T3 Defense Inc.: Form 10-Q for the period ended Dec 31, 2023

The following discussion and analysis of our financial condition and results of operations for the three months ended December 31, 2023 and 2022 should be read in conjunction with our condensed consolidated financial statements and related notes to those condensed 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-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.

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. Due to the nature of our business, the technology we use and offer to our customers, and our employees’ ability to work remotely, there was no material impact of COVID-19 on our business, operations and financial results.

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, and governmental, business and individuals’ actions that have been and continue to be taken in response to the pandemic.

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 have ownership of the FOREXWARE assets, 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. We seek to offer our client’s customers 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 manages the technology and IP behind the Markets Direct brand (which is operated by TCM). MDTG holds all the IP addresses and all the software licenses in its name, and it holds all the IP rights to the brands such as Markets Direct and TCM. MDTG then leases out the rights to use these names/brands licenses to the appropriate entities.

In fiscal year 2021, the Company completed its acquisition of Match Financial Limited, a private limited company formed in England and Wales (“Match”). Match is engaged in providing payment services from one fiat currency to another or to digital assets.

On October 20, 2021, the Company and the shareholders (the “Original Shareholders”) of Jacobi Asset Management Holdings Limited (“Jacobi”) entered into a Purchase and Sale Agreement (the “Jacobi Agreement”) pursuant to which the Company agreed to acquire 5.0% of the issued and outstanding ordinary shares of Jacobi in consideration of 548,767 shares of common stock of the Company (the “Jacobi Transaction”). On December 15, 2021, the Company, the Original Shareholders and the shareholders of Jacobi that were assigned their interest in Jacobi by the Original Shareholders (the “New Jacobi Shareholders”) entered into an Amendment to Stock Purchase Agreement agreeing that the Jacobi Transaction will be entered between the Company and the New Jacobi Shareholders. The Jacobi Transaction closed on December 15, 2021. Jacobi is a company focused on digital asset management that has received regulatory approval to launch the world’s first tier one Bitcoin exchange-traded fund (“ETF”). Jamal Khurshid and Nicholas Gregory own, directly and indirectly, approximately 40% and 10% of Jacobi, respectively. Jamal Khurshid is the Company’s chief executive officer and director and Nicholas Gregory is the Company’s director. The transactions contemplated by the Jacobi Agreement constituted a “related-party transaction” as defined in Item 404 of Regulation S-K because of Mr. Khurshid’s and Mr. Gregory’s position as beneficial owner of one or more Original Shareholders and New Jacobi Shareholders.

On December 30, 2021, Old Nukk and the shareholder (the “Digiclear Shareholder”) of Digiclear Ltd. (“Digiclear”) entered into a Purchase and Sale Agreement (the “Digiclear Agreement”) pursuant to which Old Nukk acquired 5,400,000 of the issued and outstanding ordinary shares of Digiclear in consideration of shares of common stock, which following the Merger represented 415,733 shares of common stock of the Company (valued at $5,000,000 based on the market price of Old Nukk’s common stock on the acquisition date) (the “Digiclear Transaction”). The Digiclear Transaction closed on March 17, 2022. In addition, upon the closing of the Merger, the Company agreed to provide an additional $1 million in investment to Digiclear in exchange for 4.545% of additional shares of Digiclear’s capital stock subject to the parties entering a definitive agreement. The Company and Digiclear have not entered into an additional agreement outlining the terms pursuant to which the Company would acquire the additional shares of Digiclear. Digiclear is a company developing a custody and settlement utility operating system.

Financial Services Segment’s Key Performance Indicators (KPI)

The key performance indicators outlined below are our financial services segment’s metrics that provide management with the most immediate understanding of the drivers of business performance and tracking of financial targets.

Trading volume is measured by number of trades and represents aggregate notional value of all trades.

Financial services revenue represents the top-line revenue generated from trades, before considering the costs associated with the generation of financial services revenue.

Financial services income (loss) is measured as financial services revenue, less costs incurred associated with delivery of our services. For the three months ended December 31, 2022, cost of financial services includes amortization of intangible assets which consist of license and banking infrastructure acquired on Match acquisition, introducing broker fees, banking, and trading fees incurred associated with delivery of our services.

In September 2023, we assessed our intangible assets which were solely related to the Match acquisition (which consisted of license and banking infrastructure) for any impairment and concluded that there were indicators of impairment as of September 30, 2023. We calculated that the estimated undiscounted cash flows related to our intangible assets were less than their carrying amounts. We have not been able to realize the financial projections provided by Match at the time of the intangible assets purchase and have decided to impair the intangible assets to zero. Therefore, for the three months ended December 31, 2023, cost of financial services only includes introducing broker fees, banking, and trading fees incurred associated with delivery of our services. We had a financial services income for the three months ended December 31, 2023 as compared to financial services loss for the three months ended December 31, 2022.

Average cost per trade is driven by financial services costs. Our average cost per trade decreased measurably as costs decreased.

Active clients for the three months ended December 31, 2023 and 2022 was 53 and 57, respectively.

Gross trading margin is a metric that measures financial services revenue to trading volume.

Critical Accounting Policies

Use of Estimates

The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Changes in these estimates and assumptions may have a material impact on the condensed consolidated financial statements and accompanying notes. Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the financial statements, which management considered in formulating its estimate, could change in the near term due to one or more future confirming events. Accordingly, the actual results could differ significantly from those estimates.

Significant estimates during the three months ended December 31, 2023 and 2022 include the allowance for doubtful accounts, the assumptions used in assessing impairment of long-term assets, the valuation of deferred tax assets and associated valuation allowances, the valuation of stock-based compensation, and the fair value of customer digital currency assets and liabilities.

Customer Custodial Cash and Customer Custodial Cash Liabilities

Customer custodial cash represents cash and cash equivalents maintained in Company bank accounts that are controlled by the Company but held for the benefit of customers. Customer custodial cash liabilities represent these cash deposits to be utilized for its contractual obligations to its customers. The Company classifies the assets as current based on their purpose and availability to fulfill the Company’s direct obligations to its customers.

Customer Digital Currency Assets and Liabilities

At certain times, Digital RFQ’s customers’ funds that Digital RFQ uses to make payments on behalf of its customers, remain in the form of digital assets in its customers’ wallets at its digital asset trading platforms awaiting final conversion and/or transfer to the customer’s payment final destination. These indirectly held digital assets, may consist of USDT (Stablecoin), Bitcoin, and Ethereum (collectively, “Customer digital currency assets”). Digital RFQ maintains the internal recordkeeping of its customer digital currency assets, including the amount and type of digital asset owned by each of its customers.

Digital RFQ has control of the private keys and knows the balances of all wallets with its digital asset trading platforms in order to be able to successfully carry out the movement of digital assets for its client payment instruction. As part of its customer payment instruction, Digital RFQ can execute withdrawals on the wallets in its digital asset trading platforms.

The Company has determined that the Company has control of the customer digital currency assets and records these assets on its balance sheet with a corresponding liability. The Company recognizes customer digital currency liabilities and corresponding customer digital currency assets, on initial recognition and at each reporting date, at fair value of the customer digital currency assets. Subsequent changes in fair value are adjusted to the carrying amount of these customer digital currency assets, with changes in fair value recorded in other general and administrative expense in the condensed consolidated statements of operations and comprehensive loss.

Any loss, theft, or other misuse would impact the measurement of customer digital currency assets. The Company classifies the customer digital currency assets as current based on their purpose and availability to fulfill the Company’s direct obligations to its customers.

Revenue Recognition

The Company accounts for revenue under the provisions of ASC Topic 606. The Company’s revenues are derived from providing:

• General support services under a GSA to a related party. 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 the Company is deemed to be a principal in the transactions.
• Financial services to its customers. Revenue related to its financial services offerings are recognized at a point in time when service is rendered.

Stock-based Compensation

The Company measures and recognizes compensation expense for all stock-based awards granted to non-employees, including stock options, based on the grant date fair value of the award. The Company estimates the grant date fair value of each option award using the Black-Scholes option-pricing model.

For non-employee stock-based awards, fair value is measured based on the value of the Company’s common stock on the date that the commitment for performance by the counterparty has been reached or the counterparty’s performance is complete. The fair value of the equity instrument is calculated and then recognized as compensation expense over the requisite performance period.

Results of Operations

Summary of Key Results

For the Three Months Ended December 31, 2023 Versus the Three Months Ended December 31, 2022

Revenues

For both the three months ended December 31, 2023 and 2022, we had revenue from general support services rendered to TCM under a GSA of $4,800,000. We do not expect any revenue from general support services in the near future since we have advised TCM that the GSA has been terminated due to non-payment by TCM under the GSA.

For the three months ended December 31, 2023, we had revenue from financial services of $442,391, as compared to $576,388 for the three months ended December 31, 2022, a decrease of $133,997, or 23.2%. The decrease was primarily attributable to the closure of our primary USD Banking rails when Signature and Silvergate closed in March 2023. We expect that our revenue from financial services will remain at its current level with minimal increase in the near future.

Costs of Revenues

For the three months ended December 31, 2023, our cost of general support services, which represented amount incurred for services rendered by FXDIRECT under a GSA, amounted to $4,650,000, as compared to $4,725,000 for the three months ended December 31, 2022, a decrease of $75,000, or 1.6%. Effective May 1, 2023, the amount payable by us to FXDIRECT for services under a GSA was reduced from $1,575,000 per month to $1,550,000 per month. Therefore, our cost of general support services for the three months ended December 31, 2023 was decreased as compared to the three months ended December 2022.

For the three months ended December 31, 2022, cost of financial services includes amortization of intangible assets which consist of license and banking infrastructure acquired on Match acquisition, introducing broker fees, banking, and trading fees incurred associated with delivery of our services.

In September 2023, we assessed our intangible assets which were solely related to the Match acquisition (which consisted of license and banking infrastructure) for any impairment and concluded that there were indicators of impairment as of September 30, 2023. We calculated that the estimated undiscounted cash flows related to our intangible assets were less than their carrying amounts. We have not been able to realize the financial projections provided by Match at the time of the intangible assets purchase and have decided to impair the intangible assets to zero. Therefore, for the three months ended December 31, 2023, cost of financial services only includes introducing broker fees, banking, and trading fees incurred associated with delivery of our services.

For the three months ended December 31, 2023, cost of financial services amounted to $133,691, as compared to $706,261 for the three months ended December 31, 2022, a decrease of $572,570, or 81.1%. The significant decrease was primarily attributable to decreased amount of amortization of intangible assets which consist of license and banking infrastructure acquired on Match acquisition in the three months ended December 31, 2023.

Gross Profit (Loss)

Our gross profit from general support services for the three months ended December 31, 2023 was $150,000, as compared to $75,000 for the three months ended December 31, 2022, an increase of $75,000, or 100.0%. Gross margin increased to 3.1% for the three months ended December 31, 2023 from 1.6% for the three months ended December 31, 2022. The increase in our gross margin for the general support services segment for the three months ended December 31, 2023 as compared to the three months ended December 31, 2022 was attributed to the decrease in our cost of general support services as described above.

Gross profit from financial services for the three months ended December 31, 2023 was $308,700, as compared to gross loss of $129,873 for the three months ended December 31, 2022, a decrease of $438,573, or 337.7%. Gross margin increased to 69.8% for the three months ended December 31, 2023 from (22.5)% for the three months ended December 31, 2022. The increase in our gross margin for the financial services segment for the three months ended December 31, 2023 as compared to the three months ended December 31, 2022 was primarily attributed to the decrease in cost for financial services driven by decreased amount of amortization of intangible assets which consist of license and banking infrastructure acquired on Match acquisition. We expect that our gross margin for the financial services segment will remain in its current level with minimal increase in the near future.

Operating Expenses

Operating expenses consisted of advertising and marketing, professional fees, compensation and related benefits, bad debt expense, and other general and administrative expenses.

Advertising and marketing

For the three months ended December 31, 2023, advertising and marketing expense decreased by $28,104, or 57.2%, as compared to the three months ended December 31, 2022. The decrease was primarily attributable to our decreased advertising and marketing activities. We expect that our advertising and marketing expense will remain in its current level with minimal increase in the near future.

Professional fees

Professional fees primarily consisted of audit fees, legal service fees, advisory fees, and consulting fees. For the three months ended December 31, 2023, professional fees increased by $2,185,007, or 322.7%, as compared to the three months ended December 31, 2022. The increase was primarily attributable to a significant increase in advisory service fees of $2,293,000 mainly driven by common stock granted to advisors of approximately $2,016,000, and an increase in other miscellaneous items of approximately $22,000, offset by a decrease in consulting fees of approximately $130,000 mainly due to the decrease in options granted to consultants. We expect that our professional fees will remain in its current level with minimal increase in the near future.

Compensation and related benefits

For the three months ended December 31, 2023, our compensation and related benefits increased by $93,576, or 58.4%, as compared to the three months ended December 31, 2022. The increase was mainly attributable to increased management in our financial services segment. We expect that our compensation and related benefits will remain in its current level with minimal increase in the near future.

Bad debt expense

For the three months ended December 31, 2023, our had bad debt expense of $6,145,942. In December 2023, due to non-payment by TCM under the GSA, we have advised TCM that the GSA has been terminated. We made an allowance for doubtful account for the related party’s receivable in the amount of $6,145,942 in December 2023. We did not record any allowance for doubtful account for the three months ended December 31, 2022.

Other general and administrative expenses

Other general and administrative expenses primarily consisted of rent, amortization of intangible assets, travel and entertainment, and other miscellaneous items.

For the three months ended December 31, 2023, total other general and administrative expenses decreased by $72,114, or 37.0%, as compared to the three months ended December 31, 2022. The decrease was mainly due to a decrease in amortization of intangible assets of approximately $63,000 and a decrease in other miscellaneous items of approximately $9,000 driven by our efforts at stricter controls on corporate expenditure. We expect that other general and administrative expenses will remain in its current level with minimal decrease in the near future.

Other (Expense) Income

Other (expense) income includes related parties’ interest expense and other miscellaneous income.

Other income, net, totaled $19,134 for the three months ended December 31, 2023, as compared to $2,573 for the three months ended December 31, 2022, an increase of $16,561, or 643.6%, which was attributable to an increase in other miscellaneous income of approximately $24,000, offset by an increase in related parties’ interest expense of approximately $7,000.

Net Loss

As a result of the factors described above, our net loss was $8,928,095, or $0.85 per share (basic and diluted), for the three months ended December 31, 2023, as compared to $1,133,922, or $0.11 per share (basic and diluted), for the three months ended December 31, 2022, an increase of $7,794,173 or 687.4%.

Foreign Currency Translation Adjustment

The reporting currency of the Company is U.S. Dollars. The functional currency of the parent company, Nukkleus Inc., Nukkleus Limited, Nukkleus Malta Holding Ltd. and its subsidiaries, is the U.S. dollar, the functional currency of Match Financial Limited and its subsidiary, Digital RFQ, is the British Pound (“GBP”), the functional currency of Digital RFQ’s subsidiary, DRFQ Europe UAB, is Euro, and the functional currency of Digital RFQ’s subsidiary, DRFQ Pay North America, is CAD. The financial statements of our subsidiaries whose functional currency is the GBP or Euro or CAD are translated to U.S. dollars using period end rates of exchange for assets and liabilities, average rate of exchange for revenues, costs, and expenses and cash flows, and at historical exchange rates for equity. Net gains and losses resulting from foreign exchange transactions are included in the results of operations. As a result of foreign currency translations, which are a non-cash adjustment, we reported a foreign currency translation loss of $63,313 and $27,983 for the three months ended December 31, 2023 and 2022, respectively. This non-cash loss had the effect of increasing our reported comprehensive loss.

Comprehensive Loss

As a result of our foreign currency translation adjustment, we had comprehensive loss of $8,991,408 and $1,161,905 for the three months ended December 31, 2023 and 2022, respectively.

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 December 31, 2023 and September 30, 2023, we had cash of approximately $204,000 and $19,000, respectively, exclusive of customer custodial cash. We had working capital deficit of approximately $9,663,000 as of December 31, 2023. In addition, the current cash balance cannot be projected to cover our operating expenses for the next twelve months from the release date of this report. These matters raise substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent on our ability to raise additional capital, implement our business plan, and generate sufficient revenues. There are no assurances that we will be successful in our efforts to generate sufficient revenues, maintain sufficient cash balance or report profitable operations or to continue as a going concern. As described below, we have raised additional capital through the sale of equity and debt and we plan to raise additional capital in the future through the sale of equity or debt to implement our business plan. However, there is no assurance these plans will be realized and that any additional financings will be available to us on satisfactory terms and conditions, if at all.

The following table sets forth a summary of changes in our working capital deficit from September 30, 2023 to December 31, 2023:

Our working capital deficit increased by $3,467,736 to $9,662,793 at December 31, 2023 from $6,195,057 at September 30, 2023. The increase in working capital deficit was primarily attributable to a significant decrease in due from affiliates of approximately $2,010,000 which was primarily attributable to our receivable from TCM was written off after exhaustive efforts at collection in the three months ended December 31, 2023, a decrease in note receivable – related parties, net, of approximately $128,000 driven by repayments received from note receivable – related parties in the three months ended December 31, 2023, an increase in accounts payable of approximately $157,000 due to our financial services business expansion, an increase in customer digital currency liabilities of approximately $996,000 due to the increase in customer digital currency controlled by us in the three months ended December 31, 2023, and an increase in due to affiliates of approximately $1,370,000 driven by the payments received from our affiliates and expenses paid by our affiliates on behalf of us in the three months ended December 31, 2023, offset by an increase in cash of approximately $185,000, an increase in customer digital currency assets of approximately $996,000 due to the increase in customer digital currency controlled by us in the three months ended December 31, 2023, and a decrease in customer custodial cash liabilities of approximately $112,000 resulting from fulfillment of our direct obligations to our customers.

Because the exchange rate conversion is different for the condensed consolidated balance sheets and the condensed consolidated statements of cash flows, the changes in assets and liabilities reflected on the condensed consolidated statements of cash flows are not necessarily identical with the comparable changes reflected on the condensed consolidated balance sheets.

Cash Flow for the Three Months Ended December 31, 2023 Compared to the Three Months Ended December 31, 2022

The following summarizes the key components of our cash flows for the three months ended December 31, 2023 and 2022:

Net cash flow used in operating activities for the three months ended December 31, 2023 was $737,831, which primarily reflected our consolidated net loss of approximately $8,928,000, and the changes in operating assets and liabilities, primarily consisting of an increase in customer digital currency assets of approximately $971,000 due to the increase in customer digital currency controlled by us in the three months ended December 31, 2023, a significant increase in due from affiliates of approximately $4,134,000 due to the payments made to our affiliates and monies that we paid on behalf of our affiliates in the three months ended December 31 2023, and a decrease in customer custodial cash liabilities of approximately $172,000 driven by fulfillment of our direct obligations to our customers in the three months ended December 31, 2023, offset by an increase in accounts payable of approximately $147,000 due to our business expansion, an in customer digital currency liabilities of approximately $971,000 due to the increase in customer digital currency controlled by us in the three months ended December 31, 2023, a significant increase in due to affiliates of approximately $4,078,000 driven by the payments received from our affiliates and expenses paid by our affiliates on behalf of us in the three months ended December 31, 2023, and the non-cash items adjustment primarily consisting of stock-based compensation and service expense of approximately $2,090,000, and provision for bad debt of approximately $6,146,000.

Net cash flow provided by operating activities for the three months ended December 31, 2022 was $5,834,320, which primarily reflected the non-cash items adjustment primarily consisting of amortization of intangible assets, mainly representing intangible assets acquired on Match acquisition, of approximately $593,000, and stock-based compensation and service expense of approximately $147,000 due to options granted for professional services, and the changes in operating assets and liabilities, primarily consisting of a decrease in due from affiliates of approximately $285,000 resulting from the payments received from our affiliates in the first quarter of fiscal 2023, a significant increase in customer custodial cash liabilities of approximately $5,875,000 resulting from our business expansion, an increase in due to affiliates of approximately $93,000 driven by the payments received from our affiliates and expenses paid by our affiliates on behalf of us in the first quarter of fiscal 2023, offset by our consolidated net loss of approximately $1,134,000.

Net cash flow provided by investing activities was $130,137 for the three months ended December 31, 2023 as compared to net cash flow used in investing activities of $67,800 for the three months ended December 31, 2022. During the three months ended December 31, 2023, we received proceeds from note receivable – related parties of approximately $130,000. During the three months ended December 31, 2022, we made payment for note receivable of approximately $68,000.

Net cash flow provided by financing activities was $746,171 for the three months ended December 31, 2023. During the three months ended December 31, 2023, we received cash in reverse recapitalization of approximately $150,000 and received proceeds from loans payable from third party and related party of approximately $678,000, offset by repayments made for loan payable – related parties of approximately $82,000.

There was no financing activity during the three months ended December 31, 2022.

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. 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 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.

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.

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 Condensed Consolidated Financial Statements appearing elsewhere in this report.

Foreign Currency Exchange Rate Risk

A portion of our operations are in United Kingdom. Thus, a portion of our revenues and operating results may be impacted by exchange rate fluctuations between GBP and US dollars. For the three months ended December 31, 2023 and 2022, we had an unrealized foreign currency translation loss of approximately $63,000 and $28,000, respectively, because of changes in the exchange rates.

Inflation

The effect of inflation on our revenue and operating results was not significant.

We are a smaller reporting company as defined in Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in reports filed or submitted under the Securities Exchange Act of 1934, as amended (“Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed under the Exchange Act is accumulated and communicated to management, including the principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.

In connection with the preparation of the quarterly report on Form 10-Q for the quarter ended December 31, 2023, our management, including our principal executive officer and principal financial officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures, which are defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Management regularly assesses controls and did so most recently for our financial reporting as of December 31, 2023. This assessment was based on criteria for effective internal control over financial reporting described in the Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission. Based on this assessment, management concluded that our disclosure controls and procedures were not effective as of December 31, 2023 due to the material weaknesses that were previously reported in our Annual Report on Form 10-K for the year ended September 30, 2023 filed with the SEC on July 12, 2024, that have not yet been remediated. Management’s plan to remediate these material weaknesses is described in detail in such Annual Report on Form 10-K for the year ended September 30, 2023.

In light of the material weakness, we performed additional analyses and procedures in order to conclude that our condensed consolidated financial statements for the quarter ended December 31, 2023 included in this Quarterly Report on Form 10-Q were fairly stated in accordance with US GAAP. Accordingly, management believes that despite our material weakness, our condensed consolidated financial statements for the quarter ended December 31, 2023 are fairly stated, in all material respects, in accordance with US GAAP.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the most recently completed fiscal quarter that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.