronFx Global Group (IronFx)) and acquired 100% of the issued and outstanding shares of GVS limited, a BVI corporation (a former subsidiary of IBIH limited). In addition, the Company entered into a Stock Purchase Agreement pursuant to which it has agreed to acquire the remaining equity in IBIH Limited and prior to such closing, the Company is required to enter into an option agreement to acquire FML Malta, Ltd. and FXDD Trading Limited operating units, which are affiliates through common ownership. These transactions are subject to regulatory approval, where applicable. (See Note 3)
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 will occur with the closing of the Company’s acquisition of IBIH.
The condensed consolidated financial statements have been prepared using accounting principles generally accepted in the United States of America applicable for a going concern, which assumes that the Company will realize its assets and discharge its liabilities in the ordinary course of business. Since inception, the Company has incurred net losses of $257,460 and has a working capital of $894,988 at June 30, 2016. Our ability to continue as a going concern is dependent upon the management of expenses and ability of the Company to obtain the necessary financing to meet its obligations and pay its liabilities arising from normal business operations when they come due, and upon profitable operations.
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.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All significant intercompany transactions and balances have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The balance sheet at September 30, 2015 was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. The other information in these condensed consolidated financial statements is unaudited but, in the opinion of management, reflects all adjustments necessary for a fair presentation of the results for the periods covered. These condensed consolidated financial statements should be read in conjunction with the financial statements and additional information as contained in our annual report on Form 10-K for the year ended September 30, 2015.
F-4
Cash Equivalents
The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. There were no cash equivalents at June 30, 2016 and September 30, 2015.
Loss per Common Share
Basic loss per share is computed by dividing the net loss attributable to the common stockholders by the weighted average number of shares of common stock outstanding during the period. Fully diluted loss per share is computed similar to basic loss per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. There were no dilutive financial instruments issued or outstanding for the period ended June 30, 2016.
Revenue Recognition
Prior to February 13, 2015, the Company derived its revenue from the sale of general compliance and risk management consulting services (professional services revenue). The Company utilizes written contracts as the means to establish the terms and conditions of services sold to customers.
Because the Company provides its applications as services, it follows the provisions of Securities and Exchange Commission Staff Accounting Bulletin (“SAB”) No. 104, Revenue Recognition. The Company recognizes revenue when all of the following conditions are met:
? 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 Global Service Agreements at gross as the Company is deemed to be a principal in the transactions. Revenues are recognized when the services are completed and expenses are recognized as incurred.
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.
Fair Value of Financial Instruments
The Company estimates the fair value of financial instruments using the available market information and valuation methods. Considerable judgment is required in estimating fair value. Accordingly, the estimates of fair value may not be indicative of the amounts the Company could realize in a current market exchange. As of June 30, 2016, the carrying value of accrued taxes, accrued liabilities, and due to/due from affiliates approximated fair value due to the short-term nature and maturity of these instruments.
F-5
Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of June 30, 2016. Actual results could differ from those estimates made by management.
Recently Issued Accounting Pronouncements
ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” The objective of ASU 2014-09 is to require an entity to recognize the amount of revenue which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance under U.S. GAAP when it becomes effective. The amendments become effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early application is permitted for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The standard allows an entity to apply the amendments in ASU 2014-09 using either the retrospective or cumulative effect transition method. The Company is currently evaluating the effects of adopting ASU 2014-09 on its consolidated financial statements.
ASU 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” This ASU requires management to determine whether substantial doubt exists regarding the entity’s going concern presumption, which generally refers to an entity’s ability to meet its obligations as they become due. If substantial doubt exists, certain disclosures are required. As such, management will now have primary responsibility for the going concern assessment under U.S. GAAP. To date, this responsibility has rested principally with the independent auditor. The amendments in ASU 2014-15 apply to all entities, unless they have adopted the liquidation basis of accounting under Subtopic 205-30. The new standard applies prospectively to annual periods ending after December 15, 2016, and to interim and annual periods thereafter. Early application is permitted. The Company is currently evaluating the effects of adopting ASU 2014-15 on its consolidated financial statements.
ASU 2015-01, “Income Statement–Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items.” The FASB believes that eliminating the concept of extraordinary items from U.S. GAAP will save time and reduce costs for financial statement preparers, and will alleviate uncertainty for preparers, auditors and regulators because auditors and regulators no longer will need to evaluate whether a preparer presented an unusual and/or infrequent item appropriately. The presentation and disclosure guidance for items that are unusual in nature or infrequent in occurrence has been retained and has been expanded to include items that are both unusual in nature and infrequent in occurrence. The nature and financial effects of each event or transaction is required to be presented as a separate component of income from continuing operations or, alternatively, in the notes to the financial statements. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. A reporting entity may apply the amendments prospectively. A reporting entity also may apply the amendments retrospectively to all prior periods presented in the financial statements. The Company has implemented this pronouncement.
ASU 2016-01, “Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” This new guidance makes targeted improvements to existing U.S. GAAP by: (i) requiring equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (ii) requiring public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (iii) requiring separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; (iv) eliminating the requirement to disclose the fair value of financial instruments measured at amortized cost for organizations that are not public business entities; (v) eliminating the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; and (vi) requiring a reporting organization to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk (also referred to as “own credit”) when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. Public business entities must apply the new requirements for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the effects of adopting ASU 2016-01 on its consolidated financial statements.
F-6
ASU 2016-02, “Leases (Topic 842).” Under this new guidance, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current U.S. GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current U.S. GAAP, which requires only capital leases to be recognized on the balance sheet, the new ASU will require both types of leases to be recognized on the balance sheet. The ASU also will require disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements. The ASU will take effect for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted.
The Company is currently evaluating the effects of adopting ASU 2016-02 on its consolidated financial statements.
ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This new guidance will require the earlier recognition of credit losses on loans and other financial instruments based on an expected loss model, replacing the incurred loss model that is currently in use. Under the new guidance, an entity will measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. The expected loss model will apply to loans and leases, unfunded lending commitments, held-to-maturity debt securities and other debt instruments measured at amortized cost. The impairment model for available-for-sale debt securities will require the recognition of credit losses through a valuation allowance when fair value is less than amortized cost, regardless of whether the impairment is considered to be other-than-temporary. The new guidance is effective on January 1, 2020, with early adoption permitted on January 1, 2019.
The Company is currently evaluating the effects of adopting ASU 2016-13 on its consolidated financial statements.
Management does not believe that any other recently issued, but not yet effective, accounting standard if currently adopted would have a material effect on the accompanying financial statements.
3. Share Capital
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.
On May 24, 2016, CMH sold certain intellectual property, hardware, software and other assets (collectively, 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.
On May 27, 2016, the Company entered into a Stock Purchase Agreement to acquire, from IBIH Limited, 2,200 issued and outstanding common stock for $1,000,000, representing 9.9% of IBIH Limited. In addition, the Company acquired 100% of the issued and outstanding shares of GVS Limited, a BVI corporation (a former subsidiary of IBIH Limited) for 24,156,000 shares of common stock of the Company (‘first closing’). The cost of acquisition paid in cash has been recorded on the balance sheet as a “deposit on potential acquisition,” and the common stock as “contingent common stock” as the transaction is contingent upon regulatory approval (see the following paragraph). The shares were valued at $.0023 per share.
The Company agreed to acquire the remaining 20,000 shares of IBIH Limited for 219,844,000 shares of its common stock, subject to IBIH Limited obtaining regulatory approvals from the Financial Conduct Authority in the United Kingdom and from the regulators in Cyprus (‘second closing’). The second closing is subject to the Company signing an option agreement with FML Malta, Ltd and FXDD Trading Limited, providing that the Company may acquire both entities for $1. If the second closing does not occur before November 28th, 2016, the $1,000,000 is returned to the Company and the first closing is unwound. As a result of the first closing being contingent on the second closing, the 24,156,000 shares for the purchase of IBIH Limited was recorded as contingent common stock, due to the uncertainty of the closing of the transaction. At June 30, 2016, the Company had not recorded an amount to reflect the value of the option to acquire FML Malta Ltd. and FXDD Trading Limited.
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 will occur with the closing of the Company’s acquisition of IBIH.
F-7
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 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. The Company has a choice of redeeming either in cash or in shares of common stock based on a formula in the certificate of designation. The conversion price has a floor of $0.20 per share.
At June 30, 2016, during the first close, 15,450,000 shares of common stock and 100,000 shares of Series A preferred stock were issued and were recorded as equity and as a long-term liability, respectively. The $1,000,000 of proceeds received was allocated to the common stock and Series A preferred stock according to their relative fair values determined at the time of issuance, and as a result, the Company recorded a discount on the Series A preferred stock, which is being amortized to interest expense to the date of redemption. The terms of the Series A preferred stock issued represent mandatory redeemable shares, with a fixed redemption date (in 5 years) and the Company has a choice of redeeming the instrument either in cash or a variable number of shares of common stock. As such, all dividends accrued and/or paid and any accretions are classified as part of interest expense.
4. Related Party Transactions
On May 24, 2016, the Company entered into a Global Service Agreement with FXDD Trading Limited, Bermuda. This service agreement was replaced by one with FML Malta Ltd, with substantially the same terms. The Company is to invoice FML Malta Ltd, a minimum of $2,000,000 per month in consideration for providing personnel and technical support, marketing, accounting, risk monitoring, documentation processing and customer care and support.
In addition, the Company entered into a Global Service Agreement with FXDirectDealer LLC to pay $1,975,000 per month for providing personnel and technical support, marketing, accounting, risk monitoring, documentation processing and customer care and support.
Both of the above entities are affiliates through common ownership.
On August 1, 2013, the Company had engaged the services (the “Agreement”) of Ocean Cross Business Solutions Group LLC (“OCBSG”), to provide assistance with filing of the SEC Form S-1, general accounting, finance, general management and client delivery services. OCBSG is owned by William Schloth the husband of the previous majority shareholder MLH. The Agreement provided for a monthly consulting fee of $5,000. The Agreement was mutually and satisfactorily terminated by the parties as of February 24, 2015 and no amount was due to OCBSG. The Company has reflected this arrangement in the statement of operations as related party expenses. For the three months ended June 30, 2015, there no related party costs and expenses. For the nine months ended June 30, 2015, $14,500 and $13,827 have been allocated to cost of revenue and operating expenses, respectively.
As of June 30, 2016, the due to stockholder balance principally consisted of professional and various filings fees borne by CMH on behalf of the Company.
5. Income Taxes
The provision for income taxes for the nine months end June 30, 2016 and 2015 were as follows (assuming a 15% effective tax rate):
Nine Months
Ended June
30, 2016 Nine Months
Ended June
30, 2015
Current Tax Provision:
Total current tax provision $ - $ -
Deferred Tax Provision:
Loss carry-forwards $ 28,869 $ 3,494
Change in valuation allowance (28,869 ) (3,494 )
Total deferred tax provision $ - $ -
The Company provided a valuation allowance equal to the deferred income tax assets for period ended June 30, 2016 because it is not presently known whether future taxable income will be sufficient to utilize the loss carry-forwards.
Loss carry-forwards $ 38,619
Less - valuation allowance (38,619 )
Total net deferred tax assets $ -
As of June 30, 2016, the Company had approximately $257,460 in tax loss carry-forwards that may be utilized (subject to possible limitations under IRS Code section 382) in future periods to reduce taxable income, and expire by the year 2035.
F-8
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 income tax returns of the Company are subject to examination by the IRS, generally for three years after they are filed. All periods since inception are still subject to examination.
6. Subsequent events
There were no subsequent events that occurred after the balance sheet date that require adjustments to or disclosure in the financial statements.
Item 2. Management’s Discussion and Analysis or Plan of Operation.
FORWARD-LOOKING STATEMENTS
Certain matters discussed herein are forward-looking statements. Such forward-looking statements contained in this Form 10-Q involve risks and uncertainties, including statements as to:
· 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.
These forward-looking statements can generally be identified as such because the context of the statement will include words such as we “believe,” “anticipate,” “expect,” “estimate” or words of similar meaning. Similarly, statements that describe our future plans, objectives or goals are also forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties which are described in close proximity to such statements and which could cause actual results to differ materially from those anticipated as of the date of filing of this Form 10-Q. Shareholders, potential investors and other readers are urged to consider these factors in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included herein are only made as of the date of filing of this Form 10-Q, and we undertake no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.
This discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results may differ materially from those anticipated in these forward-looking statements.
Overview
The management of the Company has stated that the acquisition of a 9.9% shareholder stake in IBIH, as well as the acquisition of the operations of IronFX and GVS Ltd. is just a first intended step towards the Company’s long term strategy of identifying leading retail forex brands from around the world as well as leading financial companies related to the industry, which can potentially be included and synergistically folded into the Company. It is the stated intention of the Company’s management to maintain the separate brand identity, operational autonomy, and segregated customer deposits for each individual retail forex brand it may potentially acquire in the future, while simultaneously capitalizing on efficiencies afforded by scale, shared backbones and optimized regulatory capital structure.
As a result of these above described transactions, which were entered in May 2016, as well as further contemplated transactions, the Company’s goal is to create an industry leading sector consolidated platform, combining strong global retail and institutional trading flows covering FX, commodities, futures, CFD and equities, with a cutting edge technological product suite, turnkey software and technological development capabilities. These contemplated transactions could potentially result in a global financial trading and financial technology group, with operations and clients, as well as one of the most comprehensive regulatory licenses coverage in the world.
4
Results of Operations
Summary of Key Results
For the three months ended June 30, 2016 versus June 30, 2015
Revenues and Cost of Revenues
Total revenue for the three months ended June 30, 2016; versus June 30, 2015 were $2,400,000 and $0 respectively. Revenues are from general support services rendered to a related party. The significant increase is due to revenues derived from the service agreement entered in May, 2016. No such agreement was in place as of June 30, 2015.
Costs of revenues for the three months ended June 30, 2016 versus June 30, 2015 were $2,370,000 and $0, respectively. Cost of revenue represents amount incurred for general support services rendered by a related party. The significant increase in costs was due to expenses incurred by the general expenses agreement entered in May, 2016. No such agreement existed as of June 30, 2015.
Operating Expenses
Total operating expenses for the three months ended June 30, 2016 versus June 30, 2015, were $158,429 versus $8,297, respectively. These amounts were primarily third party professional fees.
For the nine months ended June 30, 2016 versus June 30, 2015
Revenues and Cost of Revenues
Total revenue for the nine months ended June 30, 2016; versus June 30, 2015 were $2,400,000 and $32,469, respectively. Revenues in 2016 are for general support services rendered to a related party. The significant increase is due to revenues derived from the service agreement entered in May, 2016. No such agreement was in place as of June 30, 2015.
Costs of revenues for the nine months ended June 30, 2016 versus June 30, 2015 were $2,370,000 and $14,665, respectively. Cost of revenues included merchant account charges of $0 and $165, respectively. The remaining amount, $2,370,000 and $14,500, respectively, were related-party costs for the delivery of the general support services. The significant increase in costs was due to expenses incurred as a result of the General Services Agreement entered in May, 2016. No such agreement existed as of June 30, 2015
Operating Expenses
Total operating expenses for the nine months ended June 30, 2016 versus June 30, 2015 were $168,429 versus $49,395, respectively. The increase in costs was primarily due to the increased use of professional services providers.
Liquidity and Capital Resources
At June 30, 2016, we had cash of $0 and working capital of $894,988.
We had a total stockholders’ deficit of ($115,466) and a retained deficit of ($257,460) as of June 30, 2016.
LeapRate Staff
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