June 26, 2022

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NUKKLEUS : Management’s Discussion and Analysis of Financial Condition and Results of Operations. (form 10-K)

The following discussion and analysis of our financial condition and results of
operations for the years ended September 30, 2020 and 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 2019 and 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.



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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. 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
in
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.


Cryptocurrency-Related Risks

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
cryptocurrency markets.

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
digital currency.



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
blockchain/cryptocurrency-based assets.

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
alternatives.



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 Board or 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

blockchain networks;

? changes in consumer demographics and public tastes and preferences;

? general economic conditions and the regulatory environment relating to

cryptocurrencies; and

? 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 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 could differ from these estimates. Significant estimates during the
years ended September 30, 2020 and 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
transactions.



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 September 30, 2020 versus the year ended September 30, 2019

Revenue and Cost of Revenue

Revenue for both of the years ended September 30, 2020 and 2019 was $19,200,000,
and was from general support services rendered to TCM under a GSA.

Cost of revenue for both of the years ended September 30, 2020 and 2019 was
$18,900,000, and represented amount incurred for general support services
rendered by FXDIRECT under a GSA.


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 ended September 30, 2020 versus
the year ended September 30, 2019, were $154,179 and $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 September 30, 2020 and 2019, we recorded bad debt expense of
$0 and $40,000, respectively.

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,
2020 versus the year ended September 30, 2019, were $258,936 versus $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, 2020 versus the year
ended September 30, 2019, was $12,553 versus $25,680, respectively. The change
for the year ended September 30, 2020 as compared to the year ended September
30, 2019 was 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 $0.00
per common share (basic and diluted), for the year ended September 30, 2020. Our
net loss was $730,113, or $0.00 per 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, 2020 and 2019, we had cash balances of $82,849
and $23,514, respectively.


For the year ended September 30, 2020, we generated net cash flow of $59,355
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 September 30, 2020 Compared to the Year Ended
September 30, 2019



Net cash flow provided by operating activities was $59,335 for 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 $101,000 and the non-cash item mainly consisting of a gain on
digital currency of approximately $19,000.



Net cash flow used in operating activities was $138,431 for the year ended
September 30, 2019. These included $730,113 in net loss. Cash flows used in
operating activities included non-cash items mainly consisting of 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 ended September 30, 2019.

There was no investing activity during the year ended September 30, 2020.

Net cash flow used in investing activities was $95,692 for the year ended
September 30, 2019. During the year ended September 30, 2019, we purchased
digital currency of $95,692.

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 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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