F-1/A

As filed with the Securities and Exchange Commission on November 7, 2022

Registration Statement No. 333-266897 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

AMENDMENT NO. 4
TO

FORM F-1

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

KWESST MICRO SYSTEMS INC.

(Exact name of registrant as specified in its charter)

British Columbia	3080	98-1650180
(State or other jurisdiction of incorporation or organization)	(Primary Standard Industrial Classification Code Number)	(I.R.S. Employer Identification No.)

155 Terence Matthews Crescent,
Unit #1, Ottawa, Ontario, K2M 2A8
(613) 241-1849
(Address, including zip code and telephone number, including area code, of registrant's principal executive offices)

C T Corporation System

1015 15th Street N.W., Suite 1000

Washington, DC 20005

(202) 572-3133

(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies to:
Richard Raymer Joshua Pleitz Dorsey & Whitney LLP 161 Bay Street, Unit #4310 Toronto, ON M5J 2S1, Canada (416) 367-7370	Frank Mariage Fasken Martineau DuMoulin LLP 800 Rue du Square-Victoria Bureau 3500 Montréal, QC H4Z 1E9, Canada (514) 397-7400	Rob Condon Dentons US LLP 1221 Avenue of the  Americas New York, NY 10020 (212) 768-6700

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [X]

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [   ]

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [   ]

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [   ]

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act.

Emerging growth company [X]

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.† [   ]

† The term "new or revised financial accounting standard" refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this Registration Statement shall become effective on such date as the United States Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

__________________

The information contained in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION DATED NOVEMBER 7, 2022

Up to 2,323,232 Common Units, Each Consisting of a Common Share and a Warrant to Purchase One Common Share

Up to 2,323,232 Pre-funded Units, Each Consisting of a Pre-funded Warrant to Purchase One Common Share and a Warrant to Purchase One Common Share

KWESST Micro Systems Inc.

This is the initial public offering (“IPO”) of securities of KWESST Micro Systems Inc., a British Columbia corporation (the “Company”), in the United States, consisting of up to 2,323,232 common units (each a “Common Unit”). Each Common Unit consists of one common share, no par value per share (a “Common Share”), and one warrant (each a “Warrant”), in a firm commitment underwritten offering at an assumed public offering price of USD$4.95 per Common Unit. We have estimated the offering price range for the IPO between USD$4.71 and USD$5.21 per Common Unit and the assumed offering price is near the midpoint of this range. Each Warrant will entitle the holder to purchase one Common Share at an exercise price of USD$    , equal to 125% of the public offering price of one Common Unit, and expire five years from date of issuance.

A holder will not have the right to exercise any portion of a Warrant if the holder (together with its affiliates) would beneficially own in excess of 4.99% (or, at the election of the holder prior to issuance, 9.99%) of the number of Common Shares outstanding immediately after giving effect to the exercise, as such percentage ownership is determined in accordance with the terms of the Warrants (the "Warrant Exercise Limitation"). However, any holder may increase or decrease such percentage to any other percentage not in excess of 9.99% upon at least 61 days' prior notice from the holder to us.

We are also offering to those purchasers, if any, whose purchase of Common Units in this offering would otherwise result in the purchaser, together with its affiliates and certain related parties, beneficially owning more than 4.99% (or, at the election of the purchaser, 9.99%) of our outstanding Common Shares immediately following the consummation of this offering, the opportunity to purchase, if the purchaser so chooses, pre-funded units (each a “Pre-funded Unit”) in lieu of Common Units.  We are offering a maximum of 2,323,232 Pre-funded Units.  Each Pre-funded Unit will consist of one pre-funded warrant to purchase one Common Share at an exercise price of USD$0.01 per share (each a “Pre-funded Warrant”) and one Warrant.  The purchase price of each Pre-funded Unit is equal to the price per Common Unit being sold to the public in this offering, minus USD$0.01. The Pre-funded Warrants will be immediately exercisable and may be exercised at any time and are subject to the Warrant Exercise Limitation. Neither Company insiders nor Company affiliates have indicated an intention to purchase Pre-funded Units.

For each Pre-funded Unit we sell, the number of Common Units we are offering will be decreased on a one-for-one basis up to 2,323,232. Common Units and Pre-funded Units will not be certificated.  The Common Shares included in the Common Units or Pre-funded Units, as the case may be, and the Warrants included in the Common Units or the Pre-funded Units, can only be purchased together in this offering, but the securities contained in the Common Units and Pre-funded Units are immediately separable and will be issued separately.

The offering also includes the Common Shares issuable from time to time upon exercise of the Pre-funded Warrants and Warrants.

Although this is our IPO for securities in the United States, our Common Shares are listed for trading on the TSX Venture Exchange (the “TSXV”) under the trading stock symbol “KWE.V”, quoted on the OTCQB® Venture Market (the “OTCQB”) under the stock symbol of “KWEMF”, and listed on the Frankfurt Stock Exchange under the stock symbol of “62U”. We have applied for listing of the Common Shares and Warrants being offered on the Nasdaq Capital Market (the “Nasdaq”) under the symbol “KWE” and “KWESW”, respectively (the “Up-Listing”). No assurance can be given that our application will be approved. In order to meet Nasdaq’s initial listing criteria, all 2,323,232 Common Units being offered in this offering as well as all 606,060 Canadian Units being offered in the Canadian Offering will need to be sold. It is also a condition precedent to the underwriter’s obligation to purchase the securities being offered in this offering, and a condition precedent to the Canadian Underwriter’s obligation to purchase the securities being offered in the Canadian Offering, that Nasdaq approve the listing of our Common Shares and Warrants. Accordingly, if Nasdaq does not approve the listing of our Common Shares and Warrants, we will not and cannot proceed with this offering. There is no established trading market for the Pre-funded Warrants. We do not expect a market for such securities to develop. In addition, we do not intend to apply for the listing of the Common Units, Pre-funded Units or Pre-funded Warrants on any national securities exchange or other trading market. Without an active trading market, the liquidity of the Pre-funded Warrants will be limited

Concurrent with the IPO, we will offer units in Canada for aggregate gross proceeds of USD$3,000,000 on a firm commitment underwritten basis (the "Canadian Offering") led by PI Financial Corp. (the "Canadian Underwriter"). Each unit offered in Canada (each, a "Canadian Unit") will consist of one Common Share and one warrant to purchase one Common Shares (each, a "Canadian Warrant"). Each Canadian Unit will be sold in Canada at the public offering price of the Common Units in the IPO (the "Offering Price"). The Canadian Warrants being sold in the Canadian Offering will be issued in electronic book-entry form and governed by a warrant indenture by and between us and TSX Trust Company, as warrant agent. Each Canadian Warrant will entitle the holder to purchase one Common Share at an exercise price of USD$    , equal to 125% of the Offering Price, and expire five years from date of issuance.  The Canadian Warrants will not be listed on any exchange or market place. The securities offered in the Canadian Offering are not being offered by this Prospectus and will not be registered under the United States Securities Act of 1933, as amended (the "Securities Act") or the securities laws of any state of the United States. The Canadian Offering will be conducted in each of the provinces of Canada, except Québec, pursuant to the exclusion from the registration requirements of the Securities Act afforded by Rule 903 of Regulation S under the Securities Act. Closing of the Canadian Offering is conditional on the closing of the IPO. There is no assurance that the Canadian Offering will close or that we will receive gross proceeds of USD$3,000,000 from the Canadian Offering.

Except as otherwise indicated, information in this Prospectus, other than as set forth in our financial statements and the notes thereto, reflects a one for seventy (1-for-70) reverse stock split of our Common Shares, which we refer to as the “Reverse Split,”  which became effective on October 28, 2022, following receipt of TSXV regulatory and shareholder approval (greater than 50%  by written shareholder consent).

On November 3, 2022, the closing price for our Common Shares on the OTCQB was USD$5.68. We have assumed a public offering price of USD$4.95 per Common Unit, approximately the midpoint of the estimated price range for this offering. The actual public offering price per Common Unit and Pre-funded Unit, as the case may be, will not be determined by any particular formula but will rather be determined through negotiations between us and the underwriter at the time of pricing. Therefore, the assumed public offering price used through this Prospectus may not be indicative of the final offering price.

We are an “emerging growth company” and a “foreign private issuer” as defined under United States federal securities laws and may elect to comply with reduced public company reporting requirements. Please read Implications of Being an Emerging Growth Company and Foreign Private Issuer Status beginning on page 9 of this Prospectus for more information.

Investing in our securities involves a high degree of risk, including the risk of losing your entire investment. See Risk Factors beginning on page 19 to read about factors you should consider before buying our securities.

Neither the United States Securities and Exchange Commission nor any state securities commission nor any other regulatory body has approved or disapproved of these securities or determined if this Prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

	Per Common Unit	Per Pre-funded Unit	Total
Public offering price
Underwriting discounts and commissions(1)
Proceeds, before expenses, to us(2)

⁽¹⁾ We have also agreed to issue warrants to purchase up to 116,162 Common Shares to the underwriter (the “Underwriter Warrants”) and to reimburse the underwriter for certain expenses. This table depicts broker-dealer commissions of 7.5% of the gross offering proceeds. Underwriting discounts and commissions do not include a non-accountable expense allowance equal to 1% of the public offering price payable to the underwriter. See Underwriting on page 100 for additional disclosure regarding underwriting discounts and commissions, overallotments, and reimbursement of expenses.

This offering is being conducted on a firm commitment basis. The underwriter is obligated to take and purchase all of the Common Units and Pre-funded Units offered under this Prospectus if any such securities are taken.

We have granted a 45-day option to the underwriter, exercisable one or more times in whole or in part, to purchase up to an additional 348,484 Common Shares, representing 15% of the Common Shares sold in the IPO, and/or up to 348,484 Pre-funded Warrants, representing 15% of the Pre-funded Warrants sold in the IPO, and/or up to 348,484 Warrants, representing 15% of the Warrants sold in the IPO, in each case, solely to cover over-allotments, if any (the “Over-Allotment Option”). The Underwriter will not receive commissions or discounts for the exercise of the Over-Allotment Option with respect to Warrants.

If the Over-Allotment Option is exercised solely in full for Common Shares or Pre-Funded Warrants, we will receive incremental proceeds of approximately USD$1,595,621, after the underwriting discount of 7.5%, but before other expenses, and if the Over-Allotment Option is exercised solely in full for Warrants, will receive total gross proceeds of approximately USD$3.48.

The underwriter expects to deliver the securities to the investors on or about      , 2022.

ThinkEquity

The date of this Prospectus is      , 2022.

 

 

TABLE OF CONTENTS

ABOUT THIS PROSPECTUS	1
PROSPECTUS SUMMARY	3
THE OFFERING	10
NON-IFRS FINANCIAL MEASURES	13
SUMMARY FINANCIAL DATA	14
RISK FACTORS	16
FORWARD-LOOKING STATEMENTS	36
CAPITALIZATION AND INDEBTEDNESS	37
USE OF PROCEEDS	38
INFORMATION ON THE COMPANY	39
OPERATING AND FINANCIAL REVIEW AND PROSPECTS	61
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES	81
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS	94
FINANCIAL INFORMATION	96
MARKET FOR OUR COMMON SHARES	97
DILUTION	97
SHARES ELIGIBLE FOR FUTURE SALE	99
UNDERWRITING	100
DESCRIPTION OF SECURITIES	107
ADDITIONAL INFORMATION	111
MATERIAL CONTRACTS	114
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS	115
MATERIAL CANADIAN FEDERAL INCOME TAX CONSIDERATIONS	123
LEGAL MATTERS	124
EXPERTS	124
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	125
FINANCIAL STATEMENTS	125
CHANGE IN COMPANY'S CERTIFYING ACCOUNTANT	125
EXPENSES OF THIS OFFERING	126
WHERE YOU CAN FIND MORE INFORMATION	127
INDEX TO FINANCIAL STATEMENTS	128

ABOUT THIS PROSPECTUS

This Prospectus is part of a registration statement on Form F-1 that we filed with the United States Securities and Exchange Commission (the "SEC"). You should read this Prospectus and the related registration statement carefully. This Prospectus and registration statement contain important information you should consider when making your investment decision.

You should rely only on the information that we have provided in this Prospectus and any applicable prospectus supplement. We have not authorized anyone to provide you with different information. No dealer, salesperson or other person is authorized to give any information or to represent anything not contained in this Prospectus and any applicable prospectus supplement. You must not rely on any unauthorized information or representation. This Prospectus is an offer to sell only the securities offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. You should assume that the information in this Prospectus and any applicable prospectus supplement is accurate only as of the date on the front of the document, regardless of the time of delivery of this Prospectus, any applicable prospectus supplement, or any sale of a security.

Except as otherwise indicated, references in this Prospectus to "KWESST," "Company," "we," "us" and "our"  refer to KWEESST Micro Systems Inc. and its consolidated subsidiaries.

Enforceability of Civil Liabilities

We are incorporated under the laws of British Columbia. Some of our directors and officers, and the experts named in this Prospectus, are residents of Canada or otherwise reside outside of the United States, and all or a substantial portion of their assets, and all or a substantial portion of our assets, are located outside of the United States. We have appointed an agent for service of process in the United States, but it may be difficult for shareholders who reside in the United States to effect service within the United States upon those directors, officers and experts who are not residents of the United States. It may also be difficult for shareholders who reside in the United States to realize in the United States upon judgments of courts of the United States predicated upon our civil liability and the civil liability of our directors, officers and experts under the United States federal securities laws. Furthermore, because substantially all of our assets and substantially all of our directors and officers are located outside the United States, any judgment obtained in the United States against us or any of our directors and officers may not be collectible within the United States. There can be no assurance that United States investors will be able to enforce against us, members of our Board of Directors, officers or certain experts named herein who are residents of Canada or other countries outside the United States, any judgments in civil and commercial matters, including judgments under the federal securities laws.

Market, Industry and Other Data

This Prospectus contains estimates, projections and other information concerning our industry, our business, and the markets for our products. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties, and actual events or circumstances may differ materially from events and circumstances that are assumed in this information. Unless otherwise expressly stated, we obtained this industry, business, market and other data from our own internal estimates and research as well as from reports, research surveys, studies and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data, and similar sources.

In addition, assumptions and estimates of our and our industry's future performance are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in Risk Factors. These and other factors could cause our future performance to differ materially from our assumptions and estimates. See Forward-Looking Statements.

Trademarks

We own or have rights to various trademarks, service marks and trade names that we use in connection with the operation of our business. This Prospectus also contains additional trademarks, trade names and service marks belonging to other companies. Solely for convenience, trademarks, trade names and service marks referred to in this Prospectus may appear without the ®, ™ or SM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the right of the applicable licensor to these trademarks, trade names and service marks. We do not intend our use or display of other parties' trademarks, trade names or service marks to imply, and such use or display should not be construed to imply, a relationship with, or endorsement or sponsorship of us by, these other parties.

1

Financial Information and Currency

Our financial statements appearing in this Prospectus are prepared in Canadian dollars and in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB"), as described in Note 2 to the consolidated financial statements for the three and nine months ended June 30, 2022, the fiscal year ended September 30, 2021, the nine months ended September 30, 2020, and the year ended December 31, 2019. In September 2020, we changed our fiscal year from December 31^st to September 30^th.

Unless otherwise indicated, all references in this Prospectus to "dollars" or "CAD" or "$" are to Canadian dollars and all references to "USD" or "USD$" are to United States dollars.

Exchange Rates

The following tables set forth the annual average exchange rates for the year ended September 30, 2021, nine months ended September 30, 2020, the year ended December 31, 2019, and the monthly average exchange rates for each month during the previous twelve months, as supplied by the Bank of Canada. These exchange rates are expressed as one United States dollar converted into Canadian dollars.

Period	Average
Year Ended September 30, 2021	1.2644
Nine Months Ended September 30, 2020	1.3539
Year Ended December 31, 2019	1.3268

Month Ended	Average
September 30, 2022	1.3319
August 31, 2022	1.2922
July 31, 2022	1.2942
June 30, 2022	1.2814
May 31, 2022	1.2852
April 30, 2022	1.2628
March 31, 2022	1.2658
February 28, 2022	1.2716
January 31, 2022	1.2616
December 31, 2021	1.2794
November 30, 2021	1.2570
October 31, 2021	1.2437

The daily average exchange rate on November 3, 2022 as reported by the Bank of Canada for the conversion of USD into CAD was USD$1.00 equals CAD$1.3749.

2

PROSPECTUS SUMMARY

This summary highlights certain information contained elsewhere in this Prospectus. This summary does not contain all of the information that may be important to you. You should read and carefully consider the following summary together with the entire Prospectus, including the sections of this Prospectus entitled "Risk Factors" and "Operating and Financial Review and Prospects" and our consolidated financial statements and the related notes included elsewhere in this Prospectus, before deciding to invest in our securities.

Overview of the Company

KWESST Micro Systems Inc. develops and commercializes next-generation technology solutions that deliver a tactical advantage for military, public safety agencies and personal defense markets.  Our core mission is to protect and save lives.

We focus on three niche market segments as follows:

Non-Lethal

Our goal is to provide professionals and consumers with reliable and safer, non-lethal alternatives to the use of firearms.  Our products are designed to offer our customers effective solutions for personal, family and community protection that do not require the use of lethal force, and are intended for both the consumer and security professional markets.

In the consumer market, our products are designed to provide civilians who face potential threats from would-be assailants with an effective, non-lethal tool to deter would-be assailants and to escape harm's way.

In the professional market, our products are designed to provide domestic and international law enforcement agencies, corrections and custodial officers, private security professionals, private investigators and other professional security users with a reliable, non-lethal option to address threats and resolve conflicts without the need to resort to lethal force.

Our non-lethal product suite includes the following:

• PARA OPS, our innovative, patent-pending cartridge-based firing platform system, intended to provide more reliable non-lethal choices (single-shot and multi-shot) for consumers and law enforcement agencies; and
• A line of projectiles that are fired by PARA OPS devices, including solid slug (kinetic), inert color powder, and irritant pepper powder.
• ARWEN less-lethal launchers and ammunition for law enforcement agencies, used primarily for riot control and police tactical teams during high-risk arrests against potentially armed or violent persons.  ARWEN products have been in the marketplace for over 30 years.

The stage of development for our non-lethal product suite is as follows:

• PARA OPS: We have finalized the development of our single-shot PARA OPS device and we are currently in the low-rate initial production ("LRIP") to provide samples to potential customers and strategic partners. We expect to finalize our sales, marketing and distribution plan and begin the commercialization phase during our first quarter ending December 31, 2022 of fiscal year 2023 (i.e., October 1, 2022 to September 30, 2023) ("Fiscal 2023"). by initially targeting law enforcement agencies in which we are currently selling the ARWEN product line.  We are in the prototype phase for the multi-shot PARA OPS device, which we expect to complete and begin LRIP during Q1 Fiscal 2023.

• ARWEN: Both our ARWEN ACE (single-shot launcher) and ARWEN 37 (multi-shot launcher) are in full production, along with the related ammunition.  Our current sales and marketing efforts are primarily through tradeshows in the United States and Canada, pro bono training and direct sales to our existing law enforcement agency customers.

For further details on our non-lethal products, refer to Business Overview - Principal Products and Services. 

3

Digitization

We offer proprietary next-generation real-time situational awareness solutions for both the military and civilian markets. In the military market, our signature proprietary product, Tactical and Situational Control System ("TASCS"), offers an app that networks soldiers on the ground with each other through their smart devices so they can receive and share situational awareness information from any source including drones.  Further, we extend the TASCS app to "Joint Fires" applications (Joint Fires is a common terminology used in military for fires produced during the employment of forces from two or more components in a coordinated action toward a common objective) on indirect fire weapons like mortars, grenade launchers, heavy machine guns, rocket launchers, artillery and more. Effectively, we convert these "dumb" legacy weapon systems to "smart" precision weapon systems without any modification to the weapon or ammunition.

After successfully developing digital technologies for tactical military applications which provide real-time exchange of situational awareness, navigation, imagery, and operational information for soldiers on the ground, we became aware of opportunities to apply these digitization solutions to the public safety market. These solutions solve critical challenges for law enforcement, fire, emergency response, search and rescue, and natural disaster management, all of whom require networked situational awareness to understand, decide, and act faster and more effectively in response to a critical incident. When responders are facing a public emergency, they need information quickly. Whether it is a wildfire, active shooter scenario or a natural disaster, they need to know what they are walking into and where their resources are located. They also need to communicate and collaborate in real-time - across teams and information sources and often across departments.

We entered the civilian public safety market by launching our Critical Incident Management System ("CIMS") for enhanced public safety. Our CIMS solution integrates emergency operations, incident command post, incident commanders, and all responders whether mobile or dismounted. Our CIMS architecture is a native cloud-based Microsoft environment (MS Azure) integrated with the Team Awareness Kit ("TAK"). This provides key stakeholders with seamless fusion and sharing of crucial real-time position location, imagery, and time-sensitive emergency services data and information for effective and coordinated delivery of emergency services, including rescue, fire suppression, emergency medical care, law enforcement, and other forms of hazard control and mitigation.

The stage of development for our digitization products and services is as follows:

• TASCS Indirect Fire Modules System ("TASCS IFM"): We have completed the development for TASCS IFM for the 81mm mortar system and have conducted extensive user testing with the United States military in the past year.  We are also marketing this product to the Canadian forces and expect to conduct trials over the next twelve months. At this time, we do not expect further development unless funded by the military customer.  We will proceed to production only upon receiving a customer order.

• CIMS: Leveraging from our TAK integration experience with military customers, we are currently offering CIMS services to the public safety market.  In July 2022, we won our first contract with CounterCrisis Technology Inc. to co-implement a national Ground Search and Rescue Incident Command System for Public Safety Canada, with the Ontario Provincial Police as technical advisory stakeholder for this project.

Sales and marketing efforts for our digitization products is primarily through tradeshows and direct sales to military and public safety markets. Further details on our digitization products, refer to Business Overview - Principal Products and Services. 

4

Counter-Threat

We offer proprietary next-generation counter-threat solutions to protect against hostile enemy lasers, electronic detection and drones.  Our patented Phantom product is a miniaturized electronic warfare device with the ability to emulate the electronic communications of North Atlantic Treaty Organization ("NATO") countries to spoof adversaries as to the location of NATO forces.  Due to its small size, it can be easily deployed by soldiers at the tactical level or by drones in an area of operation, or mounted on light tactical vehicles. Our Battlefield Laser Detection System ("BLDS") product suite specifically addresses a current NATO need to protect against laser threats: lasers used to "paint" or "lase" ground personnel to target them for attack, or weaponized lasers intended to cause direct injury to personnel from a high-energy laser beam itself.  With our latest product under development, referred to as GhostNet, we believe it will provide an effective solution to counter-measure against hostile drones including loitering munitions that can hover for hours waiting for a designed target.  Military and Homeland Security agencies are seeking additional options of stopping drones kinetically but without collateral damage.

The stage of development for our counter-threat product suite is as follows:

• BLDS: We have completed the operational prototype development of our vehicle and squad laser detection product suite.  We are currently conducting sensitivity and environmental testing in preparation for customer orders at which stage we will then move the operational prototypes to production. 

• Phantom: We have completed the development of Phantom Electromagnetic Spectrum Operations ("EMSO") operational prototypes. We have tested, and are currently undergoing testing, EMSO with the United States military.  This may lead to further development to be funded by the military customer, upon receiving their specific requirements.  We will proceed to production only upon receiving a customer order.

• GhostNet: We are currently in the concept and designing phase. 

Sales and marketing efforts for our counter-threat products are primarily through tradeshows and direct sales to military. Further details on our counter-threat products, refer to Business Overview - Principal Products and Services. 

Our Market Opportunity

Non-Lethal

According to Allied Market Research: Non-Lethal Market, May 2021, the global non-lethal weapons market was approximately USD$7.4 billion in 2020 and is projected to reach USD$12.5 billion in 2028 (a 7.4% compound annual growth rate). Today, competitors are offering either high-energy cartridge systems that can be lethal (e.g. Taser) or air-based devices (e.g. Byrna ® HD brand) that are often unreliable and high maintenance based on our Executive Chairman's former experience with a non-lethal company in the United States. Our PARA OPS devices provide a unique market solution addressing these weaknesses.  Our devices are based on a low-energy cartridge system with projectile velocity (kinetic energy) well below the lethal threshold, providing a reliable, low-maintenance device for consumers and law enforcement agencies.  Based on the above global non-lethal market size, even if we win 1% global market share this represents a revenue opportunity of over USD$74 million per annum recurring.  We plan to initially focus our sales effort in the United States in the law enforcement market via distributors, an e-commerce platform and approved Federal Firearms License ("FFL") distributors.

In December 2021, we expanded our non-lethal business with the acquisition of Police Ordinance Company Inc. an Ontario (Canada) corporation ("Police Ordnance"), the owner of the ARWEN launchers sold worldwide to law enforcement agencies. A key objective of our acquisition of ARWEN was to secure a ready channel to a base of prospective law enforcement customers for PARA OPS.  In addition, the preview of PARA OPS products at the 2022 ShotSHOW in January 2022, and other events and discussions since then, elicited enquiries from various law enforcement agencies. During the quarter ended September 30, 2022, we began LRIP of the PARA OPS single shot product and we plan to contact these law enforcement agencies and others to arrange demonstrations for feedback before commencing full production.

As well, PARA OPS has been introduced and demonstrated to influential former police officers including Daniel V. Garcia (former Chief of Police, Phoenix AZ and Deputy Chief of Police, Dallas TX), and Brandon Tatum (former Tucson police officer), who have been and will be advocating PARA OPS with the law enforcement community, based on their experience with less-lethal products in service with their former agencies.   

5

Digitization

On the military front, a top priority for the U.S. and its allies, is to modernize the soldier on the ground with a digital networked common operating picture to reduce combat casualties and enable greater operational effectiveness. Our proprietary TASCS solution specifically addresses this market need. In fiscal year 2022, which ended on September 30, 2022 (“Fiscal 2022"), we successfully completed the integration of our TASCS IFM with an 81 mm mortar system for a United States military customer. Additional live demonstrations took place this summer in response to customer requests, which we expect will then lead to customer acceptance and future orders.

Further, in November 2021, we entered into a master agreement with General Dynamics Mission System ("GDMS") (the "Master Agreement") to support the development of digitization solutions for the Canadian military in which we will assist GDMS in the development of an initial prototype system that networks soldiers with information from various sources in real time, including the location of friendly forces and adversaries, and facilitates more effective, coordinated fire. We have delivered timely on the first phase of the project in June 2022, and we expect to begin the second phase in July 2022.  Management has estimated the total contract value at approximately $1 million over 12 months from the date of the Master Agreement.

Additionally, public safety agencies across the United States and abroad are seeking to implement digital solutions that can improve responder safety and incident management.  According to Accenture, digital transformation presents one of the biggest challenges for public safety agencies. Globally, the public safety and security market was USD$435 billion in 2021 and is expected to reach USD$868 billion by 2028, growing at a CAGR of 10.4%, according to Fortune Business Insights.

Counter-Threats

In today's warfare, there is a greater need to provide innovative counter-threat solutions at the tactical edge (i.e. the frontline operations at the level of soldiers and armored vehicles). Our Phantom and BLDS are two product lines that are focused on addressing this need to save soldier lives. According to Fortune Business Insights: Electronic Warfare, June 2021, the global electronic warfare market size is projected to reach USD$33.5 billion by 2028, a 5.24% CAGR from 2021. 

The addressable market for miniaturized tactical electronic warfare devices such as our Phantom is new and therefore undefined.  In Fiscal 2022, General Dynamics Land Systems ("GDLS") selected our Phantom system to be incorporated into their next-generation armored vehicle for a bid proposal to a United States military customer for up to 500 armored vehicles, a requirement for the bid proposal.  While GDLS is currently the incumbent, there is no assurance that it will win this bid; however, if they do, we are very well positioned to win a large order for our Phantom.  The U.S. government plans to announce the winner in 2023. Further, in Q4 of fiscal year 2021 ("Fiscal 2021"), we partnered with Alare Technologies ("Alare") in the United States, a system design development engineering firm, to assist us with the development of our GhostNet to address the emerging market demand for counter-loitering munitions with no collateral damage.

6

Competitive Strengths

We believe the following strengths distinguish us from our competitors and position us well to take a leadership position in the non-lethal market and significant success in the military and security forces market:

• Experienced senior management: Our Executive Chairman has over 30 years of experience in the non-lethal market, including as founder of SimunitionTM, the world-leading non-lethal combat training munitions system, and as the former Chairman and CEO of United Tactical Systems based in the United States (owner of the non-lethal PepperBall brand).  Further, he, along with our President and CEO and other members of senior management have collectively over 100 years' experience in the defense industry while serving in the military and working for defense contractors.

• Diversified business model: With a mix of anticipated non-lethal product sales (shorter sales cycle than the military market) and large military contracts, we offer a more diversified business platform than competitors in either the non-lethal or defense market. 

• Recurring business: While military contracts have longer sales cycle, once awarded, they tend to be for multiple years, providing a reliable source of recurring business.  Further, within our non-lethal business line, we will be able to sell to the same customer projectiles / ammunitions over the lifetime of their product, providing a good source of recurring revenue.

• Non-lethal cartridge-based system: Our patent-pending, proprietary cartridge-based PARA OPS system is innovative and could disrupt the non-lethal market because it specifically addresses the shortfalls from "air-powered" devices and dangerous high-energy cartridge systems currently offered in the marketplace.

• Teaming with OEMs for military contracts: By teaming with global defense Original Equipment Manufacturers ("OEMs") as we have done in Fiscal 2022 with General Dynamics Mission Systems ("GDMS") and GDLS for certain product lines, we are in a better position to indirectly win significant multi-year contracts.  OEMs are effectively integrators who look for technology partners like us to fill their technology gaps when bidding for a military contract.

• Teaming with OEMs for non-lethal applications: With our proprietary cartridge-based firing platform for non-lethal devices, we have an opportunity to partner with competitors for "white-labeling" our technology to complement their air-based product suites.

• Market synergies in non-lethal: With the recent acquisition of Police Ordnance in December 2021, we have immediate access to its law enforcement sales channel to cross-sell PARA OPS.

• Outsourced scalable model: While we continue to develop and research innovative technologies internally, we will outsource our production to a ready supply chain of proven vendors to provide scalability without taking any significant capital expenditure risks.

Growth Strategies

We believe the following are the key pillars for our growth strategy:

• Commercialization of PARA OPS: Over the next three to six months, we plan to offer our PARA OPS devices (single-shot and multi-shot) to both the professional and consumers markets with an initial focus in the United States. This will provide a new source of revenue to us including recurring revenue from the sale of projectiles. We expect to drive most of our PARA OPS revenue through our upcoming e-commerce website and to a lesser extent from licensed distributors in the United States. Over time, we expect to expand to other international markets.

• OEM partnerships for revenue growth: In addition to GDMS and GDLS, we are in discussions with other potential OEMs for strategic partnerships to accelerate our go-to-market for our Digitization and Counter-Threat product solutions for the military and security markets.

• Law enforcement penetration: We see an attractive opportunity to increase ARWEN market penetration with law enforcement agencies internationally with increased marketing spend, coupled with the cross-selling opportunity for our non-lethal PARA OPS devices.

• Strategic acquisitions: We have successfully integrated two assets and one business acquisition over the last two years.  We expect to continue to acquire complementary acquisitions that are a strategic fit and attractively priced to accelerate our growth plans.

• War in Ukraine: We have observed significant military budget spending increases by various NATO countries in response to the current war in Ukraine.  We believe this positions us well to receive new orders for our Digitization and Counter-Threat products during Fiscal 2023.

7

Risk Factors

Our business is subject to a number of risks which you should be aware before making an investment decision. You should carefully consider all of the information set forth in this Prospectus and, in particular, should evaluate the specific factors set forth under "Risk Factors" in deciding whether to invest in our securities. These risks include but are not limited to the following:

•You will experience immediate and substantial dilution as a result of this offering and may experience additional dilution in the future.

•The liquidity of our Common Shares may be decreased as a result of the Reverse Split.

•Management will have broad discretion as to the use of the proceeds from this offering, and we may not use the proceeds effectively.

•The market price of our Common Shares may be adversely impacted by the release of certain of our securities that are currently escrowed if the holders immediately trade these securities upon release.

•We have no operating experience as a publicly traded company in the United States.

•We will incur significantly increased costs and devote substantial management time as a result of operating as a United States public company.

•Global inflationary pressure may result in lower gross margins on our future product sales if we are unable to pass on the related increase in cost to our customers through an increase in the price of our products.

•Due the current global supply chain challenges, we may incur higher costs or unavailability of components, materials, and accessories.

•This offering is contingent on the approval of our Nasdaq listing application to list our Common Shares and Warrants on the Nasdaq Capital Market and the sale of all 2,323,232 Common Units in this offering as well as all 606,060 Canadian Units being offered in the Canadian Offering.

•Our inability to comply with Nasdaq's continued listing requirements could result in our Common Shares and Warrants being delisted, which could affect the market price and liquidity of our securities and reduce our ability to raise capital.

•We are an "emerging growth company," and we cannot be certain if the reduced reporting requirements applicable to emerging growth companies will make our securities less attractive to investors.

•There can be no certainty that we will ever achieve or sustain profitability or positive cash flow from our operating activities.

•Our ability to generate substantial revenue growth, or to sustain any revenue growth that is achieved.

•COVID-19, global economic turmoil, and other regional economic conditions may present a wide range of potential issues or disruptions in our business and the business of third parties who we depend on or might depend in the future for materials and manufacturing.

•Reliance on third-party suppliers may create risks related to our potential inability to obtain an adequate supply of components or materials and reduced control over pricing and timing of delivery of components and materials.

•We will be reliant on information technology systems and may be subject to damaging cyber-attacks.

•Protecting and defending against intellectual property claims may have a material adverse effect on our business.

•Our business is subject to certain risks inherent in international business, many of which are beyond our control.

•Our directors, officers or members of management may have conflicts of interest and it may not be possible for foreign investors to enforce actions against us, and our directors and officers.

•Our insurance policies may be inadequate to fully protect us from material judgments and expenses.

•Our Common Shares may experience extreme stock price volatility unrelated to our actual or expected perating performance, financial condition or prospects, making it difficult for prospective investors to assess the rapidly changing value of our common shares.

•We are subject to extensive government regulation in the United States for our products and may not be able to comply with changes in government policies and legislation.

•Rapidly changing technology and evolving industry standards could result in product obsolescence or short product life cycles.

•If we are unable to satisfy the requirements of Sarbanes-Oxley Act of 2002, as amended ("Sarbanes-Oxley") or our internal controls over financial reporting are not effective, the reliability of our financial statements may be questioned.

•We may lose foreign private issuer status in the future, which could result in additional costs and expenses.

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Implications of Being an Emerging Growth Company

As a company with less than USD$1.235 billion in revenue for our last fiscal year, we qualify as an "emerging growth company" pursuant to the Jumpstart Our Business Startups Act of 2012, as amended (the "JOBS Act"). An emerging growth company may take advantage of specified reduced reporting and other requirements compared to those that are otherwise applicable generally to public companies. These provisions include:

• reduced executive compensation disclosure;

• exemptions from the requirement to hold a non-binding advisory vote on executive compensation, including golden parachute compensation; and

• an exemption from the auditor attestation requirement under Section 404 of Sarbanes-Oxley in the assessment of the emerging growth company's internal control over financial reporting.

We will remain an emerging growth company until the earliest of (a) the last day of the fiscal year during which we have total annual gross revenues of at least USD$1.235 billion; (b) the last day of our fiscal year following the fifth anniversary of the completion of this offering; (c) the date on which we have, during the preceding three-year period, issued more than USD$1.0 billion in non-convertible debt; or (d) the date on which we are deemed to be a "large accelerated filer" under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which would occur if the market value of our Common Shares that are held by non-affiliates exceeds USD$700 million. Once we cease to be an emerging growth company, we will not be entitled to the exemptions provided in the JOBS Act discussed above.

Foreign Private Issuer Status

We are a foreign private issuer within the meaning of the rules under the Exchange Act. As such, we are exempt from certain provisions applicable to United States domestic public companies. For example:

• we are not required to provide as many Exchange Act reports, or as frequently, as a domestic public company;

• for interim reporting, we are permitted to comply solely with our home country requirements, which may be less rigorous than the rules that apply to domestic public companies;

• we are not required to provide the same level of disclosure on certain issues, such as executive compensation;

• we are exempt from provisions of Regulation FD aimed at preventing issuers from making selective disclosures of material information;

• we are not required to comply with the sections of the Exchange Act regulating the solicitation of proxies, consents, or authorizations in respect of a security registered under the Exchange Act; and

• we are not required to comply with Section 16 of the Exchange Act requiring insiders to file public reports of their share ownership and trading activities and establishing insider liability for profits realized from any "short-swing" trading transaction.

Corporate Information

We are a corporation domiciled in Canada and were incorporated under the Business Corporations Act (British Columbia) (the "BCBCA") on November 28, 2017. Our registered and head office is located at 2900 - 550 Burrard Street, Vancouver, British Columbia V6C 0A3 and our principal place of business is located at 155 Terence Matthews Crescent, Unit #1, Ottawa, Ontario, Canada, K2M 2A8. Our internet site is https://www.kwesst.com; our telephone number is (613) 319-0537.

Our registered agent in the United States is C T Corporation System, located at 1015 15^th Street N.W., Suite 1000 and its telephone number is (202)572-3133.

9

THE OFFERING

Issuer	KWESST Micro Systems Inc.
Common Units offered by us	Up to 2,323,232 Common Units, each Common Unit consisting of one Common Share and one Warrant, with each Warrant exercisable for one Common Share. The Warrants offered as part of the Common Units are exercisable immediately, at an exercise price of USD$   , equal to 125% of the public offering price of one Common Unit, and expire five years from the date of issuance.  The securities contained in the Common Units are immediately separable and will be issued separately in this offering.   This Prospectus also relates to the offering of the Common Shares issuable upon exercise of the Warrants. A holder of Warrants will not have the right to exercise any portion of a Warrant if the holder (together with its affiliates) would beneficially own in excess of 4.99% (or, at the election of the holder prior to issuance, 9.99%) of the number of Common Shares outstanding immediately after giving effect to the exercise, as such percentage ownership is determined in accordance with the terms of the Warrants. However, any holder may increase or decrease such percentage to any other percentage not in excess of 9.99% upon at least 61 days' prior notice from the holder to us.
Pre-Funded Units offered by us	We are also offering to those purchasers, if any, whose purchase of Common Units in this offering would otherwise result in the purchaser, together with its affiliates and certain related parties, beneficially owning more than 4.99% (or, at the election of the purchaser, 9.99%) of our outstanding Common Shares immediately following the consummation of this offering, the opportunity to purchase, if the purchaser so chooses, Pre-funded Units in lieu of Common Units. Each Pre-funded Unit will consist of a Pre-funded Warrant to purchase one Common Share at an exercise price of USD$0.01, per share and one Warrant.  The purchase price of each Pre-funded Unit is equal to the price per Common Unit being sold to the public in this offering, minus USD$0.01. The Pre-funded Warrants will be immediately exercisable and may be exercised at any time. For each Pre-funded Unit we sell, the number of Common Units we are offering will be decreased on a one-for-one basis. Because we will issue one Warrant as part of each Common Unit or Pre-funded Unit, the number of Warrants sold in this offering will not change. The Pre-funded Warrants are subject to the Warrant Exercise Limitation.  This Prospectus also relates to the offering of the Common Shares issuable upon exercise of the Pre-funded Warrants. Neither Company insiders nor Company affiliates have indicated an intention to purchase Pre-funded Units.

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Underwriter's over-allotment option	We have granted a 45-day option to the underwriter, exercisable one or more times in whole or in part, to purchase up to an additional 348,484 Common Shares, representing 15% of the Common Shares sold in the IPO, and/or up to 348,484 Pre-funded Warrants, representing 15% of the Pre-funded Warrants sold in the IPO, and/or up to 348,484 Warrants, representing 15% of the Warrants sold in the IPO, in each case, solely to cover over-allotments, if any. The Over-Allotment Option purchase price to be paid per additional Common Share or Pre-funded Warrant by the underwriter shall be equal to the public offering price of one Common Unit or one Pre-funded Unit, as applicable less underwriting discount, and the purchase price to be paid per additional Warrant by the underwriter shall be USD$0.00001.
Common Shares to be outstanding after this offering(1)	3,102,037 Common Shares (or 3,450,521 Common Shares if the underwriter exercises its option to purchase additional Common Units in full). Including the Canadian Offering based on an assumed offering price of USD$4.95 per Canadian Unit, 3,708,097 Common Shares (or 4,056,581 Common Shares if the underwriter exercises its option to purchase additional Common Units in full).
Symbol and Listing	We have applied for listing of our Common Shares and Warrants on the Nasdaq Capital Market under the symbol “KWE” and “KWESW”, respectively. No assurance can be given that our application will be approved. In order to meet Nasdaq’s initial listing criteria, all 2,323,232 Common Units being offered in this offering as well as all 606,060 Canadian Units being offered in the Canadian Offering will need to be sold. It is also a condition precedent to the underwriter’s obligation to purchase the securities being offered in this offering, and a condition precedent to the Canadian Underwriter’s obligation to purchase the securities being offered in the Canadian Offering, that Nasdaq approve the listing of our Common Shares and Warrants. Accordingly, if Nasdaq does not approve the listing of our Common Shares and Warrants, we will not and cannot proceed with this offering. In addition, we do not intend to apply for the listing of the Common Units, Pre-funded Units or Pre-funded Warrants on any national securities exchange or other trading market. Without an active trading market, the liquidity of the Pre-funded Warrants will be limited. Our Common Shares are quoted on the OTCQB under the stock symbol of “KWEMF”, are listed on the TSXV under the stock symbol “KWE.V” and listed on the Frankfurt Stock Exchange under the symbol of “62U”.

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Use of proceeds	We expect to receive approximately USD$9.5 million in net proceeds from the sale of securities offered by us in this offering (approximately USD$11.1 million if the underwriter exercises its Over-Allotment Option in full), after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us of approximately USD$2.0 million, based on an assumed offering price of USD$4.95 per Common Unit and USD$4.94 per Pre-funded Unit. We expect to receive approximately USD$2.3 million in additional net proceeds from the sale of securities in the Canadian Offering, after deducting estimated underwriting discounts and commissions and estimated Canadian Offering expenses payable by us of approximately USD$0.7 million, based on an assumed offering price of USD$4.95 per Canadian Unit. We expect to receive approximately USD$11.8 million (approximately USD$13.4 million if the underwriter exercises its Over-Allotment Option in full) in combined net proceeds from this offering and the Canadian Offering, after deducting estimated underwriting discounts and commissions and estimated expenses payable by us in connection with this Offering and the Canadian Offering of approximately USD$2.7 million. If the Over-Allotment Option is exercised solely in full for Common Shares or Pre-Funded Warrants, we will receive total approximate gross proceeds of USD$1.6 million, after underwriting discount of 7.5% and if the Over-Allotment Option is exercised solely in full for Warrants, will receive total approximate gross proceeds of USD$3.48. We intend to use the net proceeds from this offering and the Canadian Offering for working capital (including commercial roll-out of PARA OPS in the United States), repayment of outstanding loans, and other general corporate purposes. We may also use of a portion of the net proceeds from this offering for acquisitions or strategic investments in complementary businesses or technologies.  We have not allocated specific amounts of net proceeds for any of these purposes. The proceeds from the Canadian Offering will be used principally to repay part or all of outstanding unsecured loans in the amount of CAD$2.0 million and USD$0.22 million. There is no assurance that the Canadian Offering will close or that we will receive gross proceeds of USD$3.0 million from the Canadian Offering. If the Canadian Offering does not close, USD$0.22 million of the net proceeds from this offering will be used to repay one of the two unsecured loans issued in August 2022.
Lock-up	Our directors, executive officers, and certain shareholders who own 5% or more of our outstanding Common Shares have agreed with the underwriter to not offer, issue, sell, contract to sell, encumber, grant any option for the sale of or otherwise dispose of any of our securities for a period of ninety (90) from the date of the offering. See Underwriting for additional information.
Risk Factors	Investing in our securities involves a high degree of risk. See Risk Factors in this Prospectus for a discussion of factors you should carefully consider before investing in our securities.

(1)The number of Common Shares shown above to be outstanding after this offering is based on 778,801 Common Shares outstanding as of  November 3, 2022 and excludes as of such date (USD$ equivalent is based on a conversion rate of $1.3749):

• warrants to purchase 191,673 Common Shares at a weighted average exercise price of $54.25 (USD$39.37) per share;

• 57,102 Common Shares issuable upon the exercise of outstanding but unexercised stock options to purchase Common Shares, under our Long-Term Performance Incentive Plan as approved by our shareholders on March 31, 2022 (“LTIP”) at a weighted average exercise price of $84.00 (USD$60.96) per share;

• 18,418 Common Shares issuable upon the conversion of 15,761 restricted share units (“RSUs”), and 2,657 share appreciation rights (“SARs”), under our LTIP;

• 837 Common Shares issuable upon the conversion of 837 agent option units at an exercise price of $87.50 (USD$63.50) per share, each unit comprise of one Common Share and one warrant exercisable at $122.50 (USD$88.90) per share;

• Up to 2,323,232 Common Shares issuable upon the exercise of the Pre-funded Warrants if Pre-funded Units are sold in lieu of Common Units;

• Up to 116,162 Common Shares issuable upon the exercise of the Underwriter Warrants;

• Up to 42,424 Common Shares issuable upon the exercise of the Canadian Compensation Options (as defined below); and

• Up to approximately 44,444 Common Shares upon the repayment of the Second Loan (as defined below) by way of issuance of Common Shares if we elect to make application for such issuance with the TSX Venture Exchange and if such application if approved.

Implementation of the Up-Listing will require us to take certain actions in order to comply with the Initial Listing Requirements under Nasdaq Rules 5505(a) and 5505(b)(1) including the Reverse Split of our Common Shares, which became effective on October 28, 2022, in order to meet the minimum bid price of USD$4.00 per share.

12

NON-IFRS FINANCIAL MEASURES

In this Prospectus, we have presented earnings before interest, taxes, depreciation and amortization ("EBITDA") and EBITDA that has been adjusted for the removal of one-time, irregular and nonrecurring items ("Adjusted EBITDA") to provide readers with a supplemental measure of our operating performance and thus highlight trends in our core business that may not otherwise be apparent when relying solely on IFRS financial measures. Management also uses non-IFRS measures, in addition to IFRS financial measures, to understand and compare operating results across accounting periods, for financial and operational decision making, for planning and forecasting purposes, and to evaluate our financial performance. We believe that these non-IFRS financial measures enable us to identify underlying trends in our business that could otherwise by hidden by the effect of certain expenses that we exclude in the calculations of the non-IFRS financial measures.

Accordingly, we believe that these non-IFRS financial measures reflect our ongoing business in a manner that allows for meaningful comparisons and analysis in the business and provides useful information to investors and securities analysts, and other interested parties in understanding and evaluating our operating results, enhancing their overall understanding of our past performance and future prospects.

We caution readers that these non-IFRS financial measures do not replace the presentation of our IFRS financial results and should only be used as a supplement to, not as a substitute for, our financial results presented in accordance with IFRS. There are limitations in the use of non-IFRS measures because they do not include all the expenses that must be included under IFRS as well as they involve the exercise of judgment concerning exclusions of items from the comparable non-IFRS financial measure. Furthermore, other peers may use other non-IFRS measures to evaluate their performance, or may calculate non-IFRS measures differently, all of which could reduce the usefulness of our non-IFRS financial measures as tools for comparison.

13

SUMMARY FINANCIAL DATA

The following tables provide a summary consolidated financial data and should be read in conjunction with our consolidated financial statements, the related notes and other financial information included elsewhere in this Prospectus and the section of this Prospectus entitled Operating and Financial Review and Prospects. We have derived the following selected financial information from our audited consolidated financial statements for the fiscal year ended December 31, 2019, the fiscal period ended September 30, 2020, the fiscal year ended September 30, 2021, and unaudited condensed consolidated interim financial statements for the three and nine months ended June 30, 2021 and 2022. As an early-stage company, our historical results will not be indicative of the results to be expected in the future, and the results for any interim period are not necessarily indicative expected in any full year.

($ in thousands, except per share)
Consolidated Statements of  Operations and Comprehensive Loss Data		Year ended December 31, 2019			Nine months ended September 30, 2020			Year ended September 30, 2021			Nine months ended June 30, 2021 (Unaudited)			Nine months ended June 30, 2022 (Unaudited)
REVENUE	$	509		$	862		$	1,276		$	1,115		$	466
Cost of sales		(85	)		(247	)		(799	)		(718	)		(405	)
Gross profit		424			614			477			397			60
Gross margin %		83%			71%			37%			36%			13%
Operating expenses		1,438			4,106			9,679			6,754			7,953
Operating loss		(1,014	)		(3,491	)		(9,203	)		(6,356	)		(7,892	)
NET LOSS		(1,147	)		(3,537	)		(9,315	)		(6,431	)		(8,133	)
Net finance costs		245			61			108			61			304
Depreciation		102			104			141			88			225
EBITDA LOSS (1)		(800	)		(3,372	)		(9,067	)		(6,282	)		(7,604	)
Non-cash M&A costs (2)		-			1,514			-			-			-
Stock-based compensation		-			283			2,463			1,399			1,876
Professional fees relating to U.S. financing		-			-			-			-			500
Gain on acquisition		-			-			-			-			(42	)
Fair value adjustments		(113	)		(29	)		-			-			-
Foreign exchange loss (gain)		1			14			4			14			(23	)
Loss on disposal		-			-			1			-			1
ADJUSTED EBITDA LOSS (1)		(912	)		(1,590	)		(6,599	)		(4,869	)		(5,292	)
Loss per Common Share, Basic and Diluted, as reported	$	0.07		$	0.11		$	0.21		$	0.15		$	0.16
Loss per Common Share, Basic and Diluted (3)	$	4.90		$	7.70		$	14.70		$	10.50		$	11.20

^{(1)EBITDA Loss and Adjusted EBITDA Loss are non-IFRS financial measures. These non-IFRS financial measures do not replace the presentation of our IFRS financial results and should only be used as a supplement to, not as a substitute for, our financial results presented in accordance with IFRS.}

^{(2)M&A means merger and acquisition.}

^{(3)After giving effect to the Reverse Split.}

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The following as adjusted consolidated statements of financial position as of June 30, 2022, gives effect to (i) the sale by us of 2,323,232 Common Units (assuming no sale of any Pre-funded Units) offered by us in this Prospectus (excluding the underwriter’s Over-Allotment Option), after deducting the estimated underwriting discounts and other offering expenses and (ii) the sale by us of 2,323,232 Common Units (assuming no sale of any Pre-funded Units) offered by us in this Prospectus (excluding the underwriter’s Over-Allotment Option), after deducting the estimated underwriting discounts and other offering expenses, and including the sale by us of 606,060 Canadian Units offered in the Canadian Offering (excluding the Canadian Underwriter’s Compensation Options), after deducting the estimated underwriting discounts and other Canadian Offering expenses. There is no assurance that the Canadian Offering will close or that we will receive gross proceeds of USD$3,000,000 from the Canadian offering.

(CAD$ in thousands)
Consolidated Statements of Financial Position Data		September 30, 2021			June 30, 2022 (Unaudited)			June 30, 2022 As adjusted for Pre-IPO transactions (1) (Unaudited)			June 30, 2022 As adjusted for the IPO, net of Loan Repayment (2) (Unaudited)			June 30, 2022 As adjusted for the IPO and Canadian Offering, net of Loan Repayments (3) (Unaudited)
Cash	$	2,688		$	190		$	993		$	13,109		$	13,396
Working capital		2,896			(3,094	)		(2,750	)		9,596			12,235
Total assets		8,718			6,522			7,326			19,442			20,329
Total liabilities		2,594			5,531			5,991			5,761			4,008
Accumulated deficit		(15,389	)		(23,522	)		(23,522	)		(23,579	)		(23,916	)
Total shareholders' equity	$	6,124		$	992		$	1,335		$	13,681		$	16,321

1)Includes CAD$344,000 as a result of Common Shares issued on July 14, 2022, in connection with the closing of a non-brokered private placement of 22,857 units (post-Reverse Split), net of $nil units offering costs.  Each unit comprised of one Common Share and one warrant. Additionally, it includes USD$400,000 or CAD$520,000 unsecured loans issued on August 29, 2022, net of CAD$80,869 debt offering costs.

2)If the Canadian Offering does not close, USD$220,000 of the net proceeds from this offering will be used to repay one of the two unsecured loans that was issued in August 2022 (see Material Contracts).

3)Includes the estimated net proceeds from the Canadian Offering after the anticipated repayment of certain outstanding loans after the closing of the Canadian Offering (see Use of Proceeds).  The accumulated deficit was also adjusted to reflect the immediate charge of the unamortized debt offering costs for loan repayments. There is no assurance that the Canadian Offering will close and that we will receive gross proceeds of USD$3,000,000 from the Canadian Offering.

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RISK FACTORS

There are a number of risks that may have a material and adverse impact on our future operating and financial performance and could cause our operating and financial performance to differ materially from the estimates described in our forward-looking statements. These include widespread risks associated with any form of business and specific risks associated with our business and our involvement in the defense technology industry.

This section describes risk factors identified as being potentially significant to us. In addition, other risks and uncertainties not discussed to date or not known to management could have material and adverse effects on the valuation of our securities, existing business activities, financial condition, results of operations, plans and prospects.

Risks Related to This Offering

You will experience immediate and substantial dilution as a result of this offering.

You will incur immediate and substantial dilution as a result of this offering. After giving effect to the assumed sale by us of 2,323,232 Common Units (2,929,292 Common Units when combined with the 606,060 Canadian Units offered in the Canadian Offering) at an assumed public offering price of USD$4.95 per Common Unit (assuming no sale of any Pre-funded Units in lieu of Common Units and with an estimated offering price range for the Common Units between USD$4.71 and USD$5.21), excluding the exercise of the underwriter’s Over-Allotment Option to purchase additional Common Shares, Warrants and Pre-funded Warrants, and after deducting underwriting discounts, commissions and estimated offering expenses payable by us, investors in this offering can expect an immediate dilution of USD$2.65 per Common Share and USD$2.48 per Common Share, when combined with the Canadian Offering (see Dilution).

In addition, you may experience further dilution (i) if the underwriter exercises its Over-Allotment Option to purchase additional Common Shares and/or Warrants and/or Pre-funded Warrants, (ii) upon the exercise of the Underwriter Warrants issued to the underwriter, (iii) upon the exercise of the Warrants included in the Common Units, (iv) upon the exercise of the Pre-Funded Warrants and/or Warrants included in the Pre-funded Units, if applicable, (v) upon the exercise of the Canadian Warrants included in the Canadian Units and/or (vi) upon the exercise of the Canadian Warrants included in the Canadian Units issued to the Canadian Underwriter in connection with the Canadian Compensation Options.

There is no assurance that the Canadian Offering will close or that we will receive gross proceeds of USD$3,000,000 from the Canadian Offering.

The liquidity of our Common Shares may be decreased as a result of the Reverse Split.

The liquidity of the shares of our Common Shares may be affected adversely by the Reverse Split given the reduced number of shares that are now outstanding, especially if the market price of our Common Shares does not increase as a result of the Reverse Split. In addition, the Reverse Split may increase the number of stockholders who own odd lots (less than 100 shares) of our Common Shares, creating the potential for such stockholders to experience an increase in the cost of selling their shares and greater difficulty effecting such sales.

Although we believe that a higher market price of our Common Shares may help generate greater or broader investor interest, there can be no assurance that our increased share price following the Reverse Split will actually attract new investors, including institutional investors. In addition, there can be no assurance that the market price of our Common Shares will satisfy the investing requirements of those investors. As a result, the trading liquidity of our Common Shares may not necessarily improve.

Management will have broad discretion as to the use of the proceeds from this offering, and may not use the proceeds effectively.

Our management will have broad discretion as to the use of the net proceeds from any offering by us and could use them for purposes other than those contemplated at the time of this offering. Accordingly, you will be relying on the judgment of our management with regard to the use of these net proceeds, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. It is possible that the proceeds will be invested in a way that does not yield a favorable, or any, return for our company.

We have no operating experience as a publicly traded company in the United States.

We have no operating experience as a publicly traded company in the United States. Although the individuals who now constitute our management team have experience managing a publicly-traded company, there is no assurance that the past experience of our management team will be sufficient to operate our company as a publicly traded company in the United States, including timely compliance with the disclosure requirements of the SEC. Following the completion of this offering, we will be required to develop and implement internal control systems and procedures in order to satisfy the periodic and current reporting requirements under applicable SEC regulations and comply with the Nasdaq listing standards. These requirements will place significant strain on our management team, infrastructure and other resources. In addition, our management team may not be able to successfully or efficiently manage our company as a United States public reporting company that is subject to significant regulatory oversight and reporting obligations.

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We will incur significantly increased costs and devote substantial management time as a result of operating as a United States public company.

As a United States public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company or as a Canadian public company. For example, we will be subject to the reporting requirements of the Exchange Act, and will be required to comply with the applicable requirements of Sarbanes-Oxley and the Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as rules and regulations subsequently implemented by the SEC and the including the establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. We expect that compliance with these requirements will increase our legal and financial compliance costs and will make some activities more time consuming and costly. In addition, we expect that management and other personnel will need to divert attention from operational and other business matters to devote substantial time to these public company requirements. In particular, we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404, which involve annual assessments of a company's internal controls over financial reporting. We plan to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge and may need to establish an internal audit function. Furthermore, we expect the premium for director & officer insurance will increase significantly due to a more litigious environment in the United States. At this time, we cannot reasonably predict or estimate the amount of additional costs that we may incur as a result of becoming a United States public company or the timing of such costs.

This offering is contingent on the approval of our Nasdaq listing application to list our Common Shares and Warrants on the Nasdaq Capital Market and the sale of all 2,323,232 Common Units in this offering as well as all 606,060 Canadian Units being offered in the Canadian Offering

In order to meet Nasdaq’s initial listing criteria, all 2,323,232 Common Units being offered in this offering as well as all 606,060 Canadian Units being offered in the Canadian Offering will need to be sold. It is also a condition precedent to the underwriter’s obligation to purchase the securities being offered in this offering, and a condition precedent to the Canadian Underwriter’s obligation to purchase the securities being offered in the Canadian Offering, that Nasdaq approve the listing of our Common Shares and Warrants. Accordingly, if Nasdaq does not approve the listing of our Common Shares and Warrants, we will not and cannot proceed with this offering.

In connection with our potential Nasdaq listing of the Common Shares and Warrants, as a foreign private issuer, we intend to follow certain home country corporate governance practices instead of certain Nasdaq corporate governance requirements applicable to United States domestic companies.

As a foreign private issuer whose securities may be listed on Nasdaq, we are permitted to follow certain home country corporate governance practices instead of certain corporate governance requirements of Nasdaq. We intend to follow the TSXV listing rules in respect of private placements instead of Nasdaq requirements to obtain shareholder approval for certain dilutive events (such as issuances that will result in a change of control, certain transactions other than a public offering involving issuances of a 20% or greater interest in us and certain acquisitions of the stock or assets of another company) and the minimum quorum requirement for a shareholders meeting. Under Nasdaq listing rules, the required minimum quorum for a shareholders meeting is 33 1/3% of the outstanding Common Shares. Under Canadian law and pursuant to our notice of articles, a quorum shall be present at a shareholder meeting if two or more holders of Common Shares representing at least 5% of the total number of voting rights attaching to the said Common Shares entitled to be voted at the meeting are present or represented by proxy. Accordingly, our shareholders may not be afforded the same protection as provided under Nasdaq corporate governance rules for domestic issuers.

We cannot assure you that we will be able to continue to comply with the minimum bid price requirement of the Nasdaq Capital Market.

The Reverse Split was intended, among other reasons, to allow us to achieve the requisite increase in the market price of our Common Shares to be in compliance with the minimum bid price of  Nasdaq. Although our stock price meets such minimum bid price requirements as of the date hereof, there is no guarantee that the price of our Common Shares will stay above the minimum requirements for the time period required by Nasdaq. Further, there can be no assurance that the market price of our Common Shares will remain at the level required for continuing compliance with the minimum price requirements. It is not uncommon for the market price of a company’s common shares to decline in the period following a reverse stock split. If the market price of our Common Shares declines, the percentage decline may be greater than would have occurred in the absence of the Reverse Split. If the market price of our common were to experience such a decline, or if other factors unrelated to the number of shares of our Common Shares outstanding, such as negative financial or operational results, adversely affect the market price of our Common Shares, that may jeopardize our ability to meet or maintain the minimum bid price requirement of the exchange on which our Common Shares is listed.

Our inability to comply with Nasdaq's continued listing requirements could result in our Common Shares or Warrants being delisted, which could affect the market price and liquidity of our securities and reduce our ability to raise capital.

We have applied for listing of our Common Shares on Nasdaq under the stock symbol “KWE” and the Warrants to be sold in this offering under the symbol “KWESW”. No assurance can be given that our application will be approved. However, if such listing is approved, upon completion of this offering, we will be required to meet certain qualitative and financial tests to maintain the listing of our Common Shares and Warrants on Nasdaq. If we do not maintain compliance with Nasdaq’s continued listing requirements within specified periods and subject to permitted extensions, our Common Shares or Warrants may be recommended for delisting (subject to any appeal we would file). No assurance can be provided that we will comply with these continued listing requirements. Nasdaq has broad discretionary authority over the continued listing of securities, which it could exercise with respect to the listing of our Common Shares or Warrants. If our Common Shares or Warrants were delisted, it could be more difficult to buy or sell our Common Shares or Warrants and to obtain accurate quotations, and the price of our securities could suffer a material decline. Delisting would also impair our ability to raise capital.

Risks Relating to Our Business

We are an early-stage company.

We are an early-stage company and as such, we are subject to many risks including under-capitalization, cash shortages, and limitations with respect to personnel, financial and other resources and the lack of revenue. There is no assurance that we will be successful in achieving a return on shareholders' investment and the likelihood of success must be considered in light of our early stage of operations. Our prospects must be considered speculative in light of the risks, expenses, and difficulties frequently encountered by companies in their early stages of operations, particularly in the highly competitive and rapidly evolving markets in which we operate. To attempt to address these risks, we must, among other things, successfully implement our business plan, marketing, and commercialization strategies, respond to competitive developments, and attract, retain, and motivate qualified personnel. A substantial risk is involved in investing in us because, as a smaller commercial enterprise that has fewer resources than an established company, our management may be more likely to make mistakes, and we may be more vulnerable operationally and financially to any mistakes that may be made, as well as to external factors beyond our control.

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We currently have negative operating cash flows.

Since inception, we have generated significant negative cash flow from operations, financed in great part through equity financing. There can be no certainty that we will ever achieve or sustain profitability or positive cash flow from our operating activities. In addition, our working capital and funding needs may vary significantly depending upon a number of factors including, but not limited to:

•progress of our manufacturing, licensing, and distribution activities;

•collaborative license agreements with third parties;

•opportunities to license-in beneficial technologies or potential acquisitions;

•potential milestone or other payments that we may make to licensors or corporate partners;

•technological and market consumption and distribution models or alternative forms of proprietary technology for game-changing applications in the military and homeland security market that affect our potential revenue levels or competitive position in the marketplace;

•the level of sales and gross profit;

•costs associated with production, labor, and services costs, and our ability to realize operation and production efficiencies;

•fluctuations in certain working capital items, including product inventory, short-term loans, and accounts receivable, that may be necessary to support the growth of our business; and

•expenses associated with litigation.

There is no guarantee that we will ever become profitable. To date, we have generated limited revenues and a large portion of our expenses are fixed, including expenses related to facilities, equipment, contractual commitments and personnel. With the anticipated commercialization for certain of our product offerings during Fiscal 2023, we expect our net losses from operations will improve. Our ability to generate additional revenues and potential to become profitable will depend largely on the timely productization of our products, coupled with securing timely, cost-effective outsourced manufacturing arrangements and marketing our products. There can be no assurance that any such events will occur or that we will ever become profitable. Even if we achieve profitability, we cannot predict the level of such profitability. If we sustain losses over an extended period of time, we may be unable to continue our business.

Global inflationary pressure may have an adverse impact on our gross margins and our business.

Since December 31, 2021, we have experienced increases in global inflation, resulting in an increase in cost for some of the raw materials (batons / custom chemicals and casings) that we source to manufacture the ammunition for our ARWEN launchers. However, this increase in cost had a small negative impact to the overall gross margin earned from the sales of ARWEN ammunition (our current gross margin for ammunition is greater than 30% excluding indirect costs).

As we are not yet in the production phase for digitization and counter-threat business lines, we do not currently procure large volume of raw materials and therefore the current inflation is negligible for these business lines except for labor costs relating to research and development ("R&D") activities. During Fiscal 2022, we incurred significant payroll cost increases for some of our employees in order to retain and hire engineers given the strong local demand for experienced software and hardware engineers.  While we believe we will be able to pass on this inflation cost to our prospect military customers, there is no assurance that we will succeed.  Accordingly, continued inflationary pressure may have an adverse impact on our gross margins and could have a material adverse effect on our business, financial condition, results of operations or cash flows.

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The coronavirus may adversely impact our business.

As of the date of this Prospectus, markets, governments and health organizations around the world continue to work to contain the outbreak of the coronavirus ("COVID-19"). COVID-19 may present a wide range of potential issues or disruptions in our business and the business of third parties who we depend on or might depend in the future for materials and manufacturing, most of which we are not able to know the full extent of at the time of this Prospectus. These disruptions could include disruptions of our ability to receive timely materials, manufacture our products, or distribute our products, as well as closures of our primary facility in Ottawa, Ontario or the facilities of our suppliers, manufacturers, and customers. Any disruption of the business of our suppliers, manufacturers, or customers would likely impact our sales and operating results. Additionally, a significant outbreak of epidemic, pandemic, or contagious diseases (including COVID-19) could result in a widespread health crisis that could adversely affect the economies and financial markets of many countries, resulting in an economic downturn that could affect demand for our products. Any of these events could have a material adverse effect on our business, financial condition, results of operations, or cash flows.

While COVID-19 has not had a material impact to our business to date, the following is a summary of what we believe may impact our future business given the persistency of COVID-19: disruptions to business operations resulting from quarantines of employees, customers, manufacturers and other third-party service providers in areas affected by the outbreak; disruptions to business operations resulting from travel restrictions, including travel to industry tradeshows; and uncertainty around the duration of the virus' impact.

Despite the global vaccination efforts underway, the extent to which COVID-19 could impact our operations, financial condition, results of operations, and cash flows is highly uncertain and cannot be predicted. Negative financial results, uncertainties in the market, and a tightening of credit markets, caused by COVID-19, or a recession, could have a material adverse effect on our liquidity and ability to obtain financing in the future.

Moreover, if a pandemic, epidemic, or outbreak of an infectious disease, including COVID-19, or other public health crisis were to affect our facilities, staff, auditors, or advisors, our business could be adversely and materially affected. Such a pandemic could result in mandatory social distancing, travel bans, and quarantine restrictions, and this may limit access to our employees and professional advisors, and consequently may hamper our efforts to comply with our filing obligations with regulatory authorities.

We may not be able to successfully execute our business plan.

The execution of our business plan poses many challenges and is based on a number of assumptions. We may not be able to successfully execute our business plan. If we experience significant cost overruns, or if our business plan is more costly than we anticipate, certain activities may be delayed or eliminated, resulting in changes or delays to our current plans. Also, we may be compelled to secure additional funding (which may or may not be available or available at conditions unfavorable to us) to execute our business plan. We cannot predict with certainty our future revenues or results from our operations. If the assumptions on which our revenues or expenditures forecasts are based change, the benefits of our business plan may change as well. In addition, we may consider expanding our business beyond what is currently contemplated in our business plan. Depending on the financing requirements of a potential business expansion, we may be required to raise additional capital through the issuance of equity or debt. If we are unable to raise additional capital on acceptable terms, we may be unable to pursue a potential business expansion.

A significant portion of our revenues are non-recurring.

A significant portion of our revenue for Fiscal 2021 was prior to commercial production of TASCS IFM and considered to be non-recurring. While we expect to reach commercialization stage for certain product offerings during Fiscal 2023, there is no assurance we will succeed.

With the completion of the PARA OPS system technology acquisition in April 2021 (see Business Overview), we expect to launch the commercialization of our non-lethal PARA OPS devices during Fiscal 2023 which we anticipate will drive product revenue on a monthly basis with the use of distributors and an e-commerce platform. However, there is no assurance that we will successfully complete timely the productization of our PARA OPS or obtain market acceptance of these products. See Business Overview - Government Regulations.

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There is uncertainty with respect to our revenue growth.

There can be no assurance that we can generate substantial revenue growth, or that any revenue growth that is achieved can be sustained. Revenue growth that we have achieved or may achieve may not be indicative of future operating results. In addition, we may further increase our operating expenses in order to fund higher levels of research and development, increase our sales and marketing efforts and increase our administrative resources in anticipation of future growth. To the extent that increases in such expenses precede or are not subsequently followed by increased revenues, our business, operating results and financial condition will be materially adversely affected.

We may not be able to fully develop our products, which could prevent us from ever becoming profitable.

If we experience difficulties in the development process, such as capacity constraints, quality control problems or other disruptions, we may not be able to fully develop market-ready commercial products at acceptable costs, which would adversely affect our ability to effectively enter the market. A failure by us to achieve a low-cost structure through economies of scale or improvements in manufacturing processes would have a material adverse effect on our commercialization plans and our business, prospects, results of operations and financial condition.

We may experience delays in product sales due to marketing and distribution capabilities.

In order to successfully commercialize our products, we must continue to develop our internal marketing and sales force with technical expertise and with supporting distribution capabilities or arrange for third parties to perform these services. In order to successfully commercialize any of our products, we must have an experienced sales and distribution infrastructure. The continued development of our sales and distribution infrastructure will require substantial resources, which may divert the attention of our management and key personnel and defer our product development and commercialization efforts. To the extent that we enter into marketing and sales arrangements with other companies, our revenues will depend on the efforts of others.

Additionally, in marketing our products, we would likely compete with companies that currently have extensive and well-funded marketing and sales operations. Despite marketing and sales efforts, we may be unable to compete successfully against these companies. We may not be able to do so on favorable terms.

In the event we fail to develop substantial sales, marketing and distribution channels, or to enter into arrangements with third parties for those purposes, we will experience delays in product sales, which could have a material adverse effect on prospects, results of operations, financial condition and cash flows.

There is no assurance that our products will be accepted in the marketplace or that we will turn a profit or generate immediate revenues.

There is no assurance as to whether our products will be accepted in the marketplace. While we believe our products address customer needs, the acceptance of our products may be delayed or not materialize. We have incurred and anticipate incurring substantial expenses relating to the development of our products, the marketing of our products and initial operations of our business. Our revenues and possible profits will depend upon, among other things, our ability to successfully market our products to customers. There is no assurance that revenues and profits will be generated.

Strategic alliances may not be achieved or achieve their goals.

To achieve a scalable operating model with minimal capital expenditures, we plan to rely upon strategic alliances with OEMs for the manufacturing and distribution of our products. There can be no assurance that such strategic alliances can be achieved or will achieve their goals.

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We are dependent on key suppliers for our ARWEN product line.

We are only be able to purchase certain key components of our products from a limited number of suppliers for our ARWEN product line within our non-lethal business line. As of the date of this Prospectus, we do not have any commercial or financial contracts with any key suppliers who we have procured raw materials from.  Procurement is done in the form of individual, non-related standard purchase orders. As a result, there is no contract in place to ensure sufficient quantities are available timely on favorable terms and consequently this could result in possible lost sales or uncompetitive product pricing. The ongoing COVID-19 pandemic could adversely impact the supply chain relating to these components. 

We may incur higher costs or unavailability of components, materials and accessories.

As we expect to commercialize certain of our product lines in Fiscal 2022, we may depend on certain domestic and international suppliers for the delivery of components and materials used in the assembly of our products and certain accessories including ammunition, used with our products. Further, any reliance on third-party suppliers may create risks related to our potential inability to obtain an adequate supply of components or materials and reduced control over pricing and timing of delivery of components and materials. We currently have no long-term agreements with any of our suppliers and there is no guarantee the supply will not be interrupted.

In light of the current global supply chain challenges caused by COVID-19 and Russia's invasion of Ukraine, components used in the manufacture of our products may be delayed, become unavailable or discontinued. Any delays may take weeks or months to resolve. Further, parts obsolescence may require us to redesign our product to ensure quality replacement components. While we have not been impacted significantly from the above events to date, there is no assurance that we will not experience significant setback in operations if the global supply chain challenges worsen or continue to persist for a longer period of time.  Accordingly, supply chain delays could cause significant delays in manufacturing and loss of sales, leading to adverse effects significantly impacting our financial condition or results of operations.

Additionally, our shipping costs and the timely delivery of our products could be adversely impacted by a number of factors which could reduce the profitability of our operations, including: higher fuel costs, potential port closures, customs clearance issues, increased government regulation or changes for imports of foreign products into Canada, delays created by terrorist attacks or threats, public health issues and pandemics and epidemics, national disasters or work stoppages, and other matters. Any interruption of supply for any material components of our products could significantly delay the shipment of our products and have a material adverse effect on our revenues, profitability, and financial condition.

We rely upon a limited number of third parties for manufacturing, shipping, transportation, logistics, marketing and sales of our products.

We rely on third parties to ship, transport, and provide logistics for our products. Further, we plan on relying on third parties to manufacture, market and sell our PARA OPS system products. Our dependence on a limited number of third parties for these services leaves us vulnerable due to our need to secure these parties' services on favorable terms. Loss of, or an adverse effect on, any of these relationships or failure of any of these third parties to perform as expected could have a material and adverse effect on our business, sales, results of operations, financial condition, and reputation.

We may be subject to product liability proceedings or claims.

We may be subject to proceedings or claims that may arise in the ordinary conduct of the business, which could include product and service warranty claims, which could be substantial. Product liability for us is a major risk as some of our products will be used by military personnel in theaters-of-war (for the Tactical and Counter-Threat product offerings) and by consumers and law enforcement (for the non-lethal systems). The occurrence of product defects due to non-compliance of our manufacturing specifications and the inability to correct errors could result in the delay or loss of market acceptance of our products, material warranty expense, diversion of technological and other resources from our product development efforts, and the loss of credibility with customers, manufacturers' representatives, distributors, value-added resellers, systems integrators, original equipment manufacturers and end-users, any of which could have a material adverse effect on our business, operating results and financial conditions. To mitigate product liability risk, our products will be sold with a liability disclaimer for misuse of the product.

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If we are unable to successfully design and develop or acquire new products, our business may be harmed.

To maintain and increase sales we must continue to introduce new products and improve or enhance our existing products or new products. The success of our new and enhanced products depends on many factors, including anticipating consumer preferences, finding innovative solutions to consumer problems or acquiring new solutions through mergers and acquisitions, differentiating our products from those of our competitors, and maintaining the strength of our brand. The design and development of our products as well as acquisitions of other businesses. 

Our business could be harmed if we are unable to accurately forecast demand for our products or our results of operations.

To ensure adequate inventory supply, we forecast inventory needs and often place orders with our manufacturers before we receive firm orders from our retail partners or customers. If we fail to accurately forecast demand, we may experience excess inventory levels or a shortage of product.

If we underestimate the demand for our products, we or our suppliers may not be able to scale to meet our demand, and this could result in delays in the shipment of our products and our failure to satisfy demand, as well as damage to our reputation and retail partner relationships. If we overestimate the demand for our products, we could face inventory levels in excess of demand, which could result in inventory write-downs or write-offs and the sale of excess inventory at discounted prices, which would harm our gross margins. In addition, failures to accurately predict the level of demand for our products could cause a decline in sales and harm our results of operations and financial condition.

In addition, we may not be able to accurately forecast our results of operations and growth rate. Forecasts may be particularly challenging as we expand into new markets and geographies and develop and market new products for which we have no or limited historical data. Our historical sales, expense levels, and profitability may not be an appropriate basis for forecasting future results. Our lack of historical data related to new products makes it particularly difficult to make forecasts related to such products. The lead times and reliability of our suppliers has been inconsistent as a result of the COVID-19 pandemic and may be affected by global events in the future. These effects are expected to last through the remainder of the pandemic. Pandemic related variances require a very quick pivot and adjustments to the supply chain, production and marketing. If we are unable to make these changes quickly or at all our inventory, production and sales may be materially affected.

Failure to accurately forecast our results of operations and growth rate could cause us to make poor operating decisions that we may not be able to correct in a timely manner. Consequently, actual results could be materially different than anticipated. Even if the markets in which we compete expand, we cannot assure you that our business will grow at similar rates, if at all.

Undetected flaws may be discovered in our products.

There can be no assurance that, despite testing by us, flaws will not be found in our products and services, resulting in loss of, or delay in, market acceptance. We may be unable, for technological or other reasons, to introduce products and services in a timely manner or at all in response to changing customer requirements. In addition, there can be no assurance that while we are attempting to finish the development of our technologies, products and services, a competitor will not introduce similar or superior technologies, products and services, thus diminishing our advantage, rendering our technologies, products and services partially or wholly obsolete, or at least requiring substantial re-engineering in order to become commercially acceptable. Failure by us to maintain technology, product and service introduction schedules, avoid cost overruns and undetected errors, or introduce technologies, products and services that are superior to competing technologies, products and services would have a materially adverse effect on our business, prospects, financial condition, and results of operations.

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We will be reliant on information technology systems and may be subject to damaging cyber-attacks.

We use third parties for certain hardware, software, telecommunications and other information technology ("IT") services in connection with our operations. Our operations depend, in part, on how well we and our suppliers protect networks, equipment, IT systems and software against damage from a number of threats, including, but not limited to, cable cuts, damage to physical plants, natural disasters, intentional damage and destruction, fire, power loss, hacking, computer viruses, vandalism and theft. Our operations also depend on the timely maintenance, upgrade and replacement of networks, equipment, IT systems and software, as well as pre-emptive expenses to mitigate the risks of failures. Any of these and other events could result in information system failures, delays and/or increase in capital expenses. The failure of information systems or a component of information systems could, depending on the nature of any such failure, adversely impact our reputation and results of operations. Moreover, failure to meet the minimum cybersecurity requirements for defense contracts may disqualify us from participating in the tendering process. To date, we have not experienced any losses relating to cyber-attacks or other information security breaches, but there can be no assurance that we will not incur such losses in the future. Our risk and exposure to these matters cannot be fully mitigated because of, among other things, the evolving nature of these threats. As a result, cybersecurity and the continued development and enhancement of controls, processes and practices designed to protect systems, computers, software, data and networks from attack, damage or unauthorized access is a priority. As cyber threats continue to evolve, we may be required to expend additional resources to continue to modify or enhance protective measures or to investigate and remediate any security vulnerabilities. 

In certain circumstances, our reputation could be damaged.

Damage to our reputation can be the result of the actual or perceived occurrence of any number of events, and could include any negative publicity, whether true or not. Reputational risk for us is a major risk as some of our products will be used by military personnel in theaters-of-war or by law enforcement personnel. The increased usage of social media and other web-based tools used to generate, publish and discuss user-generated content and to connect with other users has made it increasingly easier for individuals and groups to communicate and share opinions and views regarding us and our activities, whether true or not. Although we believe that we operate in a manner that is respectful to all stakeholders and that we take care in protecting our image and reputation, we do not ultimately have direct control over how we are perceived by others. Reputational loss may result in decreased investor confidence, increased challenges in developing and maintaining community relations and an impediment to our overall ability to advance our projects, thereby having a material adverse impact on financial performance, financial condition, cash flows and growth prospects.

Our results of operations are difficult to predict and depend on a variety of factors.

There is no assurance that the production, technology acquisitions, and the commercialization of proprietary technology for game-changing applications in the military, security forces and personal defense markets will be managed successfully. Any inability to achieve such commercial success could have a material adverse effect on our business, financial condition, operating results, liquidity, and prospects. In addition, the comparability of results may be affected by changes in accounting guidance or changes in our ownership of certain assets. Accordingly, the results of operations from year to year may not be directly comparable to prior reporting periods. As a result of the foregoing and other factors, the results of operations may fluctuate significantly from period to period, and the results of any one period may not be indicative of the results for any future period.

Protecting and defending against intellectual property claims may have a material adverse effect on our business.

Our ability to compete depends, in part, upon successful protection of our intellectual property. While we have some patents and trademarks, we also rely on trade secrets to protect our technology, which is inherently risky. Going forward, we will attempt to protect proprietary and intellectual property rights to our technologies through available copyright and trademark laws, patents and licensing and distribution arrangements with reputable international companies in specific territories and media for limited durations. Despite these precautions, existing copyright, trademark and patent laws afford only limited practical protection in certain countries where we distribute our products. As a result, it may be possible for unauthorized third parties to copy and distribute our products or certain portions or applications of our intended products, which could have a material adverse effect on our business, financial condition, operating results, liquidity, and prospects.

Litigation may also be necessary to enforce our intellectual property rights, to protect our trade secrets, or to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement or invalidity. Any such litigation, infringement or invalidity claims could result in substantial costs and the diversion of resources and could have a material adverse effect on our business, financial condition, operating results, liquidity, and prospects.

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We face risks from doing business internationally.

Our commercialization strategies for our products include sales efforts outside Canada and deriving revenues from international sources. As a result, our business is subject to certain risks inherent in international business, many of which are beyond our control.

These risks may include:

•laws and policies affecting trade, investment and taxes, including laws and policies relating to the repatriation of funds and withholding taxes, and changes in these laws;

•anti-corruption laws and regulations such as the Foreign Corrupt Practices Act that impose strict requirements on how we conduct our foreign operations and changes in these laws and regulations;

•changes in local regulatory requirements, including restrictions on content and differing cultural tastes and attitudes;

•international jurisdictions where laws are less protective of intellectual property and varying attitudes towards the piracy of intellectual property;

•financial instability and increased market concentration of buyers in foreign markets;

•the instability of foreign economies and governments;

•fluctuating foreign exchange rates;

•the spread of communicable diseases in such jurisdictions, which may impact business in such jurisdictions; and

•war and acts of terrorism.

Events or developments related to these and other risks associated with international trade could adversely affect our revenues from non-Canadian sources, which could have a material adverse effect on our business, financial condition, operating results, liquidity, and prospects. Protection of electronically stored data is costly and if our data is compromised in spite of this protection, we may incur additional costs, lost opportunities, and damage to our reputation.

We maintain information in digital form as necessary to conduct our business, including confidential and proprietary information and personal information regarding our employees.

Data maintained in digital form is subject to the risk of intrusion, tampering, and theft. We develop and maintain systems to prevent this from occurring, but it is costly and requires ongoing monitoring and updating as technologies change and efforts to overcome security measures become more sophisticated. Moreover, despite our efforts, the possibility of intrusion, tampering, and theft cannot be eliminated entirely, and risks associated with each of these acts remain. In addition, we provide confidential information, digital content and personal information to third parties when it is necessary to pursue business objectives. While we obtain assurances that these third parties will protect this information and, where appropriate, monitor the protections employed by these third parties, there is a risk that data systems of these third parties may be compromised. If our data systems or data systems of these third parties are compromised, our ability to conduct our business may be impaired, we may lose profitable opportunities or the value of those opportunities may be diminished and we may lose revenue as a result of unlicensed use of our intellectual property. A breach of our network security or other theft or misuse of confidential and proprietary information, digital content or personal employee information could subject us to business, regulatory, litigation, and reputation risk, which could have a materially adverse effect on our business, financial condition, and results of operations.

Our success depends on management and key personnel.

Our success depends largely upon the continued services of our executive officers and other key employees. From time to time, there may be changes in our executive management team resulting from the hiring or departure of executives, which could disrupt our business. If we are unable to attract and retain top talent, our ability to compete may be harmed. Our success is also highly dependent on our continuing ability to identify, hire, train, retain and motivate highly qualified personnel. Competition for highly skilled executives and other employees is high in our industry, especially from larger and better capitalized defense and security companies. We may not be successful in attracting and retaining such personnel. Failure to attract and retain qualified executive officers and other key employees could have a material adverse effect on our business, prospects, financial condition, results of operations, and cash flows.

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Our directors, officers or members of management may have conflicts of interest.

Certain of our directors, officers, and other members of management serve (and may in the future serve) as directors, officers, and members of management of other companies and therefore, it is possible that a conflict may arise between their duties as one of our directors, officers or members of management and their duties as a director, officer or member of management of such other companies. Our directors and officers are aware of the existence of laws governing accountability of directors and officers for corporate opportunity and requiring disclosures by directors of conflicts of interest and we will rely upon such laws in respect of any directors' and officers' conflicts of interest or in respect of any breaches of duty by any of our directors or officers. All such conflicts will be disclosed by such directors or officers in accordance with the BCBCA and they will govern themselves in respect thereof to the best of their ability in accordance with the obligations imposed upon them by law. 

It may not be possible for foreign investors to enforce actions against us, and our directors and officers.

We are a corporation organized under the laws of the Province of British Columbia and our Canadian subsidiaries are organized under the laws of the Province of Ontario and our United States subsidiaries are organized under the laws of Delaware. All of our directors and executive officers reside principally in Canada. Because all or a substantial portion of our assets and the assets of these persons are located in Canada, it may not be possible for foreign investors, including United States investors, to effect service of process from outside of Canada upon us or those persons, or to realize in the United States upon judgments of United States courts predicted upon civil liabilities under the Exchange Act or other United States laws. Furthermore, it may not be possible to enforce against us foreign judgments obtained in courts outside of Canada based upon the civil liability provisions of the securities laws or other laws in those jurisdictions.

Any disruption at our places of business could delay revenues or increase our expenses.

Most of our operations are conducted at locations in the Province of Ontario. We maintain a significant business development operation in the United States, through our contractual relationship with SageGuild, LLC ("SageGuild") (see History and Development of the Company - Principal Capital Expenditures and Divestitures). A natural disaster, such as a fire, flood or earthquake, could cause substantial delays in our operations, damage or destroy our offices, and cause us to incur additional expenses.

In addition, because we do not maintain "key person" life insurance on any of our executive officers, employees or consultants, any delay in replacing such persons, or an inability to replace them with persons of similar expertise, would have a material adverse effect on our business, financial condition, and results of operations.

Our internal computer systems are vulnerable to damage and failure.

Despite the implementation of security measures and backup storage, our internal computer systems are vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war, and telecommunication and electrical failure. Any system failure, accident or security breach that causes interruption in our operations could result in a material disruption of our projects. To the extent that any disruption or security breach results in a loss or damage to our data or applications, or inappropriate disclosure of confidential or proprietary information, we may incur liability as a result. In addition, our technology program may be adversely affected and the further development of our technology may be delayed. We may also incur additional costs to remedy the damages caused by these disruptions or security breaches.

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Business interruptions could adversely affect our operations.

Our operations are vulnerable to outages and interruptions due to fire, floods, power loss, telecommunications failures, and similar events beyond our control. Although we have developed certain plans to respond in the event of a disaster, there can be no assurance that they will be effective in the event of a specific disaster. Any losses or damages incurred by us could have a material adverse effect on our business and results of operations.

We are subject to risks associated with possible acquisitions, licensing, business combinations, or joint ventures.

While to date we have mainly focused on developing our own products, from time to time, we could be engaged in discussions and activities with respect to possible business and/or technology acquisitions or licensing, sale of assets, business combinations, or joint ventures with the view of either complementing or expanding our internally developed products. These acquisitions and licensing activities are not crucial to our long-term business success. The anticipated benefit from any of the transactions we may pursue may not be realized as expected. Regardless of whether any such transaction is consummated, the negotiation of a potential transaction and the integration of the acquired business or technology, acquired or licensed, could incur significant costs and cause diversion of management's time and resources. Any such transaction could also result in impairment of goodwill and other intangibles, development write-offs, and other related expenses. Such transactions may pose challenges in the consolidation and integration of information technology, accounting systems, personnel, and operations. We may have difficulty managing the combined entity in the short term if we experience a significant loss of management personnel during the transition period after a significant acquisition. We may also have difficulty managing the product development and commercialization following a technology acquisition or licensing. No assurance can be given that expansion, licensing or acquisition opportunities will be successful, completed on time, or that we will realize expected operating efficiencies, cost savings, revenue enhancements, synergies or other benefits. Any of the foregoing could have a material adverse effect on our business, financial condition, operating results, liquidity, and prospects. 

Claims against us relating to any acquisition, licensing or business combination may necessitate seeking claims against the seller for which the seller may not indemnify us or that may exceed the seller's or licensor's indemnification obligations.

There may be liabilities assumed in any technology acquisition or licensing or business combination that we did not discover or that we underestimated in the course of performing our due diligence. Although a seller or licensor generally will have indemnification obligations to us under a licensing, acquisition or merger agreement, these obligations usually will be subject to financial limitations, such as general deductibles and maximum recovery amounts, as well as time limitations. There is no assurance that our right to indemnification from any seller or licensors will be enforceable, collectible or sufficient in amount, scope or duration to fully offset the amount of any undiscovered or underestimated liabilities that we may incur. Any such liabilities could have a material adverse effect on our business, financial condition, operating results, liquidity, and prospects.

Growth may cause pressure on our management and systems.

Our future growth may cause significant pressure on our management, and our operational, financial, and other resources and systems. Our ability to manage our growth effectively will require that we implement and improve our operational, financial, manufacturing, and management information systems, hire new personnel and then train, manage, and motivate these new employees. These demands may require the hiring of additional management personnel and the development of additional expertise within the existing management team. Any increase in resources devoted to production, business development, and distribution efforts without a corresponding increase in our operational, financial, and management information systems could have a material adverse effect on our business, financial condition, and results of operations.

We may infringe intellectual property rights of third parties.

For certain of our product lines, we have elected to protect our technology and products as trade secrets as opposed to seeking patent protection. We may, in future, elect to seek patent protection for some of our future products. While we believe that our products and other intellectual property do not infringe upon the proprietary rights of third parties, our commercial success depends, in part, upon us not infringing intellectual property rights of others. A number of our competitors and other third parties have been issued or may have filed patent applications or may obtain additional patents and proprietary rights for technologies similar to those utilized by us. Some of these patents may grant very broad protection to the owners of the patents. While we have engaged external intellectual property legal counsels to undertake an extensive review of existing third-party patents and prepare our patent applications for some of our products(see Business Overview), there is no assurance that their reviews and conclusion will not prevail if challenged by a third party of an alleged infringement of their intellectual properties. We may become subject to claims by third parties that our technology infringes their intellectual property rights due to the growth of products in our target markets, the overlap in functionality of those products and the prevalence of products. We may become subject to these claims either directly or through indemnities against these claims that we provide to end-users, manufacturer's representatives, distributors, value-added resellers, system integrators and original equipment manufacturers. Litigation may be necessary to determine the scope, enforceability and validity of third-party proprietary rights or to establish our proprietary rights. Some of our competitors have, or are affiliated with companies having, substantially greater resources than we and these competitors may be able to sustain the costs of complex intellectual property litigation to a greater degree and for a longer period of time than us. Regardless of their merit, any such claims could be time consuming to evaluate and defend, result in costly litigation, cause product shipment delays or stoppages, divert management's attention and focus away from the business, subject us to significant liabilities and equitable remedies, including injunctions, require that we enter into costly royalty or licensing agreements and require that we modify or stop using infringing technology.

We may be prohibited from developing or commercializing certain technologies and products unless we obtain a license from a third party. There can be no assurance that we will be able to obtain any such license on commercially favorable terms or at all. If we do not obtain such a license, we could be required to cease the sale of certain of our products.

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Risks Relating to Our Industry

The following risks relate specifically to Digitization and Counter-Threat business lines:

We are subject to extensive government regulation in the United States for our products designed for the military market.

Our customers in the United States are global defense contractors and they are subject to various United States government regulations which some may be passed on to us in order for them to be compliant. The most significant regulations and regulatory authorities that may affect our future business include the following:

•the Federal Acquisition Regulations and supplemental agency regulations, which comprehensively regulate the formation and administration of, and performance under, United States government contracts;

•the Truth in Negotiations Act, which requires certification and disclosure of all factual cost and pricing data in connection with contract negotiations;

•the False Claims Act and the False Statements Act, which impose penalties for payments made on the basis of false facts provided to the government and on the basis of false statements made to the government, respectively;

•the Foreign Corrupt Practices Act, which prohibits United States companies from providing anything of value to a foreign official to help obtain, retain or direct business, or obtain any unfair advantage; and

•laws, regulations and executive orders restricting the use and dissemination of information classified for national security purposes or determined to be "controlled unclassified information" and the exportation of certain products and technical data.

Our failure to comply with applicable regulations, rules and approvals; changes in the United States government's interpretation of such regulations, rules and approvals as have been and are applied to our contracts, proposals or business or misconduct by any of our employees could result in the imposition of fines and penalties, the loss of security clearances, a decrease in profitability, or the loss of our subcontract contracts with United States defense contractors generally, any of which could harm our business, financial condition and results of operations.

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A decline in the United States and other government budgets, changes in spending or budgetary priorities, or delays in contract awards may significantly and adversely affect our future revenue.

Since inception, most of our revenue was driven by contracts from the United States government, through United States prime defense contractors. Our results of operations could be adversely affected by government spending caps or changes in government budgetary priorities, as well by delays in the government budget process, program starts, or the award of contracts or orders under existing contracts. As a result, the market for our military solution may be impacted due to shifts in the political environment and changes in the government and agency leadership positions under the new United States administration. If annual budget appropriations or continuing resolutions are not enacted timely, we could face United States government shutdown, which could adversely impact our business and our ability to receive indirectly timely payment from United States government entities on future contracts. 

United States government contracts are generally not fully funded at inception and contain certain provisions that may be unfavorable to us.

We have entered into defense contracts with United States prime defense contractors, which it in turns transact directly with the United States government.

United States government contracts typically involve long lead times for design and development, and are subject to significant changes in contract scheduling. Congress generally appropriates funds on a fiscal year basis even though a program may continue for several years. Consequently, programs are often only partially funded initially, and additional funds are committed only as Congress makes further appropriations. The termination or reduction of funding for a government program would result in a loss of anticipated future revenue attributable to that program. In addition, United States government contracts generally contain provisions permitting termination, in whole or in part, at the government's convenience or for contractor default.

The actual receipt of revenue on future awards subcontracted to us may never occur or may change because a program schedule could change or the program could be cancelled, or a contract could be reduced, modified or terminated early.

While our remaining subcontract with the United States prime defense contractor was fully funded at September 30, 2021, we are exposed to the above risk for future United States government related contracts.

We may not be able to comply with changes in government policies and legislation.

The manufacture, sale, purchase, possession and use of weapons, ammunitions, firearms, and explosives are subject to federal, provincial and foreign laws. If such regulation becomes more expansive in the future, it could have a material adverse effect on our business, operating results, financial condition, and cash flows. New legislation, regulations, or changes to or new interpretations of existing regulation could impact our ability to manufacture or sell our products and our projectiles, or limit their market, which could impact our cost of sales and demand for our products. Similarly changes in laws related to the domestic or international use of chemical irritants by civilians or law enforcement could impact both our cost of sales and the size of our reachable market.

We may be subject, both directly and indirectly, to the adverse impact of existing and potential future government regulation of our products, technology, operations, and markets. For example, the development, production, exportation, importation, and transfer of our products and technology is subject to Canadian and provincial laws. Further, as we plan to conduct business in the United States, we will also be subject to United States and foreign export control, sanctions, customs, import and anti-boycott laws and regulations, including the Export Administration Regulations (the "EAR") (collectively, "Trade Control Laws"). If one or more of our products or technology, or the parts and components we buy from others, is or become subject to the International Traffic in Arms Regulations (the "ITAR") or national security controls under the EAR, this could significantly impact our operations, for example by severely limiting our ability to sell, export, or otherwise transfer our products or technology, or to release controlled technology to foreign person employees or others in the United States or abroad. We may not be able to retain licenses and other authorizations required under the applicable Trade Control Laws. The failure to satisfy the requirements under the Trade Control Laws, including the failure or inability to obtain necessary licenses or qualify for license exceptions, could delay or prevent the development, production, export, import, and/or in-country transfer of our products and technology, which could adversely affect our revenues and profitability.

Failure by us, our employees, or others working on our behalf to comply with the applicable government policies and regulations could result in administrative, civil, or criminal liabilities, including fines, suspension, debarment from bidding for or performing government contracts, or suspension of our export privileges, which could have a material adverse effect on us.

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The following risk relates specifically to PARA OPS business line:

We will be subject to regulation in the United States for our non-lethal systems.

While our PARA OPS devices are non-lethal (based on the kinetic energy of our projectiles), these are automatically classified as form of a firearm under the United States Bureau of Alcohol, Tobacco and Firearms ("ATF") rules and regulations because we use pyrotechnic based primers in our proprietary ammunition cartridges. We have therefore self-classified our .67 caliber PARA OPS single shot device as not only a firearm, but a "destructive device" in accordance with the ATF regulations. We intend to self-classify our other PARA OPS devices as a form of a firearm under ATF regulations until such time we have found an alternative for primers (i.e., a non-pyrotechnic gas generator) to launch our projectiles, and therefore be subject to ATF regulations. We are currently reviewing an alternative to replace the primer.  While we are confident of identifying an alternative by the end of Q1 Fiscal 2023 in order to offer "non-firearm" PARA OPS devices to the consumers market, there is no assurance that we will succeed and consequently this may adversely affect our future revenues and related results of operations, business, prospects, and financial condition.  Further, in the event we have implemented an alternative to replace the primer and then self-classify our PARA OPS devices as "non-firearm", there is no assurance that the ATF may not contest our self-classification, which could result in discontinuing sales to consumers with no firearm license where required by state law. Accordingly, this could also adversely affect our future revenues and related results of operations, business, prospects, and financial condition.

Because our business model relies on outsourced production, we have no plans of becoming a firearm manufacturer in the United States but rather to continue to partner with a FFL manufacturer for the production and distribution of our PARA OPS products. Accordingly, post commercialization in the United States the burden to comply with ATF rules and regulations applicable to the manufacturing and distribution process will be with our FFL business partners.  Our primary risk of governmental interruption of manufacturing and distribution therefore lies within the operations and attendant internal control environment of our FFL business partners. 

Furthermore, with respect to transfers to end users (government, military, or consumer), the obligation to comply with ATF rules and regulations and any applicable state laws resides with the downstream FFL wholesaler/distributor/retailer  and any penalties levied upon such parties do not flow up the distribution chain. 

See Business Overview - Government Regulation - Non-Lethal for a summary of relevant regulation in the United States for our non-lethal business line. 

The following risks apply to all business lines:

Rapid technological development could result in obsolescence or short product life cycles of our products.

The markets for our products are characterized by rapidly changing technology and evolving industry standards, which could result in product obsolescence or short product life cycles. Accordingly, our success is dependent upon our ability to anticipate technological changes in the industries we serve and to successfully identify, obtain, develop and market new products that satisfy evolving industry requirements. There can be no assurance that we will successfully develop new products or enhance and improve our existing products or that any new products and enhanced and improved existing products will achieve market acceptance. Further, there can be no assurance that competitors will not market products that have perceived advantages over our products or which render the products currently sold by us obsolete or less marketable.

We must commit significant resources to developing, testing and demonstrating new products before knowing whether our investments will result in products the market will accept. To remain competitive, we may be required to invest significantly greater resources than currently anticipated in research and development and product enhancement efforts, and result in increased operating expenses.

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Our industry is highly competitive.

The industry for military and security forces and personal defense is highly competitive and composed of many domestic and foreign companies. We have experienced and expect to continue to experience, substantial competition from numerous competitors whom we expect to continue to improve their products and technologies. Competitors may announce and introduce new products, services or enhancements that better meet the needs of end-users or changing industry standards, or achieve greater market acceptance due to pricing, sales channels or other factors. With substantially greater financial resources and operating scale than we do currently, certain competitors may be able to respond more quickly than us to changes in end-user requirements and devote greater resources to the enhancement, promotion and sale of their products. Such competition could adversely affect our ability to win new contracts and sales. 

Since we operate in evolving markets, our business and future prospects may be difficult to evaluate.

Our technological solutions are in new and rapidly evolving markets. The military, civilian public safety, professional and personal defense markets we target are in early stages of customer adoption. Accordingly, our business and future prospects may be difficult to evaluate. We cannot accurately predict the extent to which demand for our products and services will develop and/or increase, if at all. The challenges, risks and uncertainties frequently encountered by companies in rapidly evolving markets could impact our ability to do the following:

•generate sufficient revenue to obtain and/or maintain profitability;

•acquire and maintain market share;

•achieve or manage growth in operations;

•develop and renew contracts;

•attract and retain additional engineers and other highly-qualified personnel;

•successfully develop and commercially market products and services;

•adapt to new or changing policies and spending priorities of governments and government agencies; and

•access additional capital when required or on reasonable terms.

If we fail to address these and other challenges, risks and uncertainties successfully, our business, results of operations and financial condition would be materially harmed.

Uncertainty related to exportation could limit our operations in the future.

We must comply with Canadian federal and provincial laws regulating the export of our products. In some cases, explicit authorization from the Canadian government is needed to export certain products. The export regulations and the governing policies applicable to our business are subject to change. We cannot provide assurance that such export authorizations will be available for our products in the future. To date, compliance with these laws has not significantly limited our operations, but could significantly limit them in the future. Noncompliance with applicable export regulations could potentially expose us to fines, penalties and sanctions. If we cannot obtain required government approvals under applicable regulations, we may not be able to sell our products in certain international jurisdictions, which could adversely affect our business, prospects, financial condition and results of operations.

Global economic turmoil and regional economic conditions in the United States could adversely affect our business.

In addition to the risks pertaining to COVID-19 disclosed above, global economic turmoil may cause a general tightening in the credit markets, lower levels of liquidity, increases in the rates of default and bankruptcy, levels of intervention from the United States federal government and other foreign governments, decreased consumer confidence, overall slower economic activity, and extreme volatility in credit, equity, and fixed income markets. A decrease in economic activity in the United States or in other regions of the world in which we do business could adversely affect demand for our products, thus reducing our revenues and earnings. A decline in economic conditions could reduce sales of our products.

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Risks Relating to Our Financial Condition

We face substantial capital requirements and financial risk.

To be successful, our business requires a substantial investment of capital. The production, acquisition, and distribution of proprietary technology for game-changing applications in the military and security forces and personal defense markets require substantial capital. A significant amount of time may elapse between our expenditure of funds and the receipt of revenues. This may require a significant portion of funds from equity, credit, and other financing sources to fund the business. There can be no assurance that these arrangements will continue to be successfully implemented or will not be subject to substantial financial risks relating to the production, acquisition, and distribution of proprietary technology for game-changing applications in the military and security forces and personal defense markets. In addition, if demand increases through internal growth or acquisition, there may be an increase to overhead and/or larger up-front payments for production and, consequently, these increases bear greater financial risks. Any of the foregoing could have a material adverse effect on our business, financial condition, operating results, liquidity, and prospects. 

We may require additional capital which may result in dilution to existing shareholders.

We may need to engage in additional equity or debt financings to secure additional funds to fund our working capital requirement and business growth. If we raise additional funds through further issuances of equity or convertible debt securities, our existing shareholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences, and privileges superior to those of holders of the Common Shares. Any debt financing secured by us in the future could involve restrictive covenants relating to our capital-raising activities and other financial and operational matters, which might make it more difficult for us to obtain additional capital and to pursue business opportunities.

We can provide no assurance that sufficient debt or equity financing will be available on reasonable terms or at all to support our business growth and to respond to business challenges and failure to obtain sufficient debt or equity financing when required could have a material adverse effect on our business, prospects, financial condition, results of operations, and cash flows.

Over the short-term, we expect to incur operating losses and generate negative cash flow until we can produce sufficient revenues to cover our costs. We may never become profitable. Even if we do achieve profitability, we may be unable to sustain or increase our profitability in the future. There are substantial uncertainties associated with our ability to achieving and sustaining profitability. We expect our current cash position will be reduced due to future operating losses and working capital requirements, and we cannot provide certainty as to how long our cash position will last or that we will be able to access additional capital if and when necessary.

Exercise of options or warrants or vesting of restricted stock units will have a dilutive effect on your percentage ownership and will result in a dilution of your voting power and an increase in the number of Common Shares eligible for future resale in the public market, which may negatively impact the trading price of our Common Shares. 

The release of securities currently held in escrow may adversely impact the price of our Common Shares or Warrants.

The market price of our Common Shares or Warrants may be adversely impacted by the release of certain of our securities that are currently escrowed if the holders immediately trade these securities upon release. These securities are currently issued and outstanding but restricted from trading. These will be released from escrow in lots on pre-determined dates.

As of the date of this Prospectus, we have 1,376 Common Shares subject to escrow conditions pursuant to the CPC Escrow Agreement (as defined below), 39,285 Company 2024 Warrants (as defined below) subject to escrow conditions pursuant to the Surplus Security Escrow Agreement (as defined below), 113,435 Common Shares subject to escrow conditions pursuant to the Surplus Security Escrow Agreement (as defined below), 15,000 Common Shares subject to escrow conditions pursuant to the Value Security Escrow Agreement (as defined below), and 15,000 Company 2024 Warrants subject to escrow conditions pursuant to the Value Security Escrow Agreement (as defined below) (collectively, the “Escrowed Securities”). The Escrowed Securities will be released in lots 39,124 Common Shares and 18,214 Company 2024 Warrants on March 18, 2023, and 90,686 Common Shares and 36,071 Company 2024 Warrants on September 18, 2023. See Escrowed Securities and Material Contracts.

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We may need to divest assets if there is insufficient capital.

If sufficient capital is not available, we may be required to delay, reduce the scope of, eliminate or divest one or more of our assets or products, any of which could have a material adverse effect on our business, financial condition, prospects, or results of operations.

We have broad discretion over the use of net proceeds from future capital raises.

We will have broad discretion over the use of the net proceeds from any future capital raises. Because of the number and variability of factors that will determine our use of such proceeds, the ultimate use might vary substantially from the planned use. Investors may not agree with how we allocate or spend the proceeds from future capital raises. We may pursue collaborations that ultimately do not result in an increase in the market value of the Common Shares and that instead increase our losses. 

Currency fluctuations may have a material effect on us.

Fluctuations in the exchange rate between the United States dollar, other currencies and the Canadian dollar may have a material effect on our results of operations. To date, we have not engaged in currency hedging activities. To the extent that we may seek to implement hedging techniques in the future with respect to our foreign currency transactions, there can be no assurance that we will be successful in such hedging activities.

Unavailability of adequate director and officer insurance could make it difficult for us to retain and attract qualified directors and could also impact our liquidity.

We have directors and officers liability ("D&O") insurance we believe to be adequate to cover risk exposure for us and our directors and officers, who we indemnify to the full extent permitted by law, there is no guaranty that such coverage will be adequate in the event of litigation.

Our coverage needs for D&O insurance may change or increase in the future for various reasons including changes in our market capitalization, changes in trading volume or changes in the listing rules of exchanges or marketplaces on which our securities may trade from time to time. There is no guaranty that such coverage will be available or available at reasonable rates. Further, our current D&O insurance policy will not cover us if we list to a national listing in the United States, such as Nasdaq, as we currently plan. While we intend to seek new D&O insurance before completing the Up-Listing and to increase our D&O coverage as needed in the future, there can be no assurance that we will be able to do so at reasonable rates or at all, or in amounts adequate to cover expenses and liability should litigation occur. Without adequate D&O insurance, the costs of litigation including amounts we would pay to indemnify our officers and directors should they be subject to legal action based on their service to us could have a material adverse effect on our financial condition, results of operations and liquidity. Further, if we are unable to obtain adequate D&O insurance in the future for any reason, we may have difficultly retaining and attracting talented and skilled directors and officers, which could adversely affect our business, and may be unable to list our Common Shares on a national exchange in the United States, which could impact the liquidity and value of our stock.

Our insurance policies may be inadequate to fully protect us from material judgments and expenses.

We require insurance coverage for a number of risks, including business interruption, environmental matters and contamination, personal injury and property damage as well as general aviation liability coverage. Although we maintain insurance policies, we cannot provide assurance that this insurance will be adequate to protect us from all material judgments and expenses related to potential future claims or that these levels of insurance will be available in the future at economical prices or at all. A successful product liability claim could result in substantial cost to us. If insurance coverage is unavailable or insufficient to cover any such claims, our financial resources, results of operations and prospects could be adversely affected.

Even if we are fully insured as it relates to a claim, the claim could nevertheless diminish our brand and divert management's attention and resources, which could have a negative impact on our business, prospects, financial condition and results of operations.

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Risks Relating to the Ownership of our Securities

An investment in our securities involves significant risks.

Additional risks and uncertainties not presently known to us or that we currently consider immaterial may also impair our business and operations and cause the trading price of our securities to decline. If any of the following or other risks occur, our business, prospects, financial condition, results of operations and cash flows could be materially adversely impacted. In that event, the trading price of our securities could decline and security holders could lose all or part of their investment. There is no assurance that risk management steps taken will avoid future loss due to the occurrence of the risks described below or other unforeseen risks. 

Our Common Shares may experience extreme stock price volatility unrelated to our actual or expected operating performance, financial condition or prospects, making it difficult for prospective investors to assess the rapidly changing value of our common shares.

Recently, there have been instances of extreme stock price run-ups followed by rapid price declines and strong stock price volatility with a number of recent initial public offerings, especially among companies with relatively smaller public floats. As a relatively small-capitalization company with relatively small public float, we may experience greater stock price volatility, extreme price run-ups, lower trading volume and less liquidity than large-capitalization companies. In particular, our Common Shares may be subject to rapid and substantial price volatility, low volumes of trades and large spreads in bid and ask prices. Such volatility, including any stock-run up, may be unrelated to our actual or expected operating performance, financial condition or prospects, making it difficult for prospective investors to assess the rapidly changing value of our Common Shares.

In addition, if the trading volumes of our Common Shares are low, persons buying or selling in relatively small quantities may easily influence prices of our Common Shares. This low volume of trades could also cause the price of our Common Shares to fluctuate greatly, with large percentage changes in price occurring in any trading day session. Holders of our Common Shares may also not be able to readily liquidate their investment or may be forced to sell at depressed prices due to low volume trading. If high spreads between the bid and ask prices of our Common Shares exist at the time of a purchase, the stock would have to appreciate substantially on a relative percentage basis for an investor to recoup their investment. Broad market fluctuations and general economic and political conditions may also adversely affect the market price of our Common Shares.

As a result of this volatility, investors may experience losses on their investment in our Common Shares. A volatile market price of our Common Shares also could adversely affect our ability to issue additional shares of Common Shares or other securities and our ability to obtain additional financing in the future.

The market price of our securities may be volatile.

The market price for our securities may be volatile and subject to wide fluctuations in response to numerous factors, many of which are beyond our control, including, but not limited to, the following: (i) actual or anticipated fluctuations in our quarterly results of operations; (ii) recommendations by securities research analysts; (iii) changes in the economic performance or market valuations of other issuers that investors deem comparable to us; (iv) departure of executive officers or other key personnel; (v) issuances or anticipated issuances of additional Common Shares; (vi) significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving us or our competitors; and (vii) news reports relating to trends, concerns, technological or competitive developments, regulatory changes and other related issues in our industry or target markets. Financial markets have historically experienced significant price and volume fluctuations that have particularly affected the market prices of equity securities of public entities and that have, in many cases, been unrelated to the operating performance, underlying asset values or prospects of such entities. Accordingly, the market price of our securities may decline even if our operating results, underlying asset values or prospects have not changed. Additionally, these factors, as well as other related factors, may cause decreases in asset values that are deemed to be other than temporary, which may result in impairment losses. There can be no assurance that continuing fluctuations in price and volume will not occur. If such increased levels of volatility and market turmoil continue for a protracted period of time, the trading price of the Common Shares may be materially adversely affected.

There can be no assurance of active market for the Common Shares.

The Common Shares are listed on the TSXV since September 22, 2020, quoted on the OTCQB since February 4, 2021 and listed on the Frankfurt Stock Exchange since March 29, 2022. Following our planned listing of our Common Shares and Warrants sold in this offering on Nasdaq, our Common Shares will no longer be quoted on the OTCQB. There can be no assurance that we will succeed in listing the Common Shares or Warrants on Nasdaq. Further, there can be no assurance an active and liquid market for the Common Shares or Warrants will be maintained. The Warrants to be sold in this offering are not listed on an exchange or marketplace.

Approximately 0.2 million or 17% of the outstanding Common Shares as of November 3, 2022, subject to regulatory escrow imposed by the TSXV in connection with the Amalgamation (as defined below). These escrow and restrictions will gradually be lifted over a period ending on September 18, 2024. See Share Capital - Escrowed Securities.

If an active public market is not maintained, our shareholders may have difficulty selling the Common Shares or Warrants.

We are selling a substantial number of Common Shares and Warrants to purchase Common Shares in this offering, which could cause the price of our Common Shares to decline.

In this offering, we will sell up to 2,323,232 Common Shares (assuming no exercise by the underwriter of its Over-Allotment option and no purchase of Pre-funded Warrants) and up to 2,929,292 (excluding the Canadian Underwriter’s Canadian Compensation Options) Common Shares including the concurrent Canadian Offering. Additionally, we are selling Warrants to purchase Common Shares equal to the number of Common Shares being sold in the offering (assuming no purchase of Pre-funded Warrants and no exercise by the underwriter of its Over-Allotment Option). The existence of the potential additional Common Shares in the public market, or the perception that such additional shares may be in the market, could adversely affect the price of our Common Shares. We cannot predict the effect, if any, that market sales of those Common Shares or the availability of those Common Shares for sale will have on the market price of our Common Shares. Any decline in the price of a Common Share may also have a negative effect on the price in the market of a Warrant.

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There is no public market for either the Warrants or the Pre-funded Warrants being sold in this offering.

There is no established public trading market for either the warrants or the pre-funded warrants being sold in this offering. We intend to list the Warrants on Nasdaq, however there is no assurance that any market will develop. We will not list the Pre-funded Warrants on any securities exchange or nationally recognized trading system, including Nasdaq. Therefore, we do not expect a market to ever develop for the Pre-funded Warrants. Without an active market, the liquidity of the Pre-funded Warrants will be limited.

The Warrants and Pre-funded Warrants are speculative in nature.

Neither the Warrants nor the Pre-funded Warrants confer any rights of Common Share ownership on their respective holders, such as voting rights or the right to receive dividends, but rather merely represent the right to acquire Common Shares at a fixed price. Commencing on the date of issuance, holders of the Warrants may exercise their right to acquire the Common Shares and pay the stated exercise price per share prior to five years from the date of issuance, after which date any unexercised Warrants will expire and have no further value. Commencing on the date of issuance, holders of the Pre-funded Warrants may exercise their right to acquire the Common Shares and pay the stated exercise price per share until exercised in full. There can be no assurance that the market price of our Common Shares will ever equal or exceed the exercise price of the Warrants offered by this prospectus, and if so, the Warrants would expire without value.

The Warrants included in the Units and Pre-Funded Units are expected to be listed on Nasdaq separately upon the pricing of this offering, and may provide investors with an arbitrage opportunity that could adversely affect the trading price of our Common Shares.

Because the Units and Pre-Funded Units will never trade as a unit, and the Warrants are expected to be traded on Nasdaq, investors may be provided with an arbitrage opportunity that could depress the price of our Common Shares.

In the event that our Common Share price does not exceed the exercise price of the Warrants or the Pre-funded Warrants during the period when the Warrants or the Pre-funded Warrants are exercisable, as applicable, such warrants may not have any value.

Until holders of the Warrants and the Pre-funded Warrants acquire Common Shares upon exercise thereof, holders of the Warrants and Pre-funded Warrants will have no rights with respect to our Common Shares. Upon exercise of the Pre-funded Warrants, such holders will be entitled to exercise the rights of a common shareholder only as to matters for which the record date occurs after the exercise date.

There is no assurance that any of the Warrants will be exercised and we will receive the exercise proceeds therefrom.

The Warrants have an exercise price above the price of a Common Share. If the price of our Common Shares does not exceed the Warrant exercise price, then it is unlikely that the Warrants will be exercised. The Warrants will expire on the fifth anniversary of their issuance, which if they expire without being exercised the Company will not receive any proceeds therefrom.

Additionally, for the Warrants to be exercised for cash, we must keep an effective registration statement available for issuance of the Common Shares issuable on exercise of the Warrants. If we fail to maintain an effective registration statement, then the Warrants may be exercised on a cashless basis, and we will not receive any cash amount from their exercise.

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If we are unable to satisfy the requirements of Sarbanes-Oxley or our internal controls over financial reporting are not effective, the reliability of our financial statements may be questioned.

We will become subject to the requirements of Sarbanes-Oxley if the registration statement of which this Prospectus is a part is declared effective by the SEC. Section 404 of Sarbanes-Oxley ("Section 404") requires companies subject to the reporting requirements of United States securities laws to complete a comprehensive evaluation of their internal controls over financial reporting. To comply with this statute, we will be required to document and test our internal control procedures and our management will be required to assess and issue a report concerning our internal controls over financial reporting. Pursuant to the Jumpstart Our Business Startups Act of 2012, as amended, we will be classified as an "emerging growth company." Under the JOBS Act, emerging growth companies are exempt from certain reporting requirements, including the independent auditor attestation requirements of Section 404(b) of Sarbanes-Oxley. Under this exemption, our independent auditor will not be required to attest to and report on management's assessment of our internal controls over financial reporting during a five year transition period, except in the event this is accelerated if we lose our status as an "emerging growth company". We will need to prepare for compliance with Section 404 by strengthening, assessing and testing our system of internal controls to provide the basis for our report. However, the continuous process of strengthening our internal controls and complying with Section 404 is complicated and time-consuming. Furthermore, we believe that our business will grow both domestically and internationally, organically and through acquisitions, in which case our internal controls will become more complex and will require significantly more resources and attention to ensure our internal controls remain effective overall. During the course of our testing, management may identify material weaknesses or significant deficiencies, which may not be remedied in a timely manner to meet the deadline imposed by Sarbanes-Oxley. If management cannot favorably assess the effectiveness of our internal controls over financial reporting, or our independent registered public accounting firm identifies material weaknesses in our internal controls, investor confidence in our financial results may weaken, and the market price of our securities may suffer.

 Our status as an "emerging growth company."

We will be an "emerging growth company" as defined in section 3(a) of the Exchange Act (as amended by the JOBS Act), and will continue to qualify as an emerging growth company until the earliest to occur of: (a) the last day of the fiscal year during which we have total annual gross revenues of USD$1.235 billion (as such amount is indexed for inflation every five years by the SEC) or more; (b) the last day of our fiscal year following the fifth anniversary of the date of the first sale of common equity securities pursuant to an effective registration statement under the Securities Act; (c) the date on which we have, during the previous three-year period, issued more than USD$1 billion in non-convertible debt; and (d) the date on which we are deemed to be a "large accelerated filer", as defined in Rule 12b-2 under the Exchange Act. We will qualify as a large accelerated filer (and would cease to be an emerging growth company) at such time when on the last business day of our second fiscal quarter of such year the aggregate worldwide market value of our common equity held by non-affiliates is USD$700 million or more.

For so long as we remain an emerging growth company, we are permitted to, and intend to, rely upon exemptions from certain disclosure requirements that are applicable to other public companies that are not emerging growth companies. These exemptions include not being required to comply with the auditor attestation requirements of Section 404. We cannot predict whether investors will find our securities less attractive because we rely upon certain of these exemptions. If some investors find the securities less attractive as a result, there may be a less active trading market for our securities and the price of our securities may be more volatile. On the other hand, if we no longer qualify as an emerging growth company, we would be required to divert additional management time and attention from development and other business activities and incur increased legal and financial costs to comply with the additional associated reporting requirements, which could negatively impact our business, financial condition and results of operations.

We may lose foreign private issuer status in the future, which could result in significant additional costs and expenses.

We may in the future lose foreign private issuer status if a majority of the Common Shares are held in the United States and if we fail to meet the additional requirements necessary to avoid loss of foreign private issuer status, such as if: (i) a majority of the directors or executive officers are United States citizens or residents; (ii) a majority of assets are located in the United States; or (iii) the business is administered principally in the United States. The regulatory and compliance costs to us under United States securities laws as a United States domestic issuer will be significantly more than the costs incurred as an SEC foreign private issuer. If we are not a foreign private issuer, we would be required to file periodic and current reports and registration statements on United States domestic issuer forms with the SEC, which are generally more detailed and extensive than the forms available to foreign private issuers. In addition, we may lose the ability to rely upon exemptions from corporate governance requirements that are available to foreign private issuers.

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FORWARD-LOOKING STATEMENTS

Certain statements in this Prospectus constitute "forward-looking statements". Such forward-looking statements include, but are not limited to, information with respect to our objectives and our strategies to achieve these objectives, as well as statements with respect to our beliefs, plans, expectations, anticipations, estimates and intentions. These forward-looking statements may be identified by the use of terms and phrases such as "may", "would", "should", "could", "expect", "intend", "estimate", "anticipate", "plan", "foresee", "believe", or "continue", the negative of these terms and similar terminology, including references to assumptions, although not all forward-looking statements contain these terms and phrases. Forward-looking statements are provided for the purposes of assisting the reader in understanding us, our business, operations, prospects and risks at a point in time in the context of historical and possible future developments and therefore the reader is cautioned that such information may not be appropriate for other purposes.

Forward-looking statements relating to us include, among other things, statements relating to:

• our expectations regarding our business, financial condition and results of operations;
• the future state of the legislative and regulatory regimes, both domestic and foreign, in which we conduct business and may conduct business in the future;
• our expansion into domestic and international markets;
• our ability to attract customers and clients;
• our marketing and business plans and short-term objectives;
• our ability to obtain and retain the licenses and personnel we require to undertake our business;
• our strategic relationships with third parties;
• our anticipated trends and challenges in the markets in which we operate;
• governance of us as a public company; and
• expectations regarding future developments of products and our ability to bring these products to market.

Forward-looking statements are based upon a number of assumptions and are subject to a number of risks and uncertainties, many of which are beyond our control, which could cause actual results to differ materially from those that are disclosed in or implied by such forward-looking statements. These risks and uncertainties include, but are not limited to, the following risk factors:

• limited operating history;
• failure to realize growth strategy;
• failure to complete transactions or realize anticipated benefits;
• reliance on key personnel;
• regulatory compliance;
• competition;
• changes in laws, regulations and guidelines;
• demand for our products;
• fluctuating prices of raw materials;
• pricing for products;
• ability to supply sufficient product;
• expansion to other jurisdictions;
• damage to our reputation;
• operating risk and insurance coverage;
• negative operating cash flow;
• management of growth;
• product liability;
• product recalls;
• environmental regulations and risks;
• ownership and protection of intellectual property;
• constraints on marketing products;
• reliance on management;
• fraudulent or illegal activity by our employees, contractors and consultants;
• breaches of security at our facilities or in respect of electronic documents and data storage and risks related to breaches of applicable privacy laws;
• government regulations with regards to COVID-19, employee health and safety regulations;
• the duration and impact of COVID-19, and including variants of COVID-19, on our operations;
• regulatory or agency proceedings, investigations and audits;
• additional capital requirements to support our operations and growth plans, leading to further dilution to shareholders;
• conflicts of interest;
• litigation;
• risks related to United States' and other international activities;
• risks related to security clearances and risks relating to the ownership of our securities, such as potential extreme volatility in the price of our securities;
• no assurance of an active market for Common Shares and Warrants; and
• approval of our Nasdaq listing application.

Although the forward-looking statements contained in this Prospectus are based upon what we believe are reasonable assumptions, investors are cautioned against placing undue reliance on this information since actual results may vary from the forward-looking statements. Certain assumptions were made in preparing the forward-looking statements concerning availability of capital resources, business performance, market conditions and customer demand.

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CAPITALIZATION AND INDEBTEDNESS

The following table presents our unaudited capitalization and indebtedness as of June 30, 2022, in accordance with IFRS as well as the as adjusted capitalization and indebtedness as of June 30, 2022, reflecting the effect of (i) the sale by us of 2,323,232 Common Units (assuming no sale of any Pre-funded Units) offered by us in this prospectus (excluding the underwriter’s Over-Allotment Option) at the assumed public offering price of USD$4.95 per Common Unit (with an estimated offering price range for the Common Units between USD$4.21 and USD$5.21), after deducting the estimated underwriting discounts and other offering expenses and (ii) the sale by us of 2,323,232 Common Units (assuming no sale of any Pre-funded Units) offered by us in this prospectus (excluding the underwriter’s Over-Allotment Option) at the assumed public offering price of USD$4.95 per Common Unit (with an estimated offering price range for the Common Units between USD$4.21 and USD$5.21), after deducting the estimated underwriting discounts and other offering expenses, and including the sale by us of 606,060 Canadian Units offered in the Canadian Offering (excluding the Canadian Underwriter’s Compensation Options), after deducting the estimated underwriting discounts and other Canadian Offering expenses. You should read this table in conjunction with the sections of this Prospectus entitled Operating and Financial Review and Prospects, Financial Statements and the related notes and other financial information contained elsewhere in this Prospectus.

	As of June 30, 2022
(CAD$ in thousands)		Actual			As adjusted for Pre-IPO Transactions(1)			As adjusted for IPO net of Loan Repayment(2)			As adjusted for IPO and Canadian Offerings, net of Loan Repayments(3)
Debt:
Lease obligations	$	292		$	292		$	292		$	292
Unsecured borrowings		1,753			2,192			1,962			210
Total debt		2,045			2,484			2,254			502
Equity:
Share capital		19,166			19,510			31,912			34,889
Warrants		1,902			1,902			1,902			1,902
Contributed surplus		3,474			3,474			3,474			3,474
Accumulated other comprehensive gain		(28	)		(28	)		(28	)		(28	)
Accumulated deficit		(23,522	)		(23,522	)		(23,579	)		(23,916	)
Total equity		992			1,335			13,681			16,321
TOTAL CAPITALIZATION	$	3,037		$	3,819		$	15,935		$	16,823

1)Includes CAD$344,000 as a result of Common Shares issued on July 14, 2022, in connection with the closing of a non-brokered private placement of 22,857 units (post-Reverse Split), net of $nil units offering costs. Each unit comprised of one Common Share and one warrant. Additionally, it includes USD$400,000 or CAD$520,000 unsecured loans issued on August 29, 2022, net of CAD$80,869 debt offering costs.

2)If the Canadian Offering does not close, USD$220,000 of the net proceeds from this offering will be used to repay one of the two unsecured loans that was issued in August 2022 (see Material Contracts).

3)Includes the estimated net proceeds from the Canadian Offering after the anticipated repayment of certain outstanding loans after the closing of the Canadian Offering (see Use of Proceeds). The accumulated deficit was also adjusted to reflect the immediate charge of the unamortized debt offering costs for loan repayments. There is no assurance that the Canadian Offering will close and that we will receive gross proceeds of USD$3,000,000 from the Canadian Offering.

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Each USD$1.00 increase (decrease) in the assumed public offering price would increase (decrease) shareholder’s equity after this offering by approximately USD$2.1 million or USD$2.7 million including the Canadian Offering (excluding the Canadian Underwriter’s Compensation Options) (or USD$2.4 million or USD$3.0 million including the Canadian Offering if the underwriter exercises its Over-Allotment Option in full), assuming the number of Common Shares we sell, as set forth on the cover page of this Prospectus, remains the same, after deducting underwriting discounts and commissions and the estimated offering expenses payable by us, and further assuming no sale of any Pre-funded Warrants. Similarly, each increase (decrease) of  100,000 Common Shares offered by us would increase (decrease) our shareholder’s equity by USD$0.5 million, assuming the assumed public offering price remains the same and after deducting underwriting discounts and commissions.

The information in the above table for the actual information and as adjusted basis as of June 30, 2022, excludes as of such date (USD$ equivalent is based on a conversion rate of $1.3749 as of November 3, 2022):

• warrants to purchase 181,243 Common Shares at a weighted average exercise price of $56.70 (USD$41.15) per share;

• 60,138 Common Shares issuable upon the exercise of outstanding but unexercised stock options to purchase Common Shares, under our LTIP, at a weighted average exercise price of $95.90 (USD$69.60) per share;

• 36,371 Common Shares issuable upon the conversion of 21,828 RSUs, 11,885 PSUs, and 2,657 SARs, under our LTIP;

• 837 Common Shares issuable upon the conversion of 837 agent option units at an exercise price of $87.50 (USD$63.50) per share, each unit comprise of one Common Share and one warrant exercisable at $122.50 (USD$88.90) per share;

• Up to 2,323,232 Common Shares issuable upon the exercise of the Pre-funded Warrants if Pre-funded Units are sold in lieu of Common Units;

• Up to 116,162 Common Shares issuable upon the exercise of the Underwriter Warrants; and

• Up to 42,424 Common Shares issuable upon the exercise of the Canadian Compensation Options.

USE OF PROCEEDS

We estimate that the net proceeds from this offering will be approximately USD$9.5 million or USD$11.8 million including the Canadian Offering, assuming we sell only Common Units in this offering, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, based on as the assumed public offering price of USD$4.95 per Common Unit (with an estimated offering price range for the Common Units between USD$4.71 and USD$5.21). If the underwriter exercises its Over-Allotment Option in full, excluding the exercise of Warrants, we estimate that the net proceeds to us from this offering will be approximately USD$11.1million or USD$13.4 million including the Canadian Offering, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the Over-Allotment Option is exercised solely in full for Common Shares or Pre-Funded Warrants, we will receive total approximate net proceeds of USD$1.6 million, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, and if the Over-Allotment Option is exercised solely in full for Warrants, will receive total approximate net proceeds of USD$3.48. There is no assurance that the Canadian Offering will close or that we will receive gross proceeds of USD$3,000,000 from the Canadian Offering.

We expect to use the net proceeds from this offering, including the Canadian Offering, for working capital (including commercial roll-out of PARA OPS in the United States) and other general corporate purposes. Further, the Canadian Offering proceeds will be used principally to repay part or all of the following outstanding loans:

• CAD$2 million issued in March 2022 of which CAD$1.8 million will mature on April 11, 2023, and CAD$0.2 million on April 15, 2023. These loans bear interest at 9% per annum. See Material Contracts – Unsecured Loan Agreement – March 2022.
  
  
• USD$200,000 issued in August 2022, which bears interest at 6% per annum and matures on August 30, 2023. The principal at maturity is USD$220,000. See Material Contracts - Unsecured Loan Agreement – August 2022.

The use of proceeds from the above loans were for working capital and general corporate purposes.

If the Canadian Offering does not close, USD$220,000 of the net proceeds from this offering will be used to repay one of the two unsecured loans that was issued in August 2022.

We may also use a portion of the net proceeds from this offering for acquisitions or strategic investments in complementary businesses or technologies. We do not currently have any plans for any such acquisitions or investments.  We have not allocated specific amounts of net proceeds for any of these purposes. 

Each USD$1.00 increase (decrease) in the assumed public offering price of USD$4.95 per Common Unit would increase (decrease) net proceeds to us by approximately USD$2.1 million or USD$2.7 million including the Canadian Offering (or USD$2.4 million or USD$3.0 million including the Canadian Offering if the underwriter exercises its Over-Allotment Option in full), assuming the number of Common Shares we sell, as set forth on the cover page of this Prospectus, remains the same, after deducting underwriting discounts and commissions and the estimated offering expenses payable by us, and further assuming no sale of any Pre-funded Warrants. Similarly, each increase (decrease) of 100,000 Common Shares offered by us would increase (decrease) the net proceeds to us by USD$0.5 million, assuming the assumed public offering price remains the same and after deducting underwriting discounts and commissions.

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INFORMATION ON THE COMPANY

Business Overview

We develop and commercialize next-generation technology solutions that deliver a tactical advantage for military, public safety agencies and personal defense markets. Our core mission is to protect and save lives.

Principal Products and Services

The following is a summary of our main product and service categories for each business line:

Non-Lethal	Digitization	Counter-Threat
PARA OPS products: Non-reciprocating devices: A single-shot device A five-shot device 12 gauge shotgun Reciprocating devices Replica pistol AR style Ammunitions ARWEN products: Single shot 37mm launcher Multi-round 37mm launcher Ammunitions	Products: TASCS IFM TASCS NORS Services: ATAK Centre of Excellence Critical Incident Management System ("CIMS")	Products: Battlefield Laser Defense System ("BLDS") Phantom Electronic Warfare device GhostNet Counter-Drone system

Non-Lethal Products

Non-reciprocating PARA OPS devices

We are in the LRIP phase for the .67 caliber single shot and expect to complete our sales, marketing and distribution plan and begin the commercialization phase during our first quarter of Fiscal 2023, which ends December 31, 2022; whereas we are in in the prototype phase for the .67 multi-shot devices, with LRIP planned for Q1 Fiscal 2023 and commercialization in Q2 Fiscal 2023.  Both will be offered to the professional and personal defense markets, including our proprietary projectiles for these devices.

(Single shot)	(Multi-shot)

(Proprietary cartridge and projectile)

We will offer three types of payload for projectiles based on customer needs:

• solid slug for practice or pain compliance,
• inert colored powder for practice or realistic close quarters combat simulation, and
• incapacitating irritant pepper powder for operation use.

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Reciprocating PARA OPS devices

We plan to begin the design and prototype of PARA OPS high-capacity automatic pistols and carbines (referred as reciprocating devices) for non-lethal operations and force-on-force training in Q1 Fiscal 2023. 

See below for further details of our projected product development cycle and estimated additional investment to reach full commercialization for our PARA OPS devices.

ARWEN launchers

As a result of the Police Ordinance Acquisition, we are currently selling the following ARWEN products and related ammunition to law enforcement agencies:

(Multi-shot launcher)	(Single-shot launcher)

Digitization

For the Digitization business line, our products share the same core technology platforms and leverages our domain knowledge, proprietary sensor-software integration, algorithms and electronic circuity in order to develop and deliver integrated solutions to our clients who operate in the primarily dismounted domain (i.e., away from supporting platforms such as vehicles, aircraft and armored vehicles):

• Micro Integrated Sensor Software Technology ("MISST") a proprietary integration of miniaturized sensors, optics, ballistics and software that provides an advancement in affordable smart systems and mission capability. Current applications and offerings of the MISST technology enable: (i) a real-time networked situational awareness for soldiers and their weapons systems, and (ii) smart management of ordnance systems.  MISST also provides solutions for countering drone attacks and countermeasures against weaponized lasers in our Counter-Threat business line.

• Android Team Awareness Kit ("ATAK"). ATAK is a United States government owned situational awareness software application that is hosted on Android end user devices. Based on our observation, ATAK is becoming the de facto standard in the United States, Canada, and NATO for software based situational awareness and as a command and control battle management application in the dismounted domain. While the base software is United States Government owned and is available at no cost, being able to develop specific plug-ins and secure tactical networks is beyond the capacity of most user organizations. We have the experience and expertise to offer ATAK integration and networking services to prospective clients.

• After successfully developing digital technologies for tactical military applications which provide real-time exchange of situational awareness, navigation, imagery, and operational information for soldiers on the ground, we saw opportunities to apply these digitization solutions to the public safety market. These solutions solve critical challenges for law enforcement, fire, emergency response, search and rescue, and natural disaster management, all of whom require networked situational awareness to understand, decide, and act faster and more effectively in response to a critical incident. When responders are facing a public emergency, they need information quickly. Whether it is a wildfire, active shooter scenario or a natural disaster, they need to know what they're walking into and where their resources are located. They also need to communicate and collaborate in real-time - across teams and information sources and often across departments.

We entered the civilian public safety market by launching our CIMS for enhanced public safety. A critical incident is any situation that requires swift, decisive action involving multiple components in response to and occurring outside of the normal routine business activities of a public safety response, which generally involves the police department, the fire department, and can also involve the Office of Emergency Management.  The primary goal of addressing a critical incident is the resource management of first responders, equipment, and the integration of communications and technology. Our CIMS is a digital technology solution that addresses this need by integrating emergency operations, incident command post, incident commanders, and all responders whether mobile or dismounted. Our CIMS architecture is a native cloud-based Microsoft environment (MS Azure) integrated with Team Awareness Kit ("TAK"). This provides key stakeholders with seamless fusion and sharing of crucial real-time position location, imagery, and time-sensitive emergency services data and information for effective and coordinated delivery of emergency services, including rescue, fire suppression, emergency medical care, law enforcement, and other forms of hazard control and mitigation.

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The following is a summary of our Digitization main products that are ready for commercialization in Fiscal 2022:

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Counter Threats

We offer the following proprietary next-generation counter-threat solutions to protect against hostile enemy lasers, electronic detection, and drones.

Other products under development

In Q4 Fiscal 2021, we partnered with Alare in the United States to establish the technical feasibility of a kinetic system to neutralize small Unmanned Aircraft Systems ("UAS") to neutralize small UAS and loitering munitions without collateral damage.  The nature of our contract with Alare is of a short-term consulting agreement in which we agree to pay for engineering services as rendered. Further details of this drone project, referred as GhostNet, remain confidential for security and competitive reasons at the present time.  We discontinued further investment in another drone project under development, referred as GreyGhost, which was a licensed technology with AerialX Drone Solutions Inc. ("AerialX") providing a kinetic interceptor that could use multiple methods to engage target drones.  To date, AerialX has not successfully delivered a functional prototype and as a result we redirected our investment to the above GhostNet project, a niche market which we are well positioned to leverage using our specialized counter-threat knowledge and technology.

We have also started the development of Shot Counter which is largely based on the same sensor technology as the TASCS, and which can be incorporated into a firearm in order to count the number of rounds fired by the weapon. It is a small device that fits inside the pistol grip of most weapons, and functions with no user input for up to ten years on a single battery. Today we have reached the concept design; but, we have not yet built a prototype.

Over the last three financial years we have made significant investment to further advance our product development and position ourselves with OEM partners for expected commercialization during Fiscal 2023. We also concluded two acquisitions, the PARA OPS and Phantom solutions. At the moment, only the ARWEN product line is considered to be in full production.

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The following table provides an update of our current product development cycle by product line and estimated timeline by quarter (fiscal year ended September 30^th) to reach production:

	Concept & Design	Prototype(1)	Market Testing(2)	Pre- Production(3)	Commercialization(4)
PARA OPS– single shot device (5)			Q4 FY22	Q4 FY22	Q1 FY23
PARA OPS– multi-shot device (5)		Q4 FY22	Q4 FY22	Q1 FY23	Q2 FY23
PARA OPS – reciprocating devices	Q1 FY23	Q1 FY23	Q2FY23	Q2 FY23	Q3 FY23
TASCS IFM					To Be Determined
BLDS					To Be Determined
Phantom					To Be Determined

Notes:

(1)Includes prototype Version 1 (V1), integration, and testing.

(2)Includes field testing and prototype V2.

(3)Includes final product development, LRIP, and sales demonstration units. A product is not ready for pre-production until it reaches Technology Readiness Level (TRL) of 5 to 6.

(4)Subject to market demand for KWESST's product.
(5)Includes the cartridges for the devices.

We consider a product to have reached the commercialization phase when we have begun LRIP and we have a sales, marketing, and distribution plan for the product.

The following table provides management's estimate of the additional investment to reach commercialization, excluding our existing internal engineering labor costs:

	Concept & Design	Prototype	Market Testing	Pre-production	Total
Single shot PARA OPS (non-reciprocating devices)	N/A	N/A	N/A	$25,000	$25,000
Multi-shot PARA OPS (non-reciprocating devices)	N/A	N/A	$50,000	$150,000	$200,000
PARA OPS (reciprocating devices)	N/A	$125,000	$50,000	$175,000	$350,000
TASCS IFM	N/A	N/A	N/A	Funded (1)	Funded (1)
BLDS	N/A	N/A	N/A	$50,000	$50,000
Phantom	N/A	N/A	N/A	$100,000 (2)	$100,000
TOTAL	$Nil	$125,000	$100,000	$500,000	$725,000

Notes:

(1)Funded by customer orders.

(2)We are in the process of enhancing our existing Phantom units following feedback received from invitation-only United States military trials that took place during August 2022.

Refer to Liquidity and Capital Resources, for our current available liquidity and capital resources to fund the above.

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Principal Markets

Our total revenues by category of activity and geographic market for each of the last three financial years were as follows:

		Year ended September 30, 2021		Nine months ended September 30, 2020		Year ended December 31, 2019
Major products / service lines
TASCS System	$	1,255,982	$	835,097	$	472,749
Other		19,822		26,820		36,399
	$	1,275,804	$	861,917	$	509,148
Primary geographical markets
United States	$	1,238,063	$	835,097	$	472,749
Canada		37,741		26,820		36,399
	$	1,275,804	$	861,917	$	509,148

Market Opportunities

Non-Lethal

According to Allied Market Research: Non-Lethal Market, May 2021, the global non-lethal weapons market was approximately USD$7.4 billion in 2020 and is projected to reach USD$12.5 billion in 2028 (a 7.4% compound annual growth rate). We plan to target the following two markets, with an initial focus in the United States:

• Professional market:

Our main focus in the short-term is the professional market in the United States as it represents a major opportunity for our non-lethal security products. According to the U.S. Bureau of Labor Statistics, in the United States there are nearly 917,000 police officers, detectives and criminal investigators. Cases involving police shootings and deaths related to the use of conductive energy devices have increased in the United States. According to The Washington Post, there have been over 6,300 shootings in the United States since 2015 involving police.

A Reuters report estimates that at least 1,000 people have died as a result of being stunned by conductive energy devices in the United States. In over 150 of those deaths, the conductive energy device was determined to be a cause or a contributing factor.

There are several other security-related occupations which we believe are potential customers for our non-lethal products. These include 800,000 private security guards, 346,000 corrections officers and 90,000 private detectives, according to the U.S. Bureau of Labor Statistics. We believe that our PARA OPS products could play a meaningful role in addressing the tragic increase in school shooting events. According to the Naval Postgraduate School's Center for Homeland Defense and Security, there have been approximately 460 shooting events in K-12 schools during the last five years. We believe our non-lethal security products offer school personnel important options to create a tactical advantage in school shootings without using lethal firearms.

According to the U.S. Department of Education, there are over 132,000 elementary and secondary schools and nearly 6,000 colleges and universities in the United States. We believe there is an opportunity to utilize our products to enhance school safety.

Other public spaces such as grocery stores, houses of worship, bars and nightclubs, concert venues, sporting arenas and public transportation centers are also confronted with increased security challenges. Each of these locations represents an opportunity for us as they could improve security without introducing lethal firearms into crowded civilian environments by equipping their employees and security personnel with our non-lethal products.

Other market opportunities that we intend to further explore include the international professional market, realistic force-on-force training for military and police, realistic high-action gaming and animal control, both in the United States and internationally.

The principal market for the ARWEN product line of non-lethal systems is law enforcement, primarily in Canada and United States.

• Consumer market:

According to Gallup and United States Census Bureau, as at January 2022, there are approximately 82 million gun owners in the United States. We believe our PARA OPS devices will offer gun owners and members of their households a safer, personal defense option, without the risk of loss of human life.

In addition to personal defense, we believe we have an opportunity to disrupt the recreational market - specifically for paintball guns, which are air-based devices rather than cartridge-based (see below, Business Overview - Competitive Conditions). According to market research by Statista, the paintball gun market size in the United States was $1.3 billion in 2020.

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Digitization

The principal market for our digitization business lines is primarily among military and public safety agencies in countries that are members of NATO, as well as Australia and New Zealand. As the largest purchaser and user of military and public safety products, the United States is our primary focus, followed by the other NATO member countries, and to a lesser extent, the Middle and Far East.

In addition to increased military spending in the United States and other members of NATO, another important trend that we have observed is an increase in funding within the military for projects related to precision munitions for weapons already in use by the military (legacy weapons) to further enhance survivability of soldiers and their operational effectiveness. Our TASCS products are expected to benefit from these trends by transforming "dumb" legacy weapons into "smart" weapons (with better accuracy).

For our CIMS offering, our principal market is public safety agencies, primarily in Canada and United States. Public safety agencies across the United States are seeking to implement digital solutions that can improve responder safety and incident management. According to Accenture, digital transformation presents one of the biggest challenges for public safety agencies. Globally, the public safety and security market was USD$435 billion in 2021 and is expected to reach USD$868 billion by 2028, growing at a CAGR of 10.4%, according to Fortune Business Insights.

The major factors fueling the public safety market include rising instances of mass shooting, natural disasters, terrorist activities and security breaches as well as increasing law enforcement requirements for public safety and investments in public safety measures for smart cities.

Counter Threat

Our BLDS and Phantom products were developed expressly to address the health and safety threats from weaponized and/or targeting laser devices by adversaries in the field.

We are also in the counter unmanned aircraft system ("Counter-UAS") market including loitering munitions. The proliferation of small hostile drones continues to be a growing worldwide problem for military forces, sensitive facilities, and public security agencies. Most counter-drone systems are electronic, designed to detect, identify, track and, if possible, disrupt the communications protocols of drones to prevent completion of their mission. Increasingly, however, drones are being developed by adversaries that are difficult or impossible to disrupt electronically.  Military and Homeland Security agencies are therefore seeking alternatives for stopping drones kinetically but without collateral damage.  We are working with Alare Technologies Inc. to develop a proprietary drone to address this opportunity.

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Competitive Conditions

Non-lethal

We expect our competition for non-lethal PARA OPS products will primarily be manufacturers of:

• handheld CO2-powered launchers of chemical irritant projectiles, including Byrna Technologies Inc. (which sells products under the Byrna® HD brand), United Tactical Systems, LLC (which sells products under the PepperBall brand), and FN Herstal;
• conductive energy devices, including Axon Enterprises, Inc. (which sells the TASER device); and
• remote restraint devices, including Wrap Technologies Inc.

Our competitive advantage is principally our proprietary system consisting of:

• a low energy cartridge system with a cartridge casing that generates spin to a projectile, a far more reliable platform than air-based launchers;
• inexpensive firing platforms in any design that fire only our PARA OPS;
• different payloads in the projectile for various applications;
• velocities and muzzle energy far below the "lethal" threshold;
• simple internal mechanisms with few components simplifying the manufacturing process; and
• specifically configured interior mates with projectile to generate self-stabilizing spin for accuracy and distance.

Our Executive Chairman was the inventor of PARA OPS. He was previously the founder of Simunition, a manufacturer of non-lethal training ammunition, since sold to General Dynamics. Further, he was also the CEO and Executive Chairman of United Tactical Systems, LLC, a company offering public-safety products for law enforcement, military and personal defense (owns the PepperBall brand). Accordingly, he brings a wealth of market knowledge to us. Additionally, our President and CEO has almost 20 years of firearms manufacturing experience. He was previously the General Manager of Colt Canada (the Canadian division of the American firearms manufacturer). In August 2021, we also hired a senior Technical Manager with over 17 years of firearms manufacturing, he previously held senior roles at Colt Canada including most recently R&D Manager and Product Support Engineering. While we do not build lethal firearms, this experience is very relevant for building our PARA OPS business.

Many air-powered (CO2-powered) devices are complex and less reliable, specifically:

• ambient temperature causes performance to vary, especially in colder weather;
• synthetic seals and "O" rings dry out and can cause catastrophic failures; and
• such devices entail long logistics tails (for example, heavy air tanks, compressors and spare parts).

We have filed a patent application with the U.S. Patent and Trademark Office ("USPO") for our proprietary cartridge-based firing system and are developing additional filings.

For the ARWEN's product line, our primary competitors are the following:

• DEFTEC / Safariland's 40 mm LTM launchers; and
• ALS (a Pacem Defense Company)'s single shot 37mm and 40mm launchers and 40mm multi-shot launchers.

A further market advantage is the access to the law enforcement market through our ownership of ARWEN, and the strength of its brand, which has been selling non-lethal systems to law enforcement agencies internationally for over 30 years. As a result of our acquisition of Police Ordnance, we believe there are synergies between our PARA OPS and ARWEN products such as access to law enforcement market for PARA OPS, providing a low-energy cartridge for ARWEN launchers and combining facilities and engineering. 

Digitization and Counter-Threat

Our competition for digitization and counter threat business lines is primarily:

• R&D labs funded by the U.S. Department of Defense for developing systems like TASCS;
• Fabrique Nationale Herstal S.A. for their remote weapon stations (although these do not offer high angular resolution like TASCS); and
• known developers of electronic decoy systems including Motorola (Tactical TV Decoys), Synchopated Engineering (Mockingbird RF Signal Emulator), and CACI Systemware (MAGPIE).

We are currently not aware of any major direct competitors for our BLDS technology.

Our competitive advantage is the significant experience that our team of engineers and technicians have in soldier systems (which we consider to be any device that a soldier carries onto the battlefield, ranging from a communications device to a sensor), weapons, and sensor fields. Our expertise in the field of networked weapons has been recognized by the United States military who requested that we participate in the NATO working group tasked with developing standards and requirements for these types of networked weapons.

We are also not aware of any major direct competitors for our CIMS.

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Seasonality

We do not expect our non-lethal business line will be exposed to seasonality. While our Digitization and Counter-Threat business lines may be affected by national military budgets, as well as federal, state and local government spending, we expect the various customers having different spending cycles will mitigate our potential cyclicality exposure.

Manufacturing and Availability of Raw Materials

Non-lethal

We have currently outsourced the engineering work for the PARA OPS devices to a third party, with oversight by us. We plan to lease new office and lab space in the Kitchener-Waterloo area (Ontario) during the first quarter of Fiscal 2023, likely less than 10,000 square foot facility.  To achieve a scalable operating model with minimal capital expenditures, we plan to rely upon strategic alliances with OEMs for the manufacturing and distribution of our PARA OPS products.

For the ARWEN launchers, these are currently manufactured in Toronto (Ontario) area in a combined manufacturing and training facility of approximately 5,000 square feet (see Property, Plants and Equipment).  The current lease is on a month-to-month basis. 

Today, we are not aware of material sourcing issues or pricing volatility of raw materials, except for price volatility for certain components to manufacture ARWEN ammunition that will be required for our non-lethal business line (see Risk Factors - We Are Dependent on Key Suppliers for our ARWEN Product Line).

With the COVID-19 pandemic and global supply chain challenges, it is not possible to predict whether this could eventually materially impact our sourcing and pricing of our key raw materials for our non-lethal business line.

Digitization and Counter-Threat

Today we have assembled a team of engineers, technicians and advisors that have significant experience in soldier systems (which we consider to be any device that a soldier carries onto the battlefield, ranging from a communications device to a sensor), weapons, and sensor fields. It is this combination of disparate knowledge sets that enables us to integrate and develop innovative solutions. We leverage from this same pool of talent to deploy CIMS solutions for the public safety market.

Except for GhostNet, all the product development is done at our facility in Ottawa (see below, Property, Plants and Equipment). For as long as market demand justifies a low rate of production quantities, we will internally produce these products. Once demand reaches quantities necessitating commercial-level production quantities, we will outsource our production to companies specifically suited to producing each particular product. We are not aware of any material regulatory approvals that are required for us to outsource production.

Today, we are not aware of material sourcing issues or pricing volatility of key components for our Digitization and Counter-Threat business lines. However, with the COVID-19 pandemic, it is not possible to predict whether this could eventually materially impact our sourcing and pricing of our key raw materials.

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Marketing Plans and Strategies

Non-lethal

Initially we plan to sell our PARA OPS to the professional market which includes law enforcement agencies and then to the consumer market through an e-commerce store and a network of distributors. As announced on September 28, 2021, we entered into a strategic partnership with Stryk Group USA to assist us with the branding strategy and the creation and implementation of a website, coupled with the planning, communication, and marketing of our presence at the 2022 Shot Show to be held in Las Vegas, Nevada on January 18-21 of 2022.  In February 2022, we have discontinued our partnership with Stryk Group USA in favor of a team of outside experts under our direct control. In February 2022, we retained the services of Orchid Advisors LLC ("Orchid Advisors") for the commercialization of PARA OPS product line (see below Government Regulations).

For the ARWEN launchers, we plan to continue direct sales to law enforcement agencies, with marketing via tradeshows and social media/web-based.

Digitization and Counter-Threat

For digitization and counter-threat products, we plan to market through direct customer contact, tradeshows, demonstrations, and web-based marketing. Currently, we are planning to attending the following tradeshows:

Tradeshow	Location	Date of Event	Estimated Costs
CANSEC	Ottawa, Ontario	June 2022	$52,000
Eurosatory	Paris, France	June 2022	$70,000
Close Combat Symposium	Shrivenham, England	July 2022	$17,600
Ontario Tactical Advisory Board	Collingwood, Ontario	May 2022	$6,000
Silent Swarm	Grayling, Michigan	August 2022	$27,000
AUSA	Washington, DC	October 2022	$48,500
EW Symposium	Shrivenham, England	November 2022	$17,000
Best Defense	London, Ontario	November 2022	$9,000
Shot Show	Las Vegas, Nevada	January 2023	$125,000

Proprietary Protection

Non-lethal

On February 11, 2022, we filed United States patent application No. 17/669,420 claiming priority to a provisional patent serial 63/148,163 by the USPO for our PARA OPS system. On October 18, 2022, we were advised by USPO that a notice of publication of application had been issued in relation to our patent application.

Additionally, we filed patent applications for our PARA OPS system with the Canadian Intellectual Property Office (Filing Certification pending) on October 24, 2022 and with the Australian Patent Office (Serial No. 2022259822) on October 27, 2022.

We have the following active and pending trademarks:

Trademark	Country	File Date for Pending	Application # / Registration #	Status / Registration Date
PARA OPS	United States	February 2, 2022	97/248,319	Pending
PENTA OPS	Canada	November 5, 2021	2,145,499	Pending
	Canada	November 5, 2021	2,145,500	Pending
EVERYONE GOES HOME ALIVE	Canada	August 10, 2022	2,203,009	Pending
EVERYONE GOES HOME ALIVE	United States	September 16, 2022	97/594,701	Pending
ARWEN	Canada	N/A	TMA657,575	January 31, 2006
ARWEN	Great Britain	N/A	UK00001247086	July 27, 1985
ARWEN	Singapore	N/A	T9105613J	June 8, 1991
ARWEN	United States	N/A	1,404,833	August 12, 1986

Digitization

While we rely significantly on trade secrets to protect our internally developed technologies, we currently have the following patent regarding our digitization business lines:

Product line	Country	Application #	File Date	Title	Status
TASCS IFM	International	PCT/CA2021/050993	Filed on July 19, 2021 which claims the benefit of 63/054,435	Methods and Systems for Digital Image-Referenced Indirect Target Aiming	Published as W02022/016260 Pending Applicant is KWESST Inc.

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Counter Threat

While we rely significantly on trade secrets to protect our internally developed technologies, we currently have the following patent and pending patent applications regarding our counter-threat business lines:

Product line	Country	Application #	File Date	Title	Status
Phantom	United States	16/686,095	Filed on November 15, 2019 which claims the benefit of 62/657,706	Programmable Multi-Waveform RF Generator for Use as Battlefield Decoy	Issued as Patent No. 10,969,467 (assigned to KWESST Inc.)
Phantom	United States	16/116,914	Filed on August 30, 2018 which claims the benefit of 62/657,706	Programmable Multi-Waveform RF Generator for Use as Battlefield Decoy	Issued as Patent No. 11,096,243 (assigned to KWESST Inc.)
Phantom	United States	17/163,546	Filed on January 31, 2021 which claims benefit of 16/116,914	Programmable Multi-Waveform RF Generator for Use as Battlefield Decoy	Pending
Phantom	United States	17/405,021	Filed on August 17, 2021 which claims the benefit of 16/116,914	Programmable Multi-Waveform RF Generator for Use as Battlefield Decoy	Pending
Phantom	International	PCT/CA2021/050038	Filed on January 15, 2021	Programmable Multi-Waveform RF Generator for Use as Battlefield Decoy	Published as W02022/150901 Pending Applicant is KWESST Inc.
Phantom	Canada	3,106,716	Filed on January 21, 2021	Programmable Multi-Waveform RF Generator for Use as Battlefield Decoy	Pending (assigned to KWESST Inc.)
Phantom	Australia	2021200556	Filed on January 29, 2021	Programmable Multi-Waveform RF Generator for Use as Battlefield Decoy	Pending (assigned to KWESST Inc.)

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We also have the following pending trademark applications:

Trademark	Country	Application #	File Date	Status
GreyGhost	Canada	2,044,815	August 10, 2020	Pending
GreyGhost	United States	90/114,280	August 14, 2020	Pending
Phantom	Canada	2,047,424	August 24, 2020	Pending
Phantom	United States	90/135,612	August 25, 2020	Pending
	Canada	2,063,763	November 12, 2020	Pending
	United States	90/518,212	February 8, 2021	Pending

Government Regulations

Non-lethal

United States

In February 2022, we retained the services of Orchid Advisors to assist us with the classification and ATF compliance for our PARA OPS devices.  Orchid Advisors is a FFL compliance solutions firm headquartered in Hartford, Connecticut.

Based on Orchid Advisor's interpretation of the ATF rules and regulations, we have self-classified the .67 caliber version of the PARA OPS devices as a "destructive device," providing us with the ability to go to market much sooner than waiting for ATF classification ruling. Under the ATF rules, a manufacturer must determine whether the device is a firearm and therefore be subject to ATF regulation and if it is a firearm whether it is subject to National Firearms Act of 1934 ("NFA") regulations.

To be considered a regulated firearm in the United States, the device must be: (i) a weapon that (ii) will or is designed to expel a projectile (iii) by the action of an explosive. Although primers in ammunition cartridges are exempt from control under the explosives regulations as administered by ATF, they are still considered an "explosive" for the purposes of the firearm definition.  Because we use primers in the ammunition cartridges for our PARA OPS devices, we have decided to self-classify our PARA OPS devices as a form of firearm in the United States pending any different eventual classification by the ATF. 

As the PARA OPS product line is identified as a firearm in the United States, it must be determined whether an additional level of control is imposed by the NFA. Under NFA regulations, there are only two possible types of NFA firearm that PARA OPS could be defined as: (1) a "any other weapon" ("AOW") or (2) a "destructive device".  Sale of either of these to consumers is permissible but requires a lengthy approval process conducted by the ATF (the background check process on the consumer); whereas sale to law enforcement agencies, military bodies, or government agencies is a more expedient approval process (usually less than 7 days). Further, the AOW classification requires only a $5 transfer tax to consumers whereas a destructive device classification results in a $200 transfer tax to consumers (such tax being borne by the consumer). While our PARA OPS is non-lethal (the kinetic energy of our projectile is well below lethal threshold), we have determined that the current version of our PARA OPS devices are "destructive devices" because the measurement of the bore of our device is currently in excess of the one-half inch in diameter, the maximum size for AOW.

As a result, initial sales of our PARA OPS devices in the United States are expected to come primarily from law enforcement agencies until we reduce the bore of our device to less than one-half inch in diameter for the consumer market. In July 2022, we entered into a consulting agreement with an FFL engineering firm in the United States to finalize the prototype for the PARA OPS multi-shot device, including LRIP anticipated for Q1 Fiscal 2023, in addition to producing pre-production samples of the PARA OPS single shot device during Q4 Fiscal 2022.  We are currently developing a new version of PARA OPS device to meet the AOW firearm classification in order to reduce the tax burden on a consumer purchasing the PARA OPS devices.  We expect to commercially launch this AOW version during Fiscal 2023.  The distribution of our PARA OPS in the United States will be done directly with FFL distributors/firearm dealers for civilian sales.  Today, all 50 states of the United States allow civilians to own a firearm subject to the firearm laws of the state (which vary by state).  We expect the sales of our PARA OPS devices will position us well for significant recurring revenues through the sale of subsequent ammunition over the next 12 months (see Risk Factors - We have Significant Non-Recurring Revenue).

For the non-lethal ARWEN products, we maintain a Firearm Business License issued by the Chief Firearms Office of the Ontario Ministry of the Solicitor General and we are also registered under the Controlled Goods Program in Canada. For further information, see Digitization and Counter Threat. Additionally, we maintain a Federal Explosives License/Permit for the manufacturing of explosives and a Federal Firearms License for manufacturer and sale of destructive devices, both issued by the ATF in the United States.  All sales of our ARWEN launchers are made directly to law enforcement agencies.

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Rest of the World

As our current focus is commercializing PARA OPS in the United States, we have not begun analyzing the related government regulations for the rest of the world.

Digitization and Counter-Threat

Firearm Business License

In Canada, we maintain a firearm business license (the "Firearm Business License") with the Chief Firearms Officer of the Ontario Ministry of Solicitor General for our following business activities:

• Manufacture, modification and assembly: prohibited weapons, ammunition, restricted firearms, prohibited devices, prohibited ammunition, prohibited handguns, non-restricted firearms, prohibited firearms;
• Retail sales (including consignment sales): restricted firearms and non-restricted firearms;
• Consignment sales: prohibited firearms including prohibited handguns;
• Gunsmithing: prohibited firearms, prohibited handguns, non-restricted firearms, restricted firearms;
• Transportation of inventory: prohibited firearms, ammunition, prohibited handguns, non-restricted firearms, prohibited ammunition, prohibited devices, restricted firearms, prohibited weapons;
• Storage of firearms: restricted firearms, non-restricted firearms, prohibited firearms, prohibited handguns.
• Export: ammunition, prohibited handguns, non-restricted firearms, prohibited ammunition, prohibited firearms, prohibited weapons, prohibited devices;
• Possession for the purpose of instruction: restricted firearms, ammunition, non-restricted firearms, prohibited handguns.
• Import: prohibited firearms, non-restricted firearms, prohibited devices, prohibited ammunition, ammunition, prohibited weapons, prohibited handguns and restricted firearms.

The Firearm Business License is delivered for the purposes of: (i) the performance of a contract entered into by the Government of Canada, the government of a province, the government of a municipality acting on behalf of a police force, or a police force, or by a person acting on behalf of such a government or a police force; and (ii) the development, modification or testing of a prohibited firearm, prohibited weapon, prohibited device or prohibited ammunition, or any component or part thereof, for the purpose of training, or supplying goods or training materials used in the training of, a public officer as defined in subsection 117.07(2) of the Criminal Code (Canada), who is acting in the course of his or her duties or employment.

As of the date of this Prospectus, we are fully compliant with all the conditions under which the Firearm Business License is delivered and maintained.

We have applied for and received a Firearms Business License that covers off any potential scenario that we may from time to time be involved in which such a license would be required. We are currently not in the retail or consignment sale of firearms and do not expect to be in this type of business.

For greater clarity, we use real firearms in the development and testing of our products as well as in training users on their use. Any device such as the TASCS IFM or TASCS NORS must be developed and tested on the weapon platforms for which it is designed. The Shot Counter is designed to work on automatic weapons in military and police inventories. These types of weapons are classified as prohibited and are solely utilized in the development and testing of the product. Replica systems are utilized for static demonstration, trade shows and other non-firing events.

We procure ammunition such as those required for mortars, grenade launchers and others weapon types to conduct testing and evaluation. On occasion, we may need to export ammunition in support of demonstrations.

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Controlled Goods Program

In Canada, an individual or organization must register in the Controlled Goods Program with the Public Services and Procurement Canada if they need to:

• examine, possess or transfer controlled goods (munitions);
• transfer controlled goods outside of Canada; or
• receive bid solicitation documents containing controlled goods or controlled technology.

We are registered in the Controlled Goods Program and believe we are in compliance as of the date of this Prospectus.

Drone Regulations

In Canada

New regulations regarding drones in Canada by Transport Canada came into effect on June 1, 2019. The regulations, published in the Canadian Aviation Regulations (Part IX), introduce requirements and rules based on the weight of the remotely piloted aircraft ("RPA") and the intended operation. The new regulations apply to RPAs that: weigh 250 grams (g) up to and including 25 kilograms (kg) and are operated within the drone pilot's visual-line-of-sight.

The regulations introduce three categories of drones operations: basic ("Basic RPAs"), advanced ("Advanced RPAs") and all others that do not fall into these two categories. The categories are based on distance from bystanders and on airspace rules. The regulations focus on foundational issues such as aircraft making and registration, pilot knowledge and certification, airworthiness of the aircraft and flight rules.

As of the date of this Prospectus, we discontinued our investment in the Canadian drone project and therefore we are no longer subject to the above regulations.

In the United States

As our current focus is commercializing PARA OPS in the United States, we have not begun analyzing the related government regulations for the Counter-UAS market in the United States.

Economic Dependence

As an early-stage company, the revenue stream in Fiscal 2021 for the TASCS system was concentrated on one United States military customer. We recognized 98.3% of the total revenue (US $0.8 million) for this United States military customer during Fiscal 2021 (see Operating and Financial Review and Prospects, Critical Accounting Estimates).  We have delivered the remaining milestone and recognized the remaining 2.7% of the total revenue during the first quarter of Fiscal 2022. While we expect follow-on orders for our TASCS IFM 81mm mortar system during Fiscal 2023, there is no assurance of such orders.

Since September 30, 2021, we have further diversified our revenue base as a result of the Police Ordnance Acquisition.  Additionally, on December 1, 2021, we entered into a master professional services agreement (the “MPSA”) with GDMS to support the development of digitization solutions for future Canadian land C41SR programs under Strong, Secure, Engaged: Canada’s Defence Policy. This includes TAK integration and CIMS services over 12 months. The MPSA serves as the master agreement and governs the basic terms and conditions for all future statements of work (“SOW”) but does not in itself give rise to financial rights or obligations for either GDMS or us nor does it ensure that a future SOW will be awarded. Accordingly, there are no material terms in the MPSA except for the termination provision. At its sole discretion, GDMS may terminate the MPSA and/or a SOW by written notice to us. Under such event, GDMS will be liable for work rendered or expenses incurred prior to the effective date of such termination for which payment has not been made to us. GDMS may also terminate the MPSA immediately in the event of default (as defined in the GDMS). Concurrently with entering in the MPSA, we entered into a SOW with GDMS for the first phase of the project (“GDMS SOW No. 1”) which was delivered by the end of Q3 Fiscal 2022 and fully collected.  GDMS accounted for 55.9% and 63.9% of our Q3 and year-to-date (“YTD”) Fiscal 2022 consolidated revenue, respectively. Based on recent discussions with GDMS, we expect to enter into a SOW in Q1 Fiscal 2023 and another SOW in Q2 Fiscal 2023, for an aggregate value of approximately $0.4 million. With the anticipated commercial launch of PARA OPS product line in Fiscal 2023 and continued product sales from the ARWEN launchers, we anticipate our total consolidated revenue will continue to diversify with various customers, resulting in less dependence on limited customers to drive positive cash flows and profitability.

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Foreign Operations

We established office space in Stafford, Virginia to conduct United States business development activities and anticipated light assembly and distribution for our non-lethal, Digitization, and Counter-Threat business lines.

History and Development of the Company

Corporate Overview

KWESST Micro Systems Inc. is a corporation domiciled in Canada and was incorporated under the BCBCA on November 28, 2017. We develop and commercialize next-generation tactical systems for military, security, and personal defense markets. Key market segments and solutions addressed by our proprietary solutions are:

(i)non-lethal products with broad application in the professional  and personal defense,

(ii)modernized digitization of tactical teams for shared real-time situational awareness in the military and civilian markets, and

(iii)counter-measures against threats such as drones, lasers and electronic detection for the military market.

Our business activities are carried on by our wholly-owned subsidiaries as listed in Intercorporate Relationships.

Our registered and head office is located at 2900 - 550 Burrard Street, Vancouver, British Columbia V6C 0A3 and our principal place of business is located at 155 Terence Matthews Crescent, Unit #1, Ottawa, Ontario, Canada, K2M 2A8.

Our Common Shares are listed on the TSXV under the stock symbol of "KWE" and the Frankfurt Stock Exchange under the stock symbol of "62U". and quoted on the OTCQB under the stock symbol of "KWEMF".

Following the closing of the Qualifying Transaction on September 17, 2020 (as defined below) pursuant to the policies of the TSXV, we changed our fiscal year end from December 31^st to September 30^th.

The SEC maintains an internet site at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. Our internet site is https://www.kwesst.com; our telephone number is (613)319-0537.

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Intercorporate Relationships

The following chart illustrates our wholly-owned subsidiaries:

KWESST U.S. Holdings Inc.

On May 2, 2022, we incorporated a wholly-owned United States holding subsidiary in Delaware (United States). 

KWESST Public Safety Systems U.S. Inc.

On May 2, 2022, we incorporated a wholly-owned United States subsidiary in Delaware (United States), for the PARA OPS product line in the United States (see Business Overview). 

KWESST Defense Systems U.S. Inc. (formerly KWESST U.S., Inc.)

On January 28, 2021, we incorporated a wholly-owned United States subsidiary in Delaware (United States), named KWESST U.S., Inc., and established an office in Stafford, Virginia (United States) to further pursue Digitization and Counter-Threat business opportunities in the United States.  On June 3, 2022, we amended the certificate of incorporation of the subsidiary to change the name to KWESST Defense Systems U.S. Inc.

KWESST Public Safety Systems Canada Inc.

On April 6, 2022, we incorporated a wholly-owned subsidiary in Ontario (Canada), for the PARA OPS business line in Canada (see Business Overview). 

2720178 Ontario Inc. and Police Ordnance Company Inc.

On December 15, 2021, we acquired 2720178 Ontario Inc., which owns all of the issued and outstanding shares of Police Ordnance Company Inc., a company incorporated in Ontario (Canada) (see Principal Capital Expenditures and Divestitures).  These are wholly-owned subsidiaries of KWESST.

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KWESST Inc.

On April 24, 2017, we incorporated a company in Ontario (Canada) named KWESST Inc. for the Digitization and Counter-Threat business lines.

On September 17, 2020, pursuant to the Qualifying Transaction (as defined below), KWESST Inc. amalgamated with 2751530 Ontario Ltd. ("Subco"), with the amalgamated company retaining the name of "KWESST Inc."

Events in the Development of the Business

All share-related information presented in this section gives effect to the Reverse Split.

Inception to 2019 Highlights

KWESST was formed in April 2017 by Jeffrey MacLeod, our President & CEO and director and promoter. KWESST was founded to pursue advanced projects within the defense and security fields. We opened our offices in Ottawa, Ontario in May of 2017 and began development of what would become our core technology, TASCS.  Our TASCS consists of a sensor package mounted to a soldier weapon and a display running a user interface program typically known as the Battlefield Management System ("BMS").

Between May and September of 2017, we developed the first-generation prototype of the sensor package forming part of TASCS, combined with a basic BMS system. KWESST started to collaborate with a United States military drone supplier, AeroVironment, Inc. ("AeroVironment").

In March 2018, we successfully integrated AeroVironment's drone data feed into KWESST's TASCS.

From April 20, 2018 to December 14, 2018, KWESST completed several financings (collectively "KWESST 2018 Financing") in the amount of $940,255 by way of revenue sharing agreements, related party loans and 10% convertible debentures to fund our working capital requirements.

2019 Highlights

On April 12, 2019, we won our first contract with AeroVironment valued   at USD$100,000.  In August 2019, we were in discussions with AeroVironment for a further contract to integrate our TASCS IFM with AeroVironment’s Augmented Weapon Sight technology for the preproduction development of 60mm and 81mm mortar and machine gun mounts.  This was delayed to April 2020 due to COVID-19 restrictions.

On October 1, 2019, we entered into an executive service agreement with DEFSEC Corporation ("DEFSEC") in which its CEO, David Luxton, agreed to serve as our Executive Chairman (refer to Compensation for remuneration information).

On October 24, 2019, we completed a private placement of Common Shares for gross proceeds of $1,015,000 at a price of $14 per share, resulting in the issuance of 72,500 Common Shares (the “October 2019 Private Placement”).

On October 24, 2019, the revenue sharing agreements and convertible debentures that we issued as part of the KWESST 2018 Financing were settled by the issuance of: (i) 44,349 Common Shares, and (ii) $234,515 in principal amount of convertible notes, bearing interest at a rate of 10% per annum (the “KWESST 2019 Convertible Notes”).

On November 18, 2019, we entered into a non-exclusive licensing agreement (the "AerialX Licensing Agreement") with AerialX and licensed a technology required to manufacture, operate and use a drone whose principal function and purpose is to act as a projectile to intercept aerial threats using kinetic force (the "Licensed Technology").

During the quarter ended December 31, 2019, we started developing proprietary laser defense products to protect ground forces from a portable laser attack weapon developed and produced by a foreign adversary.

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Fiscal 2020 Highlights

On January 30, 2020, we completed a private placement of 37,500 Common Shares at a price of $28 per Common Share for gross proceeds of $1,050,000.

On March 1, 2020, we entered into a consulting agreement with SageGuild to provide United States business development support to facilitate the integration of our solutions/services into the U.S. Department of Defense markets. The monthly consulting fee comprised of cash and 435 Common Shares at a price of $35 per share. In preparation for a go-public transaction, the Common Shares issuable in satisfaction of the consulting fee were amended to stock options starting from May 31, 2020, in which the exercise price was satisfied by services rendered by SageGuild.

On March 25, 2020, we completed a private placement of 12,082 Common Shares at a price of $35 per Common Shares for gross proceeds of $422,875.

On April 30, 2020, Foremost Ventures Corp. ("Foremost"), together with its wholly owned subsidiary, Subco, entered into an amalgamation agreement ("Amalgamation Agreement") with KWESST Inc. pursuant to which Subco and KWESST Inc. agreed to amalgamate (the "Amalgamation") to complete an arm's length qualifying transaction, in accordance with the policies of the TSXV (the "Qualifying Transaction" or "QT").

On April 25, 2020, AeroVironment issued an additional purchase order valued at USD$635,000 to provide increased capability to the AWS system. This generated approximately $530,000 of revenue in fiscal year 2020 ("Fiscal 2020").

On May 8, 2020, we issued an aggregate amount of $1,115,034 in convertible notes comprised of (i) $1,081,504 in principal amount of convertible notes convertible at $31.50 per Common Share, bearing interest at a rate of 15% per annum (“KWESST May 2020 Private Placement Convertible Notes”) and (ii) a convertible note with a principal amount of $33,530 issued to a third party for services rendered in connection with the private placement, all of which convertible notes (including accrued interest thereon) were automatically converted into 37,274 Common Shares upon closing of the Qualifying Transaction on September 17, 2020. Additionally, as an inducement, the note holders were entitled to receive 25% of the principal amount in the form of Common Shares based on a stock price of $31.50 per share, resulting in the issuance of 8,583 Common Shares concurrently with the above conversion event.

On June 12, 2020, we entered into a technology agreement (the "GhostStep Technology Purchase Agreement") with SageGuild pursuant to which KWESST acquired GhostStep technology. We have since rebranded it as Phantom. The total purchase consideration was valued at approximately $482,000. For further information, see below, Principal Capital Expenditures and Divestitures.

On July 9, 2020, KWESST issued 62,993 subscription receipts of KWESST at $49 per subscription receipt for aggregate gross proceeds of approximately $3,087,138, before share issuance costs. As part of the Qualifying Transaction, in September 2020, the 62,993 subscription receipts were converted into Common Shares of KWESST, which were subsequently cancelled, and Common Shares were issued in exchange therefor.

On July 20, 2020, we won a contract with a United States military customer valued at USD$405,000 to integrate our TASCS IFM with a mortar system.

On September 17, 2020, KWESST completed the Qualifying Transaction with Foremost. The Amalgamation was structured as a three-cornered amalgamation and, as a result, the amalgamated corporation, named “KWESST Inc.”, became a wholly owned subsidiary of Foremost, which changed its name to “KWESST Micro Systems Inc.”. Immediately following the completion of the Amalgamation, there were 589,516 Common Shares outstanding, and the former shareholders of KWESST Inc., along with the holders of the subscription receipts and convertible notes of KWESST Inc., owned approximately 97.8% of the issued and outstanding Common Shares. This constituted a reverse acquisition for accounting purposes under IFRS.

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Fiscal 2021 Highlights

On December 16, 2020, following successful trials, a United States military customer awarded a follow-on order of USD$799,000 with new hardware and software requirements coupled with additional military trials.

On January 14, 2021, we entered into a definitive technology purchase agreement (the "DEFSEC Purchase Agreement") to acquire the Low Energy Cartridge technology from DEFSEC, a proprietary non-lethal cartridge-based firing system (rebranded as the "PARA OPS" system) for a total purchase consideration of approximately $2.9 million, subject to closing conditions. For further information, see below, Principal Capital Expenditures and Divestitures.

On February 4, 2021, the Common Shares commenced quotation on the OTCQB under the stock symbol "KWEMF."

On April 5, 2021, KWESST and AerialX entered into an amended and restated license agreement in which we obtained exclusive rights to gain exclusive rights to manufacture, operate, and use its drone for the C-UAS (Counter Unmanned Aerial Systems) market, for the United States Department of Defense and Canada's Department of National Defense. For further information, see below, Principal Capital Expenditures and Divestitures.

On April 29, 2021, we completed a private placement of 51,086 units at a price of $87.50 per unit for gross proceeds of $4,470,071 (the “April 2021 Private Placement”), as amended in August 2021. Each unit consisted of one Common Share and one Common Share purchase warrant, exercisable at a price of $122.50 per share for a period of 24 months. Following this closing, we also closed the acquisition of the PARA OPS system on same day.

On July 9, 2021, we held our first live demonstration of the PARA OPS system in Whistler, British Columbia. Following this successful live demonstration, on July 12, 2021, we announced details of our commercialization road map for the PARA OPS system, including the unveiling our products at the 2022 SHOT Show® in Las Vegas, Nevada to be held on January 18-21, 2022.

On July 21, 2021, we announced that Brandon Tatum agreed to be our strategic advisor and advocate for the LEC System. Mr. Tatum is a former Tucson Police Officer and runs a successful You-Tube channel called "The Officer Tatum", with over 1.9 million subscribers, as well as other social media platforms and a nationally syndicated radio show on the Salem Radio Network.

On August 31, 2021, the Common Share purchase warrants issued in the April 2021 Private Placement were listed for trading on the TSXV under the stock symbol "KWE.WT."

On September 16, 2021, we completed a private placement of 1,071 units at a price of $140 per unit for gross proceeds of $1,500,000 (the “September 2021 Private Placement”). Each unit consisted of one Common Share and one Common Share purchase warrant, exercisable at a price of $164.50 per share for a period of 24 months.

On September 28, 2021, we announced our strategic partnership with Stryk Group USA for the commercialization of our PARA OPS system in the United States.

Year-to-date Fiscal 2022 Highlights

On October 4, 2021, we announced the introduction to market our Phantom electronic battlefield decoy, including advanced negotiation with a global defense contractor to provide Phantom units as part of the contractor tender for armored vehicles to a large North Atlantic Treaty Organization ("NATO") customer. There are only two bidders that have qualified for this opportunity.

On October 13, 2021, we announced that we are accelerating the readiness of deployable and man-wearable BLDS for first deliveries available by end of Q1 Fiscal 2022, following military interest from a number of NATO land and Special Operation Forces at the signature European defense show, DESI, which took place in London, UK, on September 13 to 18, 2021.  While no deliveries took place in Fiscal 2022, on November 2, 2022, we won our first customer order of USD$330,000 from Nordic Defence & Security AS of Oslo, Norway, a trading and consulting agency offering solutions for the army, navy, air force in addition to other professional users such as the police, fire departments and different security dependent organizations, for the provision of four BLDS to be delivered by May 2, 2023.  These BLDS units are to be mounted and integrated on the new combat patrol vehicles for Norwegian Special Operating Forces (“SOF”) now in prototype build. Through this initial order, we are well positioned to supply a higher quantity of BLDS once the Norwegian SOF combat vehicle proceeds into full production in calendar year 2024.  There is no assurance on this timing or that we will receive additional orders for our BLDS from Norwegian SOF.

On November 12, 2021, we announced that GDLS selected KWESST’s Phantom electronic battlefield decoy as part of its ongoing efforts to develop a next generation multi-million domain mobile capability at the tactical level. If GDLS wins the contract with their United States military customer, we have estimated the potential value for this contract to KWESST could be more than USD $40 million, depending on the number of Phantom units per military vehicle and final pricing based on volume. The United States military customer is expected to announce the winner of the tender for 400-500 next generation military vehicles in calendar 2023. Accordingly, there is no assurance that we will be awarded this contract or if we are, what the value of such contract will be to KWESST.

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On November 15, 2021, we conducted live fire demonstration of our initial non-lethal cartridge-based single shot device for investors near Toronto, Ontario, including an opportunity for these investors to use the devices. Further, on January 14, 2022, we announced the unveiling of our non-lethal cartridge-based products under the brand PARA OPS at the 2022 SHOT Show® in Las Vegas held on January 18^th to 21^st 2022.

On November 23, 2021, in connection with an updated capital markets strategy, we submitted our initial application to list our Common Shares on Nasdaq. We believe that, if successful, a Nasdaq listing can broaden investor awareness for KWESST's Common Shares, with a view to supporting shareholder value.

On December 2, 2021, we announced that we engaged the New York-based public relations firm AMW Public Relations to lead our public relations, brand strategy, and media communication initiatives.

On December 8, 2021, our United States military customer accepted the delivery of the final milestone of the US $0.8 million relating to the integration of our TASCS IFM with the 81 mortar system. Final payment was received in January 2022. While we expect follow-on customer orders for this solution during Fiscal 2023, there is no assurance of such orders.

On December 14 and 16, 2021, we announced that we signed a Master Services Agreement with GDMS - Canada  to support the development of digitization solutions for future Canadian land C4ISR programs. We estimate the contract's value to KWESST to be up to $1.0 million over the next 12 months.

On December 15, 2021, we completed the non-cash acquisition of Police Ordnance Company Inc. - see below Principal Capital Expenditures and Divestitures for further details. On January 10, 2022, we announced that Police Ordnance Company Inc. received orders from law enforcement agencies for approximately $0.4 million in ARWEN products, all have since been delivered as of the date of this Prospectus. However, as most of the shipments related to open customer orders at the acquisition date, these were not recorded as revenue during the quarter but rather as a reduction of intangible assets in accordance with IFRS.

At the 2022 SHOT Show® held in Las Vegas from January 18^th to 21^st 2022, we showcased our initial PARA OPS single shot device. Since this event, we have continued to make further improvements to this device based on positive feedback from the SHOT Show®. As of the date of this Prospectus, we have finalized the design of the single shot device and are in the process of producing small quantities for market testing prior to commercial launch this summer. We are also in the process of optimizing the design of our multi-shot device for market testing in June 2022 and commercial launch soon after. Our initial sales focus will be law enforcements (see below Proprietary Protection - Government Regulations).

On February 11, 2022, we filed United States patent application No. 17/669,420 claiming priority to a provisional patent serial 63/148,163 by the USPO for our PARA OPS system.

On March 11, 2022, we closed a non-secured and non-convertible loan financing transaction with a syndicate of lenders for aggregate loan proceeds of $1.8 million and an additional $0.2 million on March 15, 2022, for a gross total of $2.0 million (the "Unsecured Loans"). The Unsecured Loans bear interest at a rate of 9.0% per annum, compounded monthly and not in advance, and have a maturity of thirteen months, with KWESST having the option to repay the whole or any part of the Unsecured Loans, without penalty or premium, at any time prior to the close of business on the maturity date. The principal amount is due only at maturity.  As part of the terms of the Unsecured Loans, we issued an aggregate of 14,285 bonus Common Shares to the lenders. These Common Shares were issued pursuant to prospectus exemptions of applicable Canadian securities laws and therefore subject to a four-month plus one day trading restriction. 

On March 29, 2022, the Common Shares commenced trading on the Frankfurt Stock Exchange under the stock symbol "62U." We believe this listing will provide us with the opportunity to further increase our investor base globally, improve our stock liquidity, and promote KWESST to the European financial markets.

We announced on April 4, 2022, with the war in Ukraine, that we are currently actioning a number of NATO and non-NATO country requests for quotations of our Phantom electronic decoy and laser detection products.  While we are confident that this activity will generate sales orders before the end of Fiscal 2022, there is no assurance that we will be successful.

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On April 22, 2022, we issued 875 Common Shares to the selling shareholders of Police Ordnance as a result of achieving the performance milestone as defined in the share purchase agreement.

On April 25, 2022, we announced that we engaged RedChip Companies ("RedChip") to lead our investor relations efforts in the United States, in advance of our pending Nasdaq listing. Headquartered in Orlando, Florida, RedChip provides investor relations, financial media, and research for microcap and small-cap stocks.

On July 6, 2022, we won our first CISM related contract and entered into a three-year contract with Counter-Crisis Technology Inc. to design, develop, and implement a significant component of a national Ground Search and Rescue Incident Command System for Public Safety Canada, with the Ontario Provincial Police as technical advisory stakeholder for this project. The total contract value is approximately $0.7 million, net of in-kind contributions of $76,000, over three years of services commencing in late July 2022.  Either party may, at any time and for any reason, terminate the contract for convenience upon at least 30 business days’ notice.  In the event of termination for convenience, we may recover only the actual cost of work completed to the date of termination in approved units of work or percentage of completion.

On July 14, 2022, we closed a non-brokered private placement, resulting in the issuance of 22,857 units of KWESST, at a price of $15.05 per unit, for aggregate gross proceeds of $0.34 million. Each unit consisted of one Common Share and one-half Common Share purchase warrant, exercisable at a price of $19.95 per share for a period of 24 months. Certain of our directors and officers participated in the amount of $87,500.

On August 29, 2022, we announced that we closed two non-secured loans in the amount of USD$200,000 per loan with a third party lender for an aggregate amount of USD$400,000. The first non-secured loan of USD$200,000 bears interest of 6% per annum and will mature on August 31, 2023.  In connection with the first non-secured loan, we issued 4,239 bonus shares (post-Reverse Split) to the lender.  The second non-secured loan of USD$200,000 (the “Second Loan”) bears interest of 6% per annum and will mature on August 31, 2023. For both loans, the repayment will be 110% of its principal and both loans are senior to our other unsecured indebtedness. The Second Loan contains certain provisions allowing us to apply to the TSX Venture Exchange to repay the principal amount by issuing Common Shares in accordance with the rules and regulations of the TSX Venture Exchange.

On September 13, 2022, we announced the commencement of the Canadian Offering following the filing of a preliminary short form base PREP prospectus with the securities regulatory authorities in each of the provinces of Canada, except Québec.

Principal Capital Expenditures and Divestitures

We made the following capital expenditures over the last three financial years and year-to-date Fiscal 2022. All share-related information presented in this section gives effect to the Reverse Split.

Year-to-date Fiscal 2022

• On December 15, 2021, we acquired 2720178 Ontario Inc., an Ontario (Canada) corporation, which owns all of the issued and outstanding shares of Police Ordnance, herein referred as the "Police Ordnance Acquisition". Located in Bowmanville, Ontario, with ancillary operations in Florida, Police Ordnance owns all intellectual properties to the ARWEN product line of non-lethal systems, and a proprietary line of 37 mm non-lethal cartridges designed for riot control and tactical teams.  Police Ordnance has law enforcement customers across Canada, the United States, and abroad. The Police Ordnance Acquisition provides us with a strategic opportunity to leverage its law enforcement customer base to accelerate growth within our specialty ordnance business (see Business Overview).

• On December 15, 2021, the closing date of the Police Ordnance Acquisition, the fair value of the purchase consideration was $0.6 million, which comprised of: (i) 3,965 Common Shares, (ii) 2,857 Common Share purchase warrants exercisable at a price of $120.40 per share and expiring on December 15, 2024; and (ii) 875 Common Shares contingent on fulfilment of a financial milestone, which was met in April 2022 resulting in the issuance of these Common Shares. At this time the purchase price allocation remains preliminary as certain inventory and intangible asset valuation assessments are ongoing. We expect to finalize the allocation in Q4 2022. While this acquisition is expected to be accretive based on historical results, we do not expect it will have a material impact to our overall consolidated results of operations, financial condition, and/or cash flows over the next twelve months.

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Fiscal 2021:

• On January 14, 2021, we entered into a purchase agreement with DEFSEC to acquire the LEC System the “DEFSEC Purchase Agreement”). The transaction closed on April 29, 2021 (the “DEFSEC Closing Date”), following the April 2021 Private Placement. DEFSEC is an Ottawa-based based private company owned by David Luxton, our Executive Chairman. The purchase consideration was approximately $2.9 million comprising of 14,285 Common Shares, 7,142 Common Share purchase warrants, and the fair value of the minimum annual royalty payments over a ten-year period. Each Common Share purchase warrant entitles the holder to purchase one Common Share, at a price of $49 per share. These warrants will expire on April 29, 2026. Under the DEFSEC Purchase Agreement, we agreed to pay a 7% royalty on future annual sales of the PARA OPS products, subject to minimum annual royalty payments over a ten-year period. Refer to Note 4(a) of the audited financial statements for Fiscal 2021 for further details.

• On April 5, 2021, we entered into an amended and restated AerialX Licensing Agreement with AerialX in which we obtained exclusive rights to the Licensed Technology for the United States Department of Defense and Canada’s Department of National Defense for a period of two years from the date upon which AerialX will meet certain technical milestones (the “Technical Milestones”). In consideration for the exclusivity, we issued 1,428 Common Shares to AerialX. We also agreed to issue an additional 1,428 Common Shares and 4,285 Common Shares upon AerialX achieving the Technical Milestones and certain financial milestones, respectively. Additionally, we agreed to pay a variable 8%-15% royalty. Refer to Note 26 of the audited financial statements of Fiscal 2021 for further details.

Fiscal 2020:

• On June 12, 2020, we entered into a technology purchase agreement with SageGuild pursuant to which we acquired the GhostStep® Technology (referred to hereinafter as “Phantom”). The Phantom technology is a portable, soldier or air deployable electronic battlefield decoy. The purchase consideration was $0.5 million, which was comprised of: (i) USD$0.1 million cash, (ii) 9,957 Common Shares, and (iii) 10,714 Common Share purchase warrants exercisable at a price of $35 per share and expiring on January 15, 2023. Additionally, we agreed to pay a 20% royalty on the first USD$3.0 million of Phantom sales and 5% thereafter up to a maximum royalty payment of USD$20.0 million, with no minimum guaranteed annual royalty payment. Refer to Note 4 of the audited financial statements of Fiscal 2021 for further details.

Year 2019:

• On November 18, 2019, we entered into the AerialX Licensing Agreement with AerialX to have a non-exclusive right to manufacture, operate, and use AerialX's technology for the Counter Unmanned Aerial Systems market, which was amended and restated on April 5, 2021.

Advisers

Our United States legal counsel is Dorsey & Whitney LLP, with a business address at 161 Bay Street, Suite 4310, Toronto, Ontario, Canada M5J 2S1.

Our Canadian legal counsel is Fasken Martineau DuMoulin S.E.N.C.R.L., s.r.l, with a business address at 800 Victoria Square, Suite 3500, Montréal, Québec, Canada, H4Z 1E9.

Auditors

KPMG LLP, Chartered Professional Accountants, are currently and have been our independent auditors since March 31, 2021. KMPG LLP audited our consolidated financial statements for the year ended September 30, 2021. The business address of KPMG LLP is 150 Elgin Street, Suite 1800, Ottawa, Ontario, K2P 2P8. KPMG LLP are registered with both the Canadian Public Accountability Board and the United States Public Company Accounting Oversight Board.

Kreston GTA LLP, Chartered Professional Accountants, audited our consolidated financial statements for the nine months ended September 30, 2020, and the year ended December 31, 2019. The business address of Kreston GTA LLP is 8953 Woodbine Avenue, Markham, Ontario, L3R 0J9. Kreston GTA LLP are registered with both the Canadian Public Accountability Board and the United States Public Company Accounting Oversight Board.

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Organizational Structure

See History and Development of the Company - Intercorporate Relationships.

Property, Plants and Equipment

We do not own any real estate property. We operate from leased premises in two different locations, as detailed in the following table:

Location	Area (approx.)	Premise Use	Expiry Date
155 Terence Matthews, Unit#1, Ottawa, Ontario, Canada	7,200 sq. ft.	Corporate offices and administration, Research and Development	April 30, 2026 (renewal extension of 5 years)
10 Center Street, Suite 201, Stafford, Virginia, United States	2,000 sq. ft.	Sales and Marketing	October 31, 2022
2370 Nash Road, Bowmanville, Ontario, Canada	5,000 sq. ft.	Manufacturing and distribution of non-lethal ARWEN products	Month-to-month

At June 30, 2022, the carrying value of our total tangible fixed assets was approximately $0.9 million held in Ottawa, Ontario, Canada.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

Certain share-related information presented in this section gives effect to the Reverse Split.

Operating Results

The following discussion of our financial condition, changes in financial conditions and results of operations should be read in conjunction with our interim unaudited condensed consolidated financial statements as at and for the three and nine months ended June 30, 2022, and our audited consolidated financial statements as at and for the year ended September 30, 2021, the nine months ended September 30, 2020, and the year ended December 31, 2019, in each case, together with the related notes (see section titled, Financial Statements). Our consolidated financial statements have been prepared in accordance with IFRS as issued by the IASB.

The following discussion contains forward-looking statements that involve inherent risks and uncertainties. Actual results may differ materially from those contained in such forward-looking statements. See the Forward-Looking Statements at the beginning of this Prospectus.

Overview and Outlook

We are an early commercial-stage technology company focused on the development and commercialization of next-generation tactical systems that meet the requirements of military and security forces and personal defense.

In the last two financial years and for the nine months ended June 30, 2022, we have significantly expanded our business through one business combination and two asset acquisitions to complement our product offerings (refer to History and Development of the Company). The following are the key market segments and solutions address by our solutions:

• non-lethal systems with broad application, including law enforcement and personal defense;
• modernized digitization of tactical forces for shared situational awareness and targeting; and
• counter-measures against threats such as drones, lasers, and electronic detection.

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Since inception, we have primarily generated revenues from pre-commercialization contracts with two United States military customers for our TASCS solution. More recently, we were awarded a USD$0.8 million contract to integrate TASCS IFM with an 81mm mortar system for a United States military customer. We held successful military exercises for this product in California in September 2021. Based on subsequent positive feedback from the United States military customer, we expect follow-on orders in Fiscal 2023. Additionally, on October 4, 2021, we announced our market introduction of our Phantom electronic decoy, enabling us to bid for a contract with GDMS, which could be valued over USD$40 million with a global defense contractor. The successful tender will be announced in late 2023. Further, we have begun LRIP for the single-shot PARA OPS business line and plan to go to market in Fiscal 2023.  Accordingly, we believe we are in a good position to generate significant revenue from a new source over the next 12 months, with continued volatility in our quarterly revenue for Fiscal 2023.

Our expenses grew dramatically over the last fiscal year compared to the prior two financial years primarily due to making a significant investment throughout our organization to position ourselves for success, coupled with one-time costs for going public in Canada (see Results of Operations - The Year Ended September 30, 2021 compared to the Nine Months Ended September 30, 2020 - Operating Expenses). We expect our expenses will continue to grow in Fiscal 2022, particularly for commercializing our PARA OPS and marketing efforts in the United States to grow our market share. Further, during YTD Fiscal 2022, due to the current global inflation we have experienced some increases in cost for certain raw materials that we source for the production of ARWEN ammunition, coupled with an increase of 6% to the annual payroll costs for our engineering group due to strong local demand for skilled, experienced engineers. However, we have observed recent layoffs from in our local technology market and therefore we believe the labor market may soften over the next twelve months.  As of the date of this Prospectus, our operations and business goals have not been materially affected by the current global supply chain disruptions nor from the disruption caused by Russia's invasion of Ukraine.  Except for the ARWEN product line, raw materials for our products are accessible from various suppliers and therefore we do not believe a persistent global supply chain dislocation will materially impact our operations over the next twelve months. It is difficult at this time to predict whether costs of raw materials will continue to increase in the light of the global supply chain disruptions; however, we expect to be able to pass on these incremental costs to customers. 

Our financial strategy to date has been to raise sufficient capital through securities offerings in order to fund our working capital requirements, product development, and business growth strategies. As our commercialization efforts increase, we may need to raise additional capital. See Liquidity and Capital Resources, for more information.

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Results of Operations - Three and Nine Months Ended June 30, 2022, and 2021

The following selected financial information is taken from the unaudited condensed consolidated interim financial statements for the three and nine months ended June 30, 2022, and 2021 ("Q3 Fiscal 2022 FS"), see Financial Information.

		Three months ended June 30,						Nine months ended June 30,
(Unaudited)		2022			2021(1)			2022			2021(1)
Revenue	$	282,432		$	521,724		$	466,148		$	1,115,757
Cost of sales		(238,350	)		(315,273	)		(405,841	)		(718,309	)
Gross profit		44,082			206,451			60,307			397,448
Gross margin %		15.6%			39.6%			12.9%			35.6%
Operating Expenses
General and administrative		1,322,730			1,236,988			3,410,887			2,909,349
Selling and marketing		851,705			882,261			2,931,460			2,195,647
R&D		350,689			678,622			1,610,445			1,648,711
Total operating expenses		2,525,124			2,797,871			7,952,792			6,753,707
Operating loss		(2,481,042	)		(2,591,420	)		(7,892,485	)		(6,356,259	)
Other expenses
Gain on acquisition		41,869			-			41,869			-
Net finance costs		(184,177	)		(27,780	)		(304,298	)		(60,857	)
Foreign exchange gain (loss)		22,901			(9,025	)		22,602			(14,189	)
Loss on disposals		-			-			(1,165	)		-
Net loss	$	(2,600,449	)	$	(2,628,225	)	$	(8,133,477	)	$	(6,431,305	)
EBITDA loss	$	(2,336,150	)	$	(2,587,006	)	$	(7,603,871	)	$	(6,281,964	)
Adjusted EBITDA loss(2)	$	(1,532,263	)	$	(2,057,558	)	$	(5,291,673	)	$	(4,868,894	)
Loss per share - basic and diluted, as reported	$	(0.05	)	$	(0.06	)	$	(0.16	)	$	(0.15	)
Weighted average common shares, basic, as reported		51,988,774			46,016,645			50,288,043			43,126,552
Loss per share, basic and diluted, post Reverse Split	$	(3.50	)	$	(4.20	)	$	(11.20	)	$	(10.50	)
Weighted average common shares, basic, post Reverse Split		742,696			657,380			718,400			616,093

^{(1)See Note 2(f) of the Q3 Fiscal 2022 FS.}

^{(2)EBITDA and Adjusted EBITDA are non-IFRS measures.}

In the following table, we reconciled the EBITDA and Adjusted EBITDA to the most comparable IFRS financial measure:

		Three months ended June 30,						Nine months ended June 30,
(Unaudited)		2022			2021			2022			2021
Net loss as reported under IFRS	$	(2,600,449	)	$	(2,628,225	)	$	(8,133,477	)	$	(6,431,305	)
Net finance  costs		184,177			27,780			304,298			60,857
Depreciation and amortization		80,122			13,439			225,308			88,484
EBITDA loss		(2,336,150	)		(2,587,006	)		(7,603,871	)		(6,281,964	)
Other adjustments:
Stock-based compensation		524,931			520,423			1,875,392			1,398,881
Professional fees relating to U.S. financing		343,726			-			500,112			-
Gain on acquisition		(41,869	)		-			(41,869	)		-
Foreign exchange loss (gain)		(22,901	)		9,025			(22,602	)		14,189
Loss on disposals		-			-			1,165			-
Adjusted EBITDA loss	$	(1,532,263	)	$	(2,057,558	)	$	(5,291,673	)	$	(4,868,894	)

Note: EBITDA and Adjusted EBITDA are non-IFRS measures

For Q3 and YTD Fiscal 2022, KWESST's net loss was $2.6 million and $8.1 million, respectively. While the results Q3 Fiscal 2022 remained relatively consistent with the comparable prior period, the YTD Fiscal 2022 net loss increased by $1.7 million over the comparable prior period, primarily due to lower revenue and higher operating expenses driven by higher headcount and related share-based awards, and increased sales and marketing efforts. Additionally, we incurred higher professional fees relating to our Nasdaq listing application and the prospectus and related registration statement with respect to this offering, coupled with financing efforts in the United States (see below).

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Most of the adjustments to EBITDA relate to non-cash share-based compensation and professional fees incurred in an effort to raise at least USD$7.0 million of capital via a brokered private placement in the United States, which we did not close due to very challenging global equity market conditions where the S&P 500 index and Nasdaq index declined by approximately 20.6% and 29.5%, respectively from January 1, 2022, to June 30, 2022. To preserve our remaining liquidity for near-term working capital, certain professional firms involved in this financing have agreed to defer the timing of payment until we complete an initial public offering on Nasdaq, which remains subject to SEC’s acceptance of our Form F-1 Registration Statement and Nasdaq’s approval of our listing on its exchange. On a post Reverse Split, the increase in share-based compensation in Q3 Fiscal 2022 compared to the same comparable prior period was primarily driven by 9,688 RSUs and 17,142 PSUs granted to officers and consultants near and at the end of Q2 Fiscal 2022, net of 5,714  PSUs forfeited during the current quarter due to not achieving one of the performance milestones as established by the independent directors of our Board. This also contributed to the increase in the YTD Fiscal 2022 share-based compensation compared to the same period in Fiscal 2021, coupled with an increase in expense for the stock units issued to key business consultants in Q4 Fiscal 2021 and Q1 Fiscal 2022 earned over 12 months.

Revenue and Gross Profit

		Three months ended June 30,			Change		Nine months ended June 30,			Change
(Unaudited)		2022		2021	%		2022		2021	%
Digitization	$	157,900	$	497,792	-68%	$	314,515	$	1,080,933	-71%
ARWENTM		100,684		-	N/A		111,176		-	N/A
Training and services		23,495		-	N/A		39,169		-	N/A
Other		353		23,932	-99%		1,288		34,824	-96%
Total revenue	$	282,432	$	521,724	-46%	$	466,148	$	1,115,757	-58%
Gross profit	$	44,082	$	206,451		$	60,307	$	397,448
Gross margin		15.6%		39.6%			12.9%		35.6%

Total revenue declined by 46% and 58% during Q3 Fiscal 2022 and YTD Fiscal 2022, respectively, compared to same periods in Fiscal 2021. Revenue for Digitization product line declined by 68% and 71% for Q3 Fiscal 2022 and YTD Fiscal 2022, respectively, primarily due to the timing of expected contracts and a smaller contract awarded by General Dynamic Mission Systems Canada in Q1 Fiscal 2022, compared to the USD$0.8 million contract awarded by a US military customer in the same quarter in Fiscal 2021 delivered throughout Fiscal 2021. The new ARWEN product line is as a result of the Police Ordnance Acquisition made in late Q1 Fiscal 2022. The Q3 Fiscal 2022 and YTD Fiscal 2022 ARWEN revenue excludes $0.2 million and $0.3 million, respectively for deliveries of ARWEN products for open customer orders at the closing of the Police Ordnance Acquisition which were recognized as a reduction of intangible assets.

While ARWEN product sales have contributed significantly to our YTD Fiscal 2022 revenues, we expect that this product line will represent a small percentage of our consolidated revenue in Fiscal 2023 and thereafter. 

We expect revenue to ramp up over the next few quarters with new anticipated military contracts, coupled with the pending commercial launch of our PARA OPS, with LRIP shipments of the PARA OPS products expected to commence in September 2022. We anticipate transitioning from LRIP to full production with strategic U.S. manufacturing and distribution partners in Q1 Fiscal 2023.

Gross margin was lower for the three and nine months ended June 30, 2022, compared to the same prior periods, primarily due to negative gross margin earned on training and services on TASCS IFM and on ARWEN products provided to military and law enforcement agencies during Q3 Fiscal 2022 to drive business development for future sales opportunities, which resulted in additional ARWEN orders during the quarter for shipment in Q4 Fiscal 2022. Excluding the impact of this negative margin on training and services, our gross margin would have been 33.53% and 26.99% for Q2 Fiscal 2022 and YTD Fiscal 2022, respectively. Our gross profit will continue to fluctuate from quarter-to-quarter with the anticipated new product mix and sales volume.

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Operating Expenses (OPEX)

		Three months ended June 30,			Change		Nine months ended June 30,			Change
(Unaudited)		2022		2021(1)	%		2022		2021(1)	%
General and administrative ("G&A")	$	1,322,730	$	1,236,988	7%	$	3,410,887	$	2,909,349	17%
Selling and marketing ("S&M")		851,705		882,261	-3%		2,931,460		2,195,647	34%
Research and development ("R&D")		350,689		678,622	-48%		1,610,445		1,648,711	-2%
Total operating expenses	$	2,525,124	$	2,797,871	-10%	$	7,952,792	$	6,753,707	18%

^{(1)See Note 2(f) of the Q3 Fiscal 2022 FS.}

Total OPEX decreased by 10% or $0.3 million for the current quarter over the comparable prior period driven by a 48% reduction in R&D spend due to allocating some of our engineers to revenue-related activities and other projects in which we capitalized development costs (included in intangible assets). This was partially offset by a 7% increase in G&A driven primarily by higher professional fees relating to our US financing effort during Q3 Fiscal 2022 (see above Adjusted EBITDA). This was partially offset by no licensing expense incurred in the current quarter, compared to $0.3 million in Q3 Fiscal 2021 in connection with our amended licensing agreement with AerialX.

Total OPEX increased by 18% or $1.2 million for YTD Fiscal 2022 over the comparable prior period, including $0.5 million of additional share-based compensation or 7.1 percentage points of the total increase. Excluding share-based compensation (non-cash item), total OPEX was $6.1 million for YTD Fiscal 2022 compared to $5.4 million for YTD Fiscal 2021. The increase was driven by the following factors:

• G&A increased by 17% or $0.5 million, primarily due augmenting the senior management team with two full-time executives and recruiting independent directors and other staff, which led to an increase in total personnel costs including $0.1 million of additional share-based compensation over YTD Fiscal 2021. Additionally, as noted above for the Q3 Fiscal 2022 increase in G&A, we incurred higher professional fees which was partially offset by no licensing expense with AerialX in the current quarter compared to Q3 Fiscal 2021.

• S&M increased by 34% or $0.7 million; however, excluding share-based compensation S&M increased by $0.4 million. This increase was primarily due to attending various investor conferences in the United States and engaging strategic advisors during Fiscal 2022. This included The Officer Tatum LLC who joined us in July 2021 as our strategic advisor and advocate for our PARA OPS product line for law enforcement and personal defense in the United States; the engagement of STRYK Group in September 2021 to assist us with the commercialization of our PARA OPS product line up to January 2022; the engagement of AMW Public Relations in November 2021 to lead our United States public relations, brand strategy and media communications initiatives; and the engagement of Orchid Advisors to assist us with ATF compliance for our PARA OPS product line. Additionally, our S&M personnel costs increased as result of the Police Ordinance Acquisition. Partially offsetting this increase in S&M, we reduced our spend in external investor relations and social media promotions.

Net Finance Costs

Total finance costs for Q3 Fiscal 2022 and YTD Fiscal 2022 were $0.2 million and $0.3 million respectively, a 563% and 400% increase over the comparable prior periods primarily due to the accretion and interest costs relating to the Unsecured Loans and the accretion cost of the discounted royalties payable to DEFSEC Corporation for the PARA OPS technology acquisition.

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Results of Operations - Fiscal Periods Ended September 30, 2021 and 2020, and December 31, 2019

The following selected financial information is taken from the audited financial statements for the year ended September 30, 2021, the nine months ended September 30, 2020, and the year ended December 31, 2019.

		Year ended September 30,			Nine months ended September 30,			Year ended December 31,		Change 2021 vs 2020 (1)		Change 2020 vs 2019 (1)
		2021			2020			2019			%		%
Revenue	$	1,275,804		$	861,917		$	509,148		11	%	126	%
Cost of sales		(798,888	)		(247,113	)		(85,101	)	142	%	287	%
Gross profit		476,916			614,804			424,047
Gross margin %		37.4	%		71.3	%		83.3	%	-39.9	%	-12.0	%
Operating Expenses
General and administrative		4,057,167			2,723,861			397,990		12	%	813	%
Selling and marketing		3,484,159			564,266			36,681		363	%	1951	%
R&D		2,138,138			817,584			1,003,705		96	%	9	%
Total operating expenses		9,679,464			4,105,711			1,438,376		77	%	281	%
Operating loss		(9,202,548	)		(3,490,907	)		(1,014,329	)	98	%	359	%
Loss on derivatives		-			29,463			113,178		-100	%	-65	%
Net finance costs		(107,751	)		(61,397	)		(245,147	)	32	%	-67	%
Foreign exchange loss		(3,742	)		(13,937	)		(982	)	-80	%	1792	%
Loss on disposals		(1,331	)		-			-
Net loss	$	(9,315,372	)	$	(3,536,778	)	$	(1,147,280	)	98	%	311	%
EBITDA	$	(9,066,631	)	$	(3,371,984	)	$	(799,991	)	102	%	462	%
Adjusted EBITDA	$	(6,599,351	)	$	(1,589,723	)	$	(912,187	)	211	%	132	%
Earnings (loss) per share - basic and diluted, as reported	$	(0.21	)	$	(0.11	)	$	(0.07	)	40	%	114	%
Weighted average common shares - basic, as reported		44,290,536			30,844,129			17,430,077		44	%	77	%
Earnings (loss) per share - basic and diluted, post Reverse Split	$	(14.70	)	$	(7.70	)	$	(4.90	)	43	%	110	%
Weighted average common shares - basic, post Reverse Split		632,721			440,630			249,001		44	%	77	%

Note:

(1)To calculate the change, we have annualized the results of operations for the nine months ended September 30, 2020. While annualized results are not indicative of actual 12-month results, we believe this is more relevant and useful information to readers to compare results year over year.

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In the following table, we reconciled the EBITDA and Adjusted EBITDA to the most comparable IFRS financial measure:

		Year ended September 30,			Nine months ended September 30,			Year ended December 31,
		2021			2020			2019
Net loss as reported under IFRS	$	(9,315,372	)	$	(3,536,778	)	$	(1,147,280	)
Net finance costs		107,751			61,397			245,147
Depreciation and amortization		140,990			103,397			102,142
EBITDA loss		(9,066,631	)		(3,371,984	)		(799,991	)
Other adjustments:
Non-cash M&A costs		-			1,514,703			-
Stock-based compensation		2,462,207			283,084			-
Fair value adjustments on derivatives		-			(29,463	)		(113,178	)
Foreign exchange loss		3,742			13,937			982
Loss on disposal		1,331			-			-
Adjusted EBITDA loss	$	(6,599,351	)	$	(1,589,723	)	$	(912,187	)

In Fiscal 2021, we incurred a net loss as reported under IFRS of $9.3 million, an increase in net loss of $5.8 million over Fiscal 2020. Over the last three financial years, our net loss substantially increased primarily due to scaling up our operations with additional headcount, increasing our investment in product development, going public in Canada, and making a significant investment in promoting and increasing awareness of our company and our new product offerings. While our revenue base has increased over the last three fiscal years, we have not reached the commercialization level to support these significant investments throughout our organization. We expect revenue to increase significantly starting from Q4 Fiscal 2022 as we begin to commercialize certain of our products that are currently under development, including, to a lesser extent new product sales from the acquisition of Police Ordnance.

Over the last three financial years, the adjustments made to our EBITDA loss were primarily driven by non-cash mergers and acquisitions ("M&A") costs, share-based compensation, and fair value adjustments on derivatives.

• The non-cash M&A costs incurred in Fiscal 2020 relate to the listing expense incurred in the reverse acquisition, coupled with related performance bonus settled in Common Shares (see Note 4(b) of our audited consolidated financial statements for Fiscal 2021).

• We implemented our stock option plan during the quarter ended March 31, 2020, which was subsequently replaced by our LTIP on March 31, 2021 (see Compensation - Equity Compensation Plan). The significant increase in share-based compensation in Fiscal 2021 over Fiscal 2020 is mainly due to granting a higher volume of options at a higher fair value per option, coupled with the timing of the grants and shorter vesting provision for certain grants. On a post Reverse Split, we granted 52,987 options at a weighted average fair value per option of $50.04, compared to 29,357 options at a weighted average fair value per option at $16.10. We also began to grant RSUs, PSUs, and SARs to our executive officers, employees, and consultants. The increase in grants was driven by the increase in headcount, including two executive officers, coupled with the recruiting of new independent directors. We also compensated certain consultants and promotors with restricted stock units and performance stock units. See Note 16(c) of our audited consolidated financial statements for Fiscal 2021 for further financial information.

• The fair value gain on derivatives recognized in Fiscal 2020 and year ended December 31, 2019 ("Fiscal 2019") relates to the fair value remeasurement on the conversion feature for the convertible notes issued in 2019. These convertible notes, including accrued interest, were subsequently converted into Common Shares upon the closing of our Qualifying Transaction in September 2020.

Financial Overview

Revenue

Since inception, our revenue was driven from the sale of product demonstration units to the United States military customers, including training. Because our performance obligations under the contract with the United States military customer were satisfied over time during Fiscal 2021, we recognized revenue over time using the percentage of completion method. We calculated this based on costs incurred to date relative to total estimated costs at completion.

With the expected commercial launch of our PARA OPS devices during Q4 Fiscal 2022, we expect revenue for these devices will be generated through the wholesale distribution of our products to dealers / distributors and through an e-commerce portal to consumers. We expect the transfer of control for our PARA OPS devices to take place at shipment and accordingly, revenue will be recognized at that point in time. As a result, coupled with a new service revenue stream for the ATAK integration services for prospective customers, we expect product revenue to accelerate from Q4 Fiscal 2022.  Accordingly, we expect our quarterly revenue will continue to fluctuate significantly for the remainder of Fiscal 2022 and in Fiscal 2023.

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Cost of Sales / Gross Profit

Cost of sales include cost of finished goods, freight, and direct overhead expenses.

We expect our gross profit will continue to fluctuate from quarter-to-quarter with the anticipated new product mix and sales volume.

Operating Expenses

Our operating expenses are presented by function as follows: general and administration ("G&A"), selling and marketing ("S&M"), and R&D.

G&A expenses consist of corporate personnel costs, various management and administrative support functions, insurance, regulatory and other public company costs, professional fees relating to corporate matters, corporate advisory consulting costs, M&A related costs, depreciation and amortization expenses, and occupancy costs related to G&A costs.

S&M expenses consist of business development costs related to the market development activities and product commercialization, marketing support function, depreciation and amortization expenses and investor relations support function.

R&D expenses consist of costs incurred in performing R&D activities, including new product development, continuous product development, materials and supplies, personnel costs, external engineering consulting, patent procurement costs, depreciation and amortization expenses, and occupancy costs related to R&D activity. These costs are net of Canadian investment tax credits for qualified Scientific Research and Experimental Development ("SR&ED") projects.

Finance Costs

Our finance costs are primarily comprised of interest and accretion expenses relating to the borrowings and accrued royalties payable relating to the acquired LEC System technology. From this total, we net interest income and the gain from the Canadian government subsidy relating to the COVID-19 loan program (which we refer to as the "CEBA Term Loan").

The Year Ended September 30, 2021 compared to the Nine Months Ended September 30, 2020

Revenue

We earned $1.3 million in revenue for Fiscal 2021, compared to $0.9 million for Fiscal 2020. On an annualized basis, our total revenue increased by 11% over the prior year mainly due to one large contract with a United States military customer relating to our TASCS IFM system. At the end of Fiscal 2021, we estimated approximately 98.3% completion on this large contract and have fully delivered the remaining performance obligation since September 30, 2021.

For both Fiscal 2021 and 2020, our TASCS IFM revenue was concentrated with two United States military customers.

Gross Profit

Our gross profit was $0.5 million for Fiscal 2021, or gross margin of 37%, compared to $0.6 million for Fiscal 2020 with gross margin of 71%. The fluctuation in gross profit / margin is due to our pre-commercialization phase. Further, the contract that was awarded to us in Fiscal 2021 was significantly more complex in nature, requiring significant judgement during the bidding process in estimating the engineering labor hours to meet the customer requirements. We incurred more engineering labor hours than anticipated, which contributed to the lower gross margin in Fiscal 2021.

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Operating Expenses ("OPEX")

Total operating expenses were $9.7 million for Fiscal 2021, compared to $4.1 million for Fiscal 2020. Excluding M&A costs, on an annualized basis total operating expenses increased by 185% driven primarily by growth in G&A, S&M and R&D.

• G&A increased by 12% on an annualized basis; however, excluding the M&A costs, our G&A increased by 161% primarily due to augmenting the senior management team with two executives and recruiting independent directors, which led to a significant increase in personnel costs, including share-based compensation. Further, as a result of becoming a public company in Canada late in Fiscal 2020, we are now incurring significantly more regulatory costs and director and officer insurance premium costs.

• S&M increased by 362% on an annualized basis primarily due to making an investment in promoting and increasing awareness about us and our product offerings, including the recruitment of Brandon Tatum, through his private company The Officer Tatum LLC, as our advisor and advocate for our LEC System for law enforcement and personal defense in the United States in advance of our commercial launch of the LEC System anticipated for January 2022. We compensate Officer Tatum primarily in non-cash consideration, RSUs and PSUs. Additionally, we made further investments in business development by recruiting consultants in the United States and in Canada to promote our product offerings.

• Excluding the investment tax credits ("ITCs"), R&D increased by 88% on an annualized basis primarily due to an increase in headcount to accelerate product development. We recognized $0.2 million and $0.1 million of ITCs in Fiscal 2021 and 2020, respectively, relating to qualified SR&ED projects. Recognition takes place only once we have completed our analysis on whether certain R&D projects qualify for SR&ED ITCs with the assistance of our external tax professionals.

Finance Costs

Net finance costs increased marginally in Fiscal 2021 mainly due to the accretion cost on the accrued royalties liability relating to the acquisition of the LEC System.

Foreign Exchange Loss

Due to small net USD exposure, we reported an immaterial foreign exchange loss for Fiscal 2021 and 2020.

Net Loss

We incurred a net loss of $9.3 million or $14.70 per basic share, post Reverse Split for Fiscal 2021 ($0.21 as reported), compared to the net loss of $3.5 million or $7.70 per basic share, post Reverse Split for Fiscal 2020 ($0.11 as reported). The increase in net loss was primarily due to investments made to drive marketing and promotional activities about us and our product offerings, accelerating product development, and recruiting talent to position ourselves for success.

The Nine Months Ended September 30, 2020 compared to the Year Ended December 31, 2019

Revenue

We earned $0.9 million in revenue for Fiscal 2020, compared to $0.5 million for Fiscal 2019. On an annualized basis, Fiscal 2020 total revenue increased by 126% over the prior year mainly due to an increase in demonstration sales for our TASCS IFM system with two United States military customers.

Gross Profit

Our gross profit was $0.6 million for Fiscal 2020, with a gross margin of 71%, compared to $0.4 million for Fiscal 2019 with gross margin of 83%. The fluctuation in gross profit and gross margin is due to our pre-commercialization phase.

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Operating Expenses

Total operating expenses were $4.1 million for Fiscal 2020, compared to $1.4 million for Fiscal 2019. Excluding M&A costs, on an annualized basis total operating expenses increased by 136% driven by growth in G&A, and S&M. With the additional capital raised in the fourth calendar quarter of 2019, coupled with additional capital raised in Fiscal 2020, we were in a position to invest and scale our operations.

• G&A increased by 813% on an annualized basis due to significant investment in positioning ourselves to be a successful public company, resulting in higher personnel costs, consulting fees and professional fees.

• S&M increased by 1951% on an annualized basis due to making an investment in United States business development by entering into a consulting agreement with SageGuild, coupled with increased expenditure on tradeshows.

• Excluding ITCs, R&D increased by 26% on an annualized basis to accelerate product development. We recognized $0.1 million of ITCs in Fiscal 2020 relating to qualified SR&ED projects from the prior year. Recognition took place in Fiscal 2020 after we completed our analysis on the qualification of certain R&D projects for SR&ED ITCs. We have since collected the ITCs from the Canadian government.

Finance Costs

For Fiscal 2020, we incurred gross finance costs of $0.1 million, compared to $0.2 million in Fiscal 2019. The decrease was primarily due to a large accretion charge in Fiscal 2019 from the conversion of the 2018 convertible notes to KWESST 2019 Convertible Notes. The KWESST 2019 Convertible Notes were subsequently converted into Common Shares in September 2020.

We also recognized approximately $20,000 of interest income and gain on termination of lease obligations, net of the above gross finance costs in Fiscal 2020.

Foreign Exchange Loss

Due to small net USD exposure, we reported an immaterial foreign exchange loss for Fiscal 2020 and Fiscal 2019.

Net Loss

We incurred a net loss of $3.5 million or $7.70 per basic share, post Reverse Split for Fiscal 2020 ($0.11, as reported), compared to the net loss of $1.1 million or $4.90 per basic share, post Reverse Split for Fiscal 2019 ($0.07, as reported). The increase in net loss was primarily due to scaling-up our operations for growth, increasing R&D activities, and incurring non-recurring charges for going public in Canada.

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Quarterly Results of Operations

The following tables summarize selected unaudited consolidated financial data for each of the last eight quarters for which such information is available. The summary financial information provided below is derived from our interim financial statements for each such quarter and are prepared under IFRS. These quarterly operating results are not necessarily indicative of our operating results for a full fiscal year or any future period. Our quarterly results of operations have been and will continue to be volatile until we have successfully commercialized our product offerings.

($ in thousands, except per share)	September 2020 (Q4 FY20)			December 2020 (Q1 FY21)			March 2021 (Q2 FY21)			June 2021 (Q3 FY21)			September 2021 (Q4 FY21)			December 2021 (Q1 FY22)			March 2022 (Q2 FY22)			June 2022 (Q3 FY22)
Revenue	$	213		$	146		$	448		$	522		$	160		$	17		$	166		$	282
Cost of sales	$	95		$	72		$	332		$	315		$	80		$	25		$	142		$	238
Gross profit	$	118		$	74		$	116		$	207		$	80		$	(8	)	$	24		$	44
Gross margin %		55.1	%		55.1	%		26.0	%		39.6	%		49.7	%		(45.9	)%		14.6	%		15.6	%
Operating expenses	$	2,392		$	1,580		$	2,376		$	2,798		$	2,925		$	3,196		$	2,231		$	2,525
Operating loss	$	(2,274	)	$	(1,506	)	$	(2,260)		$	(2,591	)	$	(2,845	)	$	(3,204	)	$	(2,207	)	$	(2,481	)
Other income (expenses)	$	248		$	(21	)	$	(17	)	$	(37	)	$	(38	)	$	(39	)	$	(83	)	$	(119	)
Net income (loss)	$	(2,026	)	$	(1,527	)	$	(2,277	)	$	(2,628	)	$	(2,883	)	$	(3,243	)	$	(2,290	)	$	(2,600	)
Net finance costs (income)	$	(45	)	$	18		$	15		$	28		$	19		$	48		$	72		$	184
Depreciation and amortization	$	15		$	39		$	35		$	13		$	53		$	72		$	73		$	81
EBITA loss	$	(2,056	)	$	(1,470	)	$	(2,227	)	$	(2,587	)	$	(2,811	)	$	(3,123	)	$	(2,145	)	$	(2336	)
Other adjustments:
Non-cash M&A costs	$	1,515		$	-		$	-		$	-		$	-		$	-		$	-		$	-
Stock-based compensation	$	137		$	274		$	605		$	555		$	998		$	928		$	423		$	525
Professional fees relating to U.S. financing	$	-		$	-		$	-		$	-		$	-		$	112		$	44		$	344
Gain on acquisition	$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	(42	)
Fair value adjustments on derivatives	$	(178	)	$	-		$	-		$	-		$	-		$	-		$	-		$	-
Foreign exchange loss (gain)	$	9		$	3		$	(5	)	$	15		$	(19	)	$	(9	)	$	9		$	(24	)
Loss on disposal	$	-		$	-		$	-		$	-		$	1		$	-		$	1		$
Adjusted EBITDA (loss)	$	(573	)	$	(1,193	)	$	(1,627	)	$	(2,017	)	$	(1,831	)	$	(2,204	)	$	(1,712	)	$	(1,532	)
Earnings (loss) per share - basic and diluted, as reported	$	(0.07	)	$	(0.04	)	$	(0.05	)	$	(0.06	)	$	(0.06	)	$	(0.07	)	$	(0.05	)	$	(0.05	)
Weighted average common shares – basic, as reported		33,025			41,392			42,142			46,016			47,746			49,022			49,868			51,989
Earnings (loss) per share - basic and diluted, post Reverse Split	$	(4.90	)	$	(2.80	)	$	(3.50	)	$	(4.20	)	$	(4.20	)	$	(4.90	)	$	(3.50	)	$	(3.50	)
Weighted average common shares - basic, post Reverse Split		472			591			602			657			682			700			712			742

Note: due to preparing the table in thousands, there may be rounding differences.

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Governmental Regulations, Laws, and Local Practices

Please see the discussion of governmental regulations, laws and local practices in Business Overview - Government Regulations . See also Risk Factors - The Company may Experience Difficulties Complying with Applicable Regulations.

Liquidity and Capital Resources

Overview

Our primary sources of capital to date have been from security offerings, exercise of stock options and warrants, and, to a lesser extent, pre-commercial revenue. As at June 30, 2022, our cash position was $0.2 million, a decrease of $2.5 million since September 30, 2021 primarily due to incurring a net operating loss for YTD Fiscal 2022, offset primarily by an increase in cash from the net proceeds of the Unsecured Loans financing in March 2022 and exercise of warrants.

For YTD Q3 Fiscal 2022, we had capital expenditures of $0.6 million compared to $0.03 million in the comparable prior period.  The increase was primarily due to product development (where capitalized), coupled with an increase in R&D equipment purchases, partially offset by net cash acquired from the Police Ordnance Acquisition.  In Fiscal 2021, we had capital expenditures of $0.9 million, compared to $0.5 million for the nine months ended September 30, 2020, most of which we invested in R&D equipment, product development (where capitalized), office furniture and equipment, computer equipment, and leasehold improvements at our corporate office. Our capital expenditures in Fiscal 2019 were negligible due to limited capital at the time.

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Our working capital was a negative $3.1 million at June 30, 2022, compared to $2.9 million at September 30, 2021, and at September 30, 2020. Working capital is calculated as follows: current assets less current liabilities. This decrease was mainly driven by our net operating loss for YTD Fiscal 2022, which was partially offset by the net proceeds from the Unsecured Loans and net assets assumed from the Police Ordnance Acquisition.

Based on management's projection, including the offering pursuant to this Prospectus, we believe that we have sufficient capital to fund our working capital, contractual obligations, and commitments over the next 12 months.  However, we may require additional capital to fund our commercialization efforts in the United States for the launch of the PARA OPS product line and/or any major customer orders for our Digitization and Counter-Threat product lines.  Potential sources of capital may include additional equity and/or debt financings.  In our view, the availability of capital will be affected by, among other things, capital market conditions, the success of our PARA OPS system commercialization efforts, timing for winning new customer contracts, potential acquisitions, and other relevant considerations (see Risk Factors). In the event we raise additional funds by issuing equity securities, our existing shareholders will likely experience dilution, and any additional incurrence of indebtedness would result in increased debt service obligations and could require us to agree to operational and financial covenants that could further restrict our operations. Any failure to raise additional funds on terms favorable to us or at all may require us to significantly change or curtail our current or planned operations in order to conserve cash until such time, if ever, that sufficient proceeds from operations are generated, and could result in us not being in a position to advance our commercialization strategy or take advantage of business opportunities.

Recent Sources and Uses of Financing

Equity and Debt Offerings

For year-to-date Fiscal 2022, we conducted the following offerings (post Reverse Split):

• On March 11, 2022, we closed a non-secured and non-convertible loan financing with various lenders in an aggregate amount of $1.8 million, which was upsized to $2.0 million on March 15, 2022. The Unsecured Loans bear interest at a rate of 9.0% per annum, compounded monthly and not in advance, and have a maturity of thirteen months, with us having the option to repay the whole or any part of the Unsecured Loans, without penalty or premium, at any time prior to the close of business on the maturity date. The principal amount is due only at maturity.  As part of the terms of the Unsecured Loans, we issued an aggregate of 14,285 Common Shares to the lenders as a bonus.  These Common Shares were issued pursuant to prospectus exemptions of applicable securities laws and therefore subject to a Canadian four-month plus one day trading restriction.  The use of proceeds was for working capital purposes.

• On July 14, 2022, we closed a non-brokered private placement of $0.3 million, resulting in the issuance of 22,857 units of KWESST (“July 2022 Units”), at a price of $15.05 per July 2022 Unit (the “Issue Price”), for aggregate gross proceeds of $0.3 million (the “July 2022 Offering”). Each July 2022 Unit is comprised of one common share and one-half common share purchase warrant (the “July 2022 Warrants”). Each July 2022 Warrant entitles its holder to acquire one additional common share of KWESST at a price of $19.95 for a period of 24 months from the closing date. Accordingly, we issued 11,428 July 2022 Warrants under the July 2022 Offering. There was no finder fee paid in this private placement. The proceeds from the July 2022 Offering will be used to fund our working capital requirements. All securities issued in connection with the July 2022 Offering are subject to a statutory hold period in Canada expiring four months and one day from the closing of the Offering. We have received final acceptance by the TSX Venture Exchange. In connection with the July 2022 Offering, certain of our directors and officers (the “Insiders”) purchased 5,813 Units for a total consideration of $87,500. The issuance of Units to the Insiders constitutes a related party transaction but is exempt from the formal valuation and minority approval requirements of Multilateral Instrument 61-101 - Protection of Minority Security Holders in Special Transactions ("MI 61-101”) as KWESST’s securities are not listed on any stock exchange identified in Section 5.5(b) of MI 61-101 and neither the fair market value of the units issued to the Insiders, nor the fair market value of the entire private placement, exceeds 25% of our market capitalization.

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For Fiscal 2021, we raised gross proceeds of $6.0 million from closing the April 2021 Private Placement and September 2021 Private Placement (together, the "2021 Financings"). The total share offering costs (cash and non-cash) were $0.8 million.  See Use of Proceeds from Fiscal 2021 and Fiscal 2020 Financings.

For Fiscal 2020, we raised gross proceeds of $5.7 million primarily from equity and convertible note offerings. The total offering costs (cash and non-cash) were $0.7 million. See Use of Proceeds from Fiscal 2021 and Fiscal 2020 Financings.

For Fiscal 2019, we raised gross proceeds $1.0 million as a result of closing the October 2019 Private Placement. The share offering costs were immaterial.  The use of proceeds was for working capital purposes.

Refer to Note 16 of our audited consolidated financial statements for Fiscal 2021 (see Financial Statements), for further details on the above equity offerings related to Fiscal 2021, 2020 and 2019.

Use of Proceeds from Fiscal 2021 and Fiscal 2020 Financings

The following table shows the net proceeds from the 2021 Financings plus the remaining working capital on April 29, 2021 (immediately after closing the April 2021 Private Placement) available to fund future working capital, product development, repayment loans and other investments:

Available Funds
Net proceeds from April 2021 Private Placement	$	4,009,223
Working capital on April 29, 2021		235,345
		4,244,568
Net proceeds from September 2021 Private Placement		1,459,270
Proforma available funds from April 29, 2021	$	5,703,838

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The following table provides an approximate breakdown of the funds we spent up to June 30, 2022, from the proceeds raised in September 2020 plus the working capital available at that time, coupled with the above 2021 available funds:

		2020 Financing							2021 Financing
Use of Proceeds (1)		Expected Allocation of Net Proceeds (2)		Estimated and Unaudited Actual Use of Funds from September 1, 2020 to April 28, 2021		Proceeds Unspent as at April 28, 2021			Expected Allocation of Net Proceeds		Estimated and Unaudited Actual Use of Funds from April 29, 2021 to June 30, 2022		Proceeds Unspent as at June 30, 2022
Products development: (3)
TASCS NORS (formerly TASCS Sniper)	$	150,000	$	15,210	$	134,790		$	-	$	-	$	-
TASCS IFM (4)		150,000		623,953		(473,953	)		400,000		311,085		88,915
BLDS		575,000		74,874		500,126			200,000		264,373		(64,373	)
Shot Counter		120,000		-		120,000			-		-		-
Phantom		150,000		134,743		15,257			500,000		574,913		(74,913	)
GreyGhost		250,000		91,284		158,716			200,000		15,840		184,160
ATAK		-		-		-			500,000		285,186		214,814
PARA OPS		-		-		-			500,000		571,606		(71,606	)
Total products development		1,395,000		940,064		454,936			2,300,000		2,023,003		276,997
Other specific allocations:
Costs related to complete QT		150,000		145,560		4,440			-		-		-
Broker commissions and fees relating to QT		189,520		189,520		-			-		-		-
Repayment of CEO and employee loans		114,049		31,252		82,797			191,600		191,600		-
Repayment of unsecured borrowings		-		-		-			310,527		310,527		-
Marketing costs		345,000		832,852		(487,852	)		-		-		-
Prepaid royalties to DEFSEC (5)		150,000		-		150,000			150,000		150,000		-
Total allocated proceeds		2,343,569		2,139,248		204,321			2,952,127		2,675,130		276,997
Unallocated proceeds for working capital		1,746,237		1,715,213		31,024			2,516,366		2,793,363		(276,997	)
Transferred to 2021 Financing for working capital		-		235,345		(235,345	)		235,345		235,345		-
Total use of proceeds	$	4,089,806	$	4,089,806	$	-		$	5,703,838	$	5,703,838	$	-

Notes:

(1)Excludes non-cash transactions settled in Common Shares.

(2)As disclosed in our Filing Statement dated August 28, 2020, as filed on SEDAR (www.sedar.com).

(3)Includes concept & design, initial prototype, market testing, and pre-production including a few demo units. Costs includes internal labor costs, outsourced engineering costs, and materials (no overhead allocation).

(4)Net of customer funding of $1.0 million up to June 30, 2022.

(5)In connection with the PARA OPS system acquisition.

Changes in Use of Proceeds

During Fiscal 2021, we allocated more funds to the TASCS IFM product line as a result of winning an additional contract with a United States military customer following the trials/testing held in September and November 2020. These trials provided us with constructive feedback for further enhancements to the TASCS IFM mortar system in advance of the extensive United States military exercises that took place in September and October 2021, which were also successful based on positive feedback received from the United States military customer. We also reallocated some of the funds to marketing to further promote and increase awareness about us and our product offerings. At April 28, 2021 (immediately prior to the closing of the April 2021 Private Placement) we had $235,345 remaining proceeds from the September 2020 Private Placement, which we have allocated to the 2021 Financings table as part of the unallocated working capital. Going forward, we will report only on the remaining funds from the 2021 Financings in accordance with applicable securities laws. 

While management intends to invest the remaining available funds as shown under the 2021 Financings in the above table; there may be circumstances where, for sound business reasons, a reallocation of funds may be advisable.

CEBA Term Loan

In April 2020, we entered into a $40,000 term loan agreement with TD Canada Trust under the Canada Emergency Business Account program administered by the Federal Government of Canada. In December 2020, the Canadian Federal Government amended the CEBA Term Loan program to increase it to $60,000. Accordingly, our indebtedness increased to $60,000.

This amendment also resulted in extending the interest-free period on the CEBA Term Loan to December 31, 2022. Thereafter, we may exercise the option for a three (3) year term extension, subject to a 5% annual interest rate during the extension period. As an inducement for early repayment, if we repay the CEBA Term Loan by December 31, 2022, $20,000 will be forgiven.

As a result of the Police Ordnance Acquisition, we assumed an additional $30,000 CEBA Term Loan based on the same terms as above.  On January 12, 2022, the government of Canada announced the repayment deadline for the CEBA Term Loans to qualify for partial loan forgiveness is being extended from December 31, 2022, to December 31, 2023, for all eligible borrowers in good standing.  Repayment on or before the new deadline of December 31, 2023, will result in loan forgiveness of up to a third of the loans.

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Cash Flow

Our approach to managing liquidity is to ensure, to the extent possible, that we always have sufficient liquidity to meet our liabilities as they come due. We regularly perform cash flow forecasts to ensure that we have sufficient cash to meet our operational needs while maintaining sufficient liquidity. At this time, we do not use any derivative financial instruments to hedge our currency risk.

The following table provides a summary of cash inflows and outflows by activity for the respective periods:

		Nine months ended June 30, 2022 (Unaudited)			Nine months ended June 30, 2021 (Unaudited)			Year ended September 30, 2021			Nine months ended September 30, 2020			Year ended December 31, 2019
Cash inflows (outflows) by activity:
Operating activities	$	(3,947,752	)	$	(4,718,229	)	$	(6,255,213	)	$	(1,791,654	)	$	(1,093,556	)
Investing activities		(614,028	)		(299,909	)		(1,073,192	)		(390,972	)		(20,190	)
Financing activities		2,063,262			4,376,504			6,942,750			5,234,771			1,135,361
Net cash inflows (outflows)	$	(2,498,518	)	$	(641,634	)	$	(385,655	)	$	3,052,145		$	21,615

Nine months ended June 30, 2022, and 2021

Cash used by operating activities

We have funded our operating activities primarily from additional equity and debt financing for both periods in Fiscal 2022 and 2021. For the nine months ended June 30, 2022, total cash flow used in operating activities decreased by 16% compared to the same period in Fiscal 2021 primarily due to deferring payments with certain vendors (primarily professional firms) to conserve cash for near-term working capital. However, we expect this to reverse for the next quarter as we honor our payment commitments with these vendors coupled with an increase in cash outflows for the launch of PARA OPS in the United States and additional inventories across all three business lines.

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Cash used by investing activities

Cash flow used in investing activities increased in YTD Fiscal 2022 compared to YTD Fiscal 2021 mainly due to $0.8 million in capitalized development costs and $0.2 million in additions to capital assets, partially offset by net cash acquired from the Police Ordnance Acquisition.

Cash provided by financing activities

The $2.3 million decrease in cash provided by financing activities in YTD Fiscal 2022 over YTD Fiscal 2021 was primarily driven lower capital raised. In YTD Fiscal 2021, we raised net proceeds of $4.0 million from equity issuance in a brokered private placement; whereas, for YTD Fiscal 2022 we raised net proceeds of $2.0 million from Unsecured Loans (see below). We also benefited from higher volume of exercised stock options, offset partially by repayment of related party loans, during YTD Fiscal 2021.

Fiscal periods ended September 30, 2021, 2020 and December 31, 2019

Cash used by operating activities

With the additional capital raised during Fiscal 2021, we continued to invest significantly across the organization and product development (refer to Operating Results - Results of Operations). As an early-stage company with various products in the pipeline (pre-commercialization phase), our revenue remains low and insufficient to cover the increase in our overhead costs, professional fees, advertising and promotion costs, and R&D costs. As a result, cash flow used in operating activities was $1.5 million and $6.3 million for Q4 Fiscal 2021 and for the full Fiscal 2021, respectively, compared to $0.2 million and $1.8 million for the comparable prior periods, respectively.

Cash used by investing activities

Cash flow used in investing activities for Fiscal 2021 was higher than in the prior two financial years, mainly due significant investment made in sales demonstration units for TASCS IFM, and to a lesser extent to a $0.15 million deposit made to DEFSEC as an advance on future royalties. The $0.4 million investment in Fiscal 2020 includes investments in capitalized developments projects and the cash consideration for the acquisition of the Phantom system from SageGuild.

Cash flow used in investing activities for Q4 Fiscal 2021 was higher than the comparable prior period mainly due to our significant investment made in sales demonstration units for TASCS IFM.

Cash provided by financing activities

The $1.7 million increase in cash provided by financing activities in Fiscal 2021 over Fiscal 2020 was primarily driven by $1.8 million of proceeds from exercised of stock options and warrants over the comparable period in light of the favorable movement in the price of the Common Shares since going public in Canada. In Fiscal 2021, we raised net proceeds of $5.4 million from equity offerings, slightly ahead of the $5.3 million raised in the prior period. We also repaid $0.2 million of related party loans during Fiscal 2021, compared to $0.08 million in the prior period (see Major Shareholders and Related Party Transactions - Related Party Transactions). In Q4 Fiscal 2021, we generated $0.8 million additional cash compared to Q4 Fiscal 2020 due to exercise of options and warrants.

The financing activities in Fiscal 2019, benefited from $1 million non-brokered private placement during the fourth quarter of 2019.

Contractual Commitments and Obligations

Our remaining operating lease commitments are for office premises, which will expire in March 2026. Further, we have committed to minimum annual royalty payments to DEFSEC for the LEC System acquisition (see Operating Results - Significant Expenses and Other Events section above).

At June 30, 2022, our contractual obligations and commitments were as follows:

Payment due:		Total		Within 1 Year		1 to 3 years		3 to 5 years
Minimum royalty commitments	$	2,500,000	$	150,000	$	350,000	$	2,000,000
Borrowings		2,090,000		2,090,000		--		-
Accounts payable and accrued liabilities		2,263,7022		2,263,7022		-		-
Lease obligations		351,000		93,600		187,200		70,200
Other commitments		12,886		12,886		-		-
Short-term rental obligations		10,574		10,574		-		-
Total contractual obligations	$	7,228,162	$	4,620,762	$	537,200	$	2,070,200

Research and Development, Patents and Licenses, etc.

Our R&D expenses are comprised of costs incurred in performing R&D activities, including new product development, continued product enhancement, materials and supplies, salaries and benefits (including share-based compensation), engineering consulting costs, patent procurement costs, and estimated R&D-related facility costs. Where we qualify for Canadian investment tax credits for qualified scientific research and experimental development expenditures, we record this income as a reduction of R&D expenses.

Additionally, we capitalize development costs only if development costs can be measured reliably, the product or process is technically or commercially feasible, future economic benefits are probable, and we have the intention and sufficient resources to complete the development and to use or sell the asset. This was case for our TASCS IFM development efforts during the nine months ended September 30, 2021. We subsequently transferred this capitalized development cost to inventory (work-in-process) during the first quarter of our fiscal 2021 as a result of winning a follow-on order from the United States military customer, which included delivery of our TASCS IFM prototype for 81mm mortar system.  For the nine months ended June 30, 2022, we capitalized development costs for our Phantom and PARA OPS systems (see Note 7 of the Q3 Fiscal 2022 FS in section titled Financial Statements).

For a description of our patents and product development in progress, please see Business Overview - Proprietary Protection.

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Critical Accounting Estimates

The following is a summary of critical accounting policies, requiring management to make significant estimates and assumptions:

Revenue

Historically, revenue recognition did not require significant management judgement as delivery of performance obligations under contracts with customers was done generally within the same quarter. However, with the USD $0.8 million contract awarded to us from the United States military customer during the first quarter of Fiscal 2021 with delivery of performance obligations over several quarters, we have revised our accounting policy to address this as follows:

Revenue is recognized upon transfer of control of products or services to customers at an amount that reflects the transaction price we expect to receive in exchange for the products or services. Our contracts with customers may include the delivery of multiple products and services, which are generally capable of being distinct and accounted for as separate performance obligations. The accounting for a contract or contracts with a customer that contain multiple performance obligations requires us to allocate the contract or contracts transaction price to the identified distinct performance obligations.

Revenue from contracts with customers is recognized, for each performance obligation, either over a period of time or at a point in time, depending on which method reflects the transfer of control of the goods or services underlying the particular obligation to the customer.

For performance obligations satisfied over time, we recognize revenue over time using an input method, based on costs incurred to date relative to total estimated costs at completion, to measure progress toward satisfying such performance obligation (for non-recurring engineering services, the input method is based on hours). Under this method, costs that do not contribute to our performance in transferring control of goods or services to the customer are excluded from the measurement of progress toward satisfying the performance obligation. In certain other situations, we might recognize revenue at a point in time, when the criteria to recognize revenue over time are not met. In any event, when the total anticipated costs exceed the total anticipated revenues on a contract, such loss is recognized in its entirety in the period it becomes known. For the contract awarded in Fiscal 2021, we recognized revenue over time based on estimated hours to deliver the performance obligations under the contract. At September 30, 2021, we have estimated the percentage of completion at 98.3% based on our estimate of the remaining hours to complete our performance obligations under the contract, with the remaining recognized during the first quarter of Fiscal 2021.

We may enter into contractual arrangements with a customer to deliver services on one project with respect to more than one performance obligation, such as non-recurring engineering, procurement, and training. When entering into such arrangements, we allocate the transaction price by reference to the stand-alone selling price of each performance obligation. Accordingly, when such arrangements exist on the same project, the value of each performance obligation is based on its stand-alone price and recognized according to the respective revenue recognition methods described above. For example, for non-recurring engineering services rendered over a contract period the revenue is recognized using the percentage of completion method; whereas for training services the revenue is recognized after the training is delivered (i.e. point in time).

We account for a contract modification, which consists of a change in the scope or price (or both) of a contract, as a separate contract when the remaining goods or services to be delivered after the modification are distinct from those delivered prior to the modification and the price of the contract increases by an amount of consideration that reflects our stand-alone selling price of the additional promised goods or services. When the contract modification is not accounted for as a separate contract, we recognize an adjustment to revenue on a cumulative catch-up basis at the date of contract modification. There was no contract modification in Fiscal 2021.

The timing of revenue recognition often differs from performance payment schedules, resulting in revenue that has been earned but not billed. These amounts are included in unbilled receivables. At September 30, 2021, we had $0.3 million of unbilled receivable. Amounts billed in accordance with customer contracts, but not yet earned, are recorded and presented as part of contract liabilities. There was no outstanding contract liability at September 30, 2021.  At June 30, 2022, we had no outstanding contracts with unbilled receivable and contract liability.

When a contract includes a significant financing component, the value of such component is excluded from the transaction price and is recognized separately as finance income or expense, as applicable.

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Accounting for acquisitions and contingent consideration

During YTD Fiscal 2022, Fiscal 2021 and 2020, we acquired technology assets, which were recorded at fair value. Refer to Note 4 of the unaudited consolidated financial statements for the three and nine months ended June 30, 2022, and Note 4 of the audited consolidated financial statements of Fiscal 2021 for further details.

Areas of significant estimation in connection with the acquisition of the PARA OPS system included:

• the determination of the discount rate for the present value of the minimum annual royalty payments to DEFSEC; and
• the volatility assumption used in the Black Scholes option model to estimate the fair value of the warrants issued to DEFSEC given our short history as a public company (see below - Accounting for share-based compensation).

Areas of significant estimation in connection with the acquisition of the Phantom included:

• the fair value of our Common Shares and warrants issued to SageGuild because we were a private company at the time of the asset acquisition; and
• the accounting for the contingent annual payments.

Areas of significant estimation in connection with the Police Ordnance Acquisition included:

• the estimated fair value of raw and work-in-progress inventories and intangible assets for the purchase price allocation, which remains under management review (to be finalized by September 30, 2022); and
• the volatility assumption used in the Black Scholes option model to estimate the fair value of the warrants issued to the selling shareholders given our short history as a public company.

Impairment of long-lived assets

We review property and equipment for impairment whenever events or changes in circumstances indicate the carrying amount may not be recoverable. An impairment loss is recognized the carrying value of an asset exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less costs to sell and value in use. For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows, referred as the cash generating unit ("CGU").

In accordance with IFRS, if the sum of the undiscounted expected future cash flows from a long-lived asset is less than the carrying value of that asset, then we recognize an asset impairment charge. The impairment charge is determined based on the excess of the asset's carrying value over its fair value, which generally represents the discounted future cash flows from that asset.

Because we are an early-stage defense technology company, management exercises significant judgment in establishing key assumptions and estimates to determine the recoverable amount of our CGU, including future cash flows based on historical and budgeting operating results, growth rates, tax rates, and appropriate after-tax discount rates. The actual results may vary and may cause significant adjustments in future periods.

Impairment of non-financial assets

We review non-financial assets for impairment whenever events or changes in circumstances indicate the carrying amount of the assets may be impaired. If the recoverable amount of the respective non-financial asset is less than our carrying amount, it is considered to be impaired. Management exercises significant judgement in estimating the recoverable amount for non-financial assets (see Impairment of long-lived assets).

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Accounting for share-based compensation

We measure share-based compensation at fair value. A key input in the Black Scholes option model is the volatility assumption in our Common Shares. Due to our limited trading history, management has established a relevant peer group of listed companies and selected the weighted average of their volatilities over a period of three to five years, where available. Starting in Fiscal 2021, we have commenced to incorporate a percentage of our stock volatility in the overall calculation of the volatility assumption. We expect to solely rely on our stock volatility by the end of Fiscal 2023 to estimate the fair value of share-based compensation as well as for warrants.

Accounting for Unsecured Loans

Due to the issuance of bonus Common Shares as part of the Unsecured Loans transaction, we are required to allocate the $2 million gross proceeds between the bonus Common Shares and the debt component based on their relative fair value.  To measure the fair value of the Unsecured Loans, we used the income approach and estimated a market discount rate of 22% to discount the future cash flows of the Unsecured Loans resulting in an estimated fair value of $1.63 million.  Accordingly, we allocated $1.63 million of the $2 million to Unsecured Loans and $0.37 million to share capital for the bonus Common Shares issued.

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DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

All share-related information presented in this section gives effect to the Reverse Split.

Directors and Senior Management

The following table sets forth the name of each of our directors and executive officers, as well as such individual's place of residence, position with us, principal business activities performed outside those with us and period of service as a director (if applicable).

Directors and Executive Officers

Name	Position With KWESST Micro	Age	Principal Business Activity Outside KWESST Micro	Director/Officer Since
David Luxton Ontario, Canada	Executive Chairman and Director	71	N/A	October 24, 2019(1)
Jeffrey MacLeod Ontario, Canada	President, CEO, Director and Promoter	62	N/A	April 24, 2017(1)
Paul Mangano (2) Maine, United States	Director	65	Founder and Owner, Surculus Advisors LLC and General Manager, Steiner Optics Inc. (up to April 2022)	September 17, 2020
Paul Fortin (2) Ontario, Canada	Director	55	Senior Associate, David Pratt & Associates and Independent Advisor	September 17, 2020
John McCoach (2) British Columbia, Canada	Director	64	Director and Chairman of the Audit Committee, Xybion Digital Inc.; Director, Principal Technologies Inc.; Vice Chairman, Royal Canadian Marine Search and Rescue	November 28, 2017(3)
Steven Archambault Ontario, Canada	Chief Financial Officer, Vice President, Corporate Services & Compliance, and Interim Corporate Secretary	51	N/A	October 1, 2020
Rick Bowes Ontario, Canada	Vice President, Operations of Digitization & Counter-Threat Products	60	N/A	April 12, 2021

Notes:

(1)Date on which the individual became a director of KWESST.

(2)A member of the Audit Committee. Mr. McCoach is Chair of the Audit Committee.

(3)Date on which the individual became a director of Foremost.

The following are brief biographies of our directors and executive officers.

David Luxton, Executive Chairman and Director

David Luxton is an entrepreneur in the defense and security industry. He is a former Canadian infantry officer, and former senior official with the Canadian and British governments. In 1990 he founded Simunition, a business that develops and sells simulated munitions for realistic close quarters combat training for military and law enforcement. Between 2003 and 2009, he led the expansion of the Allen-Vanguard Corporation, a company in the IED countermeasures business, from approximately $3,000,000 to approximately $300,000,000 in annual revenues, then served as Chairman from 2010 to October 2021. Between 2015 and 2018, he was the Executive Chairman of United Tactical Systems, LLC, a company offering non-lethal products for law enforcement, military and personal defense. From 2003 to the date of this Prospectus, he has been President & Owner of DEFSEC, a company that specializes in strategic transactions in the defense and security industry. Furthermore, from 2016 to 2020, he was a Senior Strategic Advisor to the University of Ottawa. Since 2019, he has been the Executive Chairman of KWESST. He holds a SMDP postgraduate studies from the University of Oxford. He entered into a confidentiality and non-disclosure agreement through his consulting agreement with us on October 1, 2019.

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Jeffrey MacLeod, President, Chief Executive Officer, Director and Promoter

Jeffrey MacLeod is an experienced defense industry executive with over 20 years of experience in the small arms and advanced soldier system fields. By establishing us, he aimed to develop software and hardware systems, such as the TASCS, to take existing legacy weapons and fully integrate them into a soldier system. Prior to founding KWESST, from 2008 to 2017, Jeffrey was the General Manager of Colt, a company producing small firearms for the Canadian military. Jeffrey has a Bachelor's degree in mechanical engineering from the Technical University of Nova Scotia (now DalTech) and a Master's degree in Military Vehicle Technology from the Royal Military College of Science (U.K). He is a Professional Engineer registered in the Province of Ontario. He entered into a confidentiality and non-disclosure agreement with us through his employment contract on October 1, 2019.

Steven Archambault - Chief Financial Officer, Vice President, Corporate Services and Compliance, and Interim Corporate Secretary

Mr. Archambault is an experienced finance executive with over 20 years' experience with private and public companies. He began his career as a CPA, CA with Ernst & Young LLP, followed by senior finance positions at AXIS Capital Holdings Limited, a global insurer and reinsurer listed on the New York Stock Exchange. Prior to joining us as of October 1, 2020, Mr. Archambault has been acting as a virtual CFO consultant since September 2019. From January 2018 to September 2019, he served as the CFO of Eureka 93 Inc. (formerly LiveWell Canada Inc.) listed on TSXV and subsequently on Canadian Securities Exchange. Prior to this role, Mr. Archambault held the positions of President and CFO of International Datacasting Corporation and Group CFO of Novra, and immediately prior to Novra's acquisition of IDC, he was the CFO of IDC (listed then on the TSXV) from December 2013 and Acting CEO from February 2016 to July 2016. Mr. Archambault graduated from the University of Ottawa with a Bachelor of Commerce, Honors. He has entered into a confidentiality and non-disclosure agreement with us on October 1, 2020.

Rick Bowes - Vice President, Operations of Digitization & Counter-Threat Products

Rick Bowes is an experienced defense industry executive with over 20 years of experience. Prior to joining us in April 2021, Mr. Bowes founded Cardinal Defence Consulting Inc. in 2018 and has since been offering consulting services to the defense industry. From 2016 to 2018, he served as the Vice President of Defense at ADGA Group. Over the course of his career, Mr. Bowes held various senior roles with defense contractors such as General Dynamics Canada, DRS Technologies Canada (now Leonardo DRS), ATCO Frontec and ADGA Group Inc., and he had a distinguished career as a senior officer in the Canadian Army, retiring in 2003 as a Lieutenant Colonel. He is a graduate of Royal Military College of Canada, and served in various operational and staff roles in the Canadian military and on secondment to the British Army. As an armor officer, Mr. Bowes served with various units such as Lord Strathcona's Horse (Royal Canadians) and the Canadian Airborne Regiment Battle Group across Canada and in deployed operations in Bosnia-Herzegovina with the UN Protection Force and the NATO Stabilization Force (SFOR). He was also part of the planning team for Canada's participation in the NATO Kosovo Force (KFOR) mission in 1999. He has entered into a confidentiality and non-disclosure agreement with us on April 13, 2021.

Paul Mangano - Director

Prior to being invited to join our board of directors ("Board"), Mr. Mangano founded and owned Surculus Advisors LLC since 2016, a boutique management consulting firm providing advice, leadership, specialized expertise and transaction consultation services to the industrial and high-tech sectors including aerospace, defense and security. From August 2020 to April 2022, he was the General Manager of Steiner Optics Inc., a division of Beretta. Prior to forming Surculus Advisors LLC, from 2006 to 2015, he served as the President of L-3 Communication's Public Safety & Sporting business unit. Mr. Mangano graduated with a BA in Economics from Harvard University and an MBA in High Technology from Northeastern University.

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Paul Fortin - Director

Prior to being invited to join our Board, Paul Fortin was the director of international business development at Borden Ladner Gervais LLP, a full-service law firm, from 2011 to 2019. Since March 2020, he has been working with David Pratt & Associates as a Senior Associate and is an independent advisor within the defense and security industry. Mr. Fortin graduated from Carleton University with a Bachelor's degree in Political Science and from Algonquin College with a specialization in Product Marketing Management.

John McCoach - Director

Prior to being invited to join our Board, John McCoach held multiple senior positions in various companies, including seven years as the President of the TSXV. John McCoach was a member of the Capital Markets Authority Implementation Organization Board of Directors from 2016 to 2021. Mr. McCoach is an independent director and the current Audit Committee Chairman of Xybion Digital Inc. since November 2021. Furthermore, since 2018 he has been a director of Principal Technologies Inc. (formerly Connaught Ventures Inc.) since July 2020. He also served as Interim CEO and as a director of Foremost Ventures Corp., a position he held from 2018 until the Qualifying Transaction with KWESST Inc.  Finally, Mr. McCoach is an active crew member, and Vice Chairman of, Royal Canadian Marine Search and Rescue.

Compensation

Compensation for Fiscal 2021

The aggregate amount of compensation that we paid during the year ended September 30, 2021, directly and indirectly, including directors' fees, to our named executive officers and directors in their capacity as such, was $696,512.

In accordance with the TSXV policies, the following individuals are considered our named executive officers (collectively, "NEOs" and each, an "NEO") for the purposes of disclosure in this section:

(a)each individual who, during any part of the most recently completed financial year, served as our Chief Executive Officer ("CEO"), including any individual performing functions similar to a CEO;

(b)each individual who, during any part of the most recently completed financial year, served as our Chief Financial Officer ("CFO"), including any individual performing functions similar to a CEO;

(c)each of our three most highly compensated executive officers, or the three compensated officers acting in a similar capacity, other than the CEO and CFO, at the end of the most recently completed financial year whose total compensation was more than $150,000 for the fiscal year ended September 30, 2021; and

(d)each individual who would be a NEO under paragraph (c) but for the fact the individual was not one our executive officers and was not acting acting in a similar capacity as of September 30, 2021.

Compensation Philosophy and Objectives

Our current executive compensation program is designed to provide short and long-term rewards to our executives that are consistent with individual and corporate performance and their contribution to our short and long-term objectives. Our objectives with respect to compensation of executive officers are to provide compensation levels necessary to attract and retain high quality executives, and to motivate key executives to contribute to our interests. These objectives are to be met by the principal components of our executive compensation program, which has been focused on a combination of base compensation, cash bonus remuneration, and long-term incentives in the form of stock options or other security-based compensation.

The executive compensation program adopted by us and applied to our executive officers is designed to:

(a)attract and retain qualified and experienced executives who will contribute to our growth and success;

(b)ensure that the compensation of our executive officers provides a competitive base compensation package and a strong link between corporate performance and compensation; and

(c)motivate executive officers to enhance long-term shareholder value, with current compensation being weighted toward at-risk long-term incentives in the form of options and other security-based incentives so as to foster alignment with the interests of our shareholders and stakeholders.

We do not believe that our compensation programs encourage excessive or inappropriate risk taking because: (i) our employees receive both fixed and variable compensation, and the fixed portion (salary) provides a steady income regardless of Common Share value, which allows employees to focus on our business; and (ii) our LTIP encourages a long-term perspective due to the vesting provisions, which is generally at least over two (2) years. We believe that our compensation program is appropriately structured and balanced to motivate our employees and reward the achievement of annual performance goals, as well as the achievement of long-term growth in shareholder value.

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Compensation Governance and Process

We have relied on the experience of our Board in setting our executive compensation philosophy and appropriate levels of compensation for our NEOs.

Today, we do not have a separate Compensation Committee. Our Board assumes responsibility for the oversight over the compensation of directors and executives, including:

• review and approval our remuneration and compensation policies, including short and long-term incentive compensation plans and equity-based plans, bonus plans, pension plans (if any), our LTIP and grants, and benefit plans;
• sole authority to retain and terminate any compensation consultant to assist in the evaluation of director compensation, including sole authority to approve fees and other terms of the retention;
• review and approve at least annually all compensation arrangements for our senior executives;
• review and approve at least annually all compensation arrangements for our directors; and
• review the executive compensation sections disclosed in our management information circular distributed to shareholders in respect of our annual, and any special, meetings of shareholders.

While David Luxton and Jeffrey MacLeod work with our Board in making recommendations regarding our overall compensation policies and plan as well as specific level of compensation for the other NEOs, they are recused from any Board deliberations and decisions in respect to their own personal compensation. Their respective current fixed compensation was set prior to going public in Canada.

Elements of Compensation

Our executive compensation program consists of three principal components: base salaries, annual incentive compensation and benefits, and long-term compensation.

Base Salaries

Base salaries are intended to reflect an executive officer's position within our corporate structure, his or her years of experience and level of responsibility, and salary norms in the sector and general marketplace. Accordingly, decisions with respect to base salary levels for executive officers are not based on objective identifiable performance measures but for the most part are determined by reference to competitive market information for similar roles and levels of responsibility, coupled with subjective performance factors such as leadership, commitment, accountability, industry experience, and contributions. Our view is that a competitive base salary is a necessary element for retaining qualified executive officers, as it creates a meaningful incentive for individuals to remain with us and not be unreasonably susceptible to recruiting efforts by our competitors.

In determining the base salary compensation of each NEO, the Board considers: (i) recruiting and retaining executives critical to our success and the enhancement of shareholder value; (ii) providing fair and competitive compensation; (iii) balancing the interests of management and our shareholders; and (iv) rewarding performance, both on an individual basis and with respect to operations in general.

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Annual Incentive Compensation and Benefits

Our Board will consider whether it is appropriate and in our best interests to award discretionary cash bonus to the NEOs for the most recently completed fiscal year and, if so, the amount. Discretionary cash bonuses are awarded to recognize the achievement of annual corporate objectives and to recognize contributions that enhance our intrinsic value.

The following is a summary of the maximum annual incentive compensation as a percentage of base salary / annual consulting fee, for the NEOs based on their respective employment / consulting agreements, at the sole discretion of the Board:

Position	Maximum Annual Incentive Compensation (Percentage of Base Salary)
Executive Chairman	200%
President and CEO	Not specified
CFO, VP, Corporate Services & Compliance, and Interim Corporate Secretary	50%
VP Operations - Digitization and Counter-Threat Products	50%

We have not established explicit goals / milestones for our NEOs for Fiscal 2022 for the annual cash incentive compensation. We have set financial milestones for the vesting of 8,571 PSUs awarded to each of the Executive Chairman and the President & CEO on March 31, 2022. See Operating and Financial Review and Prospects.

Long-Term Compensation

The long-term component of compensation for our NEOs, consists of (i) stock options ("Options"), (ii) RSUs, (iii) deferred share units ("DSUs" and collectively with the Options, RSUs, PSUs and SARs, the "Security-Based Compensation Awards"), (iv) SARs and/or (v) PSUs. This component of compensation is intended to reinforce management's commitment to long-term improvements in our performance.

Our Board believes that incentive compensation in the form of Security-Based Compensation Awards which vest over time, is and has been beneficial and necessary to attract and retain NEOs. Furthermore, the Board believes Security-Based Compensation Awards are an effective long-term incentive vehicle because they are directly tied to our share price over a longer period and therefore motivates NEOs to deliver sustained long-term performance and increase shareholder value, and have a time horizon that aligns with long-term corporate goals.

In determining individual equity-based grants, the Board considers the experience, responsibilities and performance of each recipient of an award under the LTIP. Previous grants are also taken into consideration during the grant process.

Benefits Plans

The NEOs are entitled to life insurance, health and dental benefits.

We do not maintain a pension plan or retirement benefit plan for the NEOs.

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Performance Graph

The following graph illustrates the cumulative return to our shareholders based on a $100 investment in the Common Shares from September 22, 2020, the date we went public in Canada, to September 30, 2021, and for the nine months ended June 30, 2022, as compared to the cumulative total return on the Standard & Poor's / TSXV Composite Index for the same period, assuming the reinvestment of cash distributions and/or dividends:

Summary Compensation Table

The following table provides information concerning the total compensation paid to the NEOs for the year ended September 30, 2021, nine months ended September 30, 2020, and year ended December 31, 2019.

									Non-equity incentive plan compensation
Name	Fiscal Year		Salary		Share-based Awards (1)		Option- based Awards (2)		Annual Incentive Plans		Long-term Incentive Plans		All Other Compensation		Total Compensation
David Luxton Executive Chairman and Director (3)	2021	$	180,000	$	237,300	$	58,000	$	-	$	-	$	-	$	475,300
	2020	$	110,769	$	-	$	-	$	5,000	$	-	$	-	$	115,769
	2019	$	32,343	$	-	$	-	$	-	$	-	$	-	$	32,343
Jeffrey MacLeod President & CEO and Director	2021	$	160,000	$	237,300	$	58,000	$	-	$	-	$	-	$	455,300
	2020	$	110,769	$	-	$	-	$	5,000	$	-	$	-	$	115,769
	2019	$	32,343	$	-	$	-	$	-	$	-	$	-	$	32,343
Steven Archambault CFO and VP, Corporate Services and Compliance (4)	2021	$	192,733	$	24,999	$	301,000	$	-	$	-	$	-	$	518,732
	2020	$	-	$	-	$	-	$	-	$	-	$	-	$	-
	2020	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Paul Kania Former CFO (5)	2021	$	-	$	-	$	-	$	-	$	-	$	-	$	-
	2020	$	50,000	$	-	$	38,750	$	-	$	-	$	-	$	88,750
	2019	$	16,000	$	-	$	-	$	-	$	-	$	-	$	16,000
Richard Bowes VP, Operations of Digitization & Counter-Threat Products(6)	2021	$	78,419	$	24,999	$	301,000	$	-	$	-	$	-	$	404,418
	2020	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Notes:

(1)Represents the grant value of RSU awards, based the closing price of the Common Shares on the TSXV on the grant date.

(2)Represents the grant value of the option awards, using the Black-Scholes option model. For the key inputs used in this valuation mode, refer to Note 16 of the audited financial statements for Fiscal 2021 (see Compensation - Outstanding Equity Awards at September 30, 2021).

(3)Effective October 1, 2019, we entered into a professional services agreement with DEFSEC Corporation, a private company owned by Mr. Luxton. The compensation payable to Mr. Luxton is paid to his private company, DEFSEC Corporation.

(4)Mr. Archambault joined as our CFO on a part-time basis on October 1, 2020, transitioned to full-time on April 1, 2021. He also took on the role of VP, Corporate Services and Compliance in October 2021.

(5)Through his private company, PLK Accounting and Finance Inc., Mr. Kania provided CFO services from November 4, 2019, to September 30, 2020.

(6)Through his private company, Cardinal Defense Consulting Inc, Mr. Bowes provided part-time virtual VP Operation services from January 25, 2021, to April 9, 2021. Effective April 12, 2021, Mr. Bowes joined as an executive officer.

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Employment and Consulting Agreements

The following summarizes the key salient terms of the employment and consulting agreements between us and our NEOs in force as of September 30, 2021.

David Luxton: On October 1, 2019, we entered into a professional services agreement with DEFSEC Corporation, a private holding company owned by Mr. Luxton, in which he agreed to serve as our Executive Chairman for an annual fee of $120,000 per year and raising to $150,000 per year upon a going public transaction. This agreement was amended effective August 1, 2020, whereby the annual fee was adjusted to $180,000 per year. Mr. Luxton is entitled to an annual incentive bonus up to 200% of his annual fee at the Board's sole discretion. This agreement will expire on December 31, 2022. We have the right to terminate his consulting agreement with six (6) month notice period, subject to termination benefits (see Compensation - Potential Termination and Change of Control Benefits).

Jeffrey MacLeod: On October 1, 2019, we entered into an employment agreement with Mr. MacLeod to serve as our President and CEO with an initial base salary of $140,000 per year and raising to $160,000 upon a going public transaction. Because Mr. MacLeod's principal residence is based in West Montrose, Ontario, his employment agreement includes a $1,000 per month housing allowance for accommodations in Ottawa, Ontario while working at our corporate office. For Fiscal 2019, Mr. MacLeod collected a lower base salary to help us conserve cash to fund our working capital requirements. Further, he did not receive any housing allowance in the last three financial years. Mr. MacLeod is entitled to an annual incentive bonus at the Board's sole discretion and five weeks of vacation per year. His employment agreement will expire on September 30, 2022. We have the right to terminate his consulting agreement with six (6) month notice period, subject to termination benefits (see Compensation - Potential Termination and Change of Control Benefits).

Steven Archambault: On October 1, 2020, we entered into a part-time employment agreement with Mr. Archambault to serve as our part-time CFO for a monthly salary of $9,950 based on two business days per week, subject to adjustment for extra business days as defined in the agreement. On April 1, 2021, we amended his employment agreement to serve as our full-time CFO with an annual base salary of $180,000, of which $25,000 is to be in the form of RSUs and $155,000 in cash. These RSUs will be granted each year on April 1^st, vesting over the next 12 months. Mr. Archambault is entitled to an annual incentive bonus up to 50% of his annual base salary at the Board's sole discretion and four weeks of vacation per year. Mr. Archambault also assumed the role of Vice President, Corporate Services and Compliance starting in October 2021. We have the right to terminate his employment agreement with 30 days' notice, subject to termination benefits (see Compensation - Potential Termination and Change of Control Benefits).

Richard Bowes: On April 12, 2021, we entered into an employment agreement with Mr. Bowes to serve as Vice President of Operations, Digitization and Counter-Threat Products with an annual base salary of $180,000, of which $25,000 is to be in the form of RSUs and $155,000 in cash. These RSUs will be granted each year on April 1^st, vesting over the next 12 months. Mr. Bowes is entitled to an annual incentive bonus up to 50% of his annual base salary at the Board's sole discretion and four weeks of vacation per year. We have the right to terminate his employment agreement with 30 days' notice, subject to termination benefits (see Compensation - Potential Termination and Change of Control Benefits).

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Outstanding Equity Awards at September 30, 2021

The following table sets forth information concerning the outstanding equity awards of each of the directors and NEOs as of September 30, 2021.

	Option-based awards										Share-based awards
	Fiscal year award granted		Number of securities underlying unexercised options		Option exercise price		Option expiration date		Value of unexercised in the- money options(1)		Number of shares or units of shares that have not vested		Market or payout value of share-based awards that have not vested (2)		Market or payout value of vested share-based awards not paid out or distributed
David Luxton (3)		2021		1,428	$	87.50		7/2/2026	$	72,000		2,143	$	295,500	$	-
Jeff MacLeod (4)		2021		1,428	$	87.50		7/2/2026	$	72,000		3,000	$	413,700	$	-
Steven Archambault (5)		2021		2,857	$	136.50		8/25/2026	$	4,000		207	$	28,634	$	-
				714	$	49.00		11/20/2025	$	63,500		-	$	-	$	-
				3,571	$	52.50		10/1/2025	$	305,000		-	$	-	$	-
Richard Bowes (6)		2021		1,428	$	136.50		8/25/2026	$	2,000		207	$	28,634	$	-
				4,285	$	90.30		4/29/2026	$	204,000		-	$	-	$	-
				1,428	$	120.40		1/25/2021	$	25,000		-	$	-	$	-
Total				17,139					$	747,500		5,557	$	766,468	$	-

Notes:

(1)Based on the difference between the exercise price of the option and $137.90, the closing price of the Common Shares on the TSXV on September 30, 2021.

(2)Based on $137.90, the closing price of the Common Shares on the TSXV on September 30, 2021.

(3)The grants were made to Mr. Luxton's private company, DEFSEC Corporation. His 2021 stock option grant will vest over two (2) years and his RSU grant will vest over one (1) year.

(4)Mr. MacLeod's 2021 stock option grant will vest over two (2) years and his RSU grant will vest over one (1) year.

(5)Mr. Archambault’s 2021 stock option grants will vest as follows: a) 2,857 options and 3,571 options over (2) years, and b) 714 options vested immediately. His RSU grant will vest over twelve (12) months.

(6)Mr. Bowes’ 2021 stock option grants will vest as follows: a) 1,428 options over one (1) year, and b) 4,285 options and 1,428 options over two (2) years.

There was no exercise of stock options during Fiscal 2021.

Value Vested or Earned During the Year

The table below sets out the value of incentive awards that vested during the year ended September 30, 2021.

Name		Option-based awards - value vested during Fiscal 2021 (1)		Share-based awards - value vested during Fiscal 2021 (2)		Non-equity incentive plan compensation - value earned during Fiscal 2021
David Luxton	$	-	$	-	$	-
Jeff MacLeod	$	-	$	-	$	-
Steven Archambault	$	41,125	$	10,514	$	-
Richard Bowes	$	9,500	$	10,514	$	-

Notes:

(1)Amounts represent the difference between the exercise price and the closing price of the Common Shares on the TSXV on the vesting date.

(2)Amounts represent the number of vested RSUs multiplied by the closing price of the Common Shares on the TSXV on the vesting date.

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Potential Termination and Change of Control Benefits

All outstanding equity compensation is forfeited / cancelled if we terminate a NEO's employment / consulting agreement for cause. Further, in the event a NEO voluntarily resigns from his employment / consulting with us, any unpaid annual incentive and unvested equity compensation are forfeited in accordance with our LTIP.

We have agreements with the NEOs that set out the terms of their employment / consulting and what they are entitled to in connection with a termination of employment or change of control. These agreements include non-solicitation, confidentiality, and ownership of intellectual property provisions to protect our interests.

The table below sets out what the NEOs are entitled to under the different termination scenarios under their respective agreements in effect as at September 30, 2021:

	Notice Period (months)		Termination Without Cause (pre-Change of Control)		Termination Without Cause in Connection with Change of Control
David Luxton
Base fee	6	$	180,000	$	270,000	(1)
Value of unvested options		$	72,000	$	72,000
Value of unvested RSUs		$	295,500	$	295,500
TOTAL		$	547,500	$	637,500
Jeffrey MacLeod
Base pay	6	$	160,000	$	240,000	(1)
Value of unvested options		$	72,000	$	72,000
Value of unvested RSUs		$	413,700	$	413,700
TOTAL		$	645,700	$	725,700
Steven Archambault
Base pay	1	$	90,000	$	90,000	(2)
Value of unvested options		$	331,375	$	331,375
Value of unvested RSUs		$	28,634	$	28,634
TOTAL		$	450,009	$	450,009
Richard Bowes
Base pay	1	$	45,000	$	45,000	(2)
Value of unvested options		$	221,500	$	221,500
Value of unvested RSUs		$	28,634	$	28,634
TOTAL		$	295,134	$	295,134

Notes:

(1)If within 24 months of, or in anticipation within 6 months of, change of control.

(2)If within 3 months of, or in anticipation within 3 months of, change of control.

A change of control is commonly defined in each of the respective agreements as:

a)the sale of all or substantially all of our outstanding Common Shares for cash or securities of an entity not managed by our management team and that are determined by our Board to be liquid for all of our shareholders ("Liquid Unrelated Issuer");

b)a merger, amalgamation, arrangement or other similar transaction involving us where the holders of our Common Shares receive cash or securities of a Liquid Unrelated Issuer, but do not immediately thereafter own securities of the successor corporation which entitle them to cash more than 50% of the votes attaching to all shares in the capital of the successor corporation;

c)the sale of all or substantially all of our assets followed by a liquidating distribution to the holders of our Common Shares of cash or securities of a Liquid Unrelated Issuer;

provided that our Board shall have the right, in its absolute discretion, to deem any transaction not enumerated above to be a change of control. For greater clarity, a sale or transfer of founders shares between related parties, and/or an initial going public transaction of any kind shall not constitute a change of control.

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Compensation of Independent Directors

In prior financial years, we made no cash compensation to the directors. In December 2020, our Board approved the following cash compensation for the independent directors effective October 1, 2020:

• $5,000 per quarter; and
• $2,500 per quarter for the Chair of the Audit Committee.

The following table sets out the total compensation for our independent directors who served at any time during the year ended September 30, 2021.

Name	Fees Earned		Stock Awards (1)		Option Awards (2)		Non-equity Incentive Plan Compensation		All Other Compensation		Total Compensation
John McCoach	$	30,000	$	-	$	110,000	$	-	$	-	$	140,000
Paul Fortin	$	20,000	$	-	$	110,000	$	-	$	-	$	130,000
Paul Mangano	$	20,000	$	-	$	110,000	$	-	$	-	$	130,000
Elisabeth Preston(3)	$	15,000	$	-	$	261,000	$	-	$	-	$	276,000

Notes

(1)Represents the grant value of RSU awards, based on the closing price of the Common Shares on the TSXV on the grant date.

(2)Represents the grant value of the option awards, using the Black-Scholes option model. For the key inputs used in this valuation mode, refer to Note 16 of the audited financial statements for the year ended September 30, 2021.

(3)Mrs. Preston retired from the Board on May 18, 2022.

Outstanding Equity Awards at September 30, 2021

The following table shows all compensation securities granted to our independent directors during Fiscal 2021.

	Option-based awards										Share-based awards
	Fiscal Year award granted		Number of securities underlying unexercised options (1)		Option exercise price		Option expiration date		Value of unexercised in the money options(2)		Number of shares or units of shares that have not vested		Market or payout value of share-based awards that have not vested (3)		Market or payout value of vested share-based awards not paid out or distributed
John McCoach		2021		3,571	$	67.90		12/15/2025	$	250,000		-	$	-	$	-
		2018		306	$	32.90		6/15/2023	$	32,142		-	$	-	$	-
Paul Fortin		2021		3,571	$	67.90		12/15/2025	$	250,000		-	$	-	$	-
Paul Mangano		2021		3,571	$	67.90		12/15/2025	$	250,000		-	$	-	$	-
Elisabeth Preston		2021		4,285	$	124.60		2/23/2026	$	57,000		-	$	-	$	-
Total				15,304					$	839,142		-	$	-	$	-

Notes:

(1)The 2021 stock option grants to the directors vest over two (2) years. The 2018 stock option granted to Mr. McCoach has fully vested.

(2)Based on the difference between the exercise price of the option and $137.90, the closing price of the Common Shares on the TSXV on September 30, 2021.

(3)Based on $137.90, the closing price of the Common Shares on the TSXV on September 30, 2021.

There was no exercise of options during Fiscal 2021.

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Equity Compensation Plans

On February 10, 2021, our Board adopted a new LTIP, which was approved by our shareholders on March 31, 2021 and on April 9, 2021 by the TSXV.  Our LTIP was subsequently amended to conform with the new TSXV policy issued on November 24, 2021 in relation to security based compensation.  Our shareholders approved this amended LTIP on March 31, 2022, which was subsequently approved by the TSXV on April 14, 2022.

The maximum number of Common Shares issuable under our LTIP for stock options is 10% of our issued and outstanding Common Shares, subject to adjustment or increase pursuant to the terms of the LTIP. Any stock options that have been cancelled, repurchased, expired, or exercised will again be available under the LTIP. At June 30, 2022, we had 60,138 outstanding stock options, leaving 14,017 stock options available for future grants.

Additionally, the maximum number of Common Shares issuable under our LTIP in respect of RSUs, DSUs, SARs, and PSUs (collectively “Share Units”) is 60,381. At June 30, 2022, we had 36,371 outstanding Share Units, and 15,788 Share Units available for future grants. Refer to Note 12 of our Q3 Fiscal 2022 FS.

The following is a summary of the salient terms of the equity-based awards available under our amended LTIP. For a more fulsome disclosure of our LTIP, a copy of our amended LTIP is available on SEDAR website at www.sedar.com.

Stock Options

Key Employees, Directors, Consultants and Persons performing Investor Relations Services (as such terms are defined in the LTIP) are eligible to receive grants of stock options to acquire Common Shares at the time of employment or contract, if applicable, and thereafter as determined by the Board.

Restricted Share Units

Key Employees, Directors and Consultants, are eligible to receive grants of RSUs, entitling the holder to receive one Common Share for each RSU, subject to restrictions as the Board may, in its sole discretion, establish in the applicable award agreement. The Board believes the granting of RSUs creates long-term incentive, a sense of ownership and an alignment of the recipients' interests with those of our shareholders and stakeholders. The granting of RSUs is intended to reward those executives who are responsible for our management and growth and to encourage such executives to develop a long-term vision for us to operate in a manner to maximize shareholder value. By using vesting periods for RSUs in addition to other restrictions, this compensation element is also designed to support long term retention of valuable Key Employees and Directors as well as provide an incentive for the achievement of specific milestones, if applicable.

Performance Share Units

Key Employees, Directors, and Consultants are eligible to receive grants of PSUs, entitling the holder to receive one Common Share for each PSU, subject to the achievement or attainment of specific performance criteria ("Performance Criteria") within a specific period ("Performance Cycle"). The number of PSUs and the Performance Criteria which must be satisfied in order for the PSUs to vest and the Performance Cycle in respect of such PSUs shall be specified in the applicable award agreement. The Board believes the granting of the PSUs incentivizes the attainment of specific goals which support our overall strategies and creates a sense of ownership and an alignment of the recipients' interests with those of our shareholders and stakeholders. The granting of PSUs is intended to reward those executives who are responsible for our management and growth and to encourage such executives to develop a long-term vision for us to operate in a manner to maximize shareholder value. By using vesting periods for PSUs in addition to other restrictions, this compensation element is also designed to support long-term retention of valuable employees as well as provide an incentive for the achievement of specific milestones, if applicable.

Deferred Share Units

Key Employees and Directors are eligible to receive grants of DSUs. Directors may elect to receive any part or all of their fees payable in respective of their position as a director as DSUs. Each holder of a DSU is entitled to receive one Common Share for each DSU. The Board believes the granting of DSUs creates long-term incentive, a sense of ownership and an alignment of the recipients' interests with those of our shareholders and Stakeholders. The granting of DSUs is intended to reward directors who are responsible for oversight of our management and growth and to encourage such directors to maintain a long-term vision for us to operate in a manner to maximize shareholder value.

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Stock Appreciation Rights

Key Employees, Directors, and Consultants are eligible to receive grants of SARs, entitling the recipient to receive a payment in Common Shares equal to the current market price less the grant price of the SAR as determined by the Board at the time of the grant for each SAR. Notwithstanding the foregoing, the Board may, in its sole discretion, satisfy payment of the entitlement in cash rather than in Common Shares. The granting of SARs is intended to reward those executives who are responsible for our management and growth and to encourage such executives to develop a long-term vision for us to operate in a manner to maximize shareholder value. By using vesting periods for SARs, this compensation element is also designed to support long-term retention of valuable employees as well as provide an incentive for the achievement of specific milestones, if applicable.

Vesting Provision

No award issued under the LTIP, other than Options, may vest before the date that is one year following the date it is granted or issued. Notwithstanding this provision, vesting may be accelerated for a Participant who dies or who ceases to be an eligible Participant under the LTIP in connection with a change of control, take-over bid, RTO, or other similar transaction. 

For Options grants to Investor Relations service providers, vesting must be over a period of not less than one year, with no more than 25% of such options vesting in any three months.

Modification of an Award

Any adjustment, other than as noted in section 4.3 Anti-Dilution of the LTIP, to award granted or issued under our LTIP must be subject to the prior acceptance of the TSXV, including adjustments related to an amalgamation, merger, arrangement, reorganization, spin-off, dividend, or recapitalization.

Further, any decrease in the exercise price of or extension to stock options granted to individuals that are Insiders at the time of the proposed amendment is subject to disinterested shareholder approval.

Securities Authorized for Issuance Under Equity Compensation Plans

The following table sets forth the securities authorized for issuance under our LTIP as of November 3, 2022.

Equity Compensation Plans Information
Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants or rights (a)	Weighted average exercise price of outstanding options, warrants and rights (b)	Number of securities remaining to be issued under Equity Compensation Plans (excluding securities listed in column (a)) (c)
LTIP	Share units: 18,418 Options: 57,102	Share units: $nil Options: $84.00	Share units: 27,503 Options: 20,381
Equity Compensation Plans not approved by the holders	n/a	n/a	n/a

Board Practices

Each of our directors will hold office until the next annual general meeting of our shareholders or until his or her office is earlier vacated, in accordance with our Articles of Incorporation (the "Articles") and the BCBCA. Each of our officers serves at the pleasure of our Board. Please also refer to Directors and Senior Management above for further details regarding the periods of service of each of our current directors and officers.

As of September 30, 2021, we did not have any service contracts with any of our independent directors.

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Board Nomination

The identification of potential candidates for nomination as our directors is carried out by all directors, who are encouraged to participate in the identification and recruitment of new directors. Potential candidates are primarily identified through referrals and business contacts.

Audit Committee

The Audit Committee's Charter

Our directors have adopted a Charter for the Audit Committee, which sets out the Audit Committee's mandate, organization, powers and responsibilities. As we are considered a "venture issuer" for the purposes of applicable Canadian securities laws, it is exempted from certain requirements pertaining to committee composition and reporting obligations. The full text of our Audit Committee Charter is available on request from us.

Composition of the Audit Committee

The members of the Audit Committee are John McCoach (Chairman), Paul Fortin, and Paul Mangano. All members are independent (as defined in National Instrument 52-110 - Audit Committees ("NI 52-110") adopted by the Canadian Securities Administrators), and all members are financially literate (as defined in NI 52-110). The Audit Committee meets regularly on at least a quarterly basis. The members of the Audit Committee do not have fixed terms and are appointed and replaced from time to time by resolution of the Board.

Relevant Education and Experience

All of the Audit Committee members are senior-level professionals with experience in financial matters; each has a broad understanding of accounting principles used to prepare financial statements and varied experience as to general application of such accounting principles. Further, John McCoach has served on other Audit Committees of reporting issuers and was previously the President of the TSXV.

For further relevant education and experience of Messrs. McCoach, Fortin, and Mangano, refer to their respective biographies in Directors, Senior Management and Employees.

Audit Committee Oversight

At no time during this past fiscal year have any recommendations by the Audit Committee respecting the appointment and/or compensation of our external auditors not been adopted by the Board.

Pre-Approval Policies and Procedures

Under its charter, the Audit Committee is required to pre-approve all non-audit services to be performed by the external auditors in relation to us, together with approval of the engagement letter for such non-audit services and estimated fees thereof. The pre-approval process for non-audit services will also involve a consideration of the potential impact of such services on the independence of the external auditors.

Employees

The following table sets forth the number of employees we had at the end of each fiscal period:

Year	Full Time	Part Time	Total
Fiscal 2019	6	nil	6
Fiscal 2020	10	nil	10
Fiscal 2021	17	0.6	17.6
Q3 Fiscal 2022	18	0.6	18.6

None of our employees are members in a labor union.

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Share Ownership

As of November 3, 2022, our directors and executive officers, as a group, beneficially owned a total of 294,820 Common Shares, representing beneficial ownership of 28.73% of the Common Shares.

The table below sets forth the number of Common Shares beneficially owned by our directors and executive officers as of November 3, 2022. The persons listed below are deemed to be the beneficial owners of Common Shares underlying options, RSUs, and warrants that are exercisable within 60 days from the above date, including “out-of-the money” options. The percentages shown below are based on 778,801 outstanding Common Shares as of November 3, 2022, plus 247,421 Common Shares underlying options, RSUs and warrants that are exercisable within 60 days for the indicated beneficial owner for an aggregate total of 1,026,227.

Shareholdings of Directors and Executive Officers

Name of Beneficial Owner	Common Shares held	Exercisable Options	RSUs	Exercisable Warrants	Number of Common Shares Beneficially Owned	Percent of Outstanding Common Shares
David Luxton (1)	68,579	714	-	33,648	102,943	10.03%
Jeffrey MacLeod (2)	141,360	714	3,000	12,000	157,074	15.31%
John McCoach	1,898	3,877	-	201	5,977	0.58%
Paul Mangano	4,610	3,571	-	11	8,193	0.80%
Paul Fortin	100	3,571	-	11	3,682	0.36%
Steven Archambault	3,697	6,071	-	977	10,746	1.05%
Richard Bowes	619	5,357	228	-	6,205	0.60%
Total	220,863	23,875	3,228	46,848	294,820	28.73%

Notes:

(1)Includes 68,032 Common Shares, 714 exercisable options, and 33,634 exercisable warrants held by his private company, DEFSEC Corporation.

(2)Common Shares are held by his private company, 2573685 Ontario Inc. Exercisable options and warrants are held by Mr. MacLeod.

Refer to section titled, Compensation, for the details of the options held by our directors and executive officers as at September 30, 2021. We have since not granted any further options.

We do not have any other equity arrangements for involving employees in our capital, except for the grant of Security-Based Compensation Awards pursuant to our LTIP at the discretion of the Board.

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

Major Shareholders

To our best knowledge, the following are our only shareholders that beneficially own, directly or indirectly, or exercise control over, shares carrying more than 5% of the outstanding voting rights attached to our Common Shares as at November 3, 2022.

Name of Shareholder	Number of Common Shares	Percentage of Common Shares
2573685 Ontario Inc.(1)	141,360	18.2%
DEFSEC Corporation (2)	68,579	8.8%
SOL Global Investments Corp. (3)	119,250	8.7%

Notes:

(1)A private holding company owned 50% by our President and CEO and 50% by his spouse.

(2)Includes 547 Common Shares held by our Executive Chairman.

(3)A holding company listed on the Canadian Securities Exchange (stock symbol: SOL). As reported on www.sedi.ca.

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Major changes in the last three years in the percentage ownership of persons who beneficially own 5% of the outstanding voting rights attached to our Common Shares were:

• On April 29, 2021, as a result of acquiring PARA OPS from DEFSEC, we issued 14,285 Common Shares (and 7,142 warrants exercisable for Common Shares). DEFSEC’s equity ownership in us increased accordingly.
• On September 10, 2021, SOL Global Investments Corp. announced its equity ownership of our Common Shares for the first time, reporting 9.6% equity ownership and 10.3% on a partially diluted basis. On December 31, 2021, SOL Global Investments Corp held 77,142 Common Shares and 5,714 warrants exercisable for Common Shares. On March 9, 2022, SOL Global Investments announced that it had reduced their Common Share holdings in KWESST to less than 10% of our total outstanding Common Shares.

Our major shareholders do not have different voting rights from other shareholders. At June 30, 2022 there were a total of 55 record holders of our Common Shares, of which nine record holders were resident in the United States, holding a total of 12,033 Common Shares, based on available information. This number represents approximately 1.6% of our total issued and outstanding Common Shares at that date.

We are a publicly owned company, and our Common Shares are owned by Canadian residents, United States residents, and residents of other countries. To our knowledge, we are not directly owned or controlled by another corporation, any foreign government or any other natural or legal person(s), whether severally or jointly. We are not aware of any arrangement, the operation of which may result in a change of control of us.

Related Party Transactions

To our knowledge, none of our directors or executive officers, nor any of our subsidiaries or insiders, nor any of our shareholders owning more than 10% of our voting shares, and no person with ties to any of the aforementioned, nor any member of the same group, has had or expects to have an interest in any transactions concluded since the beginning of Fiscal 2019 that has had or could have a material impact on us, or in any projected transactions, except as described below.

DEFSEC Purchase Agreement

The entering into the DEFSEC Purchase Agreement by us was considered to be a "related-party transaction" for purposes of Multilateral Instrument 61-101 - Protection of Minority Security Holders in Special Transactions ("MI 61-101") and Policy 5.9 - Protection of Minority Security Holders in Special Transactions of the TSXV. We relied on exemptions from the formal valuation and minority shareholder approval requirements available under MI 61-101. We were exempt from the formal valuation requirement in section 5.4 of MI 61-101 in reliance on sections 5.5(a) and (b) of MI 61-101 as the fair market value of the transaction was not more than the 25% of our market capitalization, and no securities of ours were listed or quoted for trading on prescribed stock exchanges or stock markets. Additionally, we were exempt from minority shareholder approval requirement in section 5.6 of MI 61- 101 in reliance on section 5.7(a) as the fair market value of the transaction was not more than the 25% of our market capitalization. The transaction was reviewed and approved by our independent directors and we obtained approval from over 51% of disinterested shareholders. Further, on February 19, 2021, the TSXV conditionally approved this asset acquisition. We closed the LEC Technology acquisition shortly after closing the April 2021 Private Placement.

Employment and Consulting Agreements

We have entered into a professional services agreement with DEFSEC to obtain Executive Chairman services from David Luxton and employment agreements with Jeffrey MacLeod, Steven Archambault and Richard Bowes (see Compensation - Employment and Consulting Agreements).

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Voting Agreement

On September 14, 2020, we entered into a voting agreement with Messrs. Luxton and MacLeod, pursuant to which Messrs. Luxton and MacLeod agreed to vote the voting securities of us they own and exercise voting control over to ensure that the following individuals are members of our Board of Directors: Mr. Luxton, Mr. MacLeod, one person nominated by Mr. Luxton who is from the capital markets industry, one independent person nominated by Mr. Luxton and one independent person nominated by Mr. MacLeod. Further, Messrs. Luxton and MacLeod irrevocably appointed our President as their proxy and granted our President power of attorney to vote their voting securities in a manner described in the voting agreement should either Mr. Luxton or Mr. MacLeod fail to vote or attempt to vote in a manner inconsistent with the voting agreement. This voting agreement expired on March 31, 2022.

Related Party Loans

During Fiscal 2021, we repaid all prior related party loans. Refer to Note 11 of the audited consolidated financial statements for Fiscal 2021 for further details.  There were no new related party loans for YTD Fiscal 2022 except for $74,000 of Unsecured Loans provided by certain directors and officers (Messrs. Luxton, Mangano, Fortin, McCoach, and Archambault). See Liquidity and Capital Resources - Recent Sources and Uses of Financing.

Other Related Party Transactions

From January 28, 2021, to June 24, 2022, the CEO and sole shareholder of SageGuild agreed to serve as director for our United States subsidiary, KWESST Defense Systems U.S. Inc, and as a result SageGuild was a related party to KWESST for this period. We previously entered into a consulting agreement with SageGuild in March 2020 to provide business development services in the United States. This consulting agreement, including compensation, was not modified as a result of the above. At the time, SageGuild was not a related party and the terms of this consulting agreement were negotiated at arm's length. From January 1, 2021, to September 30, 2021, the total compensation (cash and share-based) amounted to $339,309.  For the three and nine months ended June 30, 2022 the total compensation was $81,761 and $251,809 respectively.  Effective June 24, 2022, our Executive Chairman replaced SageGuild's CEO as the acting CEO and director for KWESST Defense Systems U.S. Inc. and therefore from this date SageGuild is no longer a related party.

For other immaterial related party transactions, refer to Note 11 of the audited consolidated financial statements for Fiscal 2021 and Note 9 of Q3 Fiscal 2022 FS.

FINANCIAL INFORMATION

Consolidated Statements and Other Financial Information

Financial Statements

See section titled, Financial Statements.

Our unaudited consolidated financial statements as at and for the three and nine months ended June 30, 2022, and 2021, our audited consolidated financial statements as at and for the year ended September 30, 2021, nine months ended September 30, 2020, and year ended December 31, 2019, as required under this section, are attached hereto and found immediately following the text of this Prospectus. The audit reports of Kreston GTA LLP and KPMG LLP are included therein immediately preceding the financial statements and schedules.

Legal Proceedings

We are not and have not been a party to any legal proceedings and are not aware of any such proceedings known to be contemplated.

Dividend Policy

We have not, for any of the three most recently completed fiscal years or our current fiscal year, declared or paid any dividends on our Common Shares, and do not currently have a policy with respect to the payment of dividends. For the foreseeable future, we anticipate that we will not pay dividends but will retain future earnings and other cash resources for the operation and development of our business. The payment of dividends in the future will depend on our earnings, if any, our financial condition, and such other factors as our directors consider appropriate.

Significant Changes

Except as otherwise disclosed in this Prospectus, there have been no significant changes in our financial condition since the most recent audited consolidated financial statements for the year ended September 30, 2021, and the unaudited consolidated interim financial statements for the three and nine months ended June 30, 2022.

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MARKET FOR OUR COMMON SHARES

Our Common Shares are listed and posted for trading on the TSXV under the trading stock symbol "KWE.V," are quoted on the OTCQB under the stock symbol "KWEMF" and listed on the Frankfurt Stock Exchange under the stock symbol of "62U".  We have applied to list our Common Shares and the Warrants being sold as part of this offering on Nasdaq under the symbols "KWE" and "KWESW," respectively. Such listing is dependent upon this Prospectus being declared effective as well as our meeting all the necessary listing requirements of Nasdaq.

There is no established trading market for the Pre-funded Warrants. We do not expect a market for such securities to develop. In addition, we do not intend to apply for the listing of the Pre-funded Warrants on any national securities exchange or other trading market. Without an active trading market, the liquidity of the Pre-funded Warrants will be limited.

As of November 3, 2022, our authorized capital consisted of an unlimited number of Common Shares and consisted of 778,801 Common Shares outstanding, after giving effect to the Reverse Split, and there were approximately 62 record holders of our Common Shares. Our Common Shares are issued in registered form and the transfer of our Common Shares is managed by our transfer agent, TSX Trust Company, 301 - 100 Adelaide St. W., Toronto, ON, M5H 4H1 (Tel: (416) 342-1091). The Warrants being sold in the offering will be in Warrants will be issued in electronic book-entry form to the investors and the warrant agent is Continental Stock Transfer & Trust.

For additional details regarding our Common Shares see Share Capital and for additional details regarding the Warrants see Warrants.

DILUTION

All share-related information presented in this section gives effect to the Reverse Split.

If you invest in our Common Shares in this offering, your interest will be diluted to the extent of the difference between the public offering price per Common Share (assuming no value is attributed to the Warrants and no Pre-funded Warrants are sold in the offering) and the as adjusted net tangible book value per Common Share immediately after the closing of this offering (assuming no value is attributed to the Warrants and no Pre-funded Warrants are sold in the offering). Net tangible book value per share represents our total tangible assets less our total liabilities, divided by the number of outstanding Common Shares. As of June 30, 2022, our net tangible book value was negative USD$2.7 million or USD$(3.52) per share and our net tangible book value adjusted for the Pre-IPO equity and debt transactions (see Capitalization and Indebtedness), was negative USD$2.4 million, or USD($3.12) per share, using the exchange rate of USD$1.00 per CAD$1.30.

After giving further effect to the Reverse Split, the net proceeds from our sale of 2,323,232 Common Shares in this offering (2,929,292 including the Canadian Offering) at the assumed public offering price of USD$4.95 per share (with an estimated offering price range for the Common Units between USD$4.71 and USD$5.21), after deducting underwriting discounts and commissions and estimated offering expenses payable by us and anticipated loan repayments, our as adjusted net tangible book value as of June 30, 2022, would have been USD$7.1 million, or USD$2.30 per share (USD$9.2 million or USD$2.47 including the Canadian Offering), assuming no value is attributed to the Warrants and no Pre-funded Warrants are sold in the offering. This represents an immediate increase in as adjusted net tangible book value of USD$5.42 per share (USD$5.59 including the Canadian Offering) to our existing shareholders and an immediate dilution of USD$2.65 per share (USD$2.48 per share including the Canadian Offering) to investors purchasing Common Shares in this offering.

We calculate dilution per share to new investors by subtracting the as adjusted net tangible book value per share from the public offering price paid by the new investor. The following table illustrates the dilution to new investors on a USD per share basis:

As of June 30, 2022
	Current	As adjusted for Pre-IPO transactions (1)	As adjusted for IPO, Net of Loan Repayment(1)	As adjusted for IPO and Canadian Offerings, net of Loan Repayments(1)
Assumed public offering price per share			$4.95	$4.95
Historical net tangible book value per share as of June 30, 2022	$(3.52)	$(3.52)	$(3.52)	$(3.52)
Increase in as adjusted net tangible book value per share attributable to pre-IPO transactions		$0.40	$0.40	$0.40
Increase in as adjusted net tangible book value per share attributable to this offering			$5.42	$5.59
As adjusted net tangible book value per share after this offering	$(3.52)	$(3.12)	$2.30	$2.47
Dilution in as adjusted net tangible book value per share in this offering			$2.65	$2.48

(1)See Capitalization and Indebtedness.

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The dilution information discussed above is illustrative only and will change based on the actual initial public offering price and other terms of this offering determined at pricing. A USD$1.00 increase in the assumed initial public offering price of USD$4.95 to USD$5.95 per share (assuming no value is attributed to the Warrants and no Pre-funded Warrants are sold in the offering) would increase our as adjusted net tangible book value pre-IPO transactions as of June 30, 2022, after this offering by USD$6.11 per share (USD$5.77 per share including the Canadian Offering), and would increase dilution to new investors by USD$1.96 per share (USD$2.30 per share including the Canadian Offering). An increase of 100,000 in the number of shares we are offering would increase our as adjusted net tangible book value pre-IPO transactions as of June 30, 2022, after this offering by USD$5.49 per share, and would decrease dilution to new investors by USD$2.58 per share, assuming the assumed initial public offering price per share remains the same (assuming no value is attributed to the warrants and no Pre-funded Warrants are sold in the offering).

If the underwriter’s Over-Allotment Option is exercised in full, the as adjusted net tangible book value per share after giving effect to this offering, assuming the public offering price of USD$4.95, would be USD$2.53 per share (USD$2.66 per share including the Canadian Offering), representing an immediate increase to existing shareholders of USD$5.65 per share (USD$5.77 per share including the Canadian Offering), and immediate dilution to new investors in this offering of USD$2.42 per share (USD$2.29 per share including the Canadian Offering).

The following table summarizes, on the as adjusted basis described above as of June 30, 2022, the differences between the existing shareholders and the new investors in this offering with respect to the number of shares, including shares represented by shares purchased from us, the total consideration paid to us and the average price per share based on an assumed public offering price of USD$4.95 per share before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

	Shares Issued		Total Consideration			Average Price Per
	Number	Percent	Amount (USD$)	Percent		Share (USD$)
Existing shareholders	772,627	21%	16,510,555	53%	$	21.37
IPO investors	2,323,232	63%	11,500,000	37%	$	4.95
Canadian investors	606,060	16%	3,000,000	10%	$	4.95
Total	3,701,919	100%	31,010,555	100%	$	8.38

The foregoing calculations as of November 3, 2022 (USD$ equivalent is based on a conversion rate of $1.3749):

• assumes no exercise by the underwriter of its Over-Allotment Option;

• assumes no exercise of the Underwriter Warrants;

• assumes no exercise of Canadian Compensation Options;

• assumes no exercise of any of the Warrants sold in the offering, including any Pre-funded Warrants in lieu of Common Shares;

• warrants to purchase 191,673 Common Shares at a weighted average exercise price of $54.25 (USD$39.37) per share;

• excludes 57,102 Common Shares issuable upon the exercise of outstanding but unexercised stock options to purchase our Common Shares, under our LTIP, at a weighted average exercise price of $84.00 (USD$60.96) per share;

• excludes 837 Common Shares issuable upon the conversion of 837 agent option units at an exercise price of $87.50 (USD$63.50) per share, each unit comprise of one Common Share and one warrant exercisable at $122.50 (USD$88.90) per share (issued to PI Financial Corp. pursuant to the Compensation Options agreement dated April 29, 2021, in connection with the April 2021 Private Placement); and

• excludes 18,418 Common Shares issuable upon the conversion of 15,761 RSUs, and 2,657 SARs under our LTIP.

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SHARES ELIGIBLE FOR FUTURE SALE

All share-related information presented in this section gives effect to the Reverse Split.

Future sales of substantial amounts of our Common Shares and/or Warrants in the public market, or the perception that such sales may occur, could adversely affect market prices prevailing from time to time. The majority of the outstanding Common Shares have been outstanding for many years and will be available for sale at any time after this offering. Therefore, there may be sales of substantial amounts of our Common Shares in the public market after the completion of this offering, which may adversely affect the prevailing market price and our ability to raise equity capital in the future.

Upon completion of this offering, 3,102,037 Common Shares and 2,514,905 Warrants will be outstanding (or 3,708,097 Common Shares and 3,120,965 Warrants including the Canadian Offering), assuming that no Pre-funded Warrants are sold in the offering. Of these securities, 2,323,232 Common Shares (or 2,671,716 Common Shares if the underwriter exercises in full its Over-Allotment Option) and all the Warrants sold in this offering will be freely transferable without restriction or further registration under the Securities Act, except for any Common Shares or Warrants purchased by our “affiliates,” as that term is defined in Rule 144 under the Securities Act. Of the Common Shares that will be outstanding, approximately 778,801 Common Shares and approximately 13,417,156 warrants, exercisable for a like number of Common Shares are “restricted shares” as defined in Rule 144. Restricted Common Shares may be sold in the public market only if registered under the Securities Act or if they qualify for an exemption from registration under Rule 144. As a result of the 90-day lock-up period described below, the Common Shares subject to lock-up arrangements will be available for sale in the public market only after 90 days from the date of this Prospectus (generally subject to resale limitations).

Rule 144

In general, a person who has beneficially owned restricted Common Shares for at least six months would be entitled to sell such securities, provided that (i) such person is not deemed to have been one of our affiliates at the time of, or at any time during the 90 days preceding, the sale (ii) we are subject to the Exchange Act periodic reporting requirements for at least 90 days before the sale (iii) we have filed all reports and other materials required by the Exchange Act during the preceding 12 months and (iv) one year has elapsed from the initial filing of this Prospectus with the SEC. Persons who have beneficially owned restricted shares of our Common Shares for at least six months but who are our affiliates at the time of, or any time during the 90 days preceding, the sale, would be subject to additional restrictions, by which such person would be entitled to sell within any three-month period only a number of securities that does not exceed the greater of the following:

• 1% of the number of Common Shares then outstanding, which will equal approximately 17,393 Common Shares immediately after this offering; or
• the average weekly trading volume of our Common Shares on Nasdaq during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale;

provided, in each case, that we are subject to the Exchange Act periodic reporting requirements for at least 90 days before the sale and that such sales must also comply with the manner of sale and notice provisions of Rule 144, to the extent applicable.

Rule 701

In general, under Rule 701 of the Securities Act as currently in effect, each of our employees, consultants or advisors who purchases Common Shares from us in connection with a compensatory stock plan or other written agreement executed prior to the completion of this offering is eligible to resell those Common Shares in reliance on Rule 144, but without compliance with some of the restrictions, including the holding period, contained in Rule 144. However, the Rule 701 shares would remain subject to lock-up arrangements and would only become eligible for sale when the lock-up period expires.

Lock-up Agreements

The Company, each of our directors and executive officers, and certain shareholders who own 5% or more of our outstanding Common Shares have agreed not to or are otherwise restricted in their ability to offer, pledge, sell, contract to sell, grant any option to purchase, or otherwise dispose of our Common Shares, Warrants, or any securities convertible into or exchangeable or exercisable for Common Shares, or to enter into any hedge or other arrangement or any transaction that transfers, directly or indirectly, the economic consequence of ownership of the Common Shares, for a period of 90 days after the date of this Prospectus, without the prior written consent of the underwriter. Notwithstanding the foregoing, prior written consent is not required for securities purchased in open market transactions after the IPO, transfers of securities as bona fide gifts, transfers of securities to a charity or educational institution and certain transfers made by corporations, partnerships, business entities and trusts. See Underwriting. The underwriter does not have any present intention or arrangement to release any Common Shares subject to lock-up arrangements prior to the expiration of the 90-day lock-up period.

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UNDERWRITING

We have entered into an underwriting agreement, dated,    2022, with ThinkEquity LLC, acting as the sole book-running manager and underwriter. Subject to the terms and conditions of the underwriting agreement, the underwriter has agreed to purchase, and we have agreed to sell to it, the number of Common Shares, Pre-funded Warrants and Warrants listed next to its name at the public offering price, less the underwriting discounts and commissions, as set forth on the cover page of this Prospectus and as indicated below:

Underwriter:	Number of Shares and Warrants	Number of Pre-funded Warrants and Warrants
ThinkEquity LLC
Total:

The underwriting agreement provides that the obligations of the underwriter to pay for and accept delivery of the Common Shares, Pre-funded Warrants and Warrants offered by this Prospectus are subject to various conditions and representations and warranties, including the approval of certain legal matters by its counsel and other conditions specified in the underwriting agreement. The Common Shares, Pre-funded Warrants and Warrants are offered by the underwriter, subject to prior sale, when, as and if issued to and accepted by the underwriter. The underwriter reserves the right to withdraw, cancel or modify the offer to the public and to reject orders in whole or in part. The underwriter is obligated to take and pay for all of the Common Shares, Pre-funded Warrants and Warrants offered by this Prospectus if any such securities are taken.

We have agreed to indemnify the underwriter and certain of its affiliates and controlling persons (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act), among others, against specified liabilities, including liabilities under the Securities Act, and to contribute to payments the underwriter may be required to make in respect thereof.

Discounts and Commissions

The underwriter proposes to offer the Common Shares, Pre-funded Warrants and Warrants directly to the public at the public offering prices set forth on the cover page of this Prospectus. After the offering to the public, the offering prices and other selling terms may be changed by the underwriter without changing the proceeds we will receive from the underwriter. Any Common Shares, Pre-funded Warrants and Warrants sold by the underwriter to securities dealers will be sold at the public offering price less a selling concession not in excess of USD$    per Common Share.

The following table summarizes the public offering price, underwriting commissions and proceeds before expenses to us. The underwriting commissions are 7.5% of the public offering price. We have also agreed to pay a non-accountable expense allowance to the underwriter equal to 1% of the gross proceeds received at the closing of the offering.

	Per Share and Warrant	Per Pre- funded Warrant and Warrant	Total Without Over-Allotment Option	Total With Full Over-Allotment Option
Public offering price
Underwriting discount (7.5%)
Non-accountable expense allowance (1%)
Proceeds, before expenses, to us

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We have also agreed to pay certain of the underwriter's expenses relating to the offering, including the costs associated with bound volumes of the public offering materials as well as commemorative mementos and lucite tombstones, in an amount not to exceed USD$3,000; the fees and expenses of the underwriter's legal counsel not to exceed USD$125,000; the USD$29,500 cost associated with the use of Ipreo's book building, prospectus tracking and compliance software for the Offering; up to USD$5,000 for data services and communications expenses; up to USD$5,000 of underwriter's actual accountable "road show" expenses; and up to USD$30,000 of the underwriter's market making and trading, and clearing firm settlement expenses for the Offering. Notwithstanding the foregoing,  the aggregate expenses reimbursable by the Company to the underwriter pursuant to this paragraph shall not to exceed USD$150,000 without the Company's prior written consent. Our total estimated expenses of the offering, including registration, filing and listing fees, printing fees and legal and accounting expenses, but excluding underwriting discounts and commissions, are approximately USD$1.0 million.

Over-Allotment Option

We have granted a 45-day option to the underwriter, exercisable one or more times in whole or in part, to purchase up to an additional 348,484 Common Shares, representing 15% of the Common Shares sold in the IPO, and/or up to 348,484 Pre-funded Warrants, representing 15% of the Pre-funded Warrants sold in the IPO and/or up to 348,484 Warrants, representing 15% of the Warrants sold in the IPO, in each case, solely to cover over-allotments, if any.  The purchase price to be paid per additional Common Share or Pre-funded Warrant by the underwriter shall be equal to the public offering price of one Common Unit or one Pre-funded Unit, as applicable less underwriting discount, and the purchase price to be paid per additional Warrant by the underwriter shall be USD$0.00001.

Underwriter Warrants

Upon closing of this offering, we have agreed to issue to the underwriter, or its designees, as compensation, Underwriter Warrants to purchase up to 116,162 Common Shares, which is equal to 5% of the aggregate number of Common Shares (or in lieu thereof the Pre-funded Warrants) sold in this offering. The Underwriter Warrants will be exercisable at a per share exercise price equal to 125% of the public offering price Common Unit in this offering. The Underwriter Warrants are exercisable at any time and from time to time, in whole or in part, during the four and a half year period commencing 180 days from the effective date of the registration statement of which this Prospectus is a part.

The Underwriter Warrants have been deemed compensation by FINRA and are therefore subject to a 180-day lock-up pursuant to FINRA Rule 5110(e)(1). The underwriter (or permitted assignees under Rule 5110(e)(2)) will not sell, transfer, assign, pledge, or hypothecate these Warrants or the Common Shares underlying these Warrants, nor will they engage in any hedging, short sale, derivative, put, or call transaction that would result in the effective economic disposition of the Warrants or the underlying Common Shares for a period of 180 days from the effective date of the registration statement. In addition, the Underwriter Warrants provide for registration rights upon request, in certain cases. The one-time demand registration right provided will not be greater than five years from the effective date of the registration statement in compliance with FINRA Rule 5110(g)(8)(C). The unlimited piggyback registration right provided will not be greater than seven years from the effective date of the registration statement in compliance with FINRA Rule 5110(g)(8)(D). We will bear all fees and expenses attendant to registering the Common Shares issuable on exercise of the Underwriter Warrants other than underwriting commissions incurred and payable by the holders. The exercise price and number of Common Shares issuable upon exercise of the Underwriter Warrants may be adjusted in certain circumstances including in the event of a stock dividend or our recapitalization, reorganization, merger or consolidation. However, the Underwriter Warrant exercise price or underlying Common Shares will not be adjusted for issuances of Common Shares at a price below the Underwriter Warrants' exercise price.

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Discretionary Accounts

The underwriter does not intend to confirm sales of the securities offered hereby to any accounts over which they have discretionary authority.

Lock-Up Agreements

We, our executive officers and directors, and certain of our shareholders, have agreed pursuant to "lock-up" agreements not to, or are subject to other restrictions so that they may not, without the prior written consent of the underwriter, directly or indirectly, offer to sell, sell, pledge or otherwise transfer or dispose of any Common Shares (or enter into any transaction or device that is designed to, or could be expected to, result in the transfer or disposition by any person at any time in the future of), enter into any swap or other derivatives transaction that transfers to another, in whole or in part, any of the economic benefits or risks of ownership of our Common Shares, make any demand for or exercise any right or cause to be filed a registration statement, including any amendments thereto, with respect to the registration of any Common Shares or securities convertible into or exercisable or exchangeable for Common Shares or any other of our securities or publicly disclose the intention to do any of the foregoing for a period of 90 days from the date of this Prospectus. Notwithstanding the foregoing, prior written consent is not required for securities purchased in open market transactions after the IPO, transfers of securities as bona fide gifts, transfers of securities to a charity or educational institution and certain transfers made by corporations, partnerships, business entities and trusts. 

Right of First Refusal

We have granted the underwriter a right of first refusal, for a period of twelve (12) months from the closing of the offering, to act as sole and exclusive investment banker, book-runner, financial advisor, underwriter and/or placement agent, at the underwriter's sole and exclusive discretion, for each and every future public and private equity and debt offering, including all of our equity linked financings (each, a "Subject Transaction"), or any successor (or any of our subsidiaries), on terms and conditions customary to the underwriter for such Subject Transactions.

Price Stabilization, Short Positions and Penalty Bids

In order to facilitate the offering of our securities, the underwriter may engage in transactions that stabilize, maintain or otherwise affect the price of our securities. In connection with the offering, the underwriter may purchase and sell our securities in the open market. These transactions may include short sales, purchases on the open market to cover positions created by short sales and stabilizing transactions. Short sales involve the sale by the underwriter of a greater number of securities than they are required to purchase in the offering. "Covered" short sales are sales made in an amount not greater than the underwriter option to purchase additional securities in the offering. The underwriter may close out any covered short position by either exercising the Over-Allotment Option to purchase securities or purchasing securities in the open market. In determining the source of securities to close out the covered short position, the underwriter will consider, among other things, the price of securities available for purchase in the open market as compared to the price at which they may purchase securities through the over-allotment option to purchase securities. "Naked" short sales are sales in excess of the Over-Allotment Option to purchase securities. The underwriter must close out any naked short position by purchasing securities in the open market. A naked short position is more likely to be created if the underwriter is concerned that there may be downward pressure on the price of our securities in the open market after pricing that could adversely affect investors who purchase in the offering. Stabilizing transactions consist of various bids for or purchases of securities made by the underwriter in the open market before the completion of the offering.

The underwriter makes no representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of our securities. In addition, neither we nor the underwriter make any representation that the underwriter will engage in these transactions or that these transactions, once commenced, will not be discontinued without notice.

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Electronic Offer, Sale and Distribution of Securities

A prospectus in electronic format may be made available on the websites maintained by the underwriter. The underwriter may agree to allocate a number of securities for sale to online brokerage account holders. Other than the prospectus in electronic format, the information on the underwriter's website and any information contained in any other website maintained by the underwriter is not part of this Prospectus or the registration statement of which this prospectus forms a part.

Other Relationships

From time to time, the underwriter and/or its affiliates may provide in the future, various advisory, investment and commercial banking and other services to us in the ordinary course of business, for which it will receive customary fees and commissions. However, except as disclosed in this Prospectus, we have no present arrangements with the underwriter or any of its affiliates for any further services.

Pricing of the Offering

The public offering price was determined by negotiations between us and the underwriter. Among the factors considered in determining the public offering price were our future prospects and those of our industry in general, our sales, earnings and certain other financial and operating information in recent periods, and the price-earnings ratios, price-sales ratios, market prices of securities, and certain financial and operating information of companies engaged in activities similar to ours. Neither we nor the underwriter can assure investors that an active trading market for the securities will develop or that, after the offering, the securities will trade in the public market at or above the public offering price. 

Offer Restrictions Outside the United States

Other than in the United States, no action has been taken by us or the underwriter that would permit a public offering of the securities offered by this Prospectus in any jurisdiction where action for that purpose is required. The securities offered by this Prospectus may not be offered or sold, directly or indirectly, nor may this Prospectus or any other offering material or advertisements in connection with the offer and sale of any such securities be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of that jurisdiction. Persons into whose possession this Prospectus comes are advised to inform themselves about and to observe any restrictions relating to the offering and the distribution of this Prospectus. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities offered by this Prospectus in any jurisdiction in which such an offer or a solicitation is unlawful.

Australia

This prospectus is not a disclosure document under Chapter 6D of the Australian Corporations Act, has not been lodged with the Australian Securities and Investments Commission and does not purport to include the information required of a disclosure document under Chapter 6D of the Australian Corporations Act. Accordingly, (i) the offer of the securities under this prospectus is only made to persons to whom it is lawful to offer the securities without disclosure under Chapter 6D of the Australian Corporations Act under one or more exemptions set out in section 708 of the Australian Corporations Act, (ii) this prospectus is made available in Australia only to those persons as set forth in clause (i) above, and (iii) the offeree must be sent a notice stating in substance that by accepting this offer, the offeree represents that the offeree is such a person as set forth in clause (i) above, and, unless permitted under the Australian Corporations Act, agrees not to sell or offer for sale within Australia any of the securities sold to the offeree within 12 months after its transfer to the offeree under this prospectus.

China

The information in this document does not constitute a public offer of the securities, whether by way of sale or subscription, in the People’s Republic of China (excluding, for purposes of this paragraph, Hong Kong Special Administrative Region, Macau Special Administrative Region and Taiwan). The securities may not be offered or sold directly or indirectly in the PRC to legal or natural persons other than directly to “qualified domestic institutional investors.”

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European Economic Area—Belgium, Germany, Luxembourg and Netherlands

The information in this document has been prepared on the basis that all offers of securities will be made pursuant to an exemption under the Directive 2003/71/EC (“Prospectus Directive”), as implemented in Member States of the European Economic Area (each, a “Relevant Member State”), from the requirement to produce a prospectus for offers of securities.

An offer to the public of securities has not been made, and may not be made, in a Relevant Member State except pursuant to one of the following exemptions under the Prospectus Directive as implemented in that Relevant Member State:

• to legal entities that are authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities;

• to any legal entity that has two or more of (i) an average of at least 250 employees during its last fiscal year; (ii) a total balance sheet of more than €43,000,000 (as shown on its last annual unconsolidated or consolidated financial statements) and (iii) an annual net turnover of more than €50,000,000 (as shown on its last annual unconsolidated or consolidated financial statements);

• to fewer than 100 natural or legal persons (other than qualified investors within the meaning of Article 2(1)(e) of the Prospectus Directive) subject to obtaining the prior consent of the Company or any underwriter for any such offer; or

• in any other circumstances falling within Article 3(2) of the Prospectus Directive, provided that no such offer of securities shall result in a requirement for the publication by the Company of a prospectus pursuant to Article 3 of the Prospectus Directive.

France

This document is not being distributed in the context of a public offering of financial securities (offre au public de titres financiers) in France within the meaning of Article L.411-1 of the French Monetary and Financial Code (Code Monétaire et Financier) and Articles 211-1 et seq. of the General Regulation of the French Autorité des marchés financiers (“AMF”). The securities have not been offered or sold and will not be offered or sold, directly or indirectly, to the public in France.

This document and any other offering material relating to the securities have not been, and will not be, submitted to the AMF for approval in France and, accordingly, may not be distributed or caused to distributed, directly or indirectly, to the public in France.

Such offers, sales and distributions have been and shall only be made in France to (i) qualified investors (investisseurs qualifiés) acting for their own account, as defined in and in accordance with Articles L.411-2-II-2° and D.411-1 to D.411-3, D.744-1, D.754-1 ;and D.764-1 of the French Monetary and Financial Code and any implementing regulation and/or (ii) a restricted number of non-qualified investors (cercle restreint d’investisseurs) acting for their own account, as defined in and in accordance with Articles L.411-2-II-2° and D.411-4, D.744-1, D.754-1; and D.764-1 of the French Monetary and Financial Code and any implementing regulation.

Pursuant to Article 211-3 of the General Regulation of the AMF, investors in France are informed that the securities cannot be distributed (directly or indirectly) to the public by the investors otherwise than in accordance with Articles L.411-1, L.411-2, L.412-1 and L.621-8 to L.621-8-3 of the French Monetary and Financial Code.

Ireland

The information in this document does not constitute a prospectus under any Irish laws or regulations and this document has not been filed with or approved by any Irish regulatory authority as the information has not been prepared in the context of a public offering of securities in Ireland within the meaning of the Irish Prospectus (Directive 2003/71/EC) Regulations 2005 (the “Prospectus Regulations”). The securities have not been offered or sold, and will not be offered, sold or delivered directly or indirectly in Ireland by way of a public offering, except to (i) qualified investors as defined in Regulation 2(l) of the Prospectus Regulations and (ii) fewer than 100 natural or legal persons who are not qualified investors.

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Israel

The securities offered by this prospectus have not been approved or disapproved by the Israeli Securities Authority (the ISA), nor have such securities been registered for sale in Israel. The shares may not be offered or sold, directly or indirectly, to the public in Israel, absent the publication of a prospectus. The ISA has not issued permits, approvals or licenses in connection with the offering or publishing the prospectus; nor has it authenticated the details included herein, confirmed their reliability or completeness, or rendered an opinion as to the quality of the securities being offered. Any resale in Israel, directly or indirectly, to the public of the securities offered by this prospectus is subject to restrictions on transferability and must be affected only in compliance with the Israeli securities laws and regulations.

Italy

The offering of the securities in the Republic of Italy has not been authorized by the Italian Securities and Exchange Commission (Commissione Nazionale per le Società e la Borsa, or “CONSOB”) pursuant to the Italian securities legislation and, accordingly, no offering material relating to the securities may be distributed in Italy and such securities may not be offered or sold in Italy in a public offer within the meaning of Article 1.1(t) of Legislative Decree No. 58 of 24 February 1998 (“Decree No. 58”), other than:

• to Italian qualified investors, as defined in Article 100 of Decree no.58 by reference to Article 34-ter of CONSOB Regulation no. 11971 of 14 May 1999 (“Regulation no. 1197l”) as amended (“Qualified Investors”); and

• in other circumstances that are exempt from the rules on public offer pursuant to Article 100 of Decree No. 58 and Article 34-ter of Regulation No. 11971 as amended.

• Any offer, sale or delivery of the securities or distribution of any offer document relating to the securities in Italy (excluding placements where a Qualified Investor solicits an offer from the issuer) under the paragraphs above must be:

• made by investment firms, banks or financial intermediaries permitted to conduct such activities in Italy in accordance with Legislative Decree No. 385 of 1 September 1993 (as amended), Decree No. 58, CONSOB Regulation No. 16190 of 29 October 2007 and any other applicable laws; and

• in compliance with all relevant Italian securities, tax and exchange controls and any other applicable laws.

Any subsequent distribution of the securities in Italy must be made in compliance with the public offer and prospectus requirement rules provided under Decree No. 58 and the Regulation No. 11971 as amended, unless an exception from those rules applies. Failure to comply with such rules may result in the sale of such securities being declared null and void and in the liability of the entity transferring the securities for any damages suffered by the investors.

Japan

The securities have not been and will not be registered under Article 4, paragraph 1 of the Financial Instruments and Exchange Law of Japan (Law No. 25 of 1948), as amended (the “FIEL”) pursuant to an exemption from the registration requirements applicable to a private placement of securities to Qualified Institutional Investors (as defined in and in accordance with Article 2, paragraph 3 of the FIEL and the regulations promulgated thereunder). Accordingly, the securities may not be offered or sold, directly or indirectly, in Japan or to, or for the benefit of, any resident of Japan other than Qualified Institutional Investors. Any Qualified Institutional Investor who acquires securities may not resell them to any person in Japan that is not a Qualified Institutional Investor, and acquisition by any such person of securities is conditional upon the execution of an agreement to that effect.

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Portugal

This document is not being distributed in the context of a public offer of financial securities (oferta pública de valores mobiliários) in Portugal, within the meaning of Article 109 of the Portuguese Securities Code (Código dos Valores Mobiliários). The securities have not been offered or sold and will not be offered or sold, directly or indirectly, to the public in Portugal. This document and any other offering material relating to the securities have not been, and will not be, submitted to the Portuguese Securities Market Commission (Comissăo do Mercado de Valores Mobiliários) for approval in Portugal and, accordingly, may not be distributed or caused to distributed, directly or indirectly, to the public in Portugal, other than under circumstances that are deemed not to qualify as a public offer under the Portuguese Securities Code. Such offers, sales and distributions of securities in Portugal are limited to persons who are “qualified investors” (as defined in the Portuguese Securities Code). Only such investors may receive this document and they may not distribute it or the information contained in it to any other person.

Sweden

This document has not been, and will not be, registered with or approved by Finansinspektionen (the Swedish Financial Supervisory Authority). Accordingly, this document may not be made available, nor may the securities be offered for sale in Sweden, other than under circumstances that are deemed not to require a prospectus under the Swedish Financial Instruments Trading Act (1991:980) (Sw. lag (1991:980) om handel med finansiella instrument). Any offering of securities in Sweden is limited to persons who are “qualified investors” (as defined in the Financial Instruments Trading Act). Only such investors may receive this document and they may not distribute it or the information contained in it to any other person.

Switzerland

The securities may not be publicly offered in Switzerland and will not be listed on the SIX Swiss Exchange (“SIX”) or on any other stock exchange or regulated trading facility in Switzerland. This document has been prepared without regard to the disclosure standards for issuance prospectuses under art. 652a or art. 1156 of the Swiss Code of Obligations or the disclosure standards for listing prospectuses under art. 27 ff. of the SIX Listing Rules or the listing rules of any other stock exchange or regulated trading facility in Switzerland. Neither this document nor any other offering material relating to the securities may be publicly distributed or otherwise made publicly available in Switzerland.

Neither this document nor any other offering material relating to the securities have been or will be filed with or approved by any Swiss regulatory authority. In particular, this document will not be filed with, and the offer of securities will not be supervised by, the Swiss Financial Market Supervisory Authority (FINMA).

This document is personal to the recipient only and not for general circulation in Switzerland.

United Kingdom

Neither the information in this document nor any other document relating to the offer has been delivered for approval to the Financial Services Authority in the United Kingdom and no prospectus (within the meaning of section 85 of the Financial Services and Markets Act 2000, as amended (“FSMA”) has been published or is intended to be published in respect of the securities. This document is issued on a confidential basis to “qualified investors” (within the meaning of section 86(7) of FSMA) in the United Kingdom, and the securities may not be offered or sold in the United Kingdom by means of this document, any accompanying letter or any other document, except in circumstances which do not require the publication of a prospectus pursuant to section 86(1) FSMA. This document should not be distributed, published or reproduced, in whole or in part, nor may its contents be disclosed by recipients to any other person in the United Kingdom.

Any invitation or inducement to engage in investment activity (within the meaning of section 21 of FSMA) received in connection with the issue or sale of the securities has only been communicated or caused to be communicated and will only be communicated or caused to be communicated in the United Kingdom in circumstances in which section 21(1) of FSMA does not apply to the Company.

In the United Kingdom, this document is being distributed only to, and is directed at, persons (i) who have professional experience in matters relating to investments falling within Article 19(5) (investment professionals) of the Financial Services and Markets Act 2000 (Financial Promotions) Order 2005 (“FPO”), (ii) who fall within the categories of persons referred to in Article 49(2)(a) to (d) (high net worth companies, unincorporated associations, etc.) of the FPO or (iii) to whom it may otherwise be lawfully communicated (together “relevant persons”). The investments to which this document relates are available only to, and any invitation, offer or agreement to purchase will be engaged in only with, relevant persons. Any person who is not a relevant person should not act or rely on this document or any of its contents.

Pursuant to section 3A.3 of National Instrument 33-105 Underwriting Conflicts, or NI 33-105, the underwriters are not required to comply with the disclosure requirements of NI 33-105 regarding underwriter conflicts of interest in connection with this offering.

Canadian Underwriting Agreement

In connection with the Canadian Offering, we have agreed to pay the Canadian Underwriter a cash commission equal to 7.0% of the gross proceeds from the sale of the Canadian Units. We have also agreed to issue to the Canadian Underwriter as additional consideration for the Canadian Offering, that number of non-transferable options as is equal to 7.0% of the Canadian Units sold pursuant to the Canadian Offering (the “Canadian Compensation Options”). Each Canadian Compensation Option is exercisable to purchase one Canadian Unit at the Offering Price for a period of 24 months from the closing date of the Canadian Offering. The Canadian Underwriter has not been granted an over-allotment option in connection with the Canadian Offering.

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DESCRIPTION OF SECURITIES

Common Units

Each Common Unit being offered in this offering consists of one Common Share and one Warrant, each Warrant exercisable for one Common Share. The Common Shares and Warrants that are part of the Common Units are immediately separable and will be issued separately in this offering, although they will have been purchased together in this offering.

Pre-funded Units

Each Pre-funded Unit being offered in this offering consists of one Pre-funded Warrant and one Warrant, each Pre-funded Warrant and Warrant is exercisable for one Common Share. The Pre-funded Warrants and Warrants that are part of the Pre-funded Units are immediately separable and will be issued separately in this offering, although they will have been purchased together in this offering.

Share Capital

Authorized Capital

We are authorized to issue an unlimited number of Common Shares, without par value. As of June 30, 2022, there were 745,530 Common Shares outstanding after giving effect to the Reverse Split. Refer to Information on the Company - History and Development of the Company, for the equity offerings we have made over the last three financial years.

A reconciliation of the number of Common Shares outstanding at the beginning and end of Fiscal 2021 can be found in Note 16(a) of our audited consolidated financial statements for Fiscal 2021 and for the nine months ended June 30, 2022 can be found in Note 12(a) of our Q3 Fiscal 2022 FS.

We also have disclosed the rights, preferences and restrictions attached to our Common Shares under, Memorandum and Articles of Association.

Stock Options

As of June 30, 2022, there were options outstanding to purchase a total of 60,138 of Common Shares after giving effect to the Reverse Split, which have been issued to our directors, officers, employees, and consultants pursuant to the terms and conditions of our LTIP, which is described in detail under Compensation - Equity Compensation Plan. The number of options, expiry date and exercise prices of options granted to our directors and officers are presented in Share Ownership.

Escrowed Securities

Except as otherwise described below, to our knowledge and as of the date of this Prospectus, none of the Common Shares are being held in escrow. The holders of the escrowed Common Shares have voting power over such securities.  Once released by the TSX Trust Company, the holders also have dispositive power over such securities.

Designation of Class	Number of securities held in escrow (11)	Percentage of class(1)
Common Shares(2)	1,376 (3)	0.2%
Company 2024 Warrants(4)	39,285 (5)	5.1%
Common Shares(4)	113,435 (6)(7)	14.7%
Common Shares(8)	15,000 (9)	1.9%
Company 2024 Warrants(8)	15,000 (10)	1.9%

Notes:

(1)Based on the number of outstanding Common Shares as of November 3, 2022.

(2)Common Shares subject to escrow conditions pursuant to a CPC escrow agreement between Foremost and TSX Trust Company under TSXV Policy 2.4 - Capital Pool Companies dated May 2, 2018 (the "CPC Escrow Agreement").

(3)Deposited with TSX Trust Company, acting as escrow agent. These Common Shares will be released from escrow as to:

No. of Securities (11)	% of Escrowed Securities	Release Date
668	15% of the escrowed Common Shares	March 18, 2023
668	15% of the escrowed Common Shares	September 18, 2023

Includes 458 escrowed Common Shares held by a director.

(4)Securities deposited in escrow pursuant to a surplus security escrow agreement between us and TSX Trust Company dated September 17, 2020 as a result of the qualifying transaction following the Amalgamation (the "Surplus Security Escrow Agreement").

(5)Deposited with TSX Trust Company, acting as escrow agent. These Company 2024 Warrants will be released from escrow as to:

No. of Securities (11)	% of Escrowed Securities	Release Date
10,714	15% of the escrowed Company 2024 Warrants	March 18, 2023
28,571	40% of the escrowed Company 2024 Warrants	September 18, 2023

Includes 23,571 and 7,857 escrowed Warrants, after giving effect to the Reverse Split, to be released to DEFSEC Corp. (private company owned by our Executive Chairman),  and President & CEO, respectively.

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(6)Deposited with TSX Trust Company, acting as escrow agent. These Common Shares will be released from escrow as to:

No. of Securities (11)	% of Escrowed Common Shares	Release Date
30,936	15% of the escrowed Common Shares	March 18, 2023
82,498	40% of the escrowed Common Shares	September 18, 2023

(7)  Includes 28,013, 82,108, and 2,527 escrowed Common Shares to be released to DEFSEC Corp. , 2573685 Ontario Inc., and Paul Mangano (director), respectively, after giving effect to the Reverse Split..  For greater clarity, these are included in the beneficial ownership table in Directors, Senior Management, and Employees – Share Ownership.

(8)Securities deposited in escrow pursuant to a value security escrow agreement between us and TSX Trust Company dated September 17, 2020 as a result of the qualifying transaction following the Amalgamation (the "Value Security Escrow Agreement").

(9)Deposited with TSX Trust Company, acting as escrow agent. These securities have been or will be released from escrow as to:

No. of Securities (11)	% of Escrowed Securities	Release Date
7,500	15% of the escrowed Common Shares	March 18, 2023
7,500	15% of the escrowed Common Shares	September 18, 2023

(10)Deposited with TSX Trust Company, acting as escrow agent. These securities have been or will be released from escrow as to:

No. of Securities (11)	% of Escrowed Securities	Release Date
7,500	15% of the escrowed Company 2024 Warrants	March 18, 2023
7,500	15% of the escrowed Company 2024 Warrants	September 18, 2023

(11)after giving effect to the Reverse Split.

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Warrants to be Issued in this Offering

The following is a brief summary of certain terms and conditions of the Warrants to be issued in this offering and are subject in all respects to the provisions contained in the Warrants.

Form. The Warrants will be issued in electronic book-entry form to the investors. You should review a copy of the form of warrant, which is filed as an exhibit to the registration statement of which this Prospectus forms a part, for a complete description of the terms and conditions applicable to the Warrants.

Exercisability. The Warrants are exercisable at any time after their original issuance, and at any time up to the date that is five years after their original issuance. The Warrants will be exercisable, at the option of each holder, in whole or in part by delivering to us a duly executed exercise notice and, at any time a registration statement registering the issuance of the Common Shares underlying the Warrants under the Securities Act is effective and available for the issuance of such shares, by payment in full in immediately available funds for the number of Common Shares purchased upon such exercise. If a registration statement registering the issuance of the Common Shares underlying the Warrants under the Securities Act is not effective or available, the holder may, in its sole discretion, elect to exercise the Warrant through a cashless exercise, in which case the holder would receive upon such exercise the net number of Common Shares determined according to the formula set forth in the Warrant. No fractional Common Shares will be issued in connection with the exercise of a Warrant. In lieu of fractional shares, we will pay the holder an amount in cash equal to the fractional amount multiplied by the exercise price or round up to the next whole share.

Exercise Limitation. A holder will not have the right to exercise any portion of the Warrant if the holder (together with its affiliates) would beneficially own in excess of 4.99% (or, at the election of the holder prior to issuance, 9.99%) of the number of Common Shares outstanding immediately after giving effect to the exercise, as such percentage ownership is determined in accordance with the terms of the Warrants. However, any holder may increase or decrease such percentage to any other percentage not in excess of 9.99% upon at least 61 days' prior notice from the holder to us.

Exercise Price. The exercise price per whole Common Share purchasable upon exercise of the Warrants is expected to be USD$    per Common Share. The exercise price is also subject to appropriate adjustment in the event of certain stock dividends and distributions, stock splits, stock combinations, reclassifications or similar events affecting our Common Shares and also upon any distributions of assets, including cash, stock or other property to our shareholders.

Cashless Exercise. If at the time of exercise hereof there is no effective registration statement registering, or the prospectus contained therein is not available for the issuance of the Common Shares to the holder upon exercise of the Warrants, in lieu of making the cash payment otherwise contemplated to be made to us upon such exercise in payment of the aggregate exercise price, the holder may elect instead to receive upon such exercise (either in whole or in part) the net number of Common Shares determined according to a formula set forth in the Warrants.

Transferability. Subject to applicable laws, the Warrants may be offered for sale, sold, transferred or assigned without our consent.

Exchange Listing. We have applied for the listing of the Warrants offered in this offering on Nasdaq under the symbol “KWESW”. No assurance can be given that such listing will be approved or that a trading market will develop. In order to meet Nasdaq’s initial listing criteria, all 2,323,232 Common Units being offered in our IPO, as well as all 606,060 Canadian Units being offered in the Canadian Offering, will need to be sold. It is also a condition precedent to the underwriter’s obligation to purchase the securities being offered in our IPO that Nasdaq approve the listing of our Common Shares and Warrants. Accordingly, if Nasdaq does not approve the listing of our Common Shares and Warrants, we will not and cannot proceed with this offering.

Fundamental Transactions. In the event of a fundamental transaction, as described in the Warrants and generally including any reorganization, recapitalization or reclassification of our Common Shares, the sale, transfer or other disposition of all or substantially all of our properties or assets, our consolidation or merger with or into another person, the acquisition of more than 50% of our outstanding Common Shares, or any person or group becoming the beneficial owner of 50% of the voting power represented by our outstanding Common Shares, the holders of the Warrants will be entitled to receive upon exercise of the Warrants the kind and amount of securities, cash or other property that the holders would have received had they exercised the Warrants immediately prior to such fundamental transaction.

Rights as a Stockholder. Except as otherwise provided in the Warrants or by virtue of such holder's ownership of shares of our Common Shares, the holder of a Warrant does not have the rights or privileges of a holder of our Common Shares, including any voting rights, until the holder exercises the Warrant.

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Pre-funded Warrants

The following summary of certain terms and provisions of the Pre-funded Warrants that are being offered hereby in lieu of a Common Share is not complete and is subject to, and qualified in its entirety by, the provisions of the Pre-funded Warrant, the form of which is filed as an exhibit to the registration statement of which this prospectus forms a part. Prospective investors should carefully review the terms and provisions of the form of Pre-funded Warrant for a complete description of the terms and conditions of the Pre-funded Warrants.

Duration and Exercise Price. Each Pre-funded Warrant offered hereby will have an initial exercise price per share equal to USD$0.01. The Pre-funded Warrants will be immediately exercisable and may be exercised at any time until the Pre-funded Warrants are exercised in full or they expire. The exercise price and number of Common Shares issuable upon exercise is subject to appropriate adjustment in the event of stock dividends, stock splits, reorganizations or similar events affecting our Common Shares and the exercise price.

Exercisability. The Pre-funded Warrants will be exercisable, at the option of each holder, in whole or in part, by delivering to us a duly executed exercise notice accompanied by payment in full for the number of Common Shares purchased upon such exercise (except in the case of a cashless exercise as discussed below). There is no expiration date for the Pre-funded Warrants. A holder (together with its affiliates) may not exercise any portion of the Pre-funded Warrant to the extent that the holder would own more than 4.99% (or at the election of the holder prior to the issuance of any Pre-funded Warrants, 9.99%) of the outstanding Common Shares immediately after exercise. Any holder may increase such percentage to any percentage not in excess of 9.99% upon at least 61 days' prior notice to us. No fractional Common Shares will be issued in connection with the exercise of a Pre-funded Warrant. In lieu of fractional Common Shares, we will pay the holder an amount in cash equal to the fractional amount multiplied by the exercise price of such Pre-funded Warrant or round up to the next whole share.

Cashless Exercise. In lieu of making the cash payment otherwise contemplated to be made to us upon such exercise in payment of the aggregate exercise price, the holder may elect instead to receive upon such exercise (either in whole or in part) the net number of Common Shares determined according to a formula set forth in the Pre-funded Warrants.

Fundamental Transaction. In the event of a fundamental transaction, as described in the Pre-funded Warrants and generally including any reorganization, recapitalization or reclassification of our Common Shares, the sale, transfer or other disposition of all or substantially all of our properties or assets, our consolidation or merger with or into another person, the acquisition of more than 50% of our outstanding Common Shares, or any person or group becoming the beneficial owner of 50% of the voting power represented by our outstanding Common Shares, the holders of the Pre-funded Warrants will be entitled to receive upon exercise of the Pre-funded Warrants the kind and amount of securities, cash or other property that the holders would have received had they exercised the Pre-funded Warrants immediately prior to such fundamental transaction.

Transferability. Subject to applicable laws, a Pre-funded Warrant may be transferred at the option of the holder upon surrender of the Pre-funded Warrant to us together with the appropriate instruments of transfer.

Exchange Listing. We do not intend to list the Pre-funded Warrants on any securities exchange or nationally recognized trading system.

Rights as a Shareholder. Except as otherwise provided in the Pre-funded Warrants or by virtue of such holder's ownership of Common Shares, the holders of the Pre-funded Warrants do not have the rights or privileges of holders of our Common Shares, including any voting rights, until they exercise their Pre-funded Warrants.

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ADDITIONAL INFORMATION

Memorandum and Articles of Association

Incorporation

The Company was incorporated on November 28, 2017 pursuant to the provisions of the BCBCA under the name "Foremost Ventures Corp." On September 4, 2020, the Company changed its name to "KWESST Micro Systems Inc."

Our registered and records office address is located at Suite 1510 - 789 West Pender Street, Vancouver, British Columbia, V6C 1H2, Canada. Our head office is located at 155 Terence Matthews Crescent, Unit #1, Ottawa, Ontario, K2M 2A8, Canada.

Objects and Purposes

The Articles of the Company (the "Articles") do not contain a limitation on objects and purposes. 

Directors

Article 17 of the Articles deals with a directors' disclosable interest (as defined in the BCBCA) in contracts or transactions into which the Company has entered or proposes to enter. Article 17.2 provides that a director who holds such a disclosable interest is not entitled to vote on any directors' resolution to approve such contract or transaction, unless all the directors have a disclosable interest in that contract or transaction, in which case any or all of those directors may vote on such resolution.

Pursuant to the BCBCA, a director holds a disclosable interest in a contract or transaction if (a) the contract or transaction is material to the Company, (b) the Company has entered, or proposes to enter, into the contract or transaction, and (c) the director has a material interest in the contract or transaction or the director is a director or senior officer of, or has a material interest in, a person who has a material interest in the contract or transaction. Pursuant to the BCBCA, a director does not have a disclosable interest in a number of prescribed situations, including without limitation in respect of a contract or transaction merely because the contract or transaction relates to the remuneration of the director in that person's capacity as a director of the Company.

The directors may act notwithstanding any vacancy in the board of directors, but if the Company has fewer directors in office than the number set pursuant to the Articles as the quorum of directors, the directors may only act for the purpose of appointing directors up to that number or of summoning a meeting of shareholders for the purpose of filling any vacancies on the board of directors or, subject to the BCBCA, for any other purpose. The quorum necessary for the transaction of the business of the directors may be set by the directors and, if not so set, is deemed to be set at two directors or, if the number of directors is set at one, is deemed to be set at one director, and that director may constitute a meeting.

Article 8 of the Articles deals with borrowing powers. The Company, if authorized by the directors, may: (i) borrow money in the manner and amount, on the security, from the sources and on the terms and conditions that they consider appropriate; (ii) issue bonds, debentures and other debt obligations either outright or as security for any liability or obligation of the Company or any other person and at such discounts or premiums and on such other terms as they consider appropriate; (iii) guarantee the repayment of money by any other person or the performance of any obligation of any other person; and (iv) mortgage, charge, whether by way of specific or floating charge, grant a security interest in, or give other security on, the whole or any part of the present and future assets and undertaking of the Company.

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Qualifications of Directors

The Articles do not specify a retirement age for directors.

Directors are not required to own any Common Shares of the Company.

Section 124 of the BCBCA provides that an individual is not qualified to become or act as a director of a company if that individual is:

1.under the age of 18 years;

2.found by a court, in Canada or elsewhere, to be incapable of managing the individual's own affairs;

3.an undischarged bankrupt; or

4.convicted in or out of the Province of British Columbia of an offence in connection with the promotion, formation or management of a corporation or unincorporated business, or of an offence involving fraud, unless:

a.the court orders otherwise;

b.5 years have elapsed since the last to occur of:

i.the expiration of the period set for suspension of the passing of sentence without a sentence having been passed;

ii.the imposition of a fine;

iii.the conclusion of the term of any imprisonment; and

iv.the conclusion of the term of any probation imposed; or

c.a pardon was granted or issued, or a record suspension ordered, under the Criminal Records Act (Canada) and the pardon or record suspension, as the case may be, has not been revoked or ceased to have effect.

A director who ceases to be qualified to act as a director of the Company must promptly resign.

Section 120 of the BCBCA provides that every company must have at least one director, and a public company must have at least three directors.

Rights, Preference and Restrictions

Holders of Common Shares are entitled to receive notice of any meeting of shareholders of the Company, to attend and to cast one vote per share at such meetings. Holders of Common Shares are also entitled to receive on a pro rata basis such dividends, if any, as and when declared by the Board at its discretion from funds legally available therefor and upon the liquidation, dissolution, or winding up of the Company are entitled to receive on a pro rata basis, the net assets of the Company after payment of debts and other liabilities, in each case subject to the rights, privileges, restrictions, and conditions attaching to any other series or class of shares ranking senior in priority. Common Shares do not carry any pre-emptive, subscription, redemption, conversion rights, sinking fund provisions, liability to further capital calls by the Company, or provisions discriminating against any existing or prospective holder of Common Shares as a result of such shareholder owning a substantial number of Common Shares.

The rights of shareholders of the Company may be altered only with the approval of the holders of two thirds or more of the Common Shares voted at a meeting of the Company's shareholders called and held in accordance with the Articles and applicable law.

Shareholder Meetings

The BCBCA provides that: (i) a general meeting of shareholders must be held in the Province of British Columbia, unless otherwise provided in the Company's Articles or as approved by ordinary resolution of shareholders; (ii) the Company must hold an annual general meeting of shareholders not later than 15 months after the last preceding annual general meeting and once in every calendar year; (iii) for the purpose of determining shareholders entitled to receive notice of or vote at a meeting of shareholders, the directors may set a date as the record date for that determination, provided that such date shall not precede by more than 2 months (or, in the case of a general meeting requisitioned by shareholders under the BCBCA, by more than 4 months) or be less than 21 days before the date on which the meeting is to be held; (iv) a quorum for the transaction of business at a meeting of shareholders of the Company is the quorum established by the Articles (Article 11.3 of the Articles provide that the quorum for the transaction of business at a meeting of shareholders is two persons who are, or who represent by proxy, shareholders who, in the aggregate, hold at least 5% of Common Shares entitled to vote at the meeting, are present in person; (v) the holders of not less than 5% of the issued shares entitled to vote at a meeting may requisition the directors to call a meeting of shareholders for the purpose of transacting any business that may be transacted at a general meeting; and (vi) the Court may, on its own motion or on the application of the Company, upon the application of a director or the application of a shareholder entitled to vote at the meeting: (a) order that a meeting of shareholders be called, held and conducted in a manner that the Court considers appropriate; and (b) give directions it considers necessary as to the call, holding and conduct of the meeting.

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Limitations on Ownership of Securities

Except as provided in the Investment Canada Act, there are no limitations specific to the rights of non-Canadians to hold or vote the Common Shares under the laws of Canada or the Province of British Columbia or in the Company's constating documents.

Change in Control

There are no provisions in the Company's constating documents or under applicable corporate law that would have the effect of delaying, deferring or preventing a change in the control of the Company, or that would operate with respect to any proposed merger, acquisition or corporate restructuring involving the Company or any of its subsidiaries.

Ownership Threshold

There are no provisions in the Company's constating documents or under applicable corporate law requiring share ownership to be disclosed. Securities legislation in Canada requires that shareholder ownership (as well as ownership of an interest in, or right or obligation associated with, a related financial instrument of a security of the Company) must be disclosed once a person beneficially owns or has control or direction over, directly or indirectly, securities of a reporting issuer carrying more than 10% of the voting rights attached to all the reporting issuer's outstanding voting securities. This threshold is higher than the 5% threshold under United States securities legislation at which shareholders must report their share ownership.

Changes to Capital

There are no conditions imposed by the Articles governing changes in the capital where such conditions are more significant than is required by the corporate laws of the Province of British Columbia for as long as the Company is a public company. Otherwise, Section 26.3 of the Articles provides that no share or designated security may be sold, transferred or otherwise disposed of without the consent of the directors and the directors are not required to give any reason for refusing to consent to any such sale, transfer or other disposition.

Description of Capital Structure

Our authorized share structure consists of an unlimited number of Common Shares without par value, of which 745,530 Common Shares were issued and outstanding as of June 30, 2022, after giving effect to the Reverse Split. All of the issued Common Shares are fully paid and non-assessable Common Shares in the capital of the Company. The Company does not own any of its Common Shares.

Exchange Controls

Canada has no system of exchange controls. There are no Canadian governmental laws, decrees, or regulations relating to restrictions on the repatriation of capital or earnings of the Company to non-resident investors. There are no laws in Canada or exchange control restrictions affecting the remittance of dividends or other payments made by the Company in the ordinary course to non-resident holders of the Common Shares by virtue of their ownership of such Common Shares, except as discussed below under section Material United States Federal Income Tax Consequences and Material Canadian Federal Income Tax Considerations.

There are no limitations under the laws of Canada or in the organizing documents of the Company on the right of foreigners to hold or vote securities of the Company, except that the Investment Canada Act may require that a "non-Canadian" not acquire "control" of the Company without prior review and approval by the Minister of Innovation, Science and Economic Development , where applicable thresholds are exceeded. The acquisition of one-third or more of the voting shares of the Company would give rise a rebuttable presumption of an acquisition of control, and the acquisition of more than fifty percent of the voting shares of the Company would be deemed to be an acquisition of control. In addition, the Investment Canada Act provides the Canadian government with broad discretionary powers in relation to national security to review and potentially prohibit, condition or require the divestiture of, any investment in the Company by a non-Canadian, including non-control level investments. "Non-Canadian" generally means an individual who is neither a Canadian citizen nor a permanent resident of Canada within the meaning of the Immigration and Refugee Protection Act (Canada) who has been ordinarily resident in Canada for not more than one year after the time at which he or she first became eligible to apply for Canadian citizenship, or a corporation, partnership, trust or joint venture that is ultimately controlled by non-Canadians.

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MATERIAL CONTRACTS

We are a party to the following contracts which management currently considers to be material to the Company and our assets and operations.

• Amalgamation Agreement
• DEFSEC Purchase Agreement
• GhostStep Technology Purchase Agreement
• CPC Escrow Agreement
• Surplus Security Escrow Agreement
• Value Security Escrow Agreement
• Unsecured Loan Agreement - March 2022
• GDMS MPSA
• GDMS SOW No. 1
• CounterCrisis Technology Subcontractor Agreement
• Unsecured Loan Agreements - August 2022

The terms and conditions of these material contracts are described below.

Amalgamation Agreement

See Note 4(b) of the audited consolidated financial statements for Fiscal 2021.

DEFSEC Purchase Agreement

See Note 4(a) of the audited consolidated financial statements for Fiscal 2021.

GhostStep Technology Purchase Agreement

See Note 4(c) of the audited consolidated financial statements for Fiscal 2021.

CPC Escrow Agreement

Upon completion of the initial public offering of Foremost on the TSXV on June 15, 2018, the Common Shares for the insiders of Foremost were subject to a three-year escrow period, to be released in in the manner described in the section Additional Information - Share Capital - Escrowed Securities.

Surplus Security Escrow Agreement

Pursuant to the TSXV Policy 5.4, at the closing of the QT certain holders of our Common Shares were subject to a three-year escrow, to be released in in the manner described in the section Additional Information - Share Capital - Escrowed Securities.

In the event we graduate from Tier 2 to Tier 1 on the TSXV, then the escrowed securities will be subject to accelerated releases in accordance with TSXV policy.

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Value Security Escrow Agreement

Pursuant to the TSXV Policy 5.4, at closing of the QT certain holders of our Common Shares were subject to a three-year escrow, to be released in in the manner described in the section Additional Information - Share Capital - Escrowed Securities.

In the event we graduate from Tier 2 to Tier 1 on the TSXV, then the escrowed securities will be subject to accelerated releases in accordance with TSXV policy.

Unsecured Loan Agreement – March 2022

In March 2022, we entered into loan agreements with various lenders for gross proceeds of $2 million, bearing interest at a rate of 9% per annum, compounded monthly and not in advance, and maturing in thirteen months from closing date. As an inducement, we issued an aggregate of 14,285 bonus Common Shares (post Reverse Split) to the lenders. The group of lenders was comprised of: Pender Private Debt Opportunities Fund I Limited Partnership, which provided gross proceeds of $1 million; ten different employees, directors, officers and consultants which provided gross proceeds ranging from $2,000 to $100,000 per person for aggregate gross proceeds of $192,500; and ten different arm’s length lenders which provided gross proceeds ranging from $7,500 to $150,000 per person for aggregate gross proceeds of $807,500

For further information, see Operating and Financial Review and Prospects - Liquidity and Capital Resources. 

GDMS MPSA

On December 1, 2021, we entered into a Master Professional Services Agreement with General Dynamic Mission Systems – Canada. See Operating and Financial Review and Prospects – Economic Dependence.

GDMS SOW No. 1

On December 1, 2021, we entered into Schedule B-1 to Master Professional Services Agreement - Statement of Work No. (1) with General Dynamic Mission Systems – Canada. See Operating and Financial Review and Prospects – Economic Dependence.

CounterCrisis Technology Subcontractor Agreement

On July 6, 2022, we entered into a three-year contract with CounterCrisis Technology to co-implement a national Ground Search and Rescue Incident Command System for Public Safety Canada, with the Ontario Provincial Police as technical advisory stakeholder for this project. See Events in the Development of the Business - Year-to-date Fiscal 2022 Highlights.

Unsecured Loan Agreement – August 2022

On August 29 2022, we entered into two unsecured loan agreements in the amount of USD$200,000 per loan with Walleye Opportunities Master Fund Ltd. for aggregate amount of USD$400,000, bearing interest at a rate of 6% per annum, compounded monthly and not in advance, and maturing in twelve months from closing date. For further information, see Information on the Company - Events in the Development of the Business.

MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS

In the opinion of Dorsey & Whitney LLP, which is attached as Exhibit 8.1 to the Registration Statement of which this Prospectus forms a part, the following is a summary of the material U.S. federal income tax considerations applicable to a U.S. Holder (as defined below) arising from and relating to the acquisition, ownership and disposition of Common Units or Pre-funded Units acquired pursuant to this offering, the acquisition, ownership, and disposition of Common Shares acquired as part of the Common Units, the acquisition, ownership, and disposition of Pre-funded Warrants acquired as part of the Pre-funded Units, the exercise, disposition, and lapse of Warrants acquired as part of the Common Units or Pre-funded Units, the acquisition, ownership, and disposition of Common Shares received upon exercise of the Pre-funded Warrants, and the acquisition, ownership, and disposition of Common Shares received upon exercise of the Warrants (the "Warrant Shares").

This summary is for general information purposes only and does not purport to be a complete analysis or listing of all potential U.S. federal income tax considerations that may apply to a U.S. Holder as a result of the acquisition of Common Units or Pre-funded Units pursuant to this offering. In addition, this summary does not take into account the individual facts and circumstances of any particular U.S. Holder that may affect the U.S. federal income tax consequences to such U.S. Holder, including specific tax consequences to a U.S. Holder under an applicable tax treaty. Accordingly, this summary is not intended to be, and should not be construed as, legal or U.S. federal income tax advice with respect to any particular U.S. Holder. This summary does not address the U.S. federal net investment income, U.S. federal alternative minimum, U.S. federal estate and gift, U.S. state and local, and non-U.S. tax consequences to U.S. Holders of the acquisition, ownership, and disposition of Common Units, Pre-funded Units, Common Shares, Pre-funded Warrants, Warrants and Warrant Shares. This summary also does not discuss the potential effects, whether adverse or beneficial, of any proposed legislation that, if enacted, could be applied on a retroactive or prospective basis. In addition, except as specifically set forth below, this summary does not discuss applicable tax reporting requirements. Each U.S. Holder should consult its own tax advisor regarding the U.S. federal, U.S. federal net investment income, U.S. federal alternative minimum, U.S. federal estate and gift, U.S. state and local, and non-U.S. tax consequences relating to the acquisition, ownership and disposition of Common Units, Pre-funded Units, Common Shares, Pre-funded Warrants, Warrants, and Warrant Shares.

No ruling from the Internal Revenue Service (the "IRS") has been requested, or will be obtained, regarding the U.S. federal income tax considerations applicable to U.S. Holders as discussed in this summary. This summary is not binding on the IRS, and the IRS is not precluded from taking a position that is different from, and contrary to, the positions taken in this summary. In addition, because the authorities on which this summary is based are subject to various interpretations, the IRS and the U.S. courts could disagree with one or more of the positions taken in this summary.

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Scope of this Summary

Authorities

This summary is based on the Internal Revenue Code of 1986, as amended (the "Code"), Treasury Regulations (whether final, temporary, or proposed) promulgated under the Code, published rulings of the IRS, published administrative positions of the IRS and U.S. court decisions, that are in effect and available, as of the date of this document. Any of the authorities on which this summary is based could be changed in a material and adverse manner at any time, and any such change could be applied retroactively. This summary does not discuss the potential effects, whether adverse or beneficial, of any proposed legislation that, if enacted, could be applied on a retroactive or prospective basis.

U.S. Holder

For purposes of this summary, the term "U.S. Holder" means a beneficial owner of Common Units, Pre-funded Units, Common Shares, Pre-funded Warrants, Warrants or Warrant Shares acquired pursuant to this offering that is for U.S. federal income tax purposes:

• a citizen or individual resident of the Common United States;
  
  
• a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) organized under the laws of the Common United States, any state thereof or the District of Columbia;
  
  
• an estate whose income is subject to U.S. federal income taxation regardless of its source; or
• a trust that (1) is subject to the primary supervision of a court within the Common United States and the control of one or more U.S. persons for all substantial decisions or (2) has a valid election in effect under applicable Treasury Regulations to be treated as a U.S. person.

Transactions Not Addressed

This summary does not address the tax consequences of transactions effected prior or subsequent to, or concurrently with, any purchase of Common Units or Pre-funded Units pursuant to this Prospectus (whether or not any such transactions are undertaken in connection with the purchase of Common Units or Pre-funded Units pursuant to this Prospectus).

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U.S. Holders Subject to Special U.S. Federal Income Tax Rules Not Addressed

This summary does not address the U.S. federal income tax considerations applicable to U.S. Holders that are subject to special provisions under the Code, including U.S. Holders that: (a) are tax-exempt organizations, qualified retirement plans, individual retirement accounts, or other tax-deferred accounts; (b) are financial institutions, underwriters, insurance companies, real estate investment trusts, or regulated investment companies; (c) are brokers or dealers in securities or currencies or U.S. Holders that are traders in securities that elect to apply a mark-to-market accounting method; (d) have a "functional currency" other than the U.S. dollar; (e) own Common Units, Pre-funded Units, Common Shares, Pre-funded Warrants, Warrants or Warrant Shares as part of a straddle, hedging transaction, conversion transaction, constructive sale, or other integrated transaction; (f) acquired Common Units, Pre-funded Units, Common Shares, Pre-funded Warrants, Warrants or Warrant Shares in connection with the exercise of employee stock options or otherwise as compensation for services; (g) hold Common Units, Pre-funded Units, Common Shares, Pre-funded Warrants, Warrants or Warrant Shares other than as a capital asset within the meaning of Section 1221 of the Code (generally, property held for investment purposes); (h) are partnerships and other pass-through entities (and investors in such partnerships and entities); (i) are S corporations (and shareholders thereof); (j) are subject to special tax accounting rules; (k) own, have owned or will own (directly, indirectly, or by attribution) 10% or more of the total combined voting power or value of our outstanding shares; (l) are U.S. expatriates or former long-term residents of the U.S.; (m) are subject to taxing jurisdictions other than, or in addition to, the Common United States; or (n) are subject to the alternative minimum tax. U.S. Holders that are subject to special provisions under the Code, including U.S. Holders described immediately above, should consult their own tax advisors regarding the U.S. federal, U.S. federal net investment income, U.S. federal alternative minimum, U.S. federal estate and gift, U.S. state and local, and non-U.S. tax consequences relating to the acquisition, ownership and disposition of Common Units, Pre-funded Units, Common Shares, Pre-funded Warrants, Warrants or Warrant Shares.

If an entity or arrangement that is classified as a partnership for U.S. federal income tax purposes holds Common Units, Pre-funded Units, Common Shares, Pre-funded Warrants, Warrants or Warrant Shares, the U.S. federal income tax consequences to such entity or arrangement and the owners of such entity or arrangement generally will depend on the activities of such entity or arrangement and the status of such owners. This summary does not address the tax consequences to any such entity or arrangement or owner. Owners of entities or arrangements that are classified as partnerships for U.S. federal income tax purposes should consult their own tax advisor regarding the U.S. federal income tax consequences arising from and relating to the acquisition, ownership, and disposition of Common Units, Pre-funded Units, Common Shares, Pre-funded Warrants, Warrants and Warrant Shares.

U.S. Federal Income Tax Consequences of the Acquisition of Common Units or Pre-funded Units

For U.S. federal income tax purposes, the acquisition by a U.S. Holder of a Common Unit will be treated as the acquisition of one Common Share and one Warrant. The purchase price for each Common Unit will be allocated between these two components in proportion to their relative fair market values at the time the Common Unit is purchased by the U.S. Holder. This allocation of the purchase price for each Common Unit will establish a U.S. Holder's initial tax basis for U.S. federal income tax purposes in the Common Share and one Warrant that comprise each Common Unit.

For this purpose, we will allocate USD$    of the purchase price for the Common Unit to the Common Share and USD$    of the purchase price for each Common Unit to the Warrant. However, the IRS will not be bound by such allocation of the purchase price for the Common Units, and therefore, the IRS or a U.S. court may not respect the allocation set forth above.  Each U.S. Holder should consult its own tax advisor regarding the allocation of the purchase price for the Common Units.

For U.S. federal income tax purposes, the acquisition by a U.S. Holder of a Pre-funded Unit will be treated as the acquisition of one Pre-funded Warrant and one Warrant. The purchase price for each Pre-funded Unit will be allocated between these two components in proportion to their relative fair market values at the time the Pre-funded Unit is purchased by the U.S. Holder. This allocation of the purchase price for each Pre-funded Unit will establish a U.S. Holder's initial tax basis for U.S. federal income tax purposes in the Pre-funded Warrant and one Warrant that comprise each Pre-funded Unit.

For this purpose, we will allocate USD$    of the purchase price for the Pre-funded Unit to the Pre-funded Warrant and USD$    of the purchase price for each Pre-funded Unit to the Warrant. However, the IRS will not be bound by such allocation of the purchase price for the Pre-funded Units, and therefore, the IRS or a U.S. court may not respect the allocation set forth above.  Each U.S. Holder should consult its own tax advisor regarding the allocation of the purchase price for the Pre-funded Units.

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Treatment of Pre-funded Warrants

Although it is not entirely free from doubt, we believe that a Pre-funded Warrant should be treated as a separate class of our common shares for U.S. federal income tax purposes and a U.S. Holder of Pre-funded Warrants should generally be taxed in the same manner as a holder of Common Shares except as described below. Accordingly, no gain or loss should be recognized upon the exercise of a Pre-funded Warrant and, upon exercise, the holding period of a Pre-funded Warrant should carry over to the Common Shares received. Similarly, the tax basis of the Pre-funded Warrant should carry over to the Common Shares received upon exercise, increased by the exercise price of $0.01 per share. However, such characterization is not binding on the IRS, and the IRS may treat the Pre-funded Warrants as warrants to acquire Common Shares. If so, the amount and character of a U.S. Holder's gain with respect to an investment in Pre-funded Warrants could change, and a U.S. Holder may not be entitled to make the "QEF Election" or "Mark-to-Market Election" described below with respect to the Pre-funded Warrants to mitigate PFIC consequences in the event that the Company is classified as a PFIC. Accordingly, each U.S. Holder should consult its own tax advisor regarding the risks associated with the acquisition of a Pre-funded Warrant pursuant to this offering (including potential alternative characterizations). The balance of this discussion generally assumes that the characterization described above is respected for U.S. federal income tax purposes.

Passive Foreign Investment Company Rules

If the Company were to constitute a "passive foreign investment company" within the meaning of Section 1297 of the Code (a "PFIC") for any year during a U.S. Holder's holding period, then certain potentially adverse rules would affect the U.S. federal income tax consequences to a U.S. Holder resulting from the acquisition, ownership and disposition of Common Units, Pre-funded Units, Common Shares, Pre-funded Warrants, Warrants, and Warrant Shares.  Based on current business plans and financial expectations, the Company expects that it should not be a PFIC for its current tax year and expects that it should not be a PFIC for the foreseeable future.  No opinion of legal counsel or ruling from the IRS concerning the status of the Company as a PFIC has been obtained or is currently planned to be requested.  PFIC classification is fundamentally factual in nature, generally cannot be determined until the close of the tax year in question, and is determined annually.  Additionally, the analysis depends, in part, on the application of complex U.S. federal income tax rules, which are subject to differing interpretations.  Consequently, there can be no assurance that the Company has never been, is not, and will not become a PFIC for any tax year during which U.S. Holders hold Common Units, Pre-funded Units, Common Shares, Pre-funded Warrants, Warrants, or Warrant Shares.

In addition, U.S. Holders of PFICs are required to file an annual report with the IRS containing such information as Treasury Regulations and/or other IRS guidance may require, which filing obligation would generally commence in the first tax year in which the Company is classified as a PFIC and in which such U.S. Holder holds Common Units, Pre-funded Units, Common Shares, Pre-funded Warrants, Warrants, or Warrant Shares.  In addition to penalties, a failure to satisfy such reporting requirements may result in an extension of the time period during which the IRS can assess a tax.  U.S. Holders should consult their own tax advisors regarding the requirements of filing such information returns under these rules, including the requirement to file an IRS Form 8621 annually.

In general, the Company will be a PFIC if, for a tax year, (a) 75% or more of the gross income of the Company for such tax year is passive income (the "income test") or (b) 50% or more of the value of the Company's assets either produce passive income or are held for the production of passive income (the "asset test"), based on the quarterly average of the fair market value of such assets.  "Gross income" generally includes all sales revenues less the cost of goods sold, plus income from investments and from incidental or outside operations or sources, and "passive income" generally includes, for example, dividends, interest, certain rents and royalties, certain gains from the sale of stock and securities, and certain gains from commodities transactions.  In addition, for purposes of the PFIC income test and asset test described above, if the Company owns, directly or indirectly, 25% or more of the total value of the outstanding shares of another corporation, the Company will be treated as if it (a) held a proportionate share of the assets of such other corporation and (b) received directly a proportionate share of the income of such other corporation.

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Under certain attribution rules, if the Company is a PFIC, U.S. Holders will be deemed to own their proportionate share of any subsidiary of the Company which is also a PFIC (a ''Subsidiary PFIC''), and will be subject to U.S. federal income tax on (i) a distribution on the shares of a Subsidiary PFIC or (ii) a disposition of shares of a Subsidiary PFIC, both as if the holder directly held the shares of such Subsidiary PFIC.

If the Company were a PFIC in any tax year and a U.S. Holder held Common Units, Pre-funded Units, Common Shares, Pre-funded Warrants, Warrants, or Warrant Shares, such holder generally would be subject to special rules under Section 1291 of the Code with respect to "excess distributions" made by the Company on the Common Shares, Pre-Funded Warrants, Warrants or Warrant Shares and with respect to gain from the disposition of Common Units, Pre-funded Units, Common Shares, Pre-funded Warrants, Warrants, or Warrant Shares.  An "excess distribution" generally is defined as the excess of distributions with respect to the Common Shares, Pre-Funded Warrants, Warrants or Warrant Shares received by a U.S Holder in any tax year over 125% of the average annual distributions such U.S. Holder has received from the Company during the shorter of the three preceding tax years, or such U.S. Holder's holding period for the Common Shares, Pre-Funded Warrants, Warrants or Warrant Shares, as applicable.  Generally, a U.S. Holder would be required to allocate any excess distribution or gain from the disposition of the Common Units, Pre-funded Units, Common Shares, Pre-funded Warrants, Warrants, or Warrant Shares ratably over its holding period for the Common Units, Pre-funded Units, Common Shares, Pre-funded Warrants, Warrants, or Warrant Shares, as applicable.  Such amounts allocated to the year of the disposition or excess distribution would be taxed as ordinary income, and amounts allocated to prior tax years would be taxed as ordinary income at the highest tax rate in effect for each such year and an interest charge at a rate applicable to underpayments of tax would apply.

While there are U.S. federal income tax elections that sometimes can be made to mitigate these adverse tax consequences (including, without limitation, the "QEF Election" under Section 1295 of the Code and the "Mark-to-Market Election" under Section 1296 of the Code), such elections are available in limited circumstances and must be made in a timely manner.  Under proposed Treasury Regulations, if a U.S. Holder has an option, warrant, or other right to acquire stock of a PFIC (such as the Warrants), such option, warrant or right is considered to be PFIC stock subject to the default rules of Section 1291 of the Code that apply to "excess distributions" and dispositions described above.  However, under the proposed Treasury Regulations, for the purposes of the PFIC rules, the holding period for any Warrant Shares acquired upon the exercise of a Warrant will begin on the date a U.S. Holder acquires the Common Units or Pre-funded Units (and not the date the Warrants are exercised).  This will impact the availability, and consequences, of the QEF Election and Mark-to-Market Election with respect to the Warrant Shares.  Thus, a U.S. Holder will have to account for Warrant Shares, Pre-Funded Warrants and Common Shares under the PFIC rules and the applicable elections differently.  In addition, a QEF Election may not be made with respect to the Warrants and it is unclear whether the Mark-to-Market Election may be made with respect to the Warrants.

U.S. Holders should be aware that, for each tax year, if any, that the Company is a PFIC, the Company can provide no assurances that it will satisfy the record keeping requirements of a PFIC, or that it will make available to U.S. Holders the information such U.S. Holders require to make a QEF Election with respect to the Company or any Subsidiary PFIC.

Certain additional adverse rules may apply with respect to a U.S. Holder if the Company is a PFIC, regardless of whether the U.S. Holder makes a QEF Election. These rules include special rules that apply to the amount of foreign tax credit that a U.S. Holder may claim on a distribution from a PFIC. Subject to these special rules, foreign taxes paid with respect to any distribution in respect of stock in a PFIC are generally eligible for the foreign tax credit. U.S. Holders should consult with their own tax advisors regarding the potential application of the PFIC rules to the ownership and disposition of Common Units, Pre-funded Units, Common Shares, Pre-funded Warrants, Warrants, or Warrant Shares, and the availability of certain U.S. tax elections under the PFIC rules.

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U.S. Federal Income Tax Consequences of the Exercise and Disposition of Warrants

The following discussion describes the general rules applicable to the ownership and disposition of the Warrants but is subject in its entirety to the special rules described above under the heading Passive Foreign Investment Company Rules.

Exercise of Warrants

A U.S. Holder should not recognize gain or loss on the exercise of a Warrant and related receipt of a Warrant Share (unless cash is received in lieu of the issuance of a fractional Warrant Share). A U.S. Holder's initial tax basis in the Warrant Share received on the exercise of a Warrant should be equal to the sum of (a) such U.S. Holder's tax basis in such Warrant plus (b) the exercise price paid by such U.S. Holder on the exercise of such Warrant. It is unclear whether a U.S. Holder's holding period for the Warrant Share received on the exercise of a Warrant would commence on the date of exercise of the Warrant or the day following the date of exercise of the Warrant. If we are a PFIC, a U.S. Holder's holding period for the Warrant Share for PFIC purposes will begin on the date on which such U.S. Holder acquired its Common Units.

In certain limited circumstances, a U.S. Holder may be permitted to undertake a cashless exercise of Warrants into Warrant Shares. The U.S. federal income tax treatment of a cashless exercise of Warrants into Warrant Shares is unclear, and the tax consequences of a cashless exercise could differ from the consequences upon the exercise of a Warrant described in the preceding paragraph. U.S. Holders should consult their own tax advisors regarding the U.S. federal income tax consequences of a cashless exercise of Warrants.

Disposition of Warrants

A U.S. Holder will recognize gain or loss on the sale or other taxable disposition of a Warrant in an amount equal to the difference, if any, between (a) the amount of cash plus the fair market value of any property received and (b) such U.S. Holder's tax basis in the Warrant sold or otherwise disposed of.  Subject to the PFIC rules discussed above, any such gain or loss generally will be a capital gain or loss, which will be long-term capital gain or loss if the Warrant is held for more than one year.  Deductions for capital losses are subject to complex limitations under the Code.

Expiration of Warrants Without Exercise

Upon the lapse or expiration of a Warrant, a U.S. Holder will recognize a loss in an amount equal to such U.S. Holder's tax basis in the Warrant. Any such loss generally will be a capital loss and will be long-term capital loss if the Warrants are held for more than one year. Deductions for capital losses are subject to complex limitations under the Code.

Certain Adjustments to the Warrants

Under Section 305 of the Code, an adjustment to the number of Warrant Shares that will be issued on the exercise of the Warrants, or an adjustment to the exercise price of the Warrants, may be treated as a constructive distribution to a U.S. Holder of the Warrants if, and to the extent that, such adjustment has the effect of increasing such U.S. Holder's proportionate interest in the "earnings and profits" or our assets, depending on the circumstances of such adjustment (for example, if such adjustment is to compensate for a distribution of cash or other property to the shareholders).  Adjustments to the exercise price of Warrants made pursuant to a bona fide reasonable adjustment formula that has the effect of preventing dilution of the interest of the holders of the Warrants should generally not be considered to result in a constructive distribution.  Any such constructive distribution would be taxable whether or not there is an actual distribution of cash or other property.  (See more detailed discussion of the rules applicable to distributions made by us at Distributions on Common Shares, Pre-funded Warrants and Warrant Shares below).

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General Rules Applicable to U.S. Federal Income Tax Consequences of the Acquisition, Ownership, and Disposition of Common Shares. Pre-funded Warrants and Warrant Shares

The following discussion describes the general rules applicable to the ownership and disposition of the Common Shares, Pre-funded Warrants and Warrant Shares, but is subject in its entirety to the special rules described above under the heading Passive Foreign Investment Company Rules.

Distributions on Common Shares, Pre-funded Warrants and Warrant Shares

A U.S. Holder that receives a distribution, including a constructive distribution, with respect to a Common Share, Pre-funded Warrant or Warrant Share (as well as any constructive distribution on a Warrant as described above) will be required to include the amount of such distribution in gross income as a dividend (without reduction for any Canadian income tax withheld from such distribution) to the extent of our current and accumulated "earnings and profits", as computed under U.S. federal income tax principles. A dividend generally will be taxed to a U.S. Holder at ordinary income tax rates if we are a PFIC for the tax year of such distribution or the preceding tax year. To the extent that a distribution exceeds our current and accumulated "earnings and profits", such distribution will be treated first as a tax-free return of capital to the extent of a U.S. Holder's tax basis in the Common Shares, Pre-funded Warrants or Warrant Shares and thereafter as gain from the sale or exchange of such Common Shares, Pre-funded Warrants or Warrant Shares (see "Sale or Other Taxable Disposition of Common Shares, Pre-funded Warrants and/or Warrant Shares" below). However, we may not maintain the calculations of earnings and profits in accordance with U.S. federal income tax principles, and each U.S. Holder may be required to assume that any distribution by us with respect to the Common Shares, Pre-funded Warrants or Warrant Shares will constitute ordinary dividend income. Dividends received on Common Shares, Pre-funded Warrants or Warrant Shares generally will not be eligible for the "dividends received deduction" generally applicable to corporations.  Subject to applicable limitations and provided we are eligible for the benefits of the Tax Treaty or the Common Shares are readily tradable on a Common United States securities market, dividends paid by us to non-corporate U.S. Holders, including individuals, generally will be eligible for the preferential tax rates applicable to long-term capital gains for dividends, provided certain holding period and other conditions are satisfied, including that we not be classified as a PFIC in the tax year of distribution or in the preceding tax year. The dividend rules are complex, and each U.S. Holder should consult its own tax advisor regarding the application of such rules.

Sale or Other Taxable Disposition of Common Shares, Pre-funded Warrants and/or Warrant Shares

Upon the sale or other taxable disposition of Common Shares, Pre-funded Warrants or Warrant Shares, a U.S. Holder generally will recognize capital gain or loss in an amount equal to the difference between (a) the amount of cash plus the fair market value of any property received and (b) such U.S. Holder's tax basis in such Common Shares, Pre-funded Warrants or Warrant Shares sold or otherwise disposed of. Gain or loss recognized on such sale or other taxable disposition generally will be long-term capital gain or loss if, at the time of the sale or other taxable disposition, the Common Shares, Pre-funded Warrants or Warrant Shares have been held for more than one year.  Preferential tax rates may apply to long-term capital gain of a U.S. Holder that is an individual, estate, or trust. There are no preferential tax rates for long-term capital gain of a U.S. Holder that is a corporation. Deductions for capital losses are subject to significant limitations under the Code.

Additional Tax Considerations

Receipt of Foreign Currency

The amount of any distribution paid to a U.S. Holder in foreign currency or on the sale, exchange or other taxable disposition of Common Shares, Pre-funded Warrants, Warrants or Warrant Shares generally will be equal to the U.S. dollar value of such foreign currency based on the exchange rate applicable on the date of receipt (regardless of whether such foreign currency is converted into U.S. dollars at that time).  If the foreign currency received is not converted into U.S. dollars on the date of receipt, a U.S. Holder will have a tax basis in the foreign currency equal to its U.S. dollar value on the date of receipt. Any U.S. Holder who receives payment in foreign currency and engages in a subsequent conversion or other disposition of the foreign currency may have a foreign currency exchange gain or loss that would be treated as ordinary income or loss, and generally will be U.S. source income or loss for foreign tax credit purposes. Different rules apply to U.S. Holders who use the accrual method of tax accounting. Each U.S. Holder should consult its own U.S. tax advisor regarding the U.S. federal income tax consequences of receiving, owning, and disposing of foreign currency.

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Foreign Tax Credit

Subject to the PFIC rules discussed above, a U.S. Holder that pays (whether directly or through withholding) Canadian income tax with respect to dividends paid on the Common Shares, Pre-funded Warrants or Warrant Shares (or with respect to any constructive dividend on the Warrants) generally will be entitled, at the election of such U.S. Holder, to receive either a deduction or a credit for such Canadian income tax paid.  Generally, a credit will reduce a U.S. Holder's U.S. federal income tax liability on a dollar-for-dollar basis, whereas a deduction will reduce a U.S. Holder's income subject to U.S. federal income tax.  This election is made on a year-by-year basis and applies to all foreign taxes paid or accrued (whether directly or through withholding) by a U.S. Holder during a year.  The foreign tax credit rules are complex and involve the application of rules that depend on a U.S. Holder's particular circumstances.  Accordingly, each U.S. Holder should consult its own tax advisor regarding the foreign tax credit rules.

Information Reporting; Backup Withholding Tax

Under U.S. federal income tax laws certain categories of U.S. Holders must file information returns with respect to their investment in, or involvement in, a foreign corporation. For example, U.S. return disclosure obligations (and related penalties) are imposed on U.S. Holders that hold certain specified foreign financial assets in excess of certain threshold amounts. The definition of specified foreign financial assets includes not only financial accounts maintained in foreign financial institutions, but also, unless held in accounts maintained by a financial institution, any stock or security issued by a non-U.S. person. U. S. Holders may be subject to these reporting requirements unless their Common Shares, Pre-funded Warrants, Warrants, and Warrant Shares are held in an account at certain financial institutions. Penalties for failure to file certain of these information returns are substantial.  U.S. Holders should consult their own tax advisors regarding the requirements of filing information returns, including the requirement to file IRS Form 8938.

Payments made within the U.S., or by a U.S. payor or U.S. middleman, of dividends on, and proceeds arising from the sale or other taxable disposition of the Common Shares, Pre-funded Warrants, Warrants and Warrant Shares generally may be subject to information reporting and backup withholding tax, currently at the rate of 24%, if a U.S. Holder (a) fails to furnish its correct U.S. taxpayer identification number (generally on Form W-9), (b) furnishes an incorrect U.S. taxpayer identification number, (c) is notified by the IRS that such U.S. Holder has previously failed to properly report items subject to backup withholding tax, or (d) fails to certify, under penalty of perjury, that it has furnished its correct U.S. taxpayer identification number and that the IRS has not notified such U.S. Holder that it is subject to backup withholding tax. However, certain exempt persons, such as U.S. Holders that are corporations, generally are excluded from these information reporting and backup withholding tax rules. Any amounts withheld under the U.S. backup withholding tax rules will be allowed as a credit against a U.S. Holder's U.S. federal income tax liability, if any, or will be refunded, if such U.S. Holder furnishes required information to the IRS in a timely manner.

The discussion of reporting requirements set forth above is not intended to constitute a complete description of all reporting requirements that may apply to a U.S. Holder. A failure to satisfy certain reporting requirements may result in an extension of the time period during which the IRS can assess a tax and, under certain circumstances, such an extension may apply to assessments of amounts unrelated to any unsatisfied reporting requirement. Each U.S. Holder should consult its own tax advisors regarding the information reporting and backup withholding rules.

THE ABOVE SUMMARY IS NOT INTENDED TO CONSTITUTE A COMPLETE ANALYSIS OF ALL TAX CONSIDERATIONS APPLICABLE TO U.S. HOLDERS WITH RESPECT TO THE ACQUISITION, OWNERSHIP, AND DISPOSITION OF COMMON UNITS, PRE-FUNDED UNITS, COMMON SHARES, PRE-FUNDED WARRANTS, WARRANTS, AND WARRANT SHARES. U.S. HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE TAX CONSIDERATIONS APPLICABLE TO THEM IN LIGHT OF THEIR OWN PARTICULAR CIRCUMSTANCES.

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MATERIAL CANADIAN FEDERAL INCOME TAX CONSIDERATIONS

The following is a general summary, as of the date hereof, of the principal Canadian federal income tax considerations generally applicable to the holding and disposition of Common Units and Pre-Funded Units acquired pursuant to this offering by a holder who, at all relevant times, (a) for the purposes of the Income Tax Act (Canada) (the "Tax Act"), (i) is not resident, or deemed to be resident, in Canada, (ii) deals at arm's length with, and is not affiliated with, the Company, (iii) beneficially owns Common Shares, Warrants and Pre-Funded Warrants, (collectively, the "Securities"), as the case may be, as capital property, (iv) does not use or hold the Securities in the course of carrying on, or otherwise in connection with, a business or a part of a business carried on or deemed to be carried on in Canada, and (v) is not a "registered non-resident insurer" or "authorized foreign bank" within the meaning of the Tax Act, or other holder of special status, and (b) for the purposes of the Canada-United States Income Tax Convention (1980), as amended (the "Convention"), is a resident of the U.S., has never been a resident of Canada, does not have and has not had, at any time, a permanent establishment or fixed base in Canada, and is a qualifying person or otherwise qualifies for the full benefits of the Convention. Securities will generally be considered to be capital property to a holder unless such Securities are held in the course of carrying on a business of buying or selling securities or an adventure or concern in the nature of trade. Holders who meet all the criteria in clauses (a) and (b) are referred to herein as a "U.S. Holder" or "U.S. Holders."

This summary does not deal with special situations, such as the particular circumstances of traders or dealers or holders who have entered or will enter into a "derivative forward agreement" (as defined in the Tax Act) in respect of any of the Securities. Such holders and other holders who do not meet the criteria in clauses (a) and (b) should consult their own tax advisors.

This summary is based upon the current provisions of the Tax Act and the regulations thereunder (the "Regulations") and counsel's understanding of the current administrative policies and assessing practices of the Canada Revenue Agency (the "CRA") made publicly available prior to the date hereof. It also takes into account all proposed amendments to the Tax Act and the Regulations publicly released by the Minister of Finance (Canada) (the "Tax Proposals") prior to the date hereof, and assumes that all such Tax Proposals will be enacted as currently proposed. No assurance can be given that the Tax Proposals will be enacted in the form proposed or at all. This summary does not otherwise take into account or anticipate any changes in law, whether by way of legislative, judicial or administrative action or interpretation, nor does it take into account tax laws of any province or territory of Canada or of any other jurisdiction outside Canada.

This summary is of a general nature only and is not intended to be, nor should it be construed to be, legal or tax advice to any particular U.S. Holder and no representation with respect to the federal income tax consequences to any particular U.S. Holder or prospective U.S. Holder is made. The tax consequences to a U.S. Holder will depend on the holder's particular circumstances. Accordingly, U.S. Holders should consult with their own tax advisors for advice with respect to their own particular circumstances.

Currency Conversion

In general, for purposes of the Tax Act, all amounts relating to the acquisition, holding or disposition of the Securities must be converted into Canadian dollars based on the applicable exchange rate quoted by the Bank of Canada for the relevant day or such other rate of exchange that is acceptable to the CRA.

Allocation of Cost

A U.S. Holder who acquires Common Units or Pre-Funded Units, as the case may be, will be required to allocate the purchase price paid for each Common Unit or Pre-Funded Unit on a reasonable basis between the Common Share and the Warrant comprising each Common Unit, or between the Pre-Funded Warrant and the Warrant comprising each Pre-Funded Unit, as applicable, in order to determine their respective costs to such U.S. Holder for the purposes of the Tax Act.

Exercise or Expiry of Warrants

No gain or loss will be realized by a U.S. Holder of a Warrant or Pre-Funded Warrant upon the exercise of such Warrant or Pre-Funded Warrant for Common Shares. When a Warrant or Pre-Funded Warrant is exercised, the U.S. Holder's cost of the Common Share acquired thereby will be equal to the adjusted cost base of the Warrant or Pre-Funded Warrant to such U.S. Holder, plus the amount paid by such U.S. Holder on the exercise of the Warrant or Pre-Funded Warrant. For the purpose of computing the adjusted cost base to a U.S. Holder of the Common Shares acquired on the exercise of a Warrant or Pre-Funded Warrant, the cost of such Common Shares must be averaged with the adjusted cost base to such U.S. Holder of all other Common Shares (if any) held by the U.S. Holder as capital property immediately prior to the exercise of such Warrant.

Generally, the expiry of an unexercised Warrant or Pre-Funded Warrant will give rise to a capital loss equal to the adjusted cost base to the U.S. Holder of such expired Warrant or Pre-Funded Warrant.

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Dividends

Amounts paid or credited or deemed to be paid or credited as, on account or in lieu of payment, or in satisfaction of, dividends on the Common Shares to a U.S. Holder will be subject to Canadian withholding tax. Under the Convention, the rate of Canadian withholding tax on dividends paid or credited by the Company to a U.S. Holder that beneficially owns such dividends is generally 15% unless the beneficial owner is a company that owns at least 10% of the Company's voting stock at that time, in which case the rate of Canadian withholding tax is reduced to 5%.

Dispositions

Upon the disposition of a Security (but not upon the exercise of a Warrant or Pre-Funded Warrant), a U.S. Holder will realize a capital gain (or capital loss) in the taxation year of the disposition equal to the amount by which the U.S. Holder's proceeds of disposition, net of any reasonable costs of disposition, exceed (or are exceeded by) the adjusted cost base to the U.S. Holder of the particular Security immediately before the disposition or deemed disposition.

A U.S. Holder will not be subject to tax under the Tax Act in respect of any capital gain realized by such U.S. Holder on a disposition of Securities, unless such Securities constitute "taxable Canadian property" (as defined in the Tax Act) of the U.S. Holder at the time of disposition and the U.S. Holder is not entitled to relief under the Convention.

Provided that the Common Shares are listed on a designated stock exchange for purposes of the Tax Act (which currently includes the NASDAQ) at the time of the disposition, the Securities, will generally not constitute taxable Canadian property of a U.S. Holder, unless: (a) at any time during the 60-month period immediately preceding the disposition or deemed disposition of the Security (as applicable): (i) 25% or more of the issued shares of any class or series of the share capital of the Company were owned by, or belonged to, one or any combination of (x) the U.S. Holder, (y) persons with whom the U.S. Holder did not deal at arm's length (within the meaning of the Tax Act) and (z) partnerships in which the U.S. Holder or a person referred to in (y) holds a membership interest directly or indirectly through one or more partnerships; and (ii) more than 50% of the fair market value of the Common Shares was derived directly or indirectly from one or any combination of: (A) real or immovable property situated in Canada, (B) Canadian resource property (as defined in the Tax Act), (C) timber resource property (as defined in the Tax Act), and (D) options in respect of, or interests in, or for civil law rights in, property described in any of (A) through (C) above, whether or not such property exists; or (b) the Security (as applicable) is deemed under the Tax Act to be taxable Canadian property.

If a Security is taxable Canadian property to a U.S. Holder, any capital gain realized on the disposition or deemed disposition of such Security may not be subject to Canadian federal income tax pursuant to the terms of the Convention. U.S. Holders whose Securities may be taxable Canadian property should consult their own tax advisors.

LEGAL MATTERS

Dorsey & Whitney LLP, Toronto, Ontario, is acting as counsel to our Company regarding U.S. securities law and tax matters. Fasken Martineau DuMoulin LLP, Montréal, Québec, is acting as counsel to our Company regarding Canadian securities law matters and has provided an opinion on the validity of the securities being offered pursuant to this Prospectus. Dentons US LLP, New York, New York, is acting as counsel for the underwriter.

EXPERTS

KPMG LLP, our current independent accountant, has consented to the inclusion of its report with respect to KWESST Micro Systems Inc.'s consolidated financial statements as at and for the year ended September 30, 2021, in this Prospectus, in the form and context in which they are included, and has authorized the contents of that part of the Registration Statement. The audit report covering the September 30, 2021, consolidated financial statements contains an explanatory paragraph that states that the Company's significant losses and negative operating cash flows raise substantial doubt about the entity's ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of that uncertainty. Further information regarding KPMG LLP is provided under the subheading titled Auditors.

Kreston GTA LLP, our previous independent accountant, has consented to the inclusion of its reports with respect to KWESST Micro Systems Inc.'s consolidated financial statements as at and for nine months ended September 30, 2020, and the year ended December 31, 2019, in this Prospectus, in the form and context in which they are included, and has authorized the contents of that part of the Registration Statement. Further information regarding Kreston GTA LLP is provided under the subheading titled Auditors.

124

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to a number of financial risks arising through the normal course of business, including interest rate risk, foreign currency risk, credit risk, and liquidity risk. Refer to Note 22 of our audited consolidated financial statements for Fiscal 2021 (for the year ended September 30, 2021) and Note 20 of our audited consolidated financial statements for Fiscal 2020 (for nine months ended September 30, 2020, and the year ended December 31, 2019). There were no material changes in these risks for the three and nine months ended June 30, 2022.

FINANCIAL STATEMENTS

Our consolidated financial statements are stated in Canadian dollars and are prepared in accordance with IFRS, as issued by the IASB. The following financial statements are attached hereto and found immediately following the text of this Prospectus.

• Unaudited condensed consolidated interim financial statements of KWESST Micro Systems Inc. for the three and nine months ended June 30, 2022 and 2021, together with the notes thereto.
• Audited consolidated statements of financial position of KWESST Micro Systems Inc. as at September 30, 2021, 2020 and December 31, 2019, and the consolidated statements of net loss and comprehensive loss, consolidated statements of changes in shareholder's equity and cash flows for the periods then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies.
• Report of KPMG LLP, Independent Registered Public Accounting Firm, on the consolidated statements of financial position of KWESST Micro Systems Inc. as of September 30, 2021 and the related consolidated statements of loss and comprehensive loss, changes in shareholders' equity, and cash flows for the year ended September 30, 2021, and the related notes the preceding financial statements, dated November 24, 2021.
• Report of Kreston GTA LLP, Independent Registered Public Accounting Firm, on consolidated statements of financial position of KWESST Micro Systems Inc. as of September 30, 2020 and December 31, 2019, and the related consolidated statements of loss and comprehensive loss, changes in shareholders' equity, and cash flows for the nine month ended September 30, 2020 and year ended December 31, 2019, and the related notes the preceding financial statements, dated November 22, 2021.

CHANGE IN COMPANY'S CERTIFYING ACCOUNTANT

Shortly after going public in Canada in September 2020, the newly formed Audit Committee undertook a review of external audit services, including a tender for the Company's annual audit and interim quarterly reviews.  Following this tender review, our Audit Committee selected KPMG LLP as the Company's independent auditors and approved by our Board of Directors, subject to shareholder's approval at the March 31, 2021, Annual and Special Meeting of Shareholders.  Our shareholders approved the appointment of KPMG LLP on March 31, 2021 as well as their reappointment at the March 31, 2022 Annual and Special Meeting of Shareholders.

Accordingly, Kreston GTA LLP ("Kreston") was not proposed for reappointment and resigned, effective on March 31, 2021.

The audit report of Kreston did not contain any adverse opinion or disclaimer of opinion and did not express any reservation or modified opinion in its reports for the two (2) most recently completed fiscal years of the Corporation, nor for the period from the most recently completed period for which Kreston issued an audit report in respect of the Corporation and the date of this Notice.  Further, for the two (2) most recent fiscal years and any subsequent interim period preceding their resignation: there were no disagreements with Kreston on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure.

125

Additionally, for the two (2) most recent fiscal years and any subsequent interim period preceding their resignation:

• Kreston has not advised us that the internal controls necessary for us to develop reliable financial statements do not exist;
• Kreston has not advised us that information has to come to Kreston's attention that has led it to no longer be able to rely on management's representations, or that has made it unwilling to be associated with the financial statements prepared by management;
• Kreston has not advised us of the need to expand significantly the scope of its audit, nor that information has come to their attention during our two most recent fiscal years and any subsequent interim period preceding Kreston's resignation, that if further investigated may: (i) materially impact the fairness or reliability of either: a previously issued audit report or the underlying financial statements; or the financial statements issued or to be issued covering the fiscal period(s) subsequent to the date of the most recent financial statements covered by an audit report (including information that may prevent it from rendering an unqualified audit report on those financial statements); or (ii) cause it to be unwilling to rely on management's representations or be associated with our financial statements; and due to Kreston's resignation, or for any other reason, Kreston did not so expand the scope of its audit or conduct such further investigation; or
• Kreston has not advised us that information has come to their attention that it has concluded materially impacts the fairness or reliability of either (i) a previously issued audit report or the underlying financial statements, or (ii) the financial statements issued or to be issued covering the fiscal period(s) subsequent to the date of the most recent financial statements covered by an audit report (including information that, unless resolved to Kreston's satisfaction, would prevent it from rendering an unqualified audit report on those financial statements); and due to Kreston's resignation, or for any other reason, the issue has not been resolved to their satisfaction prior to its resignation.

KPMG LLP accepted the appointment effective April 6, 2021. Additionally, during the preparation of our consolidated financial statements for the fiscal year ended September 30, 2020, we sought advice from KPMG LLP between December 3, 2020, and January 14, 2021, on the application of the relevant IFRS standard for the acquisition of GhostStep® technology and the reverse acquisition relating to our Amalgamation with Foremost. However, KPMG LLP's role was limited to assisting management in interpreting the accounting guidance under IFRS 3, Business Combination and IFRS 2, Share-based Payment.  KPMG LLP did not provide an accounting opinion on these transactions; management was ultimately responsible for the accounting analysis and conclusion which was audited by its independent auditors then, Kreston.  Further, there was no matter that was either the subject of a disagreement or a reportable event in which we consulted with KPMG LLP.

EXPENSES OF THIS OFFERING

The estimated expenses payable by us in connection with the offering described in this Prospectus (other than the underwriting discounts and commissions) will be as set forth in the table below, including the Canadian Offering. With the exception of the SEC registration fee, the FINRA filing fee, and Nasdaq listing fee, all amounts are estimates. All such expenses will be borne by us.

Item	IPO		IPO and Canadian Offering (1)
SEC registration fee	USD$	2,200	2,200
FINRA filing fee	USD$	10,000	10,000
Nasdaq listing fee	USD$	75,000	75,000
Printing and engraving expenses	USD$	100,000	115,000
Legal fees and expenses	USD$	400,000	746,500
Accounting fees and expenses	USD$	170,000	258,500
Miscellaneous expenses	USD$	340,000	390,000
Total	USD$	1,097,200	1,597,200

(1)For Canadian related expenses, we converted Canadian denominated expenses using an exchange rate of at a rate of USD$1.30 equals CAD$1.00. 

126

INTERESTS OF EXPERTS AND COUNSEL

None of the named experts or legal counsel was employed on a contingent basis, owns an amount of shares in our company which is material to that person, or has a material, direct or indirect economic interest in our company or that depends on the success of the offering.

DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling the registrant pursuant to the foregoing provisions, the registrant has been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

WHERE YOU CAN FIND MORE INFORMATION

This Prospectus and the related exhibits are available for viewing at the offices of KWESST Micro Systems Inc., 155 Terence Matthews Crescent, Unit #1, Ottawa, Ontario, Canada, K2M 2A8, telephone: (613) 241-1849.

Additional information relating to us may be found on SEDAR, the system for electronic document analysis and retrieval, at www.sedar.com. Upon effectiveness of the registration statement of which this Prospectus forms a part, we will be subject to the informational requirements of the Exchange Act that are applicable to foreign private issuers, and under those requirements will be filing reports with the SEC. Those other reports or other information may be inspected without charge at the locations described below. As a foreign private issuer, we are exempt from the rules under the Exchange Act related to the furnishing and content of proxy statements, and our officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we are not required under the Exchange Act to file annual, quarterly and current reports and financial statements with the SEC as frequently or as promptly as United States companies whose securities are registered under the Exchange Act. However, we will file with the SEC, within 120 days after the end of each fiscal year, or such applicable time as required by the SEC, an annual report on Form 20-F containing financial statements audited by an independent registered public accounting firm, and will furnish to the SEC, under cover of a current report on Form 6-K, unaudited quarterly financial information.

Reports filed with, and other information furnished to, the SEC are available from the SEC's Electronic Data Gathering and Retrieval System (EDGAR) at www.sec.gov.

We have filed with the SEC a registration statement on Form F-1 under the Securities Act with respect to the securities offered hereby. This Prospectus does not contain all of the information set forth in the registration statement and the exhibits thereto, to which reference is hereby made. With respect to each contract, agreement or other document filed as an exhibit to the registration statement, reference is made to such exhibit for a more complete description of the matter involved. The registration statement and the exhibits thereto filed by us with the SEC may be inspected at the public reference facility of the SEC listed above.

127

INDEX TO FINANCIAL STATEMENTS

Unaudited Condensed Consolidated Interim Financial Statements for the Three and Nine Months Ended June 30, 2022, and 2021
Condensed Consolidated Interim Statements of Financial Position	F-3
Condensed Consolidated Interim Statements of Net Loss and Comprehensive Loss	F-4
Condensed Consolidated Interim Statements of Changes in Shareholders' Equity	F-5
Condensed Consolidated Interim Statements of Cash Flows	F-6
Notes to the Condensed Consolidated Interim Financial Statements	F-7
Consolidated Financial Statements for the Year Ended September 30, 2021, Nine Months Ended September 30, 2020, and Year Ended December 31, 2019
Independent Auditors' Reports	F-25
Consolidated Statements of Financial Position	F-26
Consolidated Statements of Net Loss and Comprehensive Loss	F-27
Consolidated Statements of Changes in Shareholders' Equity	F-28
Consolidated Statements of Cash Flows	F-29
Notes to the Consolidated Financial Statements	F-30
Consolidated Financial Statements for the Nine Months Ended September 30, 2020, and Year Ended December 31, 2019
Independent Auditors' Reports	F-77
Consolidated Statements of Financial Position	F-79
Consolidated Statements of Net Loss and Comprehensive Loss	F-80
Consolidated Statements of Changes in Shareholders' Equity	F-81
Consolidated Statements of Cash Flows	F-82
Notes to the Consolidated Financial Statements	F-83

128

Condensed Consolidated Interim Financial Statements of

KWESST MICRO SYSTEMS INC.

Three and nine months ended June 30, 2022, and 2021

(Unaudited - Expressed in Canadian dollars)

KWESST MICRO SYSTEMS INC.

Table of Contents for the three and nine months ended June 30, 2022

	Page
FINANCIAL STATEMENTS
Condensed Consolidated Interim Statements of Financial Position	F-3
Condensed Consolidated Interim Statements of Net Loss and Comprehensive Loss	F-4
Condensed Consolidated Interim Statements of Changes in Shareholders' Equity	F-5
Condensed Consolidated Interim Statements of Cash Flows	F-6
Notes to the Condensed Consolidated Interim Financial Statements	F-7-F-22

KWESST MICRO SYSTEMS INC.

Condensed Consolidated Interim Statements of Financial Position

At June 30, 2022 and September 30, 2021

(Unaudited)

In Canadian dollars	Notes		June 30,  2022			September 30, 2021
ASSETS
Cash		$	189,587		$	2,688,105
Restricted short-term investment			30,000			30,000
Trade and other receivables	5		194,481			699,251
Inventories	6		445,000			90,299
Prepaid expenses and other			280,518			548,042
Current assets			1,139,586			4,055,697
Property and equipment			892,896			903,649
Right-of-use assets			222,652			266,214
Deposit			23,024			21,367
Intangible assets	7		4,244,253			3,470,919
Non-current assets			5,382,825			4,662,149
Total Assets		$	6,522,411		$	8,717,846
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Accounts payable and accrued liabilities	8 and 9	$	2,263,702		$	1,127,202
Accrued royalties liability	4		150,000			-
Lease obligations			67,450			32,288
Borrowings	10		1,752,865			-
Current liabilities			4,234,017			1,159,490
Accrued royalties liability	4		1,072,976			1,105,756
Lease obligations			224,410			275,621
Borrowings	10		-			53,251
Non-current liabilities			1,297,386			1,434,628
Total Liabilities			5,531,403			2,594,118
Shareholders' Equity
Share capital	12(a)		19,165,734			17,215,068
Warrants	12(b)		1,902,055			1,848,389
Contributed surplus	12(c)		3,473,768			2,458,211
Accumulated other comprehensive loss			(28,123	)		(8,991	)
Accumulated deficit			(23,522,426	)		(15,388,949	)
Total Shareholders' Equity			991,008			6,123,728
Total Liabilities and Shareholders' Equity		$	6,522,411		$	8,717,846

See Note 2(a) Going concern and Note 18 Commitments and contingencies.

See accompanying notes to the unaudited condensed consolidated interim financial statements.

On behalf of the Board of Directors:
(signed) _________, John McCoach, Director	(signed) _________, David Luxton, Director

F-3

KWESST MICRO SYSTEMS INC.

Condensed Consolidated Interim Statements of Net Loss and Comprehensive Loss

Three and nine months ended June 30, 2022 and 2021

(Unaudited)

In Canadian dollars	Notes		Three Months Ended June 30, 2022			Three Months Ended June 30, 2021			Nine Months Ended June 30, 2022			Nine Months Ended June 30, 2021
Revenue	14	$	282,432		$	521,724		$	466,148		$	1,115,757
Cost of sales			(238,350	)		(315,273	)		(405,841	)		(718,309	)
Gross profit			44,082			206,451			60,307			397,448
Operating expenses	2(f)
General and administrative			1,322,730			1,236,988			3,410,887			2,909,349
Selling and marketing			851,705			882,261			2,931,460			2,195,647
Research and development, net			350,689			678,622			1,610,445			1,648,711
Total operating expenses			2,525,124			2,797,871			7,952,792			6,753,707
Operating loss			(2,481,042	)		(2,591,420	)		(7,892,485	)		(6,356,259	)
Other income and expenses
Gain on acquisition	4		41,869			-			41,869			-
Net finance costs	15		(184,177	)		(27,780	)		(304,298	)		(60,857	)
Foreign exchange gain (loss)			22,901			(9,025	)		22,602			(14,189	)
Loss on disposals			-			-			(1,165	)		-
Total other income and expenses			(119,407	)		(36,805	)		(240,992	)		(75,046	)
Net loss		$	(2,600,449	)	$	(2,628,225	)	$	(8,133,477	)	$	(6,431,305	)
Other comprehensive loss:
Items that are or may be reclassified subsequently
to profit or loss:
Foreign currency translation differences			(34,171	)		-			(19,132	)		-
Total comprehensive loss		$	(2,634,620	)	$	(2,628,225	)	$	(8,152,609	)	$	(6,431,305	)
Net loss per share
Basic and diluted		$	(0.05	)	$	(0.06	)	$	(0.16	)	$	(0.15	)
Weighted average number of shares outstanding
Basic and diluted	13		51,988,774			46,016,645			50,288,043			43,126,552

See accompanying notes to the unaudited condensed consolidated interim financial statements.

F-4

KWESST MICRO SYSTEMS INC.

Condensed Consolidated Interim Statements of Changes in Shareholders' Equity 

Nine months ended June 30, 2022, and 2021

(Unaudited)

In Canadian dollars	Notes		Share capital			Contingent shares			Warrants			Contributed surplus			Translation reserve			Deficit			Total Shareholders' Equity
Balance, September 30, 2020		$	9,374,563		$	-		$	277,170		$	306,708		$	-		$	(6,073,577	)	$	3,884,864
Shares issued to settle debt			63,949			-			-			-			-			-			63,949
Warrants exercised			220,220			-			(102,991	)		-			-			-			117,229
Shares and warrants issued on asset acquisition			1,427,000			-			425,000			-			-			-			1,852,000
Shares and warrants issued for cash			3,571,418			-			848,654			-			-			-			4,420,072
Stock options exercised			736,419			-			-			(203,516	)		-			-			532,903
Share offering costs			(693,905	)		-			-			233,057			-			-			(460,848	)
Share-based compensation	12(c)		-			-			-			1,398,881			-			-			1,398,881
Shares for vested RSUs			2,883			-			-			(2,883	)		-			-			-
Net loss	12		-			-			-			-			-			(6,431,305	)		(6,431,305	)
Balance, June 30, 2021		$	14,702,547		$	-		$	1,447,833		$	1,732,247		$	-		$	(12,504,882	)	$	5,377,745
Balance, September 30, 2021		$	17,215,068		$	-		$	1,848,389		$	2,458,211		$	(8,991	)	$	(15,388,949	)	$	6,123,728
Shares issued to settle debt			19,000			-			-			-			-			-			19,000
Shares and warrants issued on acquisition	4		377,503			83,319			132,000			-			-			-			592,822
Contingent shares converted to common shares	4		83,319			(83,319	)		-			-			-			-			-
Warrants exercised			277,098			-			(61,173	)		-			-			-			215,925
Warrants expired			-			-			(17,161	)		17,161			-			-			-
Share-based compensation	12(c)		-			-			-			1,875,392			-			-			1,875,392
Shares for vested RSUs and PSUs			854,181			-			-			(854,181	)		-			-			-
Vested RSUs and PSUs repurchased for withholding taxes			-			-			-			(22,815	)		-			-			(22,815	)
Shares issued for unsecured loans	10		365,888			-			-			-			-			-			365,888
Share offering costs			(26,323	)		-			-			-			-			-			(26,323	)
Other comprehensive loss			-			-			-			-			(19,132	)		-			(19,132	)
Net loss			-			-			-			-			-			(8,133,477	)		(8,133,477	)
Balance, June 30, 2022		$	19,165,734		$	-		$	1,902,055		$	3,473,768		$	(28,123	)	$	(23,522,426	)	$	991,008

See accompanying notes to the unaudited condensed consolidated interim financial statements.

F-5

KWESST MICRO SYSTEMS INC.

Condensed Consolidated Interim Statements of Cash Flows

Nine months ended June 30, 2022, and 2021

(Unaudited)

In Canadian dollars	Notes		Nine months ended June 30, 2022			Nine months ended June 30, 2021
OPERATING ACTIVITIES
Net loss		$	(8,133,477	)	$	(6,431,305	)
Items not affecting cash:
Depreciation and amortization			225,308			88,484
Share-based compensation	12(c)		1,875,392			1,398,881
Gain on acquisition	4		(41,869	)		-
Net finance costs			304,298			60,857
Loss on disposals			1,165			-
Shares for amended license			-			137,000
Impairment of intangible assets			-			55,376
Changes in non-cash working capital items	17		1,886,747			1,610
Interest paid			(65,316	)		(29,132	)
Cash used in operating activities			(3,947,752	)		(4,718,229	)
INVESTING ACTIVITIES
Additions of property and equipment			(172,158	)		(119,909	)
Investments in intangible assets	7		(764,067	)		-
Recognition of open orders from acquisition	7		159,650			-
Cash acquired on acquisition	4		162,547			-
Deposit for advanced royalties			-			(150,000	)
Purchase of restricted short-term investment			-			(30,000	)
Cash flows used in investing activities			(614,028	)		(299,909	)
FINANCING ACTIVITIES
Proceeds from borrowings	10		2,000,000			326,000
Repayment of borrowings			-			(306,000	)
Payments of deferred financing fees			(74,055	)		-
Payments of share offering costs			(26,323	)		(460,848	)
Repayments to related party loans			-			(218,276	)
Repayments of lease obligations			(29,470	)		(34,576	)
Proceeds from the issuance of common shares			-			4,420,072
Proceeds from exercise of warrants			215,925			117,229
Proceeds from exercise of stock options			-			532,903
Repurchase of vested RSUs and PSUs for withholding taxes			(22,815	)		-
Cash flows provided by financing activities			2,063,262			4,376,504
Net change in cash during the period			(2,498,518	)		(641,634	)
Cash, beginning of period			2,688,105			3,073,760
Cash, end of period		$	189,587		$	2,432,126

See Note 17 Supplemental cash flow information.

See accompanying notes to the unaudited condensed consolidated interim financial statements.

F-6

KWESST MICRO SYSTEMS INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Three and nine months ended June 30, 2022, and 2021
(Expressed in Canadian dollars, except share amounts)

1.Corporate information

KWEEST Micro Systems Inc. (the "Company", "KWESST", "we", "our", and "us") was incorporated on November 28, 2017, under the laws of the Province of British Columbia. Our registered office is located at 550 Burrard Street, Suite 2900, Vancouver, British Columbia, Canada and our corporate office is located at Unit 1, 155 Terrence Matthews Crescent, Ottawa, Ontario, Canada. We have representative offices in the following foreign locations: Washington DC (United States), London (United Kingdom), and Abu Dhabi (United Arab Emirates).

We develop and commercialize next-generation technology solutions that deliver a tactical advantage for military, public safety agencies and personal defense markets.  Our core mission is to protect and save lives.

KWESST's common stock is listed on the TSX-Venture Exchange ("TSX-V'') under the stock symbol of KWE and on the OTCQB® Venture Market under the stock symbol of KWEMF and on the Frankfurt Stock Exchange under the stock symbol of 62U.

2.Basis of preparation

(a)Going concern

These unaudited condensed consolidated interim financial statements have been prepared assuming KWESST will continue as a going concern.

As an early-stage company, we have not yet reached commercial production for most of our products and have incurred significant losses and negative operating cash flows from inception that have primarily been funded from financing activities. We have incurred approximately $8.1 million net loss and negative operating cash flows of approximately $3.9 million for the nine months period ended June 30, 2022 (nine months ended June 2021 - $6.4 million net loss and negative operating cash flows of $4.7 million). 

Our ability to continue as a going concern and realize our assets and discharge our liabilities in the normal course of business is dependent upon closing timely additional sales orders and the ability to raise additional debt or equity financing, as required. There are various risks and uncertainties affecting our future financial position and its performance including, but not limited to:

• The market acceptance and rate of commercialization of our product offerings;
• Ability to successfully execute our business plan;
• Ability to raise additional capital at acceptable terms;
• General local and global economic conditions, including the ongoing COVID-19 pandemic.

Our strategy to mitigate these material risks and uncertainties is to execute timely a business plan aimed at continued focus on revenue growth, product development and innovation, improving overall gross profit, managing operating expenses and working capital requirements, and securing additional capital, as needed.

Failure to implement our business plan could have a material adverse effect on our financial condition and/or financial performance. There is no assurance that we will be able to raise additional capital as they are required in the future. Accordingly, there are material risks and uncertainties that may cast significant doubt about our ability to continue as a going concern.

These condensed consolidated interim financial statements do not include any adjustments to the carrying amounts and classification of assets, liabilities and reported expenses that may otherwise be required if the going concern basis was not appropriate.

F-7

KWESST MICRO SYSTEMS INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Three and nine months ended June 30, 2022, and 2021
(Expressed in Canadian dollars, except share amounts)

(b)Statement of compliance

These unaudited condensed consolidated interim financial statements have been prepared in accordance with IAS 34, Interim Financial Reporting, ("IAS 34") as issued by the International Accounting Standards Board ("IASB").  They do not include all the information required for a complete set of financial statements prepared in accordance with International Financial Reporting Standards ("IFRS") and should be read in conjunction with our annual consolidated financial statements for the year ended September 30, 2021. However, selected explanatory notes are included to explain events and transactions that are significant to an understanding of the changes in our financial position and performance since the last annual consolidated financial statements as at and for the year ended September 30, 2021.

These unaudited condensed consolidated interim financial statements were authorized for issue by our Board of Directors on August 11, 2022.

(c)Basis of consolidation

These unaudited condensed consolidated interim financial statements incorporate the financial statements of KWESST and the entities it controls.

Control is achieved where we have the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities, are exposed to, or have rights to, variable returns from our involvement with the entity and have the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to us until the date on which control ceases. Profit or loss of subsidiaries acquired during the year are recognized from the date of acquisition or effective date of disposal as applicable. All intercompany transactions and balances have been eliminated.

At June 30, 2022, we have the following wholly-owned subsidiaries:

	Location	Equity %
KWESST Inc.	Ottawa, Canada	100%
2720178 Ontario Inc.	Bowmanville, Canada	100%
Police Ordnance Company Inc.	Bowmanville, Canada	100%
KWESST U.S. Holdings Inc.	Delaware, Canada	100%
KWESST Defense Systems U.S. Inc.	Virginia, United States	100%
KWESST Public Safety Systems U.S. Inc.	Virginia, United States	100%
KWESST Public Safety Systems Canada Inc.	Ottawa, Canada	100%

(d)Functional and presentation currency

These financial statements are presented in Canadian dollars ("CAD"), KWESST's functional currency and presentation currency.

(e)Basis of measurement

The consolidated financial statements have been prepared on the historical cost basis except for certain financial instruments measured at fair value. Historical cost is generally based on the fair value of the consideration given in exchange for assets.

(f)Comparative figures

For the year ended September 30, 2021, we changed the presentation of our expenses in the consolidated statements of net loss and comprehensive loss from by nature to by function.  We made this change in presentation to provide more relevant financial information to facilitate peer benchmarking, particularly with peers in the United States. As a result, our operating expenses for the three and nine months ended June 30, 2022 and 2021 are now presented as follows: general and administration ("G&A"), selling and marketing ("S&M"), and research and development, net ("R&D").

F-8

KWESST MICRO SYSTEMS INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Three and nine months ended June 30, 2022, and 2021
(Expressed in Canadian dollars, except share amounts)

(g)Use of estimates and judgments

The preparation of the unaudited condensed consolidated interim financial statements in accordance with IFRS requires management to make judgments, estimates, and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income, expenses, and disclosure of contingent liabilities.  Actual results may differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to estimates are recognized prospectively.

Judgments

Information about judgments made in applying accounting policies that have the most significant effects on the amounts recognized in these consolidated financial statements are the same as disclosed in Note 2(g) of the consolidated financial statements for the year ended September 30, 2021, with the addition of the following:

• Note 4 - acquisition of Police Ordnance: whether the purchase price allocation applied to the consideration transferred and assumptions used as inputs in determining the fair value of net assets acquired is reasonable.

• Note 10 - unsecured loans: whether the estimated market discount rate used to estimate the fair value of the unsecured loans is reasonable.

Estimates

Information about assumptions and estimation uncertainties at June 30, 2022 that have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities in the next financial year are the same as disclosed in Note 2(g) of the consolidated financial statements for the year ended September 30, 2021.

COVID-19 Uncertainties

While COVID-19 has not had a material impact to our business to date, the following is a summary of what we believe may impact our future business given the persistency of COVID-19: disruptions to business operations resulting from quarantines of employees, customers, manufacturers and other third-party service providers in areas affected by the outbreak; disruptions to business operations resulting from travel restrictions, including travel to industry tradeshows; and uncertainty around the duration of the virus' impact.

Despite the global vaccination efforts underway, the extent to which COVID-19 could impact our operations, financial condition, results of operations, and cash flows is highly uncertain and cannot be predicted. Negative financial results, uncertainties in the market, and a tightening of credit markets, caused by COVID-19, or a recession, could have a material adverse effect on our liquidity and ability to obtain financing in the future.

3.Significant accounting policies

During the three and nine months ended June 30, 2022, the accounting policies in these condensed consolidated interim financial statements are the same as those applied in our consolidated financial statements as at and for the year ended September 30, 2021.

F-9

KWESST MICRO SYSTEMS INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Three and nine months ended June 30, 2022, and 2021
(Expressed in Canadian dollars, except share amounts)

4.Acquisitions

Acquisition in Current Fiscal Year

On December 15, 2021, we acquired 2720178 Ontario Inc., an Ontario (Canada) corporation, which owns all of the issued and outstanding shares of Police Ordnance Company Inc., an Ontario (Canada) corporation (together, "Police Ordnance"), herein referred as the "Police Ordnance Acquisition". Located in Bowmanville, Ontario, with ancillary operations in Florida, Police Ordnance owns all intellectual properties to the ARWEN^TM product line of launchers, and a proprietary line of 37 mm cartridges designed for riot control and tactical teams.  Police Ordnance has law enforcement customers across Canada, the United States, and abroad. The Police Ordnance Acquisition provides us with a strategic opportunity to leverage its law enforcement customer base to accelerate growth within its specialty ordnance business.

Consideration Transferred:

The purchase consideration comprised of the following:

	Number		Fair Value
Common shares	277,576	$	377,503
Warrants	200,000	$	132,000
Contingent shares	61,264	$	83,319
Total fair value purchase consideration		$	592,822

The warrants are exercisable at $1.72 each and will expire on December 15, 2024.

We issued the 61,264 contingent common shares to the sellers in April 2022 following the fulfillment of the financial milestone as defined in the share purchase agreement.

We have estimated the fair value as follows:

• Common shares: based on KWESST's closing stock price on December 15, 2021.
• Warrants: based on using the Black Scholes option model with the following key inputs: a) exercise price of $1.72, underlying stock price of $1.36, risk free rate of 1.04%, expected life of three years, and expected volatility of 84.7%.
• Contingent shares: based on KWESST's closing stock price on December 15, 2021, and high probability of achieving the financial milestone as defined in the share purchase agreement.

The net cash inflow as at the closing of the acquisition was as follows:

Cash assumed on acquisition	$	162,547
less: consideration paid in cash		-
Net cash inflow on acquisition	$	162,547

F-10

KWESST MICRO SYSTEMS INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Three and nine months ended June 30, 2022, and 2021
(Expressed in Canadian dollars, except share amounts)

Net Assets Acquired:

The purchase consideration was allocated to Police Ordnance's net assets as follows:

Total purchase consideration at fair value	$	592,822
Police Ordnance's net assets:
Cash		162,547
Trade and other receivables		104,432
Inventories		343,655
Intangible assets		165,596
Accounts payable and accrued liabilities		82,963
Corporate tax liability		32,338
Borrowings		26,238
Net assets at fair value	$	634,691
Gain on acquisition	$	41,869

The fair value of inventories in the above allocation continues to be under review due to the need for additional information related to certain specialized raw materials. In addition, we are completing our identification and assessment of intangible assets acquired in connection with the business combination, if any. This will be finalized by September 30, 2022.

Impact on KWESST's Results of Operations:

The results of operations of Police Ordnance are included in these unaudited condensed consolidated interim statements of net loss and comprehensive loss from December 16, 2021. If the acquisition had occurred on October 1, 2021, management estimates that Police Ordnance would have contributed approximately $341,500 and $623,800 of revenue and approximately $51,600 and $2,500 of net profit to KWESST's operating results for the three and nine months ended June 30, 2022, respectively. In determining these amounts, management has assumed that the fair value adjustments that arose on the date of the acquisition would have been the same if the acquisition had occurred on October 1, 2021.

KWESST incurred acquisition-related costs of $2,304 which are recorded as an expense in the unaudited condensed consolidated interim statements of net loss and comprehensive loss as part of general and administrative expenses. Share offering costs of $4,150 in relation to the acquisition are recorded against share capital on the unaudited condensed consolidated interim statements of financial position.

Acquisition in Prior Fiscal Year

On April 29, 2021, we acquired the Low Energy Cartridge technology from DEFSEC, a proprietary non-lethal cartridge-based firing system (subsequently branded as PARA OPS^TM system). This technology acquisition includes all intellectual property rights for the PARA OPS^TM system.  With this acquisition, we will target the following four market segments that currently use a variety of dated "non-lethal" or "less-lethal" systems:

(i)public order (riots and control of dangerous subjects);

(ii)military and law enforcement training (realistic force-on-force training);

(iii)personal defence (home, car, boat, RV, camping, hiking); and

(iv)high-action gaming.

As DEFSEC is a private company owned by our Executive Chairman, this asset acquisition is a related party transaction.  We relied on exemptions from the formal valuation and minority shareholder approval requirements available under Multilateral Instrument 61-101, Protection of Minority Security Holders in Special Transactions.  However, we obtained approval from over 51% disinterested shareholders as well as from the TSX-V prior to closing the acquisition.

F-11

KWESST MICRO SYSTEMS INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Three and nine months ended June 30, 2022, and 2021
(Expressed in Canadian dollars, except share amounts)

The purchase consideration consisted of:

• 1,000,000 common shares of KWESST; and
• 500,000 warrants to purchase our common shares at $0.70 each; 25% vesting on the first anniversary of the closing of the acquisition and 25% per annum thereafter. These warrants will expire on April 29, 2026.

Additionally, we will pay 7% royalty on annual sales of the PARA OPS^TM system to DEFSEC, net of taxes and duties, up to a maximum of $10 million, subject to minimum annual royalty payments starting in 2022. At closing of the acquisition, we made an upfront payment of $150,000 as an advance on future royalty payments. 

The minimum annual royalty payments are as follows:

Date		Amount
April 29 2023	$	150,000
April 29 2024	$	150,000
April 29 2025	$	200,000
April 29 2026	$	200,000
April 29 2027	$	250,000
April 29 2028	$	250,000
April 29 2029	$	300,000
April 29 2030	$	300,000
April 29 2031	$	350,000
April 29 2032	$	350,000
Total	$	2,500,000

The royalty payment obligation of the Purchase Agreement ("Agreement") will expire in 20 years unless terminated earlier under the terms set out in the Agreement.  At our sole discretion, we may terminate this Agreement for convenience, including if market conditions for sales of the PARA OPS^TM system become unfavorable subject 60 day's prior written notice.  Upon termination, we will be fully released and discharged by DEFSEC including the outstanding future royalties and any unvested warrants shall be immediately cancelled.  In return, we will return all intellectual property rights relating to the PARA OPS^TM system to DEFSEC.

The purchase price allocation was determined as follows:

	Number		Fair Value
Common shares	1,000,000	$	1,290,000
Warrants	500,000	$	425,000
Minimum royalty payments		$	1,191,219
Total		$	2,906,219
Identifiable intangible assets
Technology asset		$	2,906,219

We estimated the fair value as follows:

• Common shares: based on KWESST's closing stock price on April 29, 2021.

F-12

KWESST MICRO SYSTEMS INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Three and nine months ended June 30, 2022, and 2021
(Expressed in Canadian dollars, except share amounts)

• Warrants: based on using the Black Scholes option model with the following key inputs: a) exercise price of $0.70, underlying stock price of $1.29, risk free rate of 0.48%, expected life of three years, and expected volatility of 80%.
• Minimum royalty payments: based on the income approach, specifically discounted cash flows, using a discount rate of 13.7% per annum.

During the three and nine months ended June 30, 2022, we recorded $40,393 and $113,899, respectively, of accretion cost relating to the discounted minimum royalty payments, which is included in net finance costs in the condensed consolidated interim statement of net loss and comprehensive loss (three and nine months ended June 30, 2021 - $25,567 and $25,567, respectively). As at June 30, 2022, $1,222,976 of accrued royalties liability was outstanding (2021 - $1,105,756).

5.Trade and other receivables

The following table presents trade and other receivables for KWESST:

		June 30, 2022		September 30, 2021
Trade receivables	$	94,083	$	-
Unbilled revenue		-		308,728
Sales tax recoverable		100,398		183,761
Investment tax credits refundable		-		206,762
Total	$	194,481	$	699,251

There was no impairment of trade and other receivables during the three and nine months ended June 30, 2022 (2021 - $nil).

The following table presents changes in unbilled receivables:

		June 30, 2022			September 30, 2021
Balance, beginning of period	$	308,728		$	-
Revenue in excess of billings, net of amounts transferred to trade receivables		-			308,728
Transferred to trade receivables		(308,728	)		-
Balance, end of period	$	-		$	308,728
Current	$	-		$	308,728
Non-current	$	-		$	-

6.Inventories

The following table presents a breakdown of inventories:

		June 30, 2022		September 30, 2021
Finished goods	$	66,594	$	-
Work-in-progress		18,843		-
Raw materials		359,563		90,299
Total	$	445,000	$	90,299

There was no impairment of inventories during the three and nine months ended June 30, 2022 (2021 - $nil).

F-13

KWESST MICRO SYSTEMS INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Three and nine months ended June 30, 2022, and 2021
(Expressed in Canadian dollars, except share amounts)

7.Intangible assets

The following table presents intangible assets for KWESST:

Cost		PhantomTM System		PARA OPSTM System(1)		Patent		ARWENTM			Total
Balance at September 30, 2021	$	564,700	$	2,906,219	$	-	$	-		$	3,470,919
Additions		365,947		372,658		28,783		-			767,388
Acquisition  (Note 4)		-		-		-		165,596			165,596
Recognition of open orders (2)		-		-		-		(159,650	)		(159,650	)
Balance at June 30, 2022	$	930,647	$	3,278,877	$	28,783	$	5,946		$	4,244,253

(1)In January 2022, we have branded the technology known as the Low Energy Cartridge system as PARA OPS^TM system.

(2)This represents the open customer orders at the time of the acquisition measured at fair value, which were subsequently delivered to customers during the period. 

The balance at June 30, 2022 for Phantom^TM and PARA OPS^TM represents the acquired technology asset (i.e. intellectual properties), coupled with additional capitalized development costs. As both product lines have not yet reached commercialization, no amortization charge was recorded for the three and nine months ended June 30, 2022 (2021 - $nil).  The patent relates to the PARA OPS^TM system. Management anticipates the estimated useful life to be five years for both technology assets subsequent to the expected commercialization date and the estimated useful life of the patent will be determined subsequent to the approval of the patent.

For the three and nine months ended June 30, 2022, management concluded there was no impairment on the intangible assets (three and nine months ended June 30, 2021 - $nil and $55,376, respectively).

8.Accounts payable and accrued liabilities

The following table presents the accounts payable and accrued liabilities for KWESST:

		June 30, 2022		September 30, 2021
Trade payable	$	1,354,235	$	620,041
Accrued liabilities		661,426		384,239
Salary and vacation payable		248,041		122,922
Total	$	2,263,702	$	1,127,202

9. Related party transactions

In November 2019, KWESST hired SageGuild LLC to assist us in promoting our product offerings in the United States.  From January 28, 2021 to June 24, 2022, the CEO and sole shareholder of SageGuild LLC agreed to serve as director of KWESST Defense Systems U.S. Inc. and as a result SageGuild LLC was a related party to KWESST for this period. The total cash and share-based remuneration amounted to $81,761 and $251,809 for the three and nine months ended June 30, 2022, respectively (three and nine months ended June 30, 2021: $111,269 and $226,797, respectively). Except for the cash consideration recorded at the exchange amount, the share-based compensation was recorded at fair value.

At June 30, 2022, $90,758 (September 30, 2021 - $23,187) was owed to directors and officers for business expense reimbursements and wages, which was included in accounts payable and accrued liabilities.  Additionally, $74,000 of borrowings were owed to directors and officers at June 30, 2022 for their participation in the Unsecured Loans financing (see Note 10).

F-14

KWESST MICRO SYSTEMS INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Three and nine months ended June 30, 2022, and 2021
(Expressed in Canadian dollars, except share amounts)

10.Borrowings

There were no changes to KWESST's RBC Credit Facility since September 30, 2021, which consists of a $30,000 corporate credit card program collateralized by the short-term investment.

The following is a reconciliation of borrowings since September 30, 2021:

		CEBA Term Loan		Unsecured Loans			Total
Balance, September 30, 2021	$	53,251	$	-		$	53,251
Assumed from acquisition (Note 4)		26,238		-			26,238
Issuance at fair value		-		1,634,112			1,634,112
Deferred financing fees		-		(74,055	)		(74,055	)
Net borrowings		79,489		1,560,057			1,639,546
Accrued interest and accretion expense		5,818		162,652			168,470
Interest paid		-		(55,151	)		(55,151	)
Balance, June 30, 2022	$	85,307	$	1,667,558		$	1,752,865
Current	$	85,307	$	1,667,558		$	1,752,865
Non-current		-		-			-
Total	$	85,307	$	1,667,558		$	1,752,865

On March 11, 2022, we closed a non-secured loan financing with various lenders in an aggregate amount of $1,800,000 and an additional $200,000 on March 15, 2022, for a total of $2,000,000 (the "Unsecured Loans"). Certain directors and officers participated in this financing for an aggregate amount of $74,000. The Unsecured Loans bear interest at a rate of 9.0% per annum, compounded monthly and not in advance, and have a maturity of thirteen months, with KWESST having the option to repay the whole or any part of the Unsecured Loans, without penalty or premium, at any time prior to the close of business on the maturity date. The principal amount is due only at maturity.  As part of the terms of the Unsecured Loans, we issued an aggregate of 1,000,000 bonus common shares to the lenders. These common shares were issued pursuant to prospectus exemptions of applicable securities laws and therefore subject to a four-month plus one day trading restriction. 

As a result of issuing common shares and debt for a total combined cash consideration of $2,000,000, we allocated the gross proceeds to these two financial instruments based on their relative fair value.  To measure the fair value of the Unsecured Loans, we used the income approach and estimated a market discount rate of 22% to discount the future cash flows of the Unsecured Loans resulting in an estimated fair value of $1,634,112.  Accordingly, we allocated $1,634,112 of the $2,000,000 to Unsecured Loans and $365,888 to share capital for the bonus common shares issued (see Note 12(a)).

The total offering costs were $90,636, $74,055 of which was allocated to deferred financing fees and $16,581 allocated to share offering costs. The deferred financing fees are recognized as a reduction of the gross borrowings to be accreted over the life of the Unsecured Loans as a financing cost and the share offering costs were recognized as a reduction to common shares.

As the Unsecured Loans mature in April 2023, we presented these as current borrowings in the consolidated financial position.

F-15

KWESST MICRO SYSTEMS INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Three and nine months ended June 30, 2022, and 2021
(Expressed in Canadian dollars, except share amounts)

11.Contract liabilities

The following is a reconciliation of contract liabilities since September 30, 2021:

		Contract liabilities
Balance, September 30, 2021	$	-
Additions		300,340
Revenue recognized		(300,340	)
Balance, June 30, 2022	$	-

12.Share capital and Contributed Surplus

a)Share capital

Authorized

KWESST is authorized to issue an unlimited number of common shares.

Issued Common Shares

The following is a summary of changes in outstanding common shares since September 30, 2021:

	Number		Amount
Balance at September 30, 2021	48,965,631	$	17,215,068
Issued for  acquisition (Note 4)	277,576	$	377,503
Issued for conversion of contingent shares (Note 4)	61,264	$	83,319
Issued for debt settlements	10,000	$	19,000
Issued for exercise of warrants	1,330,000	$	277,098
Issued for conversion of share units	542,636	$	854,181
Issued for bonus shares relating to borrowings (Note 10)	1,000,000	$	365,888
Less: share offering costs for the period		$	(26,323	)
Balance at June 30, 2022	52,187,107	$	19,165,734

Refer to Note 20 (a) Subsequent Event for share issuances subsequent to June 30, 2022.

b)Warrants

The following is a summary of changes in outstanding warrants since September 30, 2021:

	Number of warrants			Weighted average exercise price
Outstanding at September 30, 2021	13,901,640		$	0.74
Issued (Note 4)	200,000		$	1.72
Exercised	(1,330,000	)	$	0.26
Expired	(84,622	)	$	0.45
Outstanding at June 30, 2022	12,687,018		$	0.81
Exercisable at June 30, 2022	12,062,018		$	0.92

F-16

KWESST MICRO SYSTEMS INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Three and nine months ended June 30, 2022, and 2021
(Expressed in Canadian dollars, except share amounts)

The following table provides additional information on the total outstanding warrants at June 30, 2022:

	Number outstanding		Fair value (1)	Expiry Date
Founders' warrants:
Exercise price of $0.20	5,520,000	$	1,013	January 1, 2024
Exercise price of $0.20	1,900,000	$	18,865	June 14, 2024
GhostStep's warrants:
Exercise price of $0.50	250,000	$	60,000	January 15, 2023
April 2021 equity financing:
Exercise price of $1.75	3,274,657	$	785,918	April 29, 2023
Exercise price of $1.75	40,000	$	9,600	August 25, 2023
LEC's warrants:
Exercise price of $0.70	500,000	$	425,000	April 29, 2026
September 2021 equity financing:
Exercise price of $2.35	750,000	$	390,000	September 16, 2023
Broker warrants:
Exercise price of $0.70	69,862	$	14,259	July 9, 2022
Exercise price of $1.75	137,499	$	33,000	April 29, 2023
Exercise price of $2.00	45,000	$	32,400	September 16, 2023
Acquisition of Police Ordnance (Note 4):
Exercise price of $1.72	200,000	$	132,000	December 15, 2024
	12,687,018	$	1,902,055

^{(1)Fair value is calculated based on the grant date fair value and number outstanding at June 30, 2022 and therefore it does not represent the fair value at June 30, 2022.}

The fair value for the warrants issued during the nine months ended June 30, 2022, was determined using the Black-Scholes option model and key inputs:

		Acquisition of POC
Exercise Price	$	1.72
Stock price	$	1.36
Volatility		84.7%
Dividend Yield		Nil
Risk-free interest rate		1.04%
Expected life		3
Weighted average fair value per warrant	$	0.66

Refer to Note 20 (a) Subsequent Event for warrants issued subsequent to June 30, 2022.

c)Contributed Surplus 

Share-based compensation

For the three and nine months ended June 30, 2022, KWESST recorded stock-based compensation expenses of $524,931 and $1,875,392, respectively (2021: $520,423 and $1,398,881, respectively). 

F-17

KWESST MICRO SYSTEMS INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Three and nine months ended June 30, 2022, and 2021
(Expressed in Canadian dollars, except share amounts)

(i)Stock Options

The following is summary of changes in outstanding options since September 30, 2021.

	Number of options			Weighted average exercise price
Outstanding at September 30, 2021	4,167,516		$	1.37
Granted	365,000			1.64
Forfeited	(322,813	)		1.65
Outstanding at June 30, 2022	4,209,703		$	1.37
Options exercisable at June 30, 2022	3,242,703		$	1.28

At June 30, 2022, there were 981,254 stock options available for grant under KWESST's LTIP.

For the options granted during the nine months ended June 30, 2022, the per share weighted-average fair value of stock options was $0.89 using the Black-Scholes option model with the following weighted-average assumptions:

Stock price	$1.24 to $1.81
Exercise price	$1.24 to $1.81
Volatility	85.21%
Dividend yield	Nil
Risk-free interest rate	1.15%
Expected life (years)	3.00
Weighted-average fair value per option	$    0.89

Amended Stock option grants

There were no amended stock option grants during the nine months ended June 30, 2022.

During the nine months ended June 30, 2021, the Board approved the acceleration of vesting for 385,500 options and the cancellation of 250,000 options. This resulted in an additional share-based compensation charge of $65,813.

(ii)Share Units

The following is summary of changes in share units since September 30, 2021.

	RSUs		PSUs		SARs	Total
Outstanding at September 30, 2021	1,139,072		200,000		150,000	1,489,072
Granted	750,784		1,256,000		36,000	2,042,784
Vested and converted to common shares	(356,036	)	(186,600	)	-	(542,636	)
Vested and repurchased for withholding taxes	(5,846	)	(17,400	)	-	(23,246	)
Forfeited	-		(420,000	)	-	(420,000	)
Outstanding at June 30, 2022	1,527,974		832,000		186,000	2,545,974

At June 30, 2022, there were 1,105,193 Share Units available for grant under KWESST's LTIP.

F-18

KWESST MICRO SYSTEMS INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Three and nine months ended June 30, 2022, and 2021
(Expressed in Canadian dollars, except share amounts)

13.Earnings (loss) per share

The following table summarizes the calculation of the weighted average basic number of basic and diluted common shares to calculate the earnings (loss) per share as reported in the condensed consolidated interim statements of net loss and comprehensive loss:

	Three months ended June 30, 2022	Three months ended June 30, 2021	Nine months ended June 30, 2022	Nine months ended June 30, 2021
Issued common shares,  beginning of period	51,484,343	42,507,387	48,965,631	41,266,176
Weighted average effect of shares issued from:
Acquisition of Police Ordnance (Note 4)	-	-	200,304	-
Exercise of options	-	54,816	-	484,936
Exercise of warrants	160,000	-	543,241	253,502
Debt settlements	-	-	9,084	66,364
Conversion of stock units	297,462	1,954	157,229	499
Conversion of contingent shares (Note 4)	46,969	-	15,484	-
Issuance of bonus shares (Note 10)	-	-	397,070	-
Private placements	-	2,460,310	-	803,061
Asset acquisitions	-	888,667	-	227,106
Amended license	-	103,511	-	24,908
Weighted average number of basic common shares	51,988,774	46,016,645	50,288,043	43,126,552
Dilutive securities:			-	-
Stock options	-	-	-	-
Warrants	-	-	-	-
Weighted average number of dilutive common shares	51,988,774	46,016,645	50,288,043	43,126,552

At June 30, 2022 and 2021, all dilutive securities were anti-dilutive because of KWESST's net loss for the above periods.

14.Revenue

The following table, revenue from contracts with customers is disaggregated by primary geographical market, major products and service lines, and timing of revenue recognition.

		Three months ended June 30, 2022		Three months ended June 30, 2021		Nine months ended June 30, 2022		Nine months ended June 30, 2021
Major products / service lines
Digitization	$	157,900	$	497,792	$	314,515	$	1,080,933
ARWENTM		100,684		-		111,176		-
Training and services		23,495		-		39,169		-
Other		353		23,932		1,288		34,824
	$	282,432	$	521,724	$	466,148	$	1,115,757
Primary geographical markets
United States	$	27,607	$	497,252	$	48,658	$	1,080,393
Canada		254,825		24,472		417,490		35,364
	$	282,432	$	521,724	$	466,148	$	1,115,757
Timing of revenue recognition
Products and services transferred over time	$	181,395	$	497,252	$	353,684	$	1,080,393
Products transferred at a point in time		101,037		24,472		112,464		35,364
	$	282,432	$	521,724	$	466,148	$	1,115,757

F-19

KWESST MICRO SYSTEMS INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Three and nine months ended June 30, 2022, and 2021
(Expressed in Canadian dollars, except share amounts)

At June 30, 2022, our total contracted not yet recognized revenue was $nil (2021 - $146,542).

For the three and nine months ended June 30, 2022, one customer accounted for 55.91% and 63.90% of the total revenue (2021 - one customer accounted for 95.31% and 96.83%, respectively).

15.Net finance costs

The following table presents a breakdown of net finance costs for the following periods:

		Three months ended June 30, 2022			Three months ended June 30, 2021			Nine months ended June 30, 2022			Nine months ended June 30, 2021
Interest expense from:
Borrowings (interest and accretion expense)	$	134,563		$	4,666		$	162,652		$	12,336
Accrued royalties liability - accretion expense		40,393			25,567			113,899			25,567
Lease obligations		7,562			(2,891	)		23,590			25,916
Other		2,709			1,042			7,668			3,784
Total interest expense		185,227			28,384			307,809			67,603
Interest income		(1,050	)		(604	)		(3,511	)		(6,746	)
Net finance costs	$	184,177		$	27,780		$	304,298		$	60,857

 16.Financial instruments

Financial risk management

We are exposed to a number of financial risks arising through the normal course of business as well as through its financial instruments. Our overall business strategies, tolerance of risk and general risk management philosophy are determined by the directors in accordance with prevailing economic and operating conditions.

For the three and nine months ended June 30, 2022, there were no material changes to KWESST's financial risks as disclosed in Note 22 of the audited consolidated financial statements for the year ended September 30, 2021.

At June 30, 2022, our contractual obligations were as follows: 

Payment due:		Total		Within 1 Year		1 to 3 years		3 to 5 years
Minimum royalty commitments	$	2,500,000	$	150,000	$	350,000	$	2,000,000
Borrowings		2,090,000		2,090,000		-		-
Accounts payable and accrued liabilities		2,263,702		2,263,702		-		-
Lease obligations		351,000		93,600		187,200		70,200
Other commitments		12,886		12,886		-		-
Short-term rental obligations		10,574		10,574		-		-
Total contractual obligations	$	7,228,162	$	4,620,762	$	537,200	$	2,070,200

At June 30, 2022, we had negative $3,094,431 (September 30, 2021 - positive $2,896,207) in working capital (current assets less current liabilities). 

F-20

KWESST MICRO SYSTEMS INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Three and nine months ended June 30, 2022, and 2021
(Expressed in Canadian dollars, except share amounts)

17.  Supplemental cash flow information

The following table presents changes in non-cash working capital:

		Nine months ended June 30, 2022			Nine months ended June 30, 2021
Trade and other receivables	$	609,202		$	23,580
Inventories		(11,046	)		(442,074	)
Prepaid expenses and other		386,904			36,979
Accounts payable and accrued liabilities		934,025			(876,121	)
Contract liabilities		-			(7,053	)
Corporate taxes payable		(32,338	)		-
Deposits		-			150,000
Accrued royalties liability		-			1,116,299
	$	1,886,747		$	1,610

The following is a summary of non-cash items that were excluded from the Statements of Cash Flows for the nine months ended June 30, 2022:

• $83,319 fair value of 61,264 contingent shares settled via common shares;
• $19,000 debt settlement via common shares;
• $61,173 fair value of warrants exercised and transferred to share capital from warrants; and
• $125,000 for 250,000 warrants exercised in connection with the GhostStep^TM acquisition in June 2020.

The following is a summary of non-cash items that were excluded from the Statements of Cash Flows for the nine months ended June 30, 2021:

• $63,949 debt settlement via common shares;
• $125,000 for 250,000 exercised warrants in connection with the GhostStep^TM acquisition in June 2020; 
• $102,991 fair value of warrants exercised and transferred to share capital;
• $203,516 fair value of options exercised and transferred to share capital from contributed surplus;
• $1,715,000 fair value of common shares and warrants issued for the acquisition of the PARA OPS^TM system;
• $137,000 fair value of common shares issued for the amended and restated license agreement with AerialX; and
• $169,832 share offering costs relating to the Broker Compensation Options.

18.Commitments and contingencies

There was no significant change to the commitments and contingencies as disclosed in Note 26 of the audited consolidated financial statements for the year ended September 30, 2021.

19.Segmented information

Our Executive Chairman has been identified as the chief operating decision maker. The Executive Chairman evaluates our performance and allocates resources based on the information provided by our internal management system at a consolidated level.  We have determined that we have only one operating segment.

At June 30, 2022, and 2021, all of KWESST's property and equipment are located in Canada, including the right-of-use assets.

F-21

KWESST MICRO SYSTEMS INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Three and nine months ended June 30, 2022, and 2021
(Expressed in Canadian dollars, except share amounts)

20.  Subsequent events

a)Non-brokered private placement

On July 14, 2022, we closed a non-brokered private placement, resulting in the issuance of 1,600,000 units of KWESST ("July 2022 Units"), at a price of $0.215 per July 2022 Unit (the "Issue Price"), for aggregate gross proceeds of $344,000 (the "July 2022 Offering").

Each July 2022 Unit is comprised of one common share and one-half common share purchase warrant (the "Warrants"). Each Warrant entitles its holder to acquire one additional common share of KWESST at a price of $0.285 for a period of 24 months from the closing date.  Accordingly, we issued 800,000 Warrants under the July 2022 Offering. There was no finder fee paid in this private placement.

Certain of our directors and officers (the "Insiders") purchased 406,975 Units for a total consideration of $87,500. The issuance of Units to the Insiders constitutes a related party transaction but is exempt from the formal valuation and minority approval requirements of Multilateral Instrument 61-101 - Protection of Minority Security Holders in Special Transactions ("MI 61-101") as KWESST's securities are not listed on any stock exchange identified in Section 5.5(b) of MI 61-101 and neither the fair market value of the units issued to the Insiders, nor the fair market value of the entire private placement, exceeds 25% of our market capitalization.

All securities issued in connection with the July 2022 Offering are subject to a statutory hold period in Canada expiring four (4) months and one (1) day from the closing of the Offering. We received final acceptance by the TSX Venture Exchange.

F-22

Consolidated Financial Statements of

KWESST MICRO SYSTEMS INC.

Year ended September 30, 2021,

Nine months ended September 30, 2020, and

Year ended December 31, 2019

(Expressed in Canadian Dollars)

F-23

KWESST MICRO SYSTEMS INC.

Table of contents for the year ended September 30, 2021, nine months ended September 30, 2020, and year ended December 31, 2019

	Page
Independent Auditor's Report	F-25
FINANCIAL STATEMENTS
Consolidated Statements of Financial Position	F-26
Consolidated Statements of Net Loss and Comprehensive Loss	F-27
Consolidated Statements of Changes in Shareholders' Equity	F-28
Consolidated Statements of Cash Flows	F-29
Notes to the Consolidated Financial Statements	F-30

F-24

INDEPENDENT AUDITOR'S REPORT

To the Shareholders of

KWESST Micro Systems Inc.

Opinion

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors
KWESST Micro Systems Inc.:

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheet of KWESST Micro Systems Inc. (the Company) as of September 30, 2021, the related consolidated statements of net loss and comprehensive loss, stockholders’ equity, and cash flows for the year then ended, and the related notes  (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2021, and its financial performance and its cash flows for the year then ended in conformity with International Financial Reporting Standards as issued by the International Accounting Standard Board.

Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2(a) to the consolidated financial statements, the Company has incurred significant losses and negative cash flows from operations since inception that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2(a). The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion. 

/s/ KPMG LLP

We have served as the Company’s auditor since 2021

Ottawa, ON
November 24, 2021

F-25

KWESST MICRO SYSTEMS INC.
Consolidated Statements of Financial Position
At September 30, 2021, September 30, 2020, and December 31, 2019

In Canadian dollars	Notes		September 30, 2021			September 30, 2020			December 31, 2019
						(Adjusted - see Note 8)
ASSETS
Cash		$	2,688,105		$	3,073,760		$	21,615
Restricted short-term investment	12		30,000			-			-
Trade and other receivables	5		699,251			480,917			219,803
Inventories	6		90,299			-			-
Prepaid expenses and other			548,042			441,837			54,075
Current assets			4,055,697			3,996,514			295,493
Property and equipment	7		903,649			174,644			70,122
Right-of-use assets	8		266,214			327,576			184,472
Deposit	8		21,367			19,341			-
Intangible assets	9		3,470,919			644,702			-
Other assets	26		-			150,000			150,000
Non-current assets			4,662,149			1,316,263			404,594
Total Assets		$	8,717,846		$	5,312,777		$	700,087
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Accounts payable and accrued liabilities	10	$	1,127,202		$	818,274		$	198,687
Lease obligations	13		32,288			44,128			85,468
Related party loans	11		-			218,276			289,828
Borrowings	12		-			32,273			-
Contract liabilities	14		-			7,053			-
Financial derivative liabilities	22		-			-			29,463
Current liabilities			1,159,490			1,120,004			603,446
Accrued royalties liability	4(a)		1,105,756			-			-
Lease obligations	13		275,621			307,909			117,218
Borrowings	12		53,251			-			-
Convertible notes	15		-			-			210,819
Non-current liabilities			1,434,628			307,909			328,037
Total Liabilities			2,594,118			1,427,913			931,483
Shareholders' Equity
Share capital	16(a)		17,215,068			9,374,563			2,284,353
Warrants	16(b)		1,848,389			277,170			21,050
Contributed surplus	16(c)		2,458,211			306,708			-
Accumulated other comprehensive loss			(8,991	)		-			-
Accumulated deficit			(15,388,949	)		(6,073,577	)		(2,536,799	)
Total Shareholders' Equity			6,123,728			3,884,864			(231,396	)
Total Liabilities and Shareholders' Equity		$	8,717,846		$	5,312,777		$	700,087

See Note 2(a) Going concern and Note 26 Commitments and contingencies.
See accompanying notes to consolidated financial statements.

On behalf of the Board of Directors:
(signed) John McCoach, Director	(signed) David Luxton , Director

F-26

KWESST MICRO SYSTEMS INC.
Consolidated Statements of Net Loss and Comprehensive Loss
Year ended September 30, 2021, nine months ended September 30, 2020, and year ended December 31, 2019

In Canadian dollars	Notes		Year ended September 30, 2021			Nine months ended September 30, 2020			Year ended December 31, 2019
						(Adjusted - see Note 8)
Revenue	18	$	1,275,804		$	861,917		$	509,148
Cost of sales			(798,888	)		(247,113	)		(85,101	)
Gross profit			476,916			614,804			424,047
Operating expenses
General and administrative	4(d)		4,057,167			2,723,861			397,990
Selling and marketing			3,484,159			564,266			36,681
Research and development, net	21(a)		2,138,138			817,584			1,003,705
Total operating expenses	19		9,679,464			4,105,711			1,438,376
Operating loss			(9,202,548	)		(3,490,907	)		(1,014,329	)
Other income (expenses)
Fair value adjustments on derivatives	22		-			29,463			113,178
Net finance costs	20		(107,751	)		(61,397	)		(245,147	)
Foreign exchange loss			(3,742	)		(13,937	)		(982	)
Loss on disposals			(1,331	)		-			-
Total other expenses			(112,824	)		(45,871	)		(132,951	)
Net loss		$	(9,315,372	)	$	(3,536,778	)	$	(1,147,280	)
Other comprehensive loss:
Items that are or may be reclassified subsequently to profit or loss:
Foreign currency translation differences			(8,991	)		-			-
Total comprehensive loss		$	(9,324,363	)	$	(3,536,778	)	$	(1,147,280	)
Net loss per share
Basic and diluted		$	(0.21	)	$	(0.11	)	$	(0.07	)
Weighted average number of shares outstanding
Basic and diluted	17		44,290,536			30,844,129			17,430,077

See accompanying notes to consolidated  financial statements.

F-27

KWESST MICRO SYSTEMS INC.
Consolidated Statements of Changes in Shareholders' Equity 
Year ended September 30, 2021, nine months ended September 30, 2020, and year ended December 31, 2019

In Canadian dollars																		Total Shareholders' Equity
	Notes		Share capital			Warrants			Contributed surplus			Translation reserve			Deficit
Balance, December 31, 2018		$	200		$	-		$	-		$	-		$	(1,389,519	)	$	(1,389,319	)
Shares issued for cash	16(a)		1,014,948			-			-			-			-			1,014,948
Shares issued for debt	16(a)		1,269,205			1,192			-			-			-			1,270,397
Warrants issued for debt	16(b)		-			19,858			-			-			-			19,858
Net loss			-			-			-			-			(1,147,280	)		(1,147,280	)
Balance, December 31, 2019		$	2,284,353		$	21,050		$	-		$	-		$	(2,536,799	)	$	(231,396	)
Shares and warrants issued for cash	16(a),(b)		4,568,013			76,120			-			-			-			4,644,133
Shares for converted debt and interest	16(a)		1,583,881			-			-			-			-			1,583,881
Shares issued for performance incentive	16(a)		731,500			-			-			-			-			731,500
Shares from Foremost's QT	4(b)		628,949			-			41,155			-			-			670,104
Shares and warrants issued on asset acquisition	4(c)		167,280			180,000			-			-			-			347,280
Stock options exercised	16(c)		78,080			-			(17,531	)		-			-			60,549
Shares for consulting services	16(a)		32,393			-			-			-			-			32,393
Share-based compensation	16(c)		-			-			283,084			-			-			283,084
Share offering costs	16(a)		(699,886	)		-			-			-			-			(699,886	)
Net loss	8		-			-			-			-			(3,536,778	)		(3,536,778	)
Balance, September 30, 2020 (adjusted)		$	9,374,563		$	277,170		$	306,708		$	-		$	(6,073,577	)	$	3,884,864
Shares for debt settlements	16(a)		63,866			-			-			-			-			63,866
Warrants exercised	16(b)		815,307			(175,741	)		-			-			-			639,566
Shares and warrants issued on asset acquisition	4(a)		1,290,000			425,000			-			-			-			1,715,000
Shares for amended license	26(a)		137,000			-			-			-			-			137,000
Shares and warrants issued for cash	16(a),(b)		4,721,818			1,280,654			-			-			-			6,002,472
Stock options and warrants exercised	16(c)		1,639,695			41,306			(531,263	)		-			-			1,149,738
Share-based compensation	16(c)		-			-			2,462,207			-			-			2,462,207
Restricted share units vested	16(c)		12,498			-			(12,498	)		-			-			-
Share offering costs	16(a)		(839,679	)		-			233,057			-			-			(606,622	)
Other comprehensive loss			-			-			-			(8,991	)		-			(8,991	)
Net loss			-			-			-			-			(9,315,372	)		(9,315,372	)
Balance, September 30, 2021		$	17,215,068		$	1,848,389		$	2,458,211		$	(8,991	)	$	(15,388,949	)	$	6,123,728

See accompanying notes to consolidated financial statements.

F-28

KWESST MICRO SYSTEMS INC.
Consolidated Statements of Cash Flows
Year ended September 30, 2021, nine months ended September 30, 2020, and year ended December 31, 2019

In Canadian dollars			Notes		Year ended September 30, 2021			Nine months ended  September 30, 2020			Year ended December 31, 2019
								(Adjusted  - see Note 8)
OPERATING ACTIVITIES
	Net loss			$	(9,315,372	)	$	(3,536,778	)	$	(1,147,280	)
	Items not affecting cash:
		Depreciation and amortization	7, 8, 27		140,990			103,397			102,142
		Impairment of intangible assets	9		55,376			-			-
		Share-based compensation	16(c)		2,462,207			283,084			-
		Shares issued  for M&A advisory and consulting services			-			763,893			-
		Shares for amended license	26(a)		137,000			-			-
		Fair value adjustments on derivative liabilities	22		-			(29,463	)		(113,178	)
		Non-cash listing expense	4(b)		-			814,703			-
		Net finance costs	20		107,751			61,217			230,858
		Loss on disposals			1,331			-			-
	Changes in non-cash working capital items		23		198,484			(245,095	)		(141,575	)
	Interest paid				(42,980	)		(6,612	)		(24,523	)
Cash used in operating activities					(6,255,213	)		(1,791,654	)		(1,093,556	)
INVESTING ACTIVITIES
	Acquisition of property and equipment		7		(809,964	)		(133,927	)		(20,190	)
	Investments in intangible assets		9		(83,228	)		(163,230	)		-
	Deposit for advanced royalties		4(a)		(150,000	)		-			-
	Deposit for long-term office lease				-			(38,212	)		-
	Purchase of restricted short-term investment		12		(30,000	)		-			-
	Acquisition of technology asset		4(c)		-			(134,192	)		-
	Cash acquired on closing of Foremost		4(b)		-			78,589			-
Cash flows used in investing activities					(1,073,192	)		(390,972	)		(20,190	)
FINANCING ACTIVITIES
	Proceeds from the issuance of common shares and warrants		16(a)		6,002,472			4,355,171			1,014,948
	Payments of share offering costs		16(a)		(606,622	)		(164,716	)		-
	Proceeds from convertible notes		16(a)		-			1,081,504			-
	Proceeds from borrowings		12		326,000			40,000			-
	Repayment of borrowings		12		(306,000	)		-			(10,747	)
	Repayments to related party loans		11		(218,276	)		(80,000	)		(70,513	)
	Proceeds from related party loans		11		-			-			310,684
	Repayments of lease obligations		13		(44,128	)		(58,188	)		(77,367	)
	Repayments of convertible notes		15		-			-			(31,644	)
	Proceeds from exercise of warrants		16(b)		680,872			-			-
	Proceeds from exercise of stock options		16(c)		1,108,432			61,000			-
Cash flows provided by financing activities					6,942,750			5,234,771			1,135,361
Net change in cash during the period					(385,655	)		3,052,145			21,615
Cash, beginning of period					3,073,760			21,615			-
Cash, end of period				$	2,688,105		$	3,073,760		$	21,615

See Note 23 Supplemental cash flow information.

See accompanying notes to consolidated  financial statements.

F-29

KWESST MICRO SYSTEMS INC.

Notes to Consolidated Financial Statements

Year ended September 30, 2021, nine months ended September 30, 2020, and

year ended December 31, 2019

(Expressed in Canadian dollars, except share amounts)

1.Corporate information

KWEEST Micro Systems Inc. (the "Company" or "KWESST") was incorporated on November 28, 2017, under the laws of the Province of British Columbia. The Company's registered office is located at 550 Burrard Street, Suite 2900, Vancouver, British Columbia, Canada. Its corporate office is located at Unit 1, 155 Terrence Matthews Crescent, Kanata, Ontario, Canada. It also has representative offices in the following foreign locations: Washington DC (United States), London (United Kingdom), and Abu Dhabi (United Arab Emirates).

KWESST develops and commercializes next-generation tactical systems. Key market segments and solutions addressed by KWESST technologies are: (i) breakthrough technology in non-lethal systems with broad application, including law enforcement and personal defence, (ii) modernized digitization of tactical forces for shared situational awareness and targeting, and (iii) counter-measures against threats such as drones, lasers and electronic detection.

KWESST's common stock is listed on the TSX-Venture Exchange ("TSX-V'') under the stock symbol of KWE and on the OTCQB® Venture Market under the stock symbol of KWEMF.

Following the closing of the Qualifying Transaction ("QT") pursuant to the policies of the TSX Venture Exchange ("TSX-V") - see Note 4 (b), KWESST changed its fiscal year end to September 30^th from December 31^st to be aligned with the U.S. government fiscal year, a key market for KWESST. Accordingly, these consolidated financial statements presented herein are for the fiscal year ended September 30, 2021, with comparatives for the nine months ended September 30, 2020, and year ended December 31, 2019.

2.Basis of preparation

(a)Going concern

These consolidated financial statements have been prepared assuming KWESST will continue as a going concern. The going concern basis of presentation assumes the Company will continue in operation for the foreseeable future and can realize its assets and discharge its liabilities and commitments in the normal course of business.

As an early-stage company, KWESST has not yet reached commercial production of its products and has incurred significant losses and negative operating cash flows from inception that have primarily been funded from financing activities. KWESST incurred $9.3 million net loss and negative operating cash flows of approximately $6.3 million for the year ended September 30, 2021 (2020 - $3.5 million net loss and negative operating cash flows of $1.8 million; 2019 - $1.1 million net loss and negative operating cash flows of $1.1 million).

The Company's ability to continue as a going concern and realize its assets and discharge its liabilities in the normal course of business is dependent upon closing timely additional sales orders and the ability to raise additional debt or equity financing, as required. There are various risks and uncertainties affecting KWESST's future financial position and its performance including, but not limited to:

• The market acceptance and rate of commercialization of the KWESST's product offerings;
• Ability to successfully execute its business plan;
• Ability to raise additional capital at acceptable terms;
• General local and global economic conditions, including the ongoing COVID-19 pandemic.

F-30

KWESST MICRO SYSTEMS INC.

Notes to Consolidated Financial Statements

Year ended September 30, 2021, nine months ended September 30, 2020, and

year ended December 31, 2019

(Expressed in Canadian dollars, except share amounts)

KWESST's strategy to mitigate these material risks and uncertainties is to execute timely a business plan aimed at continued focus on revenue growth, product development and innovation, improving overall gross profit, managing operating expenses and working capital requirements, and securing additional capital, as needed.

Failure to implement the Company’s business plan could have a material adverse effect on the Company’s financial condition and/or financial performance. There is no assurance that that the Company will be able to raise additional capital as they are required in the future. Accordingly, there are material risks and uncertainties that may cast significant doubt about KWESST’s ability to continue as a going concern.

These consolidated financial statements do not include any adjustments to the carrying amounts and classification of assets, liabilities and reported expenses that may otherwise be required if the going concern basis was not appropriate.

(b)Statement of compliance

These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB") and interpretations of the IFRS Interpretations Committee ("IFRIC"). 

The consolidated financial statements were authorized for issue by the Board of Directors on November 23, 2021.

(c)Principles of consolidation

These consolidated financial statements incorporate the financial statements of KWESST and the entities it controls.

Control is achieved where KWESST has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities, are exposed to, or have rights to, variable returns from the Company's involvement with the entity and have the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Company until the date on which control ceases. Profit or loss of subsidiaries acquired during the year are recognized from the date of acquisition or effective date of disposal as applicable. All intercompany transactions and balances have been eliminated.

At September 30, 2021, the Company has the following wholly-owned subsidiaries:

	Location	Equity %
KWESST Inc.	Kanata, Canada	100%
KWESST U.S. Inc.	Virginia, United States	100%

(d)Functional and presentation currency

The consolidated financial statements are presented in Canadian dollars ("CAD"), which is the functional currency of KWESST and its subsidiaries unless otherwise stated.

(e)Measurement basis

The consolidated financial statements have been prepared on the historical cost basis except for certain financial instruments measured at fair value. Historical cost is generally based on the fair value of the consideration given in exchange for assets.

F-31

KWESST MICRO SYSTEMS INC.

Notes to Consolidated Financial Statements

Year ended September 30, 2021, nine months ended September 30, 2020, and

year ended December 31, 2019

(Expressed in Canadian dollars, except share amounts)

(f)Comparative figures

For the year ended September 30, 2021, KWESST changed the presentation of its expenses in the consolidated statements net loss and comprehensive loss from by nature to by function.  KWESST made this change in presentation to provide more relevant financial information to facilitate peer benchmarking, particularly with peers in the United States. As a result, KWESST operating expenses are now presented as follows:  general and administration ("G&A"), selling and marketing ("S&M"), and net research and development ("R&D").

G&A expenses consist of corporate personnel costs, various management and administrative support functions, insurance, regulatory and other public company costs, professional fees relating to corporate matters, corporate advisory consulting costs, M&A related costs, depreciation and amortization expenses, and occupancy costs related to G&A costs.

S&M expenses consist of business development costs related to the market development activities and product commercialization, marketing support function, depreciation and amortization expenses and investor relations support function.

R&D expenses consist of costs incurred in performing R&D activities, including new product development, continuous product development, materials and supplies, personnel costs, external engineering consulting, patent procurement costs, depreciation and amortization expenses, and occupancy costs related to R&D activity. These costs are net of Canadian investment tax credits for qualified Scientific Research and Experimental Development ("SR&ED") projects.

As this change constitutes a change in accounting policy, KWESST has restated the presentation of the comparative expenses to conform with the current year's expense presentation.

This resulted in no change to the previously reported total operating expenses for the nine months ended September 30, 2020, and the year ended December 31, 2019. Refer to Note 19 for disclosure of expenses by nature.

(g)Use of judgments and estimates

The preparation of the consolidated financial statements in accordance with IFRS requires management to make judgments, estimates, and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income, expenses, and disclosure of contingent liabilities. Actual results may differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to estimates are recognized prospectively.

The current COVID-19 pandemic has significantly impacted health and economic conditions globally. While the COVID-19 has limited KWESST's ability to travel to foreign markets for business development during the year ended September 30, 2021, it has not significantly impacted KWESST's operations, including product development and delivery on customer contracts.  However, impacts related to COVID-19 pandemic are expected to continue to pose risks to KWESST for the foreseeable future and could have a significant impact to KWESST's business, operations or financial performance in a manner that is difficult for management to predict.

Judgments

Information about judgments made in applying accounting policies that have the most significant effects on the amounts recognized in these consolidated financial statements is included in the following notes:

F-32

KWESST MICRO SYSTEMS INC.

Notes to Consolidated Financial Statements

Year ended September 30, 2021, nine months ended September 30, 2020, and

year ended December 31, 2019

(Expressed in Canadian dollars, except share amounts)

• Note 4(a) - acquisition of LEC System: whether the estimated discount rate used to discount the minimum royalty payments is reasonable, and the reasonability of the volatility assumption used in the Black Scholes option model to estimate the fair value of the warrants issued to DEFSEC.

• Note 4(c) - acquisition of GhostStep® Technology: whether the fair value of KWESST's common shares and warrants issued was reasonable, and inputs used in accounting for the contingent annual payments.

• Note 16(c) - share-based compensation: whether the determination of KWESST's stock volatility, forfeiture rate, and expected life are reasonable in light of its limited operating history, all significant inputs in the valuation model to fair value options granted;

• Note 16(c) - broker compensation options: whether the Monte Carlo valuation model and number of simulations are reasonable to estimate the fair value of these options, coupled with the volatility assumption;

Estimates

Information about assumptions and estimation uncertainties at September 30, 2021 that have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities in the next financial year is included in the following notes:

• Note 5 - unbilled receivable: estimated percentage of completion for determining revenue recognition and related unbilled receivable amount;
• Note 9 - impairment test of intangible assets: key assumptions underlying recoverable amounts; and
• Note 21 - recognition of deferred tax assets: availability of future taxable profits against which deductible temporary differences and tax losses carried forward can be utilized.

3.Significant accounting policies

(a)Revenue recognition

Revenue is recognized upon transfer of control of products or services to customers at an amount that reflects the transaction price KWESST expects to receive in exchange for the products or services. KWESST's contracts with customers may include the delivery of multiple products and services, which are generally capable of being distinct and accounted for as separate performance obligations. The accounting for a contract or contracts with a customer that contain multiple performance obligations requires KWESST to allocate the contract or contracts transaction price to the identified distinct performance obligations based on the stand-alone selling price of each performance obligation.

F-33

KWESST MICRO SYSTEMS INC.

Notes to Consolidated Financial Statements

Year ended September 30, 2021, nine months ended September 30, 2020, and

year ended December 31, 2019

(Expressed in Canadian dollars, except share amounts)

Revenue from contracts with customers is recognized, for each performance obligation, either over a period of time or at a point in time, depending on which method reflects the transfer of control of the goods or services underlying the particular obligation to the customer.

For performance obligations satisfied over time, KWESST recognizes revenue over time using an input method, based on costs incurred to date relative to total estimated costs at completion, to measure progress toward satisfying such performance obligation (for non-recurring engineering services, the input method is based on hours). Under this method, costs that do not contribute to the performance of KWESST in transferring control of goods or services to the customer are excluded from the measurement of progress toward satisfying the performance obligation. In certain other situations, KWESST might recognize revenue at a point in time, when the criteria to recognize revenue over time are not met. In any event, when the total anticipated costs exceed the total anticipated revenues on a contract, such loss is recognized in its entirety in the period it becomes known.

KWESST may enter into contractual arrangements with a customer to deliver services on one project with respect to more than one performance obligation, such as non-recurring engineering, procurement, and training. When entering into such arrangements, KWESST allocates the transaction price by reference to the stand-alone selling price of each performance obligation. Accordingly, when such arrangements exist on the same project, the value of each performance obligation is based on its stand-alone price and recognized according to the respective revenue recognition methods described above.  For example, for non-recurring engineering services rendered over a contract period the revenue is recognized using the percentage of completion method; whereas for training services the revenue is recognized after the training is delivered (i.e. point in time).

KWESST accounts for a contract modification, which consists of a change in the scope or price (or both) of a contract, as a separate contract when the remaining goods or services to be delivered after the modification are distinct from those delivered prior to the modification and the price of the contract increases by an amount of consideration that reflects KWESST's stand-alone selling price of the additional promised goods or services. When the contract modification is not accounted for as a separate contract, KWESST recognizes an adjustment to revenue on a cumulative catch-up basis at the date of contract modification.

The timing of revenue recognition often differs from performance payment schedules, resulting in revenue that has been earned but not billed. These amounts are included in unbilled receivables. Amounts billed in accordance with customer contracts, but not yet earned, are recorded and presented as part of contract liabilities.

When a contract includes a significant financing component, the value of such component is excluded from the transaction price and is recognized separately as finance income or expense, as applicable.

(b)Financial instruments

KWESST recognizes a financial asset or a financial liability when it becomes a party to the contractual provisions of the instrument.

Trade and other receivables without a significant financing component are initially measured at the transaction price. All other financial assets and financial liabilities are initially recognized at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss ("FVTPL")) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognized immediately in profit or loss.

Financial assets

All financial assets are recognized and de-recognized on trade date.

F-34

KWESST MICRO SYSTEMS INC.

Notes to Consolidated Financial Statements

Year ended September 30, 2021, nine months ended September 30, 2020, and

year ended December 31, 2019

(Expressed in Canadian dollars, except share amounts)

Financial assets are recognized at fair value and subsequently classified and measured at:

a)Amortized cost;

b)Fair value through other comprehensive income ("FVOCI"); or

c)Fair value though profit or loss ("FVTPL").

KWESST determines the classification of its financial assets on the basis of both the business model for managing the financial assets and the contractual cash flows characteristics of the financial asset. Financial assets are not reclassified subsequent to their initial recognition unless the Company changes its business model for managing financial assets.

A financial asset is measured at amortized cost if it is held within a business model whose objective is to hold assets to collect contractual cash flows, and its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest of the principal amount outstanding. Financial assets classified at amortized cost are measured using the effective interest method. At September 30, 2021 KWESST classified the following as amortized cost:

• Cash
• Restricted short-term investment
• Trade and other receivables
• Lease deposit (non-current other asset)

All financial assets not classified and measured at amortized cost or FVOCI are measured at FVTPL. At September 30, 2021 KWESST did not have financial assets classified as FVOCI or FVTPL.

Expected credit losses

KWESST measures a loss allowance based on the lifetime expected credit losses. Lifetime expected credit losses are estimated based on factors such as KWESST's past experience of collecting payments, the number of delayed payments in the portfolio past the average credit period, observable changes in national or local economic conditions that correlate with default on receivables, financial difficulty of the borrower, and it becoming probable that the borrower will enter bankruptcy or financial re-organization.

Financial assets are written off when there is no reasonable expectation of recovery.

Financial liabilities

Financial liabilities are recognized at fair value and subsequently classified and measured at amortized cost or fair value though profit or loss ("FVTPL").

KWESST determines the classification of its financial liabilities at initial recognition. The Company has classified the following as amortized costs:

• Accounts payable and accrued liabilities
• Related party loans
• Borrowings
• Lease obligations
• Convertible notes

Financial liabilities at amortized cost are measured using the effective interest rate method.

F-35

KWESST MICRO SYSTEMS INC.

Notes to Consolidated Financial Statements

Year ended September 30, 2021, nine months ended September 30, 2020, and

year ended December 31, 2019

(Expressed in Canadian dollars, except share amounts)

At September 30, 2020 and December 31, 2019, KWESST classified financial derivative liabilities as FVTPL. Accordingly, fair value is remeasured at each reporting period with the fair value adjustment recognized in profit or loss. There was no outstanding financial derivative liability at September 30, 2021.

For convertible notes, these are initially segregated into their debt and equity components or derivative liability components at the date of issue, in accordance with the substance of the contractual agreements. The conversion feature of the convertible notes is presumed to be classified as a derivative financial liability unless it meets all the criteria to recognize as equity instrument under IAS 32.

De-recognition of financial liabilities

KWESST de-recognizes financial liabilities when its obligations are discharged, cancelled or they expire.

(c)Inventories

KWESST's inventories may consist of raw materials, work-in-progress ("WIP"), and finished goods. Inventories are measured at the lower of cost and net realizable value, with cost being determined using the weighted average cost method. The cost of WIP and finished goods includes the cost of raw materials, direct labour, and overhead. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. At each reporting period, management estimates the provision for obsolete and slow-moving inventory which may be reversed in subsequent periods, should the value subsequently be recovered.

(d)Property and equipment

Property and equipment are measured at cost less accumulated depreciation and accumulated impairment losses. Cost comprises the fair value of consideration given to acquire or construct an asset and includes the direct charges associated with bringing the asset to the location and condition necessary for putting it into use along with the future cost of dismantling and removing the asset. These assets are depreciated over their estimated useful lives using the straight-line method as this most closely reflects the expected pattern of consumption of the future economic benefits. Depreciation methods, useful lives and residual values are reviewed at each financial year end and adjusted prospectively, if appropriate.

The following table provides a summary of estimated useful lives for KWESST's property and equipment:

	Rate
Computer equipment	3 years
Computer software	3 years
Office furniture and equipment	5 years
R&D equipment	5 years
Sales demo equipment	2 years
Leasehold improvements	Shorter of useful life or remaining term of lease

At the end of each reporting period, KWESST reviews the carrying amounts of its property and equipment to determine whether there is any indication of impairment. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). The recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash flows of other assets or groups of assets (the "cash-generating unit, or CGU"). If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is recognized immediately in profit or loss.

F-36

KWESST MICRO SYSTEMS INC.

Notes to Consolidated Financial Statements

Year ended September 30, 2021, nine months ended September 30, 2020, and

year ended December 31, 2019

(Expressed in Canadian dollars, except share amounts)

Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

(e)Leases

At inception of a contract, KWESST assesses whether a contract is, or contains, a lease based on whether the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.

KWESST recognizes a right-of-use asset and a lease liability at the lease commencement date. The lease obligation is measured at the present value of the lease payments that are not paid at the commencement date of the lease, discounted using its incremental borrowing rate of 10% at the time. The right-of-use asset is initially measured based on the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle and remove the underlying asset or to restore the underlying asset or the site on which it is located, less any lease incentives received. The assets are depreciated to the earlier of the end of the useful life of the right-of-use asset or the lease term using the straight-line method as this most closely reflects the expected pattern of consumption of the future economic benefits. The lease term includes periods covered by an option to extend if KWESST is reasonably certain to exercise that option.  Lease terms range from 3 to 6 years for offices and printer. In addition, the right-of-use asset is periodically reduced by impairment losses, if any, and adjusted for certain remeasurements of the lease liability.

The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, KWESST's incremental borrowing rate. Variable lease payments that do not depend on an index or rate are not included in the measurement of the lease liability.

The lease liability is measured at amortized cost using the effective interest method. It is remeasured when there is a change in future lease payments arising from a change in an index or rate, if there is a change in KWESST's estimate of the amount expected to be payable under a residual value guarantee, or if KWESST changes its assessment of whether it will exercise a purchase, extension, or termination option. When the lease liability is remeasured in this way, a corresponding adjustment is made to the carrying value of the right-of-use asset or, is recorded in profit or loss if the carrying amount of the right-of-use asset has been reduced to zero.

KWESST has elected to apply the practical expedient not to recognize right-of-use assets and lease liabilities for short-term leases that have a lease term of 12 months or less and leases of low-value assets. The lease payments associated with these leases are recognized as an expense on a straight-line basis over the lease term.

(f)Intangible assets

(i)Research and development ("R&D") costs

Expenditure on research activities, undertaken with the prospect of gaining new scientific or technical knowledge and understanding, is recognized in profit or loss when incurred.

Development activities involve a plan or design for the production of new or substantially improved products and processes. Development expenditure is capitalized only if development costs can be measured reliably, the product or process is technically and commercially feasible, future economic benefits are probable, and KWESST has the intention and sufficient resources to complete the development and to use or sell the asset. The expenditure capitalized in respect of development activities includes the cost of materials, direct labor and overhead costs that are directly attributable to preparing the asset for its intended use, and capitalized borrowing costs. Other development expenditures are recognized in profit or loss when incurred.

F-37

KWESST MICRO SYSTEMS INC.

Notes to Consolidated Financial Statements

Year ended September 30, 2021, nine months ended September 30, 2020, and

year ended December 31, 2019

(Expressed in Canadian dollars, except share amounts)

(ii)Subsequent expenditure

Subsequent expenditure is capitalized only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditures, including expenditure on internally generated goodwill and brands, is recognized in profit or loss as incurred.

(iii)Amortization

Amortization is a systematic allocation of the amortizable amount of an intangible asset of its useful life. The amortizable amount is the cost of the asset less its estimated residual value. KWESST recognizes in profit or loss on a sales-based rate over the estimated useful lives of the intangible assets from the date they are available for use, since this method most closely reflects the expected pattern of consumption of the future economic benefits embodied in each asset. Where a sales-based rate could not be determined, the straight-line approach is used.

Internally generated intangible assets are not systematically amortized as long as they are not available for use i.e. they are not yet on site or in working condition for their intended use. Accordingly, intangible assets such as development costs are tested for impairment at least once a year, until such date as they are available for use.

(iv)Impairment

All intangible assets are periodically reviewed for impairment. The estimated present value of future cash flows associated with the intangible asset is determined and an impairment loss is recognized for the difference between this amount and the carrying amount as follows: the carrying amount of the asset is reduced to estimated present value of the future cash flows associated with the asset, discounted at the financial asset's original effective interest rate, and the resulting loss is directly recognized in profit or loss for the period.

(g)Provisions

A provision is recognized if, as a result of a past event, KWESST has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risk specific to the liability. The unwinding of the discount is recognized as a finance cost.

(h)Income taxes

Income tax expense comprises current income tax expense and deferred income tax expense. Current and deferred income taxes are recognized as an expense and included in profit or loss for the period, except to the extent that the tax arises from a transaction which is recognized in other comprehensive income or directly in shareholder's deficiency.

Current income tax

Current tax expense is the amount of income taxes payable (recoverable) in respect of the taxable income (tax loss) for a period. Current liabilities (assets) for the current and prior periods are measured at the amount expected to be paid to (recovered from) the taxation authorities, using the tax rates that have been enacted or substantively enacted by the end of the reporting period.

F-38

KWESST MICRO SYSTEMS INC.

Notes to Consolidated Financial Statements

Year ended September 30, 2021, nine months ended September 30, 2020, and

year ended December 31, 2019

(Expressed in Canadian dollars, except share amounts)

Deferred income tax

Deferred tax assets and liabilities are recognized for the temporary differences between transactions and carrying amounts of assets and liabilities that have been included in the consolidated financial statements and the amounts used for taxation purposes. Deferred income taxes are provided for using the liability method. Under the liability method, deferred income taxes are recognized for all significant temporary differences between the tax and financial statement bases of assets and liabilities and for certain carry-forward items. Deferred income tax assets are recognized only to the extent that it is probable that the deferred income tax assets will be realized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent it is no longer probable that the related tax benefit will be realized.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting period. Deferred income tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of the enactment or substantive enactment. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and KWESST intends to settle its current tax assets and liabilities on a net basis.

Investment tax credits

Investment tax credits relating to scientific research and experimental development expenditures are recorded in the fiscal period the qualifying expenditures are incurred based on management's interpretation of applicable legislation in the Income Tax Act of Canada. Credits are recorded provided there is reasonable assurance that the tax credit will be realized. Credits claimed are subject to review by the Canada Revenue Agency.

Credits claimed in connection with R&D activities are accounted for using the cost reduction method. Under this method, assistance and credits relating to the acquisition of equipment is deducted from the cost of the related assets, and those relating to current expenditures, which are primarily salaries and related benefits, are included in the determination of profit or loss as a reduction of the R&D expenses.

(i)Related party transactions

Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or common significant influence. Related parties may be individuals or corporate entities. A transaction is considered to be a related party transaction when there is a transfer of resources or obligations between related parties. Related party transactions are in the normal course of business and have commercial substance.

(j)Share-based compensation

KWESST has a Long-Term Incentive Plan ("LTIP") in which it may grant stock options, restricted share units ("RSUs"), performance stock units ("PSUs"), deferred stock units ("DSUs"), and stock appreciation rights ("SARs") to directors, employees and consultants. KWESST measures share-based compensation at fair value for all share-based awards granted under the LTIP.

F-39

KWESST MICRO SYSTEMS INC.

Notes to Consolidated Financial Statements

Year ended September 30, 2021, nine months ended September 30, 2020, and

year ended December 31, 2019

(Expressed in Canadian dollars, except share amounts)

Equity-settled service award

The grant date fair value of equity-settled share-based awards is recognized as an expense on a straight-line basis over the requisite service period, with a corresponding increase in equity, over the vesting period of the awards. For stock options, the grant date fair value is determined using the Black-Scholes option model (see Note 16(c) for key inputs used in this model). For share units, the grant date fair value is based on KWESST's closing stock price. Each tranche of an award is considered a separate award with its own vesting period and grand date fair value. The amount recognized as an expense is adjusted for estimated forfeitures.

Equity-settled performance award

The accounting for equity-settled performance award is the same as above, except compensation expense is subject to periodic adjustment based on the achievement of establishment performance criteria. 

Modified award

Where the terms of an equity-settled transaction award are modified, the minimum expense recognized is the expense as if the terms had not been modified and if the original terms of the award are met. An additional expense is recognized for any modification that increases the total fair value of the share-based payment transaction or is otherwise beneficial to the employees as measured at the date of acquisition.

(k)Foreign currency

Foreign currency transactions

The financial statements of KWESST and its Canadian wholly-owned subsidiary are measured using CAD as the functional currency. Transactions in currencies other than in CAD are translated at the exchange rates prevailing at the dates of the transactions. At the end of each reporting period, monetary items denominated in foreign currencies are translated to the functional currency at the rates prevailing at that date. Exchange differences on monetary items are recognized in profit or loss in the period in which they arise. Non-monetary items carried at fair value that are denominated in foreign currencies are translated to the functional currency at the rates prevailing at the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the rates at the date of the transaction and are not subsequently retranslated.

Foreign operations

The financial statements of KWESST U.S. Inc. are measured using the United States dollar ("USD") as its functional currency. Assets and liabilities have been translated into USD using exchange rates prevailing at the end of each reporting period. Income and expense items are translated at the average exchange rates for the period, unless exchange rates fluctuate significantly during that period, in which cases the exchange rates at the dates of the transactions are used. Exchange differences arising, if any, are recognized in other comprehensive income and accumulated in shareholders' equity.

(l)Earnings (loss) per share

Basic earnings (loss) per share is computed using net earnings (loss) over the weighted average number of common shares outstanding during the period. KWESST uses the treasury stock method to compute the dilutive effect of options, warrants, and similar instruments. Under this method, the dilutive effect on earnings per share is calculated presuming the exercise of outstanding options, warrants, and similar instruments. It assumes that the proceeds of such exercise would be used to repurchase common shares at the average market price during the period.

However, the calculation of diluted loss per share excludes the effects of various conversions and exercises of convertible debt, options and warrants that would be anti-dilutive.

F-40

KWESST MICRO SYSTEMS INC.

Notes to Consolidated Financial Statements

Year ended September 30, 2021, nine months ended September 30, 2020, and

year ended December 31, 2019

(Expressed in Canadian dollars, except share amounts)

(m)Reverse acquisition

KWESST was a capital pool company, which did not constitute a business as defined under IFRS 3 - Business Combination at the time of the QT and is therefore not within the scope of IFRS 3 (see Note 4(b)). However, the QT has some features of a reverse acquisition under IFRS 3. In the absence of a Standard that specifically applies to the QT, KWESST applied by analogy the guidance in IFRS 3 for reverse acquisitions in accordance with IAS 8 accounting policies, changes in accounting estimates and errors.

Application of the reverse acquisitions guidance by analogy results in the private operating entity KWESST Inc. being identified as the accounting acquirer, and the listed non-operating entity KWESST being identified as the accounting acquiree. The accounting acquirer is deemed to have issued shares to obtain control of the accounting acquiree KWESST. Because the QT is not within the scope of IFRS 3, KWESST accounted for it as an asset acquisition and the consideration as a share-based payment transaction which was accounted for in accordance with IFRS 2 - Share-based Payment.

According to IFRS 2, any difference in the fair value of the shares deemed to have been issued by the accounting acquirer and the fair value of the accounting acquiree's identifiable net assets represents a service received by the accounting acquirer. Regardless of the level of monetary or non-monetary assets owned by the non-listed operating entity, the entire difference was considered to be payment for a service of a stock exchange listing for its shares, and that no amount should be considered a cost of raising capital. The service received in the form of a stock exchange listing does not meet the definition of an intangible asset because it is not identifiable in accordance with IAS 38 Intangible Assets (it is not separable) and does not meet the definition of an asset that should be recognized in accordance with other Standards and the Conceptual Framework, therefore the services received was recognized as listing expense (included in merger & acquisition costs in the consolidated statements of net loss and comprehensive loss).

(n)Cash and cash equivalents

Cash and cash equivalents include cash investments in interest-bearing accounts and term deposits which can readily be redeemed for cash without penalty or are issued for terms of three months or less from dated of acquisition.

New accounting standards issued

Amendments to IAS 8, Accounting Policies, Changes to Accounting Estimates and Errors

On February 12, 2021, the IASB issued amendments to IAS 8, Accounting Policies, Changes to Accounting Estimates and Errors, in which it introduces a new definition of "accounting estimates". These amendments are designed to clarify the distinction between changes in accounting estimate and changes in accounting policies and the correction of errors. Specifically, accounting estimates are now defined as "monetary amounts in financial statements that are subject to measurement uncertainty".

The amendments become effective for annual reporting periods beginning on or after January 1, 2023, with earlier application permitted. KWESST has early adopted these amendments for the year ended September 30, 2021, which resulted in no impact to its financial position, results of operations and cash flows.

F-41

KWESST MICRO SYSTEMS INC.

Notes to Consolidated Financial Statements

Year ended September 30, 2021, nine months ended September 30, 2020, and

year ended December 31, 2019

(Expressed in Canadian dollars, except share amounts)

4.Acquisitions

a)LEC System

On April 29, 2021, KWESST acquired the Low Energy Cartridge technology from DEFSEC, a proprietary non-lethal cartridge-based firing system (herein referred as the "LEC System"). This technology acquisition includes all intellectual property rights for the LEC System. With this acquisition, KWESST will target the following four market segments that currently use a variety of dated "non-lethal" or "less-lethal" systems:

(i)public order (riots and control of dangerous subjects);

(ii)military and law enforcement training (realistic force-on-force training);

(iii)personal defence (home, car, boat, RV, camping, hiking); and

(iv)high-action gaming.

As DEFSEC is a private company owned by KWESST's Executive Chairman, this asset acquisition is a related party transaction. KWESST relied on exemptions from the formal valuation and minority shareholder approval requirements available under Multilateral Instrument 61-101, Protection of Minority Security Holders in Special Transactions. However, KWESST obtained approval from over 51% disinterested shareholders as well as from the TSX-V prior to closing the acquisition.

The purchase consideration consisted of:

• 1,000,000 common shares of KWESST; and
• 500,000 warrants to purchase KWESST's common shares at $0.70 each; 25% vesting on the first anniversary of the closing of the LEC Technology acquisition and 25% per annum thereafter. These warrants will expire on April 29, 2026.

Additionally, KWESST will pay 7% royalty on annual sales of the LEC System to DEFSEC, net of taxes and duties, up to a maximum of $10 million, subject to minimum annual royalty payments starting in 2023. At closing of the acquisition, KWESST made an upfront payment of $150,000 as an advance on royalties owed for the first anniversary of the closing date.

The following represents the future minimum annual royalty payments starting from the second anniversary of the closing date:

Date		Amount
April 29 2023	$	150,000
April 29 2024	$	150,000
April 29 2025	$	200,000
April 29 2026	$	200,000
April 29 2027	$	250,000
April 29 2028	$	250,000
April 29 2029	$	300,000
April 29 2030	$	300,000
April 29 2031	$	350,000
April 29 2032	$	350,000
Total	$	2,500,000

The royalty payment obligation of the Purchase Agreement ("Agreement") will expire in 20 years unless terminated earlier under the terms set out in the Agreement. At its sole discretion, KWESST may terminate this Agreement for convenience, including if market conditions for sales of the LEC System become unfavorable subject 60 day's prior written notice. Upon termination, KWESST will be fully released and discharged by DEFSEC including the outstanding future royalties and any unvested warrants shall be immediately cancelled. In return, KWESST will return all intellectual property rights relating to the LEC System to DEFSEC.

F-42

KWESST MICRO SYSTEMS INC.

Notes to Consolidated Financial Statements

Year ended September 30, 2021, nine months ended September 30, 2020, and

year ended December 31, 2019

(Expressed in Canadian dollars, except share amounts)

The purchase price was determined as follows:

	Number		Fair Value
Common shares	1,000,000	$	1,290,000
Warrants	500,000	$	425,000
Minimum royalty payments		$	1,191,219
Total		$	2,906,219
Identifiable intangible assets
Technology asset		$	2,906,219

KWESST estimated the fair value as follows:

• Common shares: based on KWESST's closing stock price on April 29, 2021.
• Warrants: based on using the Black Scholes option model with the following key inputs: a) exercise price of $0.70, underlying stock price of $1.29, risk free rate of 0.48%, expected life of three years, and expected volatility of 80%.
• Minimum royalty payments: based on the income approach, specifically discounted cash flows, using a discount rate of 13.7% per annum.

During the year ended September 30, 2021, KWESST recorded $64,537 of accretion cost relating to the discounted minimum royalty payments, which is included in net finance costs (see Note 20).

b)Reverse acquisition

On September 17, 2020, Foremost Ventures Corp. ("Foremost") completed the QT with KWESST Inc. pursuant to the policies of the TSX-V. Prior to the completion of the QT, Foremost effected a consolidation of its outstanding common shares on the basis of one post-consolidation common share for every 4.67 pre-consolidation common shares. The QT was done by way of a three-cornered amalgamation (the "Amalgamation") pursuant to which, among other things:

(i)KWESST Inc. amalgamated with a wholly-owned subsidiary of Foremost, incorporated for the purposes of the Amalgamation, pursuant to the provisions of the Business Corporations Act (Ontario),

(ii)Foremost changed its name to KWESST Micro Systems Inc., and

(iii)all of the outstanding common shares of KWESST Inc. (the "KWESST Shares") were cancelled and, in consideration the holders thereof received post-consolidation common shares of KWESST Micro Systems Inc. on the basis of one KWESST Micro System Inc. share for each KWESST Share.

Immediately following the QT, there were 41,266,176 shares of KWESST outstanding, of which 40,367,678 were held by the former shareholders of KWESST Inc. (representing approximately 97.8% of the outstanding shares of the Company) and 898,498 were held by the shareholders of Foremost prior to the QT. Accordingly, this transaction was accounted for as a reverse acquisition where KWESST Inc. was deemed to be the acquirer for accounting purposes.

The reverse acquisition of Foremost was accounted for under IFRS 2, Share-based Payment. Accordingly, the fair value of the purchase consideration was accounted for at the fair value of the equity instruments granted by the shareholders of KWESST Inc. to the shareholders and option holders of Foremost.

The following represents management's estimate of the fair value of the net assets acquired and total consideration transferred at September 17, 2020, the closing date of the QT.

F-43

KWESST MICRO SYSTEMS INC.

Notes to Consolidated Financial Statements

Year ended September 30, 2021, nine months ended September 30, 2020, and

year ended December 31, 2019

(Expressed in Canadian dollars, except share amounts)

Number of common shares issued to Foremost shareholders		898,498
KWESST's stock price at closing of reverse acquisition (1)	$	0.70
Common shares	$	628,949
Options		41,155
Total consideration transferred	$	670,104

^{(1)At closing, the subscription receipts issued by KWESST Inc. on July 9, 2020 pursuant to a brokered private placement (the "KWESST Subscription Receipts"), were automatically converted, into shares of KWESST. The private placement which was completed through PI Financial Corp. as agent, consisted of 4,409,553 KWESST Subscription Receipts issued at $0.70 per KWESST Subscription Receipt for gross proceeds of about $3.1 million before share issuance costs. See Note 16(a).}

The total fair value consideration was allocated to Foremost's net assets as follows:

Total fair value consideration	$	670,104
Foremost's net assets (liabilities):
Cash	$	78,589
Other receivables		1,900
Accounts payable and accrued liabilities		(225,088	)
Net assets (liabilities) at fair value		(144,599	)
Residual balance allocated to listing expense (included in M&A costs)		814,703
Total	$	670,104

The results of operations of Foremost are included in these consolidated statements of comprehensive loss from September 17, 2020.

The listing expense of $814,703 is a non-cash item - see consolidated statements of cash flows.

In addition, 1,000,000 common shares with fair value of $700,000 were issued to two M&A / capital market advisors for successfully assisting KWESST to complete the QT.

c)GhostStep® Technology

On June 12, 2020, KWESST acquired the GhostStep® Technology from SageGuild LLC ("SageGuild"). The GhostStep® Technology has since been rebranded by KWESST as the Phantom^TM, a tactical multi-function electromagnetic spectrum system. The Phantom^TM System can generate numerous radio signals across multiple bands simultaneously, move itself around the battlefield, and function as a radio-relay while performing its main role of deception.

The purchase consideration consisted of:

(i)USD $100,000 (CAD $134,192) at closing;

(ii)140,000 common shares of KWESST at closing; and

(iii)either the payment of USD $100,000 in cash or the issuance of 557,000 common shares of KWESST, at KWESST's sole discretion, upon the completion of KWESST's Qualifying Transaction ("QT").

In addition, KWESST agreed to:

(iv)make annual payments ("Yearly Payments") to SageGuild of $125,000 on each of December 31, 2020, 2021 and 2022, subject to certain conditions;

(v)issue 750,000 warrants to SageGuild exercisable at $0.50 per share and expiring on January 15, 2023 (the "SageGuild Warrants"); and

(vi)pay royalties up to USD $20 million.

F-44

KWESST MICRO SYSTEMS INC.

Notes to Consolidated Financial Statements

Year ended September 30, 2021, nine months ended September 30, 2020, and

year ended December 31, 2019

(Expressed in Canadian dollars, except share amounts)

The SageGuild Warrants will vest in equal tranches of 250,000 warrants on each of December 31, 2020, 2021 and 2022. KWESST has the right to apply the Yearly Payments against the exercise price of the Warrants. Further, in the event the consulting agreement with SageGuild is terminated, any remaining Yearly Payments will be terminated and the remaining unvested SageGuild Warrants will be cancelled. As the contingent Yearly Payments and SageGuild Warrants are directly linked, management combined these as "contingent consideration" for the purchase price allocation noted below. At December 31, 2020, KWESST issued 250,000 common shares for the 250,000 vested warrants (a non-cash transaction).

Additionally, KWESST will pay SageGuild royalties at a rate of 20% on amounts received in consideration of the grant of licenses and on sales of the Phantom^TM System up to USD $3 million. Thereafter, the royalty rate will decrease to 5%. The obligation to pay royalties will terminate automatically once KWESST has paid SageGuild a total of USD $20 million in royalties. The Purchase Agreement became effective on June 12, 2020 and will continue in full force and effect until the earliest of (i) June 12, 2040 or (ii) the date of the expiration of the last of the patents or any of the patents (which are expected to be valid for a period of seventeen years from the date of issuance) related to improvements of the Phantom^TM System to which SageGuild, or its principal Mr. Jeffrey M. Dunn, materially contributes, unless terminated earlier in accordance with the terms and conditions of the agreement.

In the event KWESST is in default of payment of any royalty payment as outlined above for a period of 30 days, SageGuild may terminate the agreement and KWESST will be required to, among other things, transfer the Phantom^TM System back to SageGuild.

The purchase price allocation was determined as follows:

	Number		Fair Value
Cash		$	134,192
Common shares	140,000	$	33,600
Cash or common share issuance (1)	555,700	$	133,680
Contingent consideration		$	180,000
Total		$	481,472
Identifiable intangible assets
Technology asset		$	481,472

^{(1)In September 2020, KWESST elected to issue 557,000 common shares rather than to pay USD $100,000.}

KWESST estimated the fair value as follows:

• Common shares: as KWESST was a private company at the time, there was no active market for its common shares. Management estimated the fair value of these shares based on the USD $100,000 cash or 557,000 common shares election available under the purchase agreement, which the two parties negotiated at arm's length. This implied a fair value of $0.24 per common share at the time of the closing of the asset acquisition.
• Contingent consideration: as previously noted above, the contingent consideration (Yearly Payments and SageGuild Warrants) is effectively future common share issuances subject to the consulting agreement with SageGuild remaining effective at each anniversary year (the service vesting period). Management assumed the entire 750,000 warrants will be converted to common shares over the next three years. Consistent with the above, management applied the estimated $0.24 per common share to the contingent 750,000 common shares issuance, for a total fair value of $180,000.

F-45

KWESST MICRO SYSTEMS INC.

Notes to Consolidated Financial Statements

Year ended September 30, 2021, nine months ended September 30, 2020, and

year ended December 31, 2019

(Expressed in Canadian dollars, except share amounts)

Because there is no minimum royalty payment under the Purchase Agreement, the future royalties were not included in the purchase price allocation. Royalties will be recognized at the time revenue is earned.

d)M&A costs

Included in KWESST's general and administrative costs are the following total M&A costs:

		Year ended September 30, 2021		Nine months ended September 30, 2020		Year ended December 31, 2019
Non-cash listing expense (1)	$	-	$	814,703	$	-
Non-cash performance share bonus  (1)		-		700,000		-
Professional fees		10,041		47,160		-
Total	$	10,041	$	1,561,863	$	-

^{1)Relates to the Reverse Acquisition transaction as noted in part (b)}

5.Trade and other receivables

The following table presents trade and other receivables for KWESST:

		September 30, 2021		September 30, 2020		December 31, 2019
				(Adjusted - see Note 8)
Trade receivables	$	-	$	209,169	$	1,191
Unbilled revenue		308,728		-		-
Sales tax recoverable		183,761		144,423		55,684
Investment tax credits refundable		206,762		127,325		162,928
Total	$	699,251	$	480,917	$	219,803

There was no impairment of trade and other receivables during the year ended September 30, 2021 (2020 - $nil, 2019 - $nil).

The following table presents changes in unbilled receivables:

		2021		2020		2019
Balance, beginning of period	$	-	$	-	$	-
Revenue in excess of billings, net of amounts transferred to    trade accounts receivable		308,728		-		-
Amounts written off		-		-		-
Balance, end of period	$	308,728	$	-	$	-
Current	$	308,728	$	-	$	-
Non-current	$	-	$	-	$	-

F-46

KWESST MICRO SYSTEMS INC.

Notes to Consolidated Financial Statements

Year ended September 30, 2021, nine months ended September 30, 2020, and

year ended December 31, 2019

(Expressed in Canadian dollars, except share amounts)

6.     Inventories

The following table presents a breakdown of inventories:

		September 30, 2021		September 30, 2020		December 31, 2019
Raw materials		90,299		-		-
Total	$	90,299	$	-	$	-

There was no impairment of inventories during the year ended September 30, 2021 (2020 - $nil, 2019 - $nil).

7.Property and equipment

The following is summary of changes in property and equipment for KWESST:

Cost		Computer equipment			Computer software			Office furniture and equipment			R&D equipment			Leasehold improvements			Sales demo equipment		Total
Balance, December 31, 2018	$	-		$	8,145		$	31,873		$	41,379		$	8,607		$	-	$	90,004
Additions		14,073			-			908			5,209			-			-		20,190
Balance, December 31, 2019	$	14,073		$	8,145		$	32,781		$	46,588		$	8,607		$	-	$	110,194
Additions		18,734			-			49,060			7,046			59,090			-		133,930
Disposals		-			-			-			-			(8,607	)		-		(8,607	)
Balance, September 30, 2020	$	32,807		$	8,145		$	81,841		$	53,634		$	59,090		$	-	$	235,517
Additions		30,778			-			11,211			165,030			58,147			548,626		813,792
Disposals		(3,828	)		(8,145	)		(2,936	)		(724	)		-			-		(15,633	)
Balance at September 30, 2021	$	59,757		$	-		$	90,116		$	217,940		$	117,237		$	548,626	$	1,033,676
Accumulated depreciation		Computer equipment			Computer software			Office furniture and equipment			R&D equipment			Leasehold improvements			Sales demo equipment		Total
Balance, December 30, 2018	$	-		$	3,396		$	9,587		$	5,256		$	2,498		$	-	$	20,737
Depreciation for the year		241			2,715			6,556			8,102			1,721			-		19,335
Balance, December 30, 2019	$	241		$	6,111		$	16,143		$	13,358		$	4,219		$	-	$	40,072
Depreciation for nine months		5,821			1,526			6,149			7,478			8,434			-		29,408
Disposals		-			-			-			-			(8,607	)		-		(8,607	)
Balance, September 30, 2020	$	6,062		$	7,637		$	22,292		$	20,836		$	4,046		$	-	$	60,873
Depreciation for the year		13,966			508			18,759			17,462			12,489			16,444		79,628
Disposals		(1,630	)		(8,145	)		(687	)		(12	)		-			-		(10,474	)
Balance at September 30, 2021	$	18,398		$	-		$	40,364		$	38,286		$	16,535		$	16,444	$	130,027
Carrying value at December 31, 2019	$	13,832		$	2,034		$	16,638		$	33,230		$	4,388		$	-	$	70,122
Carrying value at September 30, 2020	$	26,745		$	508		$	59,549		$	32,798		$	55,044		$	-	$	174,644
Carrying value at September 30, 2021	$	41,359		$	-		$	49,752		$	179,654		$	100,702		$	532,182	$	903,649

F-47

KWESST MICRO SYSTEMS INC.

Notes to Consolidated Financial Statements

Year ended September 30, 2021, nine months ended September 30, 2020, and

year ended December 31, 2019

(Expressed in Canadian dollars, except share amounts)

8.Right-of-use assets

The following table presents right-of-use assets for KWESST:

		Offices			Printer			Total
Balance at December 31, 2018	$	254,159		$	13,120		$	267,279
Depreciation		(76,248	)		(6,559	)		(82,807	)
Balance at December 31, 2019	$	177,911		$	6,561		$	184,472
Additions		571,604			-			571,604
Termination		(139,787	)		-			(139,787	)
Depreciation		(92,567	)		(3,282	)		(95,849	)
Balance at September 30, 2020 (as previously reported)		517,161			3,279			520,440
Correction of an error		(192,864	)		-			(192,864	)
Balance at September 30, 2020 (as adjusted)		324,297			3,279			327,576
Depreciation		(58,083	)		(3,279	)		(61,362	)
Balance at September 30, 2021	$	266,214		$	-		$	266,214

During the year ended September 30, 2021, management made an adjustment for a correction in the application of IFRS 16, Leases, to the new office lease entered in the prior year, whereby future variable payments were erroneously included in the calculation of the lease obligations. The following summarizes the effects of this correction to the prior year's comparatives.

Consolidated statements of financial position as at September 30, 2020:

		Previously Reported			Adjustment			Adjusted
Trade and other receivables	$	479,291		$	1,626		$	480,917
Right-of-assets	$	520,440		$	(192,864	)	$	327,576
Deposit (non-current)	$	22,337		$	(2,996	)	$	19,341
Total assets	$	5,507,011		$	(194,234	)	$	5,312,777
Lease obligations (current)	$	78,358		$	(34,230	)	$	44,128
Lease obligations (non-current)	$	496,394		$	(188,485	)	$	307,909
Total liabilities	$	1,650,628		$	(222,715	)	$	1,427,913
Deficit	$	(6,102,058	)	$	28,481		$	(6,073,577	)
Consolidated statements of net loss and comprehensive loss for the nine months ended September 30, 2020:
		Previously Reported (1)			Adjustment			Adjusted
General and administrative expenses	$	2,740,779		$	(16,918	)	$	2,723,861
Net finance costs	$	72,960		$	(11,563	)	$	61,397
Net loss and comprehensive loss	$	(3,565,259	)	$	28,481		$	(3,536,778	)

(1) Adjusted for the change in presentation - see Note 2(f).

F-48

KWESST MICRO SYSTEMS INC.

Notes to Consolidated Financial Statements

Year ended September 30, 2021, nine months ended September 30, 2020, and

year ended December 31, 2019

(Expressed in Canadian dollars, except share amounts)

Condensed consolidated interim statements of changes in shareholders' equity (deficit) for the nine months ended September 30, 2020:

		Previously Reported			Adjustment		Adjusted
Deficit	$	(6,102,058	)	$	28,481	$	(6,073,577	)
Total shareholders' equity (deficit)	$	3,856,383		$	28,481	$	3,884,864

 In connection with the lease entered in the prior year, KWESST made a total deposit of $33,726 to be released only at the end of this lease. This was initially recorded at fair value, discounted using the implied interest rate in the lease. At September 30, 2021, $21,367 (2020 - $19,341) was the carrying value and reported as non-current deposit in the consolidated statements of financial position.

9.Intangible assets

The following table presents intangible assets for KWESST:

Cost		TASCS System			PhantomTM System		LEC System		Total
Balance at December 31, 2019	$	-		$	-	$	-	$	-
Additions		163,230			481,472		-		644,702
Balance at September 30, 2020	$	163,230		$	481,472	$	-	$	644,702
Additions		-			83,228		2,906,219		2,989,447
Transferred to cost of sales		(107,854	)		-		-		(107,854	)
Impairment charge		(55,376	)		-		-		(55,376	)
Balance at September 30, 2021	$	-		$	564,700	$	2,906,219	$	3,470,919

As the technology assets have not yet reached commercialization, no amortization charge was recorded for the year ended September 30, 2021 (2020 - $nil, 2019 - $nil). At September 30 2021, management concluded there was no impairment on the Phantom System and LEC System (2020 - $nil, 2019 - $nil).  Management anticipates the estimated useful life of five years for both technology assets.

For the additions during the year ended September 30, 2021, and the nine months ended September 30, 2020, refer to Note 4.

10.Accounts payable and accrued liabilities

The following table presents the accounts payable and accrued liabilities for KWESST:

		September 30, 2021		September 30, 2020		December 31, 2019
Trade payable	$	620,041	$	493,027	$	126,481
Accrued liabilities		384,239		188,265		29,822
Salary and vacation payable		122,230		65,722		-
Payroll taxes payable		692		67,229		29,343
Other		-		4,031		13,041
Total	$	1,127,202	$	818,274	$	198,687

F-49

KWESST MICRO SYSTEMS INC.

Notes to Consolidated Financial Statements

Year ended September 30, 2021, nine months ended September 30, 2020, and

year ended December 31, 2019

(Expressed in Canadian dollars, except share amounts)

11. Related party transactions

Key management personnel compensation

Key management personnel are those having authority and responsibility for planning, directing and controlling the activities of KWESST directly or indirectly, including any directors (executive and nonexecutive) of KWESST. The key management personnel of KWESST are the executive management team and Board of Directors, who collectively control approximately (31.5%) of the issued and outstanding common shares of KWESST at September 30, 2021 (2020 - 38.0%; 2019 - 71.8%).

Key management personnel compensation comprised the following:

		Year ended September 30, 2021		Nine months ended September 30, 2020		Year ended December 31, 2019
Wages and benefits	$	427,252	$	165,769	$	48,343
Consulting fees		180,000		145,000		30,000
Directors compensation		85,000		-		-
Share-based compensation		988,716		24,959		-
Total	$	1,680,968	$	335,728	$	78,343

The consulting fees relate to compensation paid to KWESST’s Executive Chairman (via his private corporation, DEFSEC Corp) and for the prior periods the consulting fees also include the former Chief Financial Officer.

Related party loans

The following table summarizes the related party loans.

		CEO loan (1)			Employee loan			Loans from investors			Total
Balance, December 31, 2018	$	612,171		$	81,253		$	191,789		$	885,213
Additions		309,912			-			772			310,684
Transferred to convertible notes		-			-			(192,561	)		(192,561	)
Converted into common shares		(649,500	)		-			-			(649,500	)
Converted into warrants		(19,858	)		-			-			(19,858	)
Repayment of loans		(45,513	)		(25,000	)		-			(70,513	)
Accrued interest		22,706			3,657			-			26,363
Balance, December 31, 2019	$	229,918		$	59,910		$	-		$	289,828
Accrued interest		7,174			1,274			-			8,448
Repayment of loans		(30,000	)		(50,000	)		-			(80,000	)
Balance, September 30, 2020	$	207,092		$	11,184		$	-		$	218,276
Accrued interest		4,513			68			-			4,581
Repayment of loans		(211,605	)		(11,252	)		-			(222,857	)
Balance, September 30, 2021	$	-		$	-		$	-		$	-

^{(1)Includes a loan held by 2573685 Ontario Inc., the parent company at the time (co-owned by the CEO and his spouse).}

F-50

KWESST MICRO SYSTEMS INC.

Notes to Consolidated Financial Statements

Year ended September 30, 2021, nine months ended September 30, 2020, and

year ended December 31, 2019

(Expressed in Canadian dollars, except share amounts)

The CEO and employee loans accrued interest at TD Bank prime plus 1.55% and 5%, respectively. As noted in the above table, all related party loans have been repaid during the year ended September 30, 2021.

Other related party transactions:

• In April 2021, two directors and the CFO of the Company participated in the brokered private placement (see Note 16(a)); collectively, they purchased 72,000 Units for a total consideration of $90,000.  This transaction was recorded at fair value.

• In November 2019, KWESST hired SageGuild LLC to assist the Company in promoting its product offerings in the United States. In January 2021, the Acting CEO and sole shareholder of SageGuild LLC agreed to serve as director of KWESST U.S. Inc. and as a result SageGuild LLC became a related party to KWESST. The total cash and share-based remuneration amounted to $296,318 and $42,991 for business development costs from January 1, 2021, to September 30, 2021, respectively.  Except for the cash consideration recorded at the exchange amount, the share-based compensation was recorded at fair value (see Note 16(c)).

• Two directors of KWESST were investors in the 2019 convertible notes, in which KWESST incurred finance costs of $6,585 on these convertible notes for the nine months ended September 30, 2020. These were converted to common shares of KWESST in September 2020, based on the conversion rate as defined in the convertible note agreement

• The lease for a 3-D printer was with a private company owned by KWESST's President and CEO and his spouse (see Note 13). This transaction was recorded at the exchange amount.

• On October 23, 2019, $192,561 Subscription for Revenue Sharing issued in 2018 was reclassified as convertible notes (see Note 15).

At September 30, 2021, September 30, 2020 and December 31, 2019, there was no outstanding amount in accounts payable and accrued liabilities due to officers and directors of KWESST.

12.Borrowings

		CEBA Term Loan			Unsecured Loan			Total
Balance, December 31, 2019	$	-		$	-		$	-
Additional borrowings		40,000			-			40,000
Gain on government grant		(9,096	)		-			(9,096	)
Accrued interest		1,369			-			1,369
Balance, September 30, 2020	$	32,273		$	-		$	32,273
Additional borrowings		20,000			306,000			326,000
Gain on government grant		(3,514	)		-			(3,514	)
Accrued interest		4,492			4,527			9,019
Repayment		-			(310,527	)		(310,527	)
Balance, September 30, 2021	$	53,251		$	-		$	53,251
Current	$	-		$	-		$	-
Non-current		53,251			-			53,251
Total	$	53,251		$	-		$	53,251

F-51

KWESST MICRO SYSTEMS INC.

Notes to Consolidated Financial Statements

Year ended September 30, 2021, nine months ended September 30, 2020, and

year ended December 31, 2019

(Expressed in Canadian dollars, except share amounts)

CEBA Term Loan

In December 2020, the Canadian Federal Government amended the CEBA Term Loan program to increase the loan amount by $20,000 to $60,000. KWESST borrowed $40,000 in the nine-month period ended September 30, 2020, and an additional $20,000 during the current year. Additionally, effective January 1, 2021, the outstanding balance of the CEBA Term Loan was automatically converted to a 2-year interest free term loan. Accordingly, KWESST has presented this loan as non-current borrowings at September 30, 2021. The CEBA Term loan was initially recorded at fair value, discounted based on KWESST's estimated incremental borrowing rate of 10%. This resulted in recording a gain on government grant of $3,514 for the year ended September 30, 2021 (2020 - $9,096).

The CEBA Term Loan may be repaid at any time without notice or the payment of any penalty. If the CEBA Term Loan is repaid on or before December 31, 2022, $20,000 shall be forgiven. If on December 31, 2022, KWESST exercises the option for a 3-year term extension, a 5% annual interest will be applied on any balance remaining during the extension period.

KWESST has not recorded the potential forgivable amount at September 30, 2021 and 2020.

RBC Credit Facility

KWESST maintains corporate credit cards for its key employees and a foreign exchange line of credit with Royal Bank of Canada ("RBC"). To provide security, KWESST entered into a cash collateral agreement for $30,000 and a general security agreement providing a first lien on all assets. The $30,000 was invested in a short-term guaranteed investment certificate.

Unsecured Loan

On February 24, 2021, KWESST entered into an unsecured loan agreement with a private fund managed by a KWESST shareholder to borrow $306,000 for general corporate purposes. The interest rate on this loan was 0.5% per month. On May 27, 2021, KWESST repaid the loan, including accrued interest, for a total of $310,527.

13.Lease obligations

During the nine months ended September 30, 2020, KWESST terminated an office lease and entered into a long-term office lease contract. The office lease includes the right to renew for an additional five years following its expiry on April 30, 2026. Management has not included the renewal option because it was deemed too uncertain whether KWESST would renew at this time.

Under the new office lease, KWESST benefits from the following lease inducements:

• Free rent from inception (March 1, 2020) to November 1, 2020; and
• Free rent from November 1, 2021, to March 1, 2022.

When measuring the lease obligation, the Company discounted the remaining lease payments using the incremental estimated borrowing rate of Company of 10% per annum at the time of closing the new lease agreement.

F-52

KWESST MICRO SYSTEMS INC.

Notes to Consolidated Financial Statements

Year ended September 30, 2021, nine months ended September 30, 2020, and

year ended December 31, 2019

(Expressed in Canadian dollars, except share amounts)

The following table presents lease obligations for KWESST:

		Offices			Printer			Total			Current Portion		Non-current portion
Balance, December 31, 2018	$	266,292		$	13,761		$	280,053		$	77,367	$	202,686
Lease payments (including interest)		(94,270	)		(7,620	)		(101,890	)		-		-
Interest expense		23,441			1,082			24,523			-		-
Balance, December 31, 2019	$	195,463		$	7,223		$	202,686		$	85,468	$	117,218
Addition		347,640			-			347,640			-		-
Termination		(157,315	)		-			(157,315	)		-		-
Lease payments (including interest)		(62,816	)		(7,620	)		(70,436	)		-		-
Interest expense		29,065			397			29,462			-		-
Balance, September 30, 2020 (as adjusted)	$	352,037		$	-		$	352,037		$	44,128	$	307,909
Lease payments (including interest)		(78,000	)		-			(78,000	)		-		-
Interest expense		33,872			-			33,872			-		-
Balance at September 30, 2021	$	307,909		$	-		$	307,909		$	32,288	$	275,621

Refer to Note 8 regarding the correction of an error in the application of IFRS 16.

The termination of the former lease resulted in the de-recognition of the lease obligation and related unamortized book value of the right-of-use asset, resulting in a gain of $17,527. This was included in the net finance costs for the nine months ended September 30, 2020 (see Note 20).

The following table presents the contractual undiscounted cash flows for the lease obligations:

		September 30, 2021		September 30, 2020		December 31, 2019
Less than one year	$	62,400	$	78,000	$	101,890
One to five years		327,600		390,000		125,693
Total	$	390,000	$	468,000	$	227,583

14.Contract Liabilities

The following table presents the changes in contract liabilities:

		September 30, 2021			September 30, 2020		December 31, 2019
Balance, beginning of period	$	7,053		$	-	$	-
Amounts invoiced and revenue deferred		-			7,053		-
Recognition of deferred revenue included in the balance at the beginning of period		(7,053	)		-		-
Balance, end of period	$	-		$	7,053	$	-

F-53

KWESST MICRO SYSTEMS INC.

Notes to Consolidated Financial Statements

Year ended September 30, 2021, nine months ended September 30, 2020, and

year ended December 31, 2019

(Expressed in Canadian dollars, except share amounts)

15. Convertible notes

The following table presents the changes in KWESST's convertible notes:

		September 30, 2021		September 30, 2020			December 31, 2019
Balance, beginning of period	$	-	$	210,819		$	521,515
Transfer from related party loans (note 11)		-		-			192,561
Less fair value of conversion feature (note 22)		-		-			(30,688	)
Repayment		-		-			(31,644	)
Accrued interest		-		16,769			74,707
Accretion expense		-		28,130			105,265
Converted into common shares (note 16)		-		(255,718	)		(620,897	)
Balance, end of period	$	-	$	-		$	210,819

2020 Activities

As disclosed in Note 4(b), a Liquidity Event occurred which resulted in the conversion of the $255,718 outstanding convertible note, including accrued interest up to Liquidity Event, into 456,639 common shares (see Note 16).

2019 Activities

On October 23, 2019, KWESST converted $560,007 of debt and $60,890 of interest into 3,104,486 common shares at a price of $0.20 relating to all debts noted above and repaid $31,644 debt by cash. The remaining $234,515 was issued as new convertible debentures at a rate of 10% per annum and due on October 23, 2021 (the "2019 Convertible Notes"). Upon the occurrence of a Liquidity Event, the 2019 Convertible Notes will automatically convert into common shares of the Company at a conversion rate equal to a 20% discount to the value assigned to the common shares of the Company under such Liquidity Event for the entire amount of the principal amount plus all accrued interest.

"Liquidity Event" means either (1) the completion of an initial public offering which results in the common shares of the Company being listed and posted for trading or quoted on any of the Toronto Stock Exchange, the TSX Venture Exchange, the New York Stock Exchange, the American Stock Exchange, the Nasdaq National Market, the London Stock Exchange or any successor exchange or market thereto; or (2) the closing of a merger, amalgamation plan of arrangement or other transaction or series of related transactions resulting in the holders of Common shares receiving consideration in securities listed on a Qualified Exchange.

16.Share capital and Contributed Surplus

a)Share capital

Authorized

KWESST is authorized to issue an unlimited number of common shares.

F-54

KWESST MICRO SYSTEMS INC.

Notes to Consolidated Financial Statements

Year ended September 30, 2021, nine months ended September 30, 2020, and

year ended December 31, 2019

(Expressed in Canadian dollars, except share amounts)

Issued Common Shares

	September 30, 2021				September 30, 2020				December 31, 2019
	Number		Amount		Number		Amount		Number		Amount
Balance, beginning of period	41,266,176	$	9,374,563		26,879,686	$	2,284,353		200	$	200
Issued in brokered private placement	3,576,057	$	3,611,818		4,409,553	$	3,087,138		-	$	-
Issued for exercise of stock options	1,273,671	$	1,292,015		122,000	$	78,080		-	$	-
Issued for asset acquisition	1,000,000	$	1,290,000		697,000	$	167,280		-	$	-
Issued in private placement	750,000	$	1,110,000		3,486,750	$	1,480,875		5,075,000	$	1,014,948
Issued for exercise of warrants	726,575	$	815,307		-	$	-		-	$	-
Issued for exercise of broker compensation options	172,108	$	347,680		-	$	-		-	$	-
Issued for amended license	100,000	$	137,000		-	$	-		-	$	-
Issued for debt settlements	91,356	$	63,866		-	$	-		-	$	-
Issued for share units	9,688	$	12,498		-	$	-		-	$	-
Issued for conversion of 15% 2020 converted notes	-	$	-		3,210,050	$	1,328,163		-	$	-
Issued for performance bonus	-	$	-		1,045,000	$	731,500		-	$	-
Shares from Foremost's QT (Note 4(b))	-	$	-		898,498	$	628,949		-	$	-
Issued for conversion of 10% 2019 converted notes	-	$	-		456,639	$	255,718		-	$	-
Issued for consulting services	-	$	-		61,000	$	32,393		-	$	-
Issued for directors converted loans	-	$	-		-	$	-		8,000,000	$	181,308
Issued for parent company converted loans	-	$	-		-	$	-		10,700,000	$	467,000
Issued for converted debt and accrued interest	-	$	-		-	$	-		3,104,486	$	620,897
Less: share offering costs for the year	-	$	(839,679	)	-	$	(699,886	)	-	$	-
Balance, end of period	48,965,631	$	17,215,068		41,266,176	$	9,374,563		26,879,686	$	2,284,353

2021 Activities

Brokered Private Placement

In April 2021, KWESST closed its previously announced over-subscribed brokered private placement, resulting in the issuance of 3,576,057 units ("Units") of KWESST, at a price of $1.25 per Unit (the "Issue Price"), for aggregate gross proceeds of $4,470,071 (the "April 2021 Offering"), as amended in August 2021.

Under the April 2021 Offering, KWESST sold a total of 3,576,057 units at a price of $1.25 per Unit. Each Unit is comprised of one common share of the Company and one common share purchase warrant ("April 2021 Warrant"). Each April 2021 Warrant is exercisable to acquire one common share at a price of $1.75 each for a period of 24 months from the closing of the April 2021 Offering ("Closing Date"). If at any time after four (4) months and one (1) day following the Closing Date, the trading price of KWESST common stock on the TSX Venture Exchange is equal to or exceeds $3.00 for a period of 10 consecutive trading days, as evidenced by the price at the close of market, KWESST shall be entitled to notify the holders of the April 2021 Warrants of its intention to force the exercise of the April 2021 Warrants. Upon receipt of such notice, the holders of April 2021 Warrants shall have 30 days to exercise the April 2021 Warrants, failing which the April 2021 Warrants will automatically expire. Directors and officers of KWESST purchased 72,000 Units for a total consideration of $90,000.

In connection with this Offering, management has concluded the Unit qualified as an equity instrument under IAS 32, Financial Instruments: Presentation. Furthermore, management used the residual method to allocate the $1.25 consideration between common shares and the April 2021 Warrants. Because the April 2021 Warrants include an accelerator provision for expiration, management used the Barrier option model to estimate the fair value of these April 2021 Warrants at $0.24 each. As a result, $1.01 of the $1.25 consideration was allocated to common shares and is reflected in the above table of outstanding common shares.

F-55

KWESST MICRO SYSTEMS INC.

Notes to Consolidated Financial Statements

Year ended September 30, 2021, nine months ended September 30, 2020, and

year ended December 31, 2019

(Expressed in Canadian dollars, except share amounts)

The total cash and non-cash share offering costs were $630,680 for the Offering, including cash commission of $288,405 paid to the Agents and $233,057 of Compensation Options granted to the Agents (see part (c) Contributed Surplus).

Asset Acquisition

In April 2021, following the closing of the brokered private placement, KWESST closed on the acquisition of the LEC System technology resulting in the issuance of 1 million common shares and 500,000 warrants (see Note 4(a)). Management estimated a fair value of $0.85 per warrant, using the Black-Scholes option model (see below - Warrants).

Private Placement

In September 2021, KWESST closed a non-brokered private placement, resulting in the issuance of 750,000 units ("September Units") of KWESST, at a price of $2.00 per September Unit (the "Issue Price"), for aggregate gross proceeds of $1,500,000 (the "September 2021 Offering").

Under the September 2021 Offering, each September Unit is comprised of one common share and one Warrant Share exercisable at a price of $2.35 each for a period of 24 months from September 16, 2021 ("September 2021 Warrants"). If at any time after four months and one day following September 16, 2021, the trading price of KWESST common stock on the TSX-V is equal to or exceeds $4.60 for a period of 3 consecutive trading days, as evidenced by the price at the close of market, KWESST will be entitled to notify the holders of Warrants of its intention to force the exercise of the Warrants. Upon receipt of such notice, the holders of Warrants shall have 30 days to exercise the Warrants, failing which the Warrants will automatically expire.

KWESST paid cash commissions to Haywood Securities Inc. in the amount of $90,000 and granted 45,000 broker warrants ("September 2021 Broker Warrants"). Each September 2021 Broker Warrant is exercisable to acquire one common share at a price of $2.00 for a period of 24 months from the closing of the September 2021 Offering. Management estimated a fair value of $0.72 per warrant, using the Black-Scholes option model (see below - Warrants).

In connection with this private placement, management has concluded the September Unit qualified as an equity instrument under IAS 32, Financial Instruments: Presentation. Furthermore, management used the residual method to allocate the $2.00 consideration between the common share and the Warrant. Because the warrant includes an accelerator provision for expiration, management used the Barrier option model to estimate the fair value of these September 2021 Warrants at $0.52 each. As a result, $1.48 of the $2.00 consideration was allocated to common shares and is reflected in the above table of outstanding common shares at September 30, 2021.

The total cash and non-cash share offering costs were $130,730 for this private placement.

Amended License

In April 2021, KWESST issued 100,000 common shares for the exclusivity with AerialX as disclosed in Note 20.

Debt for Equity Settlement

In December 2020, KWESST settled the following liabilities with its common shares:

• $47,000 of legal fees for 67,142 common shares; and
• $16,866 of online advertising services for 24,214 common shares.

F-56

KWESST MICRO SYSTEMS INC.

Notes to Consolidated Financial Statements

Year ended September 30, 2021, nine months ended September 30, 2020, and

year ended December 31, 2019

(Expressed in Canadian dollars, except share amounts)

2020 Activities

Brokered Private Placements

In September 2020, KWESST closed a brokered private placement led by PI Financial Corp., resulting in the issuance of 4,409,553, at $0.70 each, for aggregate gross proceeds of $3,086,687. The total share offering costs were $325,887, settled in cash and warrants.

2020 Convertible Notes

In May 2020, KWESST Inc. closed on approximately $1.1 million gross proceeds from the issuance of unsecured convertible notes ("2020 Notes"), with automatic conversion upon a Liquidity Event including the listing of KWESST on the TSX-V.  In connection with these 2020 Notes, the note holders earned interest at a rate of 15% per annum. Additionally, as an inducement, the note holders also received 25% of the principal amount in the form of KWESST common shares based on a stock price of $0.45, resulting in the issuance 600,839 at the QT.

In light of KWESST going public in September 2020, resulting in the automatic conversion of these 2020 Notes, management concluded that under IAS 38 the recognition of these 2020 Notes should be accounted for as equity and not debt.  At the QT, these 2020 Notes were converted to 2,477,851 common shares. Because the 2020 Notes were treated as equity instruments, the total accrued interest of $59,112 was not recognized in the profit or loss. This accrued interest was converted to 131,360 common shares at QT. In connection with this private placement, KWESST incurred $58,065 of offering costs settled in cash and warrants.

Private Placements

In January 2020, KWESST closed a non-brokered private placement, resulting in the issuance of 2,625,000 common shares of KWESST, at $0.40 each, for aggregate gross proceeds of $1,050,000.

In March 2020, KWESST closed a non-brokered private placement, resulting in the issuance of 845,750 common shares of KWESST, at $0.50 each, for aggregate gross proceeds of $422,875.

In June 2020, KWESST closed a non-brokered private placement, resulting in the issuance of 16,000 common shares of KWESST, at $0.50 each, for aggregate gross proceeds of $8,000.

Performance Share Bonus

During the quarter ended September 30, 2020, KWESST settled performance bonuses in the form of 45,000 common shares. Additionally, KWESST awarded 500,000 common shares each to two M&A / capital market advisors for successfully assisting KWESST to complete a QT, in accordance with their respective consulting agreement.

Shares from Foremost

As part of the reverse acquisition, KWESST assumed 898,498 common shares previously issued by Foremost (see Note 4(b)).

2019 Convertible Notes

In September 2020, as a result of the completion of the QT (see Note 4 (b)) all the 2019 Convertible Notes and accrued interest were automatically converted to 456,639 common shares of KWESST.

F-57

KWESST MICRO SYSTEMS INC.

Notes to Consolidated Financial Statements

Year ended September 30, 2021, nine months ended September 30, 2020, and

year ended December 31, 2019

(Expressed in Canadian dollars, except share amounts)

Asset Acquisition

As disclosed in Note 4(c), KWESST issued 697,000 common shares to acquire the Phantom^TM System technology.

2019 Activities

Related Party Loans

During the year ended December 31, 2019, the directors and the parent of KWESST Inc. agreed to convert certain loans to common shares as follows:

• On January 1, 2019, the directors converted $32,500 of loans into 6,500,000 of units of KWESST ("2019 Units") at a conversion price of $0.005 per 2019 Unit. Each 2019 Unit is comprised of one common share and one common share purchase warrant. Each warrant entitles the holder to acquire a common share at a price of $0.2 per share and with an expiry date of June 14, 2024. The $32,500 has been prorated to common shares and warrants based on their relative fair values determined by Black-Scholes pricing model with $31,308 were allocated to common shares and $1,192 were allocated to the attached warrants.
• On March 5, 2019, the parent company converted $467,000 of loans into 10,700,000 of shares at a conversion price of $0.04364 per share.
• On August 7, 2019, the directors converted $150,000 of loans into 1,500,000 of shares at a conversion price of $0.10 per share.

2018 Convertible Notes

On October 23, 2019, KWESST converted $560,007 of convertible notes and $60,890 of interest into 3,104,486 common shares at a price of $0.20 (Note 8).

Private Placement

On October 24, 2019, KWESST closed a non-brokered private placement raising $1,014,948 at a value of $0.20, issuing 5,075,000 shares.

b)Warrants

The following reflects the warrant activities for KWESST:

	September 30, 2021				September 30, 2020			December 31, 2019
	Number of warrants			Weighted average exercise price	Number of warrants		Weighted average exercise price	Number of warrants		Weighted average exercise price
Outstanding, beginning of period	9,585,050		$	0.24	8,500,000	$	0.20	-	$	-
Issued during the period	5,043,165		$	1.73	1,085,050	$	0.54	8,500,000	$	0.20
Exercised during the period	(726,575	)	$	1.05	-	$	-	-	$	-
Outstanding, end of period	13,901,640		$	0.74	9,585,050	$	0.24	8,500,000	$	0.20
Exercisable, end of period	12,901,640		$	0.75	8,835,050	$	0.22	8,500,000	$	0.20

F-58

KWESST MICRO SYSTEMS INC.

Notes to Consolidated Financial Statements

Year ended September 30, 2021, nine months ended September 30, 2020, and

year ended December 31, 2019

(Expressed in Canadian dollars, except share amounts)

The following table provides additional information on the total outstanding warrants at September 30, 2021:

		Number outstanding		Fair value	Expiry Date
Founders' warrants:
	Exercise price of $0.20	6,500,000	$	1,192	January 1, 2024
	Exercise price of $0.20	2,000,000	$	19,858	June 14, 2024
GhostStep's warrants:
	Exercise price of $0.50	500,000	$	120,000	January 15, 2023
April 2021 equity financing:
	Exercise price of $1.75	3,274,657	$	785,918	April 29, 2023
	Exercise price of $1.75	40,000	$	9,600	August 25, 2023
LEC's warrants:
	Exercise price of $0.70	500,000	$	425,000	April 29, 2026
September 2021 equity financing:
	Exercise price of $2.35	750,000	$	390,000	September 16, 2023
Broker warrants:
	Exercise price of $0.45	84,622	$	17,162	May 8, 2022
	Exercise price of $0.70	69,862	$	14,259	July 9, 2022
	Exercise price of $1.75	137,499	$	33,000	April 29, 2023
	Exercise price of $2.00	45,000	$	32,400	September 16, 2023
		13,901,640	$	1,848,389

^{(1)Fair value is calculated based on the grant date fair value and number outstanding at September 30, 2021. It does not represent the fair value at September 30, 2021.}

The fair value for the warrants issued during the year ended September 30, 2021, was determined by the following valuation models and key inputs:

		Barrier Option Model				Black-Scholes Option Model
		April 2021 warrants		September 2021 warrants		September 2021 broker warrants		LEC warrants
Exercise Price	$	1.75	$	2.35	$	2.00	$	0.70
Stock price	$	1.01	$	2.14	$	2.14	$	0.40
Volatility		80%		80%		80%		0%
Dividend Yield		Nil		Nil		Nil		Nil
Risk-free interest rate		0.31%		0.26%		0.26%		69.00%
Barrier (accelerator on life of warrants)	$	3.00	$	4.60		N/A		N/A
Rebate	$	1.25	$	2.00		N/A		N/A
Expected life		2		1		1		3
Weighted average fair value per warrant	$	0.24	$	0.52	$	0.72	$	0.85

F-59

KWESST MICRO SYSTEMS INC.

Notes to Consolidated Financial Statements

Year ended September 30, 2021, nine months ended September 30, 2020, and

year ended December 31, 2019

(Expressed in Canadian dollars, except share amounts)

The fair value for the warrants issued during nine months ended September 30, 2020, was determined using the Black-Scholes option model using the following inputs:

		Warrants @ $0.40		Warrants @ $0.45		Warrants @ $0.70
Stock price	$	0.40	$	0.50	$	0.70
Volatility		68%		68%		67%
Dividend Yield		Nil		Nil		Nil
Risk-free interest rate		1.47%		0.27%		0.29%
Expected life		2		2		2
Estimated fair value per warrant	$	0.15	$	0.20	$	0.26

The fair value for the warrants issued during the year ended December 31, 2019, was determined using the Black-Scholes option model using the following inputs:

		Warrants @ $0.20
Stock price	$	0.044
Volatility		66.75%
Dividend Yield		Nil
Risk-free interest rate		1.40%
Expected life		5
Weighted average fair value per warrant	$	0.0099

c)Contributed Surplus

Contributed surplus consists of the broker compensation options at fair value, the cumulative amortized fair value of share-based compensation grants since inception, less amounts transferred to share capital for exercises. If outstanding options expire or are forfeited, there is no reversal of contributed surplus.

Broker Compensation Options

The April 2021 Offering was completed by PI Financial Corp., the lead agent and sole bookrunner (the "Lead Agent"), and other dealers (the "Agents"). As consideration for the services provided by the Agents in connection with the April 2021 Offering, the Agents received: (a) a cash commission of $288,405; and (b) 230,734 compensation options (the "Compensation Options"). Each Compensation Option is exercisable to acquire one unit of KWESST (a "Compensation Option Unit") at a price equal to $1.25 for a period of two years after the closing of the Offering. Each Compensation Option Unit is comprised of one Common Share and one Common Share purchase warrant (a "Compensation Option Warrant"). Each Compensation Option Warrant is exercisable to acquire one Common Share (a "Compensation Option Warrant Share") at a price of $1.75 per Compensation Option Warrant Share for a period of 24 months from the closing of the Offering.

Based on the structure of the Compensation Option, management estimated its fair value using the Monte Carlo method. Management estimated a fair value of $1.10 per Compensation Option.  The following were key inputs used in the Monte Carlo simulation: estimated life of 2 years, underlying stock price of $1.29, exercise price of Compensation Option of $1.25, exercise price of Compensation Option Warrant of $1.75, estimated volatility of 80%, risk free rate of 0.31%, and discount for lack of marketability of 0%.

F-60

KWESST MICRO SYSTEMS INC.

Notes to Consolidated Financial Statements

Year ended September 30, 2021, nine months ended September 30, 2020, and

year ended December 31, 2019

(Expressed in Canadian dollars, except share amounts)

Accordingly, KWESST recorded $233,057 of Compensation Options in contributed surplus, with an equal offset to share offering costs (a non-cash transaction).

During the year ended September 30, 2021, the Agents have exercised 172,118 Compensation Option Units for total gross proceeds of $215,148. At September 30, 2021, the total outstanding Compensation Option Units was 58,616.

Share-based compensation

On March 31, 2021, KWESST shareholders approved the Company's Long-Term Incentive Plan (the "LTIP"), replacing the former Stock Option Plan, to retain a competitive compensation structure for its directors, executives, employees, consultants, and service providers. The LTIP allows for the issuance of stock options ("Options"), restricted share units ("RSUs"), deferred share units ("DSUs"), share appreciation rights ("SARs"), and performance stock units ("PSUs") - collectively referred as Compensation Securities. The TSX-V accepted the filing of the LTIP on April 9, 2021.

Under the LTIP, the aggregate maximum number of common shares available for issuance from treasury at any given time shall not exceed 10% of the outstanding common shares as of the date of Compensation Securities, subject to adjustment or increase of such number pursuant to the terms of the LTIP. Any Options that have been cancelled, repurchased, expired, or exercised will again be available under the LTIP. The maximum number of common shares issuable under the LTIP in respect RSUs, DSUs, SARs, and PSUs (herein referred as "Share Units") shall not exceed 4,226,737 shares. The LTIP is subject to annual shareholder approval at the Annual General and Special Meeting.

(i)Stock Options

At September 30, 2021, there were 729,049 stock options available for grant under KWESST's LTIP.

The following is summary of changes in outstanding stock options for the respective periods:

	Number of options			Weighted average exercise price
Outstanding at December 31, 2019	-		$	-
Granted	2,055,000		$	0.65
Options from the Foremost QT (see Note 4(b))	85,714		$	0.47
Exercised	(122,000	)	$	0.50
Outstanding at September 30, 2020	2,018,714		$	0.65
Granted	3,709,125		$	1.49
Exercised	(1,273,573	)	$	0.72
Cancelled	(286,750	)	$	0.69
Outstanding at September 30, 2021	4,167,516		$	1.37
Options exercisable at September 30, 2021	1,844,328		$	1.25

During the year ended September 30, 2021, KWESST granted 3,709,125 (2020 - 2,055,000, 2019 - nil) options to directors, officers, employees and consultants at a weighted average exercise price of $1.49 (2020 - 0.65, 2019 - $nil). At September 30, 2021, the weighted average remaining vesting period was 1.82 years (2020 - 0.87 years).

F-61

KWESST MICRO SYSTEMS INC.

Notes to Consolidated Financial Statements

Year ended September 30, 2021, nine months ended September 30, 2020, and

year ended December 31, 2019

(Expressed in Canadian dollars, except share amounts)

For the options granted during the year ended September 30, 2021, and the nine months ended September 30, 2020, the per share weighted-average fair value of stock options was $0.72 and $0.23, respectively, using the Black-Scholes option model with the following weighted-average assumptions:

		2021		2020
Volatility		76.46%		67.71%
Dividend yield		Nil		Nil
Risk-free interest rate		0.35%		0.65%
Expected life (years)		2.26		3.38
Weighted-average fair value per option	$	0.72	$	0.23

For the year ended September 30, 2021, KWESST recorded stock-based compensation expenses of $1,854,240 (2020 - $283,084, 2019 - $nil) related to the vesting of options.

The following table summarizes information about stock options outstanding at September 30, 2021:

Range of exercise prices	Number outstanding	Weighted average remaining contractual life		Weighted average outstanding strike price	Exercisable	Remaining exercisable contractual life		Weighted average exercisable strike price
$0.25 to $0.70	640,578	3.56	$	0.67	523,703	3.59	$	0.67
$0.71 to $1.15	1,087,813	4.21	$	0.93	500,000	4.16	$	0.92
$1.16 to $1.60	646,875	4.63	$	1.29	125,000	4.55	$	1.33
$1.61 to $2.05	1,442,250	4.33	$	1.83	508,125	3.97	$	1.76
$2.06 to $2.50	350,000	4.48	$	2.23	187,500	4.35	$	2.28
	4,167,516	4.24	$	1.37	1,844,328	3.99	$	1.25

KWESST did not grant any stock options for the year ended December 31, 2019.

Amendment to stock option grants

During the year ended September 30, 2021, the Board approved the acceleration of vesting for 385,500 options and the cancellation of 250,000 options. This contributed an additional stock-based compensation charge of $65,813 (included in the above total share-based compensation expenses).

(ii)Share Units

At September 30, 2021, there were 2,727,977 Share Units available for grant under KWESST's LTIP.

F-62

KWESST MICRO SYSTEMS INC.

Notes to Consolidated Financial Statements

Year ended September 30, 2021, nine months ended September 30, 2020, and

year ended December 31, 2019

(Expressed in Canadian dollars, except share amounts)

During the year ended September 30, 2021, the Board granted the following Share Units:

	RSUs		PSUs	SARs	Total
Outstanding at September 30, 2020	-		-	-	-
Granted	1,148,760		200,000	150,000	1,498,760
Vested and converted	(9,688	)	-	-	(9,688	)
Outstanding at September 30, 2021	1,139,072		200,000	150,000	1,489,072

RSUs:

Each RSU entitles the holder to receive one common share in the future, based on continued service during the applicable period.

During the year ended September 30, 2021, KWESST granted 398,760 to directors and officers and 750,000 to consultants. The weighted-average grant date fair value of the RSUs granted in 2021 was $1.51 per unit  (2020 – $nil, 2019 - $nil). The weighted average vesting period for the outstanding RSUs is 0.69 years . KWESST recorded share-based compensation of $204,386 (2020 - $nil, 2019 - $nil) related to the RSUs.

PSUs:

Each PSU entitles the holder to receive one common share in the future, based on the achievement of established performance criteria and continued service during the applicable performance period.

During the year ended September 30, 2021, KWESST granted 50,000 PSUs to an employee and 150,000 PSUs to a consultant. The weighted-average grant date fair value of the PSUs granted in 2021 was $1.50 per unit

(2020 - $nil, 2019 - $nil). The weighted average vesting period for the outstanding PSUs is 0.40 years. KWESST recorded share-based compensation of $171,924 (2020 - $nil, 2019 - $nil) related to the PSUs.

SARs:

Each SAR entitles the holder to receive cash or common share at the discretion of the Company in the future, based on continued service during the applicable period. The amount of the cash payment or the value of common shares is determined based on the increase of the share price of KWESST between the grant date and the exercise date. Because KWESST intends to always settle in common shares, KWESST accounts for SARs as equity-settled awards.

During the year ended September 30, 2021, KWESST granted 150,000 SARs to a consultant at an exercise price of $1.65 each. KWESST recorded share-based compensation of $30,657 (2020 - $nil, 2019 - $nil) related to the SARs. The SARs will expire on July 20, 2022.

(iii)Share-based Compensation

The following table presents a breakdown of total share-based compensation expense by function:

		Year ended September 30, 2021		Nine months ended September 30, 2020		Year ended December 31, 2019
General and administrative	$	1,425,111	$	160,267	$	-
Selling and marketing		754,167		42,700		-
Research and development, net		282,929		80,117		-
Total share-based compensation	$	2,462,207	$	283,084	$	-

F-63

KWESST MICRO SYSTEMS INC.

Notes to Consolidated Financial Statements

Year ended September 30, 2021, nine months ended September 30, 2020, and

year ended December 31, 2019

(Expressed in Canadian dollars, except share amounts)

17.Earnings (loss) per share

The following table summarizes the calculation of the weighted average basic number of basic and diluted common shares:

	Year ended September 30, 2021	Nine months ended September 30, 2020	Year ended December 31, 2019
Issued common shares,  beginning of period	41,266,176	26,879,686	200
Effect of shares issued from:
Private placements	1,526,692	3,196,518	-
Exercise of options	638,292	31,282	-
Asset acquisitions	421,918	89,055	-
Exercise of warrants	306,776	-	-
Debt settlements	72,664	-	-
Amended license agreement	43,836	-	-
Exercise of broker options	11,979	-	-
Conversion of stock units	2,203	-	-
Conversion of convertible notes, including  interest	-	498,810	1,523,849
Services rendered	-	96,081	-
Qualifying transaction	-	52,697	-
Conversion of directors converted loans	-	-	7,082,192
Conversion of parent company converted loans	-	-	8,823,836
Weighted average number of basic common shares	44,290,536	30,844,129	17,430,077
Dilutive securities:
Stock options	-	-	-
Warrants	-	-	-
Weighted average number of dilutive common shares	44,290,536	30,844,129	17,430,077

At September 30, 2021, September 30, 2020, and December 31, 2019 , all the stock options and warrants were anti-dilutive because of KWESST’s net loss for both periods.

18.Revenue

a)Revenue streams

KWESST generates revenue from the sale of products to its customers.

b)Disaggregation of revenue from contracts with customers

In the following table, revenue from contacts with customers is disaggregated by primary geographical market, major products and service lines, and timing of revenue recognition.

F-64

KWESST MICRO SYSTEMS INC.

Notes to Consolidated Financial Statements

Year ended September 30, 2021, nine months ended September 30, 2020, and

year ended December 31, 2019

(Expressed in Canadian dollars, except share amounts)

		Year ended September 30, 2021		Nine months ended September 30, 2020		Year ended December 30, 2019
Major products / service lines
Digitization systems	$	1,255,982	$	835,097	$	472,749
Other		19,822		26,820		36,399
	$	1,275,804	$	861,917	$	509,148
Primary geographical markets
United States	$	1,238,063	$	835,097	$	472,749
Canada		37,741		26,820		36,399
	$	1,275,804	$	861,917	$	509,148
Timing of revenue recognition
Products and services transferred over time	$	1,238,063	$	835,097	$	472,749
Products transferred at a point in time		37,741		26,820		36,399
	$	1,275,804	$	861,917	$	509,148

Revenue allocated to remaining performance obligations represents contracted revenue that has not yet been recognized ("contracted not yet recognized") and includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods. At September 30, 2021, KWESST's contracted not yet recognized revenue was $16,545 (2020 - $233,193, 2019 - $nil), of which 100% of this amount is expected to be recognized over the next 12 months.

For the year ended September 30, 2021, one customer accounted for the revenue based in the United States (2020 - two customers, 2019 - one customer).

19.Expenses by nature

The following table presents a breakdown of expenses by nature for the following periods:

		Year ended September 30, 2021			Nine months ended  September 30, 2020			Year ended December 31, 2019
					(Adjusted - see Note 8)
Employee benefits	$	4,746,316		$	1,161,071		$	800,455
Advertising and promotion		1,914,630			220,946			23,181
Consulting fees		1,138,782			620,295			144,400
R&D consulting and material costs, net		482,348			100,483			170,852
Professional fees		722,457			190,398			97,840
Other expenses		497,120			106,007			44,578
Royalty and license costs		287,000			-			-
Travel and conferences		246,418			112,360			64,414
Depreciation and amortization		196,156			103,396			102,143
Merger and acquisition costs		22,255			1,561,860			-
Total expenses		10,253,482			4,176,816			1,447,863
Allocation to cost of sales:
Employee benefits		(574,018	)		(71,105	)		(9,487	)
Total operating expenses		9,679,464		$	4,105,711		$	1,438,376

F-65

KWESST MICRO SYSTEMS INC.

Notes to Consolidated Financial Statements

Year ended September 30, 2021, nine months ended September 30, 2020, and

year ended December 31, 2019

(Expressed in Canadian dollars, except share amounts)

20. Net finance costs

The following table presents a breakdown of net finance costs for the following periods:

			Year ended September 30,			Nine months ended September 30,			Year ended December 31,
			2021			2020			2019
						(Adjusted - see Note 8)
Interest expense from:
	Accretion cost - accrued royalties liability	$	64,537		$	-			-
	Lease obligations		33,872			31,242			24,523
	Related party loans		4,581			8,448			26,363
	Unsecured  loan		4,527			-			-
	CEBA term loan		4,481			-			-
	2019 convertible notes		-			44,899			179,972
	2020 convertible notes		-			-			-
	Other		4,115			5,885			14,289
Total interest expense			117,804			90,474			245,147
Interest income			(6,539	)		(2,454	)		-
Gain on termination of lease obligation			-			(17,527	)		-
Gain on government grant			(3,514	)		(9,096	)		-
Net finance costs		$	107,751		$	61,397		$	245,147

21. Income taxes

a)Reconciliation of effective income tax rate

KWESST's effective income tax rate differs from the statutory rate of 26.5% that would be obtained by applying the combined Canadian basic federal and provincial income tax rate to loss before income taxes. These differences result from the following:

		Year ended September 30, 2021			Nine months ended September 30, 2020			Year ended December 31,  2019
					(Adjusted - see Note 8)
Loss before income taxes	$	(9,315,372	)		(3,536,778	)		(1,147,280	)
Expected statutory tax rate		26.5%			26.5%			26.5%
Expected tax recovery resulting from loss		(2,468,574	)		(937,246	)		(304,029	)
Increase (reduction) in income taxes resulting from:
Non-deductible expenses		654,956			275,273			28,115
Foreign operations subject to different tax rates		3,593
Unrecognized temporary differences		1,826,279			661,973			275,914
Prior year differences		(16,254	)		-			-
	$	-		$	-		$	-

F-66

KWESST MICRO SYSTEMS INC.

Notes to Consolidated Financial Statements

Year ended September 30, 2021, nine months ended September 30, 2020, and

year ended December 31, 2019

(Expressed in Canadian dollars, except share amounts)

KWESST claims research and development deductions and related Investment Tax Credits ("ITC") for tax purposes based on management's interpretation of the applicable legislation in the Income Tax Act of Canada. These claims are subject to audit by the Canada Revenue Agency ("CRA") and any adjustments that results could affect ITCs recorded in the consolidated financial statements. The following table shows the breakdown of R&D expenses, net of ITCs:

		Year ended September 30, 2021			Nine months ended September 30,  2020			Year ended September 30, 2021
					(Adjusted - see Note 8)
R&D expenses	$	2,369,145		$	944,909		$	1,003,705
Less:
Investment tax credits		(231,007	)		(127,325	)		-
R&D expenses, net		2,138,138			817,584			1,003,705

b)Deferred tax balances

The following tables deferred tax assets (liabilities) have been recognized in the consolidated financial statements:

	Balance at September 30, 2020		Recognized in profit or loss		Recognized in Equity	Balance at September 30, 2021
Deferred tax assets (liabilities):
Net operating loss carryforwards	48,045		(48,045	)	-	-
Impairment provision	(48,045	)	48,045		-	-
	-		-		-	-
	Balance at December 31, 2019		Recognized in profit or loss		Recognized in Equity	Balance at September 30, 2020
Deferred tax assets (liabilities):
Net operating loss carryforwards	-		48,045		-	48,045
Impairment provision	-		(48,045	)	-	(48,045	)
	-		-		-	-

At December 31, 2019, the deferred tax assets (liabilities) recognized the consolidated financial statements were $nil.

c)Unrecognized net deferred tax assets

Deferred taxes reflect the impact of loss carryforwards and of temporary differences between amounts of assets and liabilities for financial reporting purposes and such amounts as measured by enacted tax laws. However, KWESST has not recorded net deferred tax assets at September 30, 2021, September 30, 2020 and December 31, 2019, due to the uncertainty involved in determining whether these deferred tax assets will be realized upon expiration due to KWESST's limited history and operating losses since its inception.

F-67

KWESST MICRO SYSTEMS INC.

Notes to Consolidated Financial Statements

Year ended September 30, 2021, nine months ended September 30, 2020, and

year ended December 31, 2019

(Expressed in Canadian dollars, except share amounts)

The following is a summary of KWESST's unrecognized deductible temporary differences:

	Balance at September 30, 2021	Balance at September 30, 2020	Balance at December 31, 2019
Net operating loss carryforwards	9,429,436	4,279,494	2,111,531
Share issuance costs	1,810,927	1,496,239	17,281
Intangibles and development costs	780,607	-	-
Scientific research and development expenditures	1,789,571	218,235	170,940
Other	104,793	46,891	22,106
	13,915,334	6,040,859	2,321,858

d)Available net operating losses

At September 30, 2021, KWESST has the following net operating losses in Canada available to reduce future year's taxable income which expire as follows:

Year of Expiry		Amount
2036	$	512,163
2037		744,022
2038		1,174,797
2039		1,732,039
2040 and thereafter		5,266,415
	$	9,429,436

e)Available research and development investment tax credits

The Company has the following research and development investment tax credits available to reduce future years' income taxes payable which expire as follows:

Year of Expiry		Amount
2037	$	13,361
2038		6,742
2039		-
2040 and thereafter		329,283
	$	349,386

22.Financial instruments

Fair value of financial instruments

The fair values of KWESST's cash, restricted short-term investment, trade and other receivables, accounts payable and accrued liabilities, deposit (included in non-current other assets), and related party loans approximate carrying value because of the short-term nature of these instruments.

F-68

KWESST MICRO SYSTEMS INC.

Notes to Consolidated Financial Statements

Year ended September 30, 2021, nine months ended September 30, 2020, and

year ended December 31, 2019

(Expressed in Canadian dollars, except share amounts)

Under IFRS, the levels of fair value hierarchy is as follows:

Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities;

Level 2: Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and

Level 3: inputs for the asset or liability that are not observable market data (unobservable inputs).

The lease deposit, lease obligations, accrued royalties liability, and borrowings were recorded at fair value at initial recognition.  The fair value measurement for these were Level 2. Subsequently, these were measured at amortized cost and accreted to their nominal value over their respective terms. At September 30, 2021, the fair value for accrued royalties liability approximates its carrying value as the 13.7% discount rate used at inception continues to reflect a reasonable market discount rate at September 30, 2021.  Using the same market discount rate, the fair value of the borrowings was $49,825 at September 30, 2021.

In connection with the issuance of the 2018 debentures and 2019 convertible notes (see note 15), management determined that the conversion feature was a financial derivative liability, requiring fair value remeasurement at each reporting period. Management used the Black-Scholes option model to remeasure the estimated fair value of the financial derivative liabilities (Level 2). 

The following table shows the movement of the financial derivative liabilities in 2019 and 2020:

		Total
Balance at December 31, 2018	$	111,953
Adjustment upon debentures converted to common shares		(111,953	)
Financial derivative liability on initial recognition		30,688
Remeasurement		(1,225	)
Balance at December 31, 2019		29,463
Adjustment upon convertible notes converted to common shares		(29,463	)
Balance at September 30, 2020	$	-

Financial risk management

KWESST is exposed to a number of financial risks arising through the normal course of business as well as through its financial instruments. KWESST's overall business strategies, tolerance of risk and general risk management philosophy are determined by the directors in accordance with prevailing economic and operating conditions.

(a)Interest rate risk

Interest rate risk is the risk that the fair value of cash flows of a financial instrument will fluctuate because of changes in market interest rates. At September 30, 2021, KWESST's indebtedness was interest free. Accordingly, KWESST has no interest rate risk.

(b)Foreign currency risk

Foreign currency risk is the risk that the future cash flows or fair value of KWESST's financial instruments that are denominated in a currency that is not KWESST's functional currency will fluctuate due to a change in foreign exchange rates.

F-69

KWESST MICRO SYSTEMS INC.

Notes to Consolidated Financial Statements

Year ended September 30, 2021, nine months ended September 30, 2020, and

year ended December 31, 2019

(Expressed in Canadian dollars, except share amounts)

For the year ended September 30, 2021 and nine months ended September 30 2020, KWESST's revenue was substantially denominated in US dollar driven by contracts with U.S. prime contractors in the defense sector. KWESST also procures certain raw materials denominated in US dollar for product development. Accordingly, KWESST is exposed to the US dollar currency. Where a natural hedge cannot be achieved, a  significant change in the US dollar currency could have a significant effect on KWESST's financial performance, financial position and cash flows. Currently, KWESST does not use derivative instruments to hedge its US dollar exposure.

At September 30, 2021, KWESST had the following net US dollar exposure:

		Total USD
Net liabilities in U.S. subsidiary	$	6,221
US denominated:
Assets	$	268,178
Liabilities		(74,720	)
Net US dollar exposure	$	187,237
Impact to profit  or loss if 5% movement in the US dollar	$	9,362

During the year ended September 30, 2021, KWESST recorded foreign exchange loss of $3,742 (2020 - $13,937, 2019 - $982).

(c)Credit risk

Credit risk is the risk of financial loss to KWESST if a counterparty to a financial instrument fails to meet its contractual obligations. KWESST's credit risk exposure is limited to cash, and trade and other receivables. Refer to Note 5 for the breakdown of KWESST's trade and other receivables. KWESST enters into contracts with large, financially sound US general contractors, which mitigates the credit risk. At September 30, 2021, KWESST had no outstanding trade receivable. The remaining receivable is due from the Canadian Federal and Provincial Government for sales tax recoverable and investment tax credits.

(d)              Liquidity risk

Liquidity risk is the risk that KWESST will be unable to meet its financial obligations as they become due. KWESST's objective is to ensure that it has sufficient cash to meet its near-term obligation when they become due, under both normal and stressed condition, without incurring unacceptable losses or risking reputational damage to KWESST. A key risk in managing liquidity is the degree of uncertainty in KWESST's cash flows due to its early stage in operations and the need for additional capital to fund its business strategies (see Note 2(a)).

At September 30, 2021, our contractual obligations were as follows:

Payment due:		Total		Within 1 Year		1 to 3 years		3 to 5 years
Minimum royalty commitments	$	2,500,000	$	-	$	150,000	$	2,350,000
Accounts payable and accrued liabilities		1,067,924		1,067,924		-		-
Lease obligations		390,000		62,400		187,200		140,400
Other commitments		101,928		101,928		-		-
Borrowings		60,000		-		60,000		-
Total contractual obligations	$	4,119,852	$	1,232,252	$	397,200	$	2,490,400

At September 30, 2021, KWESST had $2.7 million in cash and $2.9 million in working capital (current assets less current liabilities).

F-70

KWESST MICRO SYSTEMS INC.

Notes to Consolidated Financial Statements

Year ended September 30, 2021, nine months ended September 30, 2020, and

year ended December 31, 2019

(Expressed in Canadian dollars, except share amounts)

23. Supplemental cash flow information

The following table presents changes in non-cash working capital:

		Year ended September 30, 2021			Nine months ended September 30, 2020			Year ended December 31, 2019
Trade and other receivables	$	(218,334	)	$	(257,588	)	$	(41,465	)
Inventories		17,555			-			-
Prepaid expenses and other		(106,205	)		(387,762	)		(36,629	)
Other assets		-			-			(150,000	)
Accounts payable and accrued liabilities		(828,698	)		393,202			86,519
Contract liabilities		(7,053	)		7,053			-
Deposits		150,000			-			-
Accrued royalties liability		1,191,219			-			-
	$	198,484		$	(245,095	)	$	(141,575	)

The following is a summary of non-cash items that were excluded from the consolidated statements of cash flows for the year ended September 30, 2021:

• $63,866 debt settlement via common shares;
• $125,000 for 250,000 exercised warrants in connection with the GhostStep^TM acquisition (Note 4(c));
• $102,991 fair value of warrants exercised and transferred to share capital;
• $203,516 fair value of options exercised and transferred to share capital from contributed surplus;
• $1,715,000 fair value of common shares and warrants issued for the acquisition of the LEC System (Note 4(a)),
• $137,000 fair value of common shares issued for the amended and restated license agreement with AerialX (Note 26(a));
• $169,832 share offering costs relating to the Broker Compensation Options (Note 16(a)); and
• $3,828 non-cash consideration for computer equipment acquired.

The following is a summary of non-cash items that were excluded from the consolidated statements of cash flows for the nine months ended September 30, 2020:

• $358,178 of right-of-use asset and lease obligations relating to the new office lease;
• $139,787 of right-of-use asset and $157,315 lease obligations de-recognized from KWESST's consolidated financial position relating to the former lease office;
• $347,280 of KWESST's common shares and warrants for the asset acquisition of GhostStep^TM Technology;
• $255,718 of convertible notes, including accrued interest, settled in KWESST's common shares;
• $322,779 of share offering costs settled in KWESST's common shares;
• $41,155 of options adjustment due to QT (see note 4(b)); and
• $17,531 fair value of options exercised and transferred to KWESST's common shares.

The following is a summary of non-cash items that were excluded from the consolidated statements of cash flows for the twelve months ended December 31, 2019:

• $1,290,255 common shares and warrants for settlement of loans.

F-71

KWESST MICRO SYSTEMS INC.

Notes to Consolidated Financial Statements

Year ended September 30, 2021, nine months ended September 30, 2020, and

year ended December 31, 2019

(Expressed in Canadian dollars, except share amounts)

24. Segmented information

KWESST's Executive Chairman has been identified as the chief operating decision maker. The Executive Chairman evaluates the performance of KWESST and allocates resources based on the information provided by its internal management system at a consolidated level. KWESST has determined that it has only one operating segment.

At September 30, 2021, September 30, 2020 and December 31, 2019, all of KWESST's property and equipment are located in Canada, including the right-of-use assets.

25. Capital management

KWESST's objective in managing its capital is to safeguard its ability to continue as a going concern and to sustain future development of the business. The Company's senior management is responsible for managing the capital through regular review of financial information to ensure sufficient resources are available to meet operating requirements and investments to support its growth strategy. The Board of Directors is responsible for overseeing this process. From time to time, KWESST could issue new common shares or debt to maintain or adjust its capital structure. KWESST is not subject to any externally imposed capital requirements.

KWESST's capital is composed of the following:

		September 30, 2021			September 30, 2020			December 31, 2019
Debt:
Lease obligations	$	307,909		$	352,037		$	202,686
Related party loans		-			218,276			289,828
Borrowings		53,251			32,273			-
Convertible notes		-			-			210,819
Equity:
Share capital		17,215,068			9,374,563			2,284,353
Warrants		1,848,389			277,170			21,050
Contributed surplus		2,458,211			306,708			-
Accumulated other comprehensive loss		(8,991	)		-			-
Accumulated deficit		(15,388,949	)		(6,073,577	)		(2,536,799	)
Total capital	$	6,484,888		$	4,487,450		$	471,937

26.Commitments and contingencies

a)AerialX Drone Solutions ("AerialX")

On April 5, 2021, KWESST entered into an amended and restated licensing agreement with AerialX to gain exclusive rights to manufacture, operate, and use its drone for the C-UAS (Counter Unmanned Aerial Systems) market, specifically for the United States Department of Defense and Canada's Department of National Defence for a period of two years from the date upon which AerialX will meet certain technical milestones. In consideration for this exclusivity, KWESST has issued 100,000 common shares to AerialX ("Exclusive License Shares"). Based on KWESST's closing stock price of $1.37 on April 23, 2021 (TSX-V approval date), the fair value for these shares was $137,000. KWESST recorded the $137,000 fair value as a license cost for the year ended September 30, 2021, with an equal offset to KWESST's share capital.

F-72

KWESST MICRO SYSTEMS INC.

Notes to Consolidated Financial Statements

Year ended September 30, 2021, nine months ended September 30, 2020, and

year ended December 31, 2019

(Expressed in Canadian dollars, except share amounts)

In addition to the Exclusive License Shares, KWESST also agreed to issue an additional 100,000 common shares upon AerialX achieving the technical milestones. For the year ended September 30, 2021, Aerial X has not delivered on the technical milestones and therefore no recognition was made.

Additionally, KWESST also agreed to issue up to 300,000 common shares subject to achieving the following performance milestones:

# of Common Shares	Milestones
75,000	$3 million in sales
100,000	$9 million in sales
125,000	$18 million in sales

The amended and restated licensing agreement also changed the terms of the annual minimum royalty payment to AerialX. The initial minimum royalty payment is not due prior to the first anniversary year of the Prototype Date, which is defined under the agreement as the date upon which a functioning prototype is received by KWESST.

Under this agreement, KWESST will pay a royalty ranging from 8% to 15% of sales of AerialX technology, subject to the following minimum payments:

• 1^st anniversary: $150,000
• 2^nd anniversary: $200,000
• 3^rd anniversary: $300,000
• 4^th anniversary: $400,000
• 5^th anniversary: $500,000

In accordance with the original agreement dated November 18, 2019, in the first quarter of Fiscal 2020 KWESST made a payment of $150,000 as an advance for future royalty payments (the "Advance"). This Advance was recorded as a non-current deposit in the audited consolidated statements of financial position at December 31, 2019 and September 30, 2020. During the year ended September 30, 2021, management performed a recoverability review of all KWESST's financial assets, including this Advance. Management made the recoverability assessment on the Advance based on anticipated future sales of the licensed technology. While KWESST continues to work with AerialX on this project, management has concluded the timing and volume of future sales of the licensed drone was uncertain at this stage given AerialX has not yet met the technological milestones. Accordingly, KWESST took a charge to net loss. This charge is included in general and administrative expenses in the condensed consolidated interim statements of net loss and comprehensive loss.

Under the amended and restated licensing agreement, KWESST will continue to have non-exclusive worldwide license. This agreement will expire on April 30, 2026.

b)STRYK Group USA, LLC ("STRYK")

On September 24, 2021, KWESST entered into a services agreement with STRYK to obtain branding and website management services over a period of four months from the date upon which the agreement was signed. These services are focused on strategic promotional activities related to the LEC System. Under the agreement, KWESST has committed to future minimum payments of $101,928, due within the next fiscal year.

F-73

KWESST MICRO SYSTEMS INC.

Notes to Consolidated Financial Statements

Year ended September 30, 2021, nine months ended September 30, 2020, and

year ended December 31, 2019

(Expressed in Canadian dollars, except share amounts)

27. Depreciation and Amortization

The following table presents total depreciation and amortization expense of property and equipment and right-of-use assets by function:

		2021		2020		2019
General and administrative	$	95,310	$	89,307	$	91,084
Selling and marketing		16,443		-		-
Research and development		29,237		14,090		11,058
Total depreciation and amortization	$	140,990	$	103,397	$	102,142

F-74

Condensed Interim Consolidated Financial Statements of

KWESST MICRO SYSTEMS INC.

Nine months ended September 30, 2020, and

Twelve months ended December 31, 2019

(Expressed in Canadian Dollars)

F-75

KWESST MICRO SYSTEMS INC.

Table of Contents for the Nine months Ended September 30, 2020 and twelve months ended December 31, 2019

	Page
Independent Auditor's Report	F-77
FINANCIAL STATEMENTS
Consolidated Statements of Financial Position	F-79
Consolidated Statements of Net Loss and Comprehensive Loss	F-80
Consolidated Statements of Changes in Shareholders' Equity	F-81
Consolidated Statements of Cash Flows	F-82
Notes to the Consolidated Financial Statements	F-83

F-76

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of KWESST Micro Systems Inc.

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated statements of financial position of KWESST Micro Systems Inc. (the "Company") as of September 30, 2020 and December 31, 2019, and the related consolidated statements of loss and comprehensive loss, changes in shareholders' equity, and cash flows for the nine month ended September 30, 2020 and twelve months ended December31, 2019, and the related notes (collectively referred to as the "consolidated financial statements").

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2020 and December 31, 2019, and its financial performance and its cash flows for the periods then ended, in conformity with the International Financial Reporting Standards as issued by the International Accounting Standards Board.

Correction in the application of IFRS 16 Leases

As discussed in Note 8, the consolidated financial statements for the nine months ended September 30, 2020 have been adjusted for a correction in the application of IFRS 16 Leases.

Material Uncertainty Related to Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2(a) to the consolidated financial statements, the Company has incurred significant losses and negative cash flows from operations since inception that raise substantial doubt about its ability to continue as a going concern. Management's plans regarding these matters are also described in Note 2(a). The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified in respect of this matter.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

Kreston GTA LLP | 8953 Woodbine Avenue, Markham, Ontario, Canada, L3R 0J9, T. 905.474.5593 | www.krestongta.com

A member of Kreston International | A global network of independent accounting firms

F-77

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Emphasis of Matter

As discussed in Note 26(b) to the consolidated financial statements, subsequent to the fiscal year 2020, the Company has completed an asset acquisition transaction with a related party under common control by issuance of common shares and share purchase warrants of the Company. Our opinion is not modified in respect of this matter.

We served as the Company's auditor since 2019.

/s/ Kreston GTA LLP

Chartered Professional Accountants

Licensed Public Accountants

November 22, 2021

Markham, Canada

Kreston GTA LLP | 8953 Woodbine Avenue, Markham, Ontario, Canada, L3R 0J9, T. 905.474.5593 | www.krestongta.com

A member of Kreston International | A global network of independent accounting firms

F-78

KWESST MICRO SYSTEMS INC.
Consolidated Statements of Financial Position
At September 30, 2020 and December 31, 2019

In Canadian dollars	Note		September 30, 2020			December 31, 2019
			(Adjusted - See Note 8)			(As restated - see Note 25)
ASSETS
Cash		$	3,073,760		$	21,615
Trade and other receivables	5		480,917			219,803
Prepaid expenses and other			441,837			54,075
Current assets			3,996,514			295,493
Property and equipment	6		174,644			70,122
Right-of-use assets	8		327,576			184,472
Deposits	8		19,341			-
Intangible assets	7		644,702			-
Other assets	25		150,000			150,000
Non-current assets			1,316,263			404,594
Total Assets		$	5,312,777		$	700,087
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Liabilities
Accounts payable and accrued liabilities	9	$	818,274		$	198,687
Lease obligations	12		44,128			85,468
Related party loans	10		218,276			289,828
Borrowings	11		32,273			-
Deferred revenue	13		7,053			-
Financial derivative liabilities	14		-			29,463
Current liabilities			1,120,004			603,446
Lease obligations	12		307,909			117,218
Convertible notes	15		-			210,819
Non-current liabilities			307,909			328,037
Total Liabilities			1,427,913			931,483
Shareholders' Equity (Deficit)
Share capital	16		9,374,563			2,284,353
Contributed surplus	16		583,878			21,050
Accumulated deficit			(6,073,577	)		(2,536,799	)
Total Shareholders' equity (deficit)			3,884,864			(231,396	)
Total Liabilities and Shareholders' Equity (Deficit)		$	5,312,777		$	700,087

See Note 2(a) Going concern and Note 24 Commitments and contingencies.

See accompanying notes to consolidated financial statements.

On behalf of the Board of Directors:
(signed) John McCoach, Director	(signed) David Luxton, Director

F-79

KWESST MICRO SYSTEMS INC.
Consolidated Statements of Net Loss and Comprehensive Loss
For the nine months ended September 30, 2020 and the twelve months ended December 31, 2019

In Canadian dollars	Note		Nine Months ended September 30, 2020			Twelve months ended December 31, 2019
			(Adjusted  - see Note 8)			(As restated - see Note 25)
Revenue	18	$	861,917		$	509,148
Cost of sales			(247,113	)		(85,101	)
Gross profit			614,804			424,047
Operating expenses
General and administrative	4, 10, 16		2,723,861			397,990
Selling and marketing			564,266			36,681
Research and development, net			817,584			1,003,705
Total operating expenses			4,105,711			1,438,376
Operating loss			(3,490,907	)		(1,014,329	)
Other income (expenses)
Fair value adjustments on derivatives	14		29,463			113,178
Net finance costs	10, 12, 15		(61,397	)		(245,147	)
Foreign exchange gain (loss)			(13,937	)		(982	)
Total other income (expenses)			(45,871	)		(132,951	)
Loss before income taxes			(3,536,778	)		(1,147,280	)
Income tax recovery:	19
Current tax recovery			-			-
Deferred tax recovery			-			-
Net loss and comprehensive loss		$	(3,536,778	)	$	(1,147,280	)
Net Loss per share
Basic and diluted		$	(0.11	)	$	(0.07	)
Weighted average number of shares outstanding
Basic and diluted	17		30,844,129			17,430,077

See accompanying notes to consolidated financial statements. 

F-80

KWESST MICRO SYSTEMS INC.
Consolidated Statements of Changes in Shareholders' Equity
For the nine months ended September 30, 2020 and the twelve months ended December 31, 2019

In Canadian dollars		Common Shares					Contributed Surplus								Total Shareholders' Equity
[Refer to Note 16]	Other Notes	Number Issued		Share Capital			Warrants		Options			Deficit
Balance, December 31, 2018		200	$	200		$	-	$	-		$	(1,389,519	)	$	(1,389,319	)
Shares issued for cash		5,075,000		1,014,948			-		-			-			1,014,948
Shares issued for debt		21,804,486		1,269,205			1,192		-			-			1,270,397
Warrants issued for debt		-		-			19,858		-			-			19,858
Net loss	25	-		-			-		-			(1,147,280	)		(1,147,280	)
Balance, December 31, 2019		26,879,686	$	2,284,353		$	21,050	$	-		$	(2,536,799	)	$	(231,396	)
Shares and warrants issued in a brokered private placement		4,409,553		3,087,138			60,340		-			-			3,147,478
Shares for converted debt and interest		3,666,689		1,583,881			-		-			-			1,583,881
Shares and warrants issued in non-brokered private placements		3,486,750		1,480,875			15,780		-			-			1,496,655
Shares issued for performance incentive		1,045,000		731,500			-		-			-			731,500
Shares from Foremost's qualifying transaction	4(a)	898,498		628,949			-		41,155			-			670,104
Shares and warrants issued on acquisition of technology asset	4(b)	697,000		167,280			180,000					-			347,280
Stock options exercised		122,000		78,080			-		(17,531	)		-			60,549
Shares for consulting services		61,000		32,393			-					-			32,393
Share-based payments		-		-					283,084			-			283,084
Share offering costs		-		(699,886	)		-					-			(699,886	)
Net loss		-		-			-					(3,536,778	)		(3,536,778	)
Balance, September 30, 2020		41,266,176	$	9,374,563		$	277,170	$	306,708		$	(6,073,577	)	$	3,884,864

See accompanying notes to consolidated financial statements.

F-81

KWESST MICRO SYSTEMS INC.
Consolidated Statements of Cash Flows
For the nine months ended September 30, 2020 and the twelve months ended December 31, 2019

In Canadian dollars			Note		Nine months ended September 30, 2020			Twelve months ended December 31, 2019
					(Adjusted - See Note 8)			(As restated - see Note 25)
OPERATING ACTIVITIES
	Net loss			$	(3,536,778	)	$	(1,147,280	)
	Items not affecting cash:
		Depreciation and amortization	6, 8		103,397			102,142
		Share-based compensation	17		283,084			-
		Shares for M&A advisory and consulting services			763,893			-
		Fair value adjustments on derivative liabilities	14		(29,463	)		(113,178	)
		Non-cash listing expense (included in M&A costs)	4(a)		814,703			-
		Net finance costs			61,217			230,858
	Changes in non-cash working capital items		21		(245,095	)		(141,575	)
	Interest paid				(6,612	)		(24,523	)
Cash used in operating activities					(1,791,654	)		(1,093,556	)
INVESTING ACTIVITIES
	Acquisition of property and equipment		6		(133,927	)		(20,190	)
	Acquisition of technology asset		4(b)		(163,230	)		-
	Investments in development projects		9		(38,212	)		-
	Deposit for long-term office lease				(134,192	)		-
	Cash acquired on closing of Foremost		4(a)		78,589			-
Cash flows used in investing activities					(390,972	)		(20,190	)
FINANCING ACTIVITIES
	Proceeds from the issuance of common shares		16		4,355,171			1,014,948
	Proceeds from convertible notes and converted to equity		17		1,081,504			-
	Payments of share offering costs		17		(164,716	)		-
	Proceeds from borrowings		11		40,000			-
	Repayment of borrowings				-			(10,747	)
	Repayments to related party loans		10		(80,000	)		(70,513	)
	Proceeds from related party loans		10		-			310,684
	Repayments of lease obligations		12		(58,188	)		(77,367	)
	Repayments of convertible notes		15		-			(31,644	)
	Proceeds from exercise of stock options		16		61,000			-
Cash flows provided by financing activities					5,234,771			1,135,361
Net change in cash during the period					3,052,145			21,615
Cash, beginning of period					21,615			-
Cash, end of period				$	3,073,760		$	21,615

See Note 21 for supplemental cash flow information

See accompanying notes to consolidated financial statements.

F-82

KWESST MICRO SYSTEMS INC.
Notes to Consolidated Financial Statements
Nine months ended September 30, 2020 and twelve months ended December 31, 2019
(Expressed in Canadian dollars, except share and per share amounts)

1.Corporate information

KWEEST Micro Systems Inc. (the "Company" or "KWESST"), formerly Foremost Ventures Corp. (''Foremost''), was incorporated on November 28, 2017, under the laws of the Province of British Columbia. The Company's registered office is located at 550 Burrard Street, Suite 2900, Vancouver, British Columbia, Canada. Its corporate office is located at Unit 1, 155 Terrence Matthews Crescent, Ottawa, Ontario, Canada.

On September 17, 2020, Foremost completed a Qualifying Transaction ("the QT") with KWESST Inc., a private company, was incorporated under the laws of the Province of Ontario on April 24, 2017. The QT constituted a reverse acquisition in accordance with IFRS as the shareholders of KWESST Inc. took control of Foremost (Note 4(a)). At the time of the QT, Foremost did not constitute a business as defined under IFRS 3 - Business Combinations, and therefore the QT was accounted for as an asset acquisition. As KWESST Inc. was deemed to be the acquirer for accounting purposes, the resulting consolidated statements of financial position was presented as a continuance of KWESST Inc.'s operations at their historical carrying values, and the comparative figures presented are those of KWESST Inc. The results of operations, the cash flows, and the assets and liabilities of Foremost have been included in these consolidated financial statements since September 17, 2020.

Following the QT, KWESST, pursuant to Section 4.8(2) of National Instrument 51-102, provided notice that KWESST has changed its fiscal year end to September 30th from December 31st. Accordingly, these consolidated financial statements presented herein are as at and for the nine months ended September 30, 2020 with comparatives as at and for the twelve months ended December 31, 2019.

KWESST develops and markets innovative products to create ''intelligent tactical systems'' and proprietary technology for game-changing applications in the military and homeland security market. KWESST's core technology has multiple applications based on its micro integrated sensor software technology, or MISST, a proprietary integration of miniaturized sensors, optics, ballistics and software that provides an advancement in affordable smart systems and mission capability.

KWESST's common stock is listed on the TSX-Venture Exchange (''TSX-V'') under the stock symbol of KWE.

2.Basis of preparation

(a)Going concern

These consolidated financial statements have been prepared assuming KWESST will continue as a going concern.

As an early-stage company, KWESST has incurred significant losses and negative operating cash flows from inception that have primarily been funded from financing activities. The Company incurred approximately $3.5 million net loss and negative operating cash flows of approximately $1.8 million for the nine months period ended September 30, 2020 (2019 - $1.1 million net loss and negative operating cash flows of $1.1 million for 12 months). At September 30, 2020, KWESST had a working capital of $2.9 million (December 31, 2019 - working capital deficiency of $0.3 million).

The Company's ability to continue as a going concern and realize its assets and discharge its liabilities in the normal course of business is dependent upon closing timely additional sales orders, achieving sustained profitability and the ability to raise additional debt or equity financing, if required, to fund its working capital requirements. There are various risk and uncertainties affecting KWESST's operating including, but not limited to:

F-83

KWESST MICRO SYSTEMS INC.
Notes to Consolidated Financial Statements
Nine months ended September 30, 2020 and twelve months ended December 31, 2019
(Expressed in Canadian dollars, except share and per share amounts)

• The market acceptance and rate of commercialization of the KWESST's offerings;
• Ability to successfully execute its business plan;
• Ability to raise additional capital at acceptable terms;
• General local and global economic conditions, including the ongoing COVID-19 pandemic, certain of which are beyond the Company's control.

KWESST's strategy to mitigate these risks and uncertainties is to execute timely a business plan aimed at continued focus on revenue growth, product development and innovation, improving overall gross profit, managing operating expenses and working capital requirements, and securing additional capital, as needed. There are no guarantees that the funds raised will be sufficient to sustain KWESST's ongoing operations beyond twelve months or that additional debt or equity financing will be available to the Company or available at acceptable terms. Failure to implement the Company's business plan could have a material adverse effect on the Company's financial condition and/or financial performance. Accordingly, there are material risks and uncertainties that cast significant doubt about KWESST's ability to continue as a going concern.

These consolidated financial statements do not include any adjustments or disclosures that would be required if assets are not realized and liabilities and commitments are not settled in the normal course of operations. If KWESST is unable to continue as a going concern, then the carrying value of certain assets and liabilities would require revaluation to a liquidation basis, which could differ materially on the values presented in the financial statements.

(b)Statement of compliance

These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (''IFRS'') as issued by the International Accounting Standards Board ("IASB") and interpretations of the IFRS Interpretations Committee ("IFRIC''). 

The consolidated financial statements were authorized for issue by the Board of Directors on January 28, 2021.

(b)Principles of consolidation

These consolidated financial statements incorporate the financial statements of KWESST and the entity it controls.

Control is achieved where KWESST has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities, are exposed to, or have rights to, variable returns from the Company's involvement with the entity and have the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Company until the date on which control ceases. Profit or loss of subsidiaries acquired during the year are recognized from the date of acquisition or effective date of disposal as applicable. All intercompany transactions and balances have been eliminated.

At September 30, 2020, the Company has one wholly-owned subsidiary: KWESST Inc.

(c)Functional and presentation currency

The consolidated financial statements are presented in Canadian dollars ("CAD"), which is the functional currency of KWESST and its subsidiary.

F-84

KWESST MICRO SYSTEMS INC.
Notes to Consolidated Financial Statements
Nine months ended September 30, 2020 and twelve months ended December 31, 2019
(Expressed in Canadian dollars, except share and per share amounts)

(d)Measurement basis

The consolidated financial statements have been prepared on the historical cost basis except for certain financial instruments measured at fair value. Historical cost is generally based on the fair value of the consideration given in exchange for assets.

(e)Comparative figures

Certain comparative figures in the consolidated statements of net loss and comprehensive loss have been reclassified to conform with the current period's presentation.

(f)Use of estimates and judgments

The preparation of the consolidated financial statements in accordance with IFRS requires management to make judgments, estimates, and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income, expenses, and disclosure of contingent liabilities. Actual results may differ from these estimates.

The continuing uncertainty around the outbreak of the novel coronavirus ("COVID-19"') pandemic required the use of judgements and estimates in the preparation of the consolidated financial statements for the nine months ended September 30, 2020. The future impact of COVID-19 uncertainties could generate, in future reporting periods, a significant impact to the reported amounts of assets, liabilities, revenue and expenses in these and any future financial statements.

Critical judgments that management has made in applying KWESST's accounting policies that the most significant effect on the amounts recognized in the consolidated financial statements include: assessment of KWESST's ability to continue as a going concern (Note 2(a)); and determination of the functional currency of the principal operations of KWESST(Note 2(c)).

Significant areas having estimation uncertainty in applying accounting policies that have the most significant effect on the amounts recognized in the financial statements:

Revenue recognition

To date, substantially all of the Company's revenue arise from providing customized tactical system solutions to customers at an amount that reflects the consideration KWESST expects to receive in exchange for the system offering.

The timing of revenue recognition often differs from contract payment milestones, resulting in revenue that has been earned but not billed. These amounts are included in unbilled receivables. Amounts billed in accordance with customer contracts, but not yet earned, are recorded and presented as part of deferred revenue. At September 30, 2020, management determined there was no unbilled receivables.

Fair value of acquired intangible assets

KWESST estimates the fair value of technology acquired based on observable market inputs. Because KWESST Inc. was a private company at the time of closing the GhostStep® Technology acquisition (see Note 4(b)), the common shares issued under this transaction were not actively trading on a stock exchange. Accordingly, management measured the fair value of the common shares based on the cash versus shares election available under the purchase agreement. Specifically, KWESST Inc. had the sole discretion to pay USD $100,000 (CAD $134,192) or issue 557,000 common shares to SageGuild. This implies a fair value of $0.24 per common share of KWESST Inc. at the time of closing the transaction.

F-85

KWESST MICRO SYSTEMS INC.
Notes to Consolidated Financial Statements
Nine months ended September 30, 2020 and twelve months ended December 31, 2019
(Expressed in Canadian dollars, except share and per share amounts)

Accordingly, for the purpose of estimating the fair value of the warrants issued under this transaction (see contingent consideration below), management used $0.24 as the underlying stock price for one of the key inputs in the Black-Scholes pricing model.

Contingent consideration

The GhostStep® Technology acquisition included contingent consideration in which KWESST Inc. issued 750,000 warrants to SageGuild which are cancellable if service condition is not met (see Note 4(b)). The rights granted under warrants shall vest and be exercisable as to 250,000 warrants on each of December 31, 2020, 2021, and 2022 if service condition is met. Subject to the service condition being met, on each of these three vesting dates, SageGuild shall be deemed to have exercised 250,000 warrants for an aggregate purchase price of $125,000.

Under IFRS, the contingent consideration is classified as either a financial liability or equity based on the feature of the contingent consideration and how the number of shares to be issued is determined. Where a fixed number of shares either will or will not be issued depending on future events, the contingent consideration meets the definition of equity. The SageGuild warrants were classified as equity and the subsequent settlement will also be accounted for within equity. The contingent consideration is required to be recognized at the acquisition date fair value even if it is not deemed to be probable of payment at the date of the acquisition.

Treatment of development costs

Costs to develop products are capitalized to the extent that the criteria for recognition as intangible assets in IAS 38, Intangible Assets are met. Those criteria require that the product is technically and economically feasible, which management assessed based on the attributes of the development project, perceived user needs, industry trends, and expected future economic conditions. Management considers these factors in aggregate and applies significant judgment to determine whether the product is feasible.

Impairment of intangible assets

At September 30, 2020, the intangible assets relates primarily the GhostStep® Technology recorded at its fair value at the acquisition date (see Note 8). Because the GhostStep® Technology is pre-commercial stage with no similar technology in the current marketplace, there is significant management judgement in projecting anticipated global market demand, pricing, and gross profit for this electronic decoy technology; all key inputs in management's discounted cash flow model to determine the recoverable amount. An impairment loss is recognized if the recoverable amount of the asset is less than the carrying amount.

Useful lives of property and equipment

As KWESST is an early-stage company, it has limited operating history to estimate the useful lives of property and equipment. Management made estimates based on anticipated use. Further, management has determined the residual value of these assets to be nil. At September 30, 2020, management concluded there was no evidence of a change in the useful lives of property and equipment.

Fair value of share-based payments and warrants

Because KWESST Inc. has limited operating history and was a private company at the time of granting stock options and issuing warrants during the nine months ended September 30, 2020, management exercised significant judgement in estimating the fair value of stock options and warrants. Fair value is estimated using the Black-Scholes pricing model, which requires management to make significant judgment principally on the following key inputs: expected life of the stock option and volatility of the underlying share price. For share-based payment, management must also apply an estimated forfeiture rate to the calculated fair value, which is subject to significant judgement due to the Company's limited history.

F-86

KWESST MICRO SYSTEMS INC.
Notes to Consolidated Financial Statements
Nine months ended September 30, 2020 and twelve months ended December 31, 2019
(Expressed in Canadian dollars, except share and per share amounts)

3.Significant accounting policies

KWESST used the following significant accounting policies for the preparation of the consolidated financial statements. These policies have been applied to the comparative period.

(a)Revenue recognition

KWESST determines the amount of revenue to be recognized through application of the following five-step process:

(i)Identification of the contract, or contracts with a customer;

(ii)Identification of the performance obligations in the contract;

(iii)Determination of the transaction price;

(iv)Allocation of the transaction price to the performance obligations in the contract; and

(v)Recognition of revenue when or as the Company satisfies the performance obligations.

For contracts with payment milestones, Management estimates the percentage of completion and records unbilled revenue.

KWESST also recognizes an asset for the incremental costs of obtaining a contract with a customer if it expects the costs to be recoverable. Management has determined that sales commissions meet the requirements to be capitalized. Capitalized contract acquisition costs are amortized consistent with the pattern of transfer to the customer for the goods and services to which the asset relates. KWESST applies the practical expedient available under IFRS 15 and does not capitalize incremental costs of obtaining contracts if the amortization period is one year or less.

(b)Financial instruments

KWESST recognizes a financial asset or a financial liability when it becomes a party to the contractual provisions of the instrument.

Trade and other receivables without a significant financing component are initially measured at the transaction price. All other financial assets and financial liabilities are initially recognized at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss (''FVTPL'')) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognized immediately in profit or loss.

Financial assets

All financial assets are recognized and de-recognized on trade date.

Financial assts are recognized at fair value and subsequently classified and measured at:

a)Amortized cost;

b)Fair value through other comprehensive income (''FVOCI''); or

F-87

KWESST MICRO SYSTEMS INC.
Notes to Consolidated Financial Statements
Nine months ended September 30, 2020 and twelve months ended December 31, 2019
(Expressed in Canadian dollars, except share and per share amounts)

c)Fair value though profit or loss (''FVTPL'').

KWESST determines the classification of its financial assets on the basis of both the business model for managing the financial assets and the contractual cash flows characteristics of the financial asset. Financial assets are not reclassified subsequent to their initial recognition unless the Company changes its business model for managing financial assets.

A financial asset is measured at amortized cost if it is held within a business model whose objective is to hold assets to collect contractual cash flows, and its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest of the principal amount outstanding. At September 30, 2020, KWESST classified the following as amortized cost:

• Cash
• Trade and other receivables
• Lease deposit (non-current other asset)

All financial assets not classified and measured at amortized cost or FVOCI are measured at FVTPL. At September 30, 2020, KWESST did not have financial assets classified as FVOCI or FVTPL.

Expected credit losses

KWESST measures a loss allowance based on the lifetime expected credit losses. Lifetime expected credit losses are estimated based on factors such as KWESST's past experience of collecting payments, the number of delayed payments in the portfolio past the average credit period, observable changes in national or local economic conditions that correlate with default on receivables, financial difficulty of the borrower, and it becoming probable that the borrower will enter bankruptcy or financial re-organization.

Financial assets are written off when there is no reasonable expectation of recovery.

Financial liabilities

Financial liabilities are recognized at fair value and subsequently classified and measured at

amortized cost or fair value though profit or loss (''FVTPL'').

KWESST determines the classification of its financial liabilities at initial recognition. The Company has classified the following as amortized costs:

• Accounts payable and accrued liabilities
• Related party loans
• Borrowings
• Lease obligations
• Convertible notes

Financial liabilities at amortized cost are measured using the effective interest rate method.

At September 30, 2020 and December 31, 2019, KWESST classified financial derivative liabilities as FVTPL.  Accordingly, fair value is remeasured at each reporting period with the fair value adjustment recognized in profit or loss. There was no outstanding financial derivative liability at September 30, 2020.

F-88

KWESST MICRO SYSTEMS INC.
Notes to Consolidated Financial Statements
Nine months ended September 30, 2020 and twelve months ended December 31, 2019
(Expressed in Canadian dollars, except share and per share amounts)

De-recognition of financial liabilities

KWESST de-recognizes financial liabilities when its obligations are discharged, cancelled or they expire.

(c)Property and equipment

Property and equipment are measured at cost less accumulated depreciation and accumulated impairment losses. Cost comprises the fair value of consideration given to acquire or construct an asset and includes the direct charges associated with bringing the asset to the location and condition necessary for putting it into use along with the future cost of dismantling and removing the asset. These assets are depreciated over their estimated useful lives using the straight-line method as this most closely reflects the expected pattern of consumption o the future economic benefits. Depreciation methods, useful lives and residual values are reviewed at each financial year end and adjusted prospectively, if appropriate.

The following table provides a summary of estimated useful lives for KWESST's property and equipment:

Property and equipment	Rate
Computer equipment	5 years
Computer software	3 years
Office furniture and equipment	5 years
R&D equipment	5 years
Leasehold improvements	Shorter of useful life or remaining term of lease

At the end of each reporting period, KWESST reviews the carrying amounts of its property and equipment to determine whether there is any indication of impairment. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). The recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash flows of other assets or groups of assets (the ''cash-generating unit, or CGU''). If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is recognized immediately in profit or loss.

Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

(d)Leases

At inception of a contract, KWESST assesses whether a contract is, or contains, a lease based on whether the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.

KWESST recognizes a right-of-use asset and a lease liability at the lease commencement date. The lease obligation is measured at the present value of the remaining lease payments as of January 1, 2018, discounted using its incremental borrowing rate of 10%. The right-of-use asset is initially measured based on the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle and remove the underlying asset or to restore the underlying asset or the site on which it is located, less any lease incentives received. The assets are depreciated to the earlier of the end of the useful life of the right-of-use asset or the lease term using the straight-line method as this most closely reflects the expected pattern of consumption of the future economic benefits. The lease term includes periods covered by an option to extend if KWESST is reasonably certain to exercise that option.  Lease terms range from 3 to 6 years for offices and printer. In addition, the right-of-use asset is periodically reduced by impairment losses, if any, and adjusted for certain remeasurements of the lease liability.

F-89

KWESST MICRO SYSTEMS INC.
Notes to Consolidated Financial Statements
Nine months ended September 30, 2020 and twelve months ended December 31, 2019
(Expressed in Canadian dollars, except share and per share amounts)

The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, KWESST's incremental borrowing rate. Variable lease payments that do not depend on an index or rate are not included in the measurement of the lease liability.

The lease liability is measured at amortized cost using the effective interest method. It is remeasured when there is a change in future lease payments arising from a change in an index or rate, if there is a change in KWESST's estimate of the amount expected to be payable under a residual value guarantee, or if KWESST changes its assessment of whether it will exercise a purchase, extension, or termination option. When the lease liability is remeasured in this way, a corresponding adjustment is made to the carrying value of the right-of-use asset or, is recorded in profit or loss if the carrying amount of the right-of-use asset has been reduced to zero.

KWESST has elected to apply the practical expedient not to recognize right-of-use assets and lease liabilities for short-term leases that have a lease term of 12 months or less and leases of low-value assets. The lease payments associated with these leases are recognized as an expense on a straight-line basis over the lease term.

(e)Intangible assets

(i)Research and development ("R&D'') costs

Expenditure on research activities, undertaken with the prospect of gaining new scientific or technical knowledge and understanding, is recognized in profit or loss when incurred.

Development activities involve a plan or design for the production of new or substantially improved products and processes. Development expenditure is capitalized only if development costs can be measured reliably, the product or process is technically and commercially feasible, future economic benefits are probable, and KWESST has the intention and sufficient resources to complete the development and to use or sell the asset. The expenditure capitalized in respect of development activities includes the cost of materials, direct labor and overhead costs that are directly attributable to preparing the asset for its intended use, and capitalized borrowing costs. Other development expenditures are recognized in profit or loss when incurred.

(ii)Subsequent expenditure

Subsequent expenditure is capitalized only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditures, including expenditure on internally generated goodwill and brands, is recognized in profit or loss as incurred.

(iii)Amortization

Amortization is a systematic allocation of the amortizable amount of an intangible asset of its useful life. The amortizable amount is the cost of the asset less its estimated residual value. KWESST recognizes in profit or loss on a sales-based rate over the estimated useful lives of the intangible assets from the date they are available for use, since this method most closely reflect the expected pattern of consumption of the future economic benefits embodied in each asset. Where a sales-based rate could not be determined, the straight-line approach is used.

F-90

KWESST MICRO SYSTEMS INC.
Notes to Consolidated Financial Statements
Nine months ended September 30, 2020 and twelve months ended December 31, 2019
(Expressed in Canadian dollars, except share and per share amounts)

Internally generated intangible assets are not systematically amortized as long as they are not available for use i.e. they are not yet on site or in working condition for their intended use. Accordingly, intangible assets such as development costs are tested for impairment at least once a year, until such date as they are available for use.

(iv)Impairment

All intangible assets are periodically reviewed for impairment. The estimated present value of future cash flows associated with the intangible asset is determined and an impairment loss is recognized for the difference between this amount and the carrying amount as follows: the carrying amount of the asset is reduced to estimated present value of the future cash flows associated with the asset, discounted at the financial asset's original effective interest rate, and the resulting loss is directly recognized in profit or loss for the period.

(f)Provisions

A provision is recognized if, as a result of a past event, KWESST has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risk specific to the liability. The unwinding of the discount is recognized as a finance cost.

(g)Convertible notes

KWESST's convertible notes are segregated into their debt and equity components or derivative liability components at the date of issue, in accordance with the substance of the contractual agreements.

The conversion feature of the convertible notes is presumed to be classified as a derivative financial liability unless it meets all the criteria to recognize as equity instrument under IAS 32, Financial Instruments: Presentation. One of the criteria is that the conversion option exchanges a fixed amount of shares for a fixed amount of cash ("fixed for fixed").

If the conversion feature meets the fixed for fixed criteria, the conversion option will be classified as equity components. Equity instruments are instruments that evidence a residual interest in the assets of an entity after deducting all of its liabilities. Therefore, when the initial carrying amount of the convertible notes is allocated to its equity and liability components, the equity component is assigned the residual amount after deducting from the fair value of the instrument as a whole the amount separately determined for the liability component. The sum of the carrying amounts assigned to the liability and equity components on initial recognition is always equal to the fair value that would be ascribed to the instrument as a whole. No gain or loss arises from initially recognizing the components of the instrument separately.

If the conversion feature does not meet the fixed for fixed criteria, the conversion option will be recorded as derivative financial liability, which must be separately accounted for at fair value on initial recognition. The carrying amount of the debt component, on initial recognition, is recalculated as the difference between the proceeds of the convertible notes as a whole and the fair value of the derivative financial liabilities. Subsequent to initial recognition, the derivative financial liability is re-measured at fair value at the end of each reporting period with changes in fair value recognized in the consolidated statements of comprehensive loss for each reporting period, while the debt component is accreted to the face value of the debt using the effective interest method.

F-91

KWESST MICRO SYSTEMS INC.
Notes to Consolidated Financial Statements
Nine months ended September 30, 2020 and twelve months ended December 31, 2019
(Expressed in Canadian dollars, except share and per share amounts)

Incremental costs incurred in respect of raising capital or debt are charged against the equity or debt proceeds raised, unless the instrument to which the transaction costs relate is classified as held for trading, in which case the incremental costs are expensed to profit or loss immediately.

(h)Income taxes

Income tax expense comprises current income tax expense and deferred income tax expense. Current and deferred income taxes are recognized as an expense and included in profit or loss for the period, except to the extent that the tax arises from a transaction which is recognized in other comprehensive income or directly in shareholder's deficiency.

Current income tax

Current tax expense is the amount of income taxes payable (recoverable) in respect of the taxable income (tax loss) for a period. Current liabilities (assets) for the current and prior periods are measured at the amount expected to be paid to (recovered from) the taxation authorities, using the tax rates that have been enacted or substantively enacted by the end of the reporting period.

Deferred income tax

Deferred tax assets and liabilities are recognized for the temporary differences between transactions that have been included in the consolidated financial statements or income tax returns. Deferred income taxes are provided for using the liability method. Under the liability method, deferred income taxes are recognized for all significant temporary differences between that the tax and financial statement bases of assets and liabilities and for certain carry-forward items. Deferred income tax assets are recognized only to the extent that, in the opinion of management, it is probable that the deferred income tax assets will be realized.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting period. Deferred income tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of the enactment or substantive enactment. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and KWESST intends to settle its current tax assets and liabilities on a net basis.

Investment tax credits

Investment tax credits relating to scientific research and experimental development expenditures are recorded in the fiscal period the qualifying expenditures are incurred based on management's interpretation of applicable legislation in the Income Tax Act of Canada. Credits are recorded provided there is reasonable assurance that the tax credit will be realized. Credits claimed are subject to review by the Canada Revenue Agency.

Credits claimed in connection with R&D activities are accounted for using the cost reduction method. Under this method, assistance and credits relating to the acquisition of equipment is deducted from the cost of the related assets, and those relating to current expenditures, which are primarily salaries and related benefits, are included in the determination of profit or loss as a reduction of the R&D expenses.

F-92

KWESST MICRO SYSTEMS INC.
Notes to Consolidated Financial Statements
Nine months ended September 30, 2020 and twelve months ended December 31, 2019
(Expressed in Canadian dollars, except share and per share amounts)

(i)Related party transactions

Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or common significant influence. Related parties may be individuals or corporate entities. A transaction is considered to be a related party transaction when there is a transfer of resources or obligations between related parties. Related party transactions are in the normal course of business and have commercial substance.

(j)Share-based payments

KWESST records share-based compensation related to its stock options and certain warrants granted from the Company. Stock-based compensation for stock options and warrants are measured at fair value using a Black Scholes option-pricing model. The market value of KWESST's shares on the date of the grant is used to determine the fair value of options and warrants. Each tranche of an award is considered a separate award with its own vesting period and grand date fair value. Compensation cost is recognized as employee benefits expense over the vesting period in which employees unconditionally become entitled to the award. The amount recognized as an expense is adjusted to reflect only the number of awards for which related service conditions are expected to be met, such that the amount ultimately recognized as an expense is based on the number of awards that meet the related service conditions at the vesting date.

Where the terms of an equity-settled transaction award are modified, the minimum expense recognized is the expense as if the terms had not been modified and if the original terms of the award are met. An additional expense is recognized for any modification that increases the total fair value of the share-based payment transaction or is otherwise beneficial to the employees as measured at the date of acquisition.

(k)Foreign currency

Transactions in foreign currencies are translated to the respective functional currencies of KWESST at the exchange rate in effect at the transaction date. Monetary assets and liabilities denominated in other than the functional currency are translated at the exchange rates in effect at the reporting date. Non-monetary items that are measured in terms of historical cost in other than the functional currency are translated using the exchange rate at the date of the transaction. The resulting exchange gains and losses are recognized in profit or loss.

(l)Earnings (loss) per share

Basic earnings (loss) per share is computed using the weighted average number of common shares outstanding during the period. KWESST uses the treasury stock method to compute the dilutive effect of options, warrants, and similar instruments. Under this method, the dilutive effect on earnings per share is calculated presuming the exercise of outstanding options, warrants, and similar instruments. It assumes that the proceeds of such exercise would be used to repurchase common shares at the average market price during the period.

However, the calculation of diluted loss per share excludes the effects of various conversions and exercises of convertible debt, options and warrants that would be anti-dilutive.

F-93

KWESST MICRO SYSTEMS INC.
Notes to Consolidated Financial Statements
Nine months ended September 30, 2020 and twelve months ended December 31, 2019
(Expressed in Canadian dollars, except share and per share amounts)

(m)Reverse acquisition

KWESST was a capital pool company, which did not constitute a business as defined under IFRS 3 - Business Combination at the time of the QT and is therefore not within the scope of IFRS 3. However, the QT has some features of a reverse acquisition under IFRS 3. In the absence of a Standard that specifically applies to the QT, KWESST applied by analogy the guidance in IFRS 3 for reverse acquisitions in accordance with IAS 8 accounting policies, changes in accounting estimates and errors.

Application of the reverse acquisitions guidance by analogy results in the private operating entity KWESST Inc. being identified as the accounting acquirer, and the listed non-operating entity KWESST being identified as the accounting acquiree. The accounting acquirer is deemed to have issued shares to obtain control of the accounting acquiree KWESST. Because the QT is not within the scope of IFRS 3, KWESST accounted for it as an asset acquisition and the consideration as a share-based payment transaction which was accounted for in accordance with IFRS 2 - Share-based Payment.

According to IFRS 2, any difference in the fair value of the shares deemed to have been issued by the accounting acquirer and the fair value of the accounting acquiree's identifiable net assets represents a service received by the accounting acquirer. Regardless of the level of monetary or non-monetary assets owned by the non-listed operating entity, the entire difference was considered to be payment for a service of a stock exchange listing for its shares, and that no amount should be considered a cost of raising capital. The service received in the form of a stock exchange listing does not meet the definition of an intangible asset because it is not identifiable in accordance with IAS 38 Intangible Assets (it is not separable) and does not meet the definition of an asset that should be recognized in accordance with other Standards and the Conceptual Framework, therefore the services received was recognized as listing expense (included in merger & acquisition costs in the consolidated statements of net loss and comprehensive loss).

New accounting standards issued but not yet in effect

Classification of liabilities as current or non-current (Amendments to IAS 1)

The IASB has published Classification of Liabilities as Current or Non-Current (Amendments to IAS 1), which clarified the guidance on whether a liability should be classified as either current or non-current. The amendments were as follows:

(i)Clarified that the classification of liabilities as current or non-current should only be based on rights that are in place at the end of the reporting period.

(ii)Clarified that classification is unaffected by expectations about whether an entity will exercise its right to defer settlement of a liability; and

(iii)Made clear that settlement includes transfers to the counterparty of cash, equity instruments, other assets or services that result in extinguishment of the liability.

This new guidance is effective for annual periods beginning on or after January 1, 2022. Earlier application is permitted. KWESST has not yet assessed the impact of adoption of this guidance. Further, there is currently a proposal outstanding that would defer the effective date until January 1, 2023.

F-94

KWESST MICRO SYSTEMS INC.
Notes to Consolidated Financial Statements
Nine months ended September 30, 2020 and twelve months ended December 31, 2019
(Expressed in Canadian dollars, except share and per share amounts)

4.Acquisitions

a)Reverse acquisition

On September 17, 2020, Foremost completed the QT with KWESST Inc. pursuant to the policies of the TSX Venture Exchange (''TSX-V''). Prior to the completion of the QT, Foremost effected a consolidation of its outstanding common shares on the basis of one post-consolidation common share for every 4.67 pre-consolidation common shares. The QT was done by way of a three-cornered amalgamation (the "Amalgamation") pursuant to which, among other things:

(i)KWESST Inc. amalgamated with a wholly-owned subsidiary of Foremost, incorporated for the purposes of the Amalgamation, pursuant to the provisions of the Business Corporations Act (Ontario),

(ii)Foremost changed its name to KWESST Micro Systems Inc., and

(iii)all of the outstanding common shares of KWESST Inc. (the "KWESST Shares") were cancelled and, in consideration therefor, the holders thereof received post-consolidation common shares of KWESST Micro Systems Inc. on the basis of one KWESST Micro System Inc. share for each KWESST Share.

Immediately following the QT, there were 41,266,176 shares of KWESST outstanding, of which 40,367,678 were held by the former shareholders of KWESST Inc. (representing approximately 97.8% of the outstanding shares of the Company) and 898,498 were held by the shareholders of Foremost prior to the QT. Accordingly, this transaction was accounted for as a reverse acquisition where KWESST Inc. is deemed to be the acquirer for accounting purposes.

The reverse acquisition of Foremost was accounted for under IFRS 2, Share-based Payment. Accordingly, the fair value of the purchase consideration was accounted for at the fair value of the equity instruments granted by the shareholders of KWESST Inc. to the shareholders and option holders of Foremost.

The following represents management's estimate of the fair value of the net assets acquired and total consideration transferred at September 17, 2020, the closing date of the QT.

Number of common shares issued to Foremost shareholders		898,498
KWESST's stock price at closing of reverse acquisition (1)	$	0.70
Common shares	$	628,949
Options		41,155
Total consideration transferred	$	670,104

(1)At closing, the subscription receipts issued by KWESST Inc. on July 9, 2020 pursuant to a brokered private placement (the "KWESST Subscription Receipts"), were automatically converted, into shares of KWESST. The private placement which was completed through PI Financial Corp. as agent, consisted of 4,409,553 KWESST Subscription Receipts issued at $0.70 per KWESST Subscription Receipt for gross proceeds of about $3.1 million before share issuance costs. See Note 16.

F-95

KWESST MICRO SYSTEMS INC.
Notes to Consolidated Financial Statements
Nine months ended September 30, 2020 and twelve months ended December 31, 2019
(Expressed in Canadian dollars, except share and per share amounts)

The total fair value consideration was allocated to Foremost's net assets as follows: 

Total fair value consideration	$	670,104
Foremost's net assets (liabilities):
Cash	$	78,589
Other receivables		1,900
Accounts payable and accrued liabilities		(225,088	)
Net assets (liabilities) at fair value		(144,599	)
Residual balance allocated to listing expense (included in M&A costs)		814,703
Total	$	670,104

The results of operations of Foremost are included in these consolidated statements of comprehensive loss from September 17, 2020.

The listing expense of $814,703 is a non-cash item - see consolidated statements of cash flows.

In addition, 1,000,000 common shares with fair value of $700,000 were issued to two M&A / capital market advisors for successfully assisting KWESST to complete the QT. One of the two advisors is a related party (Note 16).

b)Asset acquisition

On June 12, 2020, KWESST Inc. entered into the GhostStep Technology Purchase Agreement (the "Purchase Agreement") with SageGuild LLC ("SageGuild") pursuant to which KWESST Inc. acquired the GhostStep® Technology.  Management determined that this transaction did not meet the definition of a business under IFRS 3 and therefore this transaction was accounted for as an asset acquisition.

The total purchase consideration ("Purchase Price") comprised of:

(i)a cash payment made on June 12, 2020 in the amount of USD $100,000 (CAD $134,192);

(ii)the issuance on June 12, 2020 of 140,000 common shares of KWESST; and

(iii)either the payment of USD $100,000 in cash or the issuance of 557,000 common shares of KWESST at a deemed price of $0.50 per common share (CAD $278,500), at KWESST's sole discretion, upon the completion of KWESST's QT.

As a result of completing the QT, KWESST Inc. has elected to issue 557,000 common shares to SageGuild.

In addition to the Purchase Price, pursuant to the Purchase Agreement KWESST Inc. has:

(i)agreed to make annual payments ("Yearly Payments") to SageGuild of $125,000 on each of December 31, 2020, 2021 and 2022, subject to certain conditions; and

(ii)issued 750,000 warrants to SageGuild exercisable at $0.50 per share and expiring on January 15, 2023 (the "Warrants") - see Notes 16.

The Warrants will vest in equal tranches of 250,000 warrants on each of December 31, 2020, 2021 and 2022. KWESST has the right to apply the Yearly Payments against the exercise price of the Warrants.

F-96

KWESST MICRO SYSTEMS INC.
Notes to Consolidated Financial Statements
Nine months ended September 30, 2020 and twelve months ended December 31, 2019
(Expressed in Canadian dollars, except share and per share amounts)

Accordingly, the total purchase consideration amounted to:

Cash consideration	$	134,192
Share issuance with no condition		33,600
Elected share issuances		133,680
Contingent consideration		180,000
Totall purchase consideration	$	481,472

The above total purchase consideration was recognized as intangible assets (see Note 8).

In addition to the above total purchase consideration, KWESST Inc. has agreed to pay SageGuild royalties at a rate of 20% on amounts received in consideration of the grant of licenses and on sales of the GhostStep® Technology until KWESST has paid SageGuild a total of USD $3 million in royalties. Once KWESST has paid SageGuild a total of USD $3 million in royalties, the royalty rate will decrease to 5%. The obligation to pay royalties will terminate automatically once KWESST has paid SageGuild a total of USD $20 million in royalties. The Purchase Agreement became effective on June 12, 2020 and will continue in full force and effect until the earliest of (i) June 12, 2040 or (ii) the date of the expiration of the last of the patents or any of the patents (which are expected to be valid for a period of seventeen years from the date of issuance) related to improvements of the GhostStep® Technology to which SageGuild, or its principal Mr. Jeffrey M. Dunn, materially contributes, unless the terminated earlier in accordance with the terms and conditions of the agreement.

In the event KWESST is in default of payment of any royalty payment as outlined above for a period of 30 days, SageGuild may terminate the agreement and KWESST will be required to, among other things, transfer the GhostStep® Technology back to SageGuild.

KWESST Inc. did not have any sales during the nine months ended September 30, 2020 that would have triggered royalty payments payable to SageGuild.

5.Trade and other receivables

The following table presents trade and other receivables for KWESST:

		September 30, 2020		December 31, 2019
Trade receivables	$	209,169	$	1,191
Sales tax recoverable		144,423		55,684
Investment tax credits refundable		127,325		162,928
Total	$	480,917	$	219,803

There was no impairment of trade and other receivables during the nine months ended September 30, 2020 (2019 - $nil).

F-97

KWESST MICRO SYSTEMS INC.
Notes to Consolidated Financial Statements
Nine months ended September 30, 2020 and twelve months ended December 31, 2019
(Expressed in Canadian dollars, except share and per share amounts)

6.Property and equipment

The following is summary of changes in property and equipment for KWESST:

Cost		Computer equipment		Computer software		Office furniture and equipment		R&D equipment		Leasehold improvements			Total property and equipment
Balance at December 31, 2018	$	-	$	8,145	$	32,781	$	40,471	$	8,607		$	90,004
Additions		14,073		-		-		6,117		-			20,190
Disposals		-		-		-		-		-			-
Balance at December 31 2019	$	14,073	$	8,145	$	32,781	$	46,588	$	8,607		$	110,194
Additions		18,734		-		49,060		7,046		59,090			133,930
Disposals		-		-		-		-		(8,607	)		(8,607	)
Balance at September 30, 2020	$	32,807	$	8,145	$	81,841	$	53,634	$	59,090		$	235,517
Accumulated depreciation		Computer equipment		Computer software		Office furniture and equipment		R&D equipment		Leasehold improvements			Total property and equipment
Balance at December 31, 2018	$	-	$	3,396	$	9,672	$	5,172	$	2,497		$	20,737
Amortization for 12 months		241		2,715		6,471		8,186		1,722			19,335
Balance at December 31, 2019	$	241	$	6,111	$	16,143	$	13,358	$	4,219		$	40,072
Amortization for 9 months		5,821		1,526		6,149		7,478		8,434			29,408
Disposals		-		-		-		-		(8,607	)		(8,607	)
Balance at September 30, 2020	$	6,062	$	7,637	$	22,292	$	20,837	$	4,045		$	60,873
Carrying value at December 31, 2019	$	13,832	$	2,034	$	16,638	$	33,229	$	4,389		$	70,122
Carrying value at September 30, 2020	$	26,745	$	508	$	59,549	$	32,797	$	55,045		$	174,644

7.Intangible assets

The following table presents intangible assets for KWESST:

		Development Costs		Technology Asset		Total
Cost
Balance at December 31, 2019	$	-	$	-	$	-
Additions		163,230		-		163,230
Additions through acquisition (Note 4)		-		481,472		481,472
Balance at September 30, 2020	$	163,230	$	481,472	$	644,702

During the nine months ended September 30, 2020, KWESST capitalized development costs of $163,230 in connection with a funded development project to support a U.S. military customer, featuring KWESST's signature Tactical Awareness and Situational Control System ("TASCS") - see Note 26 (a).

As disclosed in Note 4(b), KWESST acquired technology assets of $481,272, comprising intellectual property rights, including trademark rights, of the GhostStep® Technology, an electronic decoy system. Management has estimated a useful life of five years; however, as this technology has not yet reached commercialization, no amortization charge was recorded for the nine months period ended September 30, 2020.

F-98

KWESST MICRO SYSTEMS INC.
Notes to Consolidated Financial Statements
Nine months ended September 30, 2020 and twelve months ended December 31, 2019
(Expressed in Canadian dollars, except share and per share amounts)

8.Right-of-use assets

The following table presents right-of-use assets for KWESST:

		Offices			Printer			Total
Balance at December 31, 2018	$	254,159		$	13,120		$	267,279
Depreciation		(76,248	)		(6,559	)		(82,807	)
Balance at December 31, 2019	$	177,911		$	6,561		$	184,472
Additions		571,604			-			571,604
Termination		(139,787	)		-			(139,787	)
Depreciation		(92,567	)		(3,282	)		(95,849	)
Balance at September 30, 2020 (as previously reported)		517,161			3,279			520,440
Correction of an error		(192,864	)		-			(192,864	)
Balance at September 30, 2020 (as adjusted)	$	324,297		$	3,279		$	327,576

During the nine months ended September 30, 2020, KWESST terminated an office lease agreement due to breach of contract by the former landlord and de-recognized the related right-of-use asset and lease obligations (see Note 12). As a result, KWESST entered into a new office lease agreement with a 74-month lease term starting from March 1, 2020. In connection with this new lease, KWESST made a total deposit of $33,726 to be released only at the end of this lease. This deposit was initially recorded at fair value, discounted using the implied interest rate in the lease. At September 30, 2020, $19,341 was the carrying value and reported as non-current deposit in the consolidated statements of financial position.

Subsequently, during the year ended September 30, 2021, management made an adjustment for a correction in the application of IFRS 16, Leases, to the new office lease entered in the prior year, whereby future variable payments were erroneously included in the calculation of the lease obligations. The following summarizes the effects of this correction to the prior year's comparatives.

Consolidated statements of financial position as at September 30, 2020:

		Previously Reported			Adjustment			Adjusted
Trade and other receivables	$	479,291		$	1,626		$	480,917
Right-of-assets	$	520,440		$	(192,864	)	$	327,576
Deposit (non-current)	$	22,337		$	(2,996	)	$	19,341
Total assets	$	5,507,011		$	(194,234	)	$	5,312,777
Lease obligations (current)	$	78,358		$	(34,230	)	$	44,128
Lease obligations (non-current)	$	496,394		$	(188,485	)	$	307,909
Total liabilities	$	1,650,628		$	(222,715	)	$	1,427,913
Deficit	$	(6,102,058	)	$	28,481		$	(6,073,577	)

Consolidated consolidated interim statements of changes in shareholders' equity (deficit) for the nine months ended September 30, 2020:

		Previously Reported			Adjustment		Adjusted
Deficit	$	(6,102,058	)	$	28,481	$	(6,073,577	)
Total shareholders' equity (deficit)	$	3,856,383		$	28,481	$	3,884,864

F-99

KWESST MICRO SYSTEMS INC.
Notes to Consolidated Financial Statements
Nine months ended September 30, 2020 and twelve months ended December 31, 2019
(Expressed in Canadian dollars, except share and per share amounts)

9.Accounts payable and accrued liabilities

The following table presents the accounts payable and accrued liabilities for KWESST:

		September 30, 2020		December 31, 2019
Trade payable	$	493,027	$	126,481
Accrued liabilities		188,265		29,822
Payroll taxes payable		67,229		-
Salary and vacation payable		65,722		29,343
Other		4,031		13,041
Total	$	818,274	$	198,687

10.Related party transactions

Key management personnel compensation

Key management personnel are those having authority and responsibility for planning, directing and controlling the activities of KWESST directly or indirectly, including any directors (executive and nonexecutive) of KWESST. The key management personnel of KWESST are the executive management team and Board of Directors, who collectively control approximately 38% of the issued and outstanding common shares of KWESST at September 30, 2020.

Key management personnel compensation comprised the following:

		Nine months ended  September 30, 2020		Twelve ended December 31, 2019
Wages and benefits	$	165,769	$	48,343
Consulting fees		145,000		30,000
Directors compensation		-		-
Share-based compensation		24,959		-
Total	$	335,728	$	78,343

The consulting fees relate to compensation paid to KWESST's Executive Chairman (via his private corporation, DEFSEC Corporation), including a one-time $15,000 payment for prior year expenses in accordance with the consulting agreement.

Related party loans

The following table summarizes the related party loans.

F-100

KWESST MICRO SYSTEMS INC.
Notes to Consolidated Financial Statements
Nine months ended September 30, 2020 and twelve months ended December 31, 2019
(Expressed in Canadian dollars, except share and per share amounts)

		Loans from CEO(1)			Employee loan (2), (5)			Loans from investors (3), (4)			Total
Balance at December 31, 2018	$	612,171		$	81,253		$	191,789		$	885,213
Additions		309,912			-			772			310,684
Transferred to convertible debentures		-			-			(192,561	)		(192,561	)
Converted into common shares		(649,500	)		-			-			(649,500	)
Converted into warrants		(19,858	)		-			-			(19,858	)
Repayment of loans		(45,513	)		(25,000	)		-			(70,513	)
Accrued interest		22,706			3,657			-			26,363
Balance at December 31, 2019	$	229,918		$	59,910		$	-		$	289,828
Repayment of loans		(30,000	)		(50,000	)		-			(80,000	)
Accrued interest		7,174			1,274			-			8,448
Balance at September 30, 2020	$	207,092		$	11,184		$	-		$	218,276

^{(1)In prior years, KWESST's CEO and his spouse (major shareholders) advanced funds to KWESST to fund its working capital requirements. The loans are due on demand and accrue annual interest at TD Bank prime plus 1.55%.}

^{(2)In prior years, KWESST borrowed funds from an employee to fund its working capital requirements. The loan bears interest at 5% per annum and is due upon demand. This loan was fully repaid during the first quarter of fiscal 2021.}

^{(3)On April 20, 2018, KWESST issued two Subscriptions for Revenue Sharing in the principal amount of $50,000 each to an investor. An additional amount of $26,961 was invested to the Company on December 14, 2018. The total loan of $126,960 and was subsequently reclassified as convertible notes on October 23, 2019 (see Note 15).}

^{(4)On June 5, 2018, KWESST issued a Subscription for Revenue Sharing in the principal amount of $64,829 (USD$50,000) to one of KWESST's officer. This loan was subsequently reclassified as convertible debentures on October 23, 2019 (see Note 15).}

Other related party transactions during the nine months ended September 30, 2020:

• Two directors of KWESST were investors in the 2019 convertible notes (see Note 15), in which KWESST incurred interest expense of $6,585 on these two convertible notes. This interest expense was converted to KWESST common shares.
• KWESST hired a consulting firm to provide capital markets advisory services, including assistance to complete KWESST's Qualifying Transaction with Foremost (see Note 4 (a)) and to raise capital. This consulting firm is also a significant shareholder and holds 1,500,000 warrants and 200,000 options of KWESST, including securities held by the owner of this firm.  Total cash and share-based remuneration amounted to $494,325.
• The lease for the 3-D printer was with a private company owned by KWESST's President and CEO and his spouse (see Note 12).

At September 30, 2020 and December 31, 2019, there was no outstanding amount in accounts payable and accrued liabilities due to officers and directors of KWESST.

11.Borrowings

In April 2020, KWESST was approved and received a $40,000 term loan with TD Bank under the Canada Emergency Business Account (''CEBA Term Loan'') program funded by the Government of Canada. The CEBA Term Loan is non-interest and can be repaid at any time without penalty. KWESST has recorded a fair value of $30,904 at inception, discounted using its incremental borrowing rate of 10%. The difference of $9,096 between the fair value and the total amount of CEBA Term Loan received has been recorded as a gain on government grant for the nine months period ended September 30, 2020. See Note 26(a).

F-101

KWESST MICRO SYSTEMS INC.
Notes to Consolidated Financial Statements
Nine months ended September 30, 2020 and twelve months ended December 31, 2019
(Expressed in Canadian dollars, except share and per share amounts)

12.Lease obligations

During the nine months ended September 30, 2020, KWESST terminated an office lease and entered into a long-term office lease contract. The office lease includes the right to renew for an additional five years following its expiry on April 30, 2026. Management has not included the renewal option because it was deemed too uncertain whether KWESST would renew at this time.

Under the new office lease, KWESST benefits from the following lease inducements:

• Free rent from inception (March 1, 2020) to November 1, 2020; and

• Free rent from November 1, 2021, to March 1, 2022.

When measuring the lease obligation, the Company discounted the remaining lease payments using the incremental estimated borrowing rate of Company of 10% per annum at the time of closing the new lease agreement.

The following table presents lease obligations for KWESST: 

		Offices			Printer			Total			Current Portion		Non-current portion
Balance, December 31, 2018	$	266,292		$	13,761		$	280,053		$	77,367	$	202,686
Lease payments (including interest)		(94,270	)		(7,620	)		(101,890	)		-		-
Interest expense		23,441			1,082			24,523			-		-
Balance, December 31, 2019	$	195,463		$	7,223		$	202,686		$	85,468	$	117,218
Addition		347,640			-			347,640
Termination		(157,315	)		-			(157,315	)
Lease payments (including interest)		(62,816	)		(7,620	)		(70,436	)
Interest expense		29,065			397			29,462
Balance, September 30, 2020 (as adjusted)	$	352,037		$	-		$	352,037		$	44,128	$	307,909

Refer to Note 7 regarding the correction of an error in the application of IFRS 16.

The termination of the former lease resulted in the de-recognition of the lease obligation and related unamortized book value of the right-of-use asset, resulting in a gain of $17,527. This was included in the net finance costs for the nine months ended September 30, 2020.

The following table presents the contractual undiscounted cash flows for the lease obligations:

		September 30, 2020		December 31, 2019
Less than one year	$	78,000	$	101,890
One to five years		390,000		125,693
Total	$	468,000	$	227,583

F-102

KWESST MICRO SYSTEMS INC.
Notes to Consolidated Financial Statements
Nine months ended September 30, 2020 and twelve months ended December 31, 2019
(Expressed in Canadian dollars, except share and per share amounts)

13.Deferred revenue

The following table presents the changes in deferred revenue:

		September 30, 2020		December 31, 2019
Balance, beginning of period	$	-	$	-
Amounts invoiced and revenue deferred		7,053		-
Recognition of deferred revenue included in the balance at the beginning of period		-		-
Balance, end of period	$	7,053	$	-

14.Financial derivative liabilities

In connection with the issuance of the 2019 Convertible Notes (see Note 15), management determined that the conversion feature was a financial derivative liability which is remeasured at fair value at each reporting period (see Note 20).

The following table summarizes the financial derivative liabilities:

		Total
Balance at December 31, 2018	$	111,953
Fair value adjustment when notes were converted into common shares		(111,953	)
Fair value of financial derivative liabilities on initial recognition		30,688
Fair value adjustment		(1,225	)
Balance at December 31, 2019		29,463
Fair value adjustment		(29,463	)
Balance at September 30, 2020	$	-

15.Convertible notes

The following table presents the convertible notes for KWESST:

Balance at December 31, 2018	$	521,515
Related party loans transferred to convertible notes (Note 10)		192,561
Converted into common shares (Note 16)		(620,897	)
Repayment of debt		(31,644	)
Less fair value of conversion feature		(30,688	)
Accrued interest		74,707
Accretion expenses		105,265
Balance at December 31, 2019		210,819
Accrued interest		16,769
Accretion expenses		28,130
Converted in common shares (Note 16)		(255,718	)
Balance at September 30, 2020	$	-

F-103

KWESST MICRO SYSTEMS INC.
Notes to Consolidated Financial Statements
Nine months ended September 30, 2020 and twelve months ended December 31, 2019
(Expressed in Canadian dollars, except share and per share amounts)

Activities in 2019

During the year ended December 31, 2018, KWESST issued convertible notes to investors in the total principal amount of $601,961 bearing an interest of 10% per annum.

On October 23, 2019, KWESST converted $560,007 of debt and $60,890 of interest into 3,104,486 common shares at a price of $0.20 relating to all debts noted above and repaid $31,644 debt by cash. The remaining $234,515 was issued as new convertible debentures at a rate of 10% per annum and due on October 23, 2021. Upon the occurrence of a Liquidity Event, the new convertible note will automatically convert into common shares of KWESST at a conversion rate equal to a 20% discount to the value assigned to the common shares of KWESST under such Liquidity Event for the entire amount of the principal amount plus all accrued interest.

"Liquidity Event" means either (1) the completion of an initial public offering which results in the common shares of KWESST being listed and posted for trading or quoted on any of the Toronto Stock Exchange, the TSX Venture Exchange, the New York Stock Exchange, the American Stock Exchange, the Nasdaq National Market, the London Stock Exchange or any successor exchange or market thereto; or (2) the closing of a merger, amalgamation plan of arrangement or other transaction or series of related transactions resulting in the holders of common shares receiving consideration in securities listed on a Qualified Exchange.

The conversion feature of convertible debentures is presumed to be classified as a derivative financial liability unless it meets all the criteria to recognize as equity instrument under IAS 32 - Financial Instruments: Presentation. One of criteria is that the conversion feature exchanges a fixed amount of shares for a fixed amount of cash ("fixed for fixed"). The convertible debentures are convertible to % of the shares of the Company on a fully diluted basis which is not a fixed amount of shares, therefore the fixed for fixed criteria is not met. As such, the conversion feature was classified as financial derivative liabilities instead of an equity instrument. KWESST separated the convertible debentures into two components at initial recognition, with the debt carried at amortized cost, and the conversion feature carried at fair value as financial derivative liabilities.

Activities in 2020

As disclosed in Note 4(a), a Liquidity Event occurred which resulted in the conversion of the $255,718 outstanding convertible note, including accrued interest up to Liquidity Event, into 456,639 common shares.

16.Share capital and Contributed Surplus

Share capital

Authorized

KWESST is authorized to issue an unlimited number of common shares.

F-104

KWESST MICRO SYSTEMS INC.
Notes to Consolidated Financial Statements
Nine months ended September 30, 2020 and twelve months ended December 31, 2019
(Expressed in Canadian dollars, except share and per share amounts)

Issued Common Shares

	Number		Issued Price		Amount
Outstanding at December 2018	200	$	1.000	$	200
Issued for directors converted loans (1)	6,500,000	$	0.005		31,308
Issued for parent company converted loans (2)	10,700,000	$	0.044		467,000
Issued for directors converted loans (3)	1,500,000	$	0.100		150,000
Issued for converted debt and accrued interest (4)	3,104,486	$	0.200		620,897
Issued in private placement (5)	5,075,000	$	0.200		1,014,948
Outstanding at December 31, 2019	26,879,686			$	2,284,353
Issued in private placement (6)	2,625,000	$	0.400		1,050,000
Issued in private placement (6)	845,750	$	0.500		422,875
Issued in asset acquisition (7)	697,000	$	0.240		167,280
Issued for converted debt and accrued interest (8)	456,639	$	0.560		255,718
Issued for new converted debt and accrued interest (9)	3,210,050	$	0.414		1,328,163
Issued in private placement (10)	16,000	$	0.500		8,000
Issued for consulting services (11)	61,000	$	0.531		32,393
Issued for exercise of stock options (12)	122,000	$	0.640		78,080
Issued for performance bonus (13)	1,045,000	$	0.700		731,500
Issued in brokered private placement (14)	4,409,553	$	0.700		3,087,138
Shares from Foremost's QT  (15)	898,498	$	0.700		628,949
Outstanding at September 30, 2020	41,266,176			$	10,074,449
Less: share offering costs					(699,886	)
Total share capital at September 30, 2020				$	9,374,563

2019 Activities

(1)During the first quarter of 2019, the directors converted $32,500 of loans into 6,500,000 of units of KWESST Inc. (''Units''). Each Unit is comprised of one common share and one common share purchase warrant. Each warrant entitles the holder to acquire a common share at a price of $0.20 per share and with an expiry date of June 14, 2024.

(2)During the first quarter of 2019, the corporate shareholder of KWEEST Inc. converted $467,000 of loans into 10,700,000 common shares.

(3)During the third quarter of 2019, the directors converted $150,000 of loans into 1,500,000 common shares.

(4)During the third quarter of 2019, KWESST Inc. converted $560,007 of debt and $60,890 of interest into 3,104,486 common shares.

(5)During the third quarter of 2019, KWESST Inc. closed a non-brokered private placement raising $1,014,948 at a value of $0.20 per share by issuing 5,075,000 common shares.

2020 Activities

(6)During the first quarter of 2020, KWESST Inc. closed a non-brokered private placement, raising gross proceeds of $1,050,000 at $0.40 per share and another non-brokered private placement raising gross proceeds of $422,875 at $0.50 per share. Total share offering costs amounted to $45,283.

F-105

KWESST MICRO SYSTEMS INC.
Notes to Consolidated Financial Statements
Nine months ended September 30, 2020 and twelve months ended December 31, 2019
(Expressed in Canadian dollars, except share and per share amounts)

(7)See Note 4(b).

(8)See Note 15.

(9)During the second quarter of fiscal 2020, KWESST Inc. closed on approximately $1.1 million gross proceeds from a non-brokered private placement for unsecured convertible notes, with automatic conversion upon a Liquidity Event including the listing of the Company on the TSX-V.  In light of the Company going public during the third quarter of fiscal 2020, resulting in the automatic conversion of these notes, management concluded that under IAS 38 the recognition of these notes should be equity and not debt.  At the QT, these convertible notes were converted to 2,477,851 common shares. In connection with these notes, the note holders earned interest at a rate of 15% per annum. Because the notes were treated as equity instruments, the total accrued interest of $59,112 was not recognized in the profit or loss. This accrued interest was converted to 131,360 common shares at QT. Additionally, as an inducement, the note holders also received 25% of the principal amount in the from KWESST common shares based on a stock price of $0.45, resulting in the issuance 600,839. In connection with this private placement, KWESST incurred $58,065 of offering costs settled in cash and warrants.

(10)During the second quarter of fiscal 2020, KWESST issued 16,000 common shares under a non-brokered private placement.

(11)During the second quarter of fiscal 2020, KWESST issued 61,000 common shares as settlement for consulting services rendered.

(12)See below - Stock Options.

(13)During the third quarter, KWESST settled performance bonuses in the form of 45,000 common shares. Additionally, KWESST awarded 500,000 common shares each to two M&A / capital market advisors for successfully assisting KWESST to complete a QT, in accordance with their respective consulting agreement. One of the two advisors is a related party (see Note 10).

(14)During the third quarter and as part of the QT, KWESST closed a brokered private placement led by PI Financial Corp., resulting in gross proceeds of $3,086,687 before share offering costs of $325,887 settled in both cash and warrants.

(15)See Note 4(a).

Warrants

The following reflects the warrant activities for KWESST:

	# of Warrants		Exercise price		Fair Value	Weighted average remaining life (years)	Expiry Date
Warrants outstanding at December 31 2018	-	$	-	$	-	-
Granted	6,500,000	$	0.20	$	1,192	3.25	January 1 2024
Granted	2,000,000	$	0.20	$	19,858	3.71	June 14 2024
Warrants outstanding at December 31, 2019	8,500,000	$	0.20	$	1,192
Issued in private placement	15,000	$	0.40	$	2,265	1.33	January 30 2022
Issued in private placement	84,622	$	0.45	$	13,515	1.60	May 8 2022
Issued in asset acquisition (see Note 4)	750,000	$	0.50	$	180,000	2.29	Jan 15 2023
Issued in private placement	235,428	$	0.70	$	60,340	1.77	July 9 2022
Warrants outstanding at Sept 30, 2020	9,585,050				257,312	3.22

F-106

KWESST MICRO SYSTEMS INC.
Notes to Consolidated Financial Statements
Nine months ended September 30, 2020 and twelve months ended December 31, 2019
(Expressed in Canadian dollars, except share and per share amounts)

2019 Activities:

Warrants were issued to major shareholders, which a portion was subsequently reallocated to the Executive Chairman's controlling company (DEFSEC) and strategic advisor (See Note 10). Management determined that the estimated fair value for 6.5 million warrants issued on January 1, 2019, was insignificant. For the remaining two million warrants, management estimated the fair value for these warrants using the Black-Sholes pricing model with the following inputs:

		Warrants @ $0.20
Stock price	$	0.044
Volatility		66.75%
Dividend Yield		Nil
Risk-free interest rate		1.40%
Expected life		5
Weighted average fair value per warrant	$	0.0099

2020 Activities:

In connection with private placements, warrants were issued as compensation to brokers and consultants. Additionally, KWESST issued 750,000 warrants to SageGuild LLC in connection with the technology acquisition.

Management estimated fair value of the warrants using the Black-Scholes pricing model with the following key inputs:

		Warrants @ $0.40		Warrants @ $0.45		Warrants @ $0.70
Stock price	$	0.40	$	0.50	$	0.70
Volatility		68%		68%		67%
Dividend Yield		Nil		Nil		Nil
Risk-free interest rate		1.47%		0.27%		0.29%
Expected life		2		2		2
Estimated fair value per warrant	$	0.15	$	0.20	$	0.26

Stock options

KWESST has a rolling stock option plan (the ''Plan'') that authorizes the Board of Directors to grant incentive stock options to directors, officers, consultants and employees, whereby a maximum of 10% of the issued common shares are reserved for issuance under the Plan. Under this Plan, the exercise price of each option may not be less than the market price of KWESST's shares at the date of grant. The maximum term for options is five years. Options are granted periodically and generally vest over two years.

F-107

KWESST MICRO SYSTEMS INC.
Notes to Consolidated Financial Statements
Nine months ended September 30, 2020 and twelve months ended December 31, 2019
(Expressed in Canadian dollars, except share and per share amounts)

The following table shows the status of the Plan:

	Number of options			Weighted average exercise price
Outstanding at December 31, 2019	-		$	-
Granted	2,055,000		$	0.65
Options from the Foremost QT (see Note 4(b))	85,714		$	0.47
Exercised	(122,000	)	$	0.50
Outstanding at September 30, 2020	2,018,714		$	0.65
Options exercisable at September 30, 2021	523,214		$	0.60

The following table presents information about stock options outstanding at September 30, 2020:

Range of exercise prices	Number outstanding	Weighted average remaining contractual life	Number exercisable
$0.47	85,712	2.71	85,712
$0.50	183,000	0.67	-
$0.65	925,000	4.42	231,250
$0.70	825,000	4.79	206,250
	2,018,712		523,212

At September 30, 2020, there were 2,107,904 stock options available for grant under the Plan.

During 2020, KWESST granted 2,055,000 options (2019 - nil) and recorded stock-based compensation expenses of $283,084 (2019 - $nil) related to the vesting of options. The per share weighted-average fair value of stock options granted in 2020 was $0.23 on the date of grant using the Black-Scholes option model with the following weighted-average assumptions:

Stock price	$0.40 to $0.70
Exercise price	$0.40 to $0.70
Volatility	67.71%
Dividend yield	Nil
Risk-free interest rate	0.65%
Expected life (years)	3.38
Weighted-average fair value per option	$                        0.23

Management estimated a forfeiture rate of nil%, except for an option grant of 500,000 at $0.70 each where forfeiture rate was set at 50% based information available subsequent to September 30, 2020.

F-108

KWESST MICRO SYSTEMS INC.
Notes to Consolidated Financial Statements
Nine months ended September 30, 2020 and twelve months ended December 31, 2019
(Expressed in Canadian dollars, except share and per share amounts)

17.Earnings (loss) per share

The following table summarizes the calculation of the weighted average basic number of basic and diluted common shares:

	Nine months ended September 30, 2020	Twelve months ended December 31, 2019
Issued common shares,  beginning of period	26,879,686	200
Effect of shares issued from:
Conversion of directors converted loans	-	7,082,192
Conversion of parent company converted loans	-	8,823,836
Exercise of options	31,282	-
Conversion of convertible notes, including  interest	498,810	1,523,849
Issuance for services	96,081	-
Issuance for technology acquisition (Note 4 (b))	89,055	-
Issuance of for equity private placements	3,196,555	-
Qualifying transaction (Note 4(a))	52,659	-
Weighted average number of basic common shares	30,844,129	17,430,077
Dilutive securities:
Stock options	-	-
Warrants	-	-
Weighted average number of dilutive common shares	30,844,129	17,430,077

At September 30, 2020 and December 31, 2019, all the stock options and warrants were anti-dilutive because of KWESST's net loss for both periods.

18.Revenue

The following table presents the key streams of revenue for KWESST:

		Nine months ended September 30, 2020		Twelve months ended December 31, 2019
Systems	$	835,097	$	472,749
Other		26,820		36,399
	$	861,917	$	509,148

Revenue allocated to remaining performance obligations represents contracted revenue that has not yet been recognized ("contracted not yet recognized") and includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods. At September 30, 2020, KWESST's contracted not yet recognized revenue was $233,193, of which 100% of this amount is expected to be recognized over the next 12 months.

F-109

KWESST MICRO SYSTEMS INC.
Notes to Consolidated Financial Statements
Nine months ended September 30, 2020 and twelve months ended December 31, 2019
(Expressed in Canadian dollars, except share and per share amounts)

19.Income tax recovery

a)Reconciliation of effective income tax rate

KWESST's effective income tax rate differs from the statutory rate of 26.5% that would be obtained by applying the combined Canadian basic federal and provincial income tax rate to loss before income taxes. These differences result from the following:

		Nine months ended September 30, 2020			Twelve months ended December 31, 2019
		(Adjusted  - see Note 8)			(Restated - see Note 25)
Loss before income taxes	$	(3,536,778	)		(1,147,280	)
Expected statutory tax rate		26.5%			26.5%
Expected tax recovery resulting from loss		(937,246	)		(304,029	)
Increase (reduction) in income taxes resulting from:
Non-deductible expenses		275,273			28,115
Unrecognized temporary differences		661,973			275,914
	$	-		$	-

KWESST claims research and development deductions and related Investment Tax Credits ("ITC") for tax purposes based on management's interpretation of the applicable legislation in the Income Tax Act of Canada. These claims are subject to audit by the Canada Revenue Agency ("CRA") and any adjustments that results could affect ITCs recorded in the consolidated financial statements. During the nine months ended September 30, 2020, KWESST recognized estimated investment tax credits of $127,325 for the current period and the twelve months ended December 31, 2019. This was presented as a reduction to R&D consulting and material costs in the consolidated statements of net loss and comprehensive loss.

b)Deferred tax balances

The following tables deferred tax assets (liabilities) have been recognized in the consolidated financial statements:

		Balance at December 31, 2019		Recognized in profit or loss			Recognized in equity		Balance at September 30, 2020
Deferred tax assets (liabilities):
Net operating loss carryforwards	$	-	$	48,045		$	-	$	48,045
Intangible assets		-		(48,045	)				(48,045	)
	$	-	$	-		$	-	$	-

F-110

KWESST MICRO SYSTEMS INC.
Notes to Consolidated Financial Statements
Nine months ended September 30, 2020 and twelve months ended December 31, 2019
(Expressed in Canadian dollars, except share and per share amounts)

c)Unrecognized net deferred tax assets

Deferred taxes reflect the impact of loss carryforwards and of temporary differences between amounts of assets and liabilities for financial reporting purposes and such amounts as measured by enacted tax laws. However, KWESST has not recorded net deferred tax assets at September 30, 2020 and December 31, 2019, due to the uncertainty involved in determining whether these deferred tax assets will be realized upon expiration due to KWESST's limited history and operating losses since its inception.

The following is a summary of KWESST's unrecognized deductible temporary differences:

		Balance at		Balance at
		September 30,		December 31,
		2020		2019
Net operating loss carryforwards	$	4,279,494	$	2,111,531
Share issuance costs		1,496,239		17,281
Scientific research and development expenditures		218,235		170,940
Other		46,891		22,106
	$	6,040,859	$	2,321,858

d)Available net operating losses

At September 30, 2020, KWESST has the following net operating losses in Canada available to reduce future year's taxable income which expire as follows: 

Year of expiry		Amount
2036	$	512,163
2037		611,677
2038		1,174,797
2039		1,829,518
2040		332,641
	$	4,460,796

20.Financial instruments

Fair value of financial instruments

The fair values of KWESST's cash, trade and other receivables, accounts payables and accrued liabilities, lease deposits (included in non-current other assets), related parties, and convertible notes approximate carrying value because of the short-term nature of these instruments.

The lease deposits, convertible notes, and lease obligations were recorded at fair value at initial recognition. Subsequently, these were measured at amortized cost and accreted to their nominal value over their respective terms.

F-111

KWESST MICRO SYSTEMS INC.
Notes to Consolidated Financial Statements
Nine months ended September 30, 2020 and twelve months ended December 31, 2019
(Expressed in Canadian dollars, except share and per share amounts)

Financial derivative liabilities are the only instruments classified as a Level 2 in the fair value hierarchy, as a result of measuring its fair value at each reporting date using the Black-Scholes pricing model. Under IFRS, the levels of fair value hierarchy is as follows:

Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities;

Level 2: Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and

Level 3: inputs for the asset or liability that are not observable market data (unobservable inputs).

Financial risk management

The Company is exposed to a number of financial risks arising through the normal course of business as well as through its financial instruments. The Company's overall business strategies, tolerance of risk and general risk management philosophy are determined by the directors in accordance with prevailing economic and operating conditions.

(a)Interest rate risk

Interest rate risk is the risk that the fair value of cash flows of a financial instrument will fluctuate because of changes in market interest rates. KWESST's related party loans have fixed interest rate terms and therefore KWESST is not exposed to interest rate risk.

(b)Foreign currency risk

Foreign currency risk is the risk that the future cash flows or fair value of the Company's financial instruments that are denominated in a currency that is not KWESST's functional currency will fluctuate due to a change in foreign exchange rates.

For the nine months ended September 30 2020, KWESST's revenue was substantially denominated in US dollar driven by contracts with U.S. prime contractors in the defense sector. Accordingly, KWESST is exposed to the US dollar currency. A significant change in the US dollar currency could have a significant effect on KWESST's financial performance, financial position and cash flows. Currently, KWESST does not use derivative instruments to hedge its US dollar exposure.

At September 30, 2020, KWESST had the following net US dollar exposure:

		Total USD
Assets	$	222,262
Liabilities		(88,019	)
Net exposure at September 30, 2020	$	134,243
Impact to profit  or loss if 5% movement in the US dollar	$	6,712

During the nine months ended September 30, 2020, KWESST recorded foreign exchange loss of $13,937 (12 months in 2019: $982 loss)

F-112

KWESST MICRO SYSTEMS INC.
Notes to Consolidated Financial Statements
Nine months ended September 30, 2020 and twelve months ended December 31, 2019
(Expressed in Canadian dollars, except share and per share amounts)

(c)Credit risk

Credit risk is the risk of financial loss to the Company if a counterparty to a financial instrument fails to meet its contractual obligations. KWESST's credit risk exposure is limited to cash, and trade and other receivables. Refer to Note 5 for the breakdown of KWESST's trade and other receivables. KWESST enters into contracts with large, financially sound US general contractors, which mitigates the credit risk. Since September 30, 2020, KWESST has fully collected from the U.S. customer. The remaining receivable is due from the Canadian Federal and Provincial Government for sales tax recoverable and investment tax credits.

(d) Liquidity risk

Liquidity risk is the risk that KWESST will be unable to meet its financial obligations as they become due. KWESST's objective is to ensure that it has sufficient cash to meet its near term obligation when they become due, under both normal and stressed condition, without incurring unacceptable losses or risking reputational damage to KWESST. A key risk in managing liquidity is the degree of uncertainty in KWESST's cash flows due to its early stage in operations and the need for additional capital to fund its business strategies (see Note 2(a)).

At September 30, 2020, KWESST had approximately $3.1 million cash and $2.9 million in working capital (current assets less current liabilities).

21.Supplemental cash flow information

The following table presents changes in non-cash working capital:

		Nine months ended September 30, 2020			Twelve months ended December 31, 2019
					(As restated - see Note 25)
Trade and other receivables	$	(257,588	)	$	(41,465	)
Prepaid expenses and other		(387,762	)		(36,629	)
Other assets		-			(150,000	)
Accounts payable and accrued liabilities		393,202			86,519
Deferred revenue		7,053			-
	$	(245,095	)	$	(141,575	)

The following is a summary of non-cash items that were excluded from the consolidated statements of cash flows for the nine months ended September 30, 2020:

• $358,178 of right-of-use asset and lease obligations relating to the new office lease;
• $139,787 of right-of-use asset and $157,315 lease obligations de-recognized from KWESST's consolidated financial position relating to the former lease office;
• $347,280 of KWESST's common shares and warrants for the asset acquisition of GhostStep® Technology;
• $255,718 of convertible notes, including accrued interest, settled in KWESST's common shares;
• $322,779 of share offering costs settled in KWESST's common shares;
• $41,155 of options adjustment due to QT (see note 4(a)); and
• $17,531 fair value of options exercised and transferred to KWESST's common shares.

F-113

KWESST MICRO SYSTEMS INC.
Notes to Consolidated Financial Statements
Nine months ended September 30, 2020 and twelve months ended December 31, 2019
(Expressed in Canadian dollars, except share and per share amounts)

The following is a summary of non-cash items that were excluded from the consolidated statements of cash flows for the twelve months ended December 31, 2019:

• $1,290,255 common shares and warrants for loans.

22.Segmented information

KWESST's Executive Chairman has been identified as the chief operating decision maker. The Executive Chairman evaluates the performance of the Company and allocates resources based on the information provided by KWESST's internal management system at a consolidated level. KWESST has determined that it has only one operating segment.

Geographic information

The following table presents external revenue on a geographic basis:

		Nine months ended September 30, 2020		Twelve months ended December 31, 2019
United States	$	835,097	$	472,749
Canada		26,820		36,399
	$	861,917	$	509,148

All of KWESST's property and equipment are located in Canada, including the right-of-use assets.

Concentration of customers information

For the nine months ended September 30, 2020, two customers accounted for the revenue based in the United States. For the twelve months ended December ended December 31, 2019, one customer accounted for the revenues based in United States.

23.Capital management

KWESST's objective in managing its capital is to safeguard its ability to continue as a going concern and to sustain future development of the business. The Company's senior management is responsible for managing the capital through regular review of financial information to ensure sufficient resources are available to meet operating requirements and investments to support its growth strategy. The Board of Directors is responsible for overseeing this process. From time to time, KWESST could issue new common shares or debt to maintain or adjust its capital structure. KWESST is not subject to any externally imposed capital requirements.

F-114

KWESST MICRO SYSTEMS INC.
Notes to Consolidated Financial Statements
Nine months ended September 30, 2020 and twelve months ended December 31, 2019
(Expressed in Canadian dollars, except share and per share amounts)

KWESST's capital is composed of the following:

		September 30, 2020			December 31, 2019
		(Adjusted - See Note 8)
Debt:
Related party loans	$	218,276		$	289,828
Borrowings		32,273			-
Lease obligations		352,037			202,686
Convertible notes		-			210,819
Equity:
Share capital		9,374,563			2,284,353
Contributed surplus		583,878			21,050
Accumulated deficit		(6,073,577	)		(2,536,799	)
	$	4,487,450		$	471,937

24.Commitments and contingencies

a)Minimum royalties

On November 18, 2019, KWESST entered into a non-exclusive license agreement with a third party for its product named DroneBullet, a drone whose principal function and operation is acting as a projectile to intercept aerial threats using kinetic force.  Under this license agreement, KWESST will pay 8% royalty on annual sales of the DroneBullet to the third party, subject to the following minimum annual payments.

• $150,000 for March 31, 2020 to December 31, 2020;
• $200,000 for January 1, 2021 to December 31, 2021;
• $300,000 for January 1, 2022 to December 31, 2022;
• $400,000 for January 1, 2023 to December 31, 2023; and
• $500,000 for January 1, 2024 to December 31, 2024.

In accordance with this license agreement, KWESST paid $150,000 advanced royalty to the third party in 2019 (see Note 25). Due to delays in completing a fully functional DroneBullet, the third party delayed its minimum annual royalty payment. In light of this delay, KWESST and the third party are currently renegotiating the contract to amend certain terms, including the timing for the first minimum annual payment.

This agreement will expire on March 31, 2025. The agreement was amended subsequent to September 30, 2020 (see Note 26(c)).

25.Restatement of previously reported audited financial statements

Subsequent to the issuance of the previously reported audited financial statements for the year ended December 31, 2019, management discovered an error with the accounting for a $150,000 advanced royalty paid to a third party. This advanced royalty payment was an advance on future royalty payments under the licencing agreement (see Note 24) and therefore this payment should have been recognized as non-current other asset rather than a charge to profit or loss. It is classified as non-current because the application of the advanced royalty is limited to sales royalties in excess of the minimum annual royalties, subject to a maximum of $50,000 per year.

F-115

KWESST MICRO SYSTEMS INC.
Notes to Consolidated Financial Statements
Nine months ended September 30, 2020 and twelve months ended December 31, 2019
(Expressed in Canadian dollars, except share and per share amounts)

The following tables summarizes the effects of the adjustments described above.

Line item on the consolidated statements of financial position and consolidated statement of changes in shareholders' equity:

		As at					As at
		December 31, 2019			Adjustment		December 31, 2019
		(Previously Reported)					(As restated)
Other assets	$	-		$	150,000	$	150,000
Non-current assets	$	254,594		$	150,000	$	404,594
Total assets	$	550,087		$	150,000	$	700,087
Deficit	$	(2,686,799	)	$	150,000	$	(2,536,799	)
Total shareholders' equity (deficit)	$	(381,396	)	$	150,000	$	(231,396	)
Total liabilities and shareholders' equity (deficit)	$	550,087		$	150,000	$	700,087

Line item on the consolidated statements of net loss and comprehensive loss:

		Year ended						Year ended
		December 31, 2019			Adjustment			December 31, 2019
		(Previously Reported)						(As restated)
General and administrative expenses	$	171,273		$	(150,000	)	$	21,273
Total operating expenses	$	295,493		$	(150,000	)	$	145,493
Operating loss	$	(1,164,329	)	$	150,000		$	(1,014,329	)
Loss before income taxes	$	(1,297,280	)	$	150,000		$	(1,147,280	)
Net loss and comprehensive loss	$	(1,297,280	)	$	150,000		$	(1,147,280	)
Net loss per share	$	(0.07	)	$	150,000		$	(0.07	)

Line item on the consolidated statements of cash flows:

		Year ended						Year ended
		December 31, 2019			Adjustment			December 31, 2019
		(Previously Reported)						(As restated)
Net loss per share	$	(1,297,280	)	$	150,000		$	(1,147,280	)
Changes in non-cash working capital items	$	8,425		$	(150,000	)	$	(141,575	)

This non-current asset of $150,000 was subsequently written off.

F-116

KWESST MICRO SYSTEMS INC.
Notes to Consolidated Financial Statements
Nine months ended September 30, 2020 and twelve months ended December 31, 2019
(Expressed in Canadian dollars, except share and per share amounts)

26.Subsequent Events

a)Borrowings

In December 2020, the Canadian Federal Government amended the CEBA Term Loan program to increase the loan amount by $20,000 to $60,000. KWESST has increased its borrowings accordingly. Additionally, effective January 1, 2021, the outstanding balance of the CEBA Term Loan was automatically converted to a 2-year interest free term loan.

The CEBA Term Loan may be repaid at any time without notice or the payment of any penalty. If 75% of the CEBA Term Loan is repaid on or before December 31, 2022, the repayment of the remaining 25% shall be forgiven. If on December 31, 2022, KWESST exercises the option for a 3-year term extension, a 5% annual interest will be applied on the any balance remaining during the extension period.

b)Technology acquisition

Subsequently on April 29, 2021, KWESST acquired the Low Energy Cartridge technology from DEFSEC, a proprietary non-lethal cartridge-based firing system (herein referred as the "LEC System"). This technology acquisition includes all intellectual property rights for the LEC System. As DEFSEC is a private company owned by KWESST's Executive Chairman, this asset acquisition is a related party transaction.

The purchase consideration consisted of:

• 1,000,000 common shares of KWESST; and
• 500,000 warrants to purchase KWESST's common shares at $0.70 each; 25% vesting on the first anniversary of the closing of the LEC Technology acquisition and 25% per annum thereafter. These warrants will expire on April 29, 2026.

Additionally, KWESST will pay 7% royalty on annual sales of the LEC System to DEFSEC, net of taxes and duties, up to a maximum of $10 million, subject to minimum annual royalty payments starting in 2023.

The royalty payment obligation of the Purchase Agreement ("Agreement") will expire in 20 years unless terminated earlier under the terms set out in the Agreement.

c)Amended and restated licensing agreement

As disclosed in Note 24(a), KWESST entered into a licensing agreement with a third party, AerialX Drone Solutions ("AerialX").

Subsequently on April 5, 2021, KWESST entered into an amended and restated licensing agreement with AerialX for a period of two years from the date upon which AerialX will meet certain technical milestones. In consideration, KWESST has issued 100,000 common shares to AerialX ("Exclusive License Shares"). Based on KWESST's closing stock price of $1.37 on April 23, 2021 (TSX-V approval date), the fair value for these shares was $137,000.

F-117

KWESST MICRO SYSTEMS INC.
Notes to Consolidated Financial Statements
Nine months ended September 30, 2020 and twelve months ended December 31, 2019
(Expressed in Canadian dollars, except share and per share amounts)

d)Share capital activities

In April 2021, KWESST closed a brokered private placement, resulting in the issuance of 3,576,057 units of KWESST, at a price of $1.25 per unit for aggregate gross proceeds of $4,470,071. Each issued unit is comprised of one common share of the Company and one common share purchase warrant. Each Warrant is exercisable to acquire one common share at a price of $1.75 each for a period of 24 months from the closing date. If at any time after four (4) months and one (1) day following the closing date, the trading price of KWESST common stock on the TSX Venture Exchange is equal to or exceeds $3.00 for a period of 10 consecutive trading days, as evidenced by the price at the close of market, KWESST shall be entitled to notify the holders of the Warrants of its intention to force the exercise of the Warrants. Upon receipt of such notice, the holders shall have 30 days to exercise the Warrants, failing which the Warrants will automatically expire.

The following provides a summary of share capital activities since September 30, 2020:

	Number		Amount
Outstanding at September 30, 2020	41,266,176	$	9,374,563
Issued in brokered private placement	3,576,057	$	3,611,818
Issued for exercise of stock options	1,273,671	$	1,292,015
Issued for asset acquisition	1,000,000	$	1,290,000
Issued in private placement	750,000	$	1,110,000
Issued for exercise of warrants	726,575	$	815,307
Issued for exercise of broker compensation options	172,108	$	347,680
Issued for amended license	100,000	$	137,000
Issued for debt settlements	91,356	$	63,866
Issued for share units	9,688	$	12,498
Less: share offering costs for the year	-	$	(839,679	)
Outstanding at September 30, 2021	48,965,631	$	17,215,068

F-118

Up to 2,323,232 Common Units, Each Consisting of a Common Share and a Warrant to Purchase One Common Share

Up to 2,323,232 Pre-funded Units, Each Consisting of a Pre-funded Warrant to Purchase One Common Share and a Warrant to Purchase One Common Share

KWESST Micro Systems Inc.

PRELIMINARY PROSPECTUS

ThinkEquity

        , 2022

Through and including    , 2022 (the 25^th day after the date of this Prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer's obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 6. Indemnification of Directors and Officers.

Section 160 of the BCBCA authorizes companies to indemnify past and present directors, officers and certain other individuals for the liabilities incurred in connection with their services as such (including costs, expenses and settlement payments) in an eligible proceeding, unless such individual did not act honestly and in good faith with a view to the best interests of the company or, in the case of an eligible proceeding other than a civil proceeding, if such individual did not have reasonable grounds for believing his or her conduct in respect of which the proceeding was brought was lawful. In the case of a suit by or on behalf of the corporation or an associated corporation, a court must approve the indemnification.

Our Notice of Articles provide that we shall indemnify past and present directors against all eligible penalties to which such person is or may be liable, and we will, after the final disposition of an eligible proceeding, pay the expenses actually and reasonable incurred by such person in respect of that proceeding.

On February 25, 2022, we entered into agreements with our directors and certain officers (each an "Indemnitee" under such agreements) to indemnify the Indemnitee, to the fullest extent permitted by law and subject to certain limitations, against all liabilities, costs, charges and expenses reasonably incurred by an Indemnitee in an action or proceeding to which the Indemnitee was made a party by reason of the Indemnitee being an officer or director of (i) our company or (ii) an organization of which our company is a shareholder or creditor if the Indemnitee serves such organization at our request.

We maintain insurance policies relating to certain liabilities that our directors and officers may incur in such capacities.

Item 7. Recent sales of unregistered securities.

The following information relates to all securities issued or sold by us within the past three years and not registered under the Securities Act, adjusted for the Reverse Split. The issuances of securities described below were exempt from registration under the Securities Act in reliance on Regulation S promulgated under the Securities Act regarding sales by an issuer in offshore transactions, Regulation D under the Securities Act, Rule 701 under the Securities Act and/or pursuant to Section 4(a)(2) of the Securities Act regarding transactions not involving a public offering.

	Party	Principal Agent's name	Principal Agent's commission	Nature of Transaction	Security Type	Proceeds	Security or Exercise Price	Total number of securities
YTD Fiscal 2022
2022-08-25	Investors	ThinkEquity LLC	USD$32,000	Private placement	Common	$            51,932	$       12.25	4,239
2022-07-14	Investors	N/A	N/A	Private placement	Common	$          344,000	$       15.05	22,857
2022-07-14	Investors	N/A	N/A	Private placement	Warrant	N/A	$       19.95	11,428
2022-04-22	Police Ordnance	N/A	N/A	Non-cash M&A: contingent consideration earned	Common	N/A	$      95.20	875
2022-04-19	Investors	N/A	N/A	Exercise of warrants	Common	$           40,000	$      14.00	2,857
2022-03-30	Investors	N/A	N/A	Exercise of warrants	Common	$           40,000	$      14.00	2,857

II-1

2022-03-29	Investors	N/A	N/A	Exercise of warrants	Common	$	8,000	$	14.00	571
2022-03-28	Investors	N/A	N/A	Exercise of warrants	Common	$	8,000	$	14.00	571
2022-03-18	Investors	N/A	N/A	Exercise of warrants	Common	$	95,000	$	14.00	6,785
2022-03-15	Investors	N/A	N/A	Exercise of warrants	Common	$	25,000	$	14.00	1,785
2022-03-15	Investors	PI Financial	$           7,020	Private placement	Common	$	237,827	$	25.61	9,285
2022-03-11	Investors	PI Financial	$           3,780	Private placement	Common	$	128,061	$	25.61	5,000
2021-12-31	SageGuild	N/A	N/A	Exercise of warrants	Common	$	125,000	$	35.00	3,571
2021-12-15	Police Ordnance	N/A	N/A	Non-cash M&A	Common		N/A	$	95.20	3,965
2021-12-15	Police Ordnance	N/A	N/A	Non-cash M&A	Warrant		N/A	$	120.40	2,857
2021-10-25	Vendor (accredited)	N/A	N/A	Non-cash debt settlement	Common		N/A	$	133.00	142
Fiscal 2021
2021-09-22	Broker	N/A	N/A	Exercise of compensation options	Common	$	43,261	$	87.50	494
2021-09-22	Broker	N/A	N/A	Exercise of warrants	Common	$	60,566	$	122.50	494
2021-09-20	Investors	N/A	N/A	Exercise of warrants	Common	$	151,200	$	122.50	1,234
2021-09-17	Investors	N/A	N/A	Exercise of warrants	Common	$	218,400	$	122.50	1,782
2021-09-16	Investors	N/A	N/A	Exercise of warrants	Common	$	87,850	$	122.50	717
2021-09-16	Investors	Haywood Financial	$         90,000	Private placement	Common	$	1,500,000	$	140.00	10,714
2021-09-16	Investors	Haywood Financial	N/A	Private placement	Warrant		N/A	$	164.50	10,714
2021-09-16	Broker	Haywood Financial	N/A	Private placement	Warrant		N/A	$	140.00	642
2021-09-08	Broker	N/A	N/A	Exercise of compensation options	Common	$	19,964	$	87.50	228
2021-08-31	Broker	N/A	N/A	Exercise of compensation options	Common	$	29,339	$	87.50	335
2021-08-30	Broker	N/A	N/A	Exercise of compensation options	Common	$	122,571	$	87.50	1,400
2021-08-25	Broker	N/A	N/A	Exercise of warrants	Common	$	929	$	49.01	18
2021-08-25	Investors	N/A	N/A	Private placement	Common	$	50,000	$	87.50	571

II-2

2021-08-25	Investors	N/A	N/A	Private placement	Warrant		N/A	$	122.50	571
2021-08-17	Broker	N/A	N/A	Exercise of warrants	Common	$	2,730	$	49.00	55
2021-07-13	Broker	N/A	N/A	Exercise of warrants	Common	$	1,008	$	49.00	20
2021-04-29	DEFSEC	N/A	N/A	Non-cash asset acquisition	Common		N/A	$	90.30	14,285
2021-04-30	DEFSEC	N/A	N/A	Non-cash asset acquisition	Warrant		N/A	$	35.00	7,142
2021-04-29	Investors	PI Financial	$       288,405	Brokered private placement	Common	$	4,420,071	$	87.50	50,515
2021-04-29	Investors	PI Financial	N/A	Brokered private placement	Warrant		N/A	$	122.50	50,515
2021-04-29	Broker	PI Financial	N/A	Brokered private placement	Compensation option		N/A	$	87.50	3,296
2021-04-23	AerialX	N/A	N/A	Non-cash asset acquisition	Common		N/A	$	95.90	1,428
2021-02-23	Broker	N/A	N/A	Exercise of warrants	Common	$	41,654	$	49.00	850
2021-02-23	Broker	N/A	N/A	Exercise of warrants	Common	$	9,006	$	49.00	183
2021-02-22	Advisor	N/A	N/A	Exercise of warrants	Common	$	6,000	$	28.00	214
2021-02-12	Broker	N/A	N/A	Exercise of warrants	Common	$	1,499	$	49.00	30
2021-02-08	Broker	N/A	N/A	Exercise of warrants	Common	$	25,479	$	49.00	519
2021-02-04	Broker	N/A	N/A	Exercise of warrants	Common	$	5,727	$	49.00	116
2021-01-29	Broker	N/A	N/A	Exercise of warrants	Common	$	619	$	49.02	12
2021-01-28	Broker	N/A	N/A	Exercise of warrants	Common	$	27,245	$	49.00	556
2020-12-31	SageGuild	N/A	N/A	Exercise of warrants	Common	$	125,000	$	35.00	3,571
2020-12-14	Vendors	N/A	N/A	Non-cash debt settlement	Common		N/A	$	49.00	1,305
Fiscal 2020
2020-09-14	Advisors	N/A	N/A	Non-cash bonus	Common		N/A	$	49.00	14,285
2020-09-14	Investors	PI Financial	$       164,800	Brokered private placement	Common	$	3,087,138	$	49.01	62,993
2020-09-14	Broker	PI Financial		Brokered private placement	Warrant		N/A	$	49.00	3,363
2020-09-14	2020 Note holders	N/A	N/A	Non-cash conversion of convertible notes and commitment fee	Common		N/A	$	31.50	45,857

II-3

2020-09-14	2019 Note holders	N/A	N/A	Non-cash conversion of convertible notes	Common	N/A	$	39.20	5,944
2020-09-14	2019 Note holder	N/A	N/A	Non-cash conversion of convertible notes	Common	N/A	$	39.20	579
2020-09-14	SageGuild	N/A	N/A	Election made re non-cash asset acquisition in June 2020	Common	N/A	$	16.80	7,957
2020-07-14	Advisor	N/A	N/A	Non-cash bonus	Common	N/A	$	49.00	500
2020-07-13	Advisor	N/A	N/A	Non-cash bonus	Common	N/A	$	49.00	142
2020-06-12	SageGuild	N/A	N/A	Non-cash asset acquisition	Common	N/A	$	16.80	2,000
2020-06-13	SageGuild	N/A	N/A	Non-cash asset acquisition	Warrant	N/A	$	35.00	10,714
2020-06-12	Investors	N/A	N/A	Private placement	Common	$             8,000	$	35.00	228
2020-06-12	Consultant	N/A	N/A	Non-cash settlement for two months of services rendered	Common	N/A	$	35.00	871
2020-05-08	Advisors	N/A	N/A	Service rendered	Warrant	N/A	$	31.50	1,208
2020-03-25	Investors	N/A	N/A	Private placement	Common	$         422,875	$	35.00	12,082
2020-01-30	Investors	N/A	N/A	Private placement	Common	$      1,050,000	$	28.00	37,500
2020-01-30	Advisor	N/A	N/A	Service rendered	Warrant	N/A	$	28.00	214
Year 2019
2019-10-24	Investors	N/A	N/A	Private placement	Common	$      1,015,000	$	14.00	72,500
2019-10-24	Investors	N/A	N/A	Non-cash conversion of revenue sharing and debt agreements	Common	N/A	$	14.00	40,333
2019-10-24	Investor	N/A	N/A	Non-cash conversion of revenue sharing and debt agreements	Common	N/A	$	14.00	4,017
2019-08-17	Directors	N/A	N/A	Non-cash conversion of shareholder loans	Common	N/A	$	7.00	21,429

II-4

Additionally, we have also granted compensatory securities under our LTIP as follows:

• Nine months ended June 30, 2022: 5,214 stock options with a weighted average exercise price of $114.80 each; 10,725 RSUs, 17,942 PSUs, and 514 SARs.

• Fiscal year ended September 30, 2021: 52,987 stock options with a weighted average exercise price of $104.30 each; 16,410 RSUs, 2,857 PSUs, and 2,142 SARs.

• Fiscal period ended September 30, 2020: 29,357 stock options with a weighted average exercise price of $45.50 each.

• Year ended December 31, 2019: none

For further details, refer to Financial Statements section of this registration statement.

Item 8. Exhibits and Financial Statement Schedules.

(a) The following documents are filed as part of this registration statement:

Exhibit No.	Description
1.1	Form of Underwriting Agreement
1.2	Form of Underwriting Agreement for Canadian Offering
3.1+	Notice of Articles
3.2+	Articles of Amendment, as updated September 4, 2020
4.1	Form of Underwriter Warrant (included in Exhibit 1.1)
4.2	Form of Warrant Agency Agreement for Warrants
4.3	Form of Warrant (included in Exhibit 4.2)
4.4	Form of Pre-funded Warrant (included in Exhibit 1.1)
4.5	Form of Warrant Indenture for Canadian Warrants
4.6	Form of Warrant Certificate for Canadian Warrants (included in Exhibit 4.5)
4.7	Form of Canadian Compensation Option Certificate
5.1	Opinion of Fasken Martineau DuMoulin LLP
5.2	Opinion of Dorsey & Whitney LLP
8.1	Tax Opinion of Dorsey & Whitney LLP
9.1+	Voting Agreement among KWESST Micro Systems Inc., David Luxton, and Jeff MacLeod, dated September 14, 2020
10.1+	Amalgamation Agreement among KWESST Micro Systems Inc., Foremost Ventures Corp. and 2751530 Ontario Ltd., dated April 30, 2020
10.2+	Definitive Technology Purchase Agreement between KWESST Micro Systems Inc. and DEFSEC Corporation, dated January 15, 2021
10.3+	GhostStep Technology Purchase Agreement, between KWESST Micro Systems Inc. and SageGuild, LLC, dated June 12, 2020
10.4+	CPC Escrow Agreement between Foremost Ventures Corp. and TSX Trust Company, dated May 2, 2018
10.5+	Surplus Security Escrow Agreement between KWESST Micro Systems Inc. and TSX Trust Company, dated September 17, 2020
10.6+	Value Security Escrow Agreement between KWESST Micro Systems Inc. and TSX Trust Company, dated September 17, 2020
10.7+	Common Share Purchase Warrant Indenture between KWESST Micro Systems Inc. and TSX Trust Company, dated April 29, 2021
10.8+	First Supplemental Warrant Indenture between KWESST Micro Systems Inc. and TSX Trust Company, dated August 25, 2021
10.9+	Long-Term Performance Incentive Plan, effective March 31, 2022

II-5

10.10+	Form of Unsecured Loan Agreement, dated March 2022
10.11+	Professional Services Agreement among KWESST Inc., DEFSEC Corporation and David Luxton, dated October 1, 2019
10.12+	Employment Contract between KWEEST Inc. and Jeffrey Macleod, dated September 1, 2019
10.13+	Employment Contract between KWESST Micro Systems Inc. and Steve Archambault, dated April 1, 2021
10.14+	Employment Contract between KWESST Micro Systems Inc. and Rick Bowes, dated April 12, 2021
10.15†+	Master Professional Services Agreement between KWESST Inc. and General Dynamics Land Systems – Canada Corporation doing business as General Dynamics Mission Systems – Canada, dated December 1, 2021
10.16†+	Schedule B-1 to Master Professional Services Agreement - Statement of Work No. (1) between KWESST Micro Systems Inc. and General Dynamics Land Systems – Canada Corporation doing business as General Dynamics Mission Systems – Canada, dated December 1, 2021
10.17+	Subcontractor Agreement between KWESST Micro Systems Inc. and CounterCrisis Tech, dated July 6, 2022
10.18†+	Loan Agreement No. 1 between KWESST Micro Systems Inc. and Walleye Opportunities Master Fund Ltd., dated August 25, 2022
10.19†+	Loan Agreement No. 2 between KWESST Micro Systems Inc. and Walleye Opportunities Master Fund Ltd., dated August 25, 2022
21.1+	List of Subsidiaries of KWESST Micro Systems Inc.
23.1	Consent of Kreston GTA LLP
23.2	Consent of KPMG LLP
23.3	Consent of Fasken Martineau DuMoulin LLP (included in Exhibit 5.1)
23.4	Consent of Dorsey & Whitney LLP (included in Exhibit 5.2)
24.1+	Power of Attorney (included on signature page of the Registration Statement on Form F-1 filed with the Commission on August 16, 2022)
99.1+	Representation pursuant to Item 8.A.4 of Form 20-F
107+	Filing Fee Table

+Previously filed.

†Portions of this exhibit have been omitted in accordance with the rules of the SEC. KWESST Micro Systems Inc. agrees to furnish a copy of all omitted exhibits and schedules to the SEC upon its request.

Item 9. Undertakings.

The undersigned registrant hereby undertakes to provide to the Underwriter at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the Underwriter to permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the provisions described in Item 6, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding)is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

The undersigned registrant hereby undertakes:

(1)To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:

i.To include any prospectus required by Section 10(a)(3) of the Securities Act;

ii.To reflect in the prospectus any facts or events arising after the effective date of the registration statement(or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the SEC pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective Registration Statement;

iii.To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement.

II-6

(2)That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof;

(3)To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering;

(4)To file a post-effective amendment to the registration statement to include any financial statements required by "Item 8.A.of Form 20-F (17 CFR 249.220f)" at the start of any delayed offering or throughout a continuous offering.

(5)That, for the purpose of determining liability under the Securities Act to any purchaser: if the registrant is subject to Rule 430C (§230.430C of this chapter), each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A (§230.430A of this chapter), shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use

(6)For the purposes of determining liability under the Securities Act of 1933 to any purchaser in the initial distributions of the securities, the undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:

i.Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;

ii.Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;

iii.The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and

iv.Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.

(7)Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

The undersigned registrant hereby undertakes that:

II-7

(1)For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b) (1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.

(2)For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

II-8

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form F-1 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Ottawa, Province of Ontario, Canada, on this 7^th day of November, 2022.

KWESST MICRO SYSTEMS INC.
By:	/s/ Jeffrey MacLeod
	Jeffrey MacLeod
	Chief Executive Officer and Director

II-9

POWER OF ATTORNEY

Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated:

SIGNATURE	TITLE	DATE
/s/ Jeffrey MacLeod		November 7, 2022
Jeffrey MacLeod	Chief Executive Officer (Principal Executive Officer), Director
/s/ Steven Archambault		November 7, 2022
Steven Archambault	Chief Financial Officer (Principal Financial and Accounting Officer)
*		November 7, 2022
David Luxton	Executive Chairman and Director
*		November 7, 2022
John McCoach	Director
*		November 7, 2022
Paul Fortin	Director
*		November 7, 2022
Paul Mangano	Director

*By:      /s/Jeffrey MacLeod           

Name:    Jeffrey MacLeod

Title:      Attorney-in-Fact

II-10

SIGNATURE OF AUTHORIZED REPRESENTATIVE IN THE UNITED STATES

Pursuant to the requirements of the Securities Act of 1933, the undersigned, the duly authorized representative in the United States of KWESST Micro Systems Inc., has signed this registration statement on November 7, 2022.

Authorized United States Representative

/s/ Paul Mangano
Name:	Paul Mangano
Title:	Authorized Representative in the United States and Director

II-11

EX-1.1

UNDERWRITING AGREEMENT

between

KWESST MICRO SYSTEMS INC.

and

THINKEQUITY LLC

as Representative of the Several Underwriters

KWESST MICRO SYSTEMS INC.

UNDERWRITING AGREEMENT

New York, New York
[•], 2022

ThinkEquity LLC

As Representative of the several Underwriters named on Schedule 1 attached hereto
17 State Street, 41^st Floor

New York, NY 10004

Ladies and Gentlemen:

The undersigned, KWESST Micro Systems Inc., a corporation formed under the laws of British Columbia, Canada (collectively with its subsidiaries and affiliates, including, without limitation, all entities disclosed or described in the Registration Statement (as hereinafter defined) as being subsidiaries or affiliates of KWESST Micro Systems Inc., the "Company"), hereby confirms its agreement (this "Agreement") with ThinkEquity LLC (hereinafter referred to as "you" (including its correlatives) or the "Representative"), and with the other underwriters named on Schedule 1 hereto for which the Representative is acting as representative (the Representative and such other underwriters being collectively called the "Underwriters" or, individually, an "Underwriter") as follows:

1.Purchase and Sale of Securities.

1.1Firm Securities.

1.1.1.Nature and Purchase of Firm Securities.

(i)On the basis of the representations and warranties herein contained, but subject to the terms and conditions herein set forth, the Company agrees to issue and sell to the several Underwriters, an aggregate of [•] shares (each, a "Firm Share," and in the aggregate, the "Firm Shares") of the Company's common shares, no par value per share (the "Common Shares"), an aggregate of [•] pre-funded warrants (each, a "Pre-Funded Warrant," and in the aggregate, the "Firm Pre-Funded Warrants") to purchase one Common Share at an exercise price of $0.01 until such time as the Pre-Funded Warrant is exercised in full, subject to adjustment as provided in the Pre-Funded Warrant, and an aggregate of [•] warrants (each, a "Warrant," and in the aggregate, the "Firm Warrants"; the Firm Shares, Firm Pre-Funded Warrants and the Firm Warrants together, the "Firm Securities") to purchase one Common Share at an exercise price of $[•] for a period of five (5) years, subject to adjustment as provided in the  Warrant. 

(ii)The Underwriters, severally and not jointly, agree to purchase from the Company the number of Firm Shares, Firm Pre-Funded Warrants and Firm Warrants set forth opposite their respective names on Schedule 1 attached hereto and made a part hereof at a purchase price of $[•] per Firm Share and accompanying Firm Warrant (92.5% of the per Firm Share offering price, allocated as [•] per Firm Share and $[0.00001] per Firm Warrant) and $[•] per Firm Pre-Funded Warrant and accompanying Warrant (92.5% of the per Firm Share offering price minus $0.01, allocated as [•] per Firm Pre-Funded Warrant and $[0.00001] per Firm Warrant). The Firm Securities are to be offered initially to the public at the offering price set forth on the cover page of the Prospectus (as defined in Section 2.1.1 hereof).

1.1.2.Shares Payment and Delivery.

(i)Delivery and payment for the Firm Securities shall be made at 10:00 a.m., Eastern time, on the second (2^nd) Business Day (as defined in Section 1.1.2(ii) below) following the Effective Date (as defined below) of the Registration Statement (as defined in Section 2.1.1 below) (or the third (3^rd) Business Day following the Effective Date if the Registration Statement is declared effective after 4:01 p.m., Eastern time) or at such earlier time as shall be agreed upon by the Representative and the Company, at the offices of Dentons US LLP, 1221 Avenue of the Americas, New York, New York 10020 ("Representative Counsel"), or at such other place (or remotely by facsimile or other electronic transmission) as shall be agreed upon by the Representative and the Company. The hour and date of delivery and payment for the Firm Securities is called the "Closing Date."

(ii)Payment for the Firm Securities shall be made on the Closing Date by wire transfer in Federal (same day) funds, payable to the order of the Company upon delivery of the certificates (in form and substance satisfactory to the Underwriters) representing the Firm Securities (or through the facilities of the Depository Trust Company ("DTC")) for the account of the Underwriters. The Firm Securities shall be registered in such name or names and in such authorized denominations as the Representative may request in writing at least one (1) Business Day prior to the Closing Date. The Company shall not be obligated to sell or deliver the Firm Securities except upon tender of payment by the Representative for all of the Firm Securities. The term "Business Day" means any day other than a Saturday, a Sunday or a legal holiday or a day on which banking institutions are authorized or obligated by law to close in New York, New York.

1.2Over-allotment Option.

1.2.1.Option Shares.  For the purposes of covering any over-allotments in connection with the distribution and sale of the Firm Securities, the Company hereby grants to the Underwriters an option (the "Over-allotment Option") to purchase, in the aggregate, up to [•] additional Common Shares and/or Pre-Funded Warrants, representing 15% of the Firm Shares and Firm Pre-Funded Warrants sold in the offering from the Company (the "Option Shares" or "Option Pre-Funded Warrants," as applicable) and/or up to [•] additional Warrants to purchase an aggregate of an additional [•] Common Shares, representing 15% of the Firm Warrants sold in the offering from the Company (the "Option Warrants"). The purchase price to be paid per Option Share or Option Pre-Funded Warrant shall be equal to the price per Firm Share or Firm Pre-Funded Warrant set forth in Section 1.1.1(ii) hereof and the purchase price to be paid per Option Warrant shall be equal to the price per Firm Warrant set forth in Section 1.1.1(ii) hereof. The Over-allotment Option is, at the Underwriters' sole discretion, for Option Shares and Option Warrants together, Option Pre-Funded Warrants and Option Warrants together, solely Option Shares, Solely Option Pre-Funded Warrants, solely Option Warrants, or any combination thereof (each, an "Option Security" and collectively, the "Option Securities"). The Firm Securities and the Option Securities are collectively referred to as the "Securities." The Securities and the Underlying Shares (as defined below), are collectively referred to as the "Public Securities." The Public Securities shall be issued directly by the Company and shall have the rights and privileges described in the Registration Statement, the Pricing Disclosure Package and the Prospectus. The Firm Warrants and the Option Warrants, if any, shall be issued pursuant to, and shall have the rights and privileges set forth in, a warrant agreement, dated on or before the Closing Date, between the Company and Continental Stock Transfer & Trust, as warrant agent (the "Warrant Agreement"). The certificate (the "Pre-Funded Warrant Certificate") evidencing the Firm Pre-Funded Warrants and the Option Pre-Funded Warrants, if any, will be in the form attached hereto as Exhibit A. The offering and sale of the Public Securities is herein referred to as the "Offering."

1.2.2.Exercise of Option.  The Over-allotment Option granted pursuant to Section 1.2.1 hereof may be exercised by the Representative as to all (at any time) or any part (from time to time) of the Option Securities within 45 days after the Effective Date. The Underwriters shall not be under any obligation to purchase any Option Securities prior to the exercise of the Over-allotment Option. The Over-allotment Option granted hereby may be exercised by the giving of oral notice to the Company from the Representative, which must be confirmed in writing by overnight mail, email or facsimile or other electronic transmission setting forth the number of Option Securities to be purchased and the date and time for delivery of and payment for the Option Securities (the "Option Closing Date"), which shall not be later than one (1) full Business Day after the date of the notice or such other time as shall be agreed upon by the Company and the Representative, at the offices of Representative Counsel or at such other place (including remotely by facsimile, email or other electronic transmission) as shall be agreed upon by the Company and the Representative. If such delivery and payment for the Option Securities does not occur on the Closing Date, the Option Closing Date will be as set forth in the notice. Upon exercise of the Over-allotment Option with respect to all or any portion of the Option Securities, subject to the terms and conditions set forth herein, (i) the Company shall become obligated to sell to the Underwriters the number of Option Securities specified in such notice and (ii) each of the Underwriters, acting severally and not jointly, shall purchase that portion of the total number of Option Securities then being purchased as set forth in Schedule 1 opposite the name of such Underwriter.

- 2 -

1.2.3.Payment and Delivery.  Payment for the Option Securities shall be made on the Option Closing Date by wire transfer in Federal (same day) funds, payable to the order of the Company upon delivery to you of certificates (in form and substance satisfactory to the Underwriters) representing the Option Securities (or through the facilities of DTC) for the account of the Underwriters. The Option Securities shall be registered in such name or names and in such authorized denominations as the Representative may request in writing at least one (1) Business Day prior to the Option Closing Date. The Company shall not be obligated to sell or deliver the Option Securities except upon tender of payment by the Representative for applicable Option Securities.  An Option Closing Date may be simultaneous with, but not earlier than, the Closing Date; and in the event that such time and date are simultaneous with the Closing Date, the term "Closing Date" shall refer to the time and date of delivery of the Firm Securities and Option Securities.

1.2.4.Representative's Warrants.

1.2.4.1.Purchase Warrants. The Company hereby agrees to issue and sell to the Representative (and/or its designees) on the Closing Date, and the Option Closing Date if applicable, a warrant, in the form attached hereto as Exhibit B ("Representative's Warrant"), for the purchase of an aggregate of up to [•] Common Shares, representing 5% of the Firm Shares, Firm Pre-Funded Warrants, Option Shares and Option Pre-Funded Warrants sold on such date, for an aggregate purchase price of $100.00. The Representative's Warrant shall be exercisable, in whole or in part, commencing on the date which is one hundred eighty (180) days after the Effective Date and expiring on the five-year anniversary of the Effective Date, at an initial exercise price of $[•] per Common Share, which is equal to 125% of the initial public offering price of the Firm Shares. The Representative's Warrant and the Common Shares issuable upon exercise thereof are hereinafter referred to together as the "Representative's Securities." The Representative understands and agrees that there are significant restrictions pursuant to FINRA Rule 5110 against transferring the Representative's Warrant and the underlying Common Shares during the one hundred eighty (180) days after the Effective Date, and additional restrictions imposed on transferring the Representative's Warrant while the Common Shares are listed on the TSX Venture Exchange (the "TSXV") and by the Representative's acceptance thereof shall agree that: (A) the Representative will not sell, transfer, assign, pledge or hypothecate the Representative's Warrant, or any portion thereof, or be the subject of any hedging, short sale, derivative, put or call transaction that would result in the effective economic disposition of such securities for a period of one hundred eighty (180) days following the Effective Date to anyone other than (i) an Underwriter or a selected dealer in connection with the Offering, or (ii) an officer, partner, registered person or affiliate of the Representative or of any such Underwriter or selected dealer, or (iii) as otherwise expressly permitted by FINRA Rule 5110(g); and only if any such transferee agrees to the foregoing lock-up restrictions and (B) so long as the Common Shares are listed on the TSXV, the Representative shall not sell, transfer, assign, pledge or hypothecate the Representative's Warrant, or any portion thereof, or be the subject of any hedging, short sale, derivative, put, or call transaction that would result in the effective economic disposition of the securities, to anyone other than (i) an affiliate or employee (within the meaning of policies of the TSXV) of the Representative or (ii) an Underwriter or a selected dealer in connection with the Offering or an officer or partner thereof.

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1.2.4.2.Delivery. Delivery of the Representative's Warrant shall be made on the Closing Date or Option Closing Date, as applicable, and shall be issued in the name or names and in such authorized denominations as the Representative may request.

2.Representations and Warranties of the Company.  The Company represents and warrants to the Underwriters as of the Applicable Time (as defined below), as of the Closing Date and as of the Option Closing Date, if any, as follows:

2.1Filing of Registration Statement; Foreign Private Issuer.

2.1.1.Pursuant to the Securities Act.  The Company has filed with the U.S. Securities and Exchange Commission (the "Commission") a registration statement, and an amendment or amendments thereto, on Form F-1 (File No. 333-266897), including any related prospectus or prospectuses, for the registration of the Public Securities and the Representative's Securities under the Securities Act of 1933, as amended (the "Securities Act"), which registration statement and amendment or amendments have been prepared by the Company in all material respects in conformity with the requirements of the Securities Act and the rules and regulations of the Commission under the Securities Act (the "Securities Act Regulations") and will contain all material statements that are required to be stated therein in accordance with the Securities Act and the Securities Act Regulations. Except as the context may otherwise require, such registration statement, as amended, on file with the Commission at the time the registration statement became effective (including the Preliminary Prospectus (as defined below) included in the registration statement, financial statements, schedules, exhibits and all other documents filed as a part thereof or incorporated therein by reference and all information deemed to be a part thereof as of the Effective Date pursuant to paragraph (b) of Rule 430A of the Securities Act Regulations (the "Rule 430A Information")), is referred to herein as the "Registration Statement." If the Company files any registration statement pursuant to Rule 462(b) of the Securities Act Regulations, then after such filing, the term "Registration Statement" shall include such registration statement filed pursuant to Rule 462(b). The Registration Statement has been declared effective by the Commission on the date hereof. 

Each prospectus used prior to the effectiveness of the Registration Statement, and each prospectus that omitted the Rule 430A Information that was used after such effectiveness and prior to the execution and delivery of this Agreement, is herein called a "Preliminary Prospectus." The Preliminary Prospectus, subject to completion, dated [•], 2022, that was included in the Registration Statement immediately prior to the Applicable Time is hereinafter called the "Pricing Prospectus." The final prospectus in the form first furnished to the Underwriters for use in the Offering is hereinafter called the "Prospectus." Any reference to the "most recent Preliminary Prospectus" shall be deemed to refer to the latest Preliminary Prospectus included in the Registration Statement. 

"Applicable Time" means [•] [a.m./p.m.], Eastern time, on the date of this Agreement.

"Canadian Offering" means, concurrently with the Offering, the offering of certain securities of the Company in Canada, for aggregate gross proceeds of $3,000,000, with PI Financial Corp. serving as lead underwriter.

"Canadian Public Disclosure Documents" means all information filed by or on behalf of the Company since November 28, 2017 with the Canadian Securities Regulators and available for public viewing on SEDAR.

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"Canadian Securities Laws" means collectively, all applicable securities laws in Canada and the respective rules and regulations made thereunder, together with applicable multilateral or national instruments, orders, rulings, policies, rules and other regulatory instruments issued or adopted (and published) by Canadian Securities Regulators.

"Canadian Securities Regulators" means, collectively, the securities regulators or other securities regulatory authorities in Canada.

"Effective Date" means the date the Registration Statement is declared effective by the Commission.

"Issuer Free Writing Prospectus" means any "issuer free writing prospectus," as defined in Rule 433 of the Securities Act Regulations ("Rule 433"), including without limitation any "free writing prospectus" (as defined in Rule 405 of the Securities Act Regulations) relating to the Public Securities that is (i) required to be filed with the Commission by the Company, (ii) a "road show that is a written communication" within the meaning of Rule 433(d)(8)(i), whether or not required to be filed with the Commission, or (iii) exempt from filing with the Commission pursuant to Rule 433(d)(5)(i) because it contains a description of the Public Securities or of the Offering that does not reflect the final terms, in each case in the form filed or required to be filed with the Commission or, if not required to be filed, in the form retained in the Company's records pursuant to Rule 433(g).

"Issuer General Use Free Writing Prospectus" means any Issuer Free Writing Prospectus that is intended for general distribution to prospective investors (other than a "bona fide electronic road show," as defined in Rule 433 (the "Bona Fide Electronic Road Show")), as evidenced by its being specified in Schedule 2-B hereto.

"Issuer Limited Use Free Writing Prospectus" means any Issuer Free Writing Prospectus that is not an Issuer General Use Free Writing Prospectus.

"Pricing Disclosure Package" means any Issuer General Use Free Writing Prospectus issued at or prior to the Applicable Time, the Pricing Prospectus and the information included on Schedule 2-A hereto, all considered together.             

2.1.2.Pursuant to the Exchange Act.  The Company has filed with the Commission a Form 8-A (File Number 001-[•]) providing for the registration pursuant to Section 12(b) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), of the Common Shares and the Warrants, which registration statement complies in all material respects with the Exchange Act. The registration of the Common Shares and the Warrants under the Exchange Act has become effective by the Commission on or prior to the date hereof.  The Company has taken no action designed to, or likely to have the effect of, terminating the registration of the Common Shares and the Warrants under the Exchange Act, nor has the Company received any notification that the Commission is contemplating terminating such registration. 

2.1.3.Foreign Private Issuer.  The Company is a "foreign private issuer" (as defined in Rule 405 under the Securities Act).

2.2Stock Exchange Listing.  The Common Shares are listed on the TSXV under the symbol "KWE.V." The Common Shares and the Warrants have been approved for listing on the Nasdaq Capital Market (the "Exchange") under the symbol "KWE" and "KWESW," respectively, and the Company has taken no action designed to, or likely to have the effect of, delisting the Common Shares and the Warrants from the Exchange or the Common Shares from the TSXV, nor has the Company received any notification that the Exchange or the TSXV is contemplating terminating such listing or that the Company is out of compliance with the listing or maintenance requirements of the Exchange or the TSXV. 

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2.3No Stop Orders, etc.  Neither the Commission nor, to the Company's knowledge, any state regulatory authority has issued any order preventing or suspending the use of the Registration Statement, any Preliminary Prospectus or the Prospectus or has instituted or, to the Company's knowledge, threatened to institute, any proceedings with respect to such an order. The Company has complied with each request (if any) from the Commission for additional information.

2.4Disclosures in Registration Statement.

2.4.1.Compliance with Securities Act and 10b-5 Representation. 

(i)Each of the Registration Statement and any post-effective amendment thereto, at the time it became effective, complied in all material respects with the requirements of the Securities Act and the Securities Act Regulations. Each Preliminary Prospectus, including the prospectus filed as part of the Registration Statement as originally filed or as part of any amendment or supplement thereto, and the Prospectus, at the time each was filed with the Commission, complied in all material respects with the requirements of the Securities Act and the Securities Act Regulations. Each Preliminary Prospectus delivered to the Underwriters for use in connection with this Offering and the Prospectus was or will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.

(ii)Neither the Registration Statement nor any amendment thereto, at its effective time, as of the Applicable Time, at the Closing Date or at any Option Closing Date (if any), contained, contains or will contain an untrue statement of a material fact or omitted, omits or will omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading.  No post-effective amendment to the Registration Statement reflecting any facts or events arising after the date thereof which represent, individually or in the aggregate, a fundamental change in the information set forth therein is required to be filed with the Commission. The press releases disseminated by the Company during the twelve months preceding the date of this Agreement taken as a whole do not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made and when made, not misleading.

(iii)The Pricing Disclosure Package, as of the Applicable Time, at the Closing Date or at any Option Closing Date (if any), did not, does not and will not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; and each Issuer Limited Use Free Writing Prospectus hereto does not conflict with the information contained in the Registration Statement, any Preliminary Prospectus, the Pricing Prospectus or the Prospectus, and each such Issuer Limited Use Free Writing Prospectus, as supplemented by and taken together with the Pricing Prospectus as of the Applicable Time, did not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that this representation and warranty shall not apply to statements made or statements omitted in reliance upon and in conformity with written information furnished to the Company with respect to the Underwriters by the Representative expressly for use in the Registration Statement, the Pricing Prospectus or the Prospectus or any amendment thereof or supplement thereto. The parties acknowledge and agree that such information provided by or on behalf of any Underwriter consists solely of the following disclosure contained in the "Underwriting" section of the Prospectus: the disclosure under the headings "Discretionary Accounts," "Price Stabilization, Short Positions and Penalty Bids" and "Electronic Offer, Sale and Distribution of Securities" (the "Underwriters' Information").

(iv)Neither the Prospectus nor any amendment or supplement thereto (including any prospectus wrapper), as of its issue date, at the time of any filing with the Commission pursuant to Rule 424(b), at the Closing Date or at any Option Closing Date, included, includes or will include an untrue statement of a material fact or omitted, omits or will omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that this representation and warranty shall not apply to the Underwriters' Information.

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2.4.2.Disclosure of Agreements.  The agreements and documents described in the Registration Statement, the Pricing Disclosure Package and the Prospectus conform in all material respects to the descriptions thereof contained therein and there are no agreements or other documents required by the Securities Act and the Securities Act Regulations to be described in the Registration Statement, the Pricing Disclosure Package and the Prospectus or to be filed with the Commission as exhibits to the Registration Statement, that have not been so described or filed. Each agreement or other instrument (however characterized or described) to which the Company is a party or by which it is or may be bound or affected and (i) that is referred to in the Registration Statement, the Pricing Disclosure Package and the Prospectus, or (ii) is material to the Company's business, has been duly authorized and validly executed by the Company, is in full force and effect in all material respects and is enforceable against the Company and, to the Company's knowledge, the other parties thereto, in accordance with its terms, except (x) as such enforceability may be limited by bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally, (y) as enforceability of any indemnification or contribution provision may be limited under the federal and state securities laws, and (z) that the remedy of specific performance and injunctive and other forms of equitable relief may be subject to the equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. None of such agreements or instruments has been assigned by the Company, and neither the Company nor, to the Company's knowledge, any other party is in default thereunder and, to the Company's knowledge, no event has occurred that, with the lapse of time or the giving of notice, or both, would constitute a default thereunder. To the Company's knowledge, performance by the Company of the material provisions of such agreements or instruments will not result in a violation of any existing applicable law, rule, regulation, judgment, order or decree of any governmental agency or court, domestic or foreign, having jurisdiction over the Company or any of its assets or businesses (each, a "Governmental Entity"), including, without limitation, those relating to environmental laws and regulations.

2.4.3.Prior Securities Transactions.  No securities of the Company have been sold by the Company or by or on behalf of, or for the benefit of, any person or persons controlling, controlled by or under common control with the Company, except as disclosed in the Registration Statement, the Pricing Disclosure Package and the Preliminary Prospectus.

2.4.4.Regulations.  The disclosures in the Registration Statement, the Pricing Disclosure Package and the Prospectus concerning the effects of federal, state, local and all foreign regulation on the Offering and the Company's business as currently contemplated are correct in all material respects and no other such regulations are required to be disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus which are not so disclosed.

2.5Changes After Dates in Registration Statement.

2.5.1.No Material Adverse Change.  Since the respective dates as of which information is given in the Registration Statement, the Pricing Disclosure Package and the Prospectus, except as otherwise specifically stated therein: (i) there has been no material adverse change in the financial position or results of operations of the Company, nor any change or development that, singularly or in the aggregate, would involve a material adverse change or a prospective material adverse change, in or affecting the condition (financial or otherwise), results of operations, business, assets or prospects of the Company (a "Material Adverse Change"); (ii) there have been no material transactions entered into by the Company, other than as contemplated pursuant to this Agreement; and (iii) no officer or director of the Company has resigned from any position with the Company.  The Company does not have pending before the Commission any request for confidential treatment of information. Except for the issuance of the Public Securities contemplated by this Agreement and the Canadian Offering, no event, liability, fact, circumstance, occurrence or development has occurred or exists or is reasonably expected to occur or exist with respect to the Company or its businesses, prospects, properties, operations, assets or financial condition that would be required to be disclosed by the Company under applicable securities laws at the time this representation is made or deemed made that has not been publicly disclosed at least one Trading Day (as defined below) prior to the date that this representation is made.

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2.5.2.Recent Securities Transactions, etc.  Subsequent to the respective dates as of which information is given in the Registration Statement, the Pricing Disclosure Package and the Prospectus, and except as may otherwise be indicated or contemplated herein or disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the Company has not: (i) issued any securities or incurred any liability or obligation, direct or contingent, for borrowed money; or (ii) declared or paid any dividend or made any other distribution on or in respect to its capital stock.

2.6Independent Accountants.  To the knowledge of the Company,  KPMG LLP, Chartered Professional Accountants (the "Auditor"), whose report is filed with the Commission as part of the Registration Statement, the Pricing Disclosure Package and the Prospectus, is an independent registered public accounting firm as required by the Securities Act and the Securities Act Regulations and the Public Company Accounting Oversight Board. The Auditor has not, during the periods covered by the financial statements included in the Registration Statement, the Pricing Disclosure Package and the Prospectus, provided to the Company any non-audit services, as such term is used in Section 10A(g) of the Exchange Act.  To the knowledge of the Company,  Kreston GTA LLP, Chartered Professional Accountants (the "Prior Auditor"), whose report is filed with the Commission as part of the Registration Statement, the Pricing Disclosure Package and the Prospectus, is an independent registered public accounting firm as required by the Securities Act and the Securities Act Regulations and the Public Company Accounting Oversight Board. The Prior Auditor has not, during the periods covered by the financial statements included in the Registration Statement, the Pricing Disclosure Package and the Prospectus, provided to the Company any non-audit services, as such term is used in Section 10A(g) of the Exchange Act. Each of the Auditor and Prior Auditor is independent in accordance with the auditors' rules of professional conduct of the Chartered Professional Accountants of British Columbia, independent public accountants as required under the Canadian Securities Laws, and there has never been a reportable event (within the meaning of National Instrument 51-102 Continuous Disclosure Obligations) between the Company and the Auditor or between the Company and the Prior Auditor.

2.7Financial Statements, etc.  The financial statements, including the notes thereto and supporting schedules included in the Registration Statement, the Pricing Disclosure Package and the Prospectus, fairly present in all material respects the financial position and the results of operations of the Company at the dates and for the periods to which they apply; comply in all material respects with the applicable accounting requirements and rules and regulations of the Commission with respect thereto as in effect at the time of filing; and such financial statements have been prepared in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board ("IFRS"), consistently applied throughout the periods involved (provided that unaudited interim financial statements are subject to year-end audit adjustments that are not expected to be material in the aggregate and do not contain all footnotes required by IFRS); and the supporting schedules included in the Registration Statement present fairly the information required to be stated therein. Except as included therein, no historical or pro forma financial statements are required to be included in the Registration Statement, the Pricing Disclosure Package or the Prospectus under the Securities Act or the Securities Act Regulations. The pro forma and pro forma as adjusted financial information and the related notes, if any, included in the Registration Statement, the Pricing Disclosure Package and the Prospectus have been properly compiled and prepared in accordance with the applicable requirements of the Securities Act and the Securities Act Regulations and present fairly the information shown therein, and the assumptions used in the preparation thereof are reasonable and the adjustments used therein are appropriate to give effect to the transactions and circumstances referred to therein. All disclosures contained in the Registration Statement, the Pricing Disclosure Package or the Prospectus regarding "non-IFRS financial measures", if any, comply with Regulation G of the Exchange Act and Item 10 of Regulation S-K of the Securities Act, to the extent applicable. Each of the Registration Statement, the Pricing Disclosure Package and the Prospectus discloses all material off-balance sheet transactions, arrangements, obligations (including contingent obligations), and other relationships of the Company with unconsolidated entities or other persons that may have a material current or future effect on the Company's financial condition, changes in financial condition, results of operations, liquidity, capital expenditures, capital resources, or significant components of revenues or expenses. Each of the Registration Statement, the Pricing Disclosure Package and the Prospectus discloses all material off-balance sheet transactions, arrangements, obligations (including contingent obligations), and other relationships of the Company with unconsolidated entities or other persons that may have a material current or future effect on the Company's financial condition, changes in financial condition, results of operations, liquidity, capital expenditures, capital resources, or significant components of revenues or expenses.  Except as disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus, (a) neither the Company nor any of its direct and indirect subsidiaries, including each entity disclosed or described in the Registration Statement, the Pricing Disclosure Package and the Prospectus as being a subsidiary of the Company (each, a "Subsidiary" and, collectively, the "Subsidiaries"), has incurred any material liabilities or obligations, direct or contingent, or entered into any material transactions other than in the ordinary course of business, (b) the Company has not declared or paid any dividends or made any distribution of any kind with respect to its capital stock, (c) there has not been any change in the capital stock of the Company or any of its Subsidiaries, or, other than in the course of business, any grants under any stock or share compensation plan, and (d) there has not been any material adverse change in the Company's long-term or short-term debt.

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2.8Authorized Capital; Options, etc.  The Company had, at the date or dates indicated in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the duly authorized, issued and outstanding capitalization as set forth therein. Based on the assumptions stated in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the Company will have on the Closing Date the adjusted share capitalization set forth therein. Except as set forth in, or contemplated by, the Registration Statement, the Pricing Disclosure Package and the Prospectus, on the Effective Date, as of the Applicable Time and on the Closing Date and any Option Closing Date, there will be no stock or share options, warrants, or other rights to purchase or otherwise acquire any authorized, but unissued Common Shares of the Company or any security convertible or exercisable into Common Shares of the Company, or any contracts or commitments to issue or sell Common Shares or any such options, warrants, rights or convertible securities.

2.9Valid Issuance of Securities, etc.

2.9.1.Outstanding Securities.  All issued and outstanding securities of the Company issued prior to the transactions contemplated by this Agreement have been duly authorized and validly issued and are fully paid and non-assessable and have been issued in compliance with all United States federal and state securities laws and all Canadian provincial securities laws; the holders thereof have no rights of rescission with respect thereto, and are not subject to personal liability by reason of being such holders; and none of such securities were issued in violation of the preemptive rights of any holders of any security of the Company or similar contractual rights granted by the Company. The authorized Common Shares conform in all material respects to all statements relating thereto contained in the Registration Statement, the Pricing Disclosure Package and the Prospectus. The offers and sales of the outstanding Common Shares were at all relevant times either registered under the Securities Act and the applicable state securities or "blue sky" laws, and the applicable Canadian provincial securities laws or, based in part on the representations and warranties of the purchasers of such shares, exempt from such registration requirements.

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2.9.2.Securities Sold Pursuant to this Agreement.  The Public Securities and Representative's Securities have been duly authorized for issuance and sale and, when issued and paid for, will be validly issued, fully paid and non-assessable; the holders thereof are not and will not be subject to personal liability by reason of being such holders. The Public Securities and Representative's Securities are not and will not be subject to the preemptive rights of any holders of any security of the Company or similar contractual rights granted by the Company, and all corporate action required to be taken for the authorization, issuance and sale of the Public Securities and Representative's Securities has been duly and validly taken. The Common Shares issuable upon exercise of the Pre-Funded Warrants, the Warrants and the Representative's Warrant (the "Underlying Shares") have been duly authorized and reserved for issuance by all necessary corporate action on the part of the Company and when paid for and issued in accordance with the Pre-Funded Warrant Certificate, the Warrant Agreement and the Representative's Warrant, as the case may be, such Underlying Shares will be validly issued, fully paid and non-assessable and the holders thereof are not and will not be subject to personal liability by reason of being such holders and such Common Shares are not and will not be subject to the preemptive rights of any holders of any security of the Company or similar contractual rights granted by the Company. The Public Securities and Representative's Securities conform in all material respects to all statements with respect thereto contained in the Registration Statement, the Pricing Disclosure Package and the Prospectus. All corporate action required to be taken for the authorization, issuance and sale of the Pre-Funded Warrant, the Warrant and the Representative's Warrant has been duly and validly taken.

2.10Registration Rights of Third Parties.  Except as set forth in the Registration Statement, the Pricing Disclosure Package and the Prospectus, no holders of any securities of the Company or any rights exercisable for or convertible or exchangeable into securities of the Company have the right to require the Company to register any such securities of the Company under the Securities Act or to include any such securities in a registration statement to be filed by the Company.

2.11Validity and Binding Effect of Agreements.  This Agreement, the Pre-Funded Warrant Certificate, the Warrant Agreement and the Representative's Warrant have been duly and validly authorized by the Company, and, when executed and delivered, will constitute, the valid and binding agreements of the Company, enforceable against the Company in accordance with their respective terms, except: (i) as such enforceability may be limited by bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally; (ii) as enforceability of any indemnification or contribution provision may be limited under the federal and state securities laws; and (iii) that the remedy of specific performance and injunctive and other forms of equitable relief may be subject to the equitable defenses and to the discretion of the court before which any proceeding therefor may be brought.

2.12No Conflicts, etc.  The execution, delivery and performance by the Company of this Agreement, the Pre-Funded Warrant Certificate, the Warrant Agreement, the Representative's Warrant and all ancillary documents, the consummation by the Company of the transactions herein and therein contemplated and the compliance by the Company with the terms hereof and thereof do not and will not, with or without the giving of notice or the lapse of time or both: (i) result in a material breach of, or material conflict with, any of the terms and provisions of, or constitute a material default under, or result in the creation, modification, termination or imposition of any lien, charge or encumbrance upon any property or assets of the Company pursuant to the terms of any agreement or instrument to which the Company is a party; (ii) result in any violation of the provisions of the Company's Notice of Articles (as the same have been amended or restated from time to time, the "Charter"); or (iii) violate any existing applicable law, rule, regulation, judgment, order or decree of any Governmental Entity as of the date hereof.

2.13No Defaults; Violations.  No material default exists in the due performance and observance of any term, covenant or condition of any material license, contract, indenture, mortgage, deed of trust, note, loan or credit agreement, or any other agreement or instrument evidencing an obligation for borrowed money, or any other material agreement or instrument to which the Company is a party or by which the Company may be bound or to which any of the properties or assets of the Company is subject. The Company is not in violation of any term or provision of its Charter, or in violation of any franchise, license, permit, applicable law, rule, regulation, judgment or decree of any Governmental Entity. 

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2.14Corporate Power; Licenses; Consents.

2.14.1.Conduct of Business.  Except as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the Company has all requisite corporate power and authority, and has all necessary authorizations, approvals, orders, licenses, certificates and permits of and from all governmental regulatory officials and bodies that it needs as of the date hereof to conduct its business purpose as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus.

2.14.2.Transactions Contemplated Herein.  The Company has all corporate power and authority to enter into this Agreement, the Pre-Funded Warrant Certificate, the Warrant Agreement and the Representative's Warrant and to carry out the provisions and conditions hereof and thereof, and all consents, authorizations, approvals and orders required in connection therewith have been obtained. No consent, authorization or order of, and no filing with, any court, government agency or other body is required for the valid issuance, sale and delivery of the Public Securities and the consummation of the transactions and agreements contemplated by this Agreement, the Pre-Funded Warrant Certificate, the Warrant Agreement and the Representative's Warrant and as contemplated by the Registration Statement, the Pricing Disclosure Package and the Prospectus, except with respect to applicable federal and state securities laws and the rules and regulations of the Financial Industry Regulatory Authority, Inc. ("FINRA") and the policies of the TSXV.

2.15D&O Questionnaires.  To the Company's knowledge, all information contained in the questionnaires (the "Questionnaires") completed by each of the Company's directors and officers and affirmed immediately prior to the Offering (the "Insiders") as supplemented by all information concerning the Company's directors, officers and principal shareholders as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, as well as in the Lock-Up Agreement (as defined in Section 2.24 below), provided to the Underwriters, is true and correct in all material respects and the Company has not become aware of any information which would cause the information disclosed in the Questionnaires to become materially inaccurate and incorrect.

2.16Litigation; Governmental Proceedings.  There is no action, suit, proceeding, inquiry, arbitration, investigation, litigation or governmental proceeding pending or, to the Company's knowledge, threatened against, or involving the Company or, to the Company's knowledge, any executive officer or director which has not been disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus or in connection with the Company's listing application for the listing of the Public Securities on the Exchange, or which adversely affects or challenges the legality, validity or enforceability of this Agreement, the Pre-Funded Warrant Certificates, the Warrant Agreement, the Representative's Warrant or the Public Securities.

2.17Good Standing.  The Company has been duly organized and is validly existing as a corporation and is in good standing under the laws of the Province of British Columbia as of the date hereof, and is duly qualified to do business and is in good standing in each other jurisdiction in which its ownership or lease of property or the conduct of business requires such qualification, except where the failure to qualify, singularly or in the aggregate, would not have  or reasonably be expected to result in a Material Adverse Change.

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2.18Insurance.  The Company carries or is entitled to the benefits of insurance, with reputable insurers, in such amounts and covering such risks which the Company believes are adequate, including, but not limited to, directors and officers insurance coverage at least equal to $5,000,000 and all such insurance is in full force and effect. The Company has no reason to believe that it will not be able (i) to renew its existing insurance coverage as and when such policies expire or (ii) to obtain comparable coverage from similar institutions as may be necessary or appropriate to conduct its business as now conducted and at a cost that would not result in a Material Adverse Change.

2.19Transactions Affecting Disclosure to FINRA.

2.19.1.Finder's Fees.  Except as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, there are no claims, payments, arrangements, agreements or understandings relating to the payment of a finder's, consulting or origination fee by the Company or any Insider with respect to the sale of the Public Securities hereunder or any other arrangements, agreements or understandings of the Company or, to the Company's knowledge, any of its shareholders that may affect the Underwriters' compensation, as determined by FINRA.

2.19.2.Payments Within Twelve (12) Months.  Except as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the Company has not made any direct or indirect payments (in cash, securities or otherwise) to: (i) any person, as a finder's fee, consulting fee or otherwise, in consideration of such person raising capital for the Company or introducing to the Company persons who raised or provided capital to the Company; (ii) any FINRA member; or (iii)  any person or entity that has any direct or indirect affiliation or association with any FINRA member, within the twelve (12) months prior to the Effective Date, other than the payment to the Underwriters as provided hereunder in connection with the Offering.

2.19.3.Use of Proceeds.  None of the net proceeds of the Offering will be paid by the Company to any participating FINRA member or its affiliates, except as specifically authorized herein.

2.19.4.FINRA Affiliation.  There is no (i) officer or director of the Company, (ii) to the Company's knowledge, beneficial owner of 5% or more of any class of the Company's securities or (iii) to the Company's knowledge, beneficial owner of the Company's unregistered equity securities which were acquired during the 180-day period immediately preceding the filing of the Registration Statement that is an affiliate or associated person of a FINRA member participating in the Offering (as determined in accordance with the rules and regulations of FINRA).

2.19.5.Information. All information provided by the Company in its FINRA questionnaire to Representative Counsel specifically for use by Representative Counsel in connection with its Public Offering System filings (and related disclosure) with FINRA is true, correct and complete in all material respects.

2.20Foreign Corrupt Practices Act. None of the Company and its Subsidiaries or, to the Company's knowledge, any director, officer, agent, employee or affiliate of the Company and its Subsidiaries or any other person acting on behalf of the Company and its Subsidiaries, has, directly or indirectly, given or agreed to give any money, gift or similar benefit (other than legal price concessions to customers in the ordinary course of business) to any customer, supplier, employee or agent of a customer or supplier, or official or employee of any governmental agency or instrumentality of any government (domestic or foreign) or any political party or candidate for office (domestic or foreign) or other person who was, is, or may be in a position to help or hinder the business of the Company (or assist it in connection with any actual or proposed transaction) that (i) might subject the Company to any damage or penalty in any civil, criminal or governmental litigation or proceeding, (ii) if not given in the past, might have had a Material Adverse Change or (iii) if not continued in the future, might adversely affect the assets, business, operations or prospects of the Company. The Company has taken reasonable steps to ensure that its accounting controls and procedures are sufficient to cause the Company to comply in all material respects with the Foreign Corrupt Practices Act of 1977, as amended.

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2.21Compliance with OFAC. None of the Company and its Subsidiaries or, to the Company's knowledge, any director, officer, agent, employee or affiliate of the Company and its Subsidiaries or any other person acting on behalf of the Company and its Subsidiaries, is currently subject to any U.S. sanctions administered by the Office of Foreign Assets Control of the U.S. Department of the Treasury ("OFAC"), and the Company will not, directly or indirectly, use the proceeds of the Offering hereunder, or lend, contribute or otherwise make available such proceeds to any subsidiary, joint venture partner or other person or entity, for the purpose of financing the activities of any person currently subject to any U.S. sanctions administered by OFAC.

2.22Money Laundering Laws. The operations of the Company and its Subsidiaries are and have been conducted at all times in compliance with applicable financial recordkeeping and reporting requirements of the Currency and Foreign Transactions Reporting Act of 1970, as amended, the money laundering statutes of all applicable jurisdictions, the rules and regulations thereunder and any related or similar rules, regulations or guidelines, issued, administered or enforced by any Governmental Entity (collectively, the "Money Laundering Laws"); and no action, suit or proceeding by or before any Governmental Entity involving the Company with respect to the Money Laundering Laws is pending or, to the knowledge of the Company, threatened.

2.23Officers' Certificate.  Any certificate signed by any duly authorized officer of the Company and delivered to you or to Representative Counsel shall be deemed a representation and warranty by the Company to the Underwriters as to the matters covered thereby.

2.24Lock-Up Agreements.  Schedule 3 hereto contains a complete and accurate list of the Company's officers, directors and, to the knowledge of the Company, each owner of at least 5% of the Company's outstanding Common Shares (or securities convertible or exercisable into Common Shares), excluding SOL Global Investments Corp. (collectively, the "Lock-Up Parties").  The Company has caused each of the Lock-Up Parties to deliver to the Representative an executed Lock-Up Agreement, in the form attached hereto as Exhibit C (the "Lock-Up Agreement") prior to the execution of this Agreement.

2.25Subsidiaries.  All direct and indirect Subsidiaries of the Company are duly organized and in good standing under the laws of the place of organization or incorporation, and each Subsidiary is in good standing in each jurisdiction in which its ownership or lease of property or the conduct of business requires such qualification, except where the failure to qualify would not result in a Material Adverse Change.  The Company's ownership and control of each Subsidiary is as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus.

2.26Related Party Transactions.  There are no business relationships or related party transactions involving the Company or any other person required to be described in the Registration Statement, the Pricing Disclosure Package and the Prospectus that have not been described as required.

2.27Board of Directors.  The Board of Directors of the Company is comprised of the persons set forth under the heading of the Pricing Prospectus and the Prospectus captioned "Management." The qualifications of the persons serving as board members and the overall composition of the board comply with the Exchange Act, the Exchange Act Regulations, the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder (the "Sarbanes-Oxley Act") applicable to the Company and the listing rules of the Exchange.  At least one member of the Audit Committee of the Board of Directors of the Company qualifies as an "audit committee financial expert," as such term is defined under Regulation S-K and the listing rules of the Exchange.  In addition, at least a majority of the persons serving on the Board of Directors qualify as "independent," as defined under the listing rules of the Exchange.

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2.28Sarbanes-Oxley Compliance.

2.28.1.Disclosure Controls.  The Company has taken all necessary actions to ensure that, in the time periods required, the Company will comply with Rule 13a-15 or 15d-15 under the Exchange Act Regulations, and such controls and procedures are effective to ensure that all material information concerning the Company will be made known on a timely basis to the individuals responsible for the preparation of the Company's Exchange Act filings and other public disclosure documents.

2.28.2.Compliance.  The Company is, or at the Applicable Time and on the Closing Date will be, in material compliance with the provisions of the Sarbanes-Oxley Act applicable to it, and has implemented or will implement such programs and has taken reasonable steps to ensure the Company's future compliance (not later than the relevant statutory and regulatory deadlines therefor) with all of the material provisions of the Sarbanes-Oxley Act.

2.29Accounting Controls. The Company and its Subsidiaries maintain systems of "internal control over financial reporting" (as defined under Rules 13a-15 and 15d-15 under the Exchange Act Regulations) that comply with the requirements of the Exchange Act and have been designed by, or under the supervision of, their respective principal executive and principal financial officers, or persons performing similar functions, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS, including, but not limited to, internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with IFRS and to maintain asset accountability; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. Except as disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the Company is not aware of any material weaknesses in its internal controls.  The Company's auditors and the Audit Committee of the Board of Directors of the Company have been advised of: (i) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are known to the Company's management and that have adversely affected or are reasonably likely to adversely affect the Company's ability to record, process, summarize and report financial information; and (ii) any fraud known to the Company's management, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls over financial reporting.

2.30No Investment Company Status.  The Company is not and, after giving effect to the Offering and the application of the proceeds thereof as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, will not be, required to register as an "investment company," as defined in the Investment Company Act of 1940, as amended.

2.31No Labor Disputes.  No labor dispute with the employees of the Company or any of its Subsidiaries exists or, to the knowledge of the Company, is imminent. To the knowledge of the Company, no executive officer of the Company is in material violation of any employment contract, confidentiality, disclosure or proprietary information agreement or non-competition agreement, or any other contract or agreement or any restrictive covenant in favor of any third party, and the continued employment of each such executive officer does not subject the Company to any material liability with respect to any of the foregoing matters. The Company is in compliance with all federal, state, provincial, local and foreign laws and regulations relating to employment and employment practices, terms and conditions of employment and wages and hours, except as would not result in a Material Adverse Change.

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2.32Intellectual Property Rights.  The Company and each of its Subsidiaries owns or possesses or has valid rights to use all patents, patent applications, trademarks, service marks, trade names, trademark registrations, service mark registrations, copyrights, licenses, inventions, trade secrets and similar rights ("Intellectual Property Rights") necessary for the conduct of the business of the Company and its Subsidiaries as currently carried on and as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus.  To the knowledge of the Company, no action or use by the Company or any of its Subsidiaries necessary for the conduct of its business as currently carried on and as described in the Registration Statement and the Prospectus will involve or give rise to any infringement of, or license or similar fees for, any Intellectual Property Rights of others.  Neither the Company nor any of its Subsidiaries has received any notice alleging any such infringement, fee or conflict with asserted Intellectual Property Rights of others. To the knowledge of the Company, there is no infringement, misappropriation or violation by third parties of any of the Intellectual Property Rights owned by the Company.  There is no pending or, to the knowledge of the Company, threatened action, suit, proceeding or claim by others challenging the rights of the Company in or to any such Intellectual Property Rights, and the Company is unaware of any facts which would form a reasonable basis for any such claim, that would, individually or in the aggregate, together with any other claims in this Section 2.32, reasonably be expected to result in a Material Adverse Change.  The Intellectual Property Rights owned by the Company and, to the knowledge of the Company, the Intellectual Property Rights licensed to the Company have not been adjudged by a court of competent jurisdiction invalid or unenforceable, in whole or in part, and there is no pending or, to the Company's knowledge, threatened action, suit, proceeding or claim by others challenging the validity or scope of any such Intellectual Property Rights, and the Company is unaware of any facts which would form a reasonable basis for any such claim that would, individually or in the aggregate, together with any other claims in this Section 2.32, reasonably be expected to result in a Material Adverse Change.  There is no pending or, to the Company's knowledge, threatened action, suit, proceeding or claim by others that the Company infringes, misappropriates or otherwise violates any Intellectual Property Rights or other proprietary rights of others, the Company has not received any written notice of such claim and the Company is unaware of any other facts which would form a reasonable basis for any such claim that would, individually or in the aggregate, together with any other claims in this Section 2.32, reasonably be expected to result in a Material Adverse Change.  To the Company's knowledge, no employee of the Company is in or has ever been in violation in any material respect of any term of any employment contract, patent disclosure agreement, invention assignment agreement, non-competition agreement, non-solicitation agreement, nondisclosure agreement or any restrictive covenant to or with a former employer where the basis of such violation relates to such employee's employment with the Company, or actions undertaken by the employee while employed with the Company and could reasonably be expected to result, individually or in the aggregate, in a Material Adverse Change. To the Company's knowledge, all material technical information developed by and belonging to the Company which has not been patented has been kept confidential. The Company is not a party to or bound by any options, licenses or agreements with respect to the Intellectual Property Rights of any other person or entity that are required to be set forth in the Registration Statement, the Pricing Disclosure Package and the Prospectus and are not described therein. The Registration Statement, the Pricing Disclosure Package and the Prospectus contain in all material respects the same description of the matters set forth in the preceding sentence. None of the technology employed by the Company has been obtained or is being used by the Company in violation of any contractual obligation binding on the Company or, to the Company's knowledge, any of its officers, directors or employees, or otherwise in violation of the rights of any persons.

2.33Taxes.  Each of the Company and its Subsidiaries has filed all returns (as hereinafter defined) required to be filed with taxing authorities prior to the date hereof or has duly obtained extensions of time for the filing thereof.  Each of the Company and its Subsidiaries has paid all taxes (as hereinafter defined) shown as due on such returns that were filed and has paid all taxes imposed on or assessed against the Company or such respective Subsidiary.  The provisions for taxes payable, if any, shown on the financial statements filed with or as part of the Registration Statement are sufficient for all accrued and unpaid taxes, whether or not disputed, and for all periods to and including the dates of such consolidated financial statements.  Except as disclosed in writing to the Underwriters, (i) no issues have been raised (and are currently pending) by any taxing authority in connection with any of the returns or taxes asserted as due from the Company or its Subsidiaries, and (ii) no waivers of statutes of limitation with respect to the returns or collection of taxes have been given by or requested from the Company or its Subsidiaries.  The term "taxes" means all federal, state, local, foreign and other net income, gross income, gross receipts, sales, use, ad valorem, transfer, franchise, profits, license, lease, service, service use, withholding, payroll, employment, excise, severance, stamp, occupation, premium, property, windfall profits, customs, duties or other taxes, fees, assessments or charges of any kind whatsoever, together with any interest and any penalties, additions to tax or additional amounts with respect thereto.  The term "returns" means all returns, declarations, reports, statements and other documents required to be filed in respect to taxes.

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2.34Employee Benefit Laws; ERISA Compliance.  The Company is not in violation of or has not received notice of any violation with respect to any federal, state, provincial or foreign law relating to discrimination in the hiring, promotion or pay of employees, nor any applicable federal, state, provincial or foreign wages and hours law, nor any state law precluding the denial of credit due to the neighborhood in which a property is situated, the violation of any of which could reasonably be expected to result in a Material Adverse Change. The Company and any "employee benefit plan" (as defined under the Employee Retirement Income Security Act of 1974, as amended, and the regulations and published interpretations thereunder (collectively, "ERISA")) established or maintained by the Company or its "ERISA Affiliates" (as defined below) are in compliance in all material respects with ERISA. "ERISA Affiliate" means, with respect to the Company, any member of any group of organizations described in Sections 414(b), (c), (m) or (o) of the Internal Revenue Code of 1986, as amended, and the regulations and published interpretations thereunder (the "Code") of which the Company is a member. No "reportable event" (as defined under ERISA) has occurred or is reasonably expected to occur with respect to any "employee benefit plan" established or maintained by the Company or any of its ERISA Affiliates. No "employee benefit plan" established or maintained by the Company or any of its ERISA Affiliates, if such "employee benefit plan" were terminated, would have any "amount of unfunded benefit liabilities" (as defined under ERISA). Neither the Company nor any of its ERISA Affiliates has incurred or reasonably expects to incur any material liability under (i) Title IV of ERISA with respect to termination of, or withdrawal from, any "employee benefit plan" or (ii) Sections 412, 4971, 4975 or 4980B of the Code. Each "employee benefit plan" established or maintained by the Company or any of its ERISA Affiliates that is intended to be qualified under Section 401(a) of the Code is so qualified and, to the knowledge of the Company, nothing has occurred, whether by action or failure to act, which would cause the loss of such qualification.

2.35Compliance with Laws.  The Company: (A) is and at all times has been in compliance with all statutes, rules, or regulations applicable to the ownership, testing, development, manufacture, packaging, processing, use, distribution, marketing, labeling, promotion, sale, offer for sale, storage, import, export or disposal of any product manufactured or distributed by the Company ("Applicable Laws"), except as could not, individually or in the aggregate, reasonably be expected to result in a Material Adverse Change; (B) has not received any warning letter, untitled letter or other correspondence or notice from any other governmental authority alleging or asserting noncompliance with any Applicable Laws or any licenses, certificates, approvals, clearances, authorizations, permits and supplements or amendments thereto required by any such Applicable Laws ("Authorizations"); (C) possesses all material Authorizations and such Authorizations are valid and in full force and effect and are not in material violation of any term of any such Authorizations; (D) has not received notice of any claim, action, suit, proceeding, hearing, enforcement, investigation, arbitration or other action from any governmental authority or third party alleging that any product operation or activity conducted by the Company is in violation of any Applicable Laws or Authorizations and has no knowledge that any such governmental authority or third party is considering any such claim, litigation, arbitration, action, suit, investigation or proceeding; (E) has not received notice that any governmental authority has taken, is taking or intends to take action to limit, suspend, modify or revoke any Authorizations and has no knowledge that any such governmental authority is considering such action; and (F) has filed, obtained, maintained or submitted all material reports, documents, forms, notices, applications, records, claims, submissions and supplements or amendments as required by any Applicable Laws or Authorizations and that all such reports, documents, forms, notices, applications, records, claims, submissions and supplements or amendments were complete and correct on the date filed (or were corrected or supplemented by a subsequent submission).

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2.36Ineligible Issuer.  At the time of filing the Registration Statement and any post-effective amendment thereto, at the time of effectiveness of the Registration Statement and any amendment thereto, at the earliest time thereafter that the Company or another offering participant made a bona fide offer (within the meaning of Rule 164(h)(2) of the Securities Act Regulations) of the Public Securities and at the date hereof, the Company was and is an "ineligible issuer," as defined in Rule 405.

2.37Real Property.  Except as set forth in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the Company and its Subsidiaries have good and marketable title in fee simple to, or have valid rights to lease or otherwise use, all items of real or personal property which are material to the business of the Company and its Subsidiaries taken as a whole, in each case free and clear of all liens, encumbrances, security interests, claims and defects that do not, singly or in the aggregate, materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company or its Subsidiaries; and all of the leases and subleases material to the business of the Company and its subsidiaries, considered as one enterprise, and under which the Company or any of its Subsidiaries holds properties described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, are in full force and effect, and neither the Company nor any Subsidiary has received any notice of any material claim of any sort that has been asserted by anyone adverse to the rights of the Company or any Subsidiary under any of the leases or subleases mentioned above, or affecting or questioning the rights of the Company or such Subsidiary to the continued possession of the leased or subleased premises under any such lease or sublease.

2.38Contracts Affecting Capital.  There are no transactions, arrangements or other relationships between and/or among the Company, any of its affiliates (as such term is defined in Rule 405 of the Securities Act Regulations) and any unconsolidated entity, including, but not limited to, any structured finance, special purpose or limited purpose entity that could reasonably be expected to materially affect the Company's or its Subsidiaries' liquidity or the availability of or requirements for their capital resources required to be described or incorporated by reference in the Registration Statement, the Pricing Disclosure Package and the Prospectus which have not been described or incorporated by reference as required.

2.39Loans to Directors or Officers.  There are no outstanding loans, advances (except normal advances for business expenses in the ordinary course of business) or guarantees or indebtedness by the Company or its Subsidiaries to or for the benefit of any of the officers or directors of the Company or its Subsidiaries or any of their respective family members, except as disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus. 

2.40Data Privacy and Security Laws. To the Company's knowledge, the Company and its Subsidiaries are, and at all prior times were, in material compliance with all applicable state and federal data privacy and security laws and regulations in the United States, and all applicable provincial and federal data privacy and security laws and regulations in Canada, including without limitation the Personal Information Protection and Electronic Documents Act (S.C. 2000, c. 5) ("PIPEDA"), and the Company and its Subsidiaries have taken commercially reasonable actions to prepare to comply with, and have been and currently are in compliance with, the European Union General Data Protection Regulation ("GDPR") (EU 2016/679) (collectively, the "Privacy Laws"). To ensure compliance with the Privacy Laws, the Company and its Subsidiaries have in place, comply with, and take appropriate steps reasonably designed to ensure compliance in all material respects with their policies and procedures relating to data privacy and security and the collection, storage, use, disclosure, handling of Personal Data (the "Policies"). "Personal Data" means (i) a natural person's name, street address, telephone number, e-mail address, photograph, social security number or tax identification number, driver's license number, passport number, credit card number, bank information, or customer or account number; (ii) any information which would qualify as "personally identifying information" under the Federal Trade Commission Act, as amended; (iii) "personal information", "personal health information". and "business contact information" as defined by PIPEDA; (iv) "personal data" as defined by GDPR; and (v) any other piece of information that allows the identification of such natural person, or his or her family, or permits the collection or analysis of any data related to an identified person's health or sexual orientation. The Company and its Subsidiaries have at all times made all disclosures to users or customers required by applicable laws and regulatory rules or requirements, and none of such disclosures made or contained in any Policy have, to the knowledge of the Company, been inaccurate or in violation of any applicable laws and regulatory rules or requirements in any material respect. The Company further certifies that neither it nor any Subsidiary: (i) has received notice of any actual or potential liability under or relating to, or actual or potential violation of, any of the Privacy Laws, and has no knowledge of any event or condition that would reasonably be expected to result in any such notice; (ii) is currently conducting or paying for, in whole or in part, any investigation, remediation, or other corrective action pursuant to any Privacy Law; or (iii) is a party to any order, decree, or agreement that imposes any obligation or liability under any Privacy Law.

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2.41Industry Data.  The statistical and market-related data included in each of the Registration Statement, the Pricing Disclosure Package and the Prospectus are based on or derived from sources that the Company reasonably and in good faith believes are reliable and accurate or represent the Company's good faith estimates that are made on the basis of data derived from such sources.

2.42Reverse Share Split.  The Company took all necessary corporate action to effectuate a reverse share split of its Common Shares on the basis of one (1) such share for each seventy (70) issued and outstanding shares thereof (the “Reverse Share Split”), such Reverse Share Split was effective on October 28, 2022.

2.43IT Assets.  Except as could not reasonably be expected to result in a Material Adverse Change, (i) the computers, software, servers, networks, data communications lines, and other information technology systems owned, licensed, leased or otherwise used by the Company or its Subsidiaries (excluding any public networks) (collectively, the "IT Assets") operate and perform as is necessary for the operation of the business of the Company and its Subsidiaries as currently conducted and as proposed to be conducted as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, and (ii) to the knowledge of the Company, such IT Assets are not infected by viruses, disabling code or other harmful code. The Company and its Subsidiaries have at all times implemented and maintained all industry standard controls, policies, procedures, and safeguards to maintain and protect their confidential information and the integrity, continuous operation, redundancy and security of all IT Assets and data (including all Personal Data, sensitive, confidential or regulated data used in connection with their businesses), and to the knowledge of the Company, there have been no breaches, violations, outages or unauthorized uses of or accesses to same, except for those that have been remedied without material cost or liability or the duty to notify any other person, nor any incidents under internal review or investigations relating to the same.

2.44Testing-the-Waters Communications.  The Company has not (i) alone engaged in any Testing-the-Waters Communications, other than Testing-the-Waters Communications with the written consent of the Representative and with entities that are qualified institutional buyers within the meaning of Rule 144A under the Securities Act or institutions that are accredited investors within the meaning of Rule 501 under the Securities Act and (ii) authorized anyone other than the Representative to engage in Testing-the-Waters Communications.  The Company confirms that the Representative has been authorized to act on its behalf in undertaking Testing-the-Waters Communications.  The Company has not distributed any Written Testing-the-Waters Communications other than those listed on Schedule 2-C hereto.  "Testing-the-Waters Communication" means any oral or written communication with potential investors undertaken in reliance on Section 5(d) of the Securities Act. "Written Testing-the-Waters Communication" means any Testing-the-Waters Communication that is a written communication within the meaning of Rule 405 under the Securities Act.

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2.45Electronic Road Show.  The Company has made available a Bona Fide Electronic Road Show in compliance with Rule 433(d)(8)(ii) of the Securities Act Regulations such that no filing of any "road show" (as defined in Rule 433(h) of the Securities Act Regulations) is required in connection with the Offering.

2.46Margin Securities.  The Company owns no "margin securities" as that term is defined in Regulation U of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"), and none of the proceeds of Offering will be used, directly or indirectly, for the purpose of purchasing or carrying any margin security, for the purpose of reducing or retiring any indebtedness which was originally incurred to purchase or carry any margin security or for any other purpose which might cause any of the Common Shares to be considered a "purpose credit" within the meanings of Regulation T, U or X of the Federal Reserve Board.

2.47Emerging Growth Company.  From the time of the initial confidential submission of the Registration Statement to the Commission (or, if earlier, the first date on which the Company engaged directly in or through any Person authorized to act on its behalf in any Testing-the-Waters Communication) through the date hereof, the Company has been and is an "emerging growth company," as defined in Section 2(a) of the Securities Act (an "Emerging Growth Company").

2.48Environmental Laws.  The Company and the Subsidiaries are in material compliance with any and all applicable federal, state, local, and foreign laws, rules, regulations, requirements, decisions and orders relating to the protection of human health and safety, the environment, or hazardous or toxic substances, wastes, pollutants, or contaminants (collectively the "Environmental Laws"), have received and are in material compliance with all permits, licenses, certificates or other authorizations or approvals required of them under applicable Environmental Laws to conduct their respective businesses, and have not received notice of any actual or potential liability for the investigation or remediation of any disposal or release of hazardous or toxic substances or wastes, pollutants, or contaminants. To the Company's knowledge, there are no costs or liabilities associated with Environmental Laws of or relating to the Company or its Subsidiaries.

2.49Export and Import Laws.  The Company and, to the Company's knowledge, each of its affiliates and each director, officer, agent or employee of, or other person associated with or acting on behalf of the Company, has acted at all times in compliance in all material respects with applicable Export and Import Laws (as defined below) and there are no claims, complaints, charges, investigations or proceedings pending or expected or, to the knowledge of the Company, threatened between the Company or any of its Subsidiaries and any governmental authority under any Export or Import Laws. The term "Export and Import Laws" means the Arms Export Control Act (22 U.S.C.A. § 2278), the Export Administration Act (50 U.S.C. App. §§ 2401-2420), the International Traffic in Arms Regulations (22 C.F.R. §§ 120-130), the Export Administration Regulations (15 C.F.R. 730 et seq.), the Customs Laws of the United States (19 U.S.C. § 1 et seq.), any executive orders or regulations issued pursuant to the foregoing or by the agencies listed in Part 730 of the Export Administration Regulations , and all other laws and regulations of the United States government regulating the provision of services to non-U.S. parties or the export and import of articles or information from and to the United States of America, and all similar laws and regulations of any foreign government regulating the provision of services to parties not of the foreign country or the export and import of articles and information from and to the foreign country to parties not of the foreign country.

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2.50Government Contracts.  With respect to each Government Contract (as defined below) to which the Company or any of its Subsidiaries is currently a party or has received final payment within three years prior to the date hereof and to each Government Bid (as defined below) and except as disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus: (i) the Company and each of its Subsidiaries has complied and is in compliance in all material respects with all material terms and conditions of each Government Contract and Government Bid, including all incorporated clauses, provisions, certifications, representations, requirements, schedules, attachments, regulations and applicable laws, including without limitation the Truth in Negotiations Act, the Federal Acquisition Regulation ("FAR"), and the Cost Accounting Standards, as applicable; (ii) the Company and each of its Subsidiaries has complied in all material respects with all material requirements of statute, rule, regulation, order or agreements with the U.S. Government pertaining to, and as applicable, such Government Contract or Government Bid; and (iii) neither the U.S. Government or Canadian Government, nor any prime contractor, subcontractor or other person has notified the Company or any of its subsidiaries, in writing, that the Company or any of its Subsidiaries has breached or violated any statute, rule, regulation, certification, representation, clause, provision or requirement, except as would not, individually or in the aggregate, have a Material Adverse Change; and (iv) to the knowledge of the Company, no reasonable basis exists to give rise to a material claim by a Governmental Entity for fraud (as such concept is defined under the state or federal laws of the United States) in connection with any such Government Contract; for the purposes of this Agreement, "Government Bid" means any offer made by the Company or any of its affiliates (including its subsidiaries), which, if accepted, would result in a Government Contract; "Government Contract" means any contract, including any arrangement, joint venture, basic ordering agreement, pricing agreement, letter agreement or other similar arrangement of any kind, between the Company or any of its subsidiaries on the one hand, and (A) the United States Government or Canadian Government, (B) any prime contractor to the United States Government or Canadian Government in its capacity as a prime contractor, or (C) any subcontractor with respect to any contract described in clause (A) or clause (B) above, on the other hand. A task, purchase or delivery order under a Government Contract shall not constitute a separate Government Contract, for purposes of this definition, but shall be part of the Government Contract to which it relates.

2.51Canadian Securities Laws. 

2.51.1.The Company is a reporting issuer in the Provinces of British Columbia and Alberta, is not in default of any material requirement of the Canadian Securities Laws and is not included on a list of defaulting reporting issuers maintained by the securities regulators of the Provinces of British Columbia and Alberta.

2.51.2.The Company is in compliance in all material respects with its timely and continuous disclosure obligations under the Canadian Securities Laws of the Provinces of British Columbia and Alberta and the Company is not in default of its filings under, nor has it failed to file or publish any document required to be filed or published under the Canadian Securities Laws of the Provinces of British Columbia and Alberta and, without limiting the generality of the foregoing, there has not occurred any Material Adverse Change since the respective dates as of which information is given in the Canadian Public Disclosure Documents which has not been publicly disclosed on a non-confidential basis and the Company has not filed any confidential material change reports since the date of such statements which remain confidential as at the date hereof.

2.51.3.The Canadian Public Disclosure Documents contain no untrue statement of a material fact as at the dates thereof nor do they omit to state a material fact which, at the date thereof, was required to have been stated or was necessary to prevent a statement that was made from being false or misleading in the circumstances in which it was made and were prepared in accordance with and comply with Canadian Securities Laws.

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2.51.4.There are no reports or information that, in accordance with the requirements of the Canadian Securities Regulators or Canadian Securities Laws, must be made publicly available in connection with the Offering that have not been made publicly available as required. There are no documents required to be filed with the Canadian Securities Regulators in connection with the Offering that have not been filed as required, other than the filing of the Registration Statement and any post-closing filings required to be made by the Company pursuant to the Canadian Securities Laws. 

3.Covenants of the Company.  The Company covenants and agrees as follows:

3.1Amendments to Registration Statement.  The Company shall deliver to the Representative, prior to filing, any amendment or supplement to the Registration Statement or Prospectus proposed to be filed after the Effective Date and not file any such amendment or supplement to which the Representative shall reasonably object in writing.

3.2United States Federal Securities Laws and Canadian Securities Laws.

3.2.1.Compliance.  The Company, subject to Section 3.2.2, shall comply with the requirements of Rule 430A of the Securities Act Regulations, and will notify the Representative promptly, and confirm the notice in writing, (i) when any post-effective amendment to the Registration Statement shall become effective or any amendment or supplement to the Prospectus shall have been filed; (ii) of the receipt of any comments from the Commission; (iii) of any request by the Commission for any amendment to the Registration Statement or any amendment or supplement to the Prospectus or for additional information; (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or any post-effective amendment or of any order preventing or suspending the use of any Preliminary Prospectus or the Prospectus, or of the suspension of the qualification of the Public Securities and Representative's Securities for offering or sale in any jurisdiction, or of the initiation or threatening of any proceedings for any of such purposes or of any examination pursuant to Section 8(d) or 8(e) of the Securities Act concerning the Registration Statement and (v) if the Company becomes the subject of a proceeding under Section 8A of the Securities Act in connection with the Offering of the Public Securities and Representative's Securities. The Company shall effect all filings required under Rule 424(b) of the Securities Act Regulations, in the manner and within the time period required by Rule 424(b) (without reliance on Rule 424(b)(8)), and shall take such steps as it deems necessary to ascertain promptly whether the form of prospectus transmitted for filing under Rule 424(b) was received for filing by the Commission and, in the event that it was not, it will promptly file such prospectus. The Company shall comply with the requirements of Section 4 of BC Instrument 72-503 Distribution of Securities outside British Columbia with respect to the Offering made either to (i) a purchaser that is not resident in Canada or (ii) on or through the facilities of an exchange or market outside Canada and the Company or Underwriters have no reason to believe that the purchaser is resident in Canada. The Underwriters and the Company agree to conduct the Offering in such a manner so as not to require registration thereof or the filing of a registration statement or a prospectus or similar document in any jurisdiction, other than the United States of America. To the extent that the Company and the Underwriters agree in writing that Securities will be offered to residents of Canada on a private placement basis exempt from the prospectus requirements of Canadian Securities Laws, the Company shall comply with the requirements relating to the prospectus exemptions under the Canadian Securities Laws with respect to the Offering that is made to a purchaser that is resident in Canada and the Underwriters shall comply with all reasonable requests in connection with such offering made by the Company and in such written agreement. The Company shall use its best efforts to prevent the issuance of any stop order, prevention or suspension and, if any such order is issued, to obtain the lifting thereof at the earliest possible moment.

3.2.2.Continued Compliance.  The Company shall comply with the Securities Act, the Securities Act Regulations, the Exchange Act, the Exchange Act Regulations and the Canadian Securities Laws so as to permit the completion of the distribution of the Public Securities as contemplated in this Agreement, the Pre-Funded Warrant Certificates, the Warrant Agreement and in the Registration Statement, the Pricing Disclosure Package and the Prospectus. If at any time when a prospectus relating to the Public Securities is (or, but for the exception afforded by Rule 172 of the Securities Act Regulations ("Rule 172"), would be) required by the Securities Act to be delivered in connection with sales of the Public Securities, any event shall occur or condition shall exist as a result of which it is necessary, in the opinion of Representative Counsel or counsel for the Company, to (i) amend the Registration Statement in order that the Registration Statement will not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; (ii) amend or supplement the Pricing Disclosure Package or the Prospectus in order that the Pricing Disclosure Package or the Prospectus, as the case may be, will not include any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading in the light of the circumstances existing at the time it is delivered to a purchaser or (iii) amend the Registration Statement or amend or supplement the Pricing Disclosure Package or the Prospectus, as the case may be, in order to comply with the requirements of the Securities Act or the Securities Act Regulations, the Company will promptly (A) give the Representative notice of such event; (B) prepare any amendment or supplement as may be necessary to correct such statement or omission or to make the Registration Statement, the Pricing Disclosure Package or the Prospectus comply with such requirements and, a reasonable amount of time prior to any proposed filing or use, furnish the Representative with copies of any such amendment or supplement and (C) file with the Commission any such amendment or supplement; provided that the Company shall not file or use any such amendment or supplement to which the Representative or Representative Counsel shall reasonably object. The Company will furnish to the Underwriters such number of copies of such amendment or supplement as the Underwriters may reasonably request. The Company has given the Representative notice of any filings made pursuant to the Exchange Act or the Exchange Act Regulations within 48 hours prior to the Applicable Time.  The Company shall give the Representative notice of its intention to make any such filing from the Applicable Time until the later of the Closing Date and the exercise in full or expiration of the Over-allotment Option specified in Section 1.2 hereof and will furnish the Representative with copies of the related document(s) a reasonable amount of time prior to such proposed filing, as the case may be, and will not file or use any such document to which the Representative or Representative Counsel shall reasonably object.

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3.2.3.Exchange Act Registration.  Until the later of (i) three (3) years after the date of this Agreement and (ii) the expiration date of the Pre-Funded Warrants and Warrants (or the date that all of the Pre-Funded Warrants and Warrants have been exercised, if earlier), the Company shall use its reasonable best efforts to maintain the registration of the Common Shares and the Warrants under the Exchange Act. The Company shall not deregister the Common Shares and the Warrants under the Exchange Act without the prior written consent of the Representative.

3.2.4.Free Writing Prospectuses.  The Company agrees that, unless it obtains the prior written consent of the Representative, it shall not make any offer relating to the Public Securities that would constitute an Issuer Free Writing Prospectus or that would otherwise constitute a "free writing prospectus," or a portion thereof, required to be filed by the Company with the Commission or retained by the Company under Rule 433; provided that the Representative shall be deemed to have consented to each Issuer General Use Free Writing Prospectus set forth on Schedule 2-B hereto and any "road show that is a written communication" within the meaning of Rule 433(d)(8)(i) that has been reviewed by the Representative. The Company represents that it has treated or agrees that it will treat each such free writing prospectus consented to, or deemed consented to, by the Underwriters as an "issuer free writing prospectus," as defined in Rule 433, and that it has complied and will comply with the applicable requirements of Rule 433 with respect thereto, including timely filing with the Commission where required, legending and record keeping. If at any time following issuance of an Issuer Free Writing Prospectus there occurred or occurs an event or development as a result of which such Issuer Free Writing Prospectus conflicted or would conflict with the information contained in the Registration Statement or included or would include an untrue statement of a material fact or omitted or would omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances existing at that subsequent time, not misleading, the Company will promptly notify the Underwriters and will promptly amend or supplement, at its own expense, such Issuer Free Writing Prospectus to eliminate or correct such conflict, untrue statement or omission.

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3.2.5.Testing-the-Waters Communications.  If at any time following the distribution of any Written Testing-the-Waters Communication there occurred or occurs an event or development as a result of which such Written Testing-the-Waters Communication included or would include an untrue statement of a material fact or omitted or would omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances existing at that subsequent time, not misleading, the Company shall promptly notify the Representative and shall promptly amend or supplement, at its own expense, such Written Testing-the-Waters Communication to eliminate or correct such untrue statement or omission.

3.3Delivery to the Underwriters of Registration Statements.  The Company has delivered or made available or shall deliver or make available to the Representative and Representative Counsel, without charge, signed copies of the Registration Statement as originally filed and each amendment thereto (including exhibits filed therewith) and signed copies of all consents and certificates of experts, and will also deliver to the Underwriters, without charge, a conformed copy of the Registration Statement as originally filed and each amendment thereto (without exhibits) for each of the Underwriters. The copies of the Registration Statement and each amendment thereto furnished to the Underwriters will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.

3.4Delivery to the Underwriters of Prospectuses.  The Company has delivered or made available or will deliver or make available to each Underwriter, without charge, as many copies of each Preliminary Prospectus as such Underwriter reasonably requested, and the Company hereby consents to the use of such copies for purposes permitted by the Securities Act. The Company will furnish to each Underwriter, without charge, during the period when a prospectus relating to the Public Securities is (or, but for the exception afforded by Rule 172, would be) required to be delivered under the Securities Act, such number of copies of the Prospectus (as amended or supplemented) as such Underwriter may reasonably request. The Prospectus and any amendments or supplements thereto furnished to the Underwriters will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T. Neither the Company nor any of its directors and officers has distributed and none of them will distribute, prior to the Closing Date or Option Closing Date, as applicable, any offering material in connection with the offering and sale of the Public Securities other than the Prospectus, the Registration Statement, and copies of the documents incorporated by reference therein.

3.5Effectiveness and Events Requiring Notice to the Representative.  The Company shall use its best efforts to cause the Registration Statement to remain effective with a current prospectus through and including the expiration date of the Pre-Funded Warrants and Warrants (or the date that all of the Pre-Funded Warrants and Warrants have been exercised, if earlier), and shall notify the Representative immediately and confirm the notice in writing: (i) of the effectiveness of the Registration Statement and any amendment thereto; (ii) of the issuance by the Commission of any stop order or of the initiation, or the threatening, of any proceeding for that purpose; (iii) of the issuance by any state securities commission of any proceedings for the suspension of the qualification of the Public Securities for offering or sale in any jurisdiction or of the initiation, or the threatening, of any proceeding for that purpose; (iv) of the mailing and delivery to the Commission for filing of any amendment or supplement to the Registration Statement or Prospectus; (v) of the receipt of any comments or request for any additional information from the Commission; (vi) of the issuance by any Canadian Securities Regulator of an order ceasing or suspending trading in any securities of the Company, or ceasing or suspending trading by the directors, officers or shareholders of the Company, or any one of them, or prohibiting the trade or distribution of any of the securities referred to herein (the "Cease Trade Order"); and (vii) of the happening of any event during the period described in this Section 3.5 that, in the judgment of the Company, makes any statement of a material fact made in the Registration Statement, the Pricing Disclosure Package or the Prospectus untrue or that requires the making of any changes in (a) the Registration Statement in order to make the statements therein not misleading, or (b) in the Pricing Disclosure Package or the Prospectus in order to make the statements therein, in light of the circumstances under which they were made, not misleading. If the Commission or any state securities commission shall enter a stop order or suspend such qualification at any time, the Company shall make every reasonable effort to obtain promptly the lifting of such order. If any Canadian Securities Regulator shall enter an order ceasing or suspending trading in any securities of the Company at any time, the Company shall make every reasonable effort to obtain promptly the lifting of such order.

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3.6Review of Financial Statements.  For a period of five (5) years after the date of this Agreement, the Company, at its expense, shall cause its regularly engaged independent registered public accounting firm to review (but not audit) the Company's financial statements for each of the three fiscal quarters immediately preceding the announcement of any quarterly financial information.

3.7Listing.  The Company shall use its best efforts to maintain the listing of the shares of Common Stock and the Warrants (including the Public Securities) on the Exchange until the later of (i) three (3) years after the date of this Agreement and (ii) the expiration date of the Pre-Funded Warrants and Warrants (or the date that all of the Pre-Funded Warrants and Warrants have been exercised, if earlier).

3.8Financial Public Relations Firm.  As of the Effective Date, the Company shall have retained a financial public relations firm reasonably acceptable to the Representative and the Company, which shall initially be RedChip Companies, Inc., which firm shall be experienced in assisting issuers in initial public offerings of securities and in their relations with their security holders, and shall retain such firm or another firm reasonably acceptable to the Representative for a period of not less than two (2) years after the Effective Date. 

3.9Reports to the Representative.

3.9.1.Periodic Reports, etc.  For a period of three (3) years after the date of this Agreement, the Company shall furnish or make available to the Representative copies of such financial statements and other periodic and special reports as the Company from time to time furnishes generally to holders of any class of its securities and also promptly furnish to the Representative: (i) a copy of each periodic report the Company shall be required to file with the Commission under the Exchange Act and the Exchange Act Regulations; (ii) a copy of every press release and every news item and article with respect to the Company or its affairs which was released by the Company; (iii) a copy of each Form 6-K prepared and filed by the Company; (iv) a copy of each registration statement filed by the Company under the Securities Act; and (v) such additional documents and information with respect to the Company and the affairs of any future subsidiaries of the Company as the Representative may from time to time reasonably request; provided the Representative shall sign, if requested by the Company, a Regulation FD compliant confidentiality agreement which is reasonably acceptable to the Representative and Representative Counsel in connection with the Representative's receipt of such information. Documents filed with the Commission pursuant to its EDGAR system shall be deemed to have been delivered to the Representative pursuant to this Section 3.9.1.

3.9.2.Transfer Agent; Warrant Agent; Transfer Sheets.  Until the later of (i) three (3) years after the date of this Agreement and (ii) the expiration date of the Pre-Funded Warrants and Warrants (or the date that all of the Pre-Funded Warrants and Warrants have been exercised, if earlier), the Company shall retain a transfer agent and registrar acceptable to the Representative (the "Transfer Agent") and a warrant agent (the "Warrant Agent") and shall furnish to the Representative at the Company's sole cost and expense such transfer sheets of the Company's securities as the Representative may reasonably request, including the daily and monthly consolidated transfer sheets of the Transfer Agent, the Warrant Agent and DTC. TSX Trust Company is acceptable to the Representative to act as Transfer Agent for the Common Shares, and Continental Stock Transfer & Trust is acceptable to the Representative to act as Warrant Agent for the Warrants and United States co-Transfer Agent for the Common Shares.

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3.9.3.Trading Reports.  During such time as the Public Securities are listed on the Exchange, the Company shall provide to the Representative, at the Company's expense, such reports published by the Exchange relating to price trading of the Public Securities, as the Representative shall reasonably request.

3.10Payment of Expenses

3.10.1.General Expenses Related to the Offering.  The Company hereby agrees to pay on each of the Closing Date and the Option Closing Date, if any, to the extent not paid at the Closing Date, all expenses incident to the performance of the obligations of the Company under this Agreement, including, but not limited to: (a) all filing fees and communication expenses relating to the registration of the Public Securities to be sold in the Offering (including the Option Securities) with the Commission; (b) all Public Offering Filing System filing fees associated with the review of the Offering by FINRA and the TSXV; (c) all fees and expenses relating to the listing of such Public Securities on the Exchange, the TSXV and such other stock exchanges as the Company and the Representative together determine; (d) all fees, expenses and disbursements relating to background checks of the Company's officers and directors in an amount not to exceed $2,500 in the aggregate; (e) all fees, expenses and disbursements relating to the registration or qualification of the Public Securities under the "blue sky" securities laws of such states and other jurisdictions as the Representative may reasonably designate (including, without limitation, all filing and registration fees); (f) all fees, expenses and disbursements relating to the registration, qualification or exemption of the Public Securities under the securities laws of such foreign jurisdictions as the Representative may reasonably designate; (g) the costs of all mailing and printing of the underwriting documents (including, without limitation, the Underwriting Agreement, any Blue Sky Surveys and, if appropriate, any Agreement Among Underwriters, Selected Dealers' Agreement, Underwriters' Questionnaire and Power of Attorney), Registration Statements, Prospectuses and all amendments, supplements and exhibits thereto and as many preliminary and final Prospectuses as the Representative may reasonably deem necessary; (h) the costs and expenses of a public relations firm as described in Section 3.8 hereof; (i) the costs of preparing, printing and delivering certificates representing the Public Securities; (j) fees and expenses of the Transfer Agent for the Public Securities; (k) stock transfer and/or stamp taxes, if any, payable upon the transfer of securities from the Company to the Underwriters; (l) the costs associated with post-Closing advertising the Offering in the national editions of the Wall Street Journal and New York Times; (m) the costs associated with bound volumes of the public offering materials as well as commemorative mementos and lucite tombstones, each of which the Company or its designee will provide within a reasonable time after the Closing in such quantities as the Representative may reasonably request, in an amount not to exceed $3,000; (n) the fees and expenses of the Company's accountants; (o) the fees and expenses of the Company's legal counsel and other agents and representatives; (p) fees and expenses of Representative Counsel not to exceed $125,000; (q) the $29,500 cost associated with the Underwriters' use of Ipreo's book-building, prospectus tracking and compliance software for the Offering; (r) up to $5,000 for data services and communications expenses; (s) up to $5,000 of the Representative's actual accountable "road show" expenses; and (t) up to $30,000 of the Representative's market making and trading, and clearing firm settlement expenses for the Offering. The Representative may deduct from the net proceeds of the Offering payable to the Company on the Closing Date, or the Option Closing Date, if any, the expenses set forth herein to be paid by the Company to the Underwriters. Notwithstanding the foregoing, the aggregate expenses reimbursable by the Company to the Representative or the Underwriters pursuant to this Section 3.10.1 (together with any expenses reimbursable pursuant to Section 8.3) shall not exceed $150,000 without the prior written consent of the Company.

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3.10.2.Non-accountable Expenses.  The Company further agrees that, in addition to the expenses payable pursuant to Section 3.10.1, on the Closing Date it shall pay to the Representative, by deduction from the net proceeds of the Offering contemplated herein, a non-accountable expense allowance equal to one percent (1%) of the gross proceeds received by the Company from the sale of the Firm Securities (presuming exercise of any Pre-Funded Warrants issued; excluding the Option Securities), provided, however, that in the event that the Offering is terminated, the Company agrees to reimburse the Underwriters pursuant to Section 8.3 hereof.

3.11Application of Net Proceeds.  The Company shall apply the net proceeds from the Offering received by it in a manner consistent with the application thereof described under the caption "Use of Proceeds" in the Registration Statement, the Pricing Disclosure Package and the Prospectus.

3.12Delivery of Earnings Statements to Security Holders.  The Company shall make generally available to its security holders as soon as practicable, but not later than the first day of the fifteenth (15^th) full calendar month following the date of this Agreement, an earnings statement (which need not be certified by an independent registered public accounting firm unless required by the Securities Act or the Securities Act Regulations, but which shall satisfy the provisions of Rule 158(a) under Section 11(a) of the Securities Act) covering a period of at least twelve (12) consecutive months beginning after the date of this Agreement.  For the avoidance of doubt, earnings statements filed with the Commission pursuant to EDGAR shall be deemed to have been made available to the Company's security holders for purposes of this Section 3.12. 

3.13Stabilization.  Neither the Company nor, to its knowledge, any of its employees, directors or shareholders (without the consent of the Representative) has taken or shall take, directly or indirectly, any action designed to or that has constituted or that might reasonably be expected to cause or result in, under Regulation M of the Exchange Act, or otherwise, stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Public Securities.

3.14Internal Controls.  The Company shall maintain a system of internal accounting controls sufficient to provide reasonable assurances that: (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary in order to permit preparation of financial statements in accordance with IFRS and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences.

3.15Accountants.  As of the date of this Agreement, the Company shall retain an independent registered public accounting firm reasonably acceptable to the Representative, and the Company shall continue to retain a nationally recognized independent registered public accounting firm for a period of at least three (3) years after the date of this Agreement.  The Representative acknowledges that the Auditor is acceptable to the Representative.

3.16FINRA.  For a period of 90 days from the later of the Closing Date or the Option Closing Date, the Company shall advise the Representative (who shall make an appropriate filing with FINRA) if it is or becomes aware that (i) any officer or director of the Company, (ii) any beneficial owner of 5% or more of any class of the Company's securities or (iii) any beneficial owner of the Company's unregistered equity securities which were acquired during the 180 days immediately preceding the filing of the Registration Statement is or becomes an affiliate or associated person of a FINRA member participating in the Offering (as determined in accordance with the rules and regulations of FINRA).

3.17No Fiduciary Duties.  The Company acknowledges and agrees that the Underwriters' responsibility to the Company is solely contractual in nature and that none of the Underwriters or their affiliates or any selling agent shall be deemed to be acting in a fiduciary capacity, or otherwise owes any fiduciary duty to the Company or any of its affiliates in connection with the Offering and the other transactions contemplated by this Agreement.

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3.18Company Lock-Up Agreements. 

3.18.1.Restriction on Sales of Securities.  The Company, on behalf of itself and any successor entity, agrees that, without the prior written consent of the Representative, it will not, for a period of 90 days after the date of this Agreement (the "Lock-Up Period"), (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any shares of capital stock of the Company or any securities convertible into or exercisable or exchangeable for shares of capital stock of the Company; (ii) file or cause to be filed any registration statement with the Commission relating to the offering of any shares of capital stock of the Company or any securities convertible into or exercisable or exchangeable for shares of capital stock of the Company (other than a registration statement on Form S-8); (iii) complete any offering of debt securities of the Company, other than entering into a line of credit with a traditional bank or (iv) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of capital stock of the Company, whether any such transaction described in clause (i), (ii), (iii) or (iv) above is to be settled by delivery of shares of capital stock of the Company or such other securities, in cash or otherwise. 

The restrictions contained in this Section 3.18.1 shall not apply to (i) the Public Securities and the Representative's Securities to be sold hereunder, (ii) the issuance by the Company of Common Shares upon the exercise of a stock or share option or warrant or the conversion of a security outstanding on the date hereof, which is disclosed in the Registration Statement, Pricing Disclosure Package and Prospectus, provided that such options, warrants, and securities have not been amended since the date of this Agreement to increase the number of such securities or to decrease the exercise price, exchange price or conversion price of such securities or to extend the term of such securities, (iii) the issuance by the Company of stock or share options or shares of capital stock of the Company under any equity compensation plan of the Company, provided that in each of (ii) and (iii) above, the underlying shares shall be restricted from sale during the entire Lock-Up Period, (iv) the issuance of securities by the Company in the Canadian Offering, or (v) the issuance of the securities as compensation to the underwriter involved in the Canadian Offering.

3.18.2.Restriction on Continuous Offerings.  Notwithstanding the restrictions contained in Section 3.18.1, the Company, on behalf of itself and any successor entity, agrees that, without the prior written consent of the Representative, it will not, for a period of 12 months after the date of this Agreement, directly or indirectly, in any "at-the-market" or continuous equity transaction offer to sell, sell, contract to sell, grant any option to sell or otherwise dispose of shares of capital stock of the Company or any securities convertible into or exercisable or exchangeable for shares of capital stock of the Company.

3.19Release of D&O Lock-up Period.  If the Representative, in its sole discretion, agrees to release or waive the restrictions set forth in the Lock-Up Agreements described in Section 2.24 hereof for an officer or director of the Company and provides the Company with notice of the impending release or waiver at least three (3) Business Days before the effective date of the release or waiver, the Company agrees to announce the impending release or waiver by a press release substantially in the form of Exhibit D hereto through a major news service at least two (2) Business Days before the effective date of the release or waiver.

3.20Blue Sky Qualifications.  The Company shall use its reasonable best efforts, in cooperation with the Underwriters, if necessary, to qualify the Public Securities for offering and sale under the applicable securities laws of such states and other jurisdictions (domestic or foreign) as the Representative may designate and to maintain such qualifications in effect so long as required to complete the distribution of the Public Securities; provided, however, that the Company shall not be obligated to file any general consent to service of process or to qualify as a foreign corporation or as a dealer in securities in any jurisdiction in which it is not so qualified or to subject itself to taxation in respect of doing business in any jurisdiction in which it is not otherwise so subject.

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3.21Reporting Requirements.  The Company, during the period when a prospectus relating to the Public Securities is (or, but for the exception afforded by Rule 172, would be) required to be delivered under the Securities Act, will file all documents required to be filed with the Commission pursuant to the Exchange Act within the time periods required by the Exchange Act and Exchange Act Regulations. Additionally, the Company shall report the use of proceeds from the issuance of the Public Securities as may be required under Rule 463 under the Securities Act Regulations.

3.22Emerging Growth Company Status. The Company shall promptly notify the Representative if the Company ceases to be an Emerging Growth Company at any time prior to the later of (i) completion of the distribution of the Public Securities within the meaning of the Securities Act and (ii) fifteen (15) days following the completion of the Lock-Up Period.

3.23Foreign Private Issuer Status.  The Company shall promptly notify the Representative if the Company ceases to be Foreign Private Issuer at any time prior to three (3) years from the date of this Agreement

4.Conditions of Underwriters' Obligations.  The obligations of the Underwriters to purchase and pay for the Public Securities, as provided herein, shall be subject to (i) the continuing accuracy of the representations and warranties of the Company as of the date hereof and as of each of the Closing Date and the Option Closing Date, if any; (ii) the accuracy of the statements of officers of the Company made pursuant to the provisions hereof; (iii) the performance by the Company of its obligations hereunder; and (iv) the following conditions:

4.1Regulatory Matters.

4.1.1.Effectiveness of Registration Statement; Rule 430A Information.  The Registration Statement has become effective not later than 5:00 p.m., Eastern time, on the date of this Agreement or such later date and time as shall be consented to in writing by you, and, at each of the Closing Date and any Option Closing Date, no stop order suspending the effectiveness of the Registration Statement or any post-effective amendment thereto has been issued under the Securities Act, no order preventing or suspending the use of any Preliminary Prospectus or the Prospectus has been issued and no proceedings for any of those purposes have been instituted or are pending or, to the Company's knowledge, contemplated by the Commission. The Company has complied with each request (if any) from the Commission for additional information. The Prospectus containing the Rule 430A Information shall have been filed with the Commission in the manner and within the time frame required by Rule 424(b) (without reliance on Rule 424(b)(8)) or a post-effective amendment providing such information shall have been filed with, and declared effective by, the Commission in accordance with the requirements of Rule 430A.

4.1.2.No Cease Trade Order.  On each of the Closing Date and any Option Closing Date, no Cease Trade Order shall have been issued by any Canadian Securities Regulator and no proceedings for such purpose, to the knowledge of the Company, will be pending or threatened.

4.1.3.FINRA Clearance.  On or before the date of this Agreement, the Representative shall have received clearance from FINRA as to the amount of compensation allowable or payable to the Underwriters as described in the Registration Statement.

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4.1.4.Exchange Stock Market Clearance.  On the Closing Date, the Company's Common Shares, including the Firm Shares and the Underlying Shares, and the Warrants, shall have been approved for listing on the Exchange, subject only to official notice of issuance. On the first Option Closing Date (if any), the Company's Common Shares, including the Option Shares and the Underlying Shares, and the Option Warrants, shall have been approved for listing on the Exchange, subject only to official notice of issuance.

4.1.5.TSXV Acceptance.  On the Closing Date, the TSXV shall have conditionally accepted the Offering and the listing of the Firm Shares, the Option Shares and the Underlying Common Shares, subject only to the satisfaction of the customary listing conditions.

4.2Company Counsel Matters.

4.2.1.Closing Date Opinion of U.S. Counsel.  On the Closing Date, the Representative shall have received the favorable opinion and negative assurance letter of Dorsey & Whitney LLP, U.S. counsel to the Company, dated the Closing Date and addressed to the Representative, in form and substance reasonably satisfactory to the Representative.

4.2.2.Closing Date Opinion of Canadian Counsel. On the Closing Date, the Representative shall have received the favorable opinion and negative assurance letter of Fasken Martineau DuMoulin LLP, Canadian counsel to the Company, dated the Closing Date and addressed to the Representative, in form and substance reasonably satisfactory to the Representative.

4.2.3.Opinion of Special Intellectual Property Counsel.  On the Closing Date, the Representative shall have received the opinion of MBM Intellectual Property Law LLP, special intellectual property counsel for the Company, dated the Closing Date, addressed to the Representative, in form and substance reasonably satisfactory to the Representative.

4.2.4.Option Closing Date Opinion of Counsel. On the Option Closing Date, if any, the Representative shall have received the favorable opinions of each counsel listed in Sections 4.2.1, 4.2.2 and 4.2.3, dated the Option Closing Date, addressed to the Representative and in form and substance reasonably satisfactory to the Representative, confirming as of the Option Closing Date, the statements made by such counsel in its opinion delivered on the Closing Date.

4.2.5.Reliance. In rendering such opinions, such counsel may rely: (i) as to matters involving the application of laws other than the laws of the United States and jurisdictions in which they are admitted, to the extent such counsel deems proper and to the extent specified in such opinion, if at all, upon an opinion or opinions (in form and substance reasonably satisfactory to the Representative) of other counsel reasonably acceptable to the Representative, familiar with the applicable laws; and (ii) as to matters of fact, to the extent they deem proper, on certificates or other written statements of officers of the Company and officers of departments of various jurisdictions having custody of documents respecting the corporate existence or good standing of the Company, provided that copies of any such statements or certificates shall be delivered to Representative Counsel if requested. The opinions of each counsel listed in Section 4.2.1, 4.2.2 and 4.2.3, and any opinion relied upon by such counsel shall include a statement to the effect that it may be relied upon by Representative Counsel in its opinion delivered to the Underwriters.

4.3Comfort Letters. 

4.3.1.Cold Comfort Letter.  At the time this Agreement is executed you shall have received a cold comfort letter from each of the Prior Auditor and the Auditor, containing statements and information of the type customarily included in accountants' comfort letters with respect to the financial statements and certain financial information contained in the Registration Statement, the Pricing Disclosure Package and the Prospectus, addressed to the Representative and in form and substance satisfactory in all respects to you and to each of the Prior Auditor and Auditor, as applicable, dated as of the date of this Agreement.

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4.3.2.Bring-down Comfort Letter.  At each of the Closing Date and the Option Closing Date, if any, the Representative shall have received from each of the Prior Auditor and the Auditor, a letter, dated as of the Closing Date or the Option Closing Date, as applicable, to the effect that the each of the Prior Auditor and Auditor, as applicable, reaffirms the statements made in the letter furnished pursuant to Section 4.3.1, except that the specified date referred to shall be a date not more than three (3) Business Days prior to the Closing Date or the Option Closing Date, as applicable.

4.4Officers' Certificates.

4.4.1.Officers' Certificate.  The Company shall have furnished to the Representative a certificate, dated the Closing Date and any Option Closing Date (if such date is other than the Closing Date), of its Chief Executive Officer, its President and its Chief Financial Officer stating on behalf of the Company and not in an individual capacity that (i) such officers have carefully examined the Registration Statement, the Pricing Disclosure Package, any Issuer Free Writing Prospectus and the Prospectus and, in their opinion, the Registration Statement and each amendment thereto, as of the Applicable Time and as of the Closing Date (or any Option Closing Date if such date is other than the Closing Date) did not include any untrue statement of a material fact and did not omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and the Pricing Disclosure Package, as of the Applicable Time and as of the Closing Date (or any Option Closing Date if such date is other than the Closing Date), any Issuer Free Writing Prospectus as of its date and as of the Closing Date (or any Option Closing Date if such date is other than the Closing Date), the Prospectus and each amendment or supplement thereto, as of the respective date thereof and as of the Closing Date, did not include any untrue statement of a material fact and did not omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances in which they were made, not misleading, (ii) since the effective date of the Registration Statement, no event has occurred which should have been set forth in a supplement or amendment to the Registration Statement, the Pricing Disclosure Package or the Prospectus, (iii) to the best of their knowledge after reasonable investigation, as of the Closing Date (or any Option Closing Date if such date is other than the Closing Date), the representations and warranties of the Company in this Agreement are true and correct and the Company has complied with all agreements and satisfied all conditions on its part to be performed or satisfied hereunder at or prior to the Closing Date (or any Option Closing Date if such date is other than the Closing Date), and (iv) there has not been, subsequent to the date of the most recent audited financial statements included or incorporated by reference in the Pricing Disclosure Package, any material adverse change in the financial position or results of operations of the Company, or any change or development that, singularly or in the aggregate, would involve a material adverse change or a prospective material adverse change, in or affecting the condition (financial or otherwise), results of operations, business, assets or prospects of the Company, except as set forth in the Prospectus.

4.4.2.Secretary's Certificate.  At each of the Closing Date and the Option Closing Date, if any, the Representative shall have received a certificate of the Company signed by the Secretary of the Company, dated the Closing Date or the Option Closing Date, as the case may be, respectively, certifying on behalf of the Company and not in an individual capacity: (i) that the Charter is true and complete, has not been modified and is in full force and effect; (ii) that the resolutions of the Company's Board of Directors relating to the Offering are in full force and effect and have not been modified; (iii) as to the accuracy and completeness of all correspondence between the Company or its counsel and the Commission; and (iv) as to the incumbency of the officers of the Company. The documents referred to in such certificate shall be attached to such certificate.

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4.5No Material Changes.  Prior to and on each of the Closing Date and each Option Closing Date, if any: (i) there shall have been no material adverse change or development involving a prospective material adverse change in the condition or prospects or the business activities, financial or otherwise, of the Company from the latest dates as of which such condition is set forth in the Registration Statement, the Pricing Disclosure Package and the Prospectus; (ii) no action, suit or proceeding, at law or in equity, shall have been pending or threatened against the Company or any Insider before or by any court or federal or state commission, board or other administrative agency wherein an unfavorable decision, ruling or finding may materially adversely affect the business, operations, prospects or financial condition or income of the Company, except as set forth in the Registration Statement, the Pricing Disclosure Package and the Prospectus; (iii) no stop order shall have been issued under the Securities Act and no proceedings therefor shall have been initiated or threatened by the Commission; (iv) no Cease Trade Order shall have been issued by any Canadian Securities Regulator; and (v) the Registration Statement, the Pricing Disclosure Package and the Prospectus and any amendments or supplements thereto shall contain all material statements which are required to be stated therein in accordance with the Securities Act and the Securities Act Regulations and shall conform in all material respects to the requirements of the Securities Act and the Securities Act Regulations, and neither the Registration Statement, the Pricing Disclosure Package nor the Prospectus nor any amendment or supplement thereto shall contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading.

4.6Delivery of Agreements.

4.6.1.Lock-Up Agreements.  On or before the date of this Agreement, the Company shall have delivered to the Representative executed copies of the Lock-Up Agreements from each of the persons listed in Schedule 3 hereto.

4.6.2.Warrant Agreement. On or before the Closing Date, the Company shall have delivered to the Representative an executed copy of the Warrant Agreement.

4.6.3.Pre-Funded Warrant Certificate. On or before each of the Closing Date and any Option Closing Date, the Company shall have delivered to the Representative executed copies of the applicable Pre-Funded Warrant Certificates.

4.6.4.Representative's Warrant. On or before each of the Closing Date and any Option Closing Date, the Company shall have delivered to the Representative an executed copy of the Representative's Warrant.

4.7Additional Documents.  At the Closing Date and at each Option Closing Date (if any) Representative Counsel shall have been furnished with such documents and opinions as they may require for the purpose of enabling Representative Counsel to deliver an opinion to the Underwriters, or in order to evidence the accuracy of any of the representations or warranties, or the fulfillment of any of the conditions, herein contained; and all proceedings taken by the Company in connection with the issuance and sale of the Public Securities and the Representative's Securities as herein contemplated shall be satisfactory in form and substance to the Representative and Representative Counsel.

4.8Reverse Share Split.  The Reverse Share Split became effective as of October 28, 2022.

5.Indemnification.

5.1Indemnification of the Underwriters.

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5.1.1.General.  Subject to the conditions set forth below, the Company agrees to indemnify and hold harmless each Underwriter, its affiliates and each of its and their respective directors, officers, members, employees, representatives, partners, shareholders, affiliates, counsel, and agents and each person, if any, who controls any such Underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act (collectively the "Underwriter Indemnified Parties," and each an "Underwriter Indemnified Party"), against any and all loss, liability, claim, damage and expense whatsoever (including but not limited to any and all legal or other expenses reasonably incurred in investigating, preparing or defending against any litigation, commenced or threatened, or any claim whatsoever, whether arising out of any action between any of the Underwriter Indemnified Parties and the Company or between any of the Underwriter Indemnified Parties and any third party, or otherwise) to which they or any of them may become subject under the Securities Act, the Exchange Act or any other statute or at common law or otherwise or under the laws of foreign countries (a "Claim"), (i) arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in (A) the Registration Statement, the Pricing Disclosure Package, any Preliminary Prospectus, the Prospectus, or in any Issuer Free Writing Prospectus or in any Written Testing-the-Waters Communication (as from time to time each may be amended and supplemented); (B) any materials or information provided to investors by, or with the approval of, the Company in connection with the marketing of the Offering, including any "road show" or investor presentations made to investors by the Company (whether in person or electronically); or (C) any application or other document or written communication (in this Section 5, collectively called "application") executed by the Company or based upon written information furnished by the Company in any jurisdiction in order to qualify the Public Securities and Representative's Securities under the securities laws thereof or filed with the Commission, any state securities commission or agency, the Exchange or any other national securities exchange; or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, unless such statement or omission was made in reliance upon, and in conformity with, the Underwriters' Information or (ii) otherwise arising in connection with or allegedly in connection with the Offering.  The Company also agrees that it will reimburse each Underwriter Indemnified Party for all fees and expenses (including but not limited to any and all legal or other expenses reasonably incurred in investigating, preparing or defending against any litigation, commenced or threatened, or any claim whatsoever, whether arising out of any action between any of the Underwriter Indemnified Parties and the Company or between any of the Underwriter Indemnified Parties and any third party, or otherwise) (collectively, the "Expenses"), and further agrees wherever and whenever possible to advance payment of Expenses as they are incurred by an Underwriter Indemnified Party in investigating, preparing, pursuing or defending any Claim.

5.1.2.Procedure.  If any action is brought against an Underwriter Indemnified Party in respect of which indemnity may be sought against the Company pursuant to Section 5.1.1, such Underwriter Indemnified Party shall promptly notify the Company in writing of the institution of such action and the Company shall assume the defense of such action, including the employment and fees of counsel (subject to the approval of such Underwriter Indemnified Party) and payment of actual expenses if an Underwriter Indemnified Party requests that the Company do so. Such Underwriter Indemnified Party shall have the right to employ its or their own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of the Company and shall be advanced by the Company. The Company shall not be liable for any settlement of any action effected without its consent (which shall not be unreasonably withheld). In addition, the Company shall not, without the prior written consent of the Underwriters, settle, compromise or consent to the entry of any judgment in or otherwise seek to terminate any pending or threatened action in respect of which advancement, reimbursement, indemnification or contribution may be sought hereunder (whether or not such Underwriter Indemnified Party is a party thereto) unless such settlement, compromise, consent or termination (i) includes an unconditional release of each Underwriter Indemnified Party, acceptable to such Underwriter Indemnified Party, from all liabilities, expenses and claims arising out of such action for which indemnification or contribution may be sought and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act, by or on behalf of any Underwriter Indemnified Party.

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5.2Indemnification of the Company.  Each Underwriter, severally and not jointly, agrees to indemnify and hold harmless the Company, its directors, its officers who signed the Registration Statement and persons who control the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act against any and all loss, liability, claim, damage and expense described in the foregoing indemnity from the Company to the several Underwriters, as incurred, but only with respect to untrue statements or omissions made in the Registration Statement, any Preliminary Prospectus, the Pricing Disclosure Package or Prospectus or any amendment or supplement thereto or in any application, in reliance upon, and in strict conformity with, the Underwriters' Information. In case any action shall be brought against the Company or any other person so indemnified based on any Preliminary Prospectus, the Registration Statement, the Pricing Disclosure Package or Prospectus or any amendment or supplement thereto or any application, and in respect of which indemnity may be sought against any Underwriter, such Underwriter shall have the rights and duties given to the Company, and the Company and each other person so indemnified shall have the rights and duties given to the several Underwriters by the provisions of Section 5.1.2.  The Company agrees promptly to notify the Representative of the commencement of any litigation or proceedings against the Company or any of its officers, directors or any person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, in connection with the issuance and sale of the Public Securities or in connection with the Registration Statement, the Pricing Disclosure Package, the Prospectus, or any Issuer Free Writing Prospectus or any Written Testing-the-Waters Communication.

5.3Contribution.

5.3.1.Contribution Rights.  If the indemnification provided for in this Section 5 shall for any reason be unavailable to or insufficient to hold harmless an indemnified party under Section 5.1 or 5.2 in respect of any loss, claim, damage or liability, or any action in respect thereof, referred to therein, then each indemnifying party shall, in lieu of indemnifying such indemnified party, contribute to the amount paid or payable by such indemnified party as a result of such loss, claim, damage or liability, or action in respect thereof, (i) in such proportion as shall be appropriate to reflect the relative benefits received by the Company, on the one hand, and the Underwriters, on the other, from the Offering of the Public Securities, or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company, on the one hand, and the Underwriters, on the other, with respect to the statements or omissions that resulted in such loss, claim, damage or liability, or action in respect thereof, as well as any other relevant equitable considerations.  The relative benefits received by the Company, on the one hand, and the Underwriters, on the other, with respect to such Offering shall be deemed to be in the same proportion as the total net proceeds from the Offering of the Public Securities purchased under this Agreement (before deducting expenses) received by the Company, as set forth in the table on the cover page of the Prospectus, on the one hand, and the total underwriting discounts and commissions received by the Underwriters with respect to the Common Shares purchased under this Agreement, as set forth in the table on the cover page of the Prospectus, on the other hand.  The relative fault shall be determined by reference to whether the untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company or the Underwriters, the intent of the parties and their relative knowledge, access to information and opportunity to correct or prevent such statement or omission.  The Company and the Underwriters agree that it would not be just and equitable if contributions pursuant to this Section 5.3.1 were to be determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take into account the equitable considerations referred to herein.  The amount paid or payable by an indemnified party as a result of the loss, claim, damage or liability, or action in respect thereof, referred to above in this Section 5.3.1 shall be deemed to include, for purposes of this Section 5.3.1, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim.  Notwithstanding the provisions of this Section 5.3.1 in no event shall an Underwriter be required to contribute any amount in excess of the amount by which the total underwriting discounts and commissions received by such Underwriter with respect to the Offering of the Public Securities exceeds the amount of any damages that such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission.  No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation.

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5.3.2.Contribution Procedure.  Within fifteen (15) days after receipt by any party to this Agreement (or its representative) of notice of the commencement of any action, suit or proceeding, such party will, if a claim for contribution in respect thereof is to be made against another party ("contributing party"), notify the contributing party of the commencement thereof, but the failure to so notify the contributing party will not relieve it from any liability which it may have to any other party other than for contribution hereunder. In case any such action, suit or proceeding is brought against any party, and such party notifies a contributing party or its representative of the commencement thereof within the aforesaid 15 days, the contributing party will be entitled to participate therein with the notifying party and any other contributing party similarly notified. Any such contributing party shall not be liable to any party seeking contribution on account of any settlement of any claim, action or proceeding affected by such party seeking contribution on account of any settlement of any claim, action or proceeding affected by such party seeking contribution without the written consent of such contributing party. The contribution provisions contained in this Section 5.3.2 are intended to supersede, to the extent permitted by law, any right to contribution under the Securities Act, the Exchange Act or otherwise available.  Each Underwriter's obligations to contribute pursuant to this Section 5.3 are several and not joint.

6.Default by an Underwriter.

6.1Default Not Exceeding 10% of Firm Securities or Option Securities. If any Underwriter or Underwriters shall default in its or their obligations to purchase the Firm Securities or the Option Securities, if the Over-allotment Option is exercised hereunder, and if the number of the Firm Securities or Option Securities with respect to which such default relates does not exceed in the aggregate 10% of the number of Firm Securities or Option Securities that all Underwriters have agreed to purchase hereunder, then such Firm Securities or Option Securities to which the default relates shall be purchased by the non-defaulting Underwriters in proportion to their respective commitments hereunder.

6.2Default Exceeding 10% of Firm Securities or Option Securities. In the event that the default addressed in Section 6.1 relates to more than 10% of the Firm Securities or Option Securities, you may in your discretion arrange for yourself or for another party or parties to purchase such Firm Securities or Option Securities to which such default relates on the terms contained herein. If, within one (1) Business Day after such default relating to more than 10% of the Firm Securities or Option Securities, you do not arrange for the purchase of such Firm Securities or Option Securities, then the Company shall be entitled to a further period of one (1) Business Day within which to procure another party or parties satisfactory to you to purchase said Firm Securities or Option Securities on such terms. In the event that neither you nor the Company arrange for the purchase of the Firm Securities or Option Securities to which a default relates as provided in this Section 6, this Agreement will automatically be terminated by you or the Company without liability on the part of the Company (except as provided in Sections 3.10 and 5 hereof) or the several Underwriters (except as provided in Section 5 hereof); provided, however, that if such default occurs with respect to the Option Securities, this Agreement will not terminate as to the Firm Securities; and provided, further, that nothing herein shall relieve a defaulting Underwriter of its liability, if any, to the other Underwriters and to the Company for damages occasioned by its default hereunder.

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6.3Postponement of Closing Date.  In the event that the Firm Securities or Option Securities to which the default relates are to be purchased by the non-defaulting Underwriters, or are to be purchased by another party or parties as aforesaid, you or the Company shall have the right to postpone the Closing Date or Option Closing Date for a reasonable period, but not in any event exceeding five (5) Business Days, in order to effect whatever changes may thereby be made necessary in the Registration Statement, the Pricing Disclosure Package or the Prospectus or in any other documents and arrangements, and the Company agrees to file promptly any amendment to the Registration Statement, the Pricing Disclosure Package or the Prospectus that in the opinion of Representative Counsel may thereby be made necessary.  The term "Underwriter" as used in this Agreement shall include any party substituted under this Section 6 with like effect as if it had originally been a party to this Agreement with respect to such Securities.

7.Additional Covenants.

7.1Board Composition and Board Designations.  The Company shall ensure that: (i) the qualifications of the persons serving as members of the Board of Directors and the overall composition of the Board of Directors comply with the Sarbanes-Oxley Act, with the Exchange Act and with the listing rules of the Exchange or any other national securities exchange, as the case may be, in the event the Company seeks to have its Public Securities listed on another exchange or quoted on an automated quotation system, and (ii) if applicable, at least one member of the Audit Committee of the Board of Directors qualifies as an "audit committee financial expert," as such term is defined under Regulation S-K and the listing rules of the Exchange.

7.2Prohibition on Press Releases and Public Announcements.  The Company shall not issue press releases or engage in any other publicity, without the Representative's prior written consent, for a period ending at 5:00 p.m., Eastern time, on the first (1^st) Business Day following the forty-fifth (45^th) day after the Closing Date, other than normal and customary releases issued in the ordinary course of the Company's business.

7.3Right of First Refusal.  Provided that the Firm Shares are sold in accordance with the terms of this Agreement, the Representative shall have an irrevocable right of first refusal (the "Right of First Refusal"), for a period of twelve (12) months after the date the Offering is completed, to act as sole and exclusive investment banker, sole and exclusive book-runner, sole and exclusive financial advisor, sole and exclusive underwriter and/or sole and exclusive placement agent, at the Representative's sole and exclusive discretion, for each and every future public and private equity and debt offering, including all equity linked financings (each, a "Subject Transaction"), during such twelve (12) month period, of the Company, or any successor to or subsidiary of the Company, on terms and conditions customary to the Representative for such Subject Transactions.  For the avoidance of any doubt, the Company shall not retain, engage or solicit any additional investment banker, book-runner, financial advisor, underwriter and/or placement agent in a Subject Transaction during such twelve (12) month period without the express written consent of the Representative.

The Company shall notify the Representative of its intention to pursue a Subject Transaction, including the material terms thereof, by providing written notice thereof by registered mail or overnight courier service addressed to the Representative.  If the Representative fails to exercise its Right of First Refusal with respect to any Subject Transaction within ten (10) Business Days after the mailing of such written notice, then the Representative shall have no further claim or right with respect to the Subject Transaction. The Representative may elect, in its sole and absolute discretion, not to exercise its Right of First Refusal with respect to any Subject Transaction; provided that any such election by the Representative shall not adversely affect the Representative's Right of First Refusal with respect to any other Subject Transaction during the twelve (12) month period agreed to above. 

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8.Effective Date of this Agreement and Termination Thereof.

8.1Effective Date.  This Agreement shall become effective when both the Company and the Representative have executed the same and delivered counterparts of such signatures to the other party.

8.2Termination.  The Representative shall have the right to terminate this Agreement at any time prior to any Closing Date, (i) if any domestic or international event or act or occurrence has materially disrupted, or in your opinion will in the immediate future materially disrupt, general securities markets in the United States; or (ii) if trading on the New York Stock Exchange or the Nasdaq Stock Market LLC shall have been suspended or materially limited, or minimum or maximum prices for trading shall have been fixed, or maximum ranges for prices for securities shall have been required by FINRA or by order of the Commission or any other government authority having jurisdiction; or (iii) if the United States shall have become involved in a new war or an increase in major hostilities; or (iv) if a banking moratorium has been declared by a New York State or federal authority; or (v) if a moratorium on foreign exchange trading has been declared which materially adversely impacts the United States securities markets; or (vi) if the Company shall have sustained a material loss by fire, flood, accident, hurricane, earthquake, theft, sabotage or other calamity or malicious act which, whether or not such loss shall have been insured, will, in your opinion, make it inadvisable to proceed with the delivery of the Firm Securities or Option Securities; or (vii) if the Company is in material breach of any of its representations, warranties or covenants hereunder; (viii) if the Representative shall have become aware after the date hereof of such a material adverse change in the conditions or prospects of the Company, or such adverse material change in general market conditions as in the Representative’s judgment would make it impracticable to proceed with the offering, sale and/or delivery of the Public Securities or to enforce contracts made by the Underwriters for the sale of the Public Securities; (ix) the Public Securities shall fail for any reason to open for trading on the Exchange by the end of regular trading hours on [•], 2022; or (x) if trading of the Public Securities on the Exchange shall be suspended on or prior to the Closing Date.

8.3Expenses.  Notwithstanding anything to the contrary in this Agreement, except in the case of a default by the Underwriters, pursuant to Section 6.2 above, in the event that this Agreement shall not be carried out for any reason whatsoever, within the time specified herein or any extensions thereof pursuant to the terms herein, the Company shall be obligated to pay to the Underwriters their actual and accountable out-of-pocket expenses related to the transactions contemplated herein then due and payable (including the fees and disbursements of Representative Counsel) up to $150,000, and upon demand the Company shall pay the full amount thereof to the Representative on behalf of the Underwriters; provided, however, that such expense cap in no way limits or impairs the indemnification and contribution provisions of this Agreement.  Notwithstanding the foregoing, any advance received by the Representative will be reimbursed to the Company to the extent not actually incurred in compliance with FINRA Rule 5110(g)(4)(A). For the avoidance of doubt, the aggregate expenses reimbursable by the Company to the Representative or the Underwriters pursuant to this Section 8.3 (together with any expenses reimbursable pursuant to Section 3.10.1) shall not exceed $150,000 without the prior written consent of the Company.

8.4Indemnification.  Notwithstanding any contrary provision contained in this Agreement, any election hereunder or any termination of this Agreement, and whether or not this Agreement is otherwise carried out, the provisions of Section 5 shall remain in full force and effect and shall not be in any way affected by, such election or termination or failure to carry out the terms of this Agreement or any part hereof.

8.5Representations, Warranties, Agreements to Survive.  All representations, warranties and agreements contained in this Agreement or in certificates of officers of the Company submitted pursuant hereto, shall remain operative and in full force and effect regardless of (i) any investigation made by or on behalf of any Underwriter or its Affiliates or selling agents, any person controlling any Underwriter, its officers or directors or any person controlling the Company or (ii) delivery of and payment for the Public Securities.

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9.Miscellaneous.

9.1Notices.  All communications hereunder, except as herein otherwise specifically provided, shall be in writing and shall be mailed (registered or certified mail, return receipt requested), personally delivered or sent by email or facsimile transmission and confirmed, and shall be deemed given when so delivered or emailed or faxed and confirmed, or if mailed, two (2) days after such mailing.

If to the Representative:

ThinkEquity LLC

17 State Street, 41^st Floor

New York, NY 10004
Attn: Head of Investment Banking

Email: notices@think-equity.com

with a copy (which shall not constitute notice) to:

Dentons US LLP

1221 Avenue of the Americas

New York, NY 10020

Attn: Rob Condon, Esq.

Fax: (212) 768-6800

If to the Company:

KWESST Micro Systems Inc.

155 Terence Matthews Crescent,

Unit #1, Ottawa, Ontario, K2M 2A8

Attention: Jeffrey MacLeod and Steve Archambault

Email: macleod@kwesst.com; archambault@kwesst.com

with a copy (which shall not constitute notice) to:

Dorsey & Whitney LLP

161 Bay Street, Unit #4310

Toronto, ON M5J 2S1, Canada

Attention: Richard Raymer, Esq.

Email: raymer.richard@dorsey.com

9.2Headings.  The headings contained herein are for the sole purpose of convenience of reference, and shall not in any way limit or affect the meaning or interpretation of any of the terms or provisions of this Agreement.

9.3Amendment.  This Agreement may only be amended by a written instrument executed by each of the parties hereto.

9.4Entire Agreement.  This Agreement (together with the other agreements and documents being delivered pursuant to or in connection with this Agreement) constitutes the entire agreement of the parties hereto with respect to the subject matter hereof and thereof, and supersedes all prior agreements and understandings of the parties, oral and written, with respect to the subject matter hereof. Notwithstanding anything to the contrary set forth herein, it is understood and agreed by the parties hereto that all other terms and conditions of that certain engagement letter between the Company and the Representative, dated June 23, 2022, shall remain in full force and effect.

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9.5Binding Effect.  This Agreement shall inure solely to the benefit of and shall be binding upon the Representative, the Underwriters, the Company and the controlling persons, directors and officers referred to in Section 5 hereof, and their respective successors, legal representatives, heirs and assigns, and no other person shall have or be construed to have any legal or equitable right, remedy or claim under or in respect of or by virtue of this Agreement or any provisions herein contained. The term "successors and assigns" shall not include a purchaser, in its capacity as such, of securities from any of the Underwriters.

9.6Governing Law; Consent to Jurisdiction; Trial by Jury.  This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York, without giving effect to conflict of laws principles thereof. The Company hereby agrees that any action, proceeding or claim against it arising out of, or relating in any way to this Agreement shall be brought and enforced in the New York Supreme Court, County of New York, or in the United States District Court for the Southern District of New York, and irrevocably submits to such jurisdiction, which jurisdiction shall be exclusive. The Company hereby waives any objection to such exclusive jurisdiction and that such courts represent an inconvenient forum. Any such process or summons to be served upon the Company may be served by transmitting a copy thereof by registered or certified mail, return receipt requested, postage prepaid, addressed to it at the address set forth in Section 9.1 hereof. Such mailing shall be deemed personal service and shall be legal and binding upon the Company in any action, proceeding or claim. The Company agrees that the prevailing party(ies) in any such action shall be entitled to recover from the other party(ies) all of its reasonable attorneys' fees and expenses relating to such action or proceeding and/or incurred in connection with the preparation therefor. The Company (on its behalf and, to the extent permitted by applicable law, on behalf of its shareholders and affiliates) and each of the Underwriters hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Agreement or the transactions contemplated hereby.

9.7Execution in Counterparts.  This Agreement may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each of which shall be deemed to be an original, but all of which taken together shall constitute one and the same agreement, and shall become effective when one or more counterparts has been signed by each of the parties hereto and delivered to each of the other parties hereto. Delivery of a signed counterpart of this Agreement by facsimile or email/pdf transmission shall constitute valid and sufficient delivery thereof.

9.8Waiver, etc.  The failure of any of the parties hereto to at any time enforce any of the provisions of this Agreement shall not be deemed or construed to be a waiver of any such provision, nor to in any way effect the validity of this Agreement or any provision hereof or the right of any of the parties hereto to thereafter enforce each and every provision of this Agreement. No waiver of any breach, non-compliance or non-fulfillment of any of the provisions of this Agreement shall be effective unless set forth in a written instrument executed by the party or parties against whom or which enforcement of such waiver is sought; and no waiver of any such breach, non-compliance or non-fulfillment shall be construed or deemed to be a waiver of any other or subsequent breach, non-compliance or non-fulfillment.

9.9Waiver of Immunity.  With respect to any suit or proceeding arising out of or relating to this Agreement or the transactions contemplated hereby, each party irrevocably waives, to the fullest extent permitted by applicable law, all immunity (whether on the basis of sovereignty or otherwise) from jurisdiction, service of process, attachment (both before and after judgment) and execution to which it might otherwise be entitled, and with respect to any such suit or proceeding, each party waives any such immunity in any court of competent jurisdiction, and will not raise or claim or cause to be pleaded any such immunity at or in respect of any such suit or proceeding, including, without limitation, any immunity pursuant to the U.S. Foreign Sovereign Immunities Act of 1976, as amended.

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9.10Currency Matters.  As used herein, "$" refers to U.S. dollars. The obligation of the Company in respect of any sum due to any Underwriter under this Agreement shall, notwithstanding any judgment in a currency other than U.S. dollars or any other applicable currency (the "Judgment Currency"), not be discharged until the first business day, following receipt by such Underwriter of any sum adjudged to be so due in the Judgment Currency, on which (and only to the extent that) such Underwriter may in accordance with normal banking procedures purchase U.S. dollars or any other applicable currency with the Judgment Currency; if the U.S. dollars or other applicable currency so purchased are less than the sum originally due to such Underwriter hereunder, the Company agrees, as a separate obligation and notwithstanding any such judgment, to indemnify such Underwriter against such loss. If the U.S. dollars or other applicable currency so purchased are greater than the sum originally due to such Underwriter hereunder, such Underwriter agrees to pay to the Company an amount equal to the excess of the U.S. dollars or other applicable currency so purchased over the sum originally due to such Underwriter hereunder.

[Signature Page Follows]

- 39 -

If the foregoing correctly sets forth the understanding between the Underwriters and the Company, please so indicate in the space provided below for that purpose, whereupon this letter shall constitute a binding agreement between us.

Very truly yours,

KWESST MICRO SYSTEMS INC.

By:_________________________________________

Name: Jeffrey MacLeod
Title: President and CEO

Confirmed as of the date first written
above mentioned, on behalf of itself and as
Representative of the several Underwriters
named on Schedule 1 hereto:

THINKEQUITY LLC

By:__________________________________________

Name:

Title:

[Signature Page]
KWESST Micro Systems Inc.– Underwriting Agreement

SCHEDULE 1

Underwriter	Total Number of Firm Securities to be Purchased (Firm Shares, Firm Pre-Funded Warrants, Firm Warrants)	Number of Option Securities to be Purchased if the Over-Allotment Option is Fully Exercised (Option Shares, Option Pre-Funded Warrants, Option Warrants)
ThinkEquity LLC.
TOTAL

Sch. 1-1

SCHEDULE 2-A

Pricing Information

Number of Firm Shares: [•]

Number of Firm Pre-Funded Warrants: [•]

Number of Firm Warrants: [•]

Number of Option Shares: Up to [•]

Number of Option Pre-Funded Warrants: Up to [•]

Number of Option Warrants: Up to [•]

Public Offering Price per Firm Share:  $[•]

Public Offering Price per Firm Pre-Funded Warrant: $[•]

Public Offering Price per Firm Warrant: $[•]

Underwriting Discount per Firm Share:  $[•]

Underwriting Discount per Firm Pre-Funded Warrant; $[•]

Underwriting Discount per Firm Warrant: $[•]

Underwriting Non-accountable expense allowance per Firm Share:  $[•]

Underwriting Non-accountable expense allowance per Firm Pre-Funded Warrant:  $[•]

Underwriting Non-accountable expense allowance per Firm Warrant: $[•]

Proceeds to Company per Firm Share (before expenses): $[•]

Proceeds to Company per Firm Pre-Funded Warrant (before expenses): $[•]

Proceeds to Company per Firm Warrant (before expenses): $[•]

SCHEDULE 2-B

Issuer General Use Free Writing Prospectuses

None.

SCHEDULE 2-C

Written Testing-the-Waters Communications

None.

Sch. 2-1

SCHEDULE 3

List of Lock-Up Parties

David Luxton and DEFSEC Corporation

Jeffrey MacLeod and 2573685 Ontario Inc.

Paul Mangano

Paul Fortin

John McCoach

Steven Archambault

Richard Bowes

Sch. 3-1

EXHIBIT A

Form of Pre-Funded Warrant

PRE-FUNDED COMMON SHARE PURCHASE WARRANT

KWESST MICRO SYSTEMS INC.

Warrant Shares: _______
	Issue Date: __________, 2022
	_____________

THIS PRE-FUNDED COMMON SHARE PURCHASE WARRANT (the “Warrant”) certifies that, for value received, _____________ or its assigns (the “Holder”) is entitled, upon the terms and subject to the limitations on exercise and the conditions hereinafter set forth, at any time on or after the Issue Date, as stipulated above, until this Warrant is exercised in full (the “Termination Date”) but not thereafter, to subscribe for and purchase from KWESST Micro Systems Inc., a corporation formed under the laws of the province of British Columbia (the “Company”), up to ______ Common Shares (as subject to adjustment hereunder, the “Warrant Shares”). The purchase price of one Common Share under this Warrant shall be equal to the Exercise Price, as defined in Section 2(b).

Section 1.Definitions. In addition to the terms defined elsewhere in this Warrant, the following terms have the meanings indicated in this Section 1:

“Affiliate” means any Person that, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with a Person, as such terms are used in and construed under Rule 405 under the Securities Act.

“Commission” means the United States Securities and Exchange Commission.

“Common Shares” means the common shares of the Company, no par value per share, and any other class of securities into which such securities may hereafter be reclassified or changed.

“Common Share Equivalents” means any securities of the Company or its subsidiaries which would entitle the holder thereof to acquire at any time Common Shares, including, without limitation, any debt, preferred stock, right, option, warrant or other instrument that is at any time convertible into or exercisable or exchangeable for, or otherwise entitles the holder thereof to receive, Common Shares.

“Exchange Act” means the United States Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.

“Person” means an individual or corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or subdivision thereof) or other entity of any kind.

“Proceeding” means an action, claim, suit, investigation or proceeding (including, without limitation, an informal investigation or partial proceeding, such as a deposition), whether commenced or threatened.

“Registration Statement” means the Company’s registration statement on Form F-1 (File No. 333-266897).

“Securities Act” means the United States Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.

“Trading Day” means a day on which the Common Shares are traded on a Trading Market.

Ex. A-1

“Trading Market” means any of the following markets or exchanges on which the Common Shares are listed or quoted for trading on the date in question: the NYSE American, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market, the New York Stock Exchange or the TSX Venture Exchange (or any successors to any of the foregoing).

“Transfer Agent” means TSX Trust Company, with a mailing address of 301 - 100 Adelaide St. W., Toronto, ON, Canada M5H 4H1, and any successor transfer agent of the Company.

“VWAP” means, for any date, the price determined by the first of the following clauses that applies: (a) if the Common Shares are then listed or quoted on a primary Trading Market, the daily volume weighted average price of the Common Shares for such date (or the nearest preceding date) on the primary Trading Market on which the Common Shares are then listed or quoted as reported by Bloomberg L.P. (based on a Trading Day from 9:30 a.m. (Eastern time) to 4:02 p.m. (Eastern time)), (b) if OTCQB or OTCQX is not a Trading Market, the volume weighted average price of the Common Shares for such date (or the nearest preceding date) on OTCQB or OTCQX as applicable, (c) if the Common Shares are not then listed or quoted for trading on OTCQB or OTCQX and if prices for the Common Shares are then reported in the “Pink Open Market” published by OTC Markets Group, Inc. (or a similar organization or agency succeeding to its functions of reporting prices), the most recent bid price per Common Share so reported, or (d) in all other cases, the fair market value of a Common Share as determined by an independent appraiser selected in good faith by the holders of a majority in interest of the Warrants then outstanding and reasonably acceptable to the Company, the fees and expenses of which shall be paid by the Company.

“Warrants” means this Warrant and other Pre-Funded Common Share Purchase Warrants issued by the Company pursuant to the Registration Statement.

Section 2.Exercise.

(a)Exercise of the purchase rights represented by this Warrant may be made, in whole or in part, at any time or times on or after the Issue Date and on or before the Termination Date by delivery to the Company of a duly executed copy, submitted, delivered or mailed (including by facsimile or PDF copy submitted by email), to the Company at 155 Terence Matthews Crescent, Unit #1, Ottawa, Ontario, K2M 2A8 Attention: Steven Archambault and Wendy Liang, email: archambault@kwesst.com and liang@kwesst.com (or such alternative email or physical address provided in writing by the Company to the Holder after the date hereof)  in substantially the form annexed hereto (the “Notice of Exercise”). Within the earlier of (i) two (2) Trading Days and (ii) the number of Trading Days comprising the Standard Settlement Period  (as defined in Section 2(d)(i) herein) following the date the Holder delivers the Notice of Exercise as aforesaid, the Holder shall deliver to the Company the aggregate Exercise Price for the Warrant Shares specified in the applicable Notice of Exercise by wire transfer, bank drafts or cashier’s or certified check drawn on a United States or Canadian bank unless the cashless exercise procedure specified in Section 2(c) below is specified in the applicable Notice of Exercise. No ink-original Notice of Exercise shall be required, nor shall any medallion guarantee (or other type of guarantee or notarization) of any Notice of Exercise form be required. Notwithstanding anything herein to the contrary, the Holder shall not be required to physically surrender this Warrant to the Company until the Holder has purchased all of the Warrant Shares available hereunder, and the Warrant has been exercised in full, in which case, the Holder shall surrender this Warrant to the Company for cancellation within three (3) Trading Days of the date on which the final Notice of Exercise is delivered to the Company. Partial exercises of this Warrant resulting in purchases of a portion of the total number of Warrant Shares available hereunder shall have the effect of lowering the outstanding number of Warrant Shares purchasable hereunder in an amount equal to the applicable number of Warrant Shares purchased. The Holder and the Company shall maintain records showing the number of Warrant Shares purchased and the date of such purchases. The Company shall deliver any objection to any Notice of Exercise within one (1) Trading Day of receipt of such notice. The Holder and any assignee, by acceptance of this Warrant, acknowledge and agree that, by reason of the provisions of this paragraph, following the purchase of a portion of the Warrant Shares hereunder, the number of Warrant Shares available for purchase hereunder at any given time may be less than the amount stated on the face hereof.

(b)Exercise Price. The aggregate exercise price of this Warrant, except for a nominal exercise price of $0.01 per Warrant Share, was pre-funded to the Company on or prior to the Issue Date and, consequently, no additional consideration (other than the nominal exercise price of $0.01 per Warrant Share) shall be required to be paid by the Holder to any Person to effect any exercise of this Warrant. The Holder shall not be entitled to the return or refund of all, or any portion, of such pre-paid aggregate exercise price under any circumstance or for any reason whatsoever, including in the event this Warrant shall not have been exercised prior to the Termination Date. The remaining unpaid exercise price per Common Share under this Warrant shall be $0.01, subject to adjustment hereunder (the “Exercise Price”).

Ex. A-2

(c)Cashless Exercise. This Warrant may also be exercised, in whole or in part, at such time by means of a “cashless exercise” in which the Holder shall be entitled to receive a number of Warrant Shares for the deemed surrender of the Warrant in whole or in part equal to the quotient obtained by dividing [(A-B) (X)] by (A), where:

(A)=as applicable: (i) the VWAP for the five Trading Days immediately preceding the date of the applicable Notice of Exercise if such Notice of Exercise is (1) both executed and delivered pursuant to Section 3.3.1(a) hereof on a day that is not a Trading Day or (2) both executed and delivered pursuant to Section 3.3.1(a) hereof on a Trading Day prior to the opening of “regular trading hours” (as defined in Rule 600(b) of Regulation NMS promulgated under the federal securities laws) on such Trading Day, (ii) the VWAP for the five Trading Days immediately preceding the date of the applicable Notice of Exercise or (iii) the VWAP for the five Trading Days immediately preceding the date of the applicable Notice of Exercise if the date of such Notice of Exercise is a Trading Day and such Notice of Exercise is both executed and delivered pursuant to Section 3.3.1(a) hereof after the close of “regular trading hours” on such Trading Day;

(B)=the Exercise Price of this Warrant, as adjusted hereunder; and

(X)=the number of Warrant Shares that would be issuable upon exercise of this Warrant in accordance with the terms of this Warrant if such exercise were by means of a cash exercise rather than a cashless exercise.

The issue price for each such Warrant Share to be issued pursuant to the cashless exercise of a Warrant will be equal to (B), as defined above, and the total issue price for the aggregate number of Warrant Shares “issued pursuant to the cashless exercise” of a Warrant will be deemed paid and satisfied in full by the deemed surrender to the Company of the portion of such Warrant being exercised in accordance with this Section 2(c). Notwithstanding anything herein to the contrary, the Company shall not be required to make any cash payments or net cash settlement to the Holder in lieu of delivery of the Warrant Shares. If Warrant Shares are issued in such a cashless exercise, the parties acknowledge and agree that in accordance with Section 3(a)(9) of the Securities Act, the Warrant Shares shall take on the registered characteristics of the Warrants being exercised.  The Company agrees not to take any position contrary to this Section 2(c).

(d)Mechanics of Exercise.

(i)Delivery of Warrant Shares Upon Exercise. The Company shall cause the Warrant Shares purchased hereunder to be transmitted by the Transfer Agent to the Holder by crediting the account of the Holder’s or its designee’s balance account with the Depository Trust Company through its Deposit or Withdrawal at Custodian system (the “DWAC”) if the Company is then a participant in such system and either (A) there is an effective registration statement permitting the issuance of the Warrant Shares to or resale of the Warrant Shares by the Holder or (B) this Warrant is being exercised via cashless exercise, and otherwise by physical delivery of a certificate, registered in the Company’s share register in the name of the Holder or its designee, for the number of Warrant Shares to which the Holder is entitled pursuant to such exercise to the address specified by the Holder in the Notice of Exercise by the date that is the earlier of (i) two (2) Trading Days after the delivery to the Company of the Notice of Exercise and (ii) the number of Trading Days comprising the Standard Settlement Period after the delivery to the Company of the Notice of Exercise (such date, the “Warrant Share Delivery Date”); provided, however, that if payment of the aggregate Exercise Price (other than in the case of a cashless exercise) is received after 12:00 P.M., New York City time on the Warrant Share Delivery Date, then the Warrant Share Delivery Date shall be extended by one (1) additional Trading Day. Upon delivery of the Notice of Exercise, the Holder shall be deemed for all corporate purposes to have become the Holder of record of the Warrant Shares with respect to which this Warrant has been exercised, irrespective of the date of delivery of the Warrant Shares, provided that payment of the aggregate Exercise Price (other than in the case of a cashless exercise) is received within the earlier of (i) two (2) Trading Days and (ii) the number of Trading Days comprising the Standard Settlement Period following delivery of the Notice of Exercise. If the Company fails for any reason to deliver to the Holder the Warrant Shares subject to a Notice of Exercise by the Warrant Share Delivery Date, the Company shall pay to the Holder, in cash, as liquidated damages and not as a penalty, for each $1,000 of Warrant Shares subject to such exercise (based on the VWAP of the Common Shares on the date of the applicable Notice of Exercise), $10 per Trading Day (increasing to $20 per Trading Day on the fifth Trading Day after such liquidated damages begin to accrue) for each Trading Day after such Warrant Share Delivery Date until such Warrant Shares are delivered to said Holder or the Holder rescinds such exercise. The Company agrees to maintain a transfer agent that is a participant in the Fast Automated Securities Transfer or FAST program so long as this Warrant remains outstanding and exercisable. As used herein, “Standard Settlement Period” means the standard settlement period, expressed in a number of Trading Days, on the Company’s primary Trading Market with respect to the Common Shares as in effect on the date of delivery of the Notice of Exercise. Notwithstanding the foregoing, with respect to any Notice(s) of Exercise delivered on or prior to 12:00 p.m. (New York City time) on the Issue Date, which may be delivered at any time after the time of execution of the Underwriting Agreement, dated ________ [•], 2022 between the Company and ThinkEquity LLC, the Company agrees to deliver the Warrant Shares subject to such notice(s) by 4:00 p.m. (New York City time) on the Issue Date..

Ex. A-3

(ii)Delivery of New Warrants Upon Exercise. If this Warrant shall have been exercised in part, the Company shall, at the request of a Holder and upon surrender of this Warrant certificate, at the time of delivery of the Warrant Shares, deliver to the Holder a new Warrant evidencing the rights of the Holder to purchase the unpurchased Warrant Shares called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant.

(iii)Rescission Rights. If the Company fails to cause the Transfer Agent to transmit to the Holder the Warrant Shares pursuant to Section 2(d)(i) by the Warrant Share Delivery Date, then the Holder will have the right to rescind such exercise.

(iv)Compensation for Buy-In on Failure to Timely Deliver Warrant Shares Upon Exercise. In addition to any other rights available to the Holder, if the Company fails to cause the Transfer Agent to transmit to the Holder the Warrant Shares in accordance with the provisions of Section 2(d)(i) above pursuant to an exercise on or before the Share Delivery Date (for avoidance of doubt, other than any such failure that is due solely to any action or inaction by the Holder), and if after such date the Holder is required by its broker to purchase (in an open market transaction or otherwise) or the Holder’s brokerage firm otherwise purchases, Common Shares to deliver in satisfaction of a sale by the Holder of the Warrant Shares which the Holder anticipated receiving upon such exercise (a “Buy-In”), then the Company shall (A) pay in cash to the Holder the amount, if any, by which (x) the Holder’s total purchase price (including brokerage commissions, if any) for the Common Shares so purchased exceeds (y) the amount obtained by multiplying (1) the number of Warrant Shares that the Company was required to deliver to the Holder in connection with the exercise at issue times (2) the price at which the sell order giving rise to such purchase obligation was executed, and (B) at the option of the Holder, either reinstate the portion of the Warrant and equivalent number of Warrant Shares for which such exercise was not honored (in which case such exercise shall be deemed rescinded) or deliver to the Holder the number of Common Shares that would have been issued had the Company timely complied with its exercise and delivery obligations hereunder. For example, if the Holder purchases Common Shares having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted exercise of Common Shares with an aggregate sale price giving rise to such purchase obligation of $10,000, under clause (A) of the immediately preceding sentence the Company shall be required to pay the Holder $1,000. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In and, upon request of the Company, evidence of the amount of such loss. Nothing herein shall limit a Holder’s right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Company’s failure to timely deliver Common Shares upon exercise of the Warrant as required pursuant to the terms hereof.

(v)No Fractional Shares. No fractional Warrant Shares will be issued upon the exercise of this Warrant. If a Holder would be entitled, upon the exercise of this Warrant, to receive a fractional interest in a share, the Company shall, at its election, either pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Exercise Price or round up to the next whole Warrant Share.

(vi)Charges, Taxes and Expenses. Issuance of Warrant Shares shall be made without charge to the Holder for any issue or transfer tax or other incidental expense in respect of the issuance of such Warrant Shares, all of which taxes and expenses shall be paid by the Company, and such Warrant Shares shall be issued in the name of the Holder or in such name or names as may be directed by the Holder; provided, however, that in the event Warrant Shares are to be issued in a name other than the name of the Holder, this Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto duly executed by the Holder and the Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it for any transfer tax or other government charge incidental thereto. The Company shall pay all Transfer Agent fees required for same-day processing of any Notice of Exercise and all fees to the Depository Trust Company (or another established clearing corporation performing similar functions) required for same-day electronic delivery of the Warrant Shares.

Ex. A-4

(vii)Closing of Books. Subject to applicable laws, including applicable securities laws, the Company will not close its shareholder books or records in any manner which prevents the timely exercise of this Warrant, pursuant to the terms hereof.

(e)Holder’s Exercise Limitations. The Company shall not effect any exercise of this Warrant, and a Holder shall not have the right to exercise any portion of this Warrant, pursuant to Section 2 or otherwise, to the extent that after giving effect to such issuance after exercise as set forth on the applicable Notice of Exercise, the Holder (together with the Holder’s Affiliates, and any other Persons acting as a group together with the Holder or any of the Holder’s Affiliates (such Persons, “Attribution Parties”), would beneficially own in excess of the Beneficial Ownership Limitation (as defined below). For purposes of the foregoing sentence, the number of Common Shares beneficially owned by the Holder and its Affiliates and Attribution Parties shall include the number of Common Shares issuable upon exercise of this Warrant with respect to which such determination is being made, but shall exclude the number of Common Shares which would be issuable upon (i) exercise of the remaining, non-exercised portion of this Warrant beneficially owned by the Holder or any of its Affiliates or Attribution Parties and (ii) exercise or conversion of the unexercised or non-converted portion of any other securities of the Company (including, without limitation, any other Common Share Equivalents) subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by the Holder or any of its Affiliates or Attribution Parties. Except as set forth in the preceding sentence, for purposes of this Section 2(e), beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder, it being acknowledged by the Holder that the Company is not representing to the Holder that such calculation is in compliance with Section 13(d) of the Exchange Act and the Holder is solely responsible for any schedules required to be filed in accordance therewith. To the extent that the limitation contained in this Section 2(e) applies, the determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder together with any Affiliates and Attribution Parties) and of which portion of this Warrant is exercisable shall be in the sole discretion of the Holder, and the submission of a Notice of Exercise shall be deemed to be the Holder’s determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder together with any Affiliates and Attribution Parties) and of which portion of this Warrant is exercisable, in each case subject to the Beneficial Ownership Limitation, and the Company shall have no obligation to verify or confirm the accuracy of such determination. In addition, a determination as to any group status as contemplated above shall be determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. For purposes of this Section 2(e), in determining the number of outstanding Common Shares, a Holder may rely on the number of outstanding Common Shares as reflected in (A) the Company’s most recent periodic or annual report filed with the Commission, as the case may be, (B) a more recent public announcement by the Company or (C) a more recent written notice by the Company or the Transfer Agent setting forth the number of Common Shares outstanding. Upon the written or oral request of a Holder, the Company shall within two (2) Trading Days confirm orally and in writing to the Holder the number of Common Shares then outstanding. In any case, the number of outstanding Common Shares shall be determined after giving effect to the conversion or exercise of securities of the Company, including this Warrant, by the Holder or its Affiliates or Attribution Parties since the date as of which such number of outstanding Common Shares was reported. The “Beneficial Ownership Limitation” shall be 4.99% (or, upon election by a Holder prior to the issuance of any Warrants, 9.99%) of the number of Common Shares outstanding immediately after giving effect to the issuance of Common Shares issuable upon exercise of this Warrant. The Holder, upon notice to the Company, may increase or decrease the Beneficial Ownership Limitation provisions of this Section 2(e), provided that the Beneficial Ownership Limitation in no event exceeds 9.99% of the number of Common Shares outstanding immediately after giving effect to the issuance of Common Shares upon exercise of this Warrant held by the Holder and the provisions of this Section 2(e) shall continue to apply. Any increase in the Beneficial Ownership Limitation will not be effective until the 61st day after such notice is delivered to the Company. The provisions of this paragraph shall be construed and implemented in a manner otherwise than in strict conformity with the terms of this Section 2(e) to correct this paragraph (or any portion hereof) which may be defective or inconsistent with the intended Beneficial Ownership Limitation herein contained or to make changes or supplements necessary or desirable to properly give effect to such limitation. The limitations contained in this paragraph shall apply to a successor holder of this Warrant.

Ex. A-5

Section 3.Certain Adjustments.

(a)Share Dividends and Splits. If the Company, at any time while this Warrant is outstanding: (i) pays a stock dividend or otherwise makes a distribution or distributions on its Common Shares or any other equity or equity equivalent securities payable in Common Shares (which, for avoidance of doubt, shall not include any Common Shares issued by the Company upon exercise of this Warrant), (ii) subdivides outstanding Common Shares into a larger number of shares, (iii) combines (including by way of reverse stock split) outstanding Common Shares into a smaller number of shares, or (iv) issues by reclassification of the Common Shares any shares of capital stock of the Company, then in each case the Exercise Price shall be multiplied by a fraction of which the numerator shall be the number of Common Shares and such other capital stock of the Company (excluding treasury shares, if any) outstanding immediately before such event and of which the denominator shall be the number of Common Shares such other capital stock of the Company (excluding treasury shares, if any) outstanding immediately after such event, and the number of shares issuable upon exercise of this Warrant shall be proportionately adjusted such that the aggregate Exercise Price of this Warrant shall remain unchanged. Any adjustment made pursuant to this Section 3(a) shall become effective immediately after the record date for the determination of shareholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or re-classification.

(b)Subsequent Rights Offerings. In addition to any adjustments pursuant to Section 3(a) above, if at any time the Company grants, issues or sells any Common Share Equivalents or rights to purchase shares, warrants, securities or other property pro rata to the record holders of any class of Common Shares (the “Purchase Rights”), then the Holder will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which the Holder could have acquired if the Holder had held the number of Common Shares acquirable upon complete exercise of this Warrant (without regard to any limitations on exercise hereof, including without limitation, the Beneficial Ownership Limitation) immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of Common Shares are to be determined for the grant, issue or sale of such Purchase Rights (provided, however, to the extent that the Holder’s right to participate in any such Purchase Right would result in the Holder exceeding the Beneficial Ownership Limitation, then the Holder shall not be entitled to participate in such Purchase Right to such extent (or beneficial ownership of such Common Shares as a result of such Purchase Right to such extent), and such Purchase Right to such extent shall be held in abeyance for the Holder until such time, if ever, as its right thereto would not result in the Holder exceeding the Beneficial Ownership Limitation). To the extent that this Warrant has not been partially or completely exercised at the time of such Distribution, such portion of the Distribution shall be held in abeyance for the benefit of the Holder until the Holder has exercised this Warrant.

(c)Pro Rata Distribution. During such time as this Warrant is outstanding and subject to the prior approval of the TSX Venture Exchange, if the Company shall declare or make any special or extraordinary dividend (other than regular dividends payable in cash) or other distribution of its assets (or rights to acquire its assets) to holders of Common Shares, by way of return of capital or otherwise (including, without limitation, any distribution of shares or other securities, property or options by way of a dividend, spin off, reclassification, corporate rearrangement, scheme of arrangement or other similar transaction) (a “Distribution”), at any time after the issuance of this Warrant, then, in each such case, the Holder shall be entitled to participate in such Distribution to the same extent that the Holder would have participated therein if the Holder had held the number of Common Shares acquirable upon complete exercise of this Warrant (without regard to any limitations on exercise hereof, including without limitation, the Beneficial Ownership Limitation) immediately before the date of which a record is taken for such Distribution, or, if no such record is taken, the date as of which the record holders of Common Shares are to be determined for the participation in such Distribution (provided, however, to the extent that the Holder’s right to participate in any such Distribution would result in the Holder exceeding the Beneficial Ownership Limitation, then the Holder shall not be entitled to participate in such Distribution to such extent (or in the beneficial ownership of any Common Shares as a result of such Distribution to such extent) and the portion of such Distribution shall be held in abeyance for the benefit of the Holder until such time, if ever, as its right thereto would not result in the Holder exceeding the Beneficial Ownership Limitation). Notwithstanding the foregoing, this Section 3(c) shall not apply with respect to any Distribution to the extent that such Distribution results in an adjustment to the Exercise Price under the other provisions of this Warrant.

Ex. A-6

(d)Fundamental Transaction. If, at any time while this Warrant is outstanding, (i) the Company, directly or indirectly, in one or more related transactions effects any merger or consolidation of the Company with or into another Person, (ii) the Company, directly or indirectly, effects any sale, lease, license, assignment, transfer, conveyance or other disposition of all or substantially all of its assets in one or a series of related transactions, (iii) any, direct or indirect, purchase offer, tender offer or exchange offer (whether by the Company or another Person) is completed pursuant to which all holders of Common Shares are permitted to sell, tender or exchange their shares for other securities, cash or property and has been accepted by the holders of 50% or more of the outstanding Common Shares or 50% or more of the total voting power of the outstanding Common Shares, (iv) the Company, directly or indirectly, in one or more related transactions effects any reclassification, reorganization or recapitalization of the Common Shares or any compulsory share exchange pursuant to which all outstanding Common Shares are effectively converted into or exchanged for other securities, cash or property, or (v) the Company, directly or indirectly, in one or more related transactions consummates a stock or share purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement) with another Person or group of Persons whereby such other Person or group acquires more than 50% of the outstanding Common Shares or 50% or more of the voting power of the Common Shares (each a “Fundamental Transaction”), then, upon any subsequent exercise of this Warrant, and subject to the prior approval of the TSX Venture Exchange, the Holder shall have the right to receive, for each Warrant Share that would have been issuable upon such exercise immediately prior to the occurrence of such Fundamental Transaction, at the option of the Holder (without regard to any limitation in Section 2(e) on the exercise of this Warrant), the number of Common Shares of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and any additional consideration (the “Alternate Consideration”) receivable as a result of such Fundamental Transaction by a holder of the number of Common Shares for which the Warrant is exercisable immediately prior to such Fundamental Transaction (without regard to any limitation in Section 3.3.9 on the exercise of this Warrant). For purposes of any such exercise, the determination of the Exercise Price shall be appropriately adjusted to apply to such Alternate Consideration based on the amount of Alternate Consideration issuable in respect of one Common Share in such Fundamental Transaction, and the Company shall apportion the Exercise Price among the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the Alternate Consideration. If holders of Common Shares are given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the Alternate Consideration it receives upon any exercise of this Warrant following such Fundamental Transaction. The Company shall cause any successor entity in a Fundamental Transaction in which the Company is not the survivor (the “Successor Entity”) to assume in writing all of the obligations of the Company under this Warrant in accordance with the provisions of this Section 3(d) pursuant to written agreements delay) prior to such Fundamental Transaction and shall, at the option of the Holder, deliver to the Holder in exchange for the Warrant a security of the Successor Entity evidenced by a written instrument substantially similar in form and substance to the Warrant which is exercisable for a corresponding number of shares of capital stock of such Successor Entity (or its parent entity) equivalent to the Common Shares acquirable and receivable upon exercise of the Warrant (without regard to any limitations on the exercise of the Warrant) prior to such Fundamental Transaction, and with an exercise price which applies the exercise price hereunder to such shares of capital stock (but taking into account the relative value of the Common Shares pursuant to such Fundamental Transaction and the value of such shares of capital stock, such number of shares of capital stock and such exercise price being for the purpose of protecting the economic value of the Warrant immediately prior to the consummation of such Fundamental Transaction), and which is reasonably satisfactory in form and substance to the Holder. Upon the occurrence of any such Fundamental Transaction, the Successor Entity shall succeed to, and be substituted for (so that from and after the date of such Fundamental Transaction, the provisions of the Warrants referring to the “Company” shall refer instead to the Successor Entity), and may exercise every right and power of the Company and shall assume all of the obligations of the Company under the Warrants with the same effect as if such Successor Entity had been named as the Company herein.

(e)Calculations. All calculations under this Section 3 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. For purposes of this Section 3, the number of Common Shares deemed to be issued and outstanding as of a given date shall be the sum of the number of Common Shares (excluding treasury shares, if any) issued and outstanding.

(f)Notice to Holder.

(i)Adjustment to Exercise Price. Whenever the Exercise Price is adjusted pursuant to any provision of this Section 3, the Company shall promptly deliver to the Holder by facsimile or email a notice setting forth the Exercise Price after such adjustment and any resulting adjustment to the number of Warrant Shares and setting forth a brief statement of the facts requiring such adjustment.

Ex. A-7

(ii)Notice to Allow Exercise by Holder. If (A) the Company shall declare a dividend (or any other distribution in whatever form) on the Common Shares, (B) the Company shall declare a special nonrecurring cash dividend on or a redemption of the Common Shares, (C) the Company shall authorize the granting to all holders of the Common Shares rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights, (D) the approval of any shareholders of the Company shall be required in connection with any Fundamental Transaction, or (E) the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company, then, in each case, the Company shall cause to be delivered by facsimile or email to the Holder at its last facsimile number or email address as it shall appear upon the Warrant Register (as defined below), at least 20 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of the Common Shares of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of the Common Shares of record shall be entitled to exchange their Common Shares for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or share exchange; provided that the failure to deliver such notice or any defect therein or in the delivery thereof shall not affect the validity of the corporate action required to be specified in such notice. To the extent that any notice provided in this Warrant constitutes, or contains, material, non-public information regarding the Company or any of its subsidiaries, the Company shall simultaneously file such notice on SEDAR and with the Commission pursuant to a Report on Form 6-K. Provided such notice occurs within the Exercise Period, the Holder shall remain entitled to exercise this Warrant during the period commencing on the date of such notice to the effective date of the event triggering such notice, except as may otherwise be expressly set forth herein (including the applicable exercise period set forth herein).

Section 4.Transfer of Warrant.

(a)Transferability. Subject to compliance with any applicable securities laws, this Warrant and all rights hereunder are transferable, in whole or in part, upon surrender of this Warrant at the principal office of the Company or its designated agent, together with a written assignment of this Warrant substantially in the form attached hereto duly executed by the Holder or its agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of such transfer. Upon such surrender and, if required, such payment, the Company shall execute and deliver a new Warrant or Warrants in the name of the assignee or assignees, as applicable, and in the denomination or denominations specified in such instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be cancelled. Notwithstanding anything herein to the contrary, the Holder shall not be required to physically surrender this Warrant to the Company unless the Holder has assigned this Warrant in full, in which case, the Holder shall surrender this Warrant to the Company within three (3) Trading Days of the date the Holder delivers an assignment form to the Company assigning this Warrant full. The Warrant, if properly assigned in accordance herewith, may be exercised by a new holder for the purchase of Warrant Shares without having a new Warrant issued.

(b)New Warrants. If this Warrant is not held in global form through the Depository Trust Company (or any successor depository), this Warrant may be divided or combined with other Warrants upon presentation hereof at the aforesaid office of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by the Holder or its agent or attorney. Subject to compliance with Section 4(a), as to any transfer which may be involved in such division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice. All Warrants issued on transfers or exchanges shall be dated the original Issuance Date of this Warrant and shall be identical with this Warrant except as to the number of Warrant Shares issuable pursuant thereto.

(c)Warrant Register. The Company shall register this Warrant, upon records to be maintained by the Company for that purpose (the “Warrant Register”), in the name of the record Holder hereof from time to time. The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, absent actual notice to the contrary.

Ex. A-8

Section 5.Miscellaneous.

(a)No Rights as Shareholder Until Exercise. This Warrant does not entitle the Holder to any voting rights, dividends or other rights as a shareholder of the Company prior to the exercise hereof as set forth in Section 2(d)(i), except as expressly set forth in Section 3.

(b)Loss, Theft, Destruction or Mutilation of Warrant. The Company covenants that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant or any share certificate relating to the Warrant Shares, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it (which, in the case of the Warrant, shall not include the posting of any bond), and upon surrender and cancellation of such Warrant or share certificate, if mutilated, the Company will make and deliver a new Warrant or share certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or share certificate.

(c)Saturdays, Sundays, Holidays, etc. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall not be a Trading Day, then, such action may be taken or such right may be exercised on the next succeeding Trading Day.

(d)Authorized Shares.

(i)The Company covenants that, during the period the Warrant is outstanding, it will reserve from its authorized and unissued Common Shares a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any purchase rights under this Warrant. The Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of issuing the necessary Warrant Shares upon the exercise of the purchase rights under this Warrant. The Company will take all such reasonable action as may be necessary to assure that such Warrant Shares may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the Trading Market upon which the Common Shares may be listed. The Company covenants that all Warrant Shares which may be issued upon the exercise of the purchase rights represented by this Warrant will, upon exercise of the purchase rights represented by this Warrant and payment for such Warrant Shares in accordance herewith, be duly authorized, validly issued, fully paid and non-assessable and free from all taxes, liens and charges created by the Company in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue).

(ii)Except and to the extent as waived or consented to by the Holder, the Company shall not by any action, including, without limitation, amending its certificate of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder as set forth in this Warrant against impairment. Without limiting the generality of the foregoing, the Company will (A) not increase the par value of any Warrant Shares above the amount payable therefor upon such exercise immediately prior to such increase in par value, (B) take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and non-assessable Warrant Shares upon the exercise of this Warrant and (C) use commercially reasonable efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof, as may be, necessary to enable the Company to perform its obligations under this Warrant.

(iii)Before taking any action which would result in an adjustment in the number of Warrant Shares for which this Warrant is exercisable or in the Exercise Price, the Company shall obtain all such authorizations or exemptions thereof, or consents thereto, as may be necessary from any public regulatory body or bodies having jurisdiction thereof.

(e)Governing Law. All questions concerning the construction, validity, enforcement and interpretation of this Warrant shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without regard to the principles of conflict of laws thereof. Each party agrees that all legal Proceedings concerning the interpretation, enforcement and defense of this Warrant shall be commenced in the state and federal courts sitting in the City of New York, Borough of Manhattan (the “New York Courts”). Each party hereto hereby irrevocably submits to the exclusive jurisdiction of the New York Courts for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein (including with respect to the enforcement of any provision hereunder), and hereby irrevocably waives, and agrees not to assert in any suit, action or Proceeding, any claim that it is not personally subject to the jurisdiction of such New York Courts, or such New York Courts are improper or inconvenient venue for such Proceeding. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Warrant and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any other manner permitted by law. If any party shall commence an action or Proceeding to enforce any provisions of this Warrant, then the prevailing party in such action or Proceeding shall be reimbursed by the other party for its attorneys’ fees and other costs and expenses incurred in the investigation, preparation and prosecution of such action or Proceeding.

Ex. A-9

(f)Restrictions. The Holder acknowledges that the Warrant Shares acquired upon the exercise of this Warrant, if not registered, and the Holder does not utilize cashless exercise, will have restrictions upon resale imposed by state, provincial and federal securities laws in the United States and Canada.

(g)Nonwaiver and Expenses. No course of dealing or any delay or failure to exercise any right hereunder on the part of Holder shall operate as a waiver of such right or otherwise prejudice the Holder’s rights, powers or remedies. Without limiting any other provision of this Warrant, if the Company willfully and knowingly fails to comply with any provision of this Warrant, which results in any material damages to the Holder, the Company shall pay to the Holder such amounts as shall be sufficient to cover any costs and expenses including, but not limited to, reasonable attorneys’ fees, including those of appellate Proceedings, incurred by the Holder in collecting any amounts due pursuant hereto or in otherwise enforcing any of its rights, powers or remedies hereunder.

(h)Notices. Any and all notices or other communications or deliveries to be provided by the Holders hereunder including, without limitation, any Notice of Exercise, shall be in writing and delivered personally, by e-mail, or sent by a nationally recognized overnight courier service, addressed to the Company, at 155 Terence Matthews Crescent, Unit #1, Ottawa, Ontario, K2M 2A8 Attention: Steven Archambault and Wendy Liang, email: archambault@kwesst.com and liang@kwesst.com, or such other email address or address as the Company may specify for such purposes by notice to the Holders. Any and all notices or other communications or deliveries to be provided by the Company hereunder shall be in writing and delivered personally, by e-mail, or sent by a nationally recognized overnight courier service addressed to each Holder at the e-mail address or address of such Holder appearing on the books of the Company. Any notice or other communication or deliveries hereunder shall be deemed given and effective on the earliest of (i) the time of transmission, if such notice or communication is delivered via e-mail at the e-mail address set forth in this Section prior to 5:30 p.m. (Eastern time) on any date, (ii) the next Trading Day after the date of transmission, if such notice or communication is delivered via e-mail at the e-mail address set forth in this Section on a day that is not a Trading Day or later than 5:30 p.m. (Eastern time) on any Trading Day, (iii) the second Trading Day following the date of mailing, if sent by U.S. nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given.

(i)Limitation of Liability. No provision hereof, in the absence of any affirmative action by the Holder to exercise this Warrant to purchase Warrant Shares, and no enumeration herein of the rights or privileges of the Holder, shall give rise to any liability of the Holder for the purchase price of any Common Shares or as a shareholder of the Company, whether such liability is asserted by the Company or by creditors of the Company.

(j)Remedies. The Holder, in addition to being entitled to exercise all rights granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Warrant. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Warrant and hereby agrees to waive and not to assert the defense in any action for specific performance that a remedy at law would be adequate.

(k)Successors and Assigns. Subject to applicable securities laws, this Warrant and the rights and obligations evidenced hereby shall inure to the benefit of and be binding upon the successors and permitted assigns of the Company and the successors and permitted assigns of Holder. The provisions of this Warrant are intended to be for the benefit of any Holder from time to time of this Warrant and shall be enforceable by the Holder or holder of Warrant Shares.

Ex. A-10

(l)Amendment. This Warrant may be modified or amended or the provisions hereof waived with the written consent of the Company, on the one hand, and the Holder on the other hand.

(m)Severability. Wherever possible, each provision of this Warrant shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Warrant.

(n)No Expense Reimbursement. The Holder shall in no way be required the pay, or to reimburse the Company for, any fees or expenses of the Company's Transfer Agent in connection with the issuance or holding or sale of the Common Shares, Warrant and/or Warrant Shares. The Company shall solely be responsible for any and all such fees and expenses.

(o)Headings. The headings used in this Warrant are for the convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant.

(Signature Page Follows)

Ex. A-11

IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officer thereunto duly authorized as of the date first above indicated.

KWESST MICRO SYSTEMS INC.
By:
	Name:
	Title:

Ex. A-12

NOTICE OF EXERCISE

To:KWESST MICRO SYSTEMS INC.

(1)The undersigned hereby elects to purchase ________ Warrant Shares of the Company pursuant to the terms of the attached Warrant (only if exercised in full), and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any.

(2)Payment shall take the form of (check applicable box):

☐ in lawful money of the United States; or

☐ the cancellation of such number of Warrant Shares as is necessary, in accordance with the formula set forth in subsection 2(c), to exercise this Warrant with respect to the maximum number of Warrant Shares purchasable pursuant to the cashless exercise procedure set forth in subsection 2(c).

(3)Please issue said Warrant Shares in the name of the undersigned or in such other name as is specified below:

The Warrant Shares shall be delivered to the following DWAC Account Number:

[SIGNATURE OF HOLDER]

Name of Investing

Entity:

Signature of Authorized Signatory of Investing

Entity:

Name of Authorized

Signatory:

Title of Authorized

Signatory:

Date:

Ex. A-13

ASSIGNMENT FORM

(To assign the foregoing Warrant, execute this form and supply required information. Do not use this form to purchase shares.)

FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced thereby are hereby assigned to

Name:
	(Please Print)
Address:
	(Please Print)
Phone Number:
Email Address:
Dated: _____________________ __, ______
Holder’s Signature: ___________________________
Holder’s Address: ___________________________

Ex. A-14

EXHIBIT B

Form of Representative's Warrant

THE REGISTERED HOLDER OF THIS PURCHASE WARRANT BY ITS ACCEPTANCE HEREOF, AGREES THAT IT WILL NOT SELL, TRANSFER OR ASSIGN THIS PURCHASE WARRANT EXCEPT AS HEREIN PROVIDED AND THE REGISTERED HOLDER OF THIS PURCHASE WARRANT AGREES THAT IT WILL NOT SELL, TRANSFER, ASSIGN, PLEDGE OR HYPOTHECATE THIS PURCHASE WARRANT FOR A PERIOD OF ONE HUNDRED EIGHTY DAYS FOLLOWING THE EFFECTIVE DATE (DEFINED BELOW) TO ANYONE OTHER THAN (I) THINKEQUITY LLC OR AN UNDERWRITER OR A SELECTED DEALER IN CONNECTION WITH THE OFFERING, OR (II) A BONA FIDE OFFICER OR PARTNER OF THINKEQUITY LLC OR OF ANY SUCH UNDERWRITER OR SELECTED DEALER.

THIS PURCHASE WARRANT IS NOT EXERCISABLE PRIOR TO [________________] [DATE THAT IS 180 DAYS FROM THE EFFECTIVE DATE OF THE OFFERING]. VOID AFTER 5:00 P.M., EASTERN TIME, [___________________] [FINAL DAY IN THE FOUR AND ONE-HALF-YEAR PERIOD COMMENCING ON THE DATE THAT IS 180 DAYS FROM THE EFFECTIVE DATE OF THE OFFERING].

WARRANT TO PURCHASE COMMON SHARES

KWESST MICRO SYSTEMS INC.

Warrant Shares: _______

Initial Exercise Date: ______, 2023

THIS WARRANT TO PURCHASE COMMON SHARES (the "Warrant") certifies that, for value received, _____________ or its assigns (the "Holder") is entitled, upon the terms and subject to the limitations on exercise and the conditions hereinafter set forth, at any time on or after ____, 2023 (the "Initial Exercise Date") and, in accordance with FINRA Rule 5110(g)(8)(A), prior to at 5:00 p.m. (New York time) on the final day in the [four and one-half (4.5)-year] period commencing on the Initial Exercise Date (the "Termination Date") but not thereafter, to subscribe for and purchase from KWESST MICRO SYSTEMS INC., a corporation formed under the laws of British Columbia, Canada (the "Company"), up to ______ Common Shares, no par value per share, of the Company (the "Warrant Shares"), as subject to adjustment hereunder. The purchase price of one Common Shares under this Warrant shall be equal to the Exercise Price, as defined in Section 2(b).

Section 1. Definitions. In addition to the terms defined elsewhere in this Agreement, the following terms have the meanings indicated in this Section 1:

"Affiliate" means any Person that, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with a Person, as such terms are used in and construed under Rule 405 under the Securities Act.

"Business Day" means any day except any Saturday, any Sunday, any day which is a federal legal holiday in the United States or Canada any day on which banking institutions in the State of New York or Canada are authorized or required by law or other governmental action to close.

Ex. B-1

"Commission" means the United States Securities and Exchange Commission.

"Common Shares" means the common shares of the Company, no par value per share, and any other class of securities into which such securities may hereafter be reclassified or changed.

"Common Share Equivalents" means any securities of the Company or its subsidiaries which would entitle the holder thereof to acquire at any time Common Shares, including, without limitation, any debt, preferred shares, right, option, warrant or other instrument that is at any time convertible into or exercisable or exchangeable for, or otherwise entitles the holder thereof to receive, Common Shares.

"Effective Date" means the effective date of the registration statement on Form F-1 (File No. 333-266897), including any related prospectus or prospectuses, for the registration of the Company's Common Shares, pre-funded warrants, warrants, Common Shares underlying pre-funded warrants and warrants, Warrants and the Warrant Shares under the Securities Act, that the Company has filed with the Commission.

"Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.

"Person" means an individual or corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or subdivision thereof) or other entity of any kind.

"Rule 144" means Rule 144 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended or interpreted from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same purpose and effect as such Rule.

"Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.

"Trading Day" means a day on which the Nasdaq Capital Market (or any successor thereof), or other Trading Market where the Common Shares are traded, is open for trading.

"Trading Market" means any of the following markets or exchanges on which the Common Shares are listed or quoted for trading on the date in question: the NYSE American, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market, or the New York Stock Exchange (or any successors to any of the foregoing).

"VWAP" means, for any date, the price determined by the first of the following clauses that applies: (a) if the Common Shares then listed or quoted on a Trading Market, the daily volume weighted average price of the Common Shares for such date (or the nearest preceding date) on the Trading Market on which the Common Shares are then listed or quoted as reported by Bloomberg L.P. (based on a Trading Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New York City time)), (b)  if OTCQB or OTCQX is not a Trading Market, the volume weighted average price of a Common Share for such date (or the nearest preceding date) on the OTCQB or OTCQX as applicable, (c) if Common Shares are not then listed or quoted for trading on the OTCQB or OTCQX and if prices for Common Shares are then reported in the "Pink Sheets" published by OTC Markets Group, Inc. (or a similar organization or agency succeeding to its functions of reporting prices), the most recent bid price per Common Share so reported, or (d) in all other cases, the fair market value of the Common Shares as determined by an independent appraiser selected in good faith by the Holder and reasonably acceptable to the Company, the fees and expenses of which shall be paid by the Company.

Ex. B-2

Section 2. Exercise.

a)                  Exercise of the purchase rights represented by this Warrant may be made, in whole or in part, at any time or times on or after the Initial Exercise Date and on or before the Termination Date by delivery to the Company (or such other office or agency of the Company as it may designate by notice in writing to the registered Holder at the address of the Holder appearing on the books of the Company) of a duly executed facsimile copy (or e-mail attachment) of the Notice of Exercise Form annexed hereto. Within two (2) Trading Days following the date of exercise as aforesaid, the Holder shall deliver the aggregate Exercise Price for the shares specified in the applicable Notice of Exercise by wire transfer or cashier's check drawn on a United States bank unless the cashless exercise procedure specified in Section 2(c) below is specified in the applicable Notice of Exercise. No ink-original Notice of Exercise shall be required, nor shall any medallion guarantee (or other type of guarantee or notarization) of any Notice of Exercise form be required. Notwithstanding anything herein to the contrary, the Holder shall not be required to physically surrender this Warrant to the Company until the Holder has purchased all of the Warrant Shares available hereunder and the Warrant has been exercised in full, in which case, the Holder shall surrender this Warrant to the Company for cancellation within five (5) Trading Days of the date the final Notice of Exercise is delivered to the Company. Partial exercises of this Warrant resulting in purchases of a portion of the total number of Warrant Shares available hereunder shall have the effect of lowering the outstanding number of Warrant Shares purchasable hereunder in an amount equal to the applicable number of Warrant Shares purchased. The Holder and the Company shall maintain records showing the number of Warrant Shares purchased and the date of such purchases. The Company shall deliver any objection to any Notice of Exercise Form within one (1) Business Day of receipt of such notice. The Holder and any assignee, by acceptance of this Warrant, acknowledge and agree that, by reason of the provisions of this paragraph, following the purchase of a portion of the Warrant Shares hereunder, the number of Warrant Shares available for purchase hereunder at any given time may be less than the amount stated on the face hereof.

b)                  Exercise Price. The exercise price per Common Share under this Warrant shall be $_______¹, subject to adjustment hereunder (the "Exercise Price").

c)                  Cashless Exercise. In lieu of exercising this Warrant by delivering the aggregate Exercise Price by wire transfer or cashier's check, at the election of the Holder this Warrant may also be exercised, in whole or in part, at such time by means of a "cashless exercise" in which the Holder shall be entitled to receive the number of Warrant Shares equal to the quotient obtained by dividing [(A-B) (X)] by (A), where:

(A) =as applicable: (i) the VWAP for the five Trading Days immediately preceding the date of the applicable Notice of Exercise if such Notice of Exercise is (1) both executed and delivered pursuant to Section 2(a) hereof on a day that is not a Trading Day or (2) both executed and delivered pursuant to Section 2(a) hereof on a Trading Day prior to the opening of "regular trading hours" (as defined in Rule 600(b) of Regulation NMS promulgated under the federal securities laws) on such Trading Day, (ii) the VWAP for the five Trading Days immediately preceding the date of the applicable Notice of Exercise or (iii) the VWAP for the five Trading Days immediately preceding the date of the applicable Notice of Exercise if the date of such Notice of Exercise is a Trading Day and such Notice of Exercise is both executed and delivered pursuant to Section 2(a) hereof after the close of "regular trading hours" on such Trading Day;

^{________________________________________________
1}125% of the public offering price per common share in the offering.

Ex. B-3

(B) =the Exercise Price of this Warrant, as adjusted hereunder; and

(X) =the number of Warrant Shares that would be issuable upon exercise of this Warrant in accordance with the terms of this Warrant if such exercise were by means of a cash exercise rather than a cashless exercise.

If Warrant Shares are issued in such a "cashless exercise," the parties acknowledge and agree that in accordance with Section 3(a)(9) of the Securities Act, the Warrant Shares shall take on the registered characteristics of the Warrants being exercised, and the holding period of the Warrants being exercised may be tacked on to the holding period of the Warrant Shares.  The Company agrees not to take any position contrary to this Section 2(c).

Notwithstanding anything herein to the contrary, on the Termination Date, this Warrant shall be automatically exercised via cashless exercise pursuant to this Section 2(c).

d)                Mechanics of Exercise.

i.Delivery of Warrant Shares Upon Exercise. The Company shall cause the Warrant Shares purchased hereunder to be transmitted by its transfer agent to the Holder by crediting the account of the Holder's or its designee's balance account with The Depository Trust Company through its Deposit or Withdrawal at Custodian system ("DWAC") if the Company is then a participant in such system and either (A) there is an effective registration statement permitting the issuance of the Warrant Shares to or resale of the Warrant Shares by Holder, or (B) the Warrant Shares are eligible for resale by the Holder without volume or manner-of-sale limitations pursuant to Rule 144 and, in either case, the Warrant Shares have been sold by the Holder prior to the Warrant Share Delivery Date (as defined below), and otherwise by physical delivery of a certificate, registered in the Company's share register in the name of the Holder or its designee, for the number of Warrant Shares to which the Holder is entitled pursuant to such exercise to the address specified by the Holder in the Notice of Exercise by the date that is two (2) Trading Days after the delivery to the Company of the Notice of Exercise (such date, the "Warrant Share Delivery Date"). If the Warrant Shares can be delivered via DWAC, the transfer agent shall have received from the Company, at the expense of the Company, any legal opinions or other documentation required by it to deliver such Warrant Shares without legend (subject to receipt by the Company of reasonable back up documentation from the Holder, including with respect to affiliate status) and, if applicable and requested by the Company prior to the Warrant Share Delivery Date, the transfer agent shall have received from the Holder a confirmation of sale of the Warrant Shares (provided the requirement of the Holder to provide a confirmation as to the sale of Warrant Shares shall not be applicable to the issuance of unlegended Warrant Shares upon a cashless exercise of this Warrant if the Warrant Shares are then eligible for resale pursuant to Rule 144(b)(1)). The Warrant Shares shall be deemed to have been issued, and Holder or any other person so designated to be named therein shall be deemed to have become a holder of record of such shares for all purposes, as of the date the Warrant has been exercised, with payment to the Company of the Exercise Price (or by cashless exercise, if permitted) and all taxes required to be paid by the Holder, if any, pursuant to Section 2(d)(vi) prior to the issuance of such shares, having been paid. If the Company fails for any reason to deliver to the Holder the Warrant Shares subject to a Notice of Exercise by the second Trading Day following the Warrant Share Delivery Date, the Company shall pay to the Holder, in cash, as liquidated damages and not as a penalty, for each $1,000 of Warrant Shares subject to such exercise (based on the VWAP of the Common Shares on the date of the applicable Notice of Exercise), $10 per Trading Day (increasing to $20 per Trading Day on the fifth Trading Day after such liquidated damages begin to accrue) for each Trading Day after the second Trading Day following such Warrant Share Delivery Date until such Warrant Shares are delivered or Holder rescinds such exercise.

Ex. B-4

ii.Delivery of New Warrants Upon Exercise. If this Warrant shall have been exercised in part, the Company shall, at the request of a Holder and upon surrender of this Warrant certificate, at the time of delivery of the Warrant Shares, deliver to the Holder a new Warrant evidencing the rights of the Holder to purchase the unpurchased Warrant Shares called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant.

iii.Rescission Rights. If the Company fails to cause its transfer agent to deliver to the Holder the Warrant Shares pursuant to Section 2(d)(i) by the Warrant Share Delivery Date, then the Holder will have the right to rescind such exercise; provided, however, that the Holder shall be required to return any Warrant Shares or Common Shares subject to any such rescinded exercise notice concurrently with the return to Holder of the aggregate Exercise Price paid to the Company for such Warrant Shares and the restoration of Holder's right to acquire such Warrant Shares pursuant to this Warrant (including, issuance of a replacement warrant certificate evidencing such restored right).

iv.Compensation for Buy-In on Failure to Timely Deliver Warrant Shares Upon Exercise. In addition to any other rights available to the Holder, if the Company fails to cause its transfer agent to transmit to the Holder the Warrant Shares pursuant to an exercise on or before the Warrant Share Delivery Date (for avoidance of doubt, other than any such failure that is due solely to any action or inaction by the Holder), and if after such date the Holder is required by its broker to purchase (in an open market transaction or otherwise) or the Holder's brokerage firm otherwise purchases, Common Shares to deliver in satisfaction of a sale by the Holder of the Warrant Shares which the Holder anticipated receiving upon such exercise (a "Buy-In"), then the Company shall (A) pay in cash to the Holder the amount, if any, by which (x) the Holder's total purchase price (including brokerage commissions, if any) for the Common Shares so purchased exceeds (y) the amount obtained by multiplying (1) the number of Warrant Shares that the Company was required to deliver to the Holder in connection with the exercise at issue times (2) the price at which the sell order giving rise to such purchase obligation was executed, and (B) at the option of the Holder, either reinstate the portion of the Warrant and equivalent number of Warrant Shares for which such exercise was not honored (in which case such exercise shall be deemed rescinded) or deliver to the Holder the number of Common Shares that would have been issued had the Company timely complied with its exercise and delivery obligations hereunder. For example, if the Holder purchases Common Shares having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted exercise of Common Shares with an aggregate sale price giving rise to such purchase obligation of $10,000, under clause (A) of the immediately preceding sentence the Company shall be required to pay the Holder $1,000. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In and, upon request of the Company, evidence of the amount of such loss. Nothing herein shall limit a Holder's right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Company's failure to timely deliver Common Shares upon exercise of the Warrant as required pursuant to the terms hereof.

Ex. B-5

v.No Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. As to any fraction of a share which the Holder would otherwise be entitled to purchase upon such exercise, the Company shall, at its election, either pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Exercise Price or round up to the next whole share.

vi.Charges, Taxes and Expenses. Issuance of Warrant Shares shall be made without charge to the Holder for any issue or transfer tax or other incidental expense in respect of the issuance of such Warrant Shares, all of which taxes and expenses shall be paid by the Company, and such Warrant Shares shall be issued in the name of the Holder or in such name or names as may be directed by the Holder; provided, however, that in the event that Warrant Shares are to be issued in a name other than the name of the Holder, this Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto duly executed by the Holder and the Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it for any transfer tax incidental thereto. The Company shall pay all transfer agent fees required for same-day processing of any Notice of Exercise and all fees to the Depository Trust Company (or another established clearing corporation performing similar functions) required for same-day electronic delivery of the Warrant Shares.

vii.Closing of Books. The Company will not close its shareholder books or records in any manner which prevents the timely exercise of this Warrant, pursuant to the terms hereof.

viii.Signature. This Section 2 and the exercise form attached hereto set forth the totality of the procedures required of the Holder in order to exercise this Warrant.  Without limiting the preceding sentences, no ink-original exercise form shall be required, nor shall any medallion guarantee (or other type of guarantee or notarization) of any exercise form be required in order to exercise this Warrant.  No additional legal opinion, other information or instructions shall be required of the Holder to exercise this Warrant.  The Company shall honor exercises of this Warrant and shall deliver Warrant Shares underlying this Warrant in accordance with the terms, conditions and time periods set forth herein.

Ex. B-6

e)                  Holder's Exercise Limitations. The Company shall not effect any exercise of this Warrant, and a Holder shall not have the right to exercise any portion of this Warrant, pursuant to Section 2 or otherwise, to the extent that after giving effect to such issuance after exercise as set forth on the applicable Notice of Exercise, the Holder (together with the Holder's Affiliates, and any other Persons acting as a group together with the Holder or any of the Holder's Affiliates), would beneficially own in excess of the Beneficial Ownership Limitation (as defined below).  For purposes of the foregoing sentence, the number of Common Shares beneficially owned by the Holder and its Affiliates shall include the number of Common Shares issuable upon exercise of this Warrant with respect to which such determination is being made, but shall exclude the number of Common Shares which would be issuable upon (i) exercise of the remaining, nonexercised portion of this Warrant beneficially owned by the Holder or any of its Affiliates and (ii) exercise or conversion of the unexercised or nonconverted portion of any other securities of the Company (including, without limitation, any other Common Share Equivalents) subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by the Holder or any of its Affiliates.  Except as set forth in the preceding sentence, for purposes of this Section 2(e), beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder, it being acknowledged by the Holder that the Company is not representing to the Holder that such calculation is in compliance with Section 13(d) of the Exchange Act and the Holder is solely responsible for any schedules required to be filed in accordance therewith. To the extent that the limitation contained in this Section 2(e) applies, the determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder together with any Affiliates) and of which portion of this Warrant is exercisable shall be in the sole discretion of the Holder, and the submission of a Notice of Exercise shall be deemed to be the Holder's determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder together with any Affiliates) and of which portion of this Warrant is exercisable, in each case subject to the Beneficial Ownership Limitation, and the Company shall have no obligation to verify or confirm the accuracy of such determination. In addition, a determination as to any group status as contemplated above shall be determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. For purposes of this Section 2(e), in determining the number of outstanding Common Shares, a Holder may rely on the number of outstanding Common Shares as reflected in (A) the Company's most recent periodic or annual report filed with the Commission, as the case may be, (B) a more recent public announcement by the Company or (C) a more recent written notice by the Company or the Company's transfer agent setting forth the number of Common Shares outstanding.  Upon the written or oral request of a Holder, the Company shall within two Trading Days confirm orally and in writing to the Holder the number of Common Shares then outstanding.  In any case, the number of outstanding Common Shares shall be determined after giving effect to the conversion or exercise of securities of the Company, including this Warrant, by the Holder or its Affiliates since the date as of which such number of outstanding Common Shares was reported. The "Beneficial Ownership Limitation" shall be 9.99% of the number of Common Shares outstanding immediately after giving effect to the issuance of Common Shares issuable upon exercise of this Warrant. The Holder, upon notice to the Company, may increase or decrease the Beneficial Ownership Limitation provisions of this Section 2(e), provided that the Beneficial Ownership Limitation in no event exceeds 9.99% of the number of Common Shares outstanding immediately after giving effect to the issuance of Common Shares upon exercise of this Warrant held by the Holder and the provisions of this Section 2(e) shall continue to apply. Any increase in the Beneficial Ownership Limitation will not be effective until the 61^st day after such notice is delivered to the Company. The provisions of this paragraph shall be construed and implemented in a manner otherwise than in strict conformity with the terms of this Section 2(e) to correct this paragraph (or any portion hereof) which may be defective or inconsistent with the intended Beneficial Ownership Limitation herein contained or to make changes or supplements necessary or desirable to properly give effect to such limitation. The limitations contained in this paragraph shall apply to a successor holder of this Warrant.

Ex. B-7

Section 3. Certain Adjustments.

a)                  Stock Dividends and Splits. If the Company, at any time while this Warrant is outstanding: (i) pays a stock dividend or otherwise makes a distribution or distributions on its Common Shares or any other equity or equity equivalent securities payable in Common Shares (which, for avoidance of doubt, shall not include any Common Shares issued by the Company upon exercise of this Warrant), (ii) subdivides outstanding Common Shares into a larger number of shares, (iii) combines (including by way of reverse stock or share split) outstanding Common Shares into a smaller number of shares, or (iv) issues by reclassification of Common Shares any shares of capital stock of the Company, then in each case the Exercise Price shall be multiplied by a fraction of which the numerator shall be the number of Common Shares (excluding treasury shares, if any) outstanding immediately before such event and of which the denominator shall be the number of Common Shares outstanding immediately after such event, and the number of shares issuable upon exercise of this Warrant shall be proportionately adjusted such that the aggregate Exercise Price of this Warrant shall remain unchanged. Any adjustment made pursuant to this Section 3(a) shall become effective immediately after the record date for the determination of shareholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or re-classification.  For the purposes of clarification, the Exercise Price of this Warrant will not be adjusted in the event that the Company or any Subsidiary thereof, as applicable, sells or grants any option to purchase, or sell or grant any right to reprice, or otherwise dispose of or issue (or announce any offer, sale, grant or any option to purchase or other disposition) any Common Shares or Common Share Equivalents, at an effective price per share less than the Exercise Price then in effect.

b)                  [RESERVED]

c)                  Subsequent Rights Offerings. In addition to any adjustments pursuant to Section 3(a) above, if at any time the Company grants, issues or sells any Common Share  Equivalents or rights to purchase shares, warrants, securities or other property pro rata to the record holders of any class of Common Shares (the "Purchase Rights"), then the Holder will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which the Holder could have acquired if the Holder had held the number of Common Shares acquirable upon complete exercise of this Warrant (without regard to any limitations on exercise hereof, including without limitation, the Beneficial Ownership Limitation) immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of Common Shares are to be determined for the grant, issue or sale of such Purchase Rights (provided, however, to the extent that the Holder's right to participate in any such Purchase Right would result in the Holder exceeding the Beneficial Ownership Limitation, then the Holder shall not be entitled to participate in such Purchase Right to such extent (or beneficial ownership of such Common Shares as a result of such Purchase Right to such extent) and such Purchase Right to such extent shall be held in abeyance for the Holder until such time, if ever, as its right thereto would not result in the Holder exceeding the Beneficial Ownership Limitation).

Ex. B-8

d)                Pro Rata Distributions. During such time as this Warrant is outstanding, if the Company shall declare or make any dividend (other than cash dividends) or other distribution of its assets (or rights to acquire its assets) to holders of Common Shares, by way of return of capital or otherwise (including, without limitation, any distribution of shares or other securities, property or options by way of a dividend, spin off, reclassification, corporate rearrangement, scheme of arrangement or other similar transaction) (a "Distribution"), at any time after the issuance of this Warrant, then, in each such case, the Holder shall be entitled to participate in such Distribution to the same extent that the Holder would have participated therein if the Holder had held the number of Common Shares acquirable upon complete exercise of this Warrant (without regard to any limitations on exercise hereof, including without limitation, the Beneficial Ownership Limitation) immediately before the date of which a record is taken for such Distribution, or, if no such record is taken, the date as of which the record holders of Common Shares are to be determined for the participation in such Distribution (provided, however, to the extent that the Holder's right to participate in any such Distribution would result in the Holder exceeding the Beneficial Ownership Limitation, then the Holder shall not be entitled to participate in such Distribution to such extent (or in the beneficial ownership of any Common Shares as a result of such Distribution to such extent) and the portion of such Distribution shall be held in abeyance for the benefit of the Holder until such time, if ever, as its right thereto would not result in the Holder exceeding the Beneficial Ownership Limitation). To the extent that this Warrant has not been partially or completely exercised at the time of such Distribution, such portion of the Distribution shall be held in abeyance for the benefit of the Holder until the Holder has exercised this Warrant.

e)                  Fundamental Transaction. If, at any time while this Warrant is outstanding, (i) the Company, directly or indirectly, in one or more related transactions effects any merger or consolidation of the Company with or into another Person, (ii) the Company, directly or indirectly, effects any sale, lease, license, assignment, transfer, conveyance or other disposition of all or substantially all of its assets in one or a series of related transactions, (iii) any, direct or indirect, purchase offer, tender offer or exchange offer (whether by the Company or another Person) is completed pursuant to which holders of Common Shares are permitted to sell, tender or exchange their shares for other securities, cash or property and has been accepted by the holders of 50% or more of the outstanding Common Shares, (iv) the Company, directly or indirectly, in one or more related transactions effects any reclassification, reorganization or recapitalization of the Common Shares or any compulsory share exchange pursuant to which the Common Shares are effectively converted into or exchanged for other securities, cash or property, or (v) the Company, directly or indirectly, in one or more related transactions consummates a stock or share purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement) with another Person or group of Persons whereby such other Person or group acquires more than 50% of the outstanding Common Shares (not including any Common Shares held by the other Person or other Persons making or party to, or associated or affiliated with the other Persons making or party to, such stock or share purchase agreement or other business combination) (each a "Fundamental Transaction"), then, upon any subsequent exercise of this Warrant, the Holder shall have the right to receive, for each Warrant Share that would have been issuable upon such exercise immediately prior to the occurrence of such Fundamental Transaction, at the option of the Holder (without regard to any limitation in Section 2(e) on the exercise of this Warrant), the number of Common Shares of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and any additional consideration (the "Alternate Consideration") receivable by holders of Common Shares as a result of such Fundamental Transaction for each Common Share for which this Warrant is exercisable immediately prior to such Fundamental Transaction (without regard to any limitation in Section 2(e) on the exercise of this Warrant). For purposes of any such exercise, the determination of the Exercise Price shall be appropriately adjusted to apply to such Alternate Consideration based on the amount of Alternate Consideration issuable in respect of one Common Share in such Fundamental Transaction, and the Company shall apportion the Exercise Price among the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the Alternate Consideration. If holders of Common Shares are given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the Alternate Consideration it receives upon any exercise of this Warrant following such Fundamental Transaction. The Company shall cause any successor entity in a Fundamental Transaction in which the Company is not the survivor (the "Successor Entity") to assume in writing all of the obligations of the Company under this Warrant in accordance with the provisions of this Section 3(e) pursuant to written agreements in form and substance reasonably satisfactory to the Holder and approved by the Holder (without unreasonable delay) prior to such Fundamental Transaction and shall, at the option of the Holder, deliver to the Holder in exchange for this Warrant a security of the Successor Entity evidenced by a written instrument substantially similar in form and substance to this Warrant which is exercisable for a corresponding number of shares of capital stock of such Successor Entity (or its parent entity) equivalent to the Common Shares acquirable and receivable upon exercise of this Warrant (without regard to any limitations on the exercise of this Warrant) prior to such Fundamental Transaction, and with an exercise price which applies the exercise price hereunder to such shares of capital stock (but taking into account the relative value of the Common Shares pursuant to such Fundamental Transaction and the value of such shares of capital stock, such number of shares of capital stock and such exercise price being for the purpose of protecting the economic value of this Warrant immediately prior to the consummation of such Fundamental Transaction), and which is reasonably satisfactory in form and substance to the Holder. Upon the occurrence of any such Fundamental Transaction, the Successor Entity shall succeed to, and be substituted for (so that from and after the date of such Fundamental Transaction, the provisions of this Warrant referring to the "Company" shall refer instead to the Successor Entity), and may exercise every right and power of the Company and shall assume all of the obligations of the Company under this Warrant with the same effect as if such Successor Entity had been named as the Company herein.

Ex. B-9

f)                  Calculations. All calculations under this Section 3 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. For purposes of this Section 3, the number of Common Shares deemed to be issued and outstanding as of a given date shall be the sum of the number of Common Shares (excluding treasury shares, if any) issued and outstanding.

g)                  Notice to Holder.

i.Adjustment to Exercise Price. Whenever the Exercise Price is adjusted pursuant to any provision of this Section 3, the Company shall promptly mail to the Holder a notice setting forth the Exercise Price after such adjustment and any resulting adjustment to the number of Warrant Shares and setting forth a brief statement of the facts requiring such adjustment.

ii.Notice to Allow Exercise by Holder. If (A) the Company shall declare a dividend (or any other distribution in whatever form) on the Common Shares, (B) the Company shall declare a special nonrecurring cash dividend on or a redemption of the Common Shares, (C) the Company shall authorize the granting to all holders of the Common Shares rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights, (D) the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Shares, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, or any compulsory share exchange whereby the Common Shares are converted into other securities, cash or property, or (E) the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company, then, in each case, the Company shall cause to be mailed a notice to the Holder at its last address as it shall appear upon the Warrant Register of the Company, at least 20 calendar days prior to the applicable record or effective date hereinafter specified, stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of the Common Shares of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of the Common Shares of record shall be entitled to exchange their Common Shares for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or share exchange; provided that the failure to provide such notice or any defect therein shall not affect the validity of the corporate action required to be specified in such notice. To the extent that any notice provided hereunder constitutes, or contains, material, non-public information regarding the Company or any of the Subsidiaries, the Company shall simultaneously file such notice with the Commission to a Current Report on Form 8-K or a Report of Foreign Private Issuer on Form 6-K. The Holder shall remain entitled to exercise this Warrant during the period commencing on the date of such notice to the effective date of the event triggering such notice except as may otherwise be expressly set forth herein.

Ex. B-10

Section 4. Transfer of Warrant.

a)                  Transferability. Pursuant to FINRA Rule 5110(e)(1), neither this Warrant nor any Warrant Shares issued upon exercise of this Warrant shall be sold, transferred, assigned, pledged, or hypothecated, or be the subject of any hedging, short sale, derivative, put, or call transaction that would result in the effective economic disposition of the securities by any person for a period of 180 days immediately following the date of effectiveness or commencement of sales of the offering pursuant to which this Warrant is being issued, except the transfer of any security:

i.by operation of law or by reason of reorganization of the Company;

ii.to any FINRA member firm participating in the offering and the officers or partners thereof, if all securities so transferred remain subject to the lock-up restriction in this Section 4(a) for the remainder of the time period;

iii.if the aggregate amount of securities of the Company held by the Holder or related person do not exceed 1% of the securities being offered;

iv.that is beneficially owned on a pro-rata basis by all equity owners of an investment fund, provided that no participating member manages or otherwise directs investments by the fund, and participating members in the aggregate do not own more than 10% of the equity in the fund; or

Ex. B-11

v.the exercise or conversion of any security, if all securities received remain subject to the lock-up restriction in this Section 4(a) for the remainder of the time period.

Subject to the foregoing restriction, any applicable securities laws and the conditions set forth in Section 4(d), this Warrant and all rights hereunder (including, without limitation, any registration rights) are transferable, in whole or in part, upon surrender of this Warrant at the principal office of the Company or its designated agent, together with a written assignment of this Warrant substantially in the form attached hereto duly executed by the Holder or its agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of such transfer. Upon such surrender and, if required, such payment, the Company shall execute and deliver a new Warrant or Warrants in the name of the assignee or assignees, as applicable, and in the denomination or denominations specified in such instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be cancelled. Notwithstanding anything herein to the contrary, the Holder shall not be required to physically surrender this Warrant to the Company unless the Holder has assigned this Warrant in full, in which case, the Holder shall surrender this Warrant to the Company within three (3) Trading Days of the date the Holder delivers an assignment form to the Company assigning this Warrant full. The Warrant, if properly assigned in accordance herewith, may be exercised by a new holder for the purchase of Warrant Shares without having a new Warrant issued.

Notwithstanding the foregoing or anything to the contrary in this Warrant, so long as the Common Shares are listed on the TSX Venture Exchange (the "TSXV"), this Warrant may not be sold, transferred, assigned, pledged, or hypothecated, or be the subject of any hedging, short sale, derivative, put, or call transaction that would result in the effective economic disposition of the securities, to any person other than an affiliate or employee (or an affiliate of such employee) of ThinkEquity LLC within the meaning of the policies of the TSXV.

b)                  New Warrants. This Warrant may be divided or combined with other Warrants upon presentation hereof at the aforesaid office of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by the Holder or its agent or attorney. Subject to compliance with Section 4(a), as to any transfer which may be involved in such division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice. All Warrants issued on transfers or exchanges shall be dated the initial issuance date of this Warrant and shall be identical with this Warrant except as to the number of Warrant Shares issuable pursuant thereto.

c)                  Warrant Register. The Company shall register this Warrant, upon records to be maintained by the Company for that purpose (the "Warrant Register"), in the name of the record Holder hereof from time to time. The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, absent actual notice to the contrary. 

d)                Representation by the Holder. The Holder, by the acceptance hereof, represents and warrants that it is acquiring this Warrant and, upon any exercise hereof, will acquire the Warrant Shares issuable upon such exercise, for its own account and not with a view to or for distributing or reselling such Warrant Shares or any part thereof in violation of the Securities Act or any applicable state securities law, except pursuant to sales registered or exempted under the Securities Act.

Ex. B-12

Section 5. Registration Rights.

5.1.        Demand Registration.

5.1.1Grant of Right. The Company, upon written demand (a "Demand Notice") of the Holder(s) of at least 51% of the Warrants and/or the underlying Warrant Shares, agrees to register, on one occasion, all or any portion of the Warrant Shares underlying the Warrants (collectively, the "Registrable Securities"). On such occasion, the Company will file a registration statement with the Commission covering the Registrable Securities within sixty (60) days after receipt of a Demand Notice and use its reasonable best efforts to have the registration statement declared effective promptly thereafter, subject to compliance with review by the Commission; provided, however, that the Company shall not be required to comply with a Demand Notice if the Company has filed a registration statement with respect to which the Holder is entitled to piggyback registration rights pursuant to Section 5.2 hereof and either: (i) the Holder has elected to participate in the offering covered by such registration statement or (ii) if such registration statement relates to an underwritten primary offering of securities of the Company, until the offering covered by such registration statement has been withdrawn or until thirty (30) days after such offering is consummated. The demand for registration may be made at any time beginning on the Initial Exercise Date and expiring on the fifth anniversary of the Effective Date. The Company covenants and agrees to give written notice of its receipt of any Demand Notice by any Holder(s) to all other registered Holders of the Warrants and/or the Registrable Securities within ten (10) days after the date of the receipt of any such Demand Notice.

5.1.2Terms. The Company shall bear all fees and expenses attendant to the registration of the Registrable Securities pursuant to Section 5.1.1, but the Holders shall pay any and all underwriting commissions and the expenses of any legal counsel selected by the Holders to represent them in connection with the sale of the Registrable Securities. The Company agrees to use its reasonable best efforts to cause the filing required herein to become effective promptly and to qualify or register the Registrable Securities in such States as are reasonably requested by the Holder(s); provided, however, that in no event shall the Company be required to register the Registrable Securities in a State in which such registration would cause: (i) the Company to be obligated to register or license to do business in such State or submit to general service of process in such State, or (ii) the principal shareholders of the Company to be obligated to escrow their shares of capital stock of the Company. The Company shall cause any registration statement filed pursuant to the demand right granted under Section 5.1.1 to remain effective for a period of at least twelve (12) consecutive months after the date that the Holders of the Registrable Securities covered by such registration statement are first given the opportunity to sell all of such securities. The Holders shall only use the prospectuses provided by the Company to sell the Warrant Shares covered by such registration statement, and will immediately cease to use any prospectus furnished by the Company if the Company advises the Holder that such prospectus may no longer be used due to a material misstatement or omission. Notwithstanding the provisions of this Section 5.1.2, the Holder shall be entitled to a demand registration under this Section 5.1.2 on only one (1) occasion and such demand registration right shall terminate on the fifth anniversary of the date of the Underwriting Agreement (as defined below) in accordance with FINRA Rule 5110(g)(8)(C).

Ex. B-13

5.2       "Piggy-Back" Registration.

5.2.1Grant of Right. In addition to the demand right of registration described in Section 5.1 hereof, the Holder shall have the right, for a period of no more than two (2) years from the Initial Exercise Date in accordance with FINRA Rule 5110(g)(8)(D), to include the Registrable Securities as part of any other registration of securities filed by the Company (other than in connection with a transaction contemplated by Rule 145(a) promulgated under the Securities Act or pursuant to Form S-8 or any equivalent form); provided, however, that if, solely in connection with any primary underwritten public offering for the account of the Company, the managing underwriter(s) thereof shall, in its reasonable discretion, impose a limitation on the number of Warrant Shares which may be included in the Registration Statement because, in such underwriter(s)' judgment, marketing or other factors dictate such limitation is necessary to facilitate public distribution, then the Company shall be obligated to include in such Registration Statement only such limited portion of the Registrable Securities with respect to which the Holder requested inclusion hereunder as the underwriter shall reasonably permit. Any exclusion of Registrable Securities shall be made pro rata among the Holders seeking to include Registrable Securities in proportion to the number of Registrable Securities sought to be included by such Holders; provided, however, that the Company shall not exclude any Registrable Securities unless the Company has first excluded all outstanding securities, the holders of which are not entitled to inclusion of such securities in such Registration Statement or are not entitled to pro rata inclusion with the Registrable Securities.

5.2.2Terms. The Company shall bear all fees and expenses attendant to registering the Registrable Securities pursuant to Section 5.2.1 hereof, but the Holders shall pay any and all underwriting commissions and the expenses of any legal counsel selected by the Holders to represent them in connection with the sale of the Registrable Securities. In the event of such a proposed registration, the Company shall furnish the then Holders of outstanding Registrable Securities with not less than thirty (30) days' written notice prior to the proposed date of filing of such registration statement. Such notice to the Holders shall continue to be given for each registration statement filed by the Company during the two (2) year period following the Initial Exercise Date until such time as all of the Registrable Securities have been sold by the Holder. The holders of the Registrable Securities shall exercise the "piggy-back" rights provided for herein by giving written notice within ten (10) days of the receipt of the Company's notice of its intention to file a registration statement. Except as otherwise provided in this Warrant, there shall be no limit on the number of times the Holder may request registration under this Section 5.2.2; provided, however, that such registration rights shall terminate on the second anniversary of the Initial Exercise Date.

5.3       General Terms

5.3.1Indemnification. The Company shall indemnify the Holder(s) of the Registrable Securities to be sold pursuant to any registration statement hereunder and each person, if any, who controls such Holders within the meaning of Section 15 of the Securities Act or Section 20 (a) of the Exchange Act against all loss, claim, damage, expense or liability (including all reasonable attorneys' fees and other expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which any of them may become subject under the Securities Act, the Exchange Act or otherwise, arising from such registration statement but only to the same extent and with the same effect as the provisions pursuant to which the Company has agreed to indemnify the Underwriters contained in Section 5.1 of the underwriting agreement, dated [  ], 2022, by and between the Company and ThinkEquity LLC, as representative of the underwriters set forth therein (the "Underwriting Agreement"). The Holder(s) of the Registrable Securities to be sold pursuant to such registration statement, and their successors and assigns, shall severally, and not jointly, indemnify the Company, against all loss, claim, damage, expense or liability (including all reasonable attorneys' fees and other expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which they may become subject under the Securities Act, the Exchange Act or otherwise, arising from information furnished by or on behalf of such Holders, or their successors or assigns, in writing, for specific inclusion in such registration statement to the same extent and with the same effect as the provisions contained in Section 5.2 of the Underwriting Agreement pursuant to which the Underwriters have agreed to indemnify the Company.

Ex. B-14

5.3.2Exercise of Warrants. Nothing contained in this Warrant shall be construed as requiring the Holder(s) to exercise their Warrants prior to or after the initial filing of any registration statement or the effectiveness thereof.

5.3.3Documents Delivered to Holders. The Company shall furnish to each Holder participating in any of the foregoing offerings and to each underwriter of any such offering, if any, a signed counterpart, addressed to such Holder or underwriter, of: (i) an opinion of counsel to the Company, dated the effective date of such registration statement (and, if such registration includes an underwritten public offering, an opinion dated the date of the closing under any underwriting agreement related thereto), and (ii) a "cold comfort" letter dated the effective date of such registration statement (and, if such registration includes an underwritten public offering, a letter dated the date of the closing under the underwriting agreement) signed by the independent registered public accounting firm which has issued a report on the Company's financial statements included in such registration statement, in each case covering substantially the same matters with respect to such registration statement (and the prospectus included therein) and, in the case of such accountants' letter, with respect to events subsequent to the date of such financial statements, as are customarily covered in opinions of issuer's counsel and in accountants' letters delivered to underwriters in underwritten public offerings of securities. The Company shall also deliver promptly to each Holder participating in the offering requesting the correspondence and memoranda described below and to the managing underwriter, if any, copies of all correspondence between the Commission and the Company, its counsel or auditors and all memoranda relating to discussions with the Commission or its staff with respect to the registration statement and permit each Holder and underwriter to do such investigation, upon reasonable advance notice, with respect to information contained in or omitted from the registration statement as it deems reasonably necessary to comply with applicable securities laws or rules of FINRA. Such investigation shall include access to books, records and properties and opportunities to discuss the business of the Company with its officers and independent auditors, all to such reasonable extent and at such reasonable times as any such Holder shall reasonably request.

5.3.4Underwriting Agreement. The Company shall enter into an underwriting agreement with the managing underwriter(s), if any, selected by any Holders whose Registrable Securities are being registered pursuant to this Section 5, which managing underwriter shall be reasonably satisfactory to the Company. Such agreement shall be reasonably satisfactory in form and substance to the Company, each Holder and such managing underwriters, and shall contain such representations, warranties and covenants by the Company and such other terms as are customarily contained in agreements of that type used by the managing underwriter. The Holders shall be parties to any underwriting agreement relating to an underwritten sale of their Registrable Securities and may, at their option, require that any or all the representations, warranties and covenants of the Company to or for the benefit of such underwriters shall also be made to and for the benefit of such Holders. Such Holders shall not be required to make any representations or warranties to or agreements with the Company or the underwriters except as they may relate to such Holders, their Warrant Shares and their intended methods of distribution.

Ex. B-15

5.3.5Documents to be Delivered by Holder(s). Each of the Holder(s) participating in any of the foregoing offerings shall furnish to the Company a completed and executed questionnaire provided by the Company requesting information customarily sought of selling security holders.

5.3.6Damages. Should the registration or the effectiveness thereof required by Sections 5.1 and 5.2 hereof be delayed by the Company or the Company otherwise fails to comply with such provisions, the Holder(s) shall, in addition to any other legal or other relief available to the Holder(s), be entitled to obtain specific performance or other equitable (including injunctive) relief against the threatened breach of such provisions or the continuation of any such breach, without the necessity of proving actual damages and without the necessity of posting bond or other security.

Section 6. Miscellaneous.

a)No Rights as Shareholder Until Exercise. This Warrant does not entitle the Holder to any voting rights, dividends or other rights as a shareholder of the Company prior to the exercise hereof as set forth in Section 2(d)(i).

b)Loss, Theft, Destruction or Mutilation of Warrant. The Company covenants that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant or any certificate relating to the Warrant Shares, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it (which, in the case of the Warrant, shall not include the posting of any bond), and upon surrender and cancellation of such Warrant or share certificate, if mutilated, the Company will make and deliver a new Warrant or share certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or share certificate.

c)Saturdays, Sundays, Holidays, etc. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall not be a Trading Day, then, such action may be taken or such right may be exercised on the next succeeding Trading Day.

d)Authorized Shares.

The Company covenants that, during the period the Warrant is outstanding, it will reserve from its authorized and unissued Common Shares a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any purchase rights under this Warrant. The Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of issuing the necessary Warrant Shares upon the exercise of the purchase rights under this Warrant. The Company will take all such reasonable action as may be necessary to assure that such Warrant Shares may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the Trading Market upon which the Common Shares may be listed. The Company covenants that all Warrant Shares which may be issued upon the exercise of the purchase rights represented by this Warrant will, upon exercise of the purchase rights represented by this Warrant and payment for such Warrant Shares in accordance herewith, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges created by the Company in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue).

Ex. B-16

Except and to the extent as waived or consented to by the Holder, the Company shall not by any action, including, without limitation, amending its notice of articles, or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder as set forth in this Warrant against impairment. Without limiting the generality of the foregoing, the Company will (i) not increase the par value of any Warrant Shares above the amount payable therefor upon such exercise immediately prior to such increase in par value, (ii) take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares upon the exercise of this Warrant and (iii) use commercially reasonable efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof, as may be, necessary to enable the Company to perform its obligations under this Warrant.

Before taking any action which would result in an adjustment in the number of Warrant Shares for which this Warrant is exercisable or in the Exercise Price, the Company shall obtain all such authorizations or exemptions thereof, or consents thereto, as may be necessary from any public regulatory body or bodies having jurisdiction thereof.

e)Jurisdiction. All questions concerning the construction, validity, enforcement and interpretation of this Warrant shall be determined in accordance with the provisions of the Underwriting Agreement.

f)Restrictions. The Holder acknowledges that the Warrant Shares acquired upon the exercise of this Warrant, if not registered, or otherwise able to be resold or transferred without restriction pursuant to an exemption from registration under the Securities Act, and the Holder does not utilize cashless exercise, will have restrictions upon resale imposed by state and federal securities laws.

g)Nonwaiver and Expenses. No course of dealing or any delay or failure to exercise any right hereunder on the part of Holder shall operate as a waiver of such right or otherwise prejudice the Holder's rights, powers or remedies. Without limiting any other provision of this Warrant or the Underwriting Agreement, if the Company willfully and knowingly fails to comply with any provision of this Warrant, which results in any material damages to the Holder, the Company shall pay to the Holder such amounts as shall be sufficient to cover any costs and expenses including, but not limited to, reasonable attorneys' fees, including those of appellate proceedings, incurred by the Holder in collecting any amounts due pursuant hereto or in otherwise enforcing any of its rights, powers or remedies hereunder.

h)Notices. Any notice, request or other document required or permitted to be given or delivered to the Holder by the Company shall be delivered in accordance with the notice provisions of the Underwriting Agreement.

i)Limitation of Liability. No provision hereof, in the absence of any affirmative action by the Holder to exercise this Warrant to purchase Warrant Shares, and no enumeration herein of the rights or privileges of the Holder, shall give rise to any liability of the Holder for the purchase price of any Common Shares or as a shareholder of the Company, whether such liability is asserted by the Company or by creditors of the Company.

Ex. B-17

j)Remedies. The Holder, in addition to being entitled to exercise all rights granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Warrant. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Warrant and hereby agrees to waive and not to assert the defense in any action for specific performance that a remedy at law would be adequate.

k)Successors and Assigns. Subject to applicable securities laws, this Warrant and the rights and obligations evidenced hereby shall inure to the benefit of and be binding upon the successors and permitted assigns of the Company and the successors and permitted assigns of Holder. The provisions of this Warrant are intended to be for the benefit of any Holder from time to time of this Warrant and shall be enforceable by the Holder or holder of Warrant Shares.

l)Amendment. This Warrant may be modified or amended or the provisions hereof waived with the written consent of the Company and the Holder.

m)Severability. Wherever possible, each provision of this Warrant shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Warrant.

n)Headings. The headings used in this Warrant are for the convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant.

********************

(Signature Page Follows)

Ex. B-18

IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officer thereunto duly authorized as of the date first above indicated.

KWESST MICRO SYSTEMS INC.
By:
	Name:
	Title:

Ex. B-19

NOTICE OF EXERCISE

TO:KWESST MICRO SYSTEMS INC.

_________________________

(1)  The undersigned hereby elects to purchase ________ Warrant Shares of the Company pursuant to the terms of the attached Warrant (only if exercised in full), and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any.

(2)  Payment shall take the form of (check applicable box):

[  ] in lawful money of the United States; or

[ ] if permitted the cancellation of such number of Warrant Shares as is necessary, in accordance with the formula set forth in subsection 2(c), to exercise this Warrant with respect to the maximum number of Warrant Shares purchasable pursuant to the cashless exercise procedure set forth in subsection 2(c).

(3)  Please register and issue said Warrant Shares in the name of the undersigned or in such other name as is specified below:

_______________________________

The Warrant Shares shall be delivered to the following DWAC Account Number or by physical delivery of a certificate to:

_______________________________

_______________________________

_______________________________

(4)  Accredited Investor. If the Warrant is being exercised via cash exercise, the undersigned is an "accredited investor" as defined in Regulation D promulgated under the Securities Act of 1933, as amended

[SIGNATURE OF HOLDER]

Name of Investing Entity:

Signature of Authorized Signatory of Investing Entity:

Name of Authorized Signatory: 

Title of Authorized Signatory:

Date:

Ex. B-20

ASSIGNMENT FORM

(To assign the foregoing warrant, execute
this form and supply required information.
Do not use this form to exercise the warrant.)

FOR VALUE RECEIVED, [____] all of or [_______] shares of the foregoing Warrant and all rights evidenced thereby are hereby assigned to

_______________________________________________ whose address is

_______________________________________________________________.

_______________________________________________________________

Dated: ______________, _______

Holder's Signature:_____________________________

Holder's Address:_____________________________

_____________________________

NOTE: The signature to this Assignment Form must correspond with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatsoever. Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant.

Ex. B-21

EXHIBIT C

Lock-Up Agreement

[●], 2022

ThinkEquity LLC

17 State Street, 22^nd Floor

New York, NY 10004

As Representative of the several Underwriters named on Schedule 1 to the Underwriting Agreement referenced below

Ladies and Gentlemen:

The undersigned understands that ThinkEquity LLC (the "Representative"), proposes to enter into an Underwriting Agreement (the "Underwriting Agreement") with KWESST Micro Systems Inc., a company incorporated under the laws of British Columbia (the "Company"), providing for the public offering (the "Public Offering") of securities including shares of common shares, no par value per share, of the Company (the "Common Shares").

To induce the Representative to continue its efforts in connection with the Public Offering, the undersigned hereby agrees that, without the prior written consent of the Representative, the undersigned will not, during the period commencing on the date hereof and ending 90 days after the date of the Underwriting Agreement relating to the Public Offering (the "Lock-Up Period"), (1) offer, pledge, sell, contract to sell, grant, lend, or otherwise transfer or dispose of, directly or indirectly, any Common Shares or any securities convertible into or exercisable or exchangeable for Common Shares, whether now owned or hereafter acquired by the undersigned or with respect to which the undersigned has or hereafter acquires the power of disposition (collectively, the "Lock-Up Securities"); (2) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Lock-Up Securities, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of Lock-Up Securities, in cash or otherwise; (3) make any demand for or exercise any right with respect to the registration of any Lock-Up Securities; or (4) publicly disclose the intention to make any offer, sale, pledge or disposition, or to enter into any transaction, swap, hedge or other arrangement relating to any Lock-Up Securities. Notwithstanding the foregoing, and subject to the conditions below, the undersigned may transfer Lock-Up Securities without the prior written consent of the Representative in connection with (a) transactions relating to Lock-Up Securities acquired in open market transactions after the completion of the Public Offering; provided that no filing under Section 13 or Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or other public announcement shall be required or shall be voluntarily made in connection with subsequent sales of Lock-Up Securities acquired in such open market transactions; (b) transfers of Lock-Up Securities as a bona fide gift, by will or intestacy or to a family member or trust for the benefit of the undersigned or a family member (for purposes of this lock-up agreement, "family member" means any relationship by blood, marriage or adoption, not more remote than first cousin); (c) transfers of Lock-Up Securities to a charity or educational institution; (d) if the undersigned is a corporation, partnership, limited liability company or other business entity, (i) any transfers of Lock-Up Securities to another corporation, partnership or other business entity that controls, is controlled by or is under common control with the undersigned or (ii) distributions of Lock-Up Securities to members, partners, shareholders, subsidiaries or affiliates (as defined in Rule 405 promulgated under the Securities Act of 1933, as amended) of the undersigned; (e) if the undersigned is a trust, to a trustee or beneficiary of the trust; provided that in the case of any transfer pursuant to the foregoing clauses (b), (c) (d) or (e), (i) any such transfer shall not involve a disposition for value, (ii) each transferee shall sign and deliver to the Representative a lock-up agreement substantially in the form of this lock-up agreement and (iii) no filing under Section 13 or Section 16(a) of the Exchange Act or other public announcement shall be required or shall be voluntarily made; (f) the receipt by the undersigned from the Company of Common Shares upon the vesting of restricted share awards or share units, or upon the exercise of options to purchase the Company's Common Shares issued under an equity incentive plan of the Company or an employment arrangement described in the Pricing Prospectus (as defined in the Underwriting Agreement) (the "Plan Shares"), or the transfer of Common Shares or any securities convertible into Common Shares to the Company upon a vesting event of the Company's securities or upon the exercise of options to purchase the Company's securities, in each case on a "cashless" or "net exercise" basis or to cover tax obligations of the undersigned in connection with such vesting or exercise, but only to the extent such right expires during the Lock-up Period, provided that no filing under Section 13 or Section 16(a) of the Exchange Act or other public announcement shall be required or shall be voluntarily made within 90 days after the date of the Underwriting Agreement, and after such 90^th day, if the undersigned is required to file a report under Section 13 or Section 16(a) of the Exchange Act reporting a reduction in beneficial ownership of Common Shares during the Lock-Up Period, the undersigned shall include a statement in such schedule or report to the effect that the purpose of such transfer was to cover tax withholding obligations of the undersigned in connection with such vesting or exercise and, provided further, that the Plan Shares shall be subject to the terms of this lock-up agreement; (g) the establishment of a trading plan pursuant to Rule 10b5-1 under the Exchange Act for the transfer of Lock-Up Securities, provided that (i) such plan does not provide for the transfer of Lock-Up Securities during the Lock-Up Period and (ii) to the extent a public announcement or filing under the Exchange Act, if any, is required of or voluntarily made by or on behalf of the undersigned or the Company regarding the establishment of such plan, such public announcement or filing shall include a statement to the effect that no transfer of Lock-Up Securities may be made under such plan during the Lock-Up Period; (h) the exercise, exchange or conversion by the undersigned of any securities exercisable or exchangeable for, or convertible into, Common Shares, provided that such Common Shares shall remain subject to the terms of this lock-up agreement; (i) the transfer of Lock-Up Securities that occurs by operation of law, such as pursuant to a qualified domestic order or in connection with a divorce settlement, provided that the transferee agrees to sign and deliver a lock-up agreement substantially in the form of this lock-up agreement for the balance of the Lock-Up Period, and provided further, that any filing under Section 13 or Section 16(a) of the Exchange Act that is required to be made during the Lock-Up Period as a result of such transfer shall include a statement that such transfer has occurred by operation of law; and (j) the transfer of Lock-Up Securities pursuant to a bona fide third party tender offer, merger, consolidation or other similar transaction made to all holders of the Common Shares involving a change of control (as defined below) of the Company after the closing of the Public Offering and approved by the Company's board of directors; provided that in the event that the tender offer, merger, consolidation or other such transaction is not completed, the Lock-Up Securities owned by the undersigned shall remain subject to the restrictions contained in this lock-up agreement. For purposes of clause (j) above, "change of control" shall mean the consummation of any bona fide third party tender offer, merger, amalgamation, consolidation or other similar transaction the result of which is that any "person" (as defined in Section 13(d)(3) of the Exchange Act), or group of persons, becomes the beneficial owner (as defined in Rules 13d-3 and 13d-5 of the Exchange Act) of a majority of total voting power of the voting shares of the Company. The undersigned also agrees and consents to the entry of stop transfer instructions with the Company's transfer agent and registrar against the transfer of the undersigned's Lock-Up Securities except in compliance with this lock-up agreement.

Ex. C-1

If the undersigned is an officer or director of the Company, (i) the undersigned agrees that the foregoing restrictions shall be equally applicable to any issuer-directed or "friends and family" securities that the undersigned may purchase in the Public Offering (it being understood and agreed that this clause (i) is not intended to apply to securities purchased in the Public Offering by individuals or entities other than the undersigned); (ii) the Representative agrees that, at least three (3) business days before the effective date of any release or waiver of the foregoing restrictions in connection with a transfer of Lock-Up Securities, the Representative will notify the Company of the impending release or waiver; and (iii) the Company has agreed in the Underwriting Agreement to announce the impending release or waiver by press release through a major news service at least two (2) business days before the effective date of the release or waiver. Any release or waiver granted by the Representative hereunder to any such officer or director shall only be effective two (2) business days after the publication date of such press release. The provisions of this paragraph will not apply if (a) the release or waiver is effected solely to permit a transfer of Lock-Up Securities not for consideration and (b) the transferee has agreed in writing to be bound by the same terms described in this lock-up agreement to the extent and for the duration that such terms remain in effect at the time of such transfer.

The undersigned understands that the Company and the Representative are relying upon this lock-up agreement in proceeding toward consummation of the Public Offering. The undersigned further understands that this lock-up agreement is irrevocable and shall be binding upon the undersigned's heirs, legal representatives, successors and assigns.

The undersigned understands that, if the Underwriting Agreement is not executed by December 31, 2022, or if the Company and the Representative agree to terminate the Public Offering, or if the Underwriting Agreement (other than the provisions thereof which survive termination) shall terminate or be terminated prior to payment for and delivery of the Common Shares to be sold thereunder, then this lock-up agreement shall be void and of no further force or effect.

Ex. C-2

Whether or not the Public Offering actually occurs depends on a number of factors, including market conditions. Any Public Offering will only be made pursuant to an Underwriting Agreement, the terms of which are subject to negotiation between the Company and the Representative.

Very truly yours,

(Name - Please Print)

(Signature)

(Name of Signatory, in the case of entities - Please Print)

(Title of Signatory, in the case of entities - Please Print)

Address:

Ex. C-3

EXHIBIT D

Form of Press Release

KWESST MICRO SYSTEMS INC.

[Date]

KWESST MICRO SYSTEMS INC. (the "Company") announced today that ThinkEquity LLC, acting as representative for the underwriters in the Company's recent public offering of  _______ of the Company's common shares, is [waiving] [releasing] a lock-up restriction with respect to _________  of the Company's common shares held by [certain officers or directors] [an officer or director] of the Company.  The [waiver] [release] will take effect on  _________, 20___, and the shares may be sold on or after such date. 

This press release is not an offer or sale of the securities in the United States or in any other jurisdiction where such offer or sale is prohibited, and such securities may not be offered or sold in the United States absent registration or an exemption from registration under the Securities Act of 1933, as amended.

Ex. D-1

EX-1.2

UNDERWRITING AGREEMENT

●, 2022

KWESST Micro Systems Inc.

Unit 1, 155 Terrence Matthews Crescent

Kanata, Ontario  K2M 2A8

Attention:David Luxton, Executive Chairman

Re:Public Offering of Units of KWESST Micro Systems Inc.

Dear Sirs/Mesdames:

PI Financial Corp., as sole underwriter (the "Underwriter") understands that KWESST Micro Systems Inc. (the "Corporation") proposes to create, issue and sell by way of short form prospectus ● units of the Corporation ("Units") at a price of USD$● per Unit (the "Offering Price"), for aggregate gross proceeds to the Corporation of USD$3,000,000. The offering of the Units by the Corporation is hereinafter referred to as the "Offering".

Each Unit consists of one Common Share (a "Unit Share") and one Common Share purchase warrant of the Corporation (each, a "Warrant").  Each Warrant entitles the holder thereof to purchase one Common Share (a "Warrant Share") at an exercise price of USD$● per Warrant Share, subject to adjustment, at any time until 5:00 p.m. (eastern time) on the date that is sixty (60) months after the Closing Date of the Offering. The Units will immediately separate into Unit Shares and Warrants upon issuance. The Warrants shall be duly and validly created and issued pursuant to, and governed by, a warrant indenture, dated as of the Closing Date (the "Warrant Indenture") to be entered into between TSX Trust Company (the "Warrant Agent"), in its capacity as Warrant Agent thereunder, and the Corporation. To the extent there is any inconsistency between the description of the terms of the Warrants contained in this Agreement and the Warrant Indenture, the terms set forth in the Warrant Indenture shall govern.

The Corporation has prepared and filed with the securities regulatory authorities (the "Securities Regulators") in each of the provinces of Canada, except Québec (the "Qualifying Jurisdictions") a preliminary short form base PREP prospectus dated September 12, 2022 (the "Preliminary Prospectus") relating to the distribution of the Units pursuant to applicable securities laws of the Qualifying Jurisdictions and the respective rules, regulations, blanket rulings, orders and notices made thereunder and the local, uniform, national and multilateral instruments and written policies adopted by the Securities Regulators in the Qualifying Jurisdictions (collectively, the "Canadian Securities Laws") including MI 11-102 and NP 11-202 (as hereinafter defined). The BCSC (as hereinafter defined) has issued a Preliminary Passport System Decision Document (as hereinafter defined) for the Preliminary Prospectus.

In addition, the Corporation (a) has prepared and filed (i) with the Securities Regulators in the Qualifying Jurisdictions, a final short form base PREP prospectus dated November ●, 2022 relating to the distribution of the Units (including any documents incorporated therein by reference (including without limitation any Marketing Document (as hereinafter defined)) and any supplements or amendments thereto, the "Prospectus"), pursuant to NI 44-101 and NI 44-103 (each as hereinafter defined), omitting the PREP Information (as hereinafter defined) in accordance with the rules and procedures set forth in NI 44-103 (the "PREP Procedures") and (b) will prepare and file, as promptly as possible and in any event within two business days of the execution and delivery of this Agreement, with the Securities Regulators in the Qualifying Jurisdictions, in accordance with the PREP Procedures, a supplemented prospectus setting forth the PREP Information (including any documents incorporated therein by reference and any supplements or amendments thereto, the "Supplemented Prospectus"). The information, if any, included in the Supplemented Prospectus that is omitted from the Final Prospectus for which a Final Passport System Decision Document (as hereinafter defined) has been obtained, but that is deemed under the PREP Procedures to be incorporated by reference into the Final Prospectus as of the date of the Supplemented Prospectus, is referred to herein as the "PREP Information".

Any Prospectus Amendment (as hereinafter defined) (including any document incorporated by reference therein), and any amended or supplemented prospectus or auxiliary material, information, evidence, return, report, application, statement or document (other than any document signed by the Underwriter or its counsel) that is filed by or on behalf of the Corporation  with the Securities Regulators in the Qualifying Jurisdictions after the Supplemented Prospectus has been filed and prior to the expiry of the period of distribution of the Units, is referred to herein collectively as the "Supplementary Material".

Upon and subject to the terms and conditions set forth herein, the Underwriter hereby offers to purchase from the Corporation, and the Corporation agrees to sell to the Underwriter, all but not less than all of the Units at the Offering Price per Unit.

In consideration of the financial services to be rendered by the Underwriter in connection with the Offering, the Corporation agrees to pay the Underwriting Fee as set out in Section 14(a) of this Agreement to the Underwriter and to pay all reasonable fees and expenses of the Offering (including the Underwriter's Expenses) as set out in Section 11(a) hereof.

As additional consideration for the underwriting services to be rendered by the Underwriter in connection with the Offering, the Corporation shall issue to the Underwriter the Compensation Options (as defined herein), as set out in Section 14(a) of this Agreement.

In connection with the offering and sale of the Units, the Underwriter shall be entitled to retain as sub-agents other registered securities dealers and may receive (for delivery to the Corporation at the Closing Time) subscriptions for Units from other registered securities dealers. The fee payable to such sub-agents shall be for the account of the Underwriter.

The parties acknowledge that the Units and the Warrant Shares have not been, and will not be, registered under the U.S. Securities Act (as defined herein) or any state Securities Laws (as defined herein) and may not be offered or sold in the United States (as defined herein) or to, or for the account or benefit of, U.S. Persons (as defined herein). The parties further acknowledge and agree that the Offering shall be an Offshore Transaction (as defined herein) to non-U.S. Persons in compliance with Rule 903 of Regulation S (as defined herein).

1.DEFINITIONS

In this Agreement, in addition to the terms defined above, the following terms shall have the following meanings:

"Auditor" means KPMG LLP.

"AIF" means the annual information form of the Corporation for the year ended September 30, 2021, dated June 24, 2022.

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"Agreement" means this underwriting agreement and includes all schedules attached hereto, in each case, as they may be amended or supplemented from time to time.

"Annual Financial Statements" means the audited financial statements of the Corporation for years ended September 30, 2021 and 2020.

"Anti-Money Laundering Laws" has the meaning ascribed to such term in Section 7(b)(lix)(A) hereof.

"Applicable Laws" means all laws, rules, regulations, guidelines, policies, statutes, ordinances, codes, orders, decrees, judgments, decisions, rulings or awards of any Governmental Authority.

"BCBCA" means the Business Corporations Act (British Columbia).

"BCSC" means the British Columbia Securities Commission.

"Business Day" means a day, other than a Saturday, Sunday or statutory holiday, on which Canadian chartered banks located in Toronto, Ontario and Vancouver, British Columbia, are open for the transaction of regular business.

"Canadian Securities Laws" has the meaning ascribed to such term on the first page of this Agreement.

"CDS" means CDS Clearing and Depository Services Inc.

"Claim" has the meaning ascribed to such term in Section 14 hereof.

"Closing Date" means ●, 2022 or such other date as may be agreed to between the Underwriter and the Corporation.

"Closing Time" means 9:30 a.m. (eastern time) on the applicable Closing Date, or such other time on the Closing Date as agreed to by the Corporation and the Underwriter.

"Closing" means the completion of the purchase and sale of the Units as contemplated by this Agreement.

"Common Shares" means the common shares in the capital of the Corporation as constituted on the date hereof.

"Compensation Option Certificate" has the meaning ascribed to such term in Section 14(a) hereof.

"Compensation Option Units" has the meaning ascribed to such term in Section 14(a) hereof.

"Compensation Option Shares" has the meaning ascribed to such term in Section 14(a) hereof.

"Compensation Option Warrants" has the meaning ascribed to such term in Section 14(a) hereof.

"Compensation Option Warrant Shares" has the meaning ascribed to such term in Section 14(a) hereof.

"Compensation Options" has the meaning ascribed to such term in Section 14(a) hereof.

"Consolidation" means the consolidation of Common Shares on the basis of 70 pre-consolidated Common Shares for one (1) post-consolidation Common Shares, effective on October 28, 2022.

"Contract" means, with respect to a person, any contract, instrument, permit, concession, licence, loan or credit agreement, note, bond, mortgage, indenture, lease or other agreement, partnership or joint venture agreement or other legally binding agreement, arrangement or understanding, whether written or oral, to which the person is a party or by which, to the knowledge of such person, the person or its property and assets is bound or affected.

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"Corporation" has the meaning ascribed to such term on the first page of this Agreement.

"Corporation's Counsel" means Fasken Martineau DuMoulin LLP.

"Debt Instrument" means any note, loan, bond, debenture, indenture, promissory note or other instrument evidencing indebtedness (demand or otherwise) for borrowed money to which the Corporation is a party or otherwise bound and which is material to the Corporation.

"Directed Selling Efforts" means "directed selling efforts" as that term is defined in Rule 902(c) of Regulation S.

"Documents" means, collectively, the documents incorporated by reference in the Prospectuses and any Supplementary Material including, without limitation:

(a)the AIF;

(b)the Financial Statements;

(c)the management's discussion and analysis of the financial condition and results of operations of the Corporation for the year ended September 31, 2021;

(d)the management's discussion and analysis of the financial condition and results of operations of the Corporation for the three and nine-month period ended June 30, 2022;

(e)the Corporation's proxy circular dated February 11, 2022 prepared in connection with the Corporation's annual and special meeting of shareholders held on March 31, 2022;

(f)the material change report of the Corporation dated March 21, 2022 in connection with the completion of a non‐secured loan financing of $1.8 million, including 20% bonus shares resulting in the issuance of 900,000 pre-Consolidation Common Shares;

(g)the material change report of the Corporation dated March 21, 2022 in connection with the Corporation's closing on an additional $200,000 subscriptions to the $1.8 million non‐secured loan financing, announced on March 14, 2022;

(h)the material change report of the Corporation dated July 19, 2022 in connection with the Corporation's completion of a private placement, resulting in the issuance of 1,600,000 Pre-Consolidation units of KWESST, at a price of $0.215 per unit, for aggregate gross proceeds of $344,000;

(i)the material change report of the Corporation dated August 16, 2022 in respect with the Corporation's filing of the Registration Statement with the SEC relating to a proposed public offering of common units, consisting of one Common Share and one warrant to purchase one Common Share, and pre-funded units, consisting of one pre-funded warrant to purchase one Common Share and a warrant to purchase one Common Share;

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(j)the material change report dated September 2, 2022, in connection with the Corporation's completion of two non-secured loans in the amount of USD$200,000 per loan with a third-party lender for an aggregate amount of USD$400,000, including an issuance of 20% of the value of the loan in Pre-Consolidation Common Shares on the first loan of USD$200,000 resulting in the issuance of 296,754 Pre-Consolidation Common Shares; and (l) the indicative term sheet for the Offering dated September 12, 2022

(k)the material change report dated September 2, 2022, in connection with the Offering;

(l)for purposes of the Prospectuses, any marketing materials (including any template version, revised template version or limited use version thereof) provided to a potential investor in connection with the Offering (including the "template version" (as such term is defined in NI 41-101) of the term sheet for the Offering dated and filed on SEDAR on September 12, 2022); and

(m)any other documents required by Canadian Securities Laws to be incorporated by reference in the Prospectuses.

"Due Diligence Responses" means the written and verbal responses provided by any director or senior officer the Corporation together with all materials provided to the Underwriter and the Underwriter's Counsel in connection with the Due Diligence Session.

"Due Diligence Session" means the due diligence session held on ●, 2022 between the Underwriter, the Underwriter's Counsel, executive officers of the Corporation, and the Corporation's Counsel.

"Encumbrances" means any encumbrance of whatever kind or nature, regardless of form, whether or not registered or registrable and whether or not consensual or arising by law (statutory or otherwise), including any mortgage, lien, charge, pledge or security interest, whether fixed or floating, or any assignment, lease, option, right of pre-emption, right of first refusal, acquisition right, privilege, easement, right of way, servitude, restrictive covenant, right of use or any other right or claim of any kind or nature whatsoever which affects ownership or possession of, or title to, any interest in, or right to use or occupy property or assets.

"Engagement Letter" means the engagement letter dated September 12, 2022 between the Corporation and the Underwriter.

"Exchange" or "TSX-V" means the TSX Venture Exchange.

"Final Passport System Decision Document" means a receipt for the Prospectus issued in accordance with the Passport System.

"Financial Statements" means, collectively, the Annual Financial Statements and the Interim Financial Statements.

"General Solicitation" and "General Advertising" means "general solicitation" and "general advertising", as those terms are used under Rule 502(c) of Regulation D adopted by the SEC under the U.S. Securities Act. Without limiting the foregoing, but for greater clarity, general solicitation or general advertising includes, but is not limited to, any advertisements, articles, notices or other communications published in any newspaper, magazine or similar media, or on the internet, or broadcast over radio, television or the internet, or any seminar or meeting whose attendees had been invited by general solicitation or general advertising.

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"Governmental Authority" means any foreign, national, federal, provincial, state, municipal or local government, any political subdivision of any of the foregoing, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government and any corporation or other entity owned or controlled (through stock or capital ownership or otherwise) by any of the foregoing.

"Governmental Licences" means all permits, licences, approvals, consents, certificates, qualifications, registrations, clearances and other authorizations, and supplements and amendments to the foregoing, issued by a Governmental Authority.

"IFRS" means International Financial Reporting Standards as issued by the International Accounting Standards Board.

"including" means including without limitation.

"Indemnitor" has the meaning ascribed to such term in Section 14 hereof.

"Indemnified Parties" or "Indemnified Party" has the meaning ascribed to such term in Section 14 hereof.

"Intellectual Property" means registered and unregistered trade-marks and trade-mark applications, trade names, certification marks, distinguishing guises, patents and patent applications, registered and unregistered works subject to copyright, know-how, formulae, processes, inventions, technical expertise, research data, trade secrets, industrial designs and industrial design applications, customer lists, designs and other industrial or intellectual property of any nature whatsoever and applications for registration thereof, each of the foregoing as defined under Applicable Laws.

"Interim Financial Statements" means the unaudited financial statements of the Corporation for the three and nine month periods ended June 30, 2022 and 2021, and the notes thereto, filed with the Securities Regulators on August 11, 2022.

"knowledge" where any representation or warranty contained in this Agreement is expressly qualified by reference to the "knowledge" of the Corporation, or where reference is made herein to the knowledge of the Corporation (or similar phrases), shall be deemed to refer to the actual knowledge, after due enquiry, of the Corporation's Executive Chairman, the President & Chief Executive Officer, and the Chief Financial Officer.

"Marketing Documents" means collectively all: (i) standard terms sheets; and (ii) marketing materials (including any template version, revised template version or limited use version thereof) provided to a potential investor in connection with the Offering.

"marketing materials" has the meaning ascribed to such term in NI 41-101.

"Material Adverse Effect" means an effect that is material and adverse to the business, properties, assets, liabilities (including any contingent liabilities that may arise through outstanding, pending or threatened litigation or otherwise), capitalization, condition (financial or otherwise), operations or prospects or results of operations of the Corporation and its subsidiaries, if any, taken as a whole, whether or not arising in the ordinary course of business.

"MI 11-102" means Multilateral Instrument 11-102 Passport System.

"Nasdaq" means the Nasdaq Capital Market.

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"NI 41-101" means National Instrument 41-101 General Prospectus Requirements.

"NI 44-101" means National Instrument 44-101 Short Form Prospectus Distributions.

"NI 44-103" means National Instrument 44-103 Post-Receipt Pricing.

"NI 45-102" means National Instrument 45-102 Resale of Securities.

"NI 51-102" means National Instrument 51-102 Continuous Disclosure Obligations.

"notice" has the meaning ascribed to such term in Section 17 hereof.

"NP 11-202" means National Policy 11-202 Process for Prospectus Reviews in Multiple Jurisdictions.

"Offering Price" has the meaning ascribed to such term on the first page of this Agreement.

"Offering" has the meaning ascribed to such term on the first page of this Agreement.

"Offshore Transaction" means an "offshore transaction" as that term is defined in Rule 902(h) of Regulation S;

"OTCQX" means the OTCQX® Best Market, operated by OTC Markets;

"Passport System" means the system and procedures for prospectus filing and review under Multilateral Instrument 11-102 Passport System and NP 11-202.

"person" includes any individual (whether acting as an executor, trustee, administrator, legal representative or otherwise), corporation, partnership, trust, fund, association, syndicate, organization or other organized group of persons, whether incorporated or not.

"Preliminary Passport System Decision Document" means a receipt for the Preliminary Prospectus issued in accordance with the Passport System.

"Preliminary Prospectus" has the meaning ascribed to such term on the first page of this Agreement, including the Documents incorporated by reference therein.

"PREP Procedures" has the meaning ascribed to such term on the first page of this Agreement.

"PREP Information" has the meaning ascribed to such term on the first page of this Agreement.

"Prospectus" has the meaning ascribed to such term on the first page of this Agreement, including the Documents incorporated by reference therein.

"Prospectuses" means, collectively, the Preliminary Prospectus, the Prospectus and the Supplemented Prospectus.

"Public Record" means information which has been publicly filed on SEDAR by the Corporation pursuant to a requirement under Canadian Securities Laws;

"Qualifying Jurisdictions" has the meaning ascribed to such term on the first page of this Agreement

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"Registration Statement" means the registration statement on Form F-1 (File No. 333-266897) and its amendments filed with the SEC relating to the U.S. IPO;

"Regulation S" means Regulation S promulgated under the U.S. Securities Act.

"SEC" means the United States Securities and Exchange Commission.

"Securities Laws" means, collectively, Canadian Securities Laws and the applicable securities laws (including all rules and regulations thereunder) of any jurisdiction outside of Canada.

"Securities Regulators" has the meaning ascribed to such term on the first page of this Agreement; and "Securities Regulator" means any one of them, as the context requires.

"SEDAR" means the System for Electronic Document Analysis and Retrieval.

"Software" means any computer software programs, source code, object code, databases, data and documentation, including, without limitation, any computer software programs that incorporate and run pricing models, formula and algorithms.

"Subsidiary" means a subsidiary body corporate of the Corporation within the meaning of the BCBCA and shall include KWESST Inc., and KWESST U.S. Inc., and "Subsidiaries" means all of them.

"Supplementary Material" has the meaning ascribed to such term on the first page of this Agreement.

"Supplemented Prospectus" has the meaning ascribed to such term on the first page of this Agreement.

"Tax Act" means the Income Tax Act (Canada) and the regulations thereunder.

"U.S. IPO" means the public offering to purchasers in the United States of common units, consisting of one Common Share and one warrant to purchase one Common Share, and pre-funded units, consisting of one pre-funded warrant to purchase one Common Share and a warrant to purchase one Common Share, pursuant to the Registration Statement and in accordance with the U.S. Underwriter, as well as the concurrent listing of the Common Shares and warrants on Nasdaq.

"U.S. Person" means a U.S. person as that term is defined in Rule 902(k) of Regulation S.

"U.S. Securities Act" means the United States Securities Act of 1933, as amended.

"U.S. Underwriter" means ThinkEquity LLC.

"U.S. Underwriting Agreement" means the underwriting agreement entered into between the Corporation and the U.S. Underwriter in connection with the U.S. IPO.

"Underwriter" means PI Financial Corp.

"Underwriter's Counsel" means DS Lawyers Canada LLP.

"Underwriter's Expenses" means all costs and expenses of the Underwriter payable in connection with the Offering pursuant to Section 12 hereof.

"Underwriter's Fee" has the meaning ascribed to such term in Section 14(a) hereof.

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"Unit" has the meaning ascribed thereto on the first page of this Agreement.

"Unit Share" has the meaning ascribed thereto on the first page of this Agreement.

"United States" or "U.S." means the United States of America, its territories and possessions, any state of the United States and the District of Columbia.

"Warrant" has the meaning ascribed thereto on the first page of this Agreement.

"Warrant Agent" has the meaning ascribed thereto on the first page of this Agreement.

"Warrant Expiry Date" means 5:00 p.m. (eastern time) on the date that is sixty (60) months after the Closing Date of the Offering. 

"Warrant Indenture" has the meaning ascribed thereto on the first page of this Agreement.

"Warrant Share" has the meaning ascribed thereto on the first page of this Agreement.

The terms "affiliate", "associate", "misrepresentation", "material change", "material fact" and "control person" shall have the meanings ascribed thereto under the Securities Act (Ontario); "distribution" shall have the meanings ascribed thereto under the Securities Act (Ontario) and "distribute" has a corresponding meaning.

2.THE OFFERING

(a)Eligibility.  The Corporation represents and warrants to the Underwriter that it is eligible to use the short form prospectus offering qualification system described in NI 44-101 for the distribution of the Units and the PREP Procedures under NI 44-103.

(b)Qualification for Sale. The Corporation shall elect and comply with the Passport System and shall:

(i)forthwith after any comments with respect to the Preliminary Prospectus have been received from the Securities Regulators (or such later date as may be agreed to in writing by the Corporation and the Underwriter) use its commercially reasonable efforts to have:

(A)prepared and filed the Prospectus and other documents required under the Canadian Securities Laws with the Securities Regulators;

(B)obtained from the BCSC a Final Passport System Decision Document evidencing that a receipt for the Prospectus has been issued in British Columbia and Ontario and has been deemed to have been issued in the other Qualifying Jurisdictions, or otherwise obtained a receipt for the Prospectus from each of the Securities Regulators; and

(C)prepared and filed the Supplemented Prospectus with the Securities Regulators.

and otherwise fulfilled all legal requirements under the Canadian Securities Laws to enable the Units to be offered and sold to the public in each of the Qualifying Jurisdiction through the Underwriter or any other investment dealer or broker registered in the applicable Qualifying Jurisdiction;

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(ii)until the completion of the distribution of the Units, promptly take all additional steps and proceedings that from time to time may be required under the Canadian Securities Laws to continue to qualify the Units for distribution or, in the event that the Units have, for any reason, ceased to so qualify, to again qualify the Units for distribution in each Qualifying Jurisdiction; and

(iii)Prior to the filing of the Prospectus and, during the period of distribution of the Units, prior to the filing with any Securities Regulators of any Supplementary Material or any documents incorporated by reference therein or any news release after the date hereof, the Corporation shall have allowed the Underwriter and the Underwriter's Counsel to participate fully in the preparation of, and, acting reasonably, to approve the form of, such documents, such approval not to be unreasonably withheld and to be provided in a timely manner in order to allow the Corporation to comply with Securities Laws, and to have reviewed any documents incorporated by reference therein.

(c)Due Diligence.  During the period from the date hereof until completion of the distribution of the Units, the Corporation shall allow the Underwriter to conduct all due diligence which it may reasonably require in order to fulfill its obligations as underwriter and in order to enable the Underwriter responsibly to execute the certificates required to be executed by them in the Prospectuses or in any Supplementary Material. Without limiting the generality of the foregoing, the Corporation shall make available its directors, senior management, and shall use all commercially reasonable efforts to cause its Auditor (including of any predecessor entity or business) and legal counsel, to be available, to answer any questions which the Underwriter may have and to participate in one or more due diligence sessions to be held prior to the Closing Time (collectively, the "Due Diligence Session").  The Underwriter shall distribute a list of written questions to be answered in advance of such Due Diligence Session and the Corporation shall provide written responses to such questions in advance of the Due Diligence Session and shall use all commercially reasonable efforts to have the above-mentioned Auditor, legal counsel and other experts provide written responses to such questions at a reasonable time in advance of the Due Diligence Session.

(d)Activities During Distribution. During the distribution of the Units:

(i)the Corporation and Underwriter shall approve in writing, prior to such time marketing materials are provided to potential investors, a template version of any marketing materials reasonably requested to be provided by the Underwriter to any such potential investor, such marketing materials to comply with Canadian Securities Laws. The Corporation shall file a template version of such marketing materials with the Securities Regulators as soon as reasonably practicable after such marketing materials are so approved in writing by the Corporation and Underwriter, and in any event on or before the day the marketing materials are first provided to any potential investor of Units, and such filing shall constitute the Underwriter's authority to use such Marketing Documents in connection with the Offering. Any comparables shall be redacted from the template version in accordance with NI 44-101 prior to filing such template version with the Securities Regulators and a complete template version containing such comparables and any disclosure relating to the comparables, if any, shall be delivered to the Securities Regulators by the Corporation. The Corporation shall prepare and file with the Securities Regulators a revised template version of any marketing materials provided to potential investors in Units where required under Canadian Securities Laws;

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(ii)the Corporation, and the Underwriter, on a several (and not joint and several) basis, covenant and agree:

(A)not to provide any potential investor of Units with any marketing materials unless a template version of such marketing materials has been filed by the Corporation with the Securities Regulators on or before the day such marketing materials are first provided to any potential investor of Units;

(B)not to provide any potential investor with any materials or information in relation to the distribution of the Units or the Corporation other than: (a) such marketing materials that have been approved and filed in accordance with this Section 2(d); (b) the Prospectuses; and (c) any standard term sheets approved in writing by the Corporation and Underwriter; and

(C)that any marketing materials approved and filed in accordance with Section 2(d), and any standard term sheets approved in writing by the Corporation and the Underwriter shall only be provided to potential investors in the Qualifying Jurisdictions.

(e)The Corporation shall take or cause to be taken all such other steps and proceedings, including fulfilling all legal, regulatory and other requirements, as required under Canadian Securities Laws to qualify the Units for distribution to the public in the Qualifying Jurisdictions, to ensure that the Unit Shares, Warrant Shares, Compensation Option Shares, and Compensation Option Warrant Shares are freely tradeable in the Qualifying Jurisdictions.

3.DELIVERY OF PROSPECTUS AND RELATED DOCUMENTS

(a)Deliveries.  The Corporation shall deliver or cause to be delivered without charge to the Underwriter and the Underwriter's Counsel the documents set out below at the respective times indicated:

(iii)prior to or contemporaneously, as nearly as practicable, with the filing with the Securities Regulators of each of the Preliminary Prospectus, the Prospectus and the Supplemented Prospectus:

(A)copies of the Prospectus, signed as required by Canadian Securities Laws; and

(B)copies of any documents incorporated by reference therein, which have not previously been delivered to the Underwriter or are otherwise available on SEDAR;

(iv)as soon as they are available, copies of any Supplementary Material, signed as required by Canadian Securities Laws and including, in each case, copies of any documents incorporated by reference therein, which have not been previously delivered to the Underwriter;

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(v)prior to the filing of the Supplemented Prospectus with the Securities Regulators, a "comfort letter" from the Corporation's Auditor and any other auditors who have audited any of the financial statements included in or incorporated by reference in the Prospectus, dated the date of the Supplemented Prospectus, addressed to the Underwriter and satisfactory in form and substance to the Underwriter and the Underwriter's Counsel, acting reasonably, to the effect that they have carried out certain procedures performed for the purposes of comparing certain specified financial information and percentages appearing in the Prospectus and the documents incorporated therein by reference with indicated amounts in the financial statements or accounting records of the Corporation or other applicable entity or business and have found such information and percentages to be in agreement, which comfort letter shall be based on the applicable auditors' review having a cut-off date of not more than two Business Days prior to the date of the Prospectus;

(vi)copies of correspondence indicating that the TSXV has conditionally accepted the Offering, including the listing of the Unit Shares, the Warrant Shares, the Compensation Option Shares and the Compensation Option Warrant Shares subject only to satisfaction by the Corporation of customary post-closing conditions imposed by the TSXV (the "Standard Listing Conditions");

(vii)Comfort letters similar to the foregoing shall be provided to the Underwriter with respect to any Supplementary Material and any other relevant document at the time the same is presented to the Underwriter for their signature or, if the Underwriter's signature is not required, at the time the same is filed.  All such comfort letters shall be in form and substance acceptable to the Underwriter and the Underwriter's Counsel, acting reasonably; and

(viii)The deliveries referred to in subsections 3(iii) and 3(iv) shall also constitute the Corporation's consent to the use by the Underwriter the Prospectuses, and any Supplementary Material in connection with the offering and sale of the Units.

(b)Commercial Copies.

(i)The Corporation shall, as soon as possible but in any event not later than noon (local time at the place of delivery) on the Business Day following the date of receipt from the BCSC of the Preliminary Passport System Decision Document or the Final Passport System Decision Document, as the case may be (or such other date or time as the Underwriter and the Corporation may agree), and no later than noon (local time) on the first Business Day after the execution of any Supplementary Material in connection with the Prospectuses, cause to be delivered to the Underwriter, without charge, commercial copies of the Prospectus, the Supplemented Prospectus or such Supplementary Material, in such numbers and in such cities as the Underwriter may reasonably request by oral or written instructions to the Corporation or the printer thereof given no later than the time when the Corporation authorizes the printing of the commercial copies of such documents.

(ii)The Corporation shall cause to be provided to the Underwriter such number of copies of any documents incorporated by reference in the Prospectuses or any Supplementary Materials as the Underwriter may reasonably request.

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4.MATERIAL CHANGES AND CERTAIN OTHER COVENANTS

(a)Material Changes. During the period of distribution of the Units, the Corporation will promptly inform the Underwriter in writing of the full particulars of:

(i)any material change (actual, anticipated, threatened, contemplated or proposed by, to, or against) in or affecting the business, operations, revenues, capital, intellectual property, assets, liabilities (absolute, accrued, contingent or otherwise), condition (financial or otherwise) or results of operations of the Corporation (and the Subsidiaries, taken as a whole);

(ii)any change in any material fact contained or referred to in the Preliminary Prospectus, the Prospectus, the Supplemented Prospectus, the Registration Statement or any Supplementary Material or filing or document prepared in connection with the U.S. IPO; and

(iii)the occurrence or discovery of a material fact or event which, in any such case, is, or may be, of such a nature as to:

(A)render the Preliminary Prospectus, the Prospectus, the Supplemented Prospectus, Registration Statement, any Marketing Documents, Supplementary Material, or any filing or document prepared in connection with the U.S. IPO untrue, false or misleading in any material respect;

(B)result in a misrepresentation in the Preliminary Prospectus, the Prospectus, the Supplemented Prospectus, the Registration Statement, any Marketing Documents, any Supplementary Material, or any filing or document prepared in connection with the U.S. IPO; or

(C)result in the Preliminary Prospectus, the Prospectus, the Supplemented Prospectus the Registration Statement, any Marketing Documents, any Supplementary Material, or any filing or document prepared in connection with the U.S. IPO not complying in any material respect with Securities Laws,

provided that if the Corporation is uncertain as to whether a material change, change, occurrence or event of the nature referred to in this section has occurred or been discovered, the Corporation shall promptly inform the Underwriter of the full particulars of the occurrence giving rise to the uncertainty and shall consult with the Underwriter as to whether the occurrence is of such nature prior to making any filing referred to in paragraph 4(c).

(b)During the period of distribution of the Units, the Corporation will promptly inform the Underwriter in writing of the full particulars of:

(i)any request of any Securities Regulator, the SEC or similar regulatory authority for any amendment to, or to suspend or prevent the use of, the Preliminary Prospectus, the Prospectus, the Supplemented Prospectus, the Registration Statement, any Marketing Documents, any Supplementary Material, any filing or document prepared in connection with the U.S. IPO or any other part of the Public Record or for any additional information of a material nature;

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(ii)the issuance by any Securities Regulator, the SEC or similar regulatory authority, the Exchange or any other competent authority of any order to cease or suspend trading of any securities of the Corporation or of the institution or threat of institution of any proceedings for that purpose; and

(iii)the receipt by the Corporation of any communication from any Securities Regulator, the SEC or similar regulatory authority, the Exchange or any other competent authority relating to the Preliminary Prospectus, the Prospectus, the Supplemented Prospectus, the Registration Statement, any Marketing Documents, any Supplementary Material, any filing or document prepared in connection with the U.S. IPO, any part of the Public Record, or the distribution of the Units.

(c)The Corporation will promptly comply to the reasonable satisfaction of the Underwriter and the Underwriter's Counsel with Canadian Securities Laws with respect to any material change, change, occurrence or event of the nature referred to in subsections 4(a) or 4(b) above and the Corporation will prepare and file promptly at the Underwriter's request, acting reasonably, any amendment to the Prospectus or the Supplementary Material as may be required under Canadian Securities Laws or U.S. Securities Laws; provided that the Corporation shall have allowed the Underwriter and the Underwriter's Counsel to participate fully in the preparation of any Supplementary Material, to have reviewed any other documents incorporated by reference therein and to conduct all due diligence investigations which the Underwriter may reasonably require in order to fulfill its obligation as underwriter and in order to enable the Underwriter responsibly to execute the certificate required to be executed by them in, or in connection with, any Supplementary Material, such approval not to be unreasonably withheld and to be provided in a timely manner.  The Corporation shall further promptly deliver to each of the Underwriter and the Underwriter's Counsel a copy of each Supplementary Material as filed with the Securities Regulators and of comfort letters with respect to each such Supplementary Material substantially similar to those referred to in Section 3 above.

(d)During the period of distribution of the Units, the Corporation will promptly provide to the Underwriter, for review by the Underwriter and the Underwriter's Counsel, prior to filing or issuance:

(i)any financial statement of the Corporation;

(ii)any proposed document, including without limitation any amendment to the AIF, new annual information form, business acquisition report, material change report, interim report, or information circular, which may be incorporated, or deemed to be incorporated, by reference in the Prospectus, or is intended to be filed as part of the Public Record;

(iii)any press release of the Corporation (subject to the Corporation's obligations under Securities Laws to make timely disclosure of material information);

(iv)any Supplementary Material; and

(v)any updated Registration Statement or material or document required to filed in connection with the U.S. IPO.

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(e)During the period of distribution of the Units, the Corporation will promptly advise the Underwriter: (i) of any amendment or proposed amendment to the U.S. Underwriting Agreement; and (ii) if the U.S. Underwriting Agreement is terminated, or the Corporation determines it will not be proceeding with the U.S. IPO.

(f)The Corporation will use its reasonable commercial efforts to expeditiously pursue the satisfaction of all conditions to the completion of the U.S. IPO.

(g)the representations and warranties of the Corporation in the Warrant Indenture will, on the Closing Date be, true and correct and the Corporation will fulfill its obligations and comply with all the covenants, terms and conditions of the Warrant Indenture.

(h)The Corporation will use its commercially reasonable efforts to maintain its status as a "reporting issuer" (or the equivalent thereof) not in default of the material requirements of the applicable Canadian Securities Laws in the Qualifying Jurisdictions for a period of 12 months following the Closing Date, it being understood that such covenant shall not prevent the Corporation from participating in a merger, amalgamation or other form of business combination transaction or a going private transaction which results in the Corporation ceasing to be a reporting issuer.

(i)The Corporation will use its commercially reasonable efforts to maintain the listing of the Common Shares on the TSX-V or another recognized stock exchange for a period of at least 12 months following the Closing Date, it being understood that such covenant shall not prevent the Corporation from participating in a merger, amalgamation or other form of business combination transaction or a going private transaction which results in the Corporation ceasing to have its Common Shares listed on the TSX-V.

5.COVENANTS OF THE UNDERWRITER

The Underwriter covenants and agrees with the Corporation that it will:

(a)offer the Units in the accordance with Canadian Securities Laws and Rule 903 of Regulation S;

(b)conduct activities in connection with the proposed offer and sale of the Units in compliance with all the Canadian Securities Laws and/or the U.S. Securities Laws, and cause a similar covenant to be contained in any agreement entered into with any registered securities dealer in connection with the distribution of the Units;

(c)not solicit subscriptions for the Units, trade in Units, or otherwise do any act in furtherance of a trade of Units in any jurisdictions outside of the Qualifying Jurisdictions other than jurisdictions outside of Canada and the United States provided that such sales are made in accordance with Securities Laws of such jurisdictions; and

(d)as soon as reasonably practicable after the Closing Date (and in any event within 30 days thereof) provide the Corporation with a breakdown of the number of Units sold in each of the Qualifying Jurisdictions and, upon completion of the distribution of the Units, provide to the Corporation and to the Securities Regulators notice to that effect, if required by Canadian Securities Laws.

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The Underwriter further represents, warrants, covenants and agrees to and with the Corporation that:

(e)none of it, its affiliates, or any person acting on any of their behalf, has made or will make any Directed Selling Efforts or engaged or will engage in any form of General Solicitation or General Advertising in the United States in connection with the Offering; and

(f)no securities being offered or sold in the Offering will be offered or sold to, or for the account or benefit of, a U.S. Person or person in in the United States.

6.PRESS RELEASES

The Corporation agrees that it shall obtain prior approval of the Underwriter as to the content and form of any press release relating to the Offering, such approval not to be unreasonably withheld or delayed. In addition, any press release announcing or otherwise referring to the Offering shall not be distributed to U.S. newswire services or disseminated in the United States and shall include a prominent notation on the top of the first page to the following effect: "Not for distribution to United States newswire services or for dissemination in the United States" and a disclaimer to the following effect "This news release does not constitute an offer to sell or a solicitation of an offer to sell any of securities in the United States. The securities have not been and will not be registered under the United States Securities Act of 1933, as amended (the "U.S. Securities Act") or any state securities laws and may not be offered or sold within the United States or to U.S. Persons unless registered under the U.S. Securities Act and applicable state securities laws or an exemption from such registration requirements is available."

7.REPRESENTATIONS AND WARRANTIES OF THE CORPORATION

(a)Each delivery of the Preliminary Prospectus, Prospectus, Supplemented Prospectus and any Supplementary Material pursuant to Section 3 above shall constitute a representation and warranty to the Underwriter by the Corporation (and the Corporation hereby acknowledges that the Underwriter is relying on such representations and warranties in entering into this Agreement) that:

(i)all of the information and statements (except information and statements relating solely to the Underwriter and furnished by them in writing expressly for inclusion in the applicable document) contained in the Preliminary Prospectus, the Prospectus, the Supplemented Prospectus, the Registration Statement, or any Supplementary Material, as applicable, including, without limitation, the Documents incorporated by reference, as the case may be:

(A)are at the respective dates of such documents, true and correct in all material respects;

(B)contain no misrepresentation; and

(C)constitute full, true and plain disclosure of all material facts relating to the Corporation and the Units;

(ii)the Preliminary Prospectus, the Prospectus, the Supplemented Prospectus or any Supplementary Material, as applicable, including, without limitation, the Documents incorporated by reference, as the case may be, comply in all material respects with applicable Canadian Securities Laws, including without limitation NI 44-101; and

(iii)there has been no intervening material change (adverse material change until filing of the Prospectus) (actual, proposed or prospective, whether financial or otherwise), from the date of the Preliminary Prospectus, the Prospectus, the Supplemented Prospectus, the Registration Statement and any Supplementary Material to the date of delivery thereof, in the business, operations, revenues, capital, properties, assets, liabilities (absolute, accrued, contingent or otherwise), condition (financial or otherwise) or results of operations of the Corporation and its Subsidiaries (taken as a whole).

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(b)In addition to the representations and warranties contained in Section 7(a) hereof, the Corporation represents and warrants (and, where applicable, covenants) to the Underwriter, and acknowledges the Underwriter is relying upon such representations and warranties (and, where applicable, covenants) in entering into this Agreement, that:

(i)Good Standing of the Corporation. The Corporation and each Subsidiary (i) is a corporation incorporated and validly subsisting under the laws of its jurisdiction of incorporation, and (ii) has the corporate power and capacity to own or lease its properties and assets and to carry on its business or operations as currently conducted and as described in the Public Record.

(ii)Corporate Power.  The Corporation has all requisite corporate power and capacity to create, issue and sell the Unit Shares and Warrants, to issue the Warrant Shares upon the exercise of the Warrants, create and issue the Compensation Options, issue the Compensation Option Shares and Compensation Option Warrants upon the due exercise of the Compensation Options, to issue the Compensation Option Warrant Shares upon exercise of the Compensation Option Warrants, and to enter into and carry out its obligations under this Agreement, the Warrant Indenture and the Compensation Option Certificates.

(iii)Qualification to Conduct Business. The Corporation and each Subsidiary is duly registered to do business and is in good standing in each jurisdiction in which the character of its properties, owned or leased, or nature of its activities make such registration necessary, except where failure to be so registered or in good standing would not result in Material Adverse Effect.

(iv)Conduct of Business.  The Corporation and each Subsidiary has conducted, is conducting and will conduct its businesses in compliance in all material respects with all applicable laws, rules and regulations and, in particular, all applicable licensing and environmental legislation, regulations or by-laws or other lawful requirements of any governmental or regulatory bodies applicable to it of each jurisdiction in which it carries on a material portion of its business (except where the failure to do so would not have a Material Adverse Effect) and holds all licences, registrations and qualifications in all jurisdictions in which it carries on its business as now conducted and as presently proposed to be conducted (other than those which are not yet required), all such licences, registrations or qualifications are valid and existing and in good standing and none of such licences, registrations or qualifications contains any burdensome term, provision, condition or limitation which has or is likely to have any Material Adverse Effect on the business of the Corporation as now conducted or as proposed to be conducted and the Corporation is not aware of any legislation, regulation, rule or lawful requirements presently in force or proposed to be brought into force which the Corporation anticipates would reasonable be expected to have a Material Adverse Effect or that the Corporation will be unable to comply with without materially adversely affecting the Corporation.

(v)No Restrictions. To the knowledge of the Corporation, the Corporation and the Subsidiaries are not parties to or bound or affected by any contract limiting their freedom to compete in any line of business or any geographic area, acquire goods or services from any supplier, establish the prices at which they may sell any goods or services, sell goods or services to any customer or potential customer, or transfer or move any of their assets or operations.

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(vi)Warrant Indenture.  The representations and warranties made by the Corporation in the Warrant Indenture will be true and correct as of the date at which they are made.

(vii)CDS Deposit. All necessary corporate action has been taken by the Corporation to authorize the valid creation, issue and sale of, and the delivery by the Corporation of the Unit Shares and Warrants via a non-certificated inventory deposit with CDS.

(viii)Winding-Up. No steps or proceedings have been taken by any person, voluntary or otherwise, requiring or authorizing the dissolution or winding up of the Corporation or any Subsidiary.

(ix)Violation. The Corporation and each Subsidiary is (i) not in material violation of its articles of incorporation or by-laws; and (b) not in default of the performance or observance of any obligation, agreement, covenant or condition contained in any Contract to which it is a party or by which it or its assets and properties may be bound for any such violations or defaults that would result in a Material Adverse Effect.

(x)Subsidiaries. The Corporation does not have any subsidiaries, other than the Subsidiaries. The Corporation is the registered and beneficial holder, whether directly or indirectly, of 100% of the issued and outstanding securities of each Subsidiary, and the Corporation holds its interests in the Subsidiaries free and clear of all mortgages, charges, pledges, security interests, encumbrances, claims or demands whatsoever and, no person or other entity has any agreement, option, right or privilege (whether pre-emptive or contractual) to purchase or receive (or capable of becoming an agreement or a right to purchase or receive) from the Corporation or any Subsidiary any issued or unissued securities of any Subsidiary.

(xi)Share Capital. The authorized capital of the Corporation consists of an unlimited number of Common Shares, of which, as of the date hereof, 780,873 Common Shares were outstanding as fully paid and non-assessable shares of the Corporation.  In addition, the Corporation has 57,102 options to acquire Common Shares, 837 agent options to acquire Common Shares, warrants to acquire 191,673 Common Shares, 16,346 restricted share units and performance stock units.

(xii)Listing. The Common Shares are listed and posted for trading on the TSXV and quoted for trading on the OTCQX, the Corporation is in compliance in all material respects with the by-laws, rules and regulations of the TSX-V and, prior to the Closing Time, the Common Shares will be listed and posted for trading on the TSX-V and the Nasdaq and the Corporation will, at the Closing Time, be in compliance in all material respects with the by-laws, rules and regulations of the TSX-V and the Nasdaq.

(xiii)Units. The attributes and characteristics of the Units conform in all material respects to the attributes and characteristics thereof described in the Prospectuses.

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(xiv)No Voting Agreements. The Corporation is not a party to any agreement, nor is the Corporation aware of any agreement, which in any manner affects the voting control of any of the securities of the Corporation.

(xv)Dividends. There is not, in the constating documents, by-laws or in any Contract or other instrument or document to which the Corporation is a party, any restriction upon or impediment to the declaration of dividends by the directors of the Corporation or the payment of dividends by the Corporation to the holders of the Common Shares.

(xvi)Units Validly Issued. The Unit Shares and Warrants to be issued and sold have been, or prior to the Closing Time will be, duly created and authorized for issuance and upon issuance, delivery and payment of the aggregate Offering Price therefor will be validly issued. The Unit Shares and Warrants will not be issued in violation of or subject to any pre-emptive rights or contractual rights to purchase securities granted by the Corporation.

(xvii)Compensation Options Validly Issued. The Compensation Options to be issued have been, or prior to the Closing Time will be, duly created and authorized for issuance. The Compensation Options will not be issued in violation of or subject to any pre-emptive rights or contractual rights to purchase securities granted by the Corporation.

(xviii)Warrant Shares, Compensation Option Shares, and Compensation Option Warrant Shares Reserved for Issuance. The Warrant Shares, Compensation Option Shares and Compensation Option Warrant Shares have been, or prior to the Closing Time will be,  duly and validly authorized and reserved for issuance: (i) upon exercise of the Warrants in accordance with the terms of the Warrant Indenture and Warrant Certificates; (ii) upon the due exercise of the Compensation Options in accordance with the terms of the Compensation Option Certificates; and (iii) upon the due exercise of the Compensation Option Warrants in accordance with the terms of the Warrant Indenture and Warrant Certificates, the Warrant Shares, the Compensation Option Shares and the Compensation Option Warrant Shares, respectively, will be validly issued as fully paid and non-assessable Common Shares.

(xix)Definitive Certificates. To the extent applicable, the form and terms of any definitive certificates representing the Unit Shares, the Warrants, the Warrant Shares the Compensation Options, the Compensation Option Shares, the Compensation Option Warrants and the Compensation Option Warrant Shares have been duly approved and adopted by the Corporation and are in due proper form under Applicable Laws.

(xx)Absence of Rights. Other than pursuant to the Offering, or as disclosed in the Prospectus or Public Record, no person has any agreement or option or right or privilege (whether at law, pre-emptive or contractual) capable of becoming an agreement for the purchase, subscription or issuance of, or exchange ,or conversion into, any unissued shares, securities, warrants or convertible obligations of any nature of the Corporation or the Subsidiaries.

(xxi)Corporate Actions. All necessary corporate action has been taken by the Corporation, including obtaining the receipt of any required director approvals, so as to: (i) authorize the execution, delivery and performance of this Agreement, the Warrant Indenture and the Compensation Option Certificates; (ii) validly issue and deliver the Units; (iii) reserve and authorize the issuance of the Warrant Shares, as fully paid and non-assessable Common Shares, upon the exercise of the Warrants in accordance with the terms of the Warrant Indenture; (iv) validly issue the Compensation Options; (v) reserve and authorize the issuance of the Compensation Option Shares, as fully paid and non-assessable Common Shares, upon the due exercise of the Compensation Options in accordance with the terms of the Compensation Option Certificates, (vi) reserve and authorize the issuance of the Compensation Option Warrants in accordance with the terms of the Compensation Option Certificates, and (vii) reserve and authorize the issuance of the Compensation Option Warrant Shares in accordance with the terms of the Compensation Option Certificates and the Warrant Indenture.

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(xxii)Valid and Binding Documents. Each of the execution and delivery of this Agreement, the Warrant Indenture, the U.S. Underwriting Agreement and the Compensation Option Certificates and the performance of the transactions contemplated hereby and thereby have been authorized by all necessary corporate action of the Corporation and upon the execution and delivery thereof shall constitute valid and binding obligations of the Corporation, enforceable against the Corporation by other parties thereto in accordance with their respective terms; provided that enforcement thereof may be limited by laws affecting creditors' rights generally, that specific performance and other equitable remedies may only be granted in the discretion of a court of competent jurisdiction, that the provisions relating to indemnity, contribution and waiver of contribution may be unenforceable and that enforceability is subject to the provisions of the Limitations Act (Ontario).

(xxiii)Necessary Consents and Approvals. All consents, approvals, permits, authorizations or filings as may be required under Securities Laws that are necessary for the execution and delivery by the Corporation of this Agreement, the Warrant Indenture and the Compensation Option Certificates, the issuance, sale and delivery of the Units, the issuance of the Warrant Shares upon the automatic conversion of the Units, the issuance of the Compensation Options, the issuance of the Compensation Option Shares and the Compensation Option Warrants upon the due exercise of the Compensation Options, and the issuance of the Compensation Option Warrant Shares upon the due exercise of the Compensation Option Warrants, and the consummation of the transactions contemplated hereby and thereby have been made or obtained, as applicable, or will be made or obtained prior to the Closing Time, other than such customary post-closing notices or filings required to be submitted within the applicable time frame pursuant to Securities Laws in connection therewith.

(xxiv)Public Record. Each of the documents comprising the Public Record (including the Documents) was, as of the date thereof, in compliance in all material respects with applicable Securities Laws and did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading and such documents collectively constitute full, true and plain disclosure of all material facts relating to the Corporation.  The Corporation is in compliance with all timely disclosure obligations under applicable Securities Laws, as applicable, and, without limiting the generality of the foregoing, since September 30, 2021, under Canadian Securities Laws there has not occurred a Material Adverse Effect which has not been publicly disclosed, and none of the documents comprising the Public Records contained a Misrepresentation at the date of the filing thereof.

(xxv)Forward-Looking Information. All forward-looking information and statements of the Corporation relating to the Corporation and the Subsidiaries contained in the Prospectuses and Public Record (including the Documents), including any forecasts and estimates, expressions of opinion, intention and expectation, subject to any qualifications contained therein, as at the time they were or will be made, were or will be made based on assumptions that the Corporation believes are reasonable in the circumstances.

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(xxvi)No Material Changes. Except as disclosed in the Prospectuses or the Public Record, since the date of the Interim Financial Statements:

(A)other than the entering into of this Agreement, the Warrant Indenture, the U.S. Underwriting Agreement, and the performance of the obligations hereunder and thereunder, there has not been any material change in the assets, liabilities, obligations (absolute, accrued, contingent or otherwise), business, condition (financial or otherwise) or results of operations of the Corporation or any of the Subsidiaries;

(B)other than the entering into of this Agreement, the Warrant Indenture, the U.S. Underwriting Agreement, and the performance of the obligations hereunder and thereunder, there has not been any material change in the capital stock or long-term debt of the Corporation or any of the Subsidiaries; and

(C)the Corporation and the Subsidiaries have carried on their business in the ordinary course.

(xxvii)Accounting Controls. The Corporation maintains a system of internal accounting controls sufficient to provide reasonable assurance: (i) that transactions are completed in accordance with the general or a specific authorization of management or directors of the Corporation; (ii) that transactions are recorded as necessary to permit the preparation of the financial statements for the Corporation in conformity with IFRS and to maintain asset accountability; (iii) that access to assets of the Corporation is permitted only in accordance with the general or a specific authorization of management or directors of the Corporation; (iv) that the recorded accountability for assets of the Corporation is compared with the existing assets of the Corporation at reasonable intervals and appropriate action is taken with respect to any differences therein; and (v) regarding the prevention or timely detection of unauthorized acquisition, use or disposition of the Corporation's assets that could have a material effect on its financial statements or interim financial statements.

(xxviii)Independent Accountants.  The Auditor is independent with respect to the Corporation within the meaning of Securities Laws and there has been no reportable disagreement (within the meaning of Section 4.11 of NI 51-102) with the Auditor, and the Corporation has no current intention to change auditors.

(xxix)Accounting Records.  The books of account and other records of the Corporation, whether of a financial or accounting nature or otherwise, have been maintained in accordance with prudent business practices.

(xxx)Financial Statements.  The Financial Statements fairly present, in accordance with IFRS consistently applied, the financial position and condition of the Corporation and the Subsidiaries, on a consolidated basis, at the dates thereof and the results of the operations of the Corporation for the periods then ended and reflect all assets, liabilities or obligations (absolute, accrued, contingent or otherwise) of the Corporation as at the dates thereof.

(xxxi)Liabilities.  The Corporation has no liabilities, obligations, indebtedness or commitments, whether accrued, absolute, contingent or otherwise, which are not disclosed or referred to in the Financial Statements or referred to or disclosed herein, other than liabilities, obligations, or indebtedness or commitments: (i) incurred in the normal course of business; or (ii) which would not have a Material Adverse Effect.

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(xxxii)Related Party Accounting.  Other than as disclosed in the Financial Statements, the Corporation is not party to any related party transactions required to be disclosed under IFRS or Securities Laws.

(xxxiii)Insolvency. The Corporation has not committed an act of bankruptcy or sought protection from the creditors thereof before any court or pursuant to any legislation, proposed a compromise or arrangement to the creditors thereof generally, taken any proceeding with respect to a compromise or arrangement, taken any proceeding to be declared bankrupt or wound up, taken any proceeding to have a receiver appointed of any of the assets thereof, had any person holding any encumbrance, lien, charge, hypothec, pledge, mortgage, title retention agreement or other security interest or receiver take possession of any of the property thereof, had an execution or distress become enforceable or levied upon any portion of the property thereof or had any petition for a receiving order in bankruptcy filed against it.

(xxxiv)Compliance with Laws. The Corporation and the Subsidiaries are, in all material respects, conducting their business in compliance with all Applicable Laws of each jurisdiction in which their business is carried on and is licensed, registered or authorized in all jurisdictions in which they own, lease or operate its properties and assets or carry on their business to enable it to own, lease or operate their properties or assets and carry on business as currently conducted, except where any failure to be so licensed, registered or authorized would not reasonably be expected to have a Material Adverse Effect.

(xxxv)Applicable Laws. The Corporation has complied and will comply in all material respects with the requirements of all applicable corporate laws and Securities Laws in connection with the Offering and the issuance of the Corporation's securities thereunder.

(xxxvi)Purchases and Sales. Except as disclosed in the Public Record, the Corporation has not approved, is not contemplating and has not entered into any agreement in respect of, nor has any knowledge of:

(A)the purchase of any material property or assets or any interest therein or the sale, transfer or disposition of any material property or assets or any interest therein currently owned, directly or indirectly, by the Corporation or the Subsidiaries, whether by asset sale, transfer of shares or otherwise; or

(B)the change of control, by sale or transfer of shares or sale of all or substantially all of the property and assets of the Corporation, or otherwise, of the Corporation.

(xxxvii)Taxes and Tax Returns. The Corporation has filed in a timely manner all necessary tax returns and notices that are due and has paid all applicable taxes of whatsoever nature for all tax years prior to the date hereof to the extent that such taxes have become due or have been alleged to be due and the Corporation is not aware of any tax deficiencies or interest or penalties accrued or accruing, or alleged to be accrued or accruing, thereon where, in any of the above cases, it might reasonably be expected to have a Material Adverse Effect and there are no agreements, waivers or other arrangements providing for an extension of time with respect to the filing of any tax return by it or the payment of any material tax, governmental charge, penalty, interest or fine against it. There are no material actions, suits, proceedings, investigations or claims now threatened or, to the knowledge of the Corporation, pending against the Corporation which could result in a material liability in respect of taxes, charges or levies of any Governmental Authority, penalties, interest, fines, assessments or reassessments or any matters under discussion with any Governmental Authority relating to taxes, governmental charges, penalties, interest, fines, assessments or reassessments asserted by any such authority and the Corporation has withheld (where applicable) from each payment to each of the present and former officers, directors, employees and consultants thereof the amount of all taxes and other amounts, including, but not limited to, income tax and other deductions, required to be withheld therefrom, and has paid the same or will pay the same when due to the proper tax or other receiving authority within the time required under applicable tax legislation.

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(xxxviii)Off-Balance Sheet Transactions, Arrangements and Obligations. There are no off-balance sheet transactions, arrangements or obligations (including contingent obligations) of the Corporation with unconsolidated entities or other persons that may have a material current or future effect on the financial condition, results of operations, earnings, cash flow, liquidity, capital expenditures, capital resources or significant components of revenues or expenses of the Corporation or that would reasonably be expected to be material to an investor in making a decision to purchase the Units.

(xxxix)Receivables and Bad Debts.  The accounts receivable of the Corporation are bona fide and are good and collectible without set off or counterclaim at the aggregate recorded amounts reflected in the records of the Corporation, except those reserved as bad debt.

(xl)Governmental Licences. (A) The Corporation and each Subsidiary possesses Governmental Licences issued by the appropriate Governmental Authorities necessary or required to conduct the business or operations as now operated or proposed to be operated by the Corporation and each Subsidiary; (B) the Corporation and each Subsidiary is in compliance, in all material respects, with the terms and conditions of all such Governmental Licences; (C) all of the  Governmental Licences of the Corporation and the Subsidiaries are in good standing, valid, subsisting and in full force and effect; and (D) the Corporation and its Subsidiaries have not received any notice of non-compliance, nor does the Corporation know of, nor does it have reasonable grounds to know of, any facts that could give rise to a notice of non-compliance or indication relating to the cancellation, revocation, limitation, suspension, adverse modification or refusal to issue or renew any such Governmental Licences.

(xli)Governmental Notices. No Governmental Authority is presently alleging or asserting, or, to the knowledge of the Corporation, threatening to allege or assert, any non-compliance with any Applicable Laws or Governmental Licences in respect of the current operations or activities of the Corporations or the Subsidiaries.

(xlii)No Default or Breach. The Corporation is not in breach or default of, and the execution and delivery of this Agreement, the Warrant Indenture, the U.S. Underwriting Agreement, or the Compensation Option Certificates, and the performance by the Corporation of its obligations hereunder or thereunder, and the issuance and sale of the Unit Shares and Warrants, the issuance of the Warrant Shares upon the exercise of the Warrants, the issuance of the Compensation Options and the issuance of the Compensation Option Shares and Compensation Option Warrants upon the due exercise of the Compensation Options and the issuance of the Compensation Option Warrant Shares upon the due exercise of the Compensation Option Warrants do not and will not result in a breach or violation of any of the terms of or provisions of, or constitute a default under, whether after notice or lapse of time or both, (A) any statute, rule or regulation applicable to the Corporation, including Securities Laws; (B) the constating documents or resolutions of the Corporation which are in effect at the date hereof; (C) any Contract that the Corporation is a party to that is material to it; (D) any Governmental Licence; or (E) any judgment, decree or order binding the Corporation or the properties or assets of the Corporation.

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(xliii)No Actions or Proceedings. There are no actions, suits, proceedings or investigations (whether or not purportedly by or on behalf of the Corporation) against or affecting or, to the knowledge of the Corporation, pending or, to the knowledge of the Corporation, threatened against the Corporation or the Subsidiaries at law or in equity (whether in any court, arbitration or similar tribunal) or before or by any federal, provincial, state, municipal or other governmental department, commission, board or agency, domestic or foreign.

(xliv)No Order. No order, ruling or determination having the effect of suspending the sale or ceasing the trading in any securities of the Corporation has been issued by any regulatory authority (including the TSX-V and Nasdaq) and is continuing in effect and no proceedings for that purpose have been instituted or, to the knowledge of the Corporation, are pending, contemplated or threatened by any regulatory authority, and the Corporation is not in default of any material requirements of Securities Laws.

(xlv)Joint Venture. Other than as disclosed in the Prospectuses or Public Record, the Corporation has not entered into, or been involved in any discussions with respect to, any joint venture, partnership agreement or arrangement, or any similar agreement or arrangement, and there are no proposed joint venture or partnership agreements or arrangements, or similar agreements or arrangements, involving the Corporation or the Subsidiaries.

(xlvi)Competitor Interests. To the knowledge of the Corporation, none of the officers or directors of the Corporation or the Subsidiaries has any direct or indirect ownership interest in any firm or corporation which competes with any of the Corporation other than as a passive investment.

(xlvii)Personal Information. The Corporation has complied and is in compliance with all applicable privacy laws, has not collected, received, stored, disclosed, transferred, used, misused or permitted unauthorized access to any information protected by privacy laws, and has not received written notice of any request, complaint, investigation, inquiry or claim relating to its handling of personal information, save and except for acts of non-compliance which would not result in a Material Adverse Effect.

(xlviii)Amounts Owing to Employees.  All material bonuses, commissions, salaries and other amounts owing to employees are reflected and have been accrued in the books of account of the Corporation.

(xlix)Employment Matters.  Other than as disclosed to the Underwriter in writing, the Corporation is not a party to: (i) any contracts of employment which may not be terminated on one month's notice or which provide for payments occurring on a change of control of the Corporation, or (ii) any collective labour agreements.

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(l)Compliance with Employment Laws. The Corporation is in compliance with all applicable laws respecting employment and employment practices, terms and conditions of employment and wages and hours. The Corporation has not and is not engaged in any unfair labour practice, there is no labour strike, dispute, slowdown, stoppage, complaint or grievance pending or, to the knowledge of the Corporation, threatened against the Corporation, no union representation question exists respecting the employees of the Corporation and no collective bargaining agreement is in place or currently being negotiated by the Corporation, the Corporation has not received any notice of any unresolved matter and there are no outstanding orders under any employment or human rights legislation in any jurisdiction in which the Corporation carries on business or has employees, no employee has any agreement as to the length of notice required to terminate his or her employment with the Corporation in excess of 24 months or equivalent compensation and all benefit and pension plans of the Corporation are funded in accordance with Applicable Laws and no past service funding liability exist thereunder.

(li)Employee Plans. Each material plan for retirement, bonus, stock purchase, profit sharing, stock option, deferred compensation, severance or termination pay, insurance, medical, hospital, dental, vision care, drugs, sick leave, disability, salary continuation, legal benefits, unemployment benefits, vacation, pension, incentive or otherwise contributed to, or required to be contributed to, by the Corporation for the benefit of any current or former officer, director, employee or consultant of the Corporation has been maintained in material compliance with the terms thereof and with the requirements prescribed by any and all statutes, orders, rules, policies and regulations that are applicable to any such plan.

(lii)Accruals. All material accruals for unpaid vacation pay, premiums for unemployment insurance, health premiums, federal or provincial pension plan premiums, accrued wages, salaries and commissions and payments for any plan for any officer, director, employee or consultant of the Corporation have been accurately reflected in the books and records of the Corporation.

(liii)Work Stoppage. There has not been, and there is not currently, any labour trouble which is having a Material Adverse Effect or could reasonably be expected to have a Material Adverse Effect.

(liv)No Loans. Other than as disclosed in the Public Record, the Corporation is not a party to any Debt Instrument and does not have any material loans or other indebtedness outstanding which has been made to any of its shareholders, officers, directors or employees, past or present, or any person not dealing at "arm's length" with the Corporation.

(lv)Related Party Transactions.  Other than as disclosed in the Prospectuses or the Public Record, to the knowledge of the Corporation, none of the directors, officers or employees of the Corporation, any person who owns, directly or indirectly, more than 10% of any class of securities of the Corporation, or any associate or affiliate of any of the foregoing, had or has any material interest, direct or indirect, in any material transaction or any proposed material transaction with the Corporation which, as the case may be, materially affects, is material to or will materially affect the Corporation; and other than as disclosed in the Prospectuses or the Public Record, no director, officer, employee or other person not dealing at arm's length with the Corporation or any associate or affiliate of such person, owns, has or is entitled to any royalty, net profits interest or any other encumbrances or claims of any nature whatsoever against the Corporation, the Subsidiaries, or their respective assets.

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(lvi)Suppliers. None of the five largest suppliers of the Corporation and its Subsidiaries (the "Largest Suppliers") has notified the Corporation or its Subsidiaries, and the Corporation and its Subsidiaries have no reason to believe, that each such supplier does not intend to continue dealing with the Corporation or its Subsidiaries on substantially the same terms as presently conducted, subject to changes in pricing and volume in the ordinary course of business; and, to the knowledge of the Corporation or its Subsidiaries, none of the transactions contemplated by this Agreement will adversely affect the relationship of the Corporation or its Subsidiaries with any of its suppliers, customers or clients.

(lvii)Customers. None of the five largest customers of the Corporation and its Subsidiaries (the "Largest Customers") has notified the Corporation, and the Corporation has no reason to believe, that each such customer does not intend to continue dealing with the Corporation on substantially the same terms as presently conducted, subject to changes in pricing and volume in the ordinary course of business.

(lviii)Unlawful Payments. The Corporation has not nor, to the knowledge of the Corporation, has any director, officer, employee, Underwriter or other person associated with or acting on behalf of the Corporation, (i) used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expense relating to political activity, (ii) made any direct or indirect unlawful payment to any foreign or domestic government official or employee from corporate funds, (iii) violated or is in violation of any provision of the Corruption of Foreign Public Officials Act (Canada) or the Foreign Corrupt Practices Act (United States), or (iv) made any bribe, rebate, payoff, influence payment, kickback or other unlawful payment.

(lix)Anti-Money Laundering and Unlawful Payments.

(A)The operations of the Corporation and the Subsidiaries are and have been conducted, at all times, in material compliance with all applicable financial recordkeeping and reporting requirements of applicable anti-money laundering statutes of the jurisdictions in which the Corporation and the Subsidiaries conduct business, the rules and regulations thereunder and any related or similar rules, regulations or guidelines, issued, administered or enforced by any governmental agency (collectively, the "Anti-Money Laundering Laws"), and no action, suit or proceeding by or before any court or governmental agency, authority or body or any arbitrator involving the Corporation or the Subsidiaries with respect to the Anti-Money Laundering Laws is pending or, to the knowledge of the Corporation, threatened;

(B)the Corporation and the Subsidiaries have not, directly or indirectly: (A) made or authorized any contribution, payment or gift of funds or property to any official, employee or Underwriter of any governmental agency, authority or instrumentality of any jurisdiction; or (B) made any contribution to any candidate for public office, in either case where either the payment or the purpose of such contribution, payment or gift was, is or would be prohibited under the Corruption of Foreign Public Officials Act (Canada) or the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (Canada) or the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act (United States) or the rules and regulations promulgated thereunder or under any other legislation of any relevant jurisdiction covering a similar subject matter applicable to the Corporation, the Subsidiaries, and their operations, and will not use any portion of the proceeds of the Offering, in contravention of such legislation; and

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(C)the Corporation or, to the knowledge of the Corporation, any director, officer, employee, Underwriter, affiliate or person acting on behalf of the Corporation has not been or is not currently subject to any United States sanctions administered by the Office of Foreign Assets Control of the United States Treasury Department and the Corporation will not directly or indirectly use any proceeds of the distribution of the Units or lend, contribute or otherwise make available such proceeds to any affiliated entity, joint venture partner or other person or entity, to finance any investments in, or make any payments to, any country or person targeted by any of the sanctions of the United States.

(lx)Insurance. The Corporation maintains insurance for the Corporation and the Subsidiaries against such losses, risks and damages to its properties and assets in such amounts that are customary for the business in which it is engaged and on a basis consistent with reasonably prudent persons in comparable businesses, and all of the policies in respect of such insurance coverage are in good standing, in full force and effect in all material respects and not in default. The Corporation is in compliance with the terms of such policies and instruments in all material respects and there are no material claims by the Corporation under any such policy or instrument as to which any insurance company is denying liability or defending under a reservation of rights clause. The Corporation has no reason to believe that it will not be able to renew such existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not have a Material Adverse Effect, and the Corporation has not failed to promptly give any notice of any material claim thereunder.

(lxi)Assets. The Corporation and the Subsidiaries are the absolute legal and beneficial owner of, and have good and marketable title to, all of the material assets thereof, free of all Encumbrances, claims or demands whatsoever, and no other property rights are necessary for the conduct of the business of the Corporation and the Subsidiaries as currently conducted or as contemplated to be conducted, the Corporation does not know of any claim or the basis for any claim that might or could adversely affect the right thereof to use, transfer or otherwise exploit such rights, and, other than as disclosed in writing to the Underwriter, the Corporation does not have any responsibility or obligation to pay any commission, royalty, licence fee or similar payment to any person with respect to its property rights, except as disclosed in the Public Record.

(lxii)Material Contracts. All contracts of the Corporation and the Subsidiaries with the Largest Suppliers and the Largest Customers, and all contracts of the Corporation relating to Intellectual Property constitute a legally valid and binding agreement of the Corporation enforceable in accordance with their respective terms and no party thereto is in default thereunder, the Corporation has not received notification from any party claiming that the Corporation is in breach or default under any such contract and no event has occurred which with notice or lapse of time or both would directly or indirectly constitute such a default.

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(lxiii)Leased Premises.  With respect to the premises of the Corporation and Subsidiaries, as applicable, which are material to the Corporation and which the Corporation or a Subsidiary occupies as tenant (the "Leased Premises"), the Corporation occupies the Leased Premises and has the exclusive right to occupy and use the Leased Premises and the lease(s) pursuant to which the Corporation occupies the Leased Premises is in good standing in all material respects and in full force and effect.

(lxiv)Good Business Practice.  Any and all operations of the Corporation and its Subsidiaries have been conducted in accordance with good industry practices and in material compliance with Applicable Laws.

(lxv)Environmental Laws.  The Corporation and each Subsidiary, as applicable:

(A)has been and is in compliance with all Applicable Laws of any Governmental Authority  ("Environmental Law") relating to the protection of the environment, occupational health and safety or the processing, use, treatment, storage, disposal, discharge, transport or handling of any pollutants, contaminants, chemicals or industrial, toxic or hazardous wastes or substance, except where such non-compliance with Environmental Law would not individually, or in the aggregate, have a Material Adverse Effect on the Corporation.

(B)has obtained all Governmental Licences under Environmental Laws (the "Environmental Permits") necessary for the operation of its business as currently operated and each Environmental Permit is valid, subsisting and in good standing and the holders of the Environmental Permits are not in default or breach thereof and no proceeding is pending or threatened to revoke or limit any Environmental Permit, except in each case where the result, individually or in the aggregate, would not have a Material Adverse Effect on the Corporation.

(C)has not received any notice of, or been prosecuted for an offence alleging, material non-compliance with any Environmental Laws, and the Corporation has not settled any allegation of material non-compliance short of prosecution.  There are no orders or directions relating to environmental matters requiring any material work, repairs, construction or capital expenditures to be made with respect to any of the assets of the Corporation nor has the Corporation received notice of any of the same and which orders, directions or notices remain outstanding as unresolved.

(D)The Corporation does not store any hazardous or toxic waste or substance on its current or former properties and have not disposed of any hazardous or toxic waste, in each case in a manner contrary to any Environmental Laws.

(lxvi)Intellectual Property. The Corporation and each Subsidiary owns or has the valid rights to use all of the Intellectual Property owned or used by it as of the date hereof and as contemplated for the operation of its business (and had all rights necessary to carry out its former activities at such time such activities were being conducted) and the Corporation has a valid and enforceable right to use all third party Intellectual Property used or held for use in the business of the Corporation. All registrations, if any, and filings necessary to preserve the rights of the Corporation in the Intellectual Property owned by the Corporation have been made and are in good standing.

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(lxvii)No Infringement. Except where such infringement, impairment or conflict would not result in a Material Adverse Effect, the conduct of the business of the Corporation and each Subsidiary as currently conducted does not infringe or otherwise impair or conflict with any Intellectual Property rights of any third party or any confidentiality obligation owed to a third party, and the Intellectual Property owned by the Corporation which is material to the conduct of the business of the Corporation and its Subsidiaries as currently conducted is not being infringed by any third party. The Corporation has no pending action or proceeding, nor any threatened action or proceeding, against any person with respect to the use of the Intellectual Property owned by the Corporation or the Subsidiaries. To the knowledge of the Corporation, the Intellectual Property owned by the Corporation and the Subsidiaries does not infringe upon the Intellectual Property rights of any other person. The Corporation has no pending action or proceeding, nor, to the knowledge of the Corporation, is there any threatened action or proceeding against it with respect to the use of the Intellectual Property by the Corporation or the Subsidiaries. No third parties have rights to any material Intellectual Property that is owned by the Corporation, other than rights acquired pursuant to non-exclusive licenses granted by the Corporation in the ordinary course of business.

(lxviii)Protection of Property and Information. The Corporation has taken commercially reasonable precautions and used commercially reasonable efforts to protect and to secure the confidentiality of its trade secrets and other Intellectual Property and confidential information.

(lxix)Data Security. The Corporation has made backups of all material Software and databases used by it and maintain such backups at a secure off-site location. The Corporation has taken all reasonable steps: (i) to maintain the integrity and security of its systems and network infrastructure in connection with the collection, transmission and storage of electronic data, including video and imagery; (ii) to block the distribution of sensitive imagery which may be harmful to or breach the security interests of any country; and (ii) to protect the information technology and communication systems used in connection with their operations and business from contamination, corruption, computer viruses, firewall breaches, sabotage, hacking or other software routines or hardware components that would permit material unauthorized access or the unauthorized disablement, theft or erasure of its information technology systems, communication systems, imagery, products or Software. The Corporation has disaster recovery and security plans and procedures in place and there have been no material unauthorized intrusions or breaches of the security of the information technology or communication systems used in connection with their operations and business.

(lxx)Marketable Title. The Corporation and each of the Subsidiaries has good and marketable title to the material property and assets owned by it (including as listed or described in the Financial Statements), free and clear of all Encumbrances except for those Encumbrances which would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.

(lxxi)Indemnities.  The Corporation is not a party to or bound by any agreement of guarantee, indemnification (other than an indemnification of directors and officers of the Corporation in accordance with the by-laws of the Corporation and applicable laws, indemnification agreements or covenants that are entered into arising in the ordinary course of business, including operating and similar agreements, credit facilities, purchase and sale agreements, indemnification and contribution provisions in agency and underwriting agreements and in transfer agency agreements) or any other like commitment of the obligations, liabilities (contingent or otherwise) or indebtedness of any other person.

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(lxxii)Fees and Commissions. Other than the Underwriter (or any member of the Underwriter's selling group) pursuant to this Agreement or as disclosed to the Underwriter in writing, there is no person acting or purporting to act at the request of the Corporation who is entitled to any brokerage fees, finder's fees, agency fees or other fiscal advisory or similar fee in connection with the Offering.

(lxxiii)Minute Books. The minute books and corporate records of the Corporation and the Subsidiaries which the Corporation has made available to the Underwriter and the Underwriter's Counsel in connection with their due diligence investigation of the Corporation are all of the minute books and material corporate records of the Corporation for such period and contain true and correct copies of all constating documents of the Corporation, including all amendments thereto, and true and correct copies of all minutes of all meetings and all consent resolutions of the directors, committees of directors and shareholders of the Corporation and all such meetings were duly called and properly held and all consent resolutions were properly adopted, and such minute books and corporate records are complete in all material respects.

(lxxiv)Due Diligence. The Due Diligence Responses are, or if supplied after the date hereof, will be at the date of supply, true and correct in all material respects where they relate to matters of fact and, to the knowledge of the Corporation, such Due Diligence Responses taken as a whole do not and shall not omit any fact or information necessary to make any of the responses not misleading in light of the circumstances in which such responses were given, and the Corporation and its directors and officers will have responded and will respond in a thorough and complete fashion. Where the Due Diligence Responses of the Corporation reflect the opinion or view of the Corporation or its directors or officers (including, Due Diligence Responses or portions of such Due Diligence Responses, which are forward looking or otherwise relate to projections, forecasts or estimates of future performance or results (operating, financial or otherwise)) ("Forward-Looking Statements"), such opinions or views are subject to the qualifications and provisions set forth in the Due Diligence Responses and are and will be honestly held and believed to be reasonable at the time they are given; provided, however, it shall not constitute a breach of this paragraph solely if the actual results vary or differ from those contained in Forward-Looking Statements.

(lxxv)Government Incentives.  All filings made by the Corporation or Subsidiaries under which the Corporation or Subsidiaries has received or is entitled to government incentives, have been made in accordance, in all material respects, with all applicable legislation and contain no misrepresentations of material fact or omit to state any material fact which could cause any amount previously paid to the Corporation or the Subsidiaries or previously accrued on the accounts thereof to be recovered or disallowed.

(lxxvi)Warrant Agent. TSX Trust Company, at its office in Vancouver, British Columbia, has been duly appointed as the Warrant Agent in respect of the Warrants and Compensation Option Warrants issued pursuant to the Warrant Indenture.

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(lxxvii)Transfer Agent. TSX Trust Company, at its office in Vancouver, British Columbia, has been duly appointed as the Transfer Agent and registrar for the Common Shares. 

(lxxviii)No Cease Trade Orders.  No order ceasing or suspending trading in any securities of the Corporation or prohibiting the sale of any securities by the Corporation has been issued by an exchange or securities regulatory authority, and no proceedings for this purpose have been instituted, or are, to the Corporation's knowledge, pending, contemplated or threatened.

(lxxix)Exchange Acceptance. The Unit Shares and Warrant Shares are conditionally approved for listing and trading on the Exchange, subject to the satisfaction of the listing conditions set forth in the conditional approval letter of the Exchange dated ●, 2022, a copy of which has been provided to the Underwriter.

(lxxx)Full Disclosure. The Corporation has not withheld and will not withhold from the Underwriter prior to the Closing Time, any material facts relating to the Corporation, the Subsidiaries or the Offering.

(lxxxi)U.S. Securities Laws. The Corporation has not taken, and will not take, any action that would cause the exclusion from the registration requirements of the U.S. Securities Act afforded by Rule 903 of Regulation S to be unavailable with respect to the Offering. None of the Corporation, its affiliates, or any persons acting on any of their behalf, has made or will make any Directed Selling Efforts or engaged or will engage in any form of General Solicitation or General Advertising in the United States in connection with the Offering.

8.CLOSING

The purchase and sale of the Units shall be completed at the Closing Time at the offices of the Corporation's Counsel in Montreal, Quebec, or at such other place or time as the Underwriter and the Corporation may agree upon. At the Closing Time, the Corporation shall duly and validly deliver to the Underwriter the Units via non-certificated inventory deposit with CDS, and all of the documents set out in Section 9, against payment and delivery of the net proceeds of the Offering by wire transfer to the Underwriter.

9.CLOSING DOCUMENTS

The obligations of the Underwriter hereunder to purchase the Units at the Closing Time shall be conditional upon all representations and warranties and other statements of the Corporation herein being, at and as of the Closing Time, true and correct in all material respects, the Corporation having performed in all material respects, at the Closing Time, all of its obligations hereunder theretofore to be performed and the Underwriter receiving at the Closing Time:

(a)favourable legal opinions of the Corporation's counsel addressed to the Underwriter, in form and substance reasonably satisfactory to the Underwriter, with respect to such matters as the Underwriter may reasonably request relating to the Corporation, the offering of the Units and the transactions contemplated hereby, including, without limitation, that:

(i)the Corporation has been duly incorporated, amalgamated or continued and is validly subsisting and has all requisite corporate capacity, power and authority to carry on its business as now conducted by it and to own its properties and assets as described in the Prospectuses and is qualified to carry on business under the laws of each of the jurisdictions in which it carries on a material portion of its business;

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(ii)the Corporation has full corporate power and authority to enter into this Agreement and the Warrant Indenture and to perform its obligations set out herein and therein, and this Agreement and the Warrant Indenture have been duly authorized, executed and delivered by the Corporation, and each of this Agreement and the Warrant Indenture constitutes a legal, valid and binding obligation of the Corporation, enforceable against the Corporation in accordance with its respective terms, except that the validity, binding effect and enforceability of the terms of agreements and documents are subject to customary qualifications and assumptions;

(iii)the execution and delivery of this Agreement, the Warrant Indenture and the Compensation Option Certificates, and the fulfillment of the terms hereof and thereof by the Corporation, and the performance of and compliance with the terms of the Warrant Indenture and the Compensation Option Certificates by the Corporation does not and will not result in a breach of, or constitute a default under, and does not create a state of facts which results in a breach of or constitute a default under: (a) any applicable laws of the Province of British Columbia or the federal laws of Canada applicable therein; (b) any term or provision of the articles, by-laws or other constating documents, as applicable, of the Corporation; (c) of which counsel is aware, any resolutions of the shareholders or directors (or any committee thereof) of the Corporation; (d) of which counsel is aware, any indenture, mortgage, note, contract, agreement (written or oral), instrument, lease or other document to which the Corporation is a party or by which it is bound; or (e) of which counsel is aware, any judgment, decree or order, of any court, governmental agency or body or regulatory authority having jurisdiction over or binding the Corporation or its properties or assets;

(iv)the Corporation is a reporting issuer in each of the Provinces of Canada other than Quebec, and is not included in a list of defaulting reporting issuers maintained pursuant to Canadian Securities Laws, and is eligible to participate in NI 44-101 in each of the Qualifying Jurisdictions;

(v)the Offering has been duly authorized by all necessary corporate action on the part of the Corporation;

(vi)the Unit Shares have been issued as fully paid and non-assessable Common Shares of the Corporation;

(vii)the Warrant Shares issuable upon exercise of the Warrants, the Compensation Option Shares issuable upon exercise of the Compensation Options and the Compensation Option Warrant Shares issuable upon exercise of the Compensation Option Warrants have been reserved and allotted for issuance and when issued in accordance with the terms of the Warrant Indenture and the Compensation Option Certificates, as applicable, will be validly issued as fully paid and non-assessable shares;

(viii)the attributes of the Unit Shares, Unit Warrants, Unit Warrant Shares and Compensation Options conform in all material respects with the description thereof contained in the Prospectuses;

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(ix)the Unit Shares and Warrants are eligible investments as described under the heading "Eligibility for Investment" in the Prospectuses;

(x)the statements in the Prospectuses under the heading "Eligibility for Investment" constitute a fair summary of the qualification of the Unit Shares and Warrants as investments for certain deferred plans referred to therein;

(xi)all necessary documents have been filed, all necessary proceedings have been taken and all legal requirements have been fulfilled as required under the Canadian Securities Laws of each of the Qualifying Jurisdictions in order to qualify the Units and Compensation Options for distribution and sale to the public in each of such Qualifying Jurisdiction by or through investment dealers and brokers duly registered under the Canadian Securities Laws who have complied with the relevant provisions of such Canadian Securities Laws;

(xii)the Corporation has the necessary corporate power and authority to execute and deliver the Prospectuses and all necessary corporate action has been taken by the Corporation to authorize the execution and delivery by it of the Prospectuses and the filing thereof, as the case may be, in each of the Qualifying Jurisdictions in accordance with Canadian Securities Laws;

(xiii)the Unit Shares, Warrant Shares, Compensation Option Shares and Compensation Option Warrant Shares are conditionally approved for listing and, upon notification to the Exchange of the issuance and sale thereof and fulfillment of the conditions of the Exchange, and in the case of the Warrant Shares, Compensation Option Shares, and Compensation Option Warrant Shares, once issued, will be listed and posted for trading on the Exchange;

(xiv)TSX Trust Company, at its offices in Vancouver, has been duly appointed the transfer agent and registrar for the Common Shares, and has been duly appointed as warrant agent under the Warrant Indenture;

(xv)the form and terms of the certificates representing the Common Shares, Warrants, and Compensation Options have been duly approved and adopted by the board of directors of the Corporation and the certificates representing the Common Shares comply with all legal requirements (including the requirements of the Exchange) relating thereto; and

(xvi)the authorized and issued capital of the Corporation;

It is understood that the respective counsel may rely on the opinions of local counsel acceptable to them as to matters governed by the laws of jurisdictions other than the Provinces of British Columbia, Alberta, Ontario, Québec or Canada, and on certificates of Governmental Authorities, officers of the Corporation, the transfer agent and the Corporation's Auditors, and letters from TSX-V representatives as to relevant matters of fact;

(b)a certificate of the Corporation dated the Closing Date, addressed to the Underwriter and signed on behalf of the Corporation by the Chief Executive Officer and the Chief Financial Officer of the Corporation or such other officers of the Corporation satisfactory to the Underwriter, acting reasonably, certifying, on behalf of the Corporation and without personal liability, that:

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(i)the Corporation has complied with and satisfied all terms and conditions of this Agreement on its part to be complied with or satisfied at or prior to the Closing Time;

(ii)the representations and warranties of the Corporation set forth in this Agreement are true and correct at the Closing Time as if made at such time (and, with respect to the representations and warranties contemplated by subsection 7(a) of this Agreement, as if the Prospectus and the Supplemented Prospectus were delivered to the Underwriter at the Closing Time;

(iii)no event of a nature referred to in subsections 4(a), 4(b), 11(a)(i), 11(a)(ii), 11(a)(iii) or 11(a)(iv) of this Agreement has occurred or to the knowledge of such officer is pending, contemplated or threatened (excluding any requirement to make any determination as to the Underwriter's opinion); and

and each such statement shall be true and the Underwriter shall have no knowledge to the contrary;

(c)certificates representing the Compensation Options;

(d)a comfort letter of the Corporation's Auditors addressed to the Underwriter and dated the Closing Date, satisfactory in form and substance to the Underwriter, acting reasonably, bringing the information contained in the comfort letters referred to in subsection 4(c) hereof up to the Closing Time, which comfort letter shall be not more than two Business Days prior to the Closing Date;

(e)subject only to the Standard Listing Conditions, the Unit Shares, the Warrant Shares, Compensation Option Shares and Compensation Option Warrant Shares have been conditionally accepted for listing on the TSX-V and upon notice to the TSX-V of the issuance thereof and the fulfillment of the Standard Listing Conditions, the Unit Shares, the Warrant Shares, Compensation Option Shares and Compensation Option Warrant Shares will be listed and posted for trading on the TSX-V;

(f)evidence satisfactory to the Underwriter that the Corporation has received all necessary approvals and has taken all necessary steps in order to close the U.S. IPO concurrently with the Offering;

(g)evidence satisfactory to the Underwriter that no trading restrictions shall apply to the Unit Shares, Warrants or Warrant Shares for any reason, including as a result of the Offering or the U.S. IPO;

(h)evidence satisfactory to the Underwriter that the Corporation has obtained all other necessary third party approvals for the issuance and listing of the Units; and

(i)such other certificates and documents as the Underwriter may request, acting reasonably.

10.DELIVERIES

(a)The sale of the Units to be purchased hereunder shall be completed at the Closing Time, electronically, or at such place as the Corporation and the Underwriter may agree.  Subject to the conditions set forth herein, the Corporation, shall deliver to the Underwriter the following:

(i)the opinions, certificates and documents referred to in Section 9;

(ii)evidence of non-certificated registration as set out in subsection 10(b) representing, in the aggregate, all of the Units which the Underwriter has sold hereunder registered in the name of CDS or in such name or names as the Underwriter shall notify the Corporation in writing not less than 24 hours prior to the Closing Time;

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(iii)the Compensation Option Certificates; and

(b)If the Corporation determines to issue the Units under the non-certificated inventory process in accordance with the rules and procedures of CDS, then, as an alternative to the Corporation delivering to the Underwriter definitive certificates representing the Units in the manner and at the times set forth in this Section 10:

(i)the Underwriter will provide a direction to CDS with respect to the crediting of the Units to the accounts of the participants of CDS as shall be designated by the Underwriter in writing in sufficient time prior to the Closing Date to permit such crediting; and

(ii)the Underwriter shall have received one or more certificates and/or book-entry only securities in accordance with the "non-certificated inventory" rules and procedures of CDS evidencing the Units.

(c)The deliveries set out in subsection  10(a) shall be delivered against payment by the Underwriter to the Corporation of the gross proceeds of the Offering net of (i) the Underwriting Fee, and (ii) the Underwriter's Expenses, payable by the Corporation pursuant to Section 12 of this Agreement, by wire transfer of immediately available funds together with a receipt signed by the the Underwriter, for such Units.

11.RIGHTS OF TERMINATION

(a)In addition to any other rights or remedies available to the Underwriter, the Underwriter may, without liability, terminate their obligations hereunder, by written notice to the Corporation in the event that after the date hereof and at or prior to the Closing Time:

(i)any order to cease or suspend trading in any securities of the Corporation or prohibiting or restricting the distribution of any of the Units is made, or proceedings are announced, commenced or threatened for the making of any such order, by any securities commission or similar regulatory authority, the Exchange, Nasdaq, or any other competent authority, and such order or proceeding has not been rescinded, revoked or withdrawn or such announced, commenced or threatened proceeding has not been terminated or withdrawn;

(ii)any inquiry, action, suit, investigation or other proceeding (whether formal or informal) in relation to the Corporation or any of its directors or senior officers is announced, commenced or threatened by any Governmental Authority, securities commission or similar regulatory authority, the Exchange, Nasdaq or any other competent authority or there is a change in law, regulation or policy or the interpretation or administration thereof, if, in the reasonable opinion of the Underwriter or any one of them, the change, announcement, commencement or threatening thereof operates to prevent or restrict the trading or distribution of the Units, or which in the reasonable opinion of the Underwriter, acting in good faith, could be expected to have a material adverse effect on the market price or value of the Units;

(iii)there shall have occurred any material adverse change in the business, financial condition, assets, liabilities (contingent or otherwise), results of operations or prospects of the Corporation or any adverse change in any material fact contained or referred to in the Preliminary, Final Prospectus or Supplemented Prospectus or any amendment thereof, or there shall exist or be discovered by the Underwriter any material fact which is, or may be, of such a nature as to render the Preliminary, Final Prospectus or Supplemented Prospectus or any amendment thereof, untrue, false or misleading in a material respect or result in a misrepresentation (other than a change or fact related solely to the Underwriter), which in the reasonable opinion of any Underwriter could be expected to have a material adverse effect on the market price of the Common Shares or value of the Units and/or the securities issued pursuant to the U.S. IPO;

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(iv)there shall have occurred or be discovered any adverse change, as determined by the Underwriter in its sole discretion, acting reasonably, in the business, operations, capital or condition (financial or otherwise), business or business prospects of the Corporation or its properties, assets, liabilities or obligations (absolute, accrued, contingent or otherwise) which in the opinion of the Underwriter, could reasonably be expected to have a material adverse effect on the market price or value or marketability of the Common Shares, the Units, or any other securities of the Corporation;

(v)there should develop, occur or come into effect or existence any event, action, state, condition or occurrence of national or international consequence, acts of hostilities or escalation thereof or other calamity or crisis or any change or development involving a prospective change in national or international political, financial or economic conditions or any action, law, regulation or inquiry which, in the reasonable opinion of the Underwriter, materially adversely affects, or may materially adversely affect, the financial markets in Canada or the United States, or the business, operations or affairs of the Corporation, or the market price or value of the Units;

(vi)the Underwriter shall become aware, as a result of their due diligence review or otherwise, of any material information with respect to the Corporation which had not been publicly disclosed or disclosed in writing to the Underwriter prior to the date hereof and which in the sole opinion of the Underwriter or any one of them, acting reasonably, would be expected to have a material adverse effect on the market price or value or the marketability of the Common Shares or the Units;

(vii)the Corporation is in breach of any material term, condition or covenant of this Agreement, the U.S. Underwriting Agreement, or any of the representations and warranties made by the Corporation in this Agreement or the U.S. Underwriting Agreement is false or becomes false in any material respect; or

(viii)the Corporation has not obtained from the BCSC a Final Passport System Decision Document in accordance with subsection (m)(i)(B).

(b)The Underwriter may exercise any or all of the rights provided for in subsection 11(a) notwithstanding any material change, change, event or state of facts and notwithstanding any act or thing taken or done by the Underwriter or any inaction by the Underwriter, whether before or after the occurrence of any material change, change, event or state of facts including, without limitation, any act of the Underwriter related to the offering or continued offering of the Units for sale and any act taken by the Underwriter in connection with any amendment to the Prospectus or the Supplemented Prospectus (including the execution of any amendment or any other Supplementary Material) and the Underwriter shall only be considered to have waived or be estopped from exercising or relying upon any of their rights hereunder if such waiver or estoppel is in writing and specifically waives or estops such exercise or reliance.

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(c)Any termination pursuant to the terms of this Agreement shall be effected by notice in writing delivered to the Corporation provided that no termination shall discharge or otherwise affect any obligation of the Corporation under Sections 12, 13, or 14.  The rights of the Underwriter to terminate their obligations hereunder are in addition to, and without prejudice to, any other rights or remedies they may have.

(d)If the Underwriter elects to terminate its obligation to purchase the Units as aforesaid, whether the reason for such termination is within or beyond the control of the Corporation, the liability of the Corporation hereunder with respect to the Underwriter shall be limited to the indemnity referred to in Section 14 and the payment of expenses referred to in Section 12.

12.EXPENSES

The Corporation will be responsible for all of the Underwriter's Expenses, including the reasonable fees plus taxes and disbursements of the Underwriter's Counsel, due diligence and any marketing expenses including any GST, HST and any provincial sales tax expenses of the Underwriter. The Underwriter's Expenses are payable by the Corporation regardless of whether the Offering is completed.

13.SURVIVAL

All representations, warranties, covenants (to the extent such covenants by their terms continue after the Closing) and agreements of the Corporation herein contained or contained in any documents delivered by the Corporation pursuant to this Agreement and in connection with the transactions herein contemplated shall survive the Closing and shall continue in full force and effect for the benefit of the Underwriter for a period of 24 months following the Closing Date; provided that, the indemnity and contribution obligations under Section 14 shall survive the completion of services rendered hereunder by the Underwriter or any termination of this Agreement. The representations, warranties, covenants and agreements of the Underwriter herein contained or contained in any documents delivered by the Underwriter pursuant to this Agreement and in connection with the transactions herein contemplated shall survive the Closing and shall continue in full force and effect for the benefit of the Corporation for a period of 24 months following the Closing Date.

14.INDEMNITY

(a)The Corporation shall indemnify and save the Underwriter and its affiliates, and each of their agents, advisors, directors, officers, partners, principals, shareholders and employees, harmless against and from all liabilities, claims, demands, suits, proceedings, losses (other than losses of profit), costs (including, without limitation, legal fees and disbursements on a full indemnity basis), damages and expenses to which the Underwriter or its affiliates, or any of the Underwriter's or their affiliates' agents, directors, officers, shareholders or employees may be subject or which the Underwriter, or any of the Underwriter's agents, advisors, directors, officers, partners, principals, shareholders or employees may suffer or incur, whether under the provisions of any statute or otherwise, in any way caused by, or arising directly or indirectly from or in consequence of:

(i)the Offering;

(ii)any information or statement contained in the Preliminary Prospectus, the Prospectus, the Supplemented Prospectus, the Registration Statement, any Supplementary Material, any part of the Public Record or in any other document or material filed or delivered by or on behalf of the Corporation pursuant hereto (other than any information or statement relating solely to the Underwriter and furnished to the Corporation by the Underwriter expressly for inclusion in the Preliminary Prospectus, Prospectus, the Supplemented Prospectus, the Registration Statement, or any Supplementary Material or such other document or material) which is or is alleged to be untrue or any omission or alleged omission to provide any information or state any fact (other than any information or fact relating solely to the Underwriter) the omission of which makes or is alleged to make any such information or statement untrue or misleading in light of the circumstances in which it was made;

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(iii)any misrepresentation or alleged misrepresentation (except a misrepresentation which is based upon information relating solely to the Underwriter and furnished to the Corporation by the Underwriter in writing expressly for inclusion in the Preliminary Prospectus, Prospectus, the Supplemented Prospectus, Registration Statement, any Supplementary Material or in any document or other part of the Public Record) contained in the Preliminary Prospectus, the Prospectus, the Supplemented Prospectus, the Registration Statement, any Supplementary Material or in any other document or any other part of the Public Record filed by or on behalf of the Corporation;

(iv)any prohibition or restriction of trading in the securities of the Corporation or any prohibition or restriction affecting the distribution of the Units imposed by any competent authority if such prohibition or restriction is based on any misrepresentation or alleged misrepresentation of a kind referred to in subsection 14(a)(ii);

(v)any order made or any inquiry, investigation (whether formal or informal) or other proceeding commenced or threatened by any one or more competent authorities prohibiting, restricting, relating to or materially affecting the trading or distribution of the Units;

(vi)any breach of, default under or non-compliance by the Corporation with any requirements of the Canadian Securities Laws, the by-laws, rules or regulations of the Exchange or any representation, warranty, term or condition of this Agreement or in any certificate or other document delivered by or on behalf of the Corporation hereunder or pursuant hereto; or

(vii)the exercise by any subscriber for Units of any contractual or statutory right of rescission or damages in connection with the purchase of the Units based on any misrepresentation or alleged misrepresentation of a kind referred to in subsection 14(a)(ii),

provided, however, no party who has engaged in any fraud, wilful misconduct, fraudulent misrepresentation or gross negligence shall be entitled, to the extent that a court of competent jurisdiction from which no appeals can be made has determined that the liabilities, claims, losses, costs, damages or expenses were caused directly and solely by such activity, to claim indemnification from any person who has not engaged in such fraud, wilful misconduct, fraudulent misrepresentation or gross negligence (provided that for greater certainty, the foregoing shall not disentitle the Underwriter from claiming indemnification hereunder to the extent that the negligence, if any, relates to the Underwriter's failure to conduct adequate "due diligence"), and in such case the indemnity provided for in this section shall cease to apply and such person shall promptly reimburse the Corporation for any funds advanced to the person in respect of such liabilities, claims, suits, proceedings, demands, losses, costs, damages and expenses.

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(b)If any claim contemplated by subsection 14(a) shall be asserted against any of the persons or corporations in respect of which indemnification is or might reasonably be considered to be provided for in such subsections, such person or corporation (the "Indemnified Person") shall notify the Corporation (provided that failure to so notify the Corporation of the nature of such claim in a timely fashion shall relieve the Corporation of liability hereunder only if and to the extent that such failure materially prejudices the Corporation's ability to defend such claim) as soon as possible of the nature of such claim and the Corporation shall be entitled (but not required) to assume the defense of any suit brought to enforce such claim, provided however, that the defense shall be through legal counsel selected by the Corporation and acceptable to the Indemnified Person acting reasonably and that no admission of liability or settlement may be made by the Corporation or the Indemnified Person without the prior written consent of the other, such consent not to be unreasonably withheld.  The Indemnified Person shall have the right to retain its own counsel in any proceeding relating to a claim contemplated by subsection 14(a) if:

(i)the Indemnified Person has been advised by counsel that there may be a reasonable legal defense available to the Indemnified Person which is different from or additional to a defense available to the Corporation and that representation of the Indemnified Person and the Corporation by the same counsel would be inappropriate due to the actual or potential differing interests between them (in which case the Corporation shall not have the right to assume the defense of such proceedings on the Indemnified Person's behalf);

(ii)the Corporation shall not have taken the defense of such proceedings and employed counsel within ten (10) days after notice has been given to the Corporation of commencement of such proceedings; or

(iii)the employment of such counsel has been authorized by the Corporation in connection with the defense of such proceedings;

and, in any such event, the reasonable fees and expenses of such Indemnified Person's counsel (on a solicitor and his client basis) shall be paid by the Corporation, provided that the Corporation shall not, in connection with any one such action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the fees and expenses of more than one law firm in any single jurisdiction for all such Indemnified Persons.

(c)The Corporation hereby waives its rights to recover contribution from the Underwriter with respect to any liability of the Corporation by reason of or arising out of any misrepresentation in the Preliminary Prospectus, the Prospectus, the Supplemented Prospectus, the Registration Statement, any Supplementary Material or any other part of the Public Record provided, however, that such waiver shall not apply in respect of liability caused directly or incurred directly by reason of any misrepresentation which is based upon information relating solely to the Underwriter contained in such document and furnished to the Corporation by the Underwriter expressly for inclusion in the Preliminary Prospectus, the Prospectus, the Supplemented Prospectus, the Registration Statement or any Supplementary Material.

(d)If any legal proceedings shall be instituted against the Corporation in respect of the Preliminary Prospectus, the Prospectus, the Supplemented Prospectus, the Registration Statement, any Supplementary Material or any other part of the Public Record or the Units or if any regulatory authority or stock exchange shall carry out an investigation of the Corporation in respect of the Preliminary Prospectus, the Prospectus, the Registration Statement, the Supplemented Prospectus, any Supplementary Material or any other part of the Public Record or the Units and, in either case, any Indemnified Person is required to testify, or respond to procedures designed to discover information, in connection with or by reason of the services performed by the Underwriter hereunder, the Indemnified Persons may employ their own legal counsel and the Corporation shall pay and reimburse the Indemnified Persons for the reasonable fees, charges and disbursements (on a full indemnity basis) of such legal counsel and the other expenses reasonably incurred by the Indemnified Persons in connection with such proceedings or investigation.

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(e)The rights and remedies of the Indemnified Persons set forth in Sections 14 and 15 (in the case of the Underwriter) hereof are to the fullest extent possible in law, cumulative and not alternative and the election by any Underwriter or other Indemnified Person to exercise any such right or remedy shall not be, and shall not be deemed to be, a waiver of any other rights and remedies.

(f)The Corporation hereby acknowledges that the Underwriter is acting as agent for the Underwriter's respective agents, directors, officers, partners, principals, shareholders and employees under this Section 14 and under Section 15 with respect to all such agents, directors, officers, partners, principals, shareholders and employees.

(g)The Corporation waives any right it may have of first requiring an Indemnified Person to proceed against or enforce any other right, power, remedy or security or claim or to claim payment from any other person before claiming under this indemnity.  It is not necessary for an Indemnified Person to incur expense or make payment before enforcing such indemnity.

(h)The rights of indemnity contained in this Section 14 shall not apply if the Corporation has complied with the provisions of Sections 2(b), 3(a) and 3(b) and the person asserting any claim contemplated by this Section 14 was not provided with a copy of the Prospectus or the Supplemented Prospectus or any amendment to the Prospectus or Supplemented Prospectus or other document which corrects any misrepresentation or alleged misrepresentation which is the basis of such claim and which was required, under Canadian Securities Laws, to be delivered to such person and which the Corporation has provided to the Underwriter to forward to such person.

(i)If the Corporation has assumed the defense of any suit brought to enforce a claim hereunder, the Indemnified Person shall provide the Corporation copies of all documents and information in its possession pertaining to the claim, take all reasonable actions necessary to preserve its rights to object to or defend against the claim, consult and reasonably cooperate with the Corporation in determining whether the claim and any legal proceeding resulting therefrom should be resisted, compromised or settled and reasonably cooperate and assist in any negotiations to compromise or settle, or in any defense of, a claim undertaken by the Corporation.

15.CONTRIBUTION

In order to provide for just and equitable contribution in circumstances in which the indemnification provided for in this Agreement is due in accordance with its terms but is, for any reason, held by a court to be unavailable from the Corporation on grounds of policy or otherwise, the Corporation and the party or parties seeking indemnification shall contribute to the aggregate liabilities, claims, demands, losses (other than losses of profit), costs (including, without limitation, legal fees and disbursements on a full indemnity basis), damages and expenses (or claims, actions, suits or proceedings in respect thereof) to which they may be subject or which they may suffer or incur:

(a)in such proportion as is appropriate to reflect the relative benefit received by the Corporation on the one hand, and by the Underwriter on the other hand, from the offering of the Units; or

(b)if the allocation provided by subsection 15(a) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in subsection 15(a) above but also to reflect the relative fault of the Underwriter on the one hand, and the Corporation, on the other hand, in connection with the statements, commissions or omissions or other matters which resulted in such liabilities, claims, demands, losses, costs, damages or expenses, as well as any other relevant equitable considerations.

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The relative benefits received by the Corporation, on the one hand, and the Underwriter, on the other hand, shall be deemed to be in the same proportion that the total proceeds of the offering received by the Corporation (net of fees but before deducting expenses) bear to the fees received by the Underwriter.  In the case of liability arising out of the Preliminary Prospectus, the Prospectus, the Supplemented Prospectus, the Registration Statement or any Supplementary Material, the relative fault of the Corporation, on the one hand, and of the Underwriter, on the other hand, shall be determined by reference, among other things, to whether the misrepresentation or alleged misrepresentation, order, inquiry, investigation or other matter or thing referred to in Section 14 relates to information supplied or which ought to have been supplied by, or steps or actions taken or done on behalf of or which ought to have been taken or done on behalf of the Corporation or the Underwriter and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such misrepresentation or alleged misrepresentation, order, inquiry, investigation or other matter or thing referred to in Section 14.

The amount paid or payable by an Indemnified Person as a result of liabilities, claims, demands, losses (other than losses of profit), costs, damages and expenses (or claims, actions, suits or proceedings in respect thereof) referred to above shall, without limitation, include any legal or other expenses reasonably incurred by the Indemnified Person in connection with investigating or defending such liabilities, claims, demands, losses, costs, damages and expenses (or claims, actions, suits or proceedings in respect thereof) whether or not resulting in any action, suit, proceeding or claim.

Each of the Corporation and the Underwriter agree that it would not be just and equitable if contributions pursuant to this Agreement were determined by pro rata allocation or by any other method of allocation which does not take into account the equitable considerations referred to in the immediately preceding sections.  The rights to contribution provided in this Section 15 shall be in addition to, and without prejudice to, any other right to contribution which the Underwriter or other Indemnified Persons may have.

Any liability of an Underwriter under this Section 15 shall be limited to the amount actually received by the Underwriter under Section 14(a).

16.UNDERWRITING FEE AND COMPENSATION OPTIONS

(a)In consideration of the underwriting services to be rendered by the Underwriter in connection with the Offering, the Underwriter will receive from the Corporation:

(i)a cash commission equal to 7.0% of the aggregate gross proceeds raised in the Offering (the "Underwriting Fee");

(ii)non-transferable Compensation Options (the "Compensation Options") equal to 7.0% of the aggregate number of Units issued. Each Compensation Option shall be exercisable for one Compensation Option unit (each, a "Compensation Option Unit") for a period of 24 months from the Closing Date at a price equal to the Offering Price, pursuant to the terms of the Compensation Option certificates (the "Compensation Option Certificates") in the form and on the terms satisfactory to the Corporation and the Underwriter, acting reasonably.  Each Compensation Option Unit shall consist of one Common Share (each, a "Compensation Option Share") and one warrant (each, a "Compensation Option Warrant"), with each Compensation Option Warrant being governed by the terms of the Warrant Indenture and being exercisable on the same terms as the Warrants for one Common Share (each, a "Compensation Option Warrant Share"); and

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(iii)the Underwriter understands and agrees that the Compensation Options may not be exercised in the United States or by or on behalf of a U.S. Person or a person in the United States unless registered under the U.S. Securities Act and any applicable state securities laws or unless an exemption from such registration requirements is available.

17.NOTICES

Unless otherwise expressly provided in this Agreement, any notice or other communication to be given under this Agreement (a "notice") shall be in writing addressed as follows:

(a)if to the Corporation, to it at:

KWESST Micro Systems Inc.

Unit 1, 155 Terence Matthews Crescent
Kanata, ON K2M 2A8

Attention:Jeffrey MacLeod
Email: macleod@kwesst.com

with a copy to (which will not constitute notice):

Fasken Martineau DuMoulin LLP

800 Square Victoria, Suite 3500

Montréal, Quebec  H4Z 1E9

Attention:Frank Mariage

Email:fmariage@fasken.com

(b)if to the Underwriter:

PI Financial Corp.

666 Burrard Street

Suite 1900

Vancouver, British Columbia  V6C 3N1

Attention:Vay Tham
Email:vtham@pifinancial.com

with a copy to (which will not constitute notice):

DS Lawyers Canada LLP

Dome Tower

333 7^th Ave SW, Suite 800

Calgary, Alberta  T2P 2Z1

Attention:Dale Burstall
Email: dburstall@dsavocats.ca

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or to such other address as any of the parties may designate by notice given to the others.

Each notice shall be personally delivered to the addressee or sent by e-mail transmission to the addressee and (i) a notice which is personally delivered shall, if delivered on a Business Day, be deemed to be given and received on that day and, in any other case, be deemed to be given and received on the first Business Day following the day on which it is delivered; and (ii) a notice which is sent by e-mail transmission shall be deemed to be given and received on the first Business Day following the day on which it is confirmed to have been sent.

18.USE OF ADVICE

The Corporation acknowledges and agrees that all written and oral opinions, advice, analysis and materials provided by the Underwriter in connection with the engagement hereunder are intended solely for the Corporation's benefit and its internal use only in considering the Offering and the Corporation agrees that no such opinion, advice, analysis or material will be used for any other purpose whatsoever or reproduced, disseminated, quoted from or referred to in whole or in part at any time, in any manner or for any purpose, without the Underwriter's prior written consent in each specific instance. Any advice or opinions given by the Underwriter hereunder will be made subject to, and will be based upon such assumptions, limitations, qualifications and reservations as the Underwriter in its sole judgment, deem necessary or prudent in the circumstances. The Underwriter expressly disclaim any liability or responsibility by reason of any unauthorized use, publication, distribution of or reference to any oral or written opinions or advice or materials provided or any unauthorized reference to the Underwriter or this Agreement.

19.MATTERS RELATING TO THE ENGAGEMENT

In connection with the services described herein, the Underwriter shall act as an independent contractor, and any duties of the Underwriter arising out of this Agreement shall be owed solely to the Corporation. The Corporation acknowledges that the Underwriter is a securities firm engaged in securities trading and brokerage activities, as well as providing investment banking and financial advisory services, which may involve services provided to other companies engaged in businesses similar or competitive to the business of the Corporation. The Corporation acknowledges and agrees that in connection with all aspects of the engagement contemplated hereby, and any communications in connection therewith, the Corporation, on the one hand, and the Underwriter and any of its respective affiliates through which the Underwriter may be acting, on the other hand, will have a business relationship that does not create, by implication or otherwise, any fiduciary duty on the part of the Underwriter or such affiliates, and each party hereto agrees that no such duty will be deemed to have arisen in connection with any such transactions or communications. Information which is held elsewhere within the Underwriter, but of which none of the individuals in the investment banking department or division of the Underwriter involved in providing the services contemplated by this Agreement actually has knowledge (or without breach of internal procedures can properly obtain) will not for any purpose be taken into account in determining any of the responsibilities of the Underwriter to the Corporation under this Agreement.

20.TIME OF THE ESSENCE

Time shall, in all respects, be of the essence hereof.

21.CANADIAN DOLLARS

All references herein to dollar amounts are to lawful money of Canada unless otherwise indicated.

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22.HEADINGS

The headings contained herein are for convenience only and shall not affect the meaning or interpretation hereof.

23.SINGULAR AND PLURAL, ETC

Where the context so requires, words importing the singular number include the plural and vice versa, and words importing gender shall include the masculine, feminine and neuter genders.

24.ENTIRE AGREEMENT

This Agreement constitutes the only agreement between the parties with respect to the subject matter hereof and shall supersede any and all prior negotiations, understandings and agreements, whether oral or written, including, without limitation, the Engagement Letter. This Agreement may be amended or modified in any respect by written instrument signed by the parties only.

25.SEVERABILITY

If one or more of the provisions contained herein shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement, but this Agreement shall be construed as if such invalid, illegal or unenforceable provision or provisions had never been contained herein.

26.GOVERNING LAW

This Agreement shall be governed by and construed in accordance with the laws of the Province of Ontario and the federal laws of Canada applicable therein. Each of the Corporation and the Underwriter irrevocably submit to the non-exclusive jurisdiction of the courts of Ontario with respect to any matter arising hereunder or relating hereto.

27.SUCCESSORS AND ASSIGNS

The terms and provisions of this Agreement shall be binding upon and enure to the benefit of the Corporation and the Underwriter and their respective executors, heirs, successors and permitted assigns; provided that, except as provided herein, this Agreement shall not be assignable by any party without the written consent of the others.

28.FURTHER ASSURANCES

Each of the parties hereto shall do or cause to be done all such acts and things and shall execute or cause to be executed all such documents, agreements and other instruments as may reasonably be necessary or desirable for the purpose of carrying out the provisions and intent of this Agreement.

29.EFFECTIVE DATE

This Agreement is intended to and shall take effect as of the date first set forth above, notwithstanding its actual date of execution or delivery.

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30.COUNTERPARTS AND FACSIMILE

This Agreement may be executed in any number of counterparts and by facsimile, each of which so executed shall constitute an original and all of which taken together shall form one and the same agreement.

[Remainder of Page Intentionally Left Blank]

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If the foregoing is in accordance with your understanding and is agreed to by you, please so indicate by executing a copy of this Agreement where indicated below and delivering the same to the Underwriter.

PI FINANCIAL CORP.
Per:
	Authorized Signatory

The foregoing is hereby accepted on the terms and conditions herein set forth.

DATED as of this ● day of November, 2022.

KWESST MICRO SYSTEMS INC.
Per:
	Authorized Signatory

EX-4.2

WARRANT AGENT AGREEMENT

WARRANT AGENT AGREEMENT (this "Warrant Agreement") dated as of _________, 2022 (the "Issuance Date") between KWESST Micro Systems Inc., a corporation formed under the laws of British Columbia, Canada (the "Company"), and Continental Stock Transfer & Trust (the "Warrant Agent").

RECITALS

WHEREAS, pursuant to the terms of that certain Underwriting Agreement ("Underwriting Agreement"), dated __, 2022, by and among the Company and ThinkEquity LLC, as representative of the underwriters set forth therein, the Company is engaged in a United States public offering (the "Offering") of up to _________ (the "Shares") common shares, no par value per share (the "Common Shares"), of the Company, up to ________ pre-funded warrants (the "Pre-funded Warrants") to purchase up to __________ Common Shares (the "Pre-funded Warrant Shares"), and warrants (the "Warrants") to purchase up to _________ Common Shares (the "Warrant Shares"), including Shares, Pre-funded Warrants and Warrants issuable pursuant to the underwriters' over-allotment option;

WHEREAS, the Company has filed with the United States Securities and Exchange Commission (the "Commission") a Registration Statement on Form F-1 (Registration No. 333-266897) (as the same may be amended from time to time, the "Registration Statement") for the registration under the United States Securities Act of 1933, as amended (the "Securities Act"), of the Shares, Pre-funded Warrants, Pre-funded Warrant Shares, Warrants and Warrant Shares, and such Registration Statement was declared effective on __, 2022;

WHEREAS, the Company desires the Warrant Agent to act on behalf of the Company, and the Warrant Agent is willing to so act, in accordance with the terms set forth in this Warrant Agreement, in connection with the issuance, registration, transfer, exchange and exercise of the Warrants;

WHEREAS, the Company desires to provide for the provisions of the Warrants, the terms upon which they shall be issued and exercised, and the respective rights, limitation of rights, and immunities of the Company, the Warrant Agent, and the holders of the Warrants; and

WHEREAS, all acts and things have been done and performed which are necessary to make the Warrants the valid, binding and legal obligations of the Company, and to authorize the execution and delivery of this Warrant Agreement.

AGREEMENT

NOW, THEREFORE, in consideration of the mutual agreements herein contained, the parties hereto agree as follows:

1.Appointment of Warrant Agent. The Company hereby appoints the Warrant Agent to act as agent for the Company with respect to the Warrants, and the Warrant Agent hereby accepts such appointment and agrees to perform the same in accordance with the express terms and conditions set forth in this Warrant Agreement (and no implied terms or conditions).

2.Warrants.

2.1.Form of Warrants. The Warrants shall be registered securities and shall be initially evidenced by a global Warrant certificate ("Global Certificate") in the form of Annex A to this Warrant Agreement, which shall be deposited on behalf of the Company with a custodian for The Depository Trust Company ("DTC") and registered in the name of Cede & Co., a nominee of DTC. If DTC subsequently ceases to make its settlement system available for the Warrants, the Company may instruct the Warrant Agent regarding making arrangements for book-entry settlement. In the event that the Warrants are not eligible for, or it is no longer necessary to have the Warrants available in, registration in the name of Cede & Co., a nominee of DTC, the Company may instruct the Warrant Agent to provide written instructions to DTC to deliver to the Warrant Agent for cancellation the Global Certificate, and the Company shall instruct the Warrant Agent to deliver to each Holder (as defined below) separate certificates evidencing Warrants ("Definitive Certificates" and, together with the Global Certificate, "Warrant Certificates"), in the form of Annex C to this Warrant Agreement. The Warrants represented by the Global Certificate are referred to as "Global Warrants".

2.2.Issuance and Registration of Warrants.

2.2.1.Warrant Register. The Warrant Agent shall maintain books ("Warrant Register") for the registration of original issuance and the registration of transfer of the Warrants. Any Person (as defined below) in whose name ownership of a beneficial interest in the Warrants evidenced by a Global Certificate is recorded in the records maintained by DTC or its nominee shall be deemed the "beneficial owner" thereof, provided that all such beneficial interests shall be held through a Participant (as defined below), which shall be the registered holder of such Warrants.

2.2.2.Issuance of Warrants. Upon the initial issuance of the Warrants, the Warrant Agent shall issue the Global Certificate and deliver the Warrants in the DTC settlement system in accordance with written instructions delivered to the Warrant Agent by the Company. Ownership of beneficial interests in the Warrants shall be shown on, and the transfer of such ownership shall be effected through, records maintained (i) by DTC and (ii) by institutions that have accounts with DTC (each, a "Participant"), subject to a Holder's right to elect to receive a Warrant in certificated form in the form of Annex C to this Warrant Agreement. Any Holder desiring to elect to receive a Warrant in certificated form shall make such request in writing delivered to the Warrant Agent pursuant to Section 2.2.8, and shall surrender to the Warrant Agent the interest of the Holder on the books of the Participant evidencing the Warrants which are to be represented by a Definitive Certificate through the DTC settlement system. Thereupon, the Warrant Agent shall countersign and deliver to the Person entitled thereto a Warrant Certificate or Warrant Certificates, as the case may be, as so requested.

2.2.3.Beneficial Owner; Holder. Prior to due presentment for registration of transfer of any Warrant, the Company and the Warrant Agent may deem and treat the Person in whose name that Warrant shall be registered on the Warrant Register (the "Holder," which term shall include a Holder's transferees, successors and assigns and a "Holder" shall include, if the Warrants are held in "street name," a Participant or a designee appointed by such Participant) as the absolute owner of such Warrant for purposes of any exercise thereof, and for all other purposes, and neither the Company nor the Warrant Agent shall be affected by any notice to the contrary. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Warrant Agent or any agent of the Company or the Warrant Agent from giving effect to any written certification, proxy or other authorization furnished by DTC governing the exercise of the rights of a holder of a beneficial interest in any Warrant. The rights of beneficial owners in a Warrant evidenced by the Global Certificate shall be exercised by the Holder or a Participant through the DTC system, except to the extent set forth herein or in the Global Certificate.

2.2.4.Execution. The Warrant Certificates shall be executed on behalf of the Company by any authorized officer of the Company (an "Authorized Officer"), which need not be the same authorized signatory for all of the Warrant Certificates, either manually or by facsimile signature. The Warrant Certificates shall be countersigned by an authorized signatory of the Warrant Agent, which need not be the same signatory for all of the Warrant Certificates, and no Warrant Certificate shall be valid for any purpose unless so countersigned. In case any Authorized Officer of the Company that signed any of the Warrant Certificates ceases to be an Authorized Officer of the Company before countersignature by the Warrant Agent and issuance and delivery by the Company, such Warrant Certificates, nevertheless, may be countersigned by the Warrant Agent, issued and delivered with the same force and effect as though the person who signed such Warrant Certificates had not ceased to be an Authorized Officer; and any Warrant Certificate may be signed on behalf of the Company by any person who, at the actual date of the execution of such Warrant Certificate, shall be an Authorized Officer of the Company authorized to sign such Warrant Certificate, although at the date of the execution of this Warrant Agreement any such person was not such an Authorized Officer.

2.2.5.Registration of Transfer. At any time at or prior to the Expiration Date (as defined below), a transfer of any Warrants may be registered and any Warrant Certificate or Warrant Certificates may be split up, combined or exchanged for another Warrant Certificate or Warrant Certificates evidencing the same number of Warrants as the Warrant Certificate or Warrant Certificates surrendered. Any Holder desiring to register the transfer of Warrants or to split up, combine or exchange any Warrant Certificate shall make such request in writing delivered to the Warrant Agent, and shall surrender to the Warrant Agent the Warrant Certificate or Warrant Certificates evidencing the Warrants the transfer of which is to be registered or that is or are to be split up, combined or exchanged. Thereupon, the Warrant Agent shall countersign and deliver to the Person entitled thereto a Warrant Certificate or Warrant Certificates, as the case may be, as so requested. The Warrant Agent may require reasonable and customary payment with respect to a registration of transfer of Warrants or a split-up, combination or exchange of a Warrant Certificate (but, for purposes of clarity, not upon the exercise of the Warrants and issuance of Warrant Shares to the Holder), of a sum sufficient to cover any tax or governmental charge that may be imposed in connection with such registration of transfer, split-up, combination or exchange, together with reimbursement to the Warrant Agent of all reasonable expenses incidental thereto. All such fees and expenses shall be paid by the Company, and not by the Holder.

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2.2.6.Loss, Theft and Mutilation of Warrant Certificates. Upon receipt by the Company and the Warrant Agent of evidence reasonably satisfactory to them of the loss, theft, destruction or mutilation of a Warrant Certificate, and, in case of loss, theft or destruction, of indemnity or security in customary form and amount, and reimbursement to the Company and the Warrant Agent of all reasonable expenses incidental thereto, and upon surrender to the Warrant Agent and cancellation of the Warrant Certificate if mutilated, the Warrant Agent shall, on behalf of the Company, countersign and deliver a new Warrant Certificate of like tenor to the Holder in lieu of the Warrant Certificate so lost, stolen, destroyed or mutilated. The Warrant Agent may charge the Holder an administrative fee for processing the replacement of lost Warrant Certificates, which shall be charged only once in instances where a single surety bond obtained covers multiple certificates. The Warrant Agent may receive compensation from the surety companies or surety bond agents for administrative services provided to them.

2.2.7.Proxies. The Holder of a Warrant may grant proxies or otherwise authorize any Person, including the Participants and beneficial holders that may own interests through the Participants, to take any action that a Holder is entitled to take under this Warrant Agreement or the Warrants; provided, however, that at all times that Warrants are evidenced by a Global Certificate, exercise of those Warrants shall be effected on their behalf by Participants through DTC in accordance the procedures administered by DTC.

2.2.8.Warrant Certificate Request. A Holder has the right to elect at any time or from time to time a Warrant Exchange (as defined below) pursuant to a Warrant Certificate Request Notice (as defined below). Upon written notice by a Holder to the Warrant Agent for the exchange of some or all of such Holder's Global Warrants for a Definitive Certificate evidencing the same number of Warrants, which request shall be in the form attached hereto as Annex E (a "Warrant Certificate Request Notice" and the date of delivery of such Warrant Certificate Request Notice by the Holder, the "Warrant Certificate Request Notice Date" and the deemed surrender upon delivery by the Holder of a number of Global Warrants for the same number of Warrants evidenced by a Definitive Certificate, a "Warrant Exchange"), the Warrant Agent shall promptly effect the Warrant Exchange and shall promptly issue and deliver to the Holder a Definitive Certificate for such number of Warrants in the name set forth in the Warrant Certificate Request Notice. Such Definitive Certificate shall be dated the original issue date of the Warrants, shall be manually executed by an authorized signatory of the Company, shall be in the form attached hereto as Annex C, and shall be reasonably acceptable in all respects to such Holder. In connection with a Warrant Exchange, the Company agrees to mail by first class mail, postage prepaid, or to direct the Warrant Agent to mail by first class mail, postage prepaid,, the Definitive Certificate to the Holder within the earlier of (i) two (2) Trading Days (as defined below) and (ii) the number of Trading Days comprising the Standard Settlement Period (as defined below) of the Warrant Certificate Request Notice pursuant to the delivery instructions in the Warrant Certificate Request Notice ("Warrant Certificate Mailing Date"). If the Company fails for any reason to so mail to the Holder the Definitive Certificate subject to the Warrant Certificate Request Notice by the Warrant Certificate Mailing Date (as evidenced by proof of mailing), the Company shall pay to the Holder, in cash, as liquidated damages and not as a penalty, for each $1,000 of Warrant Shares evidenced by such Definitive Certificate (based on the VWAP (as defined below) of the Common Shares on the Warrant Certificate Request Notice Date), $10 per Business Day for each Business Day after such Warrant Certificate Mailing Date until such Definitive Certificate is mailed (as evidenced by proof of mailing) or, prior to the mailing of such Warrant Certificate, the Holder rescinds such Warrant Exchange. The Company covenants and agrees that, upon the date of delivery of the Warrant Certificate Request Notice, the Holder shall be deemed to be the holder of the Definitive Certificate and, notwithstanding anything to the contrary set forth herein, the Definitive Certificate shall be deemed for all purposes to contain all of the terms and conditions of the Warrants evidenced by such Warrant Certificate and the terms of this Warrant Agreement, other than Sections 3.3 and 8 herein, which shall not apply to the Warrants evidenced by the Definitive Certificate. For purposes of clarity, if there is a conflict between the express terms of this Warrant Agreement and the Warrant Certificate in the form of Annex C hereto with respect to terms of the Warrants, the terms of the Warrant Certificate shall govern and control.

3.Terms and Exercise of Warrants.

3.1.Exercise Price. Each Warrant shall entitle the Holder, subject to the provisions of the applicable Warrant Certificate and of this Warrant Agreement, to purchase from the Company the number of Common Shares stated therein, at the price of $____ per whole share, subject to the subsequent adjustments provided in Section 4 hereof. The term "Exercise Price" as used in this Warrant Agreement refers to the price per share at which Common Shares may be purchased at the time a Warrant is exercised.

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3.2.Duration of Warrants. Warrants may be exercised only during the period ("Exercise Period") commencing on the Issuance Date and terminating at 5:00 P.M., New York City time (the "close of business") on ______, 2027 ("Expiration Date")¹. Each Warrant not exercised on or before the Expiration Date shall become void, and all rights thereunder and all rights in respect thereof under this Warrant Agreement shall cease at the close of business on the Expiration Date.

3.3.Exercise of Warrants.

3.3.1.Exercise and Payment.

(a)Exerciseof the purchase rights represented by a Warrant may be made, in whole or in part, at any time or times during the Exercise Period by delivery to the Company and the Warrant Agent of a duly executed copy, submitted, delivered or mailed (including by facsimile or PDF copy submitted by email) to the Company at 155 Terence Matthews Crescent, Unit #1, Ottawa, Ontario, K2M 2A8 Attention: Steven Archambault and Wendy Liang, email: archambault@kwesst.com and liang@kwesst.com (or such alternative email or physical address provided in writing by the Company to the Holder after the date hereof), and to the Warrant Agent at 1 State Street, 30^th Floor, New York, NY 10004-1561 Attention: Steven Vacante, email: svacante@continentalstock.com (or such alternative email or physical address provided in writing by the Warrant Agent to the Holder after the date hereof), in substantially the form annexed as Annex B hereto (the “Notice of Exercise”). Within the earlier of (i) two (2) Trading Days and (ii) the number of Trading Days comprising the Standard Settlement Period following the date the Holder delivers the Notice of Exercise as aforesaid, the Holder shall deliver the aggregate Exercise Price for the shares specified in the applicable Notice of Exercise by wire transfer, bank drafts or cashier’s or certified check drawn on a United States or Canadian bank unless the cashless exercise procedure specified in Section 3.3.6 below is specified in the applicable Notice of Exercise. No ink-original Notice of Exercise shall be required, nor shall any medallion guarantee (or other type of guarantee or notarization) of any Notice of Exercise form be required. Notwithstanding anything herein to the contrary, the Holder shall not be required to physically surrender a Warrant Certificate to the Company until the Holder has purchased all of the Warrant Shares available thereunder and the Warrant has been exercised in full, in which case, the Holder shall surrender such Warrant to the Company for cancellation within three (3) Trading Days of the date the final Notice of Exercise is delivered to the Company. Partial exercises of a Warrant resulting in purchases of a portion of the total number of Warrant Shares available thereunder shall have the effect of lowering the outstanding number of Warrant Shares purchasable hereunder in an amount equal to the applicable number of Warrant Shares purchased. The Holder and the Company shall maintain records showing the number of Warrant Shares purchased and the date of such purchases. The Company shall deliver any objection to any Notice of Exercise within one (1) Business Day of receipt of such notice. The Holder and any assignee, by acceptance of a Warrant, acknowledge and agree that, by reason of the provisions of this paragraph, following the purchase of a portion of the Warrant Shares hereunder, the number of Warrant Shares available for purchase hereunder at any given time may be less than the amount stated on the face thereof.

(b)Notwithstanding the foregoing in this Section 3.3.1, a Holder whose interest in a Warrant is a beneficial interest in certificate(s) representing such Warrant held in registered form through DTC (or another established clearing corporation performing similar functions), shall effect exercises made pursuant to this Section 3.3.1 by delivering to DTC (or such other clearing corporation, as applicable) the appropriate instruction form for exercise, complying with the procedures to effect exercise that are required by DTC (or such other clearing corporation, as applicable), subject to a Holder's right to elect to receive a Warrant in certificated form pursuant to the terms of this Warrant Agreement, in which case this sentence shall not apply. Upon giving irrevocable instructions to its Participant to exercise Warrants, solely for purposes of Regulation SHO, the holder whose interest in the Warrant is a beneficial interest shall be deemed to have exercised such Warrant, regardless of when the applicable Warrant Shares are delivered to such holder.

^{______________________________________________
1} Insert the date that is the five-year anniversary of the Initial Exercise Date; provided, however, if such date is not a Trading Day, insert the immediately following Trading Day.

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3.3.2.Issuance of Warrant Shares.

(a)The Warrant Agent shall, on the Trading Day following the date of exercise of any Warrant, advise the Company, and the transfer agent and registrar for the Company's Common Shares (the "Transfer Agent"), in respect of (i) the number of Warrant Shares indicated on the Notice of Exercise as issuable upon such exercise with respect to such exercised Warrants, (ii) the instructions of the Holder or Participant, as the case may be, provided to the Warrant Agent with respect to the delivery of the Warrant Shares and the number of Warrants that remain outstanding after such exercise and (iii) such other information as the Company or the Transfer Agent shall reasonably request.

(b)The Company shall cause the Warrant Shares purchased hereunder to be transmitted by the Transfer Agent to the Holder by crediting the account of the Holder's or its designee's balance account with DTC through its Deposit or Withdrawal at Custodian system ("DWAC") if the Company is then a participant in such system and either (A) there is an effective registration statement permitting the issuance of the Warrant Shares to or resale of the Warrant Shares by Holder or (B) the Warrant is being exercised via cashless exercise, and otherwise by physical delivery of a certificate, registered in the Company's share register in the name of the Holder or its designee, for the number of Warrant Shares to which the Holder is entitled pursuant to such exercise to the address specified by the Holder in the Notice of Exercise by the date that is the earlier of (i) two (2) Trading Days, and (ii) the number of Trading Days comprising the Standard Settlement Period after, the delivery to the Company and the Warrant Agent of the Notice of Exercise (such date, the "Warrant Share Delivery Date"); provided, however, that if payment of the aggregate Exercise Price (other than in the case of a cashless exercise) is received after 12:00 P.M., New York City time on the Warrant Share Delivery Date, then the Warrant Share Delivery Date shall be extended by one (1) additional Trading Day. Upon delivery of the Notice of Exercise, the Holder shall be deemed for all corporate purposes to have become the holder of record of the Warrant Shares with respect to which the Warrant has been exercised, irrespective of the date of delivery of the Warrant Shares, provided that payment of the aggregate Exercise Price (other than in the case of a cashless exercise) is received within the earlier of (i) two (2) Trading Days of and (ii) the number of Trading Days comprising the Standard Settlement Period following delivery of the Notice of Exercise. If the Company fails for any reason to deliver to the Holder the Warrant Shares subject to a Notice of Exercise by the Warrant Share Delivery Date, the Company shall pay to the Holder, in cash, as liquidated damages and not as a penalty, for each $1,000 of Warrant Shares subject to such exercise (based on the VWAP of the Common Shares on the date of the applicable Notice of Exercise), $10 per Trading Day (increasing to $20 per Trading Day on the fifth Trading Day after such liquidated damages begin to accrue) for each Trading Day after such Warrant Share Delivery Date until such Warrant Shares are delivered or Holder rescinds such exercise. The Company agrees to maintain a transfer agent that is a participant in the FAST program so long as the Warrants remains outstanding and exercisable. As used herein, "Standard Settlement Period" means the standard settlement period, expressed in a number of Trading Days, on the Primary Trading Market with respect to the Common Shares as in effect on the date of delivery of the Notice of Exercise.

3.3.3.Valid Issuance. All Warrant Shares issued by the Company upon the proper exercise of a Warrant in conformity with this Warrant Agreement shall be validly issued, fully paid and non-assessable.

3.3.4.No Fractional Exercise. No fractional Warrant Shares will be issued upon the exercise of the Warrant. If, by reason of any adjustment made pursuant to Section 4, a Holder would be entitled, upon the exercise of such Warrant, to receive a fractional interest in a share, the Company shall, at its election, either pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Exercise Price or round up to the next whole share.

3.3.5.No Transfer Taxes. Issuance of Warrant Shares shall be made without charge to the Holder for any issue or transfer tax or other incidental expense in respect of the issuance of such Warrant Shares, all of which taxes and expenses shall be paid by the Company, and such Warrant Shares shall be issued in the name of the Holder or in such name or names as may be directed by the Holder; provided, however, that in the event Warrant Shares are to be issued in a name other than the name of the Holder, the Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto duly executed by the Holder and the Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it for any transfer tax incidental thereto. The Company shall pay all Transfer Agent fees required for same-day processing of any Notice of Exercise and all fees to the DTC (or another established clearing corporation performing similar functions) required for same-day electronic delivery of the Warrant Shares.

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3.3.6.Restrictive Legend Events; Cashless Exercise Under Certain Circumstances.

(a)The Company shall use its reasonable best efforts to maintain the effectiveness of the Registration Statement and the current status of the prospectus included therein or to file and maintain the effectiveness of another registration statement and another current prospectus covering the Warrants and the Warrant Shares at any time that the Warrants are exercisable. The Company shall provide to the Warrant Agent and each Holder prompt written notice of any time that the Company is unable to deliver the Warrant Shares via DTC transfer or otherwise without restrictive legend because (A) the Commission has issued a stop order with respect to the Registration Statement, (B) the Commission otherwise has suspended or withdrawn the effectiveness of the Registration Statement, either temporarily or permanently, (C) the Company has suspended or withdrawn the effectiveness of the Registration Statement, either temporarily or permanently, (D) the prospectus contained in the Registration Statement is not available for the issuance of the Warrant Shares to the Holder or (E) otherwise (each a "Restrictive Legend Event"). To the extent that the Warrants cannot be exercised as a result of a Restrictive Legend Event, the Company shall, at the election of the Holder, which shall be given within five (5) days of receipt of such notice of the Restrictive Legend Event, either (A) rescind the previously submitted Notice of Exercise and the Company shall return all consideration paid by registered holder for such shares upon such rescission or (B) treat the attempted exercise as a cashless exercise as described in paragraph (ii) below and refund the cash portion of the exercise price to the Holder.

(b)If a Restrictive Legend Event has occurred, the Warrant may also be exercisable on a cashless basis. Notwithstanding anything herein to the contrary, but without limiting the rights of a Holder to receive Warrant Shares on a "cashless exercise" pursuant to this Section 3.3.6(b) or to receive cash payments pursuant to Section 3.3.2(b) and Section 3.3.8 herein, the Company shall not be required to make any cash payments or net cash settlement to the Holder in lieu of delivery of the Warrant Shares. Upon a "cashless exercise", the Holder shall be entitled to receive the number of Warrant Shares equal to the quotient (if such quotient would be a positive number) obtained by dividing [(A-B) (X)] by (A), where:

(A) = as applicable: (i) the VWAP for the five Trading Days immediately preceding the date of the applicable Notice of Exercise if such Notice of Exercise is (1) both executed and delivered pursuant to Section 3.3.1(a) hereof on a day that is not a Trading Day or (2) both executed and delivered pursuant to Section 3.3.1(a) hereof on a Trading Day prior to the opening of "regular trading hours" (as defined in Rule 600(b) of Regulation NMS promulgated under the federal securities laws) on such Trading Day, (ii) the VWAP for the five Trading Days immediately preceding the date of the applicable Notice of Exercise or (iii) the VWAP for the five Trading Days immediately preceding the date of the applicable Notice of Exercise if the date of such Notice of Exercise is a Trading Day and such Notice of Exercise is both executed and delivered pursuant to Section 3.3.1(a) hereof after the close of "regular trading hours" on such Trading Day;

(B) = the Exercise Price of the Warrant, as adjusted as set forth herein; and

(X) = the number of Warrant Shares that would be issuable upon exercise of the Warrant in accordance with the terms of the Warrant if such exercise were by means of a cash exercise rather than a cashless exercise.

(c)If the Warrant Shares are issued in such a cashless exercise, the Company acknowledges and agrees that, in accordance with Section 3(a)(9) of the Securities Act, the Warrant Shares shall take on the registered characteristics of the Warrants being exercised and the Company agrees not to take any position contrary thereto. Upon receipt of a Notice of Exercise for a cashless exercise, the Warrant Agent will promptly deliver a copy of the Notice of Exercise to the Company to confirm the number of Warrant Shares issuable in connection with the cashless exercise. The Company shall calculate and transmit to the Warrant Agent in a written notice, and the Warrant Agent shall have no duty, responsibility or obligation under this Section 3.3.6 to calculate, the number of Warrant Shares issuable in connection with any cashless exercise. The Warrant Agent shall be entitled to rely conclusively on any such written notice provided by the Company, and the Warrant Agent shall not be liable for any action taken, suffered or omitted to be taken by it in accordance with such written instructions or pursuant to this Warrant Agreement. Notwithstanding anything herein to the contrary, on the Termination Date, the Warrant shall be automatically exercised via cashless exercise pursuant to this Section 3.3.6.

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3.3.7.Disputes. In the case of a dispute as to the determination of the Exercise Price or the arithmetic calculation of the number of Warrant Shares issuable in connection with any exercise, the Company shall promptly deliver to the Holder the number of Warrant Shares that are not disputed.

3.3.8.Compensation for Buy-In on Failure to Timely Deliver Warrant Shares Upon Exercise. In addition to any other rights available to the Holder, if the Company fails to cause the Transfer Agent to transmit to the Holder the Warrant Shares in accordance with the provisions of Section 3.3.2(b) above pursuant to an exercise on or before the Warrant Share Delivery Date, and if after such date the Holder is required by its broker to purchase (in an open market transaction or otherwise) or the Holder's brokerage firm otherwise purchases, Common Shares to deliver in satisfaction of a sale by the Holder of the Warrant Shares which the Holder anticipated receiving upon such exercise (a "Buy-In"), then the Company shall (A) pay in cash to the Holder the amount, if any, by which (x) the Holder's total purchase price (including brokerage commissions, if any) for the Common Shares so purchased exceeds (y) the amount obtained by multiplying (1) the number of Warrant Shares that the Company was required to deliver to the Holder in connection with the exercise at issue times (2) the price at which the sell order giving rise to such purchase obligation was executed, and (B) at the option of the Holder, either reinstate the portion of the Warrant and equivalent number of Warrant Shares for which such exercise was not honored (in which case such exercise shall be deemed rescinded) or deliver to the Holder the number of Common Shares that would have been issued had the Company timely complied with its exercise and delivery obligations hereunder. For example, if the Holder purchases Common Shares having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted exercise of Common Shares with an aggregate sale price giving rise to such purchase obligation of $10,000, under clause (A) of the immediately preceding sentence the Company shall be required to pay the Holder $1,000. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In and, upon request of the Company, evidence of the amount of such loss. Nothing herein shall limit a Holder's right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Company's failure to timely deliver Common Shares upon exercise of the Warrant as required pursuant to the terms hereof.

3.3.9.Beneficial Ownership Limitation. The Company shall not effect any exercise of a Warrant, and a Holder shall not have the right to exercise any portion of a Warrant, pursuant to Section 3 or otherwise, to the extent that after giving effect to such issuance after exercise as set forth on the applicable Notice of Exercise, the Holder (together with the Holder's Affiliates (as defined below), and any other Persons acting as a group together with the Holder or any of the Holder's Affiliates (such Persons, "Attribution Parties")), would beneficially own in excess of the Beneficial Ownership Limitation (as defined below). For purposes of the foregoing sentence, the number of Common Shares beneficially owned by the Holder and its Affiliates and Attribution Parties shall include the number of Common Shares issuable upon exercise of such Warrant with respect to which such determination is being made, but shall exclude the number of Common Shares which would be issuable upon (i) exercise of the remaining, non-exercised portion of such Warrant beneficially owned by the Holder or any of its Affiliates or Attribution Parties and (ii) exercise or conversion of the unexercised or non-converted portion of any other securities of the Company (including, without limitation, any other securities of the Company which would entitle the holder thereof to acquire at any time Common Shares , including, without limitation, any debt, preferred stock, right, option, warrant or other instrument that is at any time convertible into or exercisable or exchangeable for, or otherwise entitles the holder thereof to receive, Common Shares ("Common Share Equivalents")) subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by the Holder or any of its Affiliates or Attribution Parties. Except as set forth in the preceding sentence, for purposes of this Section 3.3.9, beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder, it being acknowledged by the Holder that the Company is not representing to the Holder that such calculation is in compliance with Section 13(d) of the Exchange Act and the Holder is solely responsible for any schedules required to be filed in accordance therewith. To the extent that the limitation contained in this Section 3.3.9 applies, the determination of whether a Warrant is exercisable (in relation to other securities owned by the Holder together with any Affiliates and Attribution Parties) and of which portion of a Warrant is exercisable shall be in the sole discretion of the Holder, and the submission of a Notice of Exercise shall be deemed to be the Holder's determination of whether a Warrant is exercisable (in relation to other securities owned by the Holder together with any Affiliates and Attribution Parties) and of which portion of a Warrant is exercisable, in each case subject to the Beneficial Ownership Limitation, and the Company shall have no obligation to verify or confirm the accuracy of such determination. In addition, a determination as to any group status as contemplated above shall be determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. For purposes of this Section 3.3.9, in determining the number of outstanding Common Shares , a Holder may rely on the number of outstanding Common Shares as reflected in (A) the Company's most recent periodic or annual report filed with the Commission, as the case may be, (B) a more recent public announcement by the Company or (C) a more recent written notice by the Company or the Transfer Agent setting forth the number of Common Shares outstanding. Upon the written or oral request of a Holder, the Company shall within two (2) Trading Days confirm orally and in writing to the Holder the number of Common Shares then outstanding. In any case, the number of outstanding Common Shares shall be determined after giving effect to the conversion or exercise of securities of the Company, including such Warrant, by the Holder or its Affiliates or Attribution Parties since the date as of which such number of outstanding Common Shares was reported. The "Beneficial Ownership Limitation" shall be 4.99% (or, upon election by a Holder prior to the issuance of any Warrants, 9.99%) of the number of Common Shares outstanding immediately after giving effect to the issuance of Common Shares issuable upon exercise of a Warrant. The Holder, upon notice to the Company, may increase or decrease the Beneficial Ownership Limitation provisions of this Section 3.3.9, provided that the Beneficial Ownership Limitation in no event exceeds 9.99% of the number of Common Shares outstanding immediately after giving effect to the issuance of Common Shares upon exercise of the Warrant held by the Holder and the provisions of this Section 3.3.9 shall continue to apply. Any increase in the Beneficial Ownership Limitation will not be effective until the 61^st day after such notice is delivered to the Company. The provisions of this paragraph shall be construed and implemented in a manner otherwise than in strict conformity with the terms of this Section 3.3.9 to correct this paragraph (or any portion hereof) which may be defective or inconsistent with the intended Beneficial Ownership Limitation herein contained or to make changes or supplements necessary or desirable to properly give effect to such limitation. The limitations contained in this paragraph shall apply to a successor holder of a Warrant.

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4.Adjustments.

4.1.Adjustment upon Subdivisions or Combinations. If the Company, at any time while the Warrants are outstanding: (i) pays a stock dividend or otherwise makes a distribution or distributions on its Common Shares or any other equity or equity equivalent securities payable in Common Shares (which, for avoidance of doubt, shall not include any Common Shares issued by the Company upon exercise of the Warrants), (ii) subdivides outstanding Common Shares into a larger number of shares, (iii) combines (including by way of reverse stock split) outstanding Common Shares into a smaller number of shares, or (iv) issues by reclassification of the Common Shares any shares of capital stock of the Company, then in each case the Exercise Price shall be multiplied by a fraction of which the numerator shall be the number of Common Shares and such other capital stock of the Company (excluding treasury shares, if any) outstanding immediately before such event and of which the denominator shall be the number of Common Shares and such other capital stock of the Company (excluding treasury shares, if any) outstanding immediately after such event, and the number of shares issuable upon exercise of each Warrant shall be proportionately adjusted such that the aggregate Exercise Price of such Warrant shall remain unchanged. Any adjustment made pursuant to this Section 4.1 shall become effective immediately after the record date for the determination of shareholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or re-classification.

4.2.Adjustment for Other Distributions.

4.2.1.Subsequent Rights Offerings. In addition to any adjustments pursuant to Section 4.1 above and subject to the prior approval of the TSX Venture Exchange (so long as the Common Shares are listed for trading on the TSX Venture Exchange), if at any time the Company grants, issues or sells any Common Share Equivalents or rights to purchase shares, warrants, securities or other property pro rata to the record holders of any class of Common Shares (the “Purchase Rights”), then the Holder will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which the Holder could have acquired if the Holder had held the number of Common Shares acquirable upon complete exercise of a Warrant (without regard to any limitations on exercise hereof, including without limitation, the Beneficial Ownership Limitation) immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of Common Shares are to be determined for the grant, issue or sale of such Purchase Rights (provided, however, to the extent that the Holder’s right to participate in any such Purchase Right would result in the Holder exceeding the Beneficial Ownership Limitation, then the Holder shall not be entitled to participate in such Purchase Right to such extent (or beneficial ownership of such Common Shares as a result of such Purchase Right to such extent), and such Purchase Right to such extent shall be held in abeyance for the Holder until such time, if ever, as its right thereto would not result in the Holder exceeding the Beneficial Ownership Limitation). To the extent that this Warrant has not been partially or completely exercised at the time of such Distribution, such portion of the Distribution shall be held in abeyance for the benefit of the Holder until the Holder has exercised this Warrant.

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4.2.2.Pro Rata Distributions. During such time as this Warrant is outstanding and subject to the prior approval of the TSX Venture Exchange, if the Company shall declare or make any special or extraordinary dividend (other than regular dividends payable in cash) or other distribution of its assets (or rights to acquire its assets) to holders of Common Shares, by way of return of capital or otherwise (including, without limitation, any distribution of shares or other securities, property or options by way of a dividend, spin off, reclassification, corporate rearrangement, scheme of arrangement or other similar transaction) (a "Distribution"), at any time after the issuance of the Warrants, then, in each such case, the Holder shall be entitled to participate in such Distribution to the same extent that the Holder would have participated therein if the Holder had held the number of Common Shares acquirable upon complete exercise of such Warrant (without regard to any limitations on exercise hereof, including without limitation, the Beneficial Ownership Limitation) immediately before the date of which a record is taken for such Distribution, or, if no such record is taken, the date as of which the record holders of Common Shares are to be determined for the participation in such Distribution (provided, however, to the extent that the Holder's right to participate in any such Distribution would result in the Holder exceeding the Beneficial Ownership Limitation, then the Holder shall not be entitled to participate in such Distribution to such extent (or in the beneficial ownership of any Common Shares as a result of such Distribution to such extent) and the portion of such Distribution shall be held in abeyance for the benefit of the Holder until such time, if ever, as its right thereto would not result in the Holder exceeding the Beneficial Ownership Limitation). Notwithstanding the foregoing, this Section 4.2.2 shall not apply with respect to any Distribution to the extent that such Distribution results in an adjustment to the Exercise Price under the other provisions of this Warrant Agreement.

4.3.Fundamental Transaction. If, at any time while the Warrants are outstanding, (i) the Company, directly or indirectly, in one or more related transactions effects any merger or consolidation of the Company with or into another Person, (ii) the Company, directly or indirectly, effects any sale, lease, license, assignment, transfer, conveyance or other disposition of all or substantially all of its assets in one or a series of related transactions, (iii) any, direct or indirect, purchase offer, tender offer or exchange offer (whether by the Company or another Person) is completed pursuant to which all holders of Common Shares are permitted to sell, tender or exchange their shares for other securities, cash or property and has been accepted by the holders of 50% or more of the outstanding Common Shares or 50% or more of the total voting power of the outstanding Common Shares, (iv) the Company, directly or indirectly, in one or more related transactions effects any reclassification, reorganization or recapitalization of the Common Shares or any compulsory share exchange pursuant to which all outstanding Common Shares are effectively converted into or exchanged for other securities, cash or property, or (v) the Company, directly or indirectly, in one or more related transactions consummates a stock or share purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement) with another Person or group of Persons whereby such other Person or group acquires more than 50% of the outstanding Common Shares or 50% or more of the total voting power of the outstanding Common Shares (each a "Fundamental Transaction"), then, upon any subsequent exercise of a Warrant, and subject to the prior approval of the TSX Venture Exchange, the Holder shall have the right to receive, for each Warrant Share that would have been issuable upon such exercise immediately prior to the occurrence of such Fundamental Transaction, at the option of the Holder (without regard to any limitation in Section 3.3.9 on the exercise of a Warrant), the number of Common Shares of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and any additional consideration (the "Alternate Consideration") receivable as a result of such Fundamental Transaction by a holder of the number of Common Shares for which the Warrant is exercisable immediately prior to such Fundamental Transaction (without regard to any limitation in Section 3.3.9 on the exercise of this Warrant). For purposes of any such exercise, the determination of the Exercise Price shall be appropriately adjusted to apply to such Alternate Consideration based on the amount of Alternate Consideration issuable in respect of one Common Share in such Fundamental Transaction, and the Company shall apportion the Exercise Price among the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the Alternate Consideration. If holders of Common Shares are given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the Alternate Consideration it receives upon any exercise of this Warrant following such Fundamental Transaction. The Company shall cause any successor entity in a Fundamental Transaction in which the Company is not the survivor (the "Successor Entity") to assume in writing all of the obligations of the Company under the Warrants in accordance with the provisions of this Section 4.3 pursuant to written agreements in form and substance reasonably satisfactory to the Holder and approved by the Holder (such approval not be unreasonably withheld or delayed) prior to such Fundamental Transaction and shall, at the option of the Holder, deliver to the Holder in exchange for the Warrant a security of the Successor Entity evidenced by a written instrument substantially similar in form and substance to the Warrant which is exercisable for a corresponding number of shares of capital stock of such Successor Entity (or its parent entity) equivalent to the shares of Common Shares acquirable and receivable upon exercise of the Warrant (without regard to any limitations on the exercise of the Warrant) prior to such Fundamental Transaction, and with an exercise price which applies the exercise price hereunder to such shares of capital stock (but taking into account the relative value of the Common Shares pursuant to such Fundamental Transaction and the value of such shares of capital stock, such number of shares of capital stock and such exercise price being for the purpose of protecting the economic value of the Warrant immediately prior to the consummation of such Fundamental Transaction), and which is reasonably satisfactory in form and substance to the Holder. Upon the occurrence of any such Fundamental Transaction, the Successor Entity shall succeed to, and be substituted for (so that from and after the date of such Fundamental Transaction, the provisions of the Warrants referring to the "Company" shall refer instead to the Successor Entity), and may exercise every right and power of the Company and shall assume all of the obligations of the Company under the Warrants with the same effect as if such Successor Entity had been named as the Company therein. The Company shall instruct the Warrant Agent in writing to mail by first class mail, postage prepaid, to each Holder, written notice of the execution of any such amendment, supplement or agreement with the Successor Entity. Any supplemented or amended agreement entered into by the successor corporation or transferee shall provide for adjustments, which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 4.3. The Warrant Agent shall have no duty, responsibility or obligation to determine the correctness of any provisions contained in such agreement or such notice, including but not limited to any provisions relating either to the kind or amount of securities or other property receivable upon exercise of warrants or with respect to the method employed and provided therein for any adjustments, and shall be entitled to rely conclusively for all purposes upon the provisions contained in any such agreement. The provisions of this Section 4.3 shall similarly apply to successive reclassifications, changes, consolidations, mergers, sales and conveyances of the kind described above.

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4.4.Notices to Holder.

4.4.1.Adjustment to Exercise Price. Whenever the Exercise Price is adjusted pursuant to any provision of this Section 4, the Company shall promptly deliver to the Holder by facsimile or email a notice setting forth the Exercise Price after such adjustment and any resulting adjustment to the number of Warrant Shares and setting forth a brief statement of the facts requiring such adjustment.

4.4.2.Notice to Allow Exercise by Holder. If (A) the Company shall declare a dividend (or any other distribution in whatever form) on the Common Shares, (B) the Company shall declare a special nonrecurring cash dividend on or a redemption of the Common Shares, (C) the Company shall authorize the granting to all holders of the Common Shares rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights, (D) the approval of any shareholders of the Company shall be required in connection with any Fundamental Transaction , or (E) the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company, then, in each case, the Company shall cause to be delivered by facsimile or email to the Holder at its last facsimile number or email address as it shall appear upon the Warrant Register of the Company, at least 20 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of the Common Shares of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of the Common Shares of record shall be entitled to exchange their Common Shares for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or share exchange; provided that the failure to deliver such notice or any defect therein or in the delivery thereof shall not affect the validity of the corporate action required to be specified in such notice. To the extent that any notice provided in this Warrant Agreement constitutes, or contains, material, non-public information regarding the Company or any of its subsidiaries, the Company shall simultaneously file such notice on SEDAR and with the Commission pursuant to a Report on Form 6-K. Provided such notice occurs within the Exercise Period, the Holder shall remain entitled to exercise its Warrant during the period commencing on the date of such notice to the effective date of the event triggering such notice, except as may otherwise be expressly set forth herein (including the applicable exercise period set forth herein).

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4.5.Other Events. If any event occurs of the type contemplated by the provisions of Sections 4.1 or 4.2 but not expressly provided for by such provisions (including, without limitation, the granting of stock appreciation rights, Adjustment Rights, phantom stock rights or other rights with equity features to all holders of Common Shares for no consideration), then the Company's Board of Directors will, at its discretion and in good faith, make an adjustment in the Exercise Price and the number of Warrant Shares or designate such additional consideration to be deemed issuable upon exercise of a Warrant, so as to protect the rights of the registered Holder. No adjustment to the Exercise Price will be made pursuant to more than one sub-section of this Section 4 in connection with a single issuance. Any adjustment of the type not contemplated by the provisions of Sections 4.1 or 4.2 shall be subject to prior approval of the TSX Venture Exchange.

4.6.Notices of Changes in Warrant. Upon every adjustment of the Exercise Price or the number of Warrant Shares issuable upon exercise of a Warrant, the Company shall give written notice thereof to the Warrant Agent, which notice shall state the Exercise Price resulting from such adjustment and the increase or decrease, if any, in the number of Warrant Shares purchasable at such price upon the exercise of a Warrant, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. Upon the occurrence of any event specified in Sections 4.1 or 4.2, then, in any such event, the Company shall give written notice to each Holder, at the last address set forth for such holder in the Warrant Register, as of the record date or the effective date of the event. Failure to give such notice, or any defect therein, shall not affect the legality or validity of such event. The Warrant Agent shall be entitled to rely conclusively on, and shall be fully protected in relying on, any certificate, notice or instructions provided by the Company with respect to any adjustment of the Exercise Price or the number of shares issuable upon exercise of a Warrant, or any related matter, and the Warrant Agent shall not be liable for any action taken, suffered or omitted to be taken by it in accordance with any such certificate, notice or instructions or pursuant to this Warrant Agreement. The Warrant Agent shall not be deemed to have knowledge of any such adjustment unless and until it shall have received written notice thereof from the Company.

5.Restrictive Legends; Fractional Warrants. In the event that a Warrant Certificate surrendered for transfer bears a restrictive legend, the Warrant Agent shall not register that transfer until the Warrant Agent has received an opinion of counsel for the Company stating that such transfer may be made and indicating whether the Warrants must also bear a restrictive legend upon that transfer. The Warrant Agent shall not be required to effect any registration of transfer or exchange which will result in the transfer of or delivery of a Warrant Certificate for a fraction of a Warrant.

6.Other Provisions Relating to Rights of Holders of Warrants.

6.1.No Rights as Shareholder. Except as otherwise specifically provided herein, a Holder, solely in its capacity as a holder of Warrants, shall not be entitled to vote or receive dividends or be deemed the holder of share capital of the Company for any purpose, nor shall anything contained in this Warrant Agreement be construed to confer upon a Holder, solely in its capacity as the registered holder of Warrants, any of the rights of a shareholder of the Company or any right to vote, give or withhold consent to any corporate action (whether any reorganization, issue of shares, reclassification of share capital, consolidation, merger, conveyance or otherwise), receive notice of meetings, receive dividends or subscription rights or rights to participate in new issues of shares, or otherwise, prior to the issuance to the Holder of the Warrant Shares which it is then entitled to receive upon the due exercise of Warrants.

6.2.Reservation of Common Shares. The Company shall at all times reserve and keep available a number of its authorized but unissued Common Shares that will be sufficient to permit the exercise in full of all outstanding Warrants issued pursuant to this Warrant Agreement.

7.Concerning the Warrant Agent.

7.1.Any instructions given to the Warrant Agent orally, as permitted by any provision of this Warrant Agreement, shall be confirmed in writing by the Company as soon as practicable. The Warrant Agent shall not be liable or responsible and shall be fully authorized and protected for acting, or failing to act, in accordance with any oral instructions which do not conform with the written confirmation received in accordance with this Section 7.1.

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7.2.Whether or not any Warrants are exercised, for the Warrant Agent's services as agent for the Company hereunder, the Company shall pay to the Warrant Agent such fees as may be separately agreed between the Company and Warrant Agent and the Warrant Agent's out of pocket expenses in connection with this Warrant Agreement, including, without limitation, the fees and expenses of the Warrant Agent's counsel. While the Warrant Agent endeavors to maintain out-of-pocket charges (both internal and external) at competitive rates, these charges may not reflect actual out-of-pocket costs, and may include handling charges to cover internal processing and use of the Warrant Agent's billing systems. All amounts owed by the Company to the Warrant Agent under this Warrant Agreement are due within 30 days of the Company's receipt of an invoice. Delinquent payments are subject to a late payment charge of one and one-half percent (1.5%) per month commencing 45 days from the invoice date. The Company agrees to reimburse the Warrant Agent for any attorney's fees and any other costs associated with collecting delinquent payments. No provision of this Warrant Agreement shall require Warrant Agent to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties under this Warrant Agreement or in the exercise of its rights.

7.3.As agent for the Company hereunder, the Warrant Agent:

(a)shall have no duties or obligations other than those specifically set forth herein or as may subsequently be agreed to in writing by the Warrant Agent and the Company;

(b)shall be regarded as making no representations and having no responsibilities as to the validity, sufficiency, value, or genuineness of the Warrants or any Warrant Shares;

(c)shall not be obligated to take any legal action hereunder; if, however, the Warrant Agent determines to take any legal action hereunder, and where the taking of such action might, in its judgment, subject or expose it to any expense or liability it shall not be required to act unless it has been furnished with an indemnity reasonably satisfactory to it;

(d)may rely on and shall be fully authorized and protected in acting or failing to act upon any certificate, instrument, opinion, notice, letter, telegram, telex, facsimile transmission or other document or security delivered to the Warrant Agent and believed by it to be genuine and to have been signed by the proper party or parties;

(e)shall not be liable or responsible for any recital or statement contained in the Registration Statement or any other documents relating thereto;

(f)shall not be liable or responsible for any failure on the part of the Company to comply with any of its covenants and obligations relating to the Warrants, including without limitation obligations under applicable securities laws;

(g)may rely on and shall be fully authorized and protected in acting or failing to act upon the written, telephonic or oral instructions with respect to any matter relating to its duties as Warrant Agent covered by this Warrant Agreement (or supplementing or qualifying any such actions) of officers of the Company, and is hereby authorized and directed to accept instructions with respect to the performance of its duties hereunder from the Company or counsel to the Company, and may apply to the Company, for advice or instructions in connection with the Warrant Agent's duties hereunder, and the Warrant Agent shall not be liable for any delay in acting while waiting for those instructions; any applications by the Warrant Agent for written instructions from the Company may, at the option of the Warrant Agent, set forth in writing any action proposed to be taken or omitted by the Warrant Agent under this Warrant Agreement and the date on or after which such action shall be taken or such omission shall be effective; the Warrant Agent shall not be liable for any action taken by, or omission of, the Warrant Agent in accordance with a proposal included in such application on or after the date specified in such application (which date shall not be less than five (5) Business Days after the date such application is sent to the Company, unless the Company shall have consented in writing to any earlier date) unless prior to taking any such action, the Warrant Agent shall have received written instructions in response to such application specifying the action to be taken or omitted;

(h)may consult with counsel satisfactory to the Warrant Agent, including its in-house counsel, and the advice of such counsel shall be full and complete authorization and protection in respect of any action taken, suffered, or omitted by it hereunder in good faith and in accordance with the advice of such counsel;

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(i)may perform any of its duties hereunder either directly or by or through nominees, correspondents, designees, or subagents, and it shall not be liable or responsible for any misconduct or negligence on the part of any nominee, correspondent, designee, or subagent appointed with reasonable care by it in connection with this Warrant Agreement;

(j)is not authorized, and shall have no obligation, to pay any brokers, dealers, or soliciting fees to any Person; and

(k)shall not be required hereunder to comply with the laws or regulations of any country other than the United States of America or any political subdivision thereof.

7.4.In the absence of gross negligence or willful or illegal misconduct on its part, the Warrant Agent shall not be liable for any action taken, suffered, or omitted by it or for any error of judgment made by it in the performance of its duties under this Warrant Agreement. Anything in this Warrant Agreement to the contrary notwithstanding, in no event shall Warrant Agent be liable for special, indirect, incidental, consequential or punitive losses or damages of any kind whatsoever (including but not limited to lost profits), even if the Warrant Agent has been advised of the possibility of such losses or damages and regardless of the form of action. Any liability of the Warrant Agent will be limited in the aggregate to the amount of fees paid by the Company hereunder. The Warrant Agent shall not be liable for any failures, delays or losses, arising directly or indirectly out of conditions beyond its reasonable control including, but not limited to, acts of government, exchange or market ruling, suspension of trading, work stoppages or labor disputes, fires, civil disobedience, riots, rebellions, storms, electrical or mechanical failure, computer hardware or software failure, communications facilities failures including telephone failure, war, terrorism, insurrection, earthquakes, floods, acts of God or similar occurrences.

7.5.In the event any question or dispute arises with respect to the proper interpretation of the Warrants or the Warrant Agent's duties under this Warrant Agreement or the rights of the Company or of any Holder, the Warrant Agent shall not be required to act and shall not be held liable or responsible for its refusal to act until the question or dispute has been judicially settled (and, if appropriate, it may file a suit in interpleader or for a declaratory judgment for such purpose) by final judgment rendered by a court of competent jurisdiction, binding on all Persons interested in the matter which is no longer subject to review or appeal, or settled by a written document in form and substance satisfactory to Warrant Agent and executed by the Company and each such Holder. In addition, the Warrant Agent may require for such purpose, but shall not be obligated to require, the execution of such written settlement by all the Holders and all other Persons that may have an interest in the settlement.

7.6.The Company covenants to indemnify the Warrant Agent and hold it harmless from and against any loss, liability, claim or expense ("Loss") arising out of or in connection with the Warrant Agent's duties under this Warrant Agreement, including the costs and expenses of defending itself against any Loss, unless such Loss shall have been determined by a court of competent jurisdiction to be a result of the Warrant Agent's gross negligence or willful misconduct.

7.7.The Company represents and warrants that (a) it is duly incorporated and validly existing under the laws of its jurisdiction of incorporation, (b) the offer and sale of the Warrants and the execution, delivery and performance of all transactions contemplated thereby (including this Warrant Agreement) have been duly authorized by all necessary corporate action and will not result in a breach of or constitute a default under the notice of articles, articles of association, bylaws or any similar document of the Company or any indenture, agreement or instrument to which it is a party or is bound, (c) this Warrant Agreement has been duly executed and delivered by the Company and constitutes the legal, valid, binding and enforceable obligation of the Company, (d) the Warrants will comply in all material respects with all applicable requirements of law and (e) to the best of its knowledge, there is no litigation pending or threatened as of the date hereof in connection with the offering of the Warrants.

7.8.Set forth in Annex D hereto is a list of the names and specimen signatures of the persons authorized to act for the Company under this Warrant Agreement. The Company shall, from time to time, certify to you the names and signatures of any other persons authorized to act for the Company under this Warrant Agreement.

7.9. The Warrant Agent, or any successor to it hereafter appointed, may resign its duties and be discharged from all further duties and liabilities hereunder after giving thirty (30) days' notice in writing to the Company, or such shorter period of time agreed to by the Company. The Company may terminate the services of the Warrant Agent, or any successor Warrant Agent, after giving thirty (30) days' notice in writing to the Warrant Agent or successor Warrant Agent, or such shorter period of time as agreed. If the office of the Warrant Agent becomes vacant by resignation, termination or incapacity to act or otherwise, the Company shall appoint in writing a successor Warrant Agent in place of the Warrant Agent. If the Company shall fail to make such appointment within a period of thirty (30) days after it has been notified in writing of such resignation or incapacity by the Warrant Agent, then the Warrant Agent or any Holder may apply to any court of competent jurisdiction for the appointment of a successor Warrant Agent at the Company's cost. Pending appointment of a successor to such Warrant Agent, either by the Company or by such a court, the duties of the Warrant Agent shall be carried out by the Company. Any successor Warrant Agent (but not including the initial Warrant Agent), whether appointed by the Company or by such court, shall be a Person organized and existing under the laws of any state of the United States of America, in good standing, and authorized under such laws to exercise corporate trust powers and subject to supervision or examination by federal or state authority. After appointment, any successor Warrant Agent shall be vested with all the authority, powers, rights, immunities, duties, and obligations of its predecessor Warrant Agent with like effect as if originally named as Warrant Agent hereunder, without any further act or deed, and except for executing and delivering documents as provided in the sentence that follows, the predecessor Warrant Agent shall have no further duties, obligations, responsibilities or liabilities hereunder, but shall be entitled to all rights that survive the termination of this Warrant Agreement and the resignation or removal of the Warrant Agent, including but not limited to its right to indemnity hereunder. If for any reason it becomes necessary or appropriate or at the request of the Company, the predecessor Warrant Agent shall execute and deliver, at the expense of the Company, an instrument transferring to such successor Warrant Agent all the authority, powers, and rights of such predecessor Warrant Agent hereunder; and upon request of any successor Warrant Agent the Company shall make, execute, acknowledge, and deliver any and all instruments in writing for more fully and effectually vesting in and confirming to such successor Warrant Agent all such authority, powers, rights, immunities, duties, and obligations.

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7.10.In the event a successor Warrant Agent shall be appointed, the Company shall give notice thereof to the predecessor Warrant Agent and the Transfer Agent not later than the effective date of any such appointment.

7.11.Any Person into which the Warrant Agent may be merged or converted or with which it may be consolidated or any Person resulting from any merger, conversion or consolidation to which the Warrant Agent shall be a party or any Person succeeding to the shareowner services business of the Warrant Agent or any successor Warrant Agent shall be the successor Warrant Agent under this Warrant Agreement, without any further act or deed.

8.Miscellaneous Provisions.

8.1.Unless terminated earlier by the parties hereto, this Warrant Agreement shall terminate 90 days after the earlier of the Expiration Date and the date on which no Warrants remain outstanding (the "Termination Date"). On the Business Day following the Termination Date, the Warrant Agent shall deliver to the Company any entitlements, if any, held by the Warrant Agent under this Warrant Agreement. The Warrant Agent's right to be reimbursed for fees, charges and out-of-pocket expenses as provided in Section 7 shall survive the termination of this Warrant Agreement.

8.2.If any provision of this Warrant Agreement shall be held illegal, invalid, or unenforceable by any court, this Warrant Agreement shall be construed and enforced as if such provision had not been contained herein and shall be deemed an Agreement among the parties to it to the full extent permitted by applicable law.

8.3.In the event of inconsistency between this Warrant Agreement and the descriptions in the Registration Statement, as they may from time to time be amended, the terms of this Warrant Agreement shall control.

8.4.Any notice, statement or demand authorized by this Warrant Agreement to be given or made by the Company, the Warrant Agent or by the holder of any Warrant to or on the Company or the Warrant Agent including, without limitation, any Notice of Exercise, shall be in writing and delivered by e-mail, hand or sent by a nationally recognized overnight courier service, addressed (until another address is filed in writing by the Company or the Warrant Agent) as set forth below and if to any holder any notice, statement or demand shall be given to the last address set forth for such holder (if any) in the Warrant Register:

KWESST Micro Systems Inc.

155 Terence Matthews Crescent,

Unit #1, Ottawa, Ontario, K2M 2A8

Attention: Jeffrey MacLeod and Steve Archambault

Email: macleod@kwesst.com; archambault@kwesst.com

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with a copy (which shall not constitute notice) to:

Dorsey & Whitney LLP

161 Bay Street, Unit #4310

Toronto, ON M5J 2S1, Canada

Attention: Richard Raymer, Esq.

Email: raymer.richard@dorsey.com

If to the Warrant Agent, to:

Continental Stock Transfer & Trust
1 State Street, 30^th Floor,
New York, NY 10004-1561
Attention: Steven Vacante,
Email: svacante@continentalstock.com

8.5.Any notice or other communication or deliveries hereunder shall be deemed given and effective on the earliest of (i) the time of transmission, if such notice or communication is delivered via e-mail at the e-mail address set forth above prior to 5:30 p.m. (New York City time) on any date, (ii) the next Trading Day after the date of transmission, if such notice or communication is delivered via e-mail at the e-mail address set forth above on a day that is not a Trading Day or later than 5:30 p.m. (New York City time) on any Trading Day, (iii) the second Trading Day following the date of mailing, if sent by U.S. nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. Notwithstanding any other provision of this Warrant Agreement, where this Warrant Agreement provides for notice of any event to the Holder, if this Warrant Agreement is held in global form by DTC (or any successor depositary), such notice shall be sufficiently given if given to DTC (or any successor depositary) pursuant to the procedures of DTC (or such successor depositary), subject to a Holder's right to elect to receive a Warrant in certificated form pursuant to the terms of this Warrant Agreement, in which case this sentence shall not apply.

8.6.This Warrant Agreement shall be governed by and construed in accordance with the laws of the State of New York. All actions and proceedings relating to or arising from, directly or indirectly, this Warrant Agreement may be litigated in courts located within the Borough of Manhattan in the City and State of New York. The Company hereby submits to the personal jurisdiction of such courts and consents that any service of process may be made by certified or registered mail, return receipt requested, directed to the Company at its address last specified for notices hereunder.

8.7.This Warrant Agreement shall inure to the benefit of and be binding upon the successors and assigns of the parties hereto. This Warrant Agreement may not be assigned, or otherwise transferred, in whole or in part, by either party without the prior written consent of the other party, which the other party will not unreasonably withhold, condition or delay; except that (i) consent is not required for an assignment or delegation of duties by the Warrant Agent to any affiliate of the Warrant Agent and (ii) any reorganization, merger, consolidation, sale of assets or other form of business combination by the Warrant Agent or the Company shall not be deemed to constitute an assignment of this Warrant Agreement.

8.8.No provision of this Warrant Agreement may be amended, modified or waived, except in a written document signed by both parties. The Company and the Warrant Agent may amend or supplement this Warrant Agreement without the consent of any Holder for the purpose of curing any ambiguity, or curing, correcting or supplementing any defective provision contained herein or adding or changing any other provisions with respect to matters or questions arising under this Warrant Agreement as the parties may deem necessary or desirable so long as such amendment or supplement shall not adversely affect the interest of the Holders. All other amendments and supplements shall require the vote or written consent of Holders of at least 50.1% of the then outstanding Warrants; provided that if any such amendment or supplement disproportionately and adversely affects the rights of a Holder compared to other Holders, the prior written consent of such Holder shall also be required.

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8.9.The Company will from time to time promptly pay all taxes and charges that may be imposed upon the Company or the Warrant Agent in respect of the issuance or delivery of Warrant Shares upon the exercise of Warrants, but the Company may require the Holders to pay any transfer taxes in respect of the Warrants or such shares. The Warrant Agent may refrain from registering any transfer of Warrants or any delivery of any Warrant Shares unless or until the Persons requesting the registration or issuance shall have paid to the Warrant Agent for the account of the Company the amount of such tax or charge, if any, or shall have established to the reasonable satisfaction of the Company and the Warrant Agent that such tax or charge, if any, has been paid.

8.10.Nothing in this Warrant Agreement expressed and nothing that may be implied from any of the provisions hereof is intended, or shall be construed, to confer upon, or give to, any Person other than the parties hereto and the Holders any right, remedy, or claim under or by reason of this Warrant Agreement or of any covenant, condition, stipulation, promise, or agreement hereof.

8.11.A copy of this Warrant Agreement shall be available at all reasonable times at the office of the Warrant Agent designated for such purpose for inspection by any Holder. Prior to such inspection, the Warrant Agent may require any such holder to provide reasonable evidence of its interest in the Warrants.

8.12.This Warrant Agreement may be executed in any number of original, facsimile or electronic counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument.

8.13.The Section headings herein are for convenience only and are not part of this Warrant Agreement and shall not affect the interpretation thereof.

8.14.If a Warrant is held in global form through DTC (or any successor depositary), such Warrant is issued subject to this Warrant Agent Agreement. To the extent any provision of a Warrant conflicts with the express provisions of this Warrant Agent Agreement, the provisions of such Warrant shall govern and be controlling.

9.Certain Definitions. As used herein, the following terms shall have the following meanings:

"Adjustment Right" means any right granted with respect to any securities issued in connection with, or with respect to, any issuance, sale or delivery (or deemed issuance, sale or delivery in accordance with Section 4) of Common Shares (other than rights of the type described in Section 4.2 and 4.3 hereof) that could result in a decrease in the net consideration received by the Company in connection with, or with respect to, such securities (including, without limitation, any cash settlement rights, cash adjustment or other similar rights) but excluding anti-dilution and other similar rights.

"Affiliate" means any Person that, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with a Person, as such terms are used in and construed under Rule 405 under the Securities Act.

"Business Day" means any day except any Saturday, any Sunday, any day which is a federal legal holiday in the United States or in Canada, or any day on which banking institutions in the State of New York and in the Provinces of British Columbia and Ontario are authorized or required by law or other governmental action to close.

"Person" means an individual or corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or subdivision thereof) or other entity of any kind.

"Primary Trading Market" means, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market (or any successors to any of the foregoing).

"Trading Day" means any day on which the Common Shares are traded on a Trading Market, or, if that Trading Market is not the Primary Trading Market for the Common Shares, then on the principal securities exchange or securities market in the United States on which the Common Shares are then traded, provided that "Trading Day" shall not include any day on which the Common Shares are scheduled to trade on such exchange or market for less than 4.5 hours or any day that the Common Shares are suspended from trading during the final hour of trading on such exchange or market (or if such exchange or market does not designate in advance the closing time of trading on such exchange or market, then during the hour ending at 4:00 P.M., New York City time).

16

"Trading Market" means the NYSE American, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market, the New York Stock Exchange or the TSX Venture Exchange (or any successors to any of the foregoing).

"VWAP" means, for any date, the price determined by the first of the following clauses that applies: (a) if the Common Shares are then listed or quoted on the Primary Trading Market, the daily volume weighted average price of the Common Shares for such date (or the nearest preceding date) on the Primary Trading Market on which the Common Shares are then listed or quoted as reported by Bloomberg L.P. (based on a Trading Day from 9:30 a.m. (New York City  time) to 4:02 p.m. (New York City time)), (b) if OTCQB or OTCQX is not a Trading Market, the volume weighted average price of the Common Shares for such date (or the nearest preceding date) on OTCQB or OTCQX as applicable, (c) if the Common Shares are not then listed or quoted for trading on OTCQB or OTCQX and if prices for the Common Shares are then reported on the "Pink Open Market" (or a similar organization or agency succeeding to its functions of reporting prices), the most recent bid price per Common Share so reported, or (d) in all other cases, the fair market value of a Common Share as determined by an independent appraiser selected in good faith by the holders of a majority in interest of the Warrants then outstanding and reasonably acceptable to the Company, the fees and expenses of which shall be paid by the Company.

[SIGNATURE PAGE FOLLOWS]

17

IN WITNESS WHEREOF, this Warrant Agent Agreement has been duly executed by the parties hereto as of the day and year first above written.

KWESST MICRO SYSTEMS INC.

By: _______________________________________

Name:

Title:

CONTINENTAL STOCK TRANSFER & TRUST

By: _______________________________________

Name:

Title:

Annex A Form of Global Certificate

Annex B Notice of Exercise

Annex C Form of Certificated Warrant

Annex D Authorized Representatives

Annex E Form of Warrant Certificate Request Notice

ANNEX A

[FORM OF GLOBAL CERTIFICATE]

UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.

KWESST MICRO SYSTEMS INC.
WARRANT CERTIFICATE
NOT EXERCISABLE AFTER ______, 2027

This certifies that the person whose name and address appears below, or registered assigns, is the registered owner of the number of Warrants set forth below. Each Warrant entitles its registered holder to purchase from KWESST Micro Systems Inc., a corporation formed under the laws of the province of British Columbia (the "Company"), at any time prior to 5:00 p.m. (New York City time) on ________, 2027, one common share, no par value, of the Company (each, a "Warrant Share" and collectively, the "Warrant Shares"), at an exercise price of $___ per share, subject to possible adjustments as provided in the Warrant Agreement (as defined below).

This Warrant Certificate, with or without other Warrant Certificates, upon surrender at the designated office of the Warrant Agent, may be exchanged for another Warrant Certificate or Warrant Certificates evidencing the same number of Warrants as the Warrant Certificate or Warrant Certificates surrendered. A transfer of the Warrants evidenced hereby may be registered upon surrender of this Warrant Certificate at the designated office of the Warrant Agent by the registered holder in person or by a duly authorized attorney, properly endorsed or accompanied by proper instruments of transfer, a signature guarantee, and such other and further documentation as the Warrant Agent may reasonably request and duly stamped as may be required by the laws of the State of New York and of the United States of America.

The terms and conditions of the Warrants and the rights and obligations of the holder of this Warrant Certificate are set forth in the Warrant Agent Agreement dated as of _______, 2022 (the "Warrant Agreement") between the Company and Continental Stock Transfer & Trust (the "Warrant Agent"). A copy of the Warrant Agreement is available for inspection during business hours at the office of the Warrant Agent.

This Warrant Certificate shall not be valid or obligatory for any purpose until it shall have been countersigned by an authorized signatory of the Warrant Agent.

WITNESS the facsimile signature of a proper officer of the Company.

KWESST MICRO SYSTEMS INC.

By: _______________________________________

Name:

Title:

Dated: _________________

Countersigned:

CONTINENTAL STOCK TRANSFER & TRUST,

As Warrant Agent

By: _______________________________________

Name:

Title:

_{PLEASE DETACH HERE}

Certificate No.:_________ Number of Warrants:__________

WARRANT CUSIP NO.: ___________

	[ISSUER]
[Name & Address of Holder]	_______________________, Warrant Agent
	By Mail:
	___________________________________________
	By hand or overnight courier:
	___________________________________________

ANNEX B

NOTICE OF EXERCISE

TO:KWESST MICRO SYSTEMS INC.

(1)       The undersigned hereby elects to purchase ________ Warrant Shares of the Company pursuant to the terms of the attached Warrant Certificate (only if exercised in full), and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any.

(2)        Payment shall take the form of (check applicable box):

☐ in lawful money of the United States; or

☐ if permitted the cancellation of such number of Warrant Shares as is necessary, in accordance with the formula set forth in Section 3.3.6(b) of the Warrant Agreement (as defined in the Warrant Certificate), to exercise this Warrant with respect to the maximum number of Warrant Shares purchasable pursuant to the cashless exercise procedure set forth in Section 3.3.6(b) of the Warrant Agreement.

(3)        Please issue said Warrant Shares in the name of the undersigned or in such other name as is specified below:

The Warrant Shares shall be delivered to the following DWAC Account Number:

Name of Holder: ________________________________________________________________

Signature of Authorized Signatory of Holder: __________________________________________

Name of Authorized Signatory: ____________________________________________________________

Title of Authorized Signatory: _____________________________________________________________

Date: _______________

ANNEX C

[FORM OF CERTIFICATED WARRANT]

COMMON SHARE PURCHASE WARRANT

KWESST MICRO SYSTEMS INC.

Warrant Shares: _______	Initial Exercise Date: __________, 2022
	Issue Date: __________, 2022
	CUSIP: ______________
	ISIN: _______________

THIS COMMON SHARE PURCHASE WARRANT (the "Warrant") certifies that, for value received, _____________ or its assigns (the "Holder") is entitled, upon the terms and subject to the limitations on exercise and the conditions hereinafter set forth, at any time on or after ___________, 2022 (the "Initial Exercise Date") and on or prior to the 5:00 p.m., New York City time on ______, 2027² (the "Termination Date") but not thereafter, to subscribe for and purchase from KWESST Micro Systems Inc., a corporation formed under the laws of the province of British Columbia (the "Company"), up to ______ Common Shares (as subject to adjustment hereunder, the "Warrant Shares"). The purchase price of one Common Share under this Warrant shall be equal to the Exercise Price, as defined in Section 2(b). This Warrant shall initially be issued and maintained in the form of a security held in book-entry form and The Depository Trust Company or its nominee ("DTC") shall initially be the sole registered holder of this Warrant, subject to a Holder's right to elect to receive a Warrant in certificated form pursuant to the terms of the Warrant Agent Agreement, in which case this sentence shall not apply.

Section 1.Definitions. In addition to the terms defined elsewhere in this Warrant, the following terms have the meanings indicated in this Section 1:

"Affiliate" means any Person that, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with a Person, as such terms are used in and construed under Rule 405 under the Securities Act.

"Business Day" means any day except any Saturday, any Sunday, any day which is a federal legal holiday in the United States or in Canada, or any day on which banking institutions in the State of New York and in the Provinces of British Columbia and Ontario are authorized or required by law or other governmental action to close.

"Commission" means the United States Securities and Exchange Commission.

"Common Shares" means the common shares of the Company, no par value per share, and any other class of securities into which such securities may hereafter be reclassified or changed.

"Common Share Equivalents" means any securities of the Company or its subsidiaries which would entitle the holder thereof to acquire at any time Common Shares, including, without limitation, any debt, preferred stock, right, option, warrant or other instrument that is at any time convertible into or exercisable or exchangeable for, or otherwise entitles the holder thereof to receive, Common Shares.

"Exchange Act" means the United States Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.

"Person" means an individual or corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or subdivision thereof) or other entity of any kind.

^{______________________________________________
2} Insert the date that is the five-year anniversary of the Initial Exercise Date; provided, however, if such date is not a Trading Day, insert the immediately following Trading Day. 

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"Proceeding" means an action, claim, suit, investigation or proceeding (including, without limitation, an informal investigation or partial proceeding, such as a deposition), whether commenced or threatened.

"Registration Statement" means the Company's registration statement on Form F-1 (File No. 333-266897).

"Securities Act" means the United States Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.

"Trading Day" means a day on which the Common Shares are traded on a Trading Market.

"Trading Market" means any of the following markets or exchanges on which the Common Shares are listed or quoted for trading on the date in question: the NYSE American, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market, the New York Stock Exchange or the TSX Venture Exchange (or any successors to any of the foregoing).

"Transfer Agent" means TSX Trust Company, with a mailing address of 301 - 100 Adelaide St. W., Toronto, ON, Canada M5H 4H1, and any successor transfer agent of the Company.

"Warrant Agent Agreement" means that certain Warrant Agent Agreement, dated as of the Initial Exercise Date, between the Company and the Warrant Agent.

"Warrant Agent" means Continental Stock Transfer & Trust with a mailing address of 1 State Street, 30th Floor, New York, NY 10004-1561 Attention: Steven Vacante and any successor warrant agent of the Company.

"Warrants" means this Warrant and other Common Share Purchase Warrants issued by the Company pursuant to the Registration Statement.

"VWAP" means, for any date, the price determined by the first of the following clauses that applies: (a) if the Common Shares are then listed or quoted on a Primary Trading Market, the daily volume weighted average price of the Common Shares for such date (or the nearest preceding date) on the Primary Trading Market on which the Common Shares are then listed or quoted as reported by Bloomberg L.P. (based on a Trading Day from 9:30 a.m. (Eastern time) to 4:02 p.m. (Eastern time)), (b) if OTCQB or OTCQX is not a Trading Market, the volume weighted average price of the Common Shares for such date (or the nearest preceding date) on OTCQB or OTCQX as applicable, (c) if the Common Shares are not then listed or quoted for trading on OTCQB or OTCQX and if prices for the Common Shares are then reported in the "Pink Open Market" published by OTC Markets Group, Inc. (or a similar organization or agency succeeding to its functions of reporting prices), the most recent bid price per Common Share so reported, or (d) in all other cases, the fair market value of a Common Share as determined by an independent appraiser selected in good faith by the holders of a majority in interest of the Warrants then outstanding and reasonably acceptable to the Company, the fees and expenses of which shall be paid by the Company.

Section 2.Exercise of Warrant.

(a)Exercise and Payment. Exercise of the purchase rights represented by this Warrant may be made, in whole or in part, at any time or times during the period commencing on the Initial Exercise Date and terminating at 5:00 p.m., Eastern time on the Termination Date (“Exercise Period”) by delivery to the Company and the Warrant Agent of a duly executed copy, submitted, delivered or mailed (including by facsimile or PDF copy submitted by email), to the Company at 155 Terence Matthews Crescent, Unit #1, Ottawa, Ontario, K2M 2A8 Attention: Steven Archambault and Wendy Liang, email: archambault@kwesst.com and liang@kwesst.com (or such alternative email or physical address provided in writing by the Company to the Holder after the date hereof), and to the Warrant Agent at 1 State Street, 30^th Floor, New York, NY 10004-1561 Attention: Steven Vacante, email: svacante@continentalstock.com (or such alternative email or physical address provided in writing by the Warrant Agent to the Holder after the date hereof), in substantially the form annexed as Annex B hereto (the “Notice of Exercise”). Within the earlier of (i) two (2) Trading Days and (ii) the number of Trading Days comprising the Standard Settlement Period following the date the Holder delivers the Notice of Exercise as aforesaid, the Holder shall deliver the aggregate Exercise Price for the shares specified in the applicable Notice of Exercise by wire transfer, bank drafts or cashier’s or certified check drawn on a United States or Canadian bank unless the cashless exercise procedure specified in Section 2(c) below is specified in the applicable Notice of Exercise. No ink-original Notice of Exercise shall be required, nor shall any medallion guarantee (or other type of guarantee or notarization) of any Notice of Exercise form be required. Notwithstanding anything herein to the contrary, the Holder shall not be required to physically surrender this Warrant to the Company until the Holder has purchased all of the Warrant Shares available hereunder and the Warrant has been exercised in full, in which case, the Holder shall surrender this Warrant to the Company for cancellation within three (3) Trading Days of the date the final Notice of Exercise is delivered to the Company. Partial exercises of this Warrant resulting in purchases of a portion of the total number of Warrant Shares available hereunder shall have the effect of lowering the outstanding number of Warrant Shares purchasable hereunder in an amount equal to the applicable number of Warrant Shares purchased. The Holder and the Company shall maintain records showing the number of Warrant Shares purchased and the date of such purchases. The Company shall deliver any objection to any Notice of Exercise within one (1) Trading Day of receipt of such notice. The Holder and any assignee, by acceptance of this Warrant, acknowledge and agree that, by reason of the provisions of this paragraph, following the purchase of a portion of the Warrant Shares hereunder, the number of Warrant Shares available for purchase hereunder at any given time may be less than the amount stated on the face hereof. Notwithstanding the foregoing in this Section 2(a), a holder whose interest in this Warrant is a beneficial interest in certificate(s) representing this Warrant held in book-entry form through DTC (or another established clearing corporation performing similar functions), shall effect exercises made pursuant to this Section 2(a) by delivering to DTC (or such other clearing corporation, as applicable) the appropriate instruction form for exercise, complying with the procedures to effect exercise that are required by DTC (or such other clearing corporation, as applicable), subject to a Holder’s right to elect to receive a Warrant in certificated form pursuant to the terms of the Warrant Agent Agreement, in which case this sentence shall not apply.

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(b)Exercise Price. The exercise price per Warrant Share under this Warrant shall be $_____, subject to adjustment hereunder (the "Exercise Price").

(c)Cashless Exercise. If at the time of exercise hereof there is no effective registration statement registering, or the prospectus contained therein is not available for the issuance of the Warrant Shares to the Holder, then this Warrant may also be exercised, in whole or in part, at such time by means of a "cashless exercise" in which the Holder shall be entitled to receive a number of Warrant Shares equal to the quotient obtained (if such quotient would be a positive number) by dividing [(A-B) (X)] by (A), where:

(A) = as applicable: (i) the VWAP for the five Trading Days immediately preceding the date of the applicable Notice of Exercise if such Notice of Exercise is (1) both executed and delivered pursuant to Section 3.3.1(a) hereof on a day that is not a Trading Day or (2) both executed and delivered pursuant to Section 3.3.1(a) hereof on a Trading Day prior to the opening of "regular trading hours" (as defined in Rule 600(b) of Regulation NMS promulgated under the federal securities laws) on such Trading Day, (ii) the VWAP for the five Trading Days immediately preceding the date of the applicable Notice of Exercise or (iii) the VWAP for the five Trading Days immediately preceding the date of the applicable Notice of Exercise if the date of such Notice of Exercise is a Trading Day and such Notice of Exercise is both executed and delivered pursuant to Section 3.3.1(a) hereof after the close of "regular trading hours" on such Trading Day;

(B) = the Exercise Price of this Warrant, as adjusted hereunder; and

(X) = the number of Warrant Shares that would be issuable upon exercise of this Warrant in accordance with the terms of this Warrant if such exercise were by means of a cash exercise rather than a cashless exercise.

Notwithstanding anything herein to the contrary, but without limiting the rights of a Holder to receive Warrant Shares on a "cashless exercise" pursuant to this Section 2(c) or to receive cash payments pursuant to Section 3(d)(i) and Section 3(d)(iv) herein, the Company shall not be required to make any cash payments or net cash settlement to the Holder in lieu of delivery of the Warrant Shares. If Warrant Shares are issued in such a cashless exercise, the parties acknowledge and agree that in accordance with Section 3(a)(9) of the Securities Act, the Warrant Shares shall take on the registered characteristics of the Warrants being exercised. The Company agrees not to take any position contrary to this Section 2(c).

Notwithstanding anything herein to the contrary, on the Termination Date, this Warrant shall be automatically exercised via cashless exercise pursuant to this Section 2(c).

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(d)Mechanics of Exercise.

(i)Delivery of Warrant Shares Upon Exercise. The Company shall cause the Warrant Shares purchased hereunder to be transmitted by the Transfer Agent to the Holder by crediting the account of the Holder's or its designee's balance account with DTC through its Deposit or Withdrawal at Custodian system ("DWAC") if the Company is then a participant in such system and either (A) there is an effective registration statement permitting the issuance of the Warrant Shares to or resale of the Warrant Shares by Holder or (B) this Warrant is being exercised via cashless exercise, and otherwise by physical delivery of a certificate, registered in the Company's share register in the name of the Holder or its designee, for the number of Warrant Shares to which the Holder is entitled pursuant to such exercise to the address specified by the Holder in the Notice of Exercise by the date that is earlier of (i) two (2) Trading Days after the delivery to the Company of the Notice of Exercise and (ii) the number of Trading Days comprising the Standard Settlement Period after the delivery to the Company and the Warrant Agent of the Notice of Exercise (such date, the "Warrant Share Delivery Date"); provided, however, that if payment of the aggregate Exercise Price (other than in the case of a cashless exercise) is received after 12:00 P.M., New York City time on the Warrant Share Delivery Date, then the Warrant Share Delivery Date shall be extended by one (1) additional Trading Day. Upon delivery of the Notice of Exercise, the Holder shall be deemed for all corporate purposes to have become the holder of record of the Warrant Shares with respect to which this Warrant has been exercised, irrespective of the date of delivery of the Warrant Shares, provided that payment of the aggregate Exercise Price (other than in the case of a cashless exercise) is received the earlier of (i) two (2) Trading Days of and (ii) the number of Trading Days comprising the Standard Settlement Period following the delivery of the Notice of Exercise. If the Company fails for any reason to deliver to the Holder the Warrant Shares subject to a Notice of Exercise by the Warrant Share Delivery Date, the Company shall pay to the Holder, in cash, as liquidated damages and not as a penalty, for each $1,000 of Warrant Shares subject to such exercise (based on the VWAP of the Common Shares on the date of the applicable Notice of Exercise), $10 per Trading Day (increasing to $20 per Trading Day on the fifth Trading Day after such liquidated damages begin to accrue) for each Trading Day after such Warrant Share Delivery Date until such Warrant Shares are delivered or Holder rescinds such exercise. The Company agrees to maintain a transfer agent that is a participant in the FAST program so long as this Warrant remains outstanding and exercisable. As used herein, "Standard Settlement Period" means the standard settlement period, expressed in a number of Trading Days, on the Primary Trading Market with respect to the Common Shares as in effect on the date of delivery of the Notice of Exercise.

(ii)Delivery of New Warrants Upon Exercise. If this Warrant shall have been exercised in part, the Company shall, at the request of a Holder and upon surrender of this Warrant certificate, at the time of delivery of the Warrant Shares, deliver to the Holder a new Warrant evidencing the rights of the Holder to purchase the unpurchased Warrant Shares called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant.

(iii)Rescission Rights. If the Company fails to cause the Transfer Agent to transmit to the Holder the Warrant Shares pursuant to Section 2(d)(i) by the Warrant Share Delivery Date, then the Holder will have the right to rescind such exercise.

(iv)Compensation for Buy-In on Failure to Timely Deliver Warrant Shares Upon Exercise. In addition to any other rights available to the Holder, if the Company fails to cause the Transfer Agent to transmit to the Holder the Warrant Shares in accordance with the provisions of Section 2(d)(i) above pursuant to an exercise on or before the Share Delivery Date (for avoidance of doubt, other than any such failure that is due solely to any action or inaction by the Holder), and if after such date the Holder is required by its broker to purchase (in an open market transaction or otherwise) or the Holder's brokerage firm otherwise purchases, Common Shares to deliver in satisfaction of a sale by the Holder of the Warrant Shares which the Holder anticipated receiving upon such exercise (a "Buy-In"), then the Company shall (A) pay in cash to the Holder the amount, if any, by which (x) the Holder's total purchase price (including brokerage commissions, if any) for the Common Shares so purchased exceeds (y) the amount obtained by multiplying (1) the number of Warrant Shares that the Company was required to deliver to the Holder in connection with the exercise at issue times (2) the price at which the sell order giving rise to such purchase obligation was executed, and (B) at the option of the Holder, either reinstate the portion of the Warrant and equivalent number of Warrant Shares for which such exercise was not honored (in which case such exercise shall be deemed rescinded) or deliver to the Holder the number of Common Shares that would have been issued had the Company timely complied with its exercise and delivery obligations hereunder. For example, if the Holder purchases Common Shares having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted exercise of Common Shares with an aggregate sale price giving rise to such purchase obligation of $10,000, under clause (A) of the immediately preceding sentence the Company shall be required to pay the Holder $1,000. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In and, upon request of the Company, evidence of the amount of such loss. Nothing herein shall limit a Holder's right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Company's failure to timely deliver Common Shares upon exercise of the Warrant as required pursuant to the terms hereof.

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(v)No Fractional Shares. No fractional Warrant Shares will be issued upon the exercise of this Warrant. If a Holder would be entitled, upon the exercise of this Warrant, to receive a fractional interest in a share, the Company shall, at its election, either pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Exercise Price or round up to the next whole Warrant Share.

(vi)Charges, Taxes and Expenses. Issuance of Warrant Shares shall be made without charge to the Holder for any issue or transfer tax or other incidental expense in respect of the issuance of such Warrant Shares, all of which taxes and expenses shall be paid by the Company, and such Warrant Shares shall be issued in the name of the Holder or in such name or names as may be directed by the Holder; provided, however, that in the event Warrant Shares are to be issued in a name other than the name of the Holder, this Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto duly executed by the Holder and the Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it for any transfer tax or other government charge incidental thereto. The Company shall pay all Transfer Agent fees required for same-day processing of any Notice of Exercise and all fees to the DTC (or another established clearing corporation performing similar functions) required for same-day electronic delivery of the Warrant Shares.

(vii)Closing of Books. Subject to applicable laws, including applicable securities laws, the Company will not close its shareholder books or records in any manner which prevents the timely exercise of this Warrant, pursuant to the terms hereof.

(e)Holder's Exercise Limitations. The Company shall not effect any exercise of this Warrant, and a Holder shall not have the right to exercise any portion of this Warrant, pursuant to Section 2 or otherwise, to the extent that after giving effect to such issuance after exercise as set forth on the applicable Notice of Exercise, the Holder (together with the Holder's Affiliates, and any other Persons acting as a group together with the Holder or any of the Holder's Affiliates (such Persons, "Attribution Parties")), would beneficially own in excess of the Beneficial Ownership Limitation (as defined below). For purposes of the foregoing sentence, the number of Common Shares beneficially owned by the Holder and its Affiliates and Attribution Parties shall include the number of Common Shares issuable upon exercise of this Warrant with respect to which such determination is being made, but shall exclude the number of Common Shares which would be issuable upon (i) exercise of the remaining, non-exercised portion of this Warrant beneficially owned by the Holder or any of its Affiliates or Attribution Parties and (ii) exercise or conversion of the unexercised or non-converted portion of any other securities of the Company (including, without limitation, any other Common Share Equivalents) subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by the Holder or any of its Affiliates or Attribution Parties. Except as set forth in the preceding sentence, for purposes of this Section 2(e), beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder, it being acknowledged by the Holder that the Company is not representing to the Holder that such calculation is in compliance with Section 13(d) of the Exchange Act and the Holder is solely responsible for any schedules required to be filed in accordance therewith. To the extent that the limitation contained in this Section 2(e) applies, the determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder together with any Affiliates and Attribution Parties) and of which portion of this Warrant is exercisable shall be in the sole discretion of the Holder, and the submission of a Notice of Exercise shall be deemed to be the Holder's determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder together with any Affiliates and Attribution Parties) and of which portion of this Warrant is exercisable, in each case subject to the Beneficial Ownership Limitation, and the Company shall have no obligation to verify or confirm the accuracy of such determination. In addition, a determination as to any group status as contemplated above shall be determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. For purposes of this Section 2(e), in determining the number of outstanding Common Shares, a Holder may rely on the number of outstanding Common Shares as reflected in (A) the Company's most recent periodic or annual report filed with the Commission, as the case may be, (B) a more recent public announcement by the Company or (C) a more recent written notice by the Company or the Transfer Agent setting forth the number of Common Shares outstanding. Upon the written or oral request of a Holder, the Company shall within two (2) Trading Days confirm orally and in writing to the Holder the number of Common Shares then outstanding. In any case, the number of outstanding Common Shares shall be determined after giving effect to the conversion or exercise of securities of the Company, including this Warrant, by the Holder or its Affiliates or Attribution Parties since the date as of which such number of outstanding Common Shares was reported. The "Beneficial Ownership Limitation" shall be 4.99% (or, upon election by a Holder prior to the issuance of any Warrants, 9.99%) of the number of Common Shares outstanding immediately after giving effect to the issuance of Common Shares issuable upon exercise of this Warrant. The Holder, upon notice to the Company, may increase or decrease the Beneficial Ownership Limitation provisions of this Section 2(e), provided that the Beneficial Ownership Limitation in no event exceeds 9.99% of the number of Common Shares outstanding immediately after giving effect to the issuance of Common Shares upon exercise of this Warrant held by the Holder and the provisions of this Section 2(e) shall continue to apply. Any increase in the Beneficial Ownership Limitation will not be effective until the 61st day after such notice is delivered to the Company. The provisions of this paragraph shall be construed and implemented in a manner otherwise than in strict conformity with the terms of this Section 2(e) to correct this paragraph (or any portion hereof) which may be defective or inconsistent with the intended Beneficial Ownership Limitation herein contained or to make changes or supplements necessary or desirable to properly give effect to such limitation. The limitations contained in this paragraph shall apply to a successor holder of this Warrant.

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Section 3.Certain Adjustments.

(a)Share Dividends and Splits. If the Company, at any time while this Warrant is outstanding: (i) pays a stock dividend or otherwise makes a distribution or distributions on its Common Shares or any other equity or equity equivalent securities payable in Common Shares (which, for avoidance of doubt, shall not include any Common Shares issued by the Company upon exercise of this Warrant), (ii) subdivides outstanding Common Shares into a larger number of shares, (iii) combines (including by way of reverse stock split) outstanding Common Shares into a smaller number of shares, or (iv) issues by reclassification of the Common Shares any shares of capital stock of the Company, then in each case the Exercise Price shall be multiplied by a fraction of which the numerator shall be the number of Common Shares and such other capital stock of the Company (excluding treasury shares, if any) outstanding immediately before such event and of which the denominator shall be the number of Common Shares such other capital stock of the Company (excluding treasury shares, if any) outstanding immediately after such event, and the number of shares issuable upon exercise of this Warrant shall be proportionately adjusted such that the aggregate Exercise Price of this Warrant shall remain unchanged. Any adjustment made pursuant to this Section 3(a) shall become effective immediately after the record date for the determination of shareholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or re-classification.

(b)Subsequent Rights Offerings. In addition to any adjustments pursuant to Section 3(a) above and subject to the prior approval of the TSX Venture Exchange (so long as the Common Shares are listed for trading on the TSX Venture Exchange), if at any time the Company grants, issues or sells any Common Share Equivalents or rights to purchase shares, warrants, securities or other property pro rata to the record holders of any class of Common Shares (the “Purchase Rights”), then the Holder will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which the Holder could have acquired if the Holder had held the number of Common Shares acquirable upon complete exercise of this Warrant (without regard to any limitations on exercise hereof, including without limitation, the Beneficial Ownership Limitation) immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of Common Shares are to be determined for the grant, issue or sale of such Purchase Rights (provided, however, to the extent that the Holder’s right to participate in any such Purchase Right would result in the Holder exceeding the Beneficial Ownership Limitation, then the Holder shall not be entitled to participate in such Purchase Right to such extent (or beneficial ownership of such Common Shares as a result of such Purchase Right to such extent), and such Purchase Right to such extent shall be held in abeyance for the Holder until such time, if ever, as its right thereto would not result in the Holder exceeding the Beneficial Ownership Limitation). To the extent that this Warrant has not been partially or completely exercised at the time of such Distribution, such portion of the Distribution shall be held in abeyance for the benefit of the Holder until the Holder has exercised this Warrant.

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(c)Pro Rata Distribution. During such time as this Warrant is outstanding and subject to the prior approval of the TSX Venture Exchange, if the Company shall declare or make any special or extraordinary dividend (other than regular dividends payable in cash) or other distribution of its assets (or rights to acquire its assets) to holders of Common Shares, by way of return of capital or otherwise (including, without limitation, any distribution of shares or other securities, property or options by way of a dividend, spin off, reclassification, corporate rearrangement, scheme of arrangement or other similar transaction) (a "Distribution"), at any time after the issuance of this Warrant, then, in each such case, the Holder shall be entitled to participate in such Distribution to the same extent that the Holder would have participated therein if the Holder had held the number of Common Shares acquirable upon complete exercise of this Warrant (without regard to any limitations on exercise hereof, including without limitation, the Beneficial Ownership Limitation) immediately before the date of which a record is taken for such Distribution, or, if no such record is taken, the date as of which the record holders of Common Shares are to be determined for the participation in such Distribution (provided, however, to the extent that the Holder's right to participate in any such Distribution would result in the Holder exceeding the Beneficial Ownership Limitation, then the Holder shall not be entitled to participate in such Distribution to such extent (or in the beneficial ownership of any Common Shares as a result of such Distribution to such extent) and the portion of such Distribution shall be held in abeyance for the benefit of the Holder until such time, if ever, as its right thereto would not result in the Holder exceeding the Beneficial Ownership Limitation). Notwithstanding the foregoing, this Section 3(c) shall not apply with respect to any Distribution to the extent that such Distribution results in an adjustment to the Exercise Price under the other provisions of this Warrant.

(d)Fundamental Transaction. If, at any time while this Warrant is outstanding, (i) the Company, directly or indirectly, in one or more related transactions effects any merger or consolidation of the Company with or into another Person, (ii) the Company, directly or indirectly, effects any sale, lease, license, assignment, transfer, conveyance or other disposition of all or substantially all of its assets in one or a series of related transactions, (iii) any, direct or indirect, purchase offer, tender offer or exchange offer (whether by the Company or another Person) is completed pursuant to which all holders of Common Shares are permitted to sell, tender or exchange their shares for other securities, cash or property and has been accepted by the holders of 50% or more of the outstanding Common Shares or 50% or more of the total voting power of the outstanding Common Shares, (iv) the Company, directly or indirectly, in one or more related transactions effects any reclassification, reorganization or recapitalization of the Common Shares or any compulsory share exchange pursuant to which all outstanding Common Shares are effectively converted into or exchanged for other securities, cash or property, or (v) the Company, directly or indirectly, in one or more related transactions consummates a stock or share purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement) with another Person or group of Persons whereby such other Person or group acquires more than 50% of the outstanding Common Shares or 50% or more of the voting power of the Common Shares (each a "Fundamental Transaction"), then, upon any subsequent exercise of this Warrant, and subject to the prior approval of the TSX Venture Exchange, the Holder shall have the right to receive, for each Warrant Share that would have been issuable upon such exercise immediately prior to the occurrence of such Fundamental Transaction, at the option of the Holder (without regard to any limitation in Section 2(e) on the exercise of this Warrant), the number of Common Shares of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and any additional consideration (the "Alternate Consideration") receivable as a result of such Fundamental Transaction by a holder of the number of Common Shares for which the Warrant is exercisable immediately prior to such Fundamental Transaction (without regard to any limitation in Section 3.3.9 on the exercise of this Warrant). For purposes of any such exercise, the determination of the Exercise Price shall be appropriately adjusted to apply to such Alternate Consideration based on the amount of Alternate Consideration issuable in respect of one Common Share in such Fundamental Transaction, and the Company shall apportion the Exercise Price among the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the Alternate Consideration. If holders of Common Shares are given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the Alternate Consideration it receives upon any exercise of this Warrant following such Fundamental Transaction. The Company shall cause any successor entity in a Fundamental Transaction in which the Company is not the survivor (the "Successor Entity") to assume in writing all of the obligations of the Company under this Warrant in accordance with the provisions of this Section 3(d) pursuant to written agreements delay) prior to such Fundamental Transaction and shall, at the option of the Holder, deliver to the Holder in exchange for the Warrant a security of the Successor Entity evidenced by a written instrument substantially similar in form and substance to the Warrant which is exercisable for a corresponding number of shares of capital stock of such Successor Entity (or its parent entity) equivalent to the shares of Common Shares acquirable and receivable upon exercise of the Warrant (without regard to any limitations on the exercise of the Warrant) prior to such Fundamental Transaction, and with an exercise price which applies the exercise price hereunder to such shares of capital stock (but taking into account the relative value of the Common Shares pursuant to such Fundamental Transaction and the value of such shares of capital stock, such number of shares of capital stock and such exercise price being for the purpose of protecting the economic value of the Warrant immediately prior to the consummation of such Fundamental Transaction), and which is reasonably satisfactory in form and substance to the Holder. Upon the occurrence of any such Fundamental Transaction, the Successor Entity shall succeed to, and be substituted for (so that from and after the date of such Fundamental Transaction, the provisions of the Warrants referring to the "Company" shall refer instead to the Successor Entity), and may exercise every right and power of the Company and shall assume all of the obligations of the Company under the Warrants with the same effect as if such Successor Entity had been named as the Company herein.

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(e)Calculations. All calculations under this Section 3 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. For purposes of this Section 3, the number of Common Shares deemed to be issued and outstanding as of a given date shall be the sum of the number of Common Shares (excluding treasury shares, if any) issued and outstanding.

(f)Notice to Holder.

(i)Adjustment to Exercise Price. Whenever the Exercise Price is adjusted pursuant to any provision of this Section 3, the Company shall promptly deliver to the Holder by facsimile or email a notice setting forth the Exercise Price after such adjustment and any resulting adjustment to the number of Warrant Shares and setting forth a brief statement of the facts requiring such adjustment.

(ii)Notice to Allow Exercise by Holder. If (A) the Company shall declare a dividend (or any other distribution in whatever form) on the Common Shares, (B) the Company shall declare a special nonrecurring cash dividend on or a redemption of the Common Shares, (C) the Company shall authorize the granting to all holders of the Common Shares rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights, (D) the approval of any shareholders of the Company shall be required in connection with any Fundamental Transaction, or (E) the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company, then, in each case, the Company shall cause to be delivered by facsimile or email to the Holder at its last facsimile number or email address as it shall appear upon the Warrant Register (as defined below), at least 20 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of the Common Shares of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of the Common Shares of record shall be entitled to exchange their Common Shares for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or share exchange; provided that the failure to deliver such notice or any defect therein or in the delivery thereof shall not affect the validity of the corporate action required to be specified in such notice. To the extent that any notice provided in this Warrant constitutes, or contains, material, non-public information regarding the Company or any of its subsidiaries, the Company shall simultaneously file such notice on SEDAR and with the Commission pursuant to a Report on Form 6-K. Provided such notice occurs within the Exercise Period, the Holder shall remain entitled to exercise this Warrant during the period commencing on the date of such notice to the effective date of the event triggering such notice, except as may otherwise be expressly set forth herein (including the applicable exercise period set forth herein).

Section 4.Transfer of Warrant.

(a)Transferability. Subject to compliance with any applicable securities laws, this Warrant and all rights hereunder are transferable, in whole or in part, upon surrender of this Warrant at the principal office of the Company or its designated agent, together with a written assignment of this Warrant substantially in the form attached hereto duly executed by the Holder or its agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of such transfer. Upon such surrender and, if required, such payment, the Company shall execute and deliver a new Warrant or Warrants in the name of the assignee or assignees, as applicable, and in the denomination or denominations specified in such instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be cancelled. Notwithstanding anything herein to the contrary, the Holder shall not be required to physically surrender this Warrant to the Company unless the Holder has assigned this Warrant in full, in which case, the Holder shall surrender this Warrant to the Company within three (3) Trading Days of the date the Holder delivers an assignment form to the Company assigning this Warrant full. The Warrant, if properly assigned in accordance herewith, may be exercised by a new holder for the purchase of Warrant Shares without having a new Warrant issued.

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(b)New Warrants. If this Warrant is not held in global form through DTC (or any successor depository), this Warrant may be divided or combined with other Warrants upon presentation hereof at the aforesaid office of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by the Holder or its agent or attorney. Subject to compliance with Section 4(a), as to any transfer which may be involved in such division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice. All Warrants issued on transfers or exchanges shall be dated the original Issuance Date of this Warrant and shall be identical with this Warrant except as to the number of Warrant Shares issuable pursuant thereto.

(c)Warrant Register. The Warrant Agent (or, in the event a Holder elects to receive a Definitive Certificate (as defined in the Warrant Agent Agreement), the Company) shall register this Warrant, upon records to be maintained by the Warrant Agent (or, in the event a Holder elects to receive a Definitive Certificate, the Company) for that purpose (the "Warrant Register"), in the name of the record Holder hereof from time to time. The Company and the Warrant Agent may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, absent actual notice to the contrary.

Section 5.Miscellaneous.

(a)No Rights as Shareholder Until Exercise. This Warrant does not entitle the Holder to any voting rights, dividends or other rights as a shareholder of the Company prior to the exercise hereof as set forth in Section 2(d)(i), except as expressly set forth in Section 3.

(b)Loss, Theft, Destruction or Mutilation of Warrant. The Company covenants that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant or any share certificate relating to the Warrant Shares, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it (which, in the case of the Warrant, shall not include the posting of any bond), and upon surrender and cancellation of such Warrant or share certificate, if mutilated, the Company will make and deliver a new Warrant or share certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or share certificate.

(c)Saturdays, Sundays, Holidays, etc. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall not be a Trading Day, then, such action may be taken or such right may be exercised on the next succeeding Trading Day.

(d)Authorized Shares.

(i)The Company covenants that, during the period the Warrant is outstanding, it will reserve from its authorized and unissued Common Shares a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any purchase rights under this Warrant. The Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of issuing the necessary Warrant Shares upon the exercise of the purchase rights under this Warrant. The Company will take all such reasonable action as may be necessary to assure that such Warrant Shares may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the Trading Market upon which the Common Shares may be listed. The Company covenants that all Warrant Shares which may be issued upon the exercise of the purchase rights represented by this Warrant will, upon exercise of the purchase rights represented by this Warrant and payment for such Warrant Shares in accordance herewith, be duly authorized, validly issued, fully paid and non-assessable and free from all taxes, liens and charges created by the Company in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue).

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(ii)Except and to the extent as waived or consented to by the Holder, the Company shall not by any action, including, without limitation, amending its certificate of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder as set forth in this Warrant against impairment. Without limiting the generality of the foregoing, the Company will (A) not increase the par value of any Warrant Shares above the amount payable therefor upon such exercise immediately prior to such increase in par value, (B) take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and non-assessable Warrant Shares upon the exercise of this Warrant and (C) use commercially reasonable efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof, as may be, necessary to enable the Company to perform its obligations under this Warrant.

(iii)Before taking any action which would result in an adjustment in the number of Warrant Shares for which this Warrant is exercisable or in the Exercise Price, the Company shall obtain all such authorizations or exemptions thereof, or consents thereto, as may be necessary from any public regulatory body or bodies having jurisdiction thereof.

(e)Governing Law. All questions concerning the construction, validity, enforcement and interpretation of this Warrant shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without regard to the principles of conflict of laws thereof. Each party agrees that all legal Proceedings concerning the interpretation, enforcement and defense of this Warrant shall be commenced in the state and federal courts sitting in the City of New York, Borough of Manhattan (the "New York Courts"). Each party hereto hereby irrevocably submits to the exclusive jurisdiction of the New York Courts for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein (including with respect to the enforcement of any provision hereunder), and hereby irrevocably waives, and agrees not to assert in any suit, action or Proceeding, any claim that it is not personally subject to the jurisdiction of such New York Courts, or such New York Courts are improper or inconvenient venue for such Proceeding. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Warrant and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any other manner permitted by law. If any party shall commence an action or Proceeding to enforce any provisions of this Warrant, then the prevailing party in such action or Proceeding shall be reimbursed by the other party for its attorneys' fees and other costs and expenses incurred in the investigation, preparation and prosecution of such action or Proceeding.

(f)Restrictions. The Holder acknowledges that the Warrant Shares acquired upon the exercise of this Warrant, if not registered, and the Holder does not utilize cashless exercise, will have restrictions upon resale imposed by state, provincial and federal securities laws in the United States and Canada.

(g)Nonwaiver and Expenses. No course of dealing or any delay or failure to exercise any right hereunder on the part of Holder shall operate as a waiver of such right or otherwise prejudice the Holder's rights, powers or remedies. Without limiting any other provision of this Warrant, if the Company willfully and knowingly fails to comply with any provision of this Warrant, which results in any material damages to the Holder, the Company shall pay to the Holder such amounts as shall be sufficient to cover any costs and expenses including, but not limited to, reasonable attorneys' fees, including those of appellate Proceedings, incurred by the Holder in collecting any amounts due pursuant hereto or in otherwise enforcing any of its rights, powers or remedies hereunder.

(h)Notices. Any and all notices or other communications or deliveries to be provided by the Holders hereunder including, without limitation, any Notice of Exercise, shall be in writing and delivered personally, by e-mail, or sent by a nationally recognized overnight courier service, addressed to the Company, at 155 Terence Matthews Crescent, Unit #1, Ottawa, Ontario, K2M 2A8 Attention: Steven Archambault and Wendy Liang, email: archambault@kwesst.com and liang@kwesst.com, or such other email address or address as the Company may specify for such purposes by notice to the Holders. Any and all notices or other communications or deliveries to be provided by the Company hereunder shall be in writing and delivered personally, by e-mail, or sent by a nationally recognized overnight courier service addressed to each Holder at the e-mail address or address of such Holder appearing on the books of the Warrant Agent. Any notice or other communication or deliveries hereunder shall be deemed given and effective on the earliest of (i) the time of transmission, if such notice or communication is delivered via e-mail at the e-mail address set forth in this Section prior to 5:30 p.m. (Eastern time) on any date, (ii) the next Trading Day after the date of transmission, if such notice or communication is delivered via e-mail at the e-mail address set forth in this Section on a day that is not a Trading Day or later than 5:30 p.m. (Eastern time) on any Trading Day, (iii) the second Trading Day following the date of mailing, if sent by U.S. nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. Notwithstanding any other provision of this Warrant, where this Warrant provides for notice of any event to the Holder, if this Warrant is held in global form by DTC (or any successor depositary), such notice shall be sufficiently given if given to DTC (or any successor depositary) pursuant to the procedures of DTC (or such successor depositary), subject to a Holder's right to elect to receive a Warrant in certificated form pursuant to the terms of the Warrant Agent Agreement, in which case this sentence shall not apply.

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(i)Warrant Agent Agreement. If this Warrant is held in global form through DTC (or any successor depositary), this Warrant is issued subject to the Warrant Agent Agreement. To the extent any provision of this Warrant conflicts with the express provisions of the Warrant Agent Agreement, the provisions of this Warrant shall govern and be controlling.

(j)Limitation of Liability. No provision hereof, in the absence of any affirmative action by the Holder to exercise this Warrant to purchase Warrant Shares, and no enumeration herein of the rights or privileges of the Holder, shall give rise to any liability of the Holder for the purchase price of any Common Shares or as a shareholder of the Company, whether such liability is asserted by the Company or by creditors of the Company.

(k)Remedies. The Holder, in addition to being entitled to exercise all rights granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Warrant. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Warrant and hereby agrees to waive and not to assert the defense in any action for specific performance that a remedy at law would be adequate.

(l)Successors and Assigns. Subject to applicable securities laws, this Warrant and the rights and obligations evidenced hereby shall inure to the benefit of and be binding upon the successors and permitted assigns of the Company and the successors and permitted assigns of Holder. The provisions of this Warrant are intended to be for the benefit of any Holder from time to time of this Warrant and shall be enforceable by the Holder or holder of Warrant Shares.

9.1.Amendment. This Warrant may be modified or amended or the provisions hereof waived with the written consent of the Company, on the one hand, and either: (i) the Holder or the beneficial owner of this Warrant, on the other hand, or (ii) the vote or written consent of the Holders of at least 50.1% of the then outstanding Warrants issued pursuant to the Warrant Agent Agreement, on the other hand; provided that if any such modification, amendment or waiver disproportionately and adversely affects the rights of a Holder compared to other Holders, the prior written consent of such Holder shall also be required.

(m)Severability. Wherever possible, each provision of this Warrant shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Warrant.

(n)Headings. The headings used in this Warrant are for the convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant.

(Signature Page Follows)

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IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officer thereunto duly authorized as of the date first above indicated.

KWESST MICRO SYSTEMS INC.
By:
	Name:
	Title:

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NOTICE OF EXERCISE

TO:KWESST MICRO SYSTEMS INC.

(1)        The undersigned hereby elects to purchase ________ Warrant Shares of the Company pursuant to the terms of the attached Warrant (only if exercised in full), and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any.

(2)        Payment shall take the form of (check applicable box):

☐ in lawful money of the United States; or

☐ if permitted the cancellation of such number of Warrant Shares as is necessary, in accordance with the formula set forth in subsection 2(c), to exercise this Warrant with respect to the maximum number of Warrant Shares purchasable pursuant to the cashless exercise procedure set forth in subsection 2(c).

(3)        Please issue said Warrant Shares in the name of the undersigned or in such other name as is specified below:

The Warrant Shares shall be delivered to the following DWAC Account Number:

Name of Holder: ________________________________________________________________

Signature of Authorized Signatory of Holder: __________________________________________

Name of Authorized Signatory: ____________________________________________________________

Title of Authorized Signatory: _____________________________________________________________

Date: _______________

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ASSIGNMENT FORM

(To assign the foregoing Warrant, execute this form and supply required information. Do not use this form to purchase shares.)

FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced thereby are hereby assigned to

Name:
	(Please Print)
Address:
	(Please Print)
Phone Number:
Email Address:
Dated: __________________ ___ __, ______
Holder's Signature:
Holder's Address:

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ANNEX D

AUTHORIZED REPRESENTATIVES

Name	Title	Signature
David Luxton	Executive Chairman and Director
Jeffrey MacLeod	Chief Executive Officer
Steven Archambault	Chief Financial Officer

ANNEX E

[FORM OF WARRANT CERTIFICATE REQUEST NOTICE]

WARRANT CERTIFICATE REQUEST NOTICE

To:CONTINENTAL STOCK TRANSFER & TRUST,

as Warrant Agent for KWESST MICRO SYSTEMS INC. (the "Company")

The undersigned Holder of Common Share Purchase Warrants ("Warrants") in the form of Global Warrants issued by the Company hereby elects to receive a Definitive Certificate evidencing the Warrants held by the Holder as specified below:

(1)Name of Holder of Warrants in form of Global Warrants:                                                                                       

(2)Name of Holder in Definitive Certificate (if different from name of Holder of Warrants in form of Global Warrants):                                                                                                                                                                       

(3)Number of Warrants in name of Holder in form of Global Warrants:                                                                     

(4)Number of Warrants for which Definitive Certificate shall be issued:                                                                     

(5)Number of Warrants in name of Holder in form of Global Warrants after issuance:                                               

The Definitive Certificate shall be delivered to the following address:

The undersigned hereby acknowledges and agrees that, in connection with this Warrant Exchange and the issuance of the Definitive Certificate, the Holder is deemed to have surrendered the number of Warrants in form of Global Warrants in the name of the Holder equal to the number of Warrants evidenced by the Definitive Certificate.

Name of Holder: ________________________________________________________________

Signature of Authorized Signatory of Holder: __________________________________________

Name of Authorized Signatory: ____________________________________________________________

Title of Authorized Signatory: _____________________________________________________________

Date: _______________

EX-4.4

PRE-FUNDED COMMON SHARE PURCHASE WARRANT

KWESST MICRO SYSTEMS INC.

Warrant Shares: _______
	Issue Date: __________, 2022
	_____________

THIS PRE-FUNDED COMMON SHARE PURCHASE WARRANT (the "Warrant") certifies that, for value received, _____________ or its assigns (the "Holder") is entitled, upon the terms and subject to the limitations on exercise and the conditions hereinafter set forth, at any time on or after the Issue Date, as stipulated above, until this Warrant is exercised in full (the "Termination Date") but not thereafter, to subscribe for and purchase from KWESST Micro Systems Inc., a corporation formed under the laws of the province of British Columbia (the "Company"), up to ______ Common Shares (as subject to adjustment hereunder, the "Warrant Shares"). The purchase price of one Common Share under this Warrant shall be equal to the Exercise Price, as defined in Section 2(b).

Section 1.Definitions. In addition to the terms defined elsewhere in this Warrant, the following terms have the meanings indicated in this Section 1:

"Affiliate" means any Person that, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with a Person, as such terms are used in and construed under Rule 405 under the Securities Act.

"Commission" means the United States Securities and Exchange Commission.

"Common Shares" means the common shares of the Company, no par value per share, and any other class of securities into which such securities may hereafter be reclassified or changed.

"Common Share Equivalents" means any securities of the Company or its subsidiaries which would entitle the holder thereof to acquire at any time Common Shares, including, without limitation, any debt, preferred stock, right, option, warrant or other instrument that is at any time convertible into or exercisable or exchangeable for, or otherwise entitles the holder thereof to receive, Common Shares.

"Exchange Act" means the United States Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.

"Person" means an individual or corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or subdivision thereof) or other entity of any kind.

"Proceeding" means an action, claim, suit, investigation or proceeding (including, without limitation, an informal investigation or partial proceeding, such as a deposition), whether commenced or threatened.

"Registration Statement" means the Company's registration statement on Form F-1 (File No. 333-266897).

"Securities Act" means the United States Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.

"Trading Day" means a day on which the Common Shares are traded on a Trading Market.

"Trading Market" means any of the following markets or exchanges on which the Common Shares are listed or quoted for trading on the date in question: the NYSE American, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market, the New York Stock Exchange or the TSX Venture Exchange (or any successors to any of the foregoing).

"Transfer Agent" means TSX Trust Company, with a mailing address of 301 - 100 Adelaide St. W., Toronto, ON, Canada M5H 4H1, and any successor transfer agent of the Company.

"VWAP" means, for any date, the price determined by the first of the following clauses that applies: (a) if the Common Shares are then listed or quoted on a primary Trading Market, the daily volume weighted average price of the Common Shares for such date (or the nearest preceding date) on the primary Trading Market on which the Common Shares are then listed or quoted as reported by Bloomberg L.P. (based on a Trading Day from 9:30 a.m. (Eastern time) to 4:02 p.m. (Eastern time)), (b) if OTCQB or OTCQX is not a Trading Market, the volume weighted average price of the Common Shares for such date (or the nearest preceding date) on OTCQB or OTCQX as applicable, (c) if the Common Shares are not then listed or quoted for trading on OTCQB or OTCQX and if prices for the Common Shares are then reported in the "Pink Open Market" published by OTC Markets Group, Inc. (or a similar organization or agency succeeding to its functions of reporting prices), the most recent bid price per Common Share so reported, or (d) in all other cases, the fair market value of a Common Share as determined by an independent appraiser selected in good faith by the holders of a majority in interest of the Warrants then outstanding and reasonably acceptable to the Company, the fees and expenses of which shall be paid by the Company.

"Warrants" means this Warrant and other Pre-Funded Common Share Purchase Warrants issued by the Company pursuant to the Registration Statement.

Section 2.Exercise.

(a) Exercise of the purchase rights represented by this Warrant may be made, in whole or in part, at any time or times on or after the Issue Date and on or before the Termination Date by delivery to the Company of a duly executed copy, submitted, delivered or mailed (including by facsimile or PDF copy submitted by email), to the Company at 155 Terence Matthews Crescent, Unit #1, Ottawa, Ontario, K2M 2A8 Attention: Steven Archambault and Wendy Liang, email: archambault@kwesst.com and liang@kwesst.com (or such alternative email or physical address provided in writing by the Company to the Holder after the date hereof)  in substantially the form annexed hereto (the "Notice of Exercise"). Within the earlier of (i) two (2) Trading Days and (ii) the number of Trading Days comprising the Standard Settlement Period  (as defined in Section 2(d)(i) herein) following the date the Holder delivers the Notice of Exercise as aforesaid, the Holder shall deliver to the Company the aggregate Exercise Price for the Warrant Shares specified in the applicable Notice of Exercise by wire transfer, bank drafts or cashier's or certified check drawn on a United States or Canadian bank unless the cashless exercise procedure specified in Section 2(c) below is specified in the applicable Notice of Exercise. No ink-original Notice of Exercise shall be required, nor shall any medallion guarantee (or other type of guarantee or notarization) of any Notice of Exercise form be required. Notwithstanding anything herein to the contrary, the Holder shall not be required to physically surrender this Warrant to the Company until the Holder has purchased all of the Warrant Shares available hereunder, and the Warrant has been exercised in full, in which case, the Holder shall surrender this Warrant to the Company for cancellation within three (3) Trading Days of the date on which the final Notice of Exercise is delivered to the Company. Partial exercises of this Warrant resulting in purchases of a portion of the total number of Warrant Shares available hereunder shall have the effect of lowering the outstanding number of Warrant Shares purchasable hereunder in an amount equal to the applicable number of Warrant Shares purchased. The Holder and the Company shall maintain records showing the number of Warrant Shares purchased and the date of such purchases. The Company shall deliver any objection to any Notice of Exercise within one (1) Trading Day of receipt of such notice. The Holder and any assignee, by acceptance of this Warrant, acknowledge and agree that, by reason of the provisions of this paragraph, following the purchase of a portion of the Warrant Shares hereunder, the number of Warrant Shares available for purchase hereunder at any given time may be less than the amount stated on the face hereof.

(b)Exercise Price. The aggregate exercise price of this Warrant, except for a nominal exercise price of $0.01 per Warrant Share, was pre-funded to the Company on or prior to the Issue Date and, consequently, no additional consideration (other than the nominal exercise price of $0.01 per Warrant Share) shall be required to be paid by the Holder to any Person to effect any exercise of this Warrant. The Holder shall not be entitled to the return or refund of all, or any portion, of such pre-paid aggregate exercise price under any circumstance or for any reason whatsoever, including in the event this Warrant shall not have been exercised prior to the Termination Date. The remaining unpaid exercise price per Common Share under this Warrant shall be $0.01, subject to adjustment hereunder (the "Exercise Price").

(c)Cashless Exercise. This Warrant may also be exercised, in whole or in part, at such time by means of a "cashless exercise" in which the Holder shall be entitled to receive a number of Warrant Shares for the deemed surrender of the Warrant in whole or in part equal to the quotient obtained by dividing [(A-B) (X)] by (A), where:

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(A) = as applicable: (i) the VWAP for the five Trading Days immediately preceding the date of the applicable Notice of Exercise if such Notice of Exercise is (1) both executed and delivered pursuant to Section 3.3.1(a) hereof on a day that is not a Trading Day or (2) both executed and delivered pursuant to Section 3.3.1(a) hereof on a Trading Day prior to the opening of "regular trading hours" (as defined in Rule 600(b) of Regulation NMS promulgated under the federal securities laws) on such Trading Day, (ii) the VWAP for the five Trading Days immediately preceding the date of the applicable Notice of Exercise or (iii) the VWAP for the five Trading Days immediately preceding the date of the applicable Notice of Exercise if the date of such Notice of Exercise is a Trading Day and such Notice of Exercise is both executed and delivered pursuant to Section 3.3.1(a) hereof after the close of "regular trading hours" on such Trading Day;

(B) = the Exercise Price of this Warrant, as adjusted hereunder; and

(X) = the number of Warrant Shares that would be issuable upon exercise of this Warrant in accordance with the terms of this Warrant if such exercise were by means of a cash exercise rather than a cashless exercise.

The issue price for each such Warrant Share to be issued pursuant to the cashless exercise of a Warrant will be equal to (B), as defined above, and the total issue price for the aggregate number of Warrant Shares "issued pursuant to the cashless exercise" of a Warrant will be deemed paid and satisfied in full by the deemed surrender to the Company of the portion of such Warrant being exercised in accordance with this Section 2(c). Notwithstanding anything herein to the contrary, the Company shall not be required to make any cash payments or net cash settlement to the Holder in lieu of delivery of the Warrant Shares. If Warrant Shares are issued in such a cashless exercise, the parties acknowledge and agree that in accordance with Section 3(a)(9) of the Securities Act, the Warrant Shares shall take on the registered characteristics of the Warrants being exercised.  The Company agrees not to take any position contrary to this Section 2(c).

(d)Mechanics of Exercise.

(i)Delivery of Warrant Shares Upon Exercise. The Company shall cause the Warrant Shares purchased hereunder to be transmitted by the Transfer Agent to the Holder by crediting the account of the Holder's or its designee's balance account with the Depository Trust Company through its Deposit or Withdrawal at Custodian system (the "DWAC") if the Company is then a participant in such system and either (A) there is an effective registration statement permitting the issuance of the Warrant Shares to or resale of the Warrant Shares by the Holder or (B) this Warrant is being exercised via cashless exercise, and otherwise by physical delivery of a certificate, registered in the Company's share register in the name of the Holder or its designee, for the number of Warrant Shares to which the Holder is entitled pursuant to such exercise to the address specified by the Holder in the Notice of Exercise by the date that is the earlier of (i) two (2) Trading Days after the delivery to the Company of the Notice of Exercise and (ii) the number of Trading Days comprising the Standard Settlement Period after the delivery to the Company of the Notice of Exercise (such date, the "Warrant Share Delivery Date"); provided, however, that if payment of the aggregate Exercise Price (other than in the case of a cashless exercise) is received after 12:00 P.M., New York City time on the Warrant Share Delivery Date, then the Warrant Share Delivery Date shall be extended by one (1) additional Trading Day. Upon delivery of the Notice of Exercise, the Holder shall be deemed for all corporate purposes to have become the Holder of record of the Warrant Shares with respect to which this Warrant has been exercised, irrespective of the date of delivery of the Warrant Shares, provided that payment of the aggregate Exercise Price (other than in the case of a cashless exercise) is received within the earlier of (i) two (2) Trading Days and (ii) the number of Trading Days comprising the Standard Settlement Period following delivery of the Notice of Exercise. If the Company fails for any reason to deliver to the Holder the Warrant Shares subject to a Notice of Exercise by the Warrant Share Delivery Date, the Company shall pay to the Holder, in cash, as liquidated damages and not as a penalty, for each $1,000 of Warrant Shares subject to such exercise (based on the VWAP of the Common Shares on the date of the applicable Notice of Exercise), $10 per Trading Day (increasing to $20 per Trading Day on the fifth Trading Day after such liquidated damages begin to accrue) for each Trading Day after such Warrant Share Delivery Date until such Warrant Shares are delivered to said Holder or the Holder rescinds such exercise. The Company agrees to maintain a transfer agent that is a participant in the Fast Automated Securities Transfer or FAST program so long as this Warrant remains outstanding and exercisable. As used herein, "Standard Settlement Period" means the standard settlement period, expressed in a number of Trading Days, on the Company's primary Trading Market with respect to the Common Shares as in effect on the date of delivery of the Notice of Exercise. Notwithstanding the foregoing, with respect to any Notice(s) of Exercise delivered on or prior to 12:00 p.m. (New York City time) on the Issue Date, which may be delivered at any time after the time of execution of the Underwriting Agreement, dated ________ [•], 2022 between the Company and ThinkEquity LLC, the Company agrees to deliver the Warrant Shares subject to such notice(s) by 4:00 p.m. (New York City time) on the Issue Date..

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(ii)Delivery of New Warrants Upon Exercise. If this Warrant shall have been exercised in part, the Company shall, at the request of a Holder and upon surrender of this Warrant certificate, at the time of delivery of the Warrant Shares, deliver to the Holder a new Warrant evidencing the rights of the Holder to purchase the unpurchased Warrant Shares called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant.

(iii)Rescission Rights. If the Company fails to cause the Transfer Agent to transmit to the Holder the Warrant Shares pursuant to Section 2(d)(i) by the Warrant Share Delivery Date, then the Holder will have the right to rescind such exercise.

(iv)Compensation for Buy-In on Failure to Timely Deliver Warrant Shares Upon Exercise. In addition to any other rights available to the Holder, if the Company fails to cause the Transfer Agent to transmit to the Holder the Warrant Shares in accordance with the provisions of Section 2(d)(i) above pursuant to an exercise on or before the Share Delivery Date (for avoidance of doubt, other than any such failure that is due solely to any action or inaction by the Holder), and if after such date the Holder is required by its broker to purchase (in an open market transaction or otherwise) or the Holder's brokerage firm otherwise purchases, Common Shares to deliver in satisfaction of a sale by the Holder of the Warrant Shares which the Holder anticipated receiving upon such exercise (a "Buy-In"), then the Company shall (A) pay in cash to the Holder the amount, if any, by which (x) the Holder's total purchase price (including brokerage commissions, if any) for the Common Shares so purchased exceeds (y) the amount obtained by multiplying (1) the number of Warrant Shares that the Company was required to deliver to the Holder in connection with the exercise at issue times (2) the price at which the sell order giving rise to such purchase obligation was executed, and (B) at the option of the Holder, either reinstate the portion of the Warrant and equivalent number of Warrant Shares for which such exercise was not honored (in which case such exercise shall be deemed rescinded) or deliver to the Holder the number of Common Shares that would have been issued had the Company timely complied with its exercise and delivery obligations hereunder. For example, if the Holder purchases Common Shares having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted exercise of Common Shares with an aggregate sale price giving rise to such purchase obligation of $10,000, under clause (A) of the immediately preceding sentence the Company shall be required to pay the Holder $1,000. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In and, upon request of the Company, evidence of the amount of such loss. Nothing herein shall limit a Holder's right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Company's failure to timely deliver Common Shares upon exercise of the Warrant as required pursuant to the terms hereof.

(v)No Fractional Shares. No fractional Warrant Shares will be issued upon the exercise of this Warrant. If a Holder would be entitled, upon the exercise of this Warrant, to receive a fractional interest in a share, the Company shall, at its election, either pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Exercise Price or round up to the next whole Warrant Share.

(vi)Charges, Taxes and Expenses. Issuance of Warrant Shares shall be made without charge to the Holder for any issue or transfer tax or other incidental expense in respect of the issuance of such Warrant Shares, all of which taxes and expenses shall be paid by the Company, and such Warrant Shares shall be issued in the name of the Holder or in such name or names as may be directed by the Holder; provided, however, that in the event Warrant Shares are to be issued in a name other than the name of the Holder, this Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto duly executed by the Holder and the Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it for any transfer tax or other government charge incidental thereto. The Company shall pay all Transfer Agent fees required for same-day processing of any Notice of Exercise and all fees to the Depository Trust Company (or another established clearing corporation performing similar functions) required for same-day electronic delivery of the Warrant Shares.

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(vii)Closing of Books. Subject to applicable laws, including applicable securities laws, the Company will not close its shareholder books or records in any manner which prevents the timely exercise of this Warrant, pursuant to the terms hereof.

(e)Holder's Exercise Limitations. The Company shall not effect any exercise of this Warrant, and a Holder shall not have the right to exercise any portion of this Warrant, pursuant to Section 2 or otherwise, to the extent that after giving effect to such issuance after exercise as set forth on the applicable Notice of Exercise, the Holder (together with the Holder's Affiliates, and any other Persons acting as a group together with the Holder or any of the Holder's Affiliates (such Persons, "Attribution Parties"), would beneficially own in excess of the Beneficial Ownership Limitation (as defined below). For purposes of the foregoing sentence, the number of Common Shares beneficially owned by the Holder and its Affiliates and Attribution Parties shall include the number of Common Shares issuable upon exercise of this Warrant with respect to which such determination is being made, but shall exclude the number of Common Shares which would be issuable upon (i) exercise of the remaining, non-exercised portion of this Warrant beneficially owned by the Holder or any of its Affiliates or Attribution Parties and (ii) exercise or conversion of the unexercised or non-converted portion of any other securities of the Company (including, without limitation, any other Common Share Equivalents) subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by the Holder or any of its Affiliates or Attribution Parties. Except as set forth in the preceding sentence, for purposes of this Section 2(e), beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder, it being acknowledged by the Holder that the Company is not representing to the Holder that such calculation is in compliance with Section 13(d) of the Exchange Act and the Holder is solely responsible for any schedules required to be filed in accordance therewith. To the extent that the limitation contained in this Section 2(e) applies, the determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder together with any Affiliates and Attribution Parties) and of which portion of this Warrant is exercisable shall be in the sole discretion of the Holder, and the submission of a Notice of Exercise shall be deemed to be the Holder's determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder together with any Affiliates and Attribution Parties) and of which portion of this Warrant is exercisable, in each case subject to the Beneficial Ownership Limitation, and the Company shall have no obligation to verify or confirm the accuracy of such determination. In addition, a determination as to any group status as contemplated above shall be determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. For purposes of this Section 2(e), in determining the number of outstanding Common Shares, a Holder may rely on the number of outstanding Common Shares as reflected in (A) the Company's most recent periodic or annual report filed with the Commission, as the case may be, (B) a more recent public announcement by the Company or (C) a more recent written notice by the Company or the Transfer Agent setting forth the number of Common Shares outstanding. Upon the written or oral request of a Holder, the Company shall within two (2) Trading Days confirm orally and in writing to the Holder the number of Common Shares then outstanding. In any case, the number of outstanding Common Shares shall be determined after giving effect to the conversion or exercise of securities of the Company, including this Warrant, by the Holder or its Affiliates or Attribution Parties since the date as of which such number of outstanding Common Shares was reported. The "Beneficial Ownership Limitation" shall be 4.99% (or, upon election by a Holder prior to the issuance of any Warrants, 9.99%) of the number of Common Shares outstanding immediately after giving effect to the issuance of Common Shares issuable upon exercise of this Warrant. The Holder, upon notice to the Company, may increase or decrease the Beneficial Ownership Limitation provisions of this Section 2(e), provided that the Beneficial Ownership Limitation in no event exceeds 9.99% of the number of Common Shares outstanding immediately after giving effect to the issuance of Common Shares upon exercise of this Warrant held by the Holder and the provisions of this Section 2(e) shall continue to apply. Any increase in the Beneficial Ownership Limitation will not be effective until the 61st day after such notice is delivered to the Company. The provisions of this paragraph shall be construed and implemented in a manner otherwise than in strict conformity with the terms of this Section 2(e) to correct this paragraph (or any portion hereof) which may be defective or inconsistent with the intended Beneficial Ownership Limitation herein contained or to make changes or supplements necessary or desirable to properly give effect to such limitation. The limitations contained in this paragraph shall apply to a successor holder of this Warrant.

Section 3.Certain Adjustments.

(a)Share Dividends and Splits. If the Company, at any time while this Warrant is outstanding: (i) pays a stock dividend or otherwise makes a distribution or distributions on its Common Shares or any other equity or equity equivalent securities payable in Common Shares (which, for avoidance of doubt, shall not include any Common Shares issued by the Company upon exercise of this Warrant), (ii) subdivides outstanding Common Shares into a larger number of shares, (iii) combines (including by way of reverse stock split) outstanding Common Shares into a smaller number of shares, or (iv) issues by reclassification of the Common Shares any shares of capital stock of the Company, then in each case the Exercise Price shall be multiplied by a fraction of which the numerator shall be the number of Common Shares and such other capital stock of the Company (excluding treasury shares, if any) outstanding immediately before such event and of which the denominator shall be the number of Common Shares such other capital stock of the Company (excluding treasury shares, if any) outstanding immediately after such event, and the number of shares issuable upon exercise of this Warrant shall be proportionately adjusted such that the aggregate Exercise Price of this Warrant shall remain unchanged. Any adjustment made pursuant to this Section 3(a) shall become effective immediately after the record date for the determination of shareholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or re-classification.

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(b)Subsequent Rights Offerings. In addition to any adjustments pursuant to Section 3(a) above, subject to the prior approval of the TSX Venture Exchange (so long as the Common Shares are listed for trading on the TSX Venture Exchange), if at any time the Company grants, issues or sells any Common Share Equivalents or rights to purchase shares, warrants, securities or other property pro rata to the record holders of any class of Common Shares (the "Purchase Rights"), then the Holder will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which the Holder could have acquired if the Holder had held the number of Common Shares acquirable upon complete exercise of this Warrant (without regard to any limitations on exercise hereof, including without limitation, the Beneficial Ownership Limitation) immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of Common Shares are to be determined for the grant, issue or sale of such Purchase Rights (provided, however, to the extent that the Holder's right to participate in any such Purchase Right would result in the Holder exceeding the Beneficial Ownership Limitation, then the Holder shall not be entitled to participate in such Purchase Right to such extent (or beneficial ownership of such Common Shares as a result of such Purchase Right to such extent), and such Purchase Right to such extent shall be held in abeyance for the Holder until such time, if ever, as its right thereto would not result in the Holder exceeding the Beneficial Ownership Limitation). To the extent that this Warrant has not been partially or completely exercised at the time of such Distribution, such portion of the Distribution shall be held in abeyance for the benefit of the Holder until the Holder has exercised this Warrant.

(c)Pro Rata Distribution. During such time as this Warrant is outstanding and subject to the prior approval of the TSX Venture Exchange, if the Company shall declare or make any special or extraordinary dividend (other than regular dividends payable in cash) or other distribution of its assets (or rights to acquire its assets) to holders of Common Shares, by way of return of capital or otherwise (including, without limitation, any distribution of shares or other securities, property or options by way of a dividend, spin off, reclassification, corporate rearrangement, scheme of arrangement or other similar transaction) (a "Distribution"), at any time after the issuance of this Warrant, then, in each such case, the Holder shall be entitled to participate in such Distribution to the same extent that the Holder would have participated therein if the Holder had held the number of Common Shares acquirable upon complete exercise of this Warrant (without regard to any limitations on exercise hereof, including without limitation, the Beneficial Ownership Limitation) immediately before the date of which a record is taken for such Distribution, or, if no such record is taken, the date as of which the record holders of Common Shares are to be determined for the participation in such Distribution (provided, however, to the extent that the Holder's right to participate in any such Distribution would result in the Holder exceeding the Beneficial Ownership Limitation, then the Holder shall not be entitled to participate in such Distribution to such extent (or in the beneficial ownership of any Common Shares as a result of such Distribution to such extent) and the portion of such Distribution shall be held in abeyance for the benefit of the Holder until such time, if ever, as its right thereto would not result in the Holder exceeding the Beneficial Ownership Limitation). Notwithstanding the foregoing, this Section 3(c) shall not apply with respect to any Distribution to the extent that such Distribution results in an adjustment to the Exercise Price under the other provisions of this Warrant.

(d)Fundamental Transaction. If, at any time while this Warrant is outstanding, (i) the Company, directly or indirectly, in one or more related transactions effects any merger or consolidation of the Company with or into another Person, (ii) the Company, directly or indirectly, effects any sale, lease, license, assignment, transfer, conveyance or other disposition of all or substantially all of its assets in one or a series of related transactions, (iii) any, direct or indirect, purchase offer, tender offer or exchange offer (whether by the Company or another Person) is completed pursuant to which all holders of Common Shares are permitted to sell, tender or exchange their shares for other securities, cash or property and has been accepted by the holders of 50% or more of the outstanding Common Shares or 50% or more of the total voting power of the outstanding Common Shares, (iv) the Company, directly or indirectly, in one or more related transactions effects any reclassification, reorganization or recapitalization of the Common Shares or any compulsory share exchange pursuant to which all outstanding Common Shares are effectively converted into or exchanged for other securities, cash or property, or (v) the Company, directly or indirectly, in one or more related transactions consummates a stock or share purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement) with another Person or group of Persons whereby such other Person or group acquires more than 50% of the outstanding Common Shares or 50% or more of the voting power of the Common Shares (each a "Fundamental Transaction"), then, upon any subsequent exercise of this Warrant, and subject to the prior approval of the TSX Venture Exchange, the Holder shall have the right to receive, for each Warrant Share that would have been issuable upon such exercise immediately prior to the occurrence of such Fundamental Transaction, at the option of the Holder (without regard to any limitation in Section 2(e) on the exercise of this Warrant), the number of Common Shares of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and any additional consideration (the "Alternate Consideration") receivable as a result of such Fundamental Transaction by a holder of the number of Common Shares for which the Warrant is exercisable immediately prior to such Fundamental Transaction (without regard to any limitation in Section 3.3.9 on the exercise of this Warrant). For purposes of any such exercise, the determination of the Exercise Price shall be appropriately adjusted to apply to such Alternate Consideration based on the amount of Alternate Consideration issuable in respect of one Common Share in such Fundamental Transaction, and the Company shall apportion the Exercise Price among the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the Alternate Consideration. If holders of Common Shares are given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the Alternate Consideration it receives upon any exercise of this Warrant following such Fundamental Transaction. The Company shall cause any successor entity in a Fundamental Transaction in which the Company is not the survivor (the "Successor Entity") to assume in writing all of the obligations of the Company under this Warrant in accordance with the provisions of this Section 3(d) pursuant to written agreements delay) prior to such Fundamental Transaction and shall, at the option of the Holder, deliver to the Holder in exchange for the Warrant a security of the Successor Entity evidenced by a written instrument substantially similar in form and substance to the Warrant which is exercisable for a corresponding number of shares of capital stock of such Successor Entity (or its parent entity) equivalent to the Common Shares acquirable and receivable upon exercise of the Warrant (without regard to any limitations on the exercise of the Warrant) prior to such Fundamental Transaction, and with an exercise price which applies the exercise price hereunder to such shares of capital stock (but taking into account the relative value of the Common Shares pursuant to such Fundamental Transaction and the value of such shares of capital stock, such number of shares of capital stock and such exercise price being for the purpose of protecting the economic value of the Warrant immediately prior to the consummation of such Fundamental Transaction), and which is reasonably satisfactory in form and substance to the Holder. Upon the occurrence of any such Fundamental Transaction, the Successor Entity shall succeed to, and be substituted for (so that from and after the date of such Fundamental Transaction, the provisions of the Warrants referring to the "Company" shall refer instead to the Successor Entity), and may exercise every right and power of the Company and shall assume all of the obligations of the Company under the Warrants with the same effect as if such Successor Entity had been named as the Company herein.

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(e)Calculations. All calculations under this Section 3 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. For purposes of this Section 3, the number of Common Shares deemed to be issued and outstanding as of a given date shall be the sum of the number of Common Shares (excluding treasury shares, if any) issued and outstanding.

(f)Notice to Holder.

(i)Adjustment to Exercise Price. Whenever the Exercise Price is adjusted pursuant to any provision of this Section 3, the Company shall promptly deliver to the Holder by facsimile or email a notice setting forth the Exercise Price after such adjustment and any resulting adjustment to the number of Warrant Shares and setting forth a brief statement of the facts requiring such adjustment.

(ii)Notice to Allow Exercise by Holder. If (A) the Company shall declare a dividend (or any other distribution in whatever form) on the Common Shares, (B) the Company shall declare a special nonrecurring cash dividend on or a redemption of the Common Shares, (C) the Company shall authorize the granting to all holders of the Common Shares rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights, (D) the approval of any shareholders of the Company shall be required in connection with any Fundamental Transaction, or (E) the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company, then, in each case, the Company shall cause to be delivered by facsimile or email to the Holder at its last facsimile number or email address as it shall appear upon the Warrant Register (as defined below), at least 20 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of the Common Shares of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of the Common Shares of record shall be entitled to exchange their Common Shares for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or share exchange; provided that the failure to deliver such notice or any defect therein or in the delivery thereof shall not affect the validity of the corporate action required to be specified in such notice. To the extent that any notice provided in this Warrant constitutes, or contains, material, non-public information regarding the Company or any of its subsidiaries, the Company shall simultaneously file such notice on SEDAR and with the Commission pursuant to a Report on Form 6-K. Provided such notice occurs within the Exercise Period, the Holder shall remain entitled to exercise this Warrant during the period commencing on the date of such notice to the effective date of the event triggering such notice, except as may otherwise be expressly set forth herein (including the applicable exercise period set forth herein).

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Section 4.Transfer of Warrant.

(a)Transferability. Subject to compliance with any applicable securities laws, this Warrant and all rights hereunder are transferable, in whole or in part, upon surrender of this Warrant at the principal office of the Company or its designated agent, together with a written assignment of this Warrant substantially in the form attached hereto duly executed by the Holder or its agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of such transfer. Upon such surrender and, if required, such payment, the Company shall execute and deliver a new Warrant or Warrants in the name of the assignee or assignees, as applicable, and in the denomination or denominations specified in such instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be cancelled. Notwithstanding anything herein to the contrary, the Holder shall not be required to physically surrender this Warrant to the Company unless the Holder has assigned this Warrant in full, in which case, the Holder shall surrender this Warrant to the Company within three (3) Trading Days of the date the Holder delivers an assignment form to the Company assigning this Warrant full. The Warrant, if properly assigned in accordance herewith, may be exercised by a new holder for the purchase of Warrant Shares without having a new Warrant issued.

(b)New Warrants. If this Warrant is not held in global form through the Depository Trust Company (or any successor depository), this Warrant may be divided or combined with other Warrants upon presentation hereof at the aforesaid office of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by the Holder or its agent or attorney. Subject to compliance with Section 4(a), as to any transfer which may be involved in such division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice. All Warrants issued on transfers or exchanges shall be dated the original Issuance Date of this Warrant and shall be identical with this Warrant except as to the number of Warrant Shares issuable pursuant thereto.

(c)Warrant Register. The Company shall register this Warrant, upon records to be maintained by the Company for that purpose (the "Warrant Register"), in the name of the record Holder hereof from time to time. The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, absent actual notice to the contrary.

Section 5.Miscellaneous.

8

(a)No Rights as Shareholder Until Exercise. This Warrant does not entitle the Holder to any voting rights, dividends or other rights as a shareholder of the Company prior to the exercise hereof as set forth in Section 2(d)(i), except as expressly set forth in Section 3.

(b)Loss, Theft, Destruction or Mutilation of Warrant. The Company covenants that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant or any share certificate relating to the Warrant Shares, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it (which, in the case of the Warrant, shall not include the posting of any bond), and upon surrender and cancellation of such Warrant or share certificate, if mutilated, the Company will make and deliver a new Warrant or share certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or share certificate.

(c)Saturdays, Sundays, Holidays, etc. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall not be a Trading Day, then, such action may be taken or such right may be exercised on the next succeeding Trading Day.

(d)Authorized Shares.

(i)The Company covenants that, during the period the Warrant is outstanding, it will reserve from its authorized and unissued Common Shares a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any purchase rights under this Warrant. The Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of issuing the necessary Warrant Shares upon the exercise of the purchase rights under this Warrant. The Company will take all such reasonable action as may be necessary to assure that such Warrant Shares may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the Trading Market upon which the Common Shares may be listed. The Company covenants that all Warrant Shares which may be issued upon the exercise of the purchase rights represented by this Warrant will, upon exercise of the purchase rights represented by this Warrant and payment for such Warrant Shares in accordance herewith, be duly authorized, validly issued, fully paid and non-assessable and free from all taxes, liens and charges created by the Company in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue).

(ii)Except and to the extent as waived or consented to by the Holder, the Company shall not by any action, including, without limitation, amending its certificate of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder as set forth in this Warrant against impairment. Without limiting the generality of the foregoing, the Company will (A) not increase the par value of any Warrant Shares above the amount payable therefor upon such exercise immediately prior to such increase in par value, (B) take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and non-assessable Warrant Shares upon the exercise of this Warrant and (C) use commercially reasonable efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof, as may be, necessary to enable the Company to perform its obligations under this Warrant.

(iii)Before taking any action which would result in an adjustment in the number of Warrant Shares for which this Warrant is exercisable or in the Exercise Price, the Company shall obtain all such authorizations or exemptions thereof, or consents thereto, as may be necessary from any public regulatory body or bodies having jurisdiction thereof.

(e)Governing Law. All questions concerning the construction, validity, enforcement and interpretation of this Warrant shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without regard to the principles of conflict of laws thereof. Each party agrees that all legal Proceedings concerning the interpretation, enforcement and defense of this Warrant shall be commenced in the state and federal courts sitting in the City of New York, Borough of Manhattan (the "New York Courts"). Each party hereto hereby irrevocably submits to the exclusive jurisdiction of the New York Courts for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein (including with respect to the enforcement of any provision hereunder), and hereby irrevocably waives, and agrees not to assert in any suit, action or Proceeding, any claim that it is not personally subject to the jurisdiction of such New York Courts, or such New York Courts are improper or inconvenient venue for such Proceeding. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Warrant and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any other manner permitted by law. If any party shall commence an action or Proceeding to enforce any provisions of this Warrant, then the prevailing party in such action or Proceeding shall be reimbursed by the other party for its attorneys' fees and other costs and expenses incurred in the investigation, preparation and prosecution of such action or Proceeding.

9

(f)Restrictions. The Holder acknowledges that the Warrant Shares acquired upon the exercise of this Warrant, if not registered, and the Holder does not utilize cashless exercise, will have restrictions upon resale imposed by state, provincial and federal securities laws in the United States and Canada.

(g)Nonwaiver and Expenses. No course of dealing or any delay or failure to exercise any right hereunder on the part of Holder shall operate as a waiver of such right or otherwise prejudice the Holder's rights, powers or remedies. Without limiting any other provision of this Warrant, if the Company willfully and knowingly fails to comply with any provision of this Warrant, which results in any material damages to the Holder, the Company shall pay to the Holder such amounts as shall be sufficient to cover any costs and expenses including, but not limited to, reasonable attorneys' fees, including those of appellate Proceedings, incurred by the Holder in collecting any amounts due pursuant hereto or in otherwise enforcing any of its rights, powers or remedies hereunder.

(h)Notices. Any and all notices or other communications or deliveries to be provided by the Holders hereunder including, without limitation, any Notice of Exercise, shall be in writing and delivered personally, by e-mail, or sent by a nationally recognized overnight courier service, addressed to the Company, at 155 Terence Matthews Crescent, Unit #1, Ottawa, Ontario, K2M 2A8 Attention: Steven Archambault and Wendy Liang, email: archambault@kwesst.com and liang@kwesst.com, or such other email address or address as the Company may specify for such purposes by notice to the Holders. Any and all notices or other communications or deliveries to be provided by the Company hereunder shall be in writing and delivered personally, by e-mail, or sent by a nationally recognized overnight courier service addressed to each Holder at the e-mail address or address of such Holder appearing on the books of the Company. Any notice or other communication or deliveries hereunder shall be deemed given and effective on the earliest of (i) the time of transmission, if such notice or communication is delivered via e-mail at the e-mail address set forth in this Section prior to 5:30 p.m. (Eastern time) on any date, (ii) the next Trading Day after the date of transmission, if such notice or communication is delivered via e-mail at the e-mail address set forth in this Section on a day that is not a Trading Day or later than 5:30 p.m. (Eastern time) on any Trading Day, (iii) the second Trading Day following the date of mailing, if sent by U.S. nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given.

(i)Limitation of Liability. No provision hereof, in the absence of any affirmative action by the Holder to exercise this Warrant to purchase Warrant Shares, and no enumeration herein of the rights or privileges of the Holder, shall give rise to any liability of the Holder for the purchase price of any Common Shares or as a shareholder of the Company, whether such liability is asserted by the Company or by creditors of the Company.

(j)Remedies. The Holder, in addition to being entitled to exercise all rights granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Warrant. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Warrant and hereby agrees to waive and not to assert the defense in any action for specific performance that a remedy at law would be adequate.

(k)Successors and Assigns. Subject to applicable securities laws, this Warrant and the rights and obligations evidenced hereby shall inure to the benefit of and be binding upon the successors and permitted assigns of the Company and the successors and permitted assigns of Holder. The provisions of this Warrant are intended to be for the benefit of any Holder from time to time of this Warrant and shall be enforceable by the Holder or holder of Warrant Shares.

10

(l)Amendment. This Warrant may be modified or amended or the provisions hereof waived with the written consent of the Company, on the one hand, and  the Holder on the other hand.

(m)Severability. Wherever possible, each provision of this Warrant shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Warrant.

(n)No Expense Reimbursement. The Holder shall in no way be required the pay, or to reimburse the Company for, any fees or expenses of the Company's Transfer Agent in connection with the issuance or holding or sale of the Common Shares, Warrant and/or Warrant Shares.  The Company shall solely be responsible for any and all such fees and expenses.

(o)Headings. The headings used in this Warrant are for the convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant.

(Signature Page Follows)

11

IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officer thereunto duly authorized as of the date first above indicated.

KWESST MICRO SYSTEMS INC.
By:
	Name:
	Title:

12

NOTICE OF EXERCISE

To:KWESST MICRO SYSTEMS INC.

(1)The undersigned hereby elects to purchase ________ Warrant Shares of the Company pursuant to the terms of the attached Warrant (only if exercised in full), and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any.

(2)Payment shall take the form of (check applicable box):

☐ in lawful money of the United States; or

☐ the cancellation of such number of Warrant Shares as is necessary, in accordance with the formula set forth in subsection 2(c), to exercise this Warrant with respect to the maximum number of Warrant Shares purchasable pursuant to the cashless exercise procedure set forth in subsection 2(c).

(3)Please issue said Warrant Shares in the name of the undersigned or in such other name as is specified below:

The Warrant Shares shall be delivered to the following DWAC Account Number:

[SIGNATURE OF HOLDER]

Name of Investing Entity:

Signature of Authorized Signatory of Investing
Entity:

Name of Authorized Signatory:

Title of Authorized Signatory:

Date:

ASSIGNMENT FORM

(To assign the foregoing Warrant, execute this form and supply required information. Do not use this form to purchase shares.)

FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced thereby are hereby assigned to

Name:
	(Please Print)
Address:
	(Please Print)
Phone Number:
Email Address:
Dated: _____________________ __, ______
Holder's Signature:
Holder's Address:

EX-4.5

KWESST MICRO SYSTEMS INC.

as the Corporation

and

TSX TRUST COMPANY

as the Warrant Agent

WARRANT INDENTURE
Providing for the Issue of Warrants

Dated as of [●]

TABLE OF CONTENTS

ARTICLE 1 INTERPRETATION	2
1.1Definitions.	2
1.2Gender and Number.	7
1.3Headings, Etc.	7
1.4Day not a Business Day.	7
1.5Time of the Essence.	7
1.6Monetary References.	7
1.7Applicable Law.	7
ARTICLE 2 ISSUE OF WARRANTS	7
2.1Creation and Issue of Warrants.	7
2.2Terms of Warrants.	8
2.3Warrantholder not a Shareholder.	8
2.4Warrants to Rank Pari Passu.	8
2.5Form of Warrants.	8
2.6Book Entry Only Warrants.	9
2.7Warrant Certificate.	11
2.8Legends.	12
2.9Register of Warrants	14
2.10Issue in Substitution for Warrant Certificates Lost, etc.	15
2.11Exchange of Warrant Certificates.	15
2.12Transfer and Ownership of Warrants.	16
2.13Cancellation of Surrendered Warrants.	17
ARTICLE 3 EXERCISE OF WARRANTS	17
3.1Right of Exercise.	17
3.2Warrant Exercise.	17
3.3U.S. Restrictions; Legended Certificates	20
3.4Transfer Fees and Taxes.	22
3.5Warrant Agency.	22
3.6Effect of Exercise of Warrant Certificates.	22
3.7Partial Exercise of Warrants; Fractions.	23
3.8Expiration of Warrants.	23
3.9Accounting and Recording.	23
3.10Securities Restrictions.	24
ARTICLE 4 ADJUSTMENT OF NUMBER OF COMMON SHARES AND EXERCISE PRICE	24
4.1Adjustment of Number of Common Shares and Exercise Price.	24
4.2Entitlement to Common Shares on Exercise of Warrant.	28
4.3No Adjustment for Certain Transactions.	28
4.4Determination by Independent Firm.	28
4.5Proceedings Prior to any Action Requiring Adjustment.	29
4.6Certificate of Adjustment.	29
4.7Notice of Special Matters.	29
4.8No Action after Notice.	29
4.9Other Action.	30
4.10Protection of Warrant Agent.	30
4.11Participation by Warrantholder.	30

- i -

ARTICLE 5 RIGHTS OF THE CORPORATION AND COVENANTS	30
5.1Optional Purchases by the Corporation.	30
5.2General Covenants.	31
5.3Warrant Agent's Remuneration and Expenses.	32
5.4Performance of Covenants by Warrant Agent.	32
5.5Enforceability of Warrants.	32
ARTICLE 6 ENFORCEMENT	33
6.1Suits by Registered Warrantholders.	33
6.2Suits by the Corporation.	33
6.3Immunity of Shareholders, etc.	33
6.4Waiver of Default.	33
ARTICLE 7 MEETINGS OF WARRANTHOLDERS	34
7.1Right to Convene Meetings.	34
7.2Notice.	34
7.3Chair.	34
7.4Quorum.	34
7.5Power to Adjourn.	35
7.6Show of Hands.	35
7.7Poll and Voting.	35
7.8Regulations.	35
7.9Corporation and Warrant Agent May be Represented.	36
7.10Powers Exercisable by Extraordinary Resolution.	36
7.11Meaning of Extraordinary Resolution.	37
7.12Powers Cumulative.	38
7.13Minutes.	38
7.14Instruments in Writing.	38
7.15Binding Effect of Resolutions.	38
7.16Holdings by Corporation Disregarded.	39
ARTICLE 8 SUPPLEMENTAL INDENTURES	39
8.1Provision for Supplemental Indentures for Certain Purposes.	39
8.2Successor Entities.	40
ARTICLE 9 CONCERNING THE WARRANT AGENT	40
9.1Indenture Legislation.	40
9.2Rights and Duties of Warrant Agent.	40
9.3Evidence, Experts and Advisers.	41
9.4Documents, Monies, etc. Held by Warrant Agent.	42
9.5Actions by Warrant Agent to Protect Interest.	43
9.6Warrant Agent Not Required to Give Security.	43
9.7Protection of Warrant Agent.	43
9.8Replacement of Warrant Agent; Successor by Merger.	45
9.9Conflict of Interest.	45
9.10Acceptance of Agency	46
9.11Warrant Agent Not to be Appointed Receiver.	46

- ii -

9.12Warrant Agent Not Required to Give Notice of Default.	46
9.13Anti-Money Laundering.	46
9.14Compliance with Privacy Code.	47
9.15Securities Exchange Commission Certification.	47
ARTICLE 10 GENERAL	47
10.1Notice to the Corporation and the Warrant Agent.	47
10.2Notice to Registered Warrantholders.	48
10.3Ownership of Warrants.	49
10.4Counterparts and Electronic Copies.	49
10.5Satisfaction and Discharge of Indenture.	49
10.6Provisions of Indenture and Warrants for the Sole Benefit of Parties and Registered Warrantholders.	50
10.7Warrants Owned by the Corporation - Certificate to be Provided.	50
10.8Severability	50
10.9Force Majeure	50
10.10Assignment, Successors and Assigns	51
10.11Rights of Rescission and Withdrawal for Holders	51
SCHEDULE "A" FORM OF WARRANT	A-1
SCHEDULE "B" FORM OF DECLARATION FOR REMOVAL OF LEGEND	B-1

- iii -

WARRANT INDENTURE

THIS WARRANT INDENTURE is dated as of [●],

BETWEEN:

KWESST MICRO SYSTEMS INC., a corporation existing under the laws of the province of British Columbia (the "Corporation"),

- and -

TSX TRUST COMPANY, a trust company existing under the laws of Canada and registered to carry on business in the Province of British Columbia (the "Warrant Agent")

WHEREAS the Corporation proposes to issue by way of public offering [●] units of the Corporation (the "Units") at a price of US$[●] per Unit, each such Unit consisting of one common share in the capital of the Corporation (each, a "Common Share") and one Warrant (as defined below) (the "Offering");

AND WHEREAS in partial consideration of the underwriter's services rendered in connection with the Offering, the Corporation has agreed to issue compensation options exercisable to purchase up to [●] additional Units;

AND WHEREAS up to an aggregate number of [●] Warrants may be issued, comprised of up to [●] Warrants forming part of the Units sold to purchasers under the Offering and up to [●] Warrants issuable upon the exercise of the underwriters' compensation options;

AND WHEREAS each Warrant is exercisable for one Common Share at an exercise price of US$[●] per share for a period of five (5) years from the date hereof;

AND WHEREAS the Corporation is duly authorized to create and issue the Warrants to be issued as herein provided;

AND WHEREAS all acts and deeds necessary have been done and performed to make the Warrants, when created and issued as provided in this Indenture, legal, valid and binding upon the Corporation with the benefits and subject to the terms and conditions of this Indenture;

AND WHEREAS the foregoing recitals are made as representations and statements of fact by the Corporation and not by the Warrant Agent;

NOW THEREFORE, in consideration of the premises and mutual covenants hereinafter contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Corporation hereby appoints the Warrant Agent as warrant agent to hold the rights, interests and benefits contained herein for and on behalf of those persons who from time to time become the holders of Warrants issued pursuant to this Indenture and the parties hereto agree as follows:

Page 1 of 52

ARTICLE 1
INTERPRETATION

1.1Definitions.

In this Indenture, including the recitals and schedules hereto, and in all indentures supplemental hereto:

(a)"Adjustment Period" means the period from the Effective Date up to and including the Expiry Time;

(b)"Applicable Law" means any statute of Canada or a province thereof, and the regulations under any such named or other statute, relating to warrant indentures or to the rights, duties and obligations of warrant agents under warrant indentures, to the extent that such provisions are at the time in force and applicable to this Indenture;

(c)"Auditors" means a firm of chartered accountants duly appointed as auditors of the Corporation;

(d)"Authenticated" means (a) with respect to the issuance of a Warrant Certificate, one which has been duly signed by the Corporation or on which the manual or electronic signatures of the Corporation have been printed, lithographed or otherwise electronically or mechanically reproduced and countersigned by the Warrant Agent, and (b) with respect to the issuance of an Uncertificated Warrant, one in respect of which the Warrant Agent has completed all Internal Procedures such that the particulars of such Uncertificated Warrant as required by Section 2.7 are entered in the register of holders of Warrants, "Authenticate", "Authenticating" and "Authentication" have the appropriate correlative meanings;

(e)"Book Entry Only Participants" means institutions that participate directly or indirectly in the Depository's book entry registration system for the Warrants;

(f)"Book Entry Only Warrants" means Warrants that are to be held only by or on behalf of the Depository;

(g)"Business Day" means any day other than Saturday, Sunday or a statutory or civic holiday, or any other day on which the banks are not open for business in the City of Vancouver, British Columbia and City of Toronto, Ontario, and shall be a day on which the Exchange is open for trading;

(h)"CDS Global Warrants" means Warrants representing all or a portion of the aggregate number of Warrants issued in the name of the Depository and represented by an Uncertificated Warrant, or if requested by the Depository or the Corporation, by a Warrant Certificate;

(i)"CDSX" means the settlement and clearing system of CDS Clearing and Depository Services Inc. for equity and debt securities in Canada;

(j)"Certificated Warrant" means a Warrant evidenced by a writing or writings substantially in the form of Schedule "A", attached hereto;

Page 2 of 52

(k)"Common Shares" means, subject to Article 4, fully paid and non-assessable common shares in the capital of the Corporation as presently constituted;

(l)"Confirmation" has the meaning set forth in Section 3.2(2);

(m)"Corporation" means KWESST Micro Systems Inc., a corporation existing under the laws of the province of British Columbia, and its lawful successors from time to time;

(n)"Counsel" means a barrister or solicitor or a firm of barristers and solicitors retained by the Warrant Agent or retained by the Corporation and acceptable to the Warrant Agent, which may or may not be counsel for the Corporation;

(o)"Current Market Price" means, at any date, the volume weighted average trading price per share at which the Common Shares have traded:

(i)on the Exchange; or

(ii)if the Common Shares are not listed on the Exchange, on any other stock exchange upon which the Common Shares are listed as may be selected for this purpose by the Directors of the Corporation, acting reasonably; or

(iii)if the Common Shares are not listed on any stock exchange, on any over-the-counter market on which the Common Shares are trading, as may be selected for this purpose by the Directors of the Corporation acting reasonably;

during the 20 consecutive Trading Days (on each of which at least 500 Common Shares are traded in board lots) ending the third Trading Day before such date and the weighted average price shall be determined by dividing the aggregate sale price of all Common Shares sold in board lots on the exchange or market, as the case may be, during the 20 consecutive Trading Days by the number of Common Shares sold or, if not traded on any recognized market or exchange, as determined by the Directors of the Corporation, acting reasonably. Whenever the Current Market Price is required to be determined hereunder, the Corporation shall deliver to the Warrant Agent a certificate of the Corporation specifying such Current Market Price and setting out the details of its calculation. In the event of any subsequent dispute as to the determination of the Current Market Price, the Corporation's Auditors shall make such determination which, absent manifest error, shall be binding for all purposes hereunder;

(p)"Depository" means CDS Clearing and Depository Services Inc. or such other qualified person as is designated in writing by the Corporation to act as depository in respect of the Warrants;

(q)"Directors" means the board of directors of the Corporation;

(r)"Dividends" means any dividends paid by the Corporation;

Page 3 of 52

(s)"DRS" means the Direct Registration System maintained by the Warrant Agent in respect of the Warrants;

(t)"DRS Advice" means the notification produced by the DRS system evidencing ownership of the Warrants or Common Shares, as the case may be;

(u)"Effective Date" means the date of this Indenture;

(v)"Exchange" means the TSX Venture Exchange;

(w)"Exchange Rate" means the number of Common Shares subject to the right of purchase under each Warrant which as of the date hereof is one (1) Common Share;

(x)"Exercise Date" means, in relation to a Warrant, the Business Day on which such Warrant is validly exercised or deemed to be validly exercised in accordance with Article 3 hereof;

(y)"Exercise Notice" has the meaning set forth in Section 3.2(1);

(z)"Exercise Price" means US$[●] for each Common Share payable in immediately available funds, subject to adjustment in accordance with the provisions of Article 4;

(aa)"Expiry Date" means [●], 2027;

(bb)"Expiry Time" means 5:00 p.m. (Eastern time) on the Expiry Date;

(cc)"Extraordinary Resolution" has the meaning set forth in Section 7.11;

(dd)"Indenture" has the meaning set forth on the face page hereof;

(ee)"Internal Procedures" means in respect of the making of any one or more entries to, changes in or deletions of any one or more entries in the register at any time (including without limitation, original issuance or registration of transfer of ownership) the minimum number of the Warrant Agent's internal procedures customary at such time for the entry, change or deletion made to be complete under the operating procedures followed at the time by the Warrant Agent;

(ff)"Issue Date" means in relation to a Warrant, the date of issue of the Warrant as per written order of the Corporation;

(gg)"Offering" has the meaning attributed to it in the recitals hereto;

(hh)"person" means an individual, body corporate, partnership, trust, agent, executor, administrator, legal representative or any unincorporated organization;

(ii)"Prospectus" means a final short form base PREP prospectus dated October [●], 2022 of the Corporation;

(jj)"register" means the one set of records and accounts maintained by the Warrant Agent pursuant to Section 2.9:

Page 4 of 52

(kk)"Registered Warrantholders" means the persons who are registered owners of Warrants as such names appear on the register, and for greater certainty, shall include the Depository as well as the holders of Uncertificated Warrants appearing on the register of the Warrant Agent;

(ll)"Regulation D" means Regulation D as promulgated by the United States Securities and Exchange Commission under the U.S. Securities Act;

(mm)"Regulation S" means Regulation S as promulgated by the United States Securities and Exchange Commission under the U.S. Securities Act;

(nn)"Shareholders" means holders of Common Shares;

(oo)"this Warrant Indenture", "this Indenture", "hereto" "herein", "hereby", "hereof" and similar expressions mean and refer to this Indenture and any indenture, deed or instrument supplemental hereto; and the expressions "Article", "Section", "subsection" and "paragraph" followed by a number, letter or both mean and refer to the specified article, section, subsection or paragraph of this Indenture;

(pp)"Trading Day" means a day on which the Exchange (or such other exchange on which the Common Shares are listed and which forms the primary trading market for such shares) is open for trading, and if the Common Shares are not listed on a stock exchange, a day on which an over-the-counter market where such shares are traded is open for business;

(qq) "Uncertificated Warrant" means any Warrant which is not a Certificated Warrant;

(rr)"United States" means the United States of America, its territories and possessions, any state of the United States, and the District of Columbia;

(ss)"Unit" has the meaning ascribed to such term in the Prospectus;

(tt)"U.S. Exchange Act" means the United States Securities Exchange Act of 1934, as amended and the rules and regulations promulgated thereunder;

(uu)"U.S. Person" means a "U.S. person" as set forth in Regulation S and includes, subject to certain exclusions set out therein, the following: (i) any natural person resident in the United States; (ii) any partnership or corporation organized or incorporated under the laws of the United States; (iii) any estate of which any executor or administrator is a U.S. Person; (iv) any trust of which any trustee is a U.S. Person; (v) any agency or branch of a foreign entity located in the United States; (vi) any non-discretionary account or similar account (other than an estate or trust) held by a dealer or other fiduciary for the benefit or account of a U.S. Person; (vii) any discretionary account or similar account (other than an estate or trust) held by a dealer or other fiduciary organized, incorporated, or (if an individual) resident in the United States; (viii) any partnership or corporation if (A) organized or incorporated under the laws of any jurisdiction other than the United States and (B) formed by a U.S. Person principally for the purpose of investing in securities not registered under the U.S. Securities Act, unless it is organized or incorporated, and owned, by "accredited investors" (as defined in Rule 501(a) of Regulation D) who are not natural persons, estates or trusts;

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(vv)"U.S. Purchaser" is (a) any U.S. Person that purchased Units, (b) any person that purchased Units on behalf of any U.S. Person or any person in the United States, (c) any purchaser of Units that received an offer of the Units while in the United States, (d) any person that was in the United States at the time the purchaser's buy order was made or the subscription agreement for Units was executed or delivered;

(ww)"U.S. Securities Act" means the United States Securities Act of 1933, as amended and the rules and regulations promulgated thereunder;

(xx)"U.S. Securities Laws" means all applicable securities legislation in the United States, including without limitation, the U.S. Securities Act, the U.S. Exchange Act and the rules and regulations promulgated thereunder, and any applicable state securities laws;

(yy)"Warrant Agency" means the principal offices of the Warrant Agent in the City of Toronto, Ontario or such other place as may be designated in accordance with Section 3.5;

(zz)"Warrant Agent" means TSX Trust Company, in its capacity as warrant agent of the Warrants, or its successors from time to time;

(aaa)"Warrant Certificate" means a certificate, substantially in the form set forth in Schedule "A" hereto or such other form as may be approved by the Corporation and the Warrant Agent, to evidence those Warrants that will be evidenced by a certificate;

(bbb)"Warrantholders", or "holders" without reference to Warrants, means the persons entered in the register hereinafter mentioned as holders of Warrants outstanding at such time;

(ccc)"Warrantholders' Request" means an instrument signed in one or more counterparts by Registered Warrantholders holding in the aggregate not less than 20% of all Warrants then unexercised and outstanding, requesting the Warrant Agent to take some action or proceeding specified therein;

(ddd)"Warrants" means the Common Share purchase warrants created by and authorized by and issuable under this Indenture, to be issued and Authenticated hereunder as a Certificated Warrant and/or Uncertificated Warrant, entitling the holder thereof to purchase one Common Share (subject to adjustment as herein provided) per Warrant at the Exercise Price prior to the Expiry Time; and

(eee)"written order of the Corporation", "written request of the Corporation", "written consent of the Corporation" and "certificate of the Corporation" mean, respectively, a written order, request, consent and certificate signed in the name of the Corporation by its Chief Executive Officer or Chief Financial Officer, or a person acting in any such capacity for the Corporation, or any other authorized officer and may consist of one or more instruments so executed.

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1.2Gender and Number.

Words importing the singular number or masculine gender shall include the plural number or the feminine or neuter genders, and vice versa.

1.3Headings, Etc.

The division of this Indenture into Articles and Sections, the provision of a Table of Contents and the insertion of headings are for convenience of reference only and shall not affect the construction or interpretation of this Indenture or of the Warrants.

1.4Day not a Business Day.

If any day on or before which any action or notice is required to be taken or given hereunder is not a Business Day, then such action or notice shall be required to be taken or given on or before the requisite time on the next succeeding day that is a Business Day.

1.5Time of the Essence.

Time shall be of the essence of this Indenture.

1.6Monetary References.

Whenever any amounts of money are referred to herein, such amounts shall be deemed to be in lawful money of the United States unless otherwise expressed.

1.7Applicable Law.

This Indenture, the Warrants, and the Warrant Certificates (including all documents relating thereto, which by common accord have been and will be drafted in English) shall be construed in accordance with the laws of the Province of British Columbia and the federal laws of Canada applicable therein. Each of the parties hereto, which shall include the Warrantholders, irrevocably attorns to the exclusive jurisdiction of the courts of the Province of British Columbia with respect to all matters arising out of this Indenture and the transactions contemplated herein.

ARTICLE 2
ISSUE OF WARRANTS

2.1Creation and Issue of Warrants.

Subject to adjustment in accordance with the provisions hereof, a maximum of [●] Warrants are hereby created and authorized to be issued in accordance with the terms and conditions hereof. By written order of the Corporation, the Warrant Agent shall issue and deliver Warrants in certificated or uncertificated form pursuant to Section 2.6 hereof to Registered Warrantholders and record the names of the Registered Warrantholders on the Warrant register. Registration of interests in Warrants held by the Depository may be evidenced by a position appearing on the register for Warrants of the Warrant Agent for an amount representing the aggregate number of such Warrants outstanding from time to time.

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2.2Terms of Warrants.

(1)Subject to the applicable conditions for exercise set out in Article 3 having been satisfied and subject to adjustment in accordance with Article 4, each Warrant shall entitle each Warrantholder thereof, upon exercise at any time after the Issue Date and prior to the Expiry Time, to acquire one (1) Common Share upon payment of the Exercise Price.

(2)No fractional Warrants shall be issued or otherwise provided for hereunder and Warrants may only be exercised in a sufficient number to acquire whole numbers of Common Shares. Any fractional Warrants shall be rounded down to the nearest whole number and no consideration shall be paid for any such fractional Warrant, which is not issued.

(3)Each Warrant shall entitle the holder thereof to such other rights and privileges as are set forth in this Indenture.

(4)The number of Common Shares which may be purchased pursuant to the Warrants and the Exercise Price therefor shall be adjusted upon the events and in the manner specified in Article 4.

2.3Warrantholder not a Shareholder.

Except as may be specifically provided herein, nothing in this Indenture or in the holding of a Warrant Certificate, entitlement to a Warrant or otherwise, shall, in itself, confer or be construed as conferring upon a Warrantholder any right or interest whatsoever as a Shareholder, including, but not limited to, the right to vote at, to receive notice of, or to attend, meetings of Shareholders or any other proceedings of the Corporation, or the right to Dividends and other allocations.

2.4Warrants to Rank Pari Passu.

All Warrants shall rank equally and without preference over each other, whatever may be the actual date of issue thereof.

2.5Form of Warrants.

(1)The Warrants may be issued in both certificated and uncertificated form (including a DRS Advice). All Warrants issued in certificated form shall be evidenced by a Warrant Certificate (including all replacements issued in accordance with this Indenture), substantially in the form set out in Schedule "A" hereto, which shall be dated as of the Issue Date, shall bear such distinguishing letters and numbers as the Corporation may, with the approval of the Warrant Agent, prescribe, and shall be issuable in any denomination excluding fractions. All Warrants issued to the Depository may be in either a certificated or uncertificated form, such uncertificated form being evidenced by a book position on the register of Warrantholders to be maintained by the Warrant Agent in accordance with Section 2.9 and which may also be evidenced by a DRS Advice.

(2)Each Warrantholder by purchasing such Warrant acknowledges and agrees that the terms and conditions set forth in the form of the Warrant Certificate set out in Schedule "A" hereto shall apply to all Warrants and Warrantholders regardless of whether such Warrants are issued in certificated or uncertificated form or whether such Warrantholders are Registered Warrantholders or beneficial owners of Warrants who beneficially hold security entitlements in respect of the Warrants through a Depository.

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2.6Book Entry Only Warrants.

(1)Registration of beneficial interests in and transfers of Warrants held by the Depository shall be made only through the book entry registration system and no Warrant Certificates shall be issued in respect of such Warrants except where physical certificates evidencing ownership in such securities are required or as set out herein or as may be requested by the Depository, as determined by the Corporation, from time to time. Except as provided in this Section 2.6, owners of beneficial interests in any CDS Global Warrants shall not be entitled to have Warrants registered in their names and shall not receive or be entitled to receive Warrants in certificated form or to have their names appear in the register referred to in Section 2.9 herein. Notwithstanding any terms set out herein, Warrants having the legend set forth in Section 2.8(1) herein may not be held in the name of the Depositary or in the form of Uncertificated Warrants.

(2)Notwithstanding any other provision in this Indenture, no CDS Global Warrants may be exchanged in whole or in part for Warrants registered, and no transfer of any CDS Global Warrants in whole or in part may be registered, in the name of any person other than the Depository for such CDS Global Warrants or a nominee thereof unless:

(a)the Depository notifies the Corporation that it is unwilling or unable to continue to act as depository in connection with the Book Entry Only Warrants and the Corporation is unable to locate a qualified successor;

(b)the Corporation determines that the Depository is no longer willing, able or qualified to properly discharge its responsibilities as holder of the CDS Global Warrants and the Corporation is unable to locate a qualified successor;

(c)the Depository ceases to be a clearing agency or otherwise ceases to be eligible to be a depository and the Corporation is unable to locate a qualified successor;

(d)the Corporation determines that the Warrants shall no longer be held as Book Entry Only Warrants through the Depository;

(e)such right is required by Applicable Law, as determined by the Corporation and the Corporation's Counsel;

(f)the Warrant is to be Authenticated to or for the account or benefit of a person in the United States or a U.S. Person (in which case, the Warrant Certificate shall contain the legend set forth in Section 2.8(1), if applicable); or

(g)such registration is effected in accordance with the Internal Procedures of the Depository and the Warrant Agent,

following which, Warrant Certificates shall be registered and issued to the beneficial owners of such Warrants or their nominees as directed by the Depository. The Corporation shall provide a certificate of the Corporation giving notice to the Warrant Agent of the occurrence of any event outlined in this Section 2.6(2).

(3)Subject to the provisions of this Section 2.6, any exchange of CDS Global Warrants for Warrants which are not CDS Global Warrants may be made in whole or in part in accordance with the provisions of Section 2.12, mutatis mutandis. All such Warrants issued in exchange for a CDS Global Warrant or any portion thereof shall be registered in such names as the Depository for such CDS Global Warrants shall direct and shall be entitled to the same benefits and subject to the same terms and conditions (except insofar as they relate specifically to CDS Global Warrants or to any legend required by Section 2.8(1) and the restrictions set out in such legend) as the CDS Global Warrants or portion thereof surrendered upon such exchange.

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(4)Every Warrant that is Authenticated upon registration or transfer of a CDS Global Warrant, or in exchange for or in lieu of a CDS Global Warrant or any portion thereof, whether pursuant to this Section 2.6, or otherwise, shall be Authenticated in the form of, and shall be, a CDS Global Warrant, unless such Warrant is registered in the name of a person other than the Depository for such CDS Global Warrant or a nominee thereof.

(5)Notwithstanding anything to the contrary in this Indenture, subject to Applicable Law, the CDS Global Warrant will be issued as an Uncertificated Warrant, unless otherwise requested in writing by the Depository or the Corporation.

(6)The rights of beneficial owners of Warrants who hold securities entitlements in respect of the Warrants through the book entry registration system shall be limited to those established by Applicable Law and agreements between the Depository and the Book Entry Only Participants and between such Book Entry Only Participants and the beneficial owners of Warrants who hold securities entitlements in respect of the Warrants through the book entry registration system, and such rights must be exercised through a Book Entry Only Participant in accordance with the rules and procedures of the Depository.

(7)Notwithstanding anything herein to the contrary, neither the Corporation nor the Warrant Agent nor any agent thereof shall have any responsibility or liability for:

(a)the electronic records maintained by the Depository relating to any ownership interests or any other interests in the Warrants or the depository system maintained by the Depository, or payments made on account of any ownership interest or any other interest of any person in any Warrant represented by an electronic position in the book entry registration system (other than the Depository or its nominee);

(b)maintaining, supervising or reviewing any records of the Depository or any Book Entry Only Participant relating to any such interest; or

(c)any advice or representation made or given by the Depository or those contained herein that relate to the rules and regulations of the Depository or any action to be taken by the Depository on its own direction or at the direction of any Book Entry Only Participant.

(8)The Corporation may terminate the application of this Section 2.6 in its sole discretion in which case all Warrants shall be evidenced by Warrant Certificates registered in the name of a person other than the Depository.

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2.7Warrant Certificate.

(1)For Warrants issued in certificated form (including all replacements issued in accordance with this Indenture), the form of certificate representing Warrants shall be substantially as set out in Schedule "A" hereto or such other form as is authorized from time to time by the Corporation and the Warrant Agent. Each Warrant Certificate shall be Authenticated on behalf of the Warrant Agent. Each Warrant Certificate shall be signed by any of the Chief Executive Officer, Chief Financial Officer or any other authorized officer of the Corporation whose signature shall appear on the Warrant Certificate and may be printed, lithographed or otherwise electronically or mechanically reproduced thereon and, in such event, certificates so signed are as valid and binding upon the Corporation as if it had been signed manually. Any Warrant Certificate which has the applicable signatures as hereinbefore provided shall be valid notwithstanding that one or more of the persons whose signature is printed, lithographed or otherwise electronically or mechanically reproduced no longer holds office at the date of issuance of such certificate. The Warrant Certificates may be engraved, printed or lithographed, or partly in one form and partly in another, as the Warrant Agent may determine.

(2)The Warrant Agent shall Authenticate Uncertificated Warrants (whether upon original issuance, exchange, registration of transfer, partial payment, or otherwise) by completing its Internal Procedures and the Corporation shall, and hereby acknowledges that it shall, thereupon be deemed to have duly and validly issued such Uncertificated Warrants under this Indenture. Such Authentication shall be conclusive evidence that such Uncertificated Warrant has been duly issued hereunder and that the holder or holders are entitled to the benefits of this Indenture, including valid entitlements to the Common Shares. The register shall be final and conclusive evidence as to all matters relating to Uncertificated Warrants with respect to which this Indenture requires the Warrant Agent to maintain records or accounts. In case of differences between the register at any time and any other time the register at the later time shall be controlling, absent manifest error and such Uncertificated Warrants are binding on the Corporation.

(3)Any Warrant Certificate validly issued in accordance with the terms of this Indenture in effect at the time of issue of such Warrant Certificate shall, subject to the terms of this Indenture and Applicable Law, validly entitle the holder to acquire Common Shares, notwithstanding that the form of such Warrant Certificate may not be in the form currently required by this Indenture.

(4)No Warrant shall be considered issued and shall be valid or obligatory or shall entitle the holder thereof to the benefits of this Indenture, until it has been Authenticated by the Warrant Agent.

(5)No Certificated Warrant shall be considered issued and shall be obligatory or shall entitle the holder thereof to the benefits of this Indenture, until it has been Authenticated by signature by or on behalf of the Warrant Agent. Such Authentication on any such Certificated Warrant shall be conclusive evidence that such Certificated Warrant is duly Authenticated and is valid and a binding obligation of the Corporation and that the holder is entitled to the benefits of this Indenture.

(6)No Uncertificated Warrant shall be considered issued and shall be obligatory or shall entitle the holder thereof to the benefits of this Indenture, until it has been Authenticated by entry on the register of the particulars of the Uncertificated Warrant. Such entry on the register of the particulars of an Uncertificated Warrant shall be conclusive evidence that such Uncertificated Warrant is a valid and binding obligation of the Corporation and that the beneficial owner is entitled to the benefits of this Indenture.

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(7)The Authentication by the Warrant Agent of any Warrants whether by way of entry on the register or otherwise shall not be construed as a representation or warranty by the Warrant Agent as to the validity of the Indenture or such Warrants, Warrant Certificates or Uncertificated Warrants (except the due Authentication thereof) or as to the performance by the Corporation of its obligations under this Indenture and the Warrant Agent shall in no respect be liable or answerable for the use made of the Warrants or any of them or the proceeds thereof. Authentication by the Warrant Agent shall be conclusive evidence as against the Corporation that the Warrants so Authenticated have been duly issued hereunder and that the holder thereof is entitled to the benefits of this Indenture.

2.8Legends.

(1)Neither the Warrants nor the Common Shares issuable upon exercise thereof ("Warrant Shares") have been, nor will they be, registered under the U.S. Securities Act or the securities laws of any state, and may not be offered, sold or otherwise disposed of in the United States, or to or for the account or benefit of a U.S. Person or a person in the United States, unless an exemption from the registration requirements under the U.S. Securities Act and applicable state securities laws is available, and the holder agrees not to offer, sell or otherwise dispose of the Warrants or Common Shares issuable upon exercise of the Warrants in the United States, or to or for the account or benefit of a U.S. Person, unless registered under the U.S. Securities Act or an exemption from registration under the U.S. Securities Act and applicable state securities laws is available. Warrants and, if applicable, Common Shares, issued to, or for the account or benefit of, a U.S. Person or person in the United States upon exercise of the Warrants (and any certificates issued in replacement thereof or in substitution therefor) must be issued only in individually certificated form.

Any certificates representing Warrants issued to, or for the account or benefit of, a U.S. Person or person in the United States, a U.S. Warrantholder, and, if applicable, any certificates representing Common Shares issued on exercise of Warrants issued to, or for the account or benefit of, a U.S. Person or person in the United States, and any certificates issued in replacement thereof or in substitution therefor, shall, until such time as the same is no longer required under applicable requirements of the U.S. Securities Act or applicable state securities laws, bear a legend in substantially the following form:

"THE SECURITIES REPRESENTED HEREBY [if for Warrants shall also include: AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF] HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "U.S. SECURITIES ACT") OR ANY STATE SECURITIES LAWS. THE HOLDER HEREOF, BY PURCHASING SUCH SECURITIES, AGREES FOR THE BENEFIT OF KWESST MICRO SYSTEMS INC. (THE "CORPORATION") THAT SUCH SECURITIES MAY BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED ONLY (A) TO THE CORPORATION, (B) OUTSIDE THE UNITED STATES IN ACCORDANCE WITH RULE 904 OF REGULATION S AND IN COMPLIANCE WITH APPLICABLE LOCAL SECURITIES LAWS AND REGULATIONS, IF AVAILABLE, (C) WITHIN THE UNITED STATES IN ACCORDANCE WITH THE EXEMPTION FROM REGISTRATION UNDER THE U.S. SECURITIES ACT PROVIDED BY (I) RULE 144 OR (II) RULE 144A, IF AVAILABLE, OR (D) WITH THE PRIOR WRITTEN CONSENT OF THE CORPORATION PURSUANT TO ANOTHER EXEMPTION FROM REGISTRATION UNDER THE U.S. SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS AFTER FIRST PROVIDING TO THE CORPORATION, IN EACH CASE OF (C)(I) AND (D) IF REQUESTED, AN OPINION OF U.S. COUNSEL OF RECOGNIZED STANDING IN FORM AND SUBSTANCE SATISFACTORY TO THE CORPORATION THAT THE OFFER, SALE, PLEDGE OR OTHER TRANSFER DOES NOT REQUIRE REGISTRATION UNDER THE U.S. SECURITIES ACT OR APPLICABLE STATE SECURITIES LAWS, AND AFTER FIRST PROVIDING TO THE CORPORATION SUCH OTHER EVIDENCE OF COMPLIANCE WITH APPLICABLE SECURITIES LAWS AS THE CORPORATION SHALL REASONABLY REQUEST.

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DELIVERY OF THIS CERTIFICATE MAY NOT CONSTITUTE "GOOD DELIVERY" IN SETTLEMENT OF TRANSACTIONS ON STOCK EXCHANGES IN CANADA."

[if a Warrant: "THIS WARRANT MAY NOT BE EXERCISED BY OR ON BEHALF OF, OR FOR THE ACCOUNT OR BENEFIT OF, A PERSON IN THE UNITED STATES OR A U.S. PERSON UNLESS THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS OR AN EXEMPTION FROM SUCH REGISTRATION REQUIREMENTS IS AVAILABLE."]

provided that, if any such Warrants and any Warrant Shares issued on exercise of Warrants are being sold outside the United States in accordance with Rule 904 of Regulation S, if available, and in compliance with applicable local securities laws and regulations, and provided that the Corporation is a "foreign issuer" within the meaning of Regulation S at the time of sale, the legend set forth above may be removed by providing a declaration to the Corporation's registrar and the Warrant Agent to the effect set forth in Schedule "B" hereto together with such documentation as the Corporation or Warrant Agent may reasonably request; provided, further, that, if any securities are being sold pursuant to Rule 144 under the U.S. Securities Act or with the prior written consent of the Corporation pursuant to another exemption from registration under the U.S. Securities Act and applicable state securities laws, the legend may be removed by delivery to the Corporation and to the Warrant Agent of an opinion of counsel, of recognized standing satisfactory in form and substance to the Corporation, to the effect that such legend is no longer required under applicable requirements of the U.S. Securities Act or state securities laws.

(2)Each CDS Global Warrant if issued as a Certificated Warrant originally issued in Canada and held by the Depository and each Warrant Certificate issued in exchange therefor or in substitution thereof shall bear the following legend or such variations thereof as the Corporation may prescribe from time to time:

"UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF CDS CLEARING AND DEPOSITORY SERVICES INC. ("CDS") TO KWESST MICRO SYSTEMS INC. (THE "ISSUER") OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IN RESPECT THEREOF IS REGISTERED IN THE NAME OF CDS & CO., OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF CDS (AND ANY PAYMENT IS MADE TO CDS & CO OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF CDS), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED HOLDER HEREOF, CDS & CO., HAS A PROPERTY INTEREST IN THE SECURITIES REPRESENTED BY THIS CERTIFICATE HEREIN AND IT IS A VIOLATION OF ITS RIGHTS FOR ANOTHER PERSON TO HOLD, TRANSFER OR DEAL WITH THIS CERTIFICATE."

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(3)Neither the Warrants nor the Warrant Shares issuable upon exercise of the Warrants have been or shall be registered under the U.S. Securities Act or under any United States state securities laws.

2.9Register of Warrants

(1)The Warrant Agent shall maintain records and accounts concerning the Warrants, whether certificated or uncertificated, which shall contain the information called for below with respect to each Warrant, together with such other information as may be required by law or as the Warrant Agent may elect to record. All such information shall be kept in one set of accounts and records which the Warrant Agent shall designate (in such manner as shall permit it to be so identified as such by an unaffiliated party) as the register of the holders of Warrants and shall be maintained at the principal office of the Warrant Agent in Toronto, Ontario. The information to be entered for each account in the register of Warrants at any time shall include (without limitation):

(a)the name and address of the Registered Warrantholder, the date of Authentication thereof and the number Warrants;

(b)whether such Warrant is a Certificated Warrant or an Uncertificated Warrant and, if a Certificated Warrant, the unique number or code assigned to and imprinted thereupon and, if an Uncertificated Warrant, the unique number or code assigned thereto if any;

(c)whether such Warrant has been cancelled; and

(d)a register of transfers in which all transfers of Warrants and the date and other particulars of each transfer shall be entered.

(2)The register shall be available for inspection by the Corporation and or any Warrantholder during the Warrant Agent's regular business hours on a Business Day and upon payment to the Warrant Agent of its reasonable fees. Any Warrantholder exercising such right of inspection shall first provide an affidavit in form satisfactory to the Corporation and the Warrant Agent stating the name and address of the Warrantholder and agreeing not to use the information therein except in connection with an effort to call a meeting of Warrantholders or to influence the voting of Warrantholders at any meeting of Warrantholders.

(3)Once an Uncertificated Warrant has been Authenticated, the information set forth in the register with respect thereto at the time of Authentication may be altered, modified, amended, supplemented or otherwise changed only to reflect exercise or proper instructions to the Warrant Agent from the holder as provided herein, except that the Warrant Agent may act unilaterally to make purely administrative changes internal to the Warrant Agent and changes to correct errors. Each person who becomes a holder of an Uncertificated Warrant, by their or its acquisition thereof, shall be deemed to have irrevocably (i) consented to the foregoing authority of the Warrant Agent to make such minor error corrections, and (ii) agreed to pay to the Warrant Agent, promptly upon written demand, the full amount of all loss and expense (including, without limitation, reasonable legal fees of the Warrant Agent plus interest, at an appropriate then prevailing rate of interest to the Warrant Agent), sustained by the Warrant Agent as a proximate result of such error if, but only if, and only to the extent that such present or former holder realized any benefit as a result of such error and could reasonably have prevented, forestalled or minimized such loss and expense by prompt reporting of the error or avoidance of accepting benefits thereof, whether or not such error is, or should have been, timely detected and corrected by the Warrant Agent; provided, that no person who is a bona fide purchaser shall have any such obligation to the Corporation or to the Warrant Agent.

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2.10Issue in Substitution for Warrant Certificates Lost, etc.

(1)If any Warrant Certificate becomes mutilated or is lost, destroyed or stolen, the Corporation, subject to Applicable Law, shall issue and thereupon the Warrant Agent shall Authenticate and deliver, a new Warrant Certificate of like tenor, and bearing the same legend, if applicable, as the one mutilated, lost, destroyed or stolen in exchange for and in place of and upon cancellation of such mutilated Warrant Certificate, or in lieu of and in substitution for such lost, destroyed or stolen Warrant Certificate, and the substituted Warrant Certificate shall be in a form approved by the Corporation and the Warrant Agent and the Warrants evidenced thereby shall be entitled to the benefits hereof and shall rank equally in accordance with its terms with all other Warrants issued or to be issued hereunder.

(2)The applicant for the issue of a new Warrant Certificate pursuant to this Section 2.10 shall bear the cost of the issue thereof and in case of loss, destruction or theft shall, as a condition precedent to the issuance thereof, furnish to the Corporation and to the Warrant Agent such evidence of ownership and of the loss, destruction or theft of the Warrant Certificate so lost, destroyed or stolen as shall be satisfactory to the Corporation and to the Warrant Agent, in their sole discretion, acting reasonably, and such applicant shall also be required to furnish an indemnity and surety bond in amount and form satisfactory to the Corporation and the Warrant Agent, in their sole discretion, and shall pay the reasonable charges of the Corporation and the Warrant Agent in connection therewith. In the case of mutilation, the Registered Warrantholder shall surrender the mutilated Warrant Certificate alongside the condition precedent stipulated in this Section 2.10(2).

2.11Exchange of Warrant Certificates.

(1)Any one or more Warrant Certificates representing any number of Warrants may, upon compliance with the reasonable requirements of the Warrant Agent (including compliance with applicable securities legislation), be exchanged for one or more other Warrant Certificates representing the same aggregate number of Warrants, and bearing the same legend, if applicable, as represented by the Warrant Certificate or Warrant Certificates so exchanged.

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(2)Warrant Certificates may be exchanged only at the Warrant Agency or at any other place that is designated by the Corporation with the approval of the Warrant Agent. Any Warrant Certificate from the holder (or such other instructions, in form satisfactory to the Warrant Agent), tendered for exchange shall be surrendered to the Warrant Agency and cancelled by the Warrant Agent.

(3)Warrant Certificates exchanged for Warrant Certificates that bear the legend(s) set forth in Sections 2.8(1), and/or 2.8(2),  shall bear the same legend(s).

2.12Transfer and Ownership of Warrants.

(1)The Warrants may only be transferred on the register kept by the Warrant Agent at the Warrant Agency by the holder or its legal representatives or its attorney duly appointed by an instrument in writing in form and execution satisfactory to the Warrant Agent only upon:

(a)in the case of a Warrant Certificate or DRS Advice, surrendering to the Warrant Agent at the Warrant Agency the Warrant Certificates representing the Warrants to be transferred together with a duly executed transfer form as set forth in Schedule "A" hereto (together with a declaration for removal of legend or opinion of counsel, if required by Sections 2.8(1)); or

(b)in the case of Book Entry Only Warrants, in accordance with procedures prescribed by the Depository under the book entry registration system,

and upon compliance with:

(c)the conditions herein;

(d)such reasonable requirements as the Warrant Agent may prescribe; and

(e)all applicable securities legislation and requirements of regulatory authorities,

and, such transfer shall be duly noted in such register by the Warrant Agent. Upon compliance with such requirements, the Warrant Agent shall issue to the transferee of a Certificated Warrant, a Warrant Certificate, representing the Warrants transferred, to the transferee of an Uncertificated Warrant, an Uncertificated Warrant representing the Warrants transferred, and to the transferee of a DRS Advice, a DRS Advice in respect of the Warrants transferred, or the Warrant Agent shall Authenticate and deliver a Warrant Certificate upon request that part of the CDS Global Warrant be certificated, and the transferee of a Book Entry Only Warrant shall be recorded through the relevant Book Entry Only Participant in accordance with the book-entry registration system as the entitlement holder in respect of such Warrants. Transfers within the systems of the Depository are not the responsibility of the Warrant Agent and will not be noted on the register maintained by the Warrant Agent.

(2)If a Warrant Certificate tendered for transfer bears the legend set forth in 2.8(1), the Warrant Agent shall not register such transfer unless the transferor has provided the Warrant Agent with the Warrant Certificate and such securities may be transferred only (A) to the Corporation, (B) outside the United States in accordance with Rule 904 of Regulation S and in compliance with applicable local securities laws and regulations, if available, (C) within the United States in accordance with the exemption from registration under the U.S. Securities Act provided by (i) Rule 144 or (ii) Rule 144A and in compliance with applicable local laws and regulations, if available, or (D) with the prior written consent of the Corporation pursuant to another exemption from registration under the U.S. Securities Act and applicable state securities laws after first providing to the Corporation and the Warrant Agent (1) in the case of a transfer pursuant to clause (B), a declaration in the form of Schedule "B" hereto together with such additional documentation as the Corporation and the Warrant Agent may reasonably prescribe, and (2) in the case of a transfer pursuant to clause (C)(i) or clause (D), an opinion of U.S. counsel of recognized standing in form and substance satisfactory to the Corporation and the Warrant Agent that the offer, sale, pledge or other transfer does not require registration under the U.S. Securities Act or applicable state securities laws, or after first providing to the Corporation such other evidence of compliance with applicable securities laws as the Corporation shall reasonably request. Warrants and, if applicable, Common Shares issuable upon exercise of the Warrants, issued to, or for the account or benefit of, a U.S. Person or person in the United States (and any certificates issued in replacement thereof or in substitution therefor) must be issued only in individually certificated form.

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(3)Any Warrant issued to a transferee upon transfers contemplated by this Section 2.12 shall bear the appropriate legend as set forth in Sections 2.8(1), and/or 2.8(2),  as applicable.

(4)Subject to the provisions of this Indenture and Applicable Law, the Warrantholder shall be entitled to the rights and privileges attaching to the Warrants, and the issue of Common Shares by the Corporation upon the exercise of Warrants in accordance with the terms and conditions herein contained shall discharge all responsibilities of the Corporation and the Warrant Agent with respect to such Warrants and neither the Corporation nor the Warrant Agent shall be bound to inquire into the title of any such holder.

2.13Cancellation of Surrendered Warrants.

All Certificated Warrants and Uncertificated Warrants surrendered pursuant to Article 3 or transferred or exchanged pursuant to Article 2 shall be cancelled by the Warrant Agent and upon such circumstances all such Warrants shall be deemed cancelled and so noted on the register by the Warrant Agent. Upon request by the Corporation, the Warrant Agent shall furnish to the Corporation a cancellation certificate identifying the Warrants so cancelled, the number of Warrants evidenced thereby, the number of Common Shares, if any, issued pursuant to such Warrants, as applicable, and the details of any Warrants issued in substitution or exchange for such Warrants cancelled.

ARTICLE 3
EXERCISE OF WARRANTS

3.1Right of Exercise.

Subject to the provisions hereof, each Warrantholder may exercise the right conferred on such holder to subscribe for and purchase one Common Share for each Warrant after the Issue Date and prior to the Expiry Time in accordance with the conditions and subject to the restrictions herein.

3.2Warrant Exercise.

(1)Registered Warrantholders of Certificated Warrants who wish to exercise the Warrants held by them in order to acquire Common Shares must, if permitted pursuant to the terms and conditions hereunder and as set forth in any applicable legend, complete the exercise form (the "Exercise Notice") in the form attached hereto as Schedule "B", which may be amended by the Corporation with the consent of the Warrant Agent, such consent not to be unreasonably withheld, if such amendment does not, in the reasonable opinion of the Corporation and the Warrant Agent, which may be based on the advice of Counsel, materially and adversely affect the rights, entitlements and interests of the Warrantholders, and deliver such certificate(s), the executed Exercise Notice and a certified cheque, bank draft or money order payable to or to the order of the Corporation for the aggregate Exercise Price to the Warrant Agent at the Warrant Agency prior to the Expiry Time. The Warrants represented by a Warrant Certificate shall be deemed to be surrendered upon personal delivery of such certificate, Exercise Notice and aggregate Exercise Price or, if such documents are sent by mail or other means of transmission, upon actual receipt thereof by the Warrant Agent at the office referred to above.

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(2)If, at the time of exercise of the Warrants, in accordance with the provisions of Section 3.2(1), there are any trading restrictions on the Common Shares issued upon exercise of the Warrants pursuant to Applicable Laws or stock exchange requirements, the Corporation shall, on the advice of counsel, endorse any certificates representing the Common Shares to such effect. The Warrant Agent is entitled to assume compliance with all Applicable Laws unless otherwise notified in writing by the Corporation.

(3)A Registered Warrantholder of Uncertificated Warrants evidenced by a security entitlement in respect of Warrants must complete the Exercise Notice and deliver the executed Exercise Notice and a certified cheque, bank draft or money order payable to or to the order of the Corporation for the aggregate Exercise Price to the Warrant Agent at the Warrant Agency prior to the Expiry Time. The Uncertificated Warrants shall be deemed to be surrendered upon receipt of the Exercise Notice and aggregate Exercise Price or, if such documents are sent by mail or other means of transmission, upon actual receipt thereof by the Warrant Agent at the office referred to above.

(4)A Registered Warrantholder may request their Warrants be held electronically through a book based registration system, including CDSX. A beneficial owner of Uncertificated Warrants evidenced by a security entitlement in respect of Warrants in the book entry registration system who desires to exercise his or her Warrants must do so by causing a Book Entry Participant to deliver to the Depository on behalf of the beneficial owner, notice of the beneficial owner's intention to exercise Warrants in a manner acceptable to the Depository. Forthwith upon receipt by the Depository of such notice, as well as payment for the aggregate Exercise Price, the Depository shall deliver to the Warrant Agent confirmation of its intention to exercise Warrants (a "Confirmation") in a manner acceptable to the Warrant Agent, including by electronic means through the book entry registration system, including CDSX.  An electronic exercise of the Warrants initiated by the Book Entry Participant through a book entry registration system, including CDSX, shall constitute a representation to both the Corporation and the Warrant Agent that the beneficial owner at the time of exercise of such Warrants: (i) is not in the United States, (ii) is not a U.S. Person and is not exercising such Warrants on behalf of, or for the account or benefit of, a U.S. Person or a person in the United States, and (ii) did not execute or deliver the notice of the beneficial owner's intention to exercise such Warrants in the United States. If the Book Entry Participant is not able to make or deliver the foregoing representations by initiating the electronic exercise of the Warrants, then such Warrants shall be withdrawn from the book entry registration system, including CDSX, by the Book Entry Participant and an individually registered Warrant Certificate shall be issued by the Warrant Agent to such beneficial owner of the Uncertificated Warrants or Book Entry Participant and the exercise procedures set forth in Section 3.2(1) and Section 3.2(3) shall be followed.

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(5)Payment representing the aggregate Exercise Price must be provided to the appropriate office of the Book Entry Only Participant in a manner acceptable to it. A notice in form acceptable to the Book Entry Only Participant and payment from such beneficial holder should be provided to the Book Entry Only Participant sufficiently in advance so as to permit the Book Entry Only Participant to deliver notice and payment to the Depository and for the Depository in turn to deliver notice and payment to the Warrant Agent prior to the Expiry Time. The Depository will initiate the exercise by way of the Confirmation and forward the aggregate Exercise Price electronically to the Warrant Agent and the Warrant Agent will execute the exercise by issuing to the Depository through the book entry registration system the Common Shares to which the exercising Warrantholder is entitled pursuant to the exercise. Any expense associated with the exercise process will be for the account of the entitlement holder exercising the Warrants and/or the Book Entry Only Participant exercising the Warrants on its behalf.

(6)By causing a Book Entry Only Participant to deliver notice to the Depository, a Warrantholder shall be deemed to have irrevocably surrendered their Warrants so exercised and appointed such Book Entry Only Participant to act as their exclusive settlement agent with respect to the exercise and the receipt of Common Shares in connection with the obligations arising from such exercise.

(7)Any notice which the Depository determines to be incomplete, not in proper form or not duly executed shall for all purposes be void and of no force and effect and the exercise to which it relates shall be considered for all purposes not to have been exercised thereby. A failure by a Book Entry Only Participant to exercise or to give effect to the settlement thereof in accordance with the Warrantholder's instructions will not give rise to any obligations or liability on the part of the Corporation or Warrant Agent to the Book Entry Only Participant or the beneficial owner.

(8)The Exercise Notice referred to in this Section 3.2 shall be signed by the Registered Warrantholder, or its executors or administrators or other legal representatives or an attorney of the Registered Warrantholder, duly appointed by an instrument in writing satisfactory to the Warrant Agent but such Exercise Notice need not be executed by the Depository.

(9)Any exercise referred to in this Section 3.2 shall require that the entire Exercise Price for Common Shares subscribed must be paid at the time of subscription and such Exercise Price and original Exercise Notice executed by the Registered Warrantholder or the Confirmation from the Depository must be received by the Warrant Agent prior to the Expiry Time.

(10)Notwithstanding the foregoing in this Section 3.2, Warrants may only be exercised pursuant to this Section 3.2 by or on behalf of a Registered Warrantholder (excluding the Depository), who is permitted to and makes one of the certifications set forth on the Exercise Notice and delivers, if applicable, any opinion or other evidence as required by the Corporation.

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(11)If the form of Exercise Notice set forth in the Warrant Certificate shall have been amended, the Corporation shall cause the amended Exercise Notice to be forwarded to all Warrantholders.

(12)Exercise Notices and Confirmations must be delivered to the Warrant Agent at any time during the Warrant Agent's actual business hours on any Business Day prior to the Expiry Time. Any Exercise Notice or Confirmations received by the Warrant Agent after business hours on any Business Day other than Expiry Date will be deemed to have been received by the Warrant Agent on the next following Business Day.

(13)Any Warrant with respect to which an Exercise Notice or Confirmation is not received by the Warrant Agent before the Expiry Time shall be deemed to have expired and become void and all rights with respect to such Warrants shall terminate and be cancelled.

3.3U.S. Restrictions; Legended Certificates

(1)The Warrants and the Common Shares issuable upon exercise thereof have not been and will not be registered under the U.S. Securities Act or the securities laws of any state of the United States, and the Warrants may not be exercised within the United States or by or on behalf of, or for the account or benefit of,any U.S. Person or person in the United States unless an exemption from the registration requirements of the U.S. Securities Act and the securities laws of all applicable states is available. The Warrant Agent shall not issue or register Common Shares or the certificates representing such Common Shares unless the Warrantholder provides (except in the case of Common Shares issued to CDS Clearing and Depository Services Inc. on exercise of CDS Global Warrants):

(a)a written certification that the Warrantholder at the time of exercise of the Warrants (a) is not in the United States; (b) is not a U.S. Person and is not exercising the Warrants on behalf of, or account or benefit of, a U.S. Person or a person in the United States; and (c) represents and warrants that the exercise of the Warrants and the acquisition of the Common Shares issuable upon exercise thereof occurred in an "offshore transaction" (as defined under Regulation S; or

(b)a written certification that the Warrantholder is the original U.S. Purchaser and (a) purchased Units directly from the Corporation for its own account or the account of another "accredited investor", as that term is defined in Rule 501(a) of Regulation D, pursuant to an executed unit subscription agreement for the purchase of Units; (b) is exercising the Warrants solely for its own account or the account of such other accredited investor for whose account such holder exercises sole investment discretion; (c) was an accredited investor, both on the date the Units were purchased from the Corporation and on the date of the exercise of the Warrants; and (d) if the Warrants are being exercised on behalf of another person, the Warrantholder represents, warrants and certifies that such person was the beneficial purchaser for whose account the Warrantholder originally acquired Units upon the exercise of which the Warrants were acquired and was an accredited investor, both on the date the Units were purchased from the Corporation and on the date of the exercise of the Warrants;

(c)a written certification that the Warrantholder is the original U.S. Purchaser and (a) purchased the Warrants directly from the Corporation pursuant to a duly executed subscription agreement (including any required certifications set forth therein) for the purchase of Units; (b) is exercising the Warrants solely for its own account or for the account of the original beneficial purchaser, if any; (c) each of it and any beneficial purchaser was on the date the Units were purchased from the Corporation, and is on the date of exercise of the Warrants, a "qualified institutional buyer" within the meaning of Rule 144A under the U.S. Securities Act; and (d) all the representations, warranties and covenants set forth in the written and duly executed subscription agreement (including any required certifications set forth therein) made by the Warrantholder for the purchase of Units from the Corporation continue to be true and correct as if duly executed as of the date thereof; or

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(d)an opinion of counsel of recognized standing in form and substance reasonably satisfactory to the Corporation to the effect that the exercise of the Warrants and the issuance of the Warrant Shares are exempt from registration under the U.S. Securities Act or any applicable state securities laws.

(2)No certificates representing Common Shares will be registered or delivered to an address in the United States unless the Warrantholder complies with the requirements set forth in Sections 3.3(1)(b), 3.3(1)(c), or 3.3(1)(d) and, in the case of 3.3(1)(d), the Corporation has confirmed in writing to the Warrant Agent that the opinion of counsel and such other evidence required by the Corporation is reasonably satisfactory to the Corporation. The certificates representing any Common Shares issued in connection with the exercise of Warrants pursuant to Sections 3.3(1)(b), 3.3(1)(c), or 3.3(1)(d) shall bear the legend set forth in Section 3.3(3) of this Indenture. Certificates representing Common Shares issued in connection with the exercise of Warrants pursuant to Section 3.3(1)(a) shall not bear the legend set forth in Section 3.3(3). Warrant Shares, issued to, or for the account or benefit of, a U.S. Person or person in the United States (and any certificates issued in replacement thereof or in substitution therefor) must be issued only in individually certificated form.

(3)Certificates representing Common Shares issued upon the exercise of Warrants which bear the legend set forth in 2.8(1) and which are issued and delivered pursuant to Sections 3.3(1)(b), 3.3(1)(c) and 3.3(1)(d) (and each certificate issued in exchange therefor or in substitution thereof) shall bear the following legend:

"THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "U.S. SECURITIES ACT") OR ANY STATE SECURITIES LAWS. THE HOLDER HEREOF, BY PURCHASING SUCH SECURITIES, AGREES FOR THE BENEFIT OF KWESST MICRO SYSTEMS INC. (THE "CORPORATION") THAT SUCH SECURITIES MAY BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED ONLY (A) TO THE CORPORATION, (B) OUTSIDE THE UNITED STATES IN ACCORDANCE WITH RULE 904 OF REGULATION S AND IN COMPLIANCE WITH APPLICABLE LOCAL SECURITIES LAWS AND REGULATIONS, IF AVAILABLE, (C) WITHIN THE UNITED STATES IN ACCORDANCE WITH THE EXEMPTION FROM REGISTRATION UNDER THE U.S. SECURITIES ACT PROVIDED BY (I) RULE 144 OR (II) RULE 144A, IF AVAILABLE, OR (D) WITH THE PRIOR WRITTEN CONSENT OF THE CORPORATION PURSUANT TO ANOTHER EXEMPTION FROM REGISTRATION UNDER THE U.S. SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS AFTER FIRST PROVIDING TO THE CORPORATION, IN EACH CASE OF (C)(I) AND (D) IF REQUESTED, AN OPINION OF U.S. COUNSEL OF RECOGNIZED STANDING IN FORM AND SUBSTANCE SATISFACTORY TO THE CORPORATION THAT THE OFFER, SALE, PLEDGE OR OTHER TRANSFER DOES NOT REQUIRE REGISTRATION UNDER THE U.S. SECURITIES ACT OR APPLICABLE STATE SECURITIES LAWS, AND AFTER FIRST PROVIDING TO THE CORPORATION SUCH OTHER EVIDENCE OF COMPLIANCE WITH APPLICABLE SECURITIES LAWS AS THE CORPORATION SHALL REASONABLY REQUEST.

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DELIVERY OF THIS CERTIFICATE MAY NOT CONSTITUTE "GOOD DELIVERY" IN SETTLEMENT OF TRANSACTIONS ON STOCK EXCHANGES IN CANADA."

(4)Any unexercised Warrants must be re-issued in certificated form and bear the legend set out in Section 2.8(1).

3.4Transfer Fees and Taxes.

If any of the Common Shares subscribed for are to be issued to a person or persons other than the Registered Warrantholder, the Registered Warrantholder shall execute the form of transfer and will comply with such reasonable requirements as the Warrant Agent may stipulate and will pay to the Corporation or the Warrant Agent on behalf of the Corporation, all applicable transfer or similar taxes and the Corporation will not be required to issue or deliver certificates evidencing Common Shares unless or until such Warrantholder shall have paid to the Corporation or the Warrant Agent on behalf of the Corporation, the amount of such tax or shall have established to the satisfaction of the Corporation and the Warrant Agent that such tax has been paid or that no tax is due.

3.5Warrant Agency.

To facilitate the exchange, transfer or exercise of Warrants and compliance with such other terms and conditions hereof as may be required, the Corporation has appointed the Warrant Agent at the Warrant Agency, as the agency at which Warrants may be surrendered for exchange or transfer or at which Warrants may be exercised and the Warrant Agent has accepted such appointment. The Corporation may from time to time designate alternate or additional places as the Warrant Agency (subject to the Warrant Agent's prior approval) and will give notice to the Warrant Agent of any proposed change of the Warrant Agency. Branch registers shall also be kept at such other place or places, if any, as the Corporation, with the approval of the Warrant Agent, may designate. The Warrant Agent will from time to time when requested to do so by the Corporation or any Registered Warrantholder, subject to Section 2.9(1), upon payment of the Warrant Agent's reasonable charges, furnish a list of the names and addresses of Registered Warrantholders showing the number of Warrants held by each such Registered Warrantholder.

3.6Effect of Exercise of Warrant Certificates.

(1)Upon the exercise of Warrants pursuant to and in compliance with Section 3.2 and subject to Section 3.3 and Section 3.4, the Common Shares to be issued pursuant to the Warrants exercised shall be deemed to have been issued and the person or persons to whom such Common Shares are to be issued shall be deemed to have become the holder or holders of such Common Shares as of the Exercise Date, unless the registers shall be closed on such date, in which case the Common Shares subscribed for shall be deemed to have been issued and such person or persons deemed to have become the holder or holders of record of such Common Shares, on the date on which such registers are reopened. It is hereby understood that in order for persons to whom Common Shares are to be issued to become holders of Common Shares of record on the Exercise Date, beneficial holders must commence the exercise process sufficiently in advance so that the Warrant Agent is in receipt of all items of exercise at least one Business Day prior to such Exercise Date.

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(2)As soon as practical, and in any event within five Business Days after the Exercise Date with respect to a Warrant, the Warrant Agent shall use commercially reasonable efforts to cause to be delivered or mailed to the person or persons in whose name or names the Warrant is registered or, as directed on the Exercise Form if so specified in writing by the holder, cause to be delivered to such person or persons at the Warrant Agency where the Warrant Certificate was surrendered, a certificate or certificates or DRS Advices for the appropriate number of Common Shares subscribed for, or any other appropriate evidence of the issuance of Common Shares to such person or persons in respect of Common Shares issued under the book entry registration system or DRS.

3.7Partial Exercise of Warrants; Fractions.

(1)The holder of any Warrants may exercise his right to acquire a number of whole Common Shares less than the aggregate number which the holder is entitled to acquire. In the event of any exercise of a number of Warrants less than the number which the holder is entitled to exercise, the holder of Warrants upon such exercise shall, in addition, be entitled to receive, without charge therefor, a new Warrant Certificate(s), bearing the same legend, if applicable, or other appropriate evidence of Warrants, in respect of the balance of the Warrants held by such holder and which were not then exercised.

(2)Notwithstanding anything herein contained including any adjustment provided for in Article 4, the Corporation shall not be required, upon the exercise of any Warrants, to issue fractions of Common Shares. Warrants may only be exercised in a sufficient number to acquire whole numbers of Common Shares. Any fractional Common Shares shall be rounded down to the nearest whole number and the holder of such Warrants shall not be entitled to any compensation in respect of any fractional Common Share which is not issued.

3.8Expiration of Warrants.

Immediately after the Expiry Time, all rights under any Warrant in respect of which the right of acquisition provided for herein shall not have been exercised shall cease and terminate and each Warrant shall be void and of no further force or effect.

3.9Accounting and Recording.

(1)The Warrant Agent shall promptly account to the Corporation with respect to Warrants exercised and shall promptly forward to the Corporation (or into an account or accounts of the Corporation with the bank or trust company designated by the Corporation for that purpose), all monies received by the Warrant Agent on the subscription of Common Shares through the exercise of Warrants. All such monies and any securities or other instruments, from time to time received by the Warrant Agent shall be received for the benefit of, and shall be segregated and kept apart by the Warrant Agent for, the Warrantholders and the Corporation as their interests may appear.

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(2)The Warrant Agent shall record the particulars of Warrants exercised, which particulars shall include the names and addresses of the persons who become holders of Common Shares on exercise and the Exercise Date, in respect thereof. The Warrant Agent shall provide such particulars in writing to the Corporation within five Business Days of any request by the Corporation therefor.

3.10Securities Restrictions.

(1)Notwithstanding anything herein contained, Common Shares will be issued upon exercise of a Warrant only in compliance with the securities laws of any applicable jurisdiction.

(2)Notwithstanding any other provisions of this Indenture, in processing and registering transfers of Warrants, and in processing exercises of Warrants, no duty or responsibility whatsoever shall rest upon the Warrant Agent to determine the compliance by any transferor or transferee or by holder exercising Warrants with the terms of any legend affixed on the Warrant Certificates, or with the relevant securities laws or regulations, and the Warrant Agent shall be entitled to assume that all transfers and exercises of Warrants are legal and proper.

ARTICLE 4
ADJUSTMENT OF NUMBER OF COMMON SHARES AND EXERCISE PRICE

4.1Adjustment of Number of Common Shares and Exercise Price.

The subscription rights in effect under the Warrants for Common Shares issuable upon the exercise of the Warrants shall be subject to adjustment from time to time as follows:

(a)if, at any time during the Adjustment Period, the Corporation shall:

(i)subdivide, re-divide or change its outstanding Common Shares into a greater number of Common Shares;

(ii)reduce, combine or consolidate its outstanding Common Shares into a smaller number of Common Shares;

(iii)issue or distribute Common Shares or securities exchangeable for, or convertible into, Common Shares to all or substantially all of the holders of Common Shares by way of distribution (other than a distribution of Common Shares upon the exercise of Warrants);

(any of such events in Section 4.1(a) being called a "Common Share Reorganization") then the Exercise Price shall be adjusted as of the effective date or record date of such subdivision, re-division, change, reduction, combination, consolidation or distribution, as the case may be, such that in the case of the events referred to in (i) or (iii) above, the Exercise Price shall be decreased in proportion to the number of outstanding Common Shares resulting from such subdivision, re-division, change, issuance or distribution or, in the case of the events referred to in (ii) above, the Exercise Price shall be increased in proportion to the number of outstanding Common Shares resulting from such reduction, combination or consolidation by multiplying the Exercise Price in effect immediately prior to such effective date or record date by a fraction, the numerator of which shall be the number of Common Shares outstanding on such effective date or record date before giving effect to such Common Share Reorganization and the denominator of which shall be the number of Common Shares outstanding as of the effective date or record date after giving effect to such Common Share Reorganization (including, in the case where securities exchangeable for or convertible into Common Shares are distributed, the number of Common Shares that would have been outstanding had such securities been exchanged for or converted into Common Shares on such record date or effective date).

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Such adjustment shall be made successively whenever any event referred to in this Section 4.1(a) shall occur. Upon any adjustment of the Exercise Price pursuant to Section 4.1(a), the Exchange Rate shall be contemporaneously adjusted by multiplying the number of Common Shares theretofore obtainable on the exercise thereof by a fraction of which the numerator shall be the Exercise Price in effect immediately prior to such adjustment and the denominator shall be the Exercise Price resulting from such adjustment;

(b)if and whenever at any time during the Adjustment Period, the Corporation shall fix a record date for the issuance of rights, options or warrants to all or substantially all the holders of its outstanding Common Shares entitling them, for a period expiring not more than 45 days after such record date, to subscribe for or purchase Common Shares (or securities convertible or exchangeable into Common Shares) at a price per Common Share (or having a conversion or exchange price per Common Share) less than 95% of the Current Market Price on such record date (a "Rights Offering"), the Exercise Price shall be adjusted immediately after such record date so that it shall equal the amount determined by multiplying the Exercise Price in effect on such record date by a fraction, of which the numerator shall be the total number of Common Shares outstanding on such record date plus a number of Common Shares equal to the number arrived at by dividing the aggregate price of the total number of additional Common Shares offered for subscription or purchase (or the aggregate conversion or exchange price of the convertible or exchangeable securities so offered) by such Current Market Price, and of which the denominator shall be the total number of Common Shares outstanding on such record date plus the total number of additional Common Shares offered for subscription or purchase or into which the convertible or exchangeable securities so offered are convertible or exchangeable; any Common Shares owned by or held for the account of the Corporation shall be deemed not to be outstanding for the purpose of any such computation; such adjustment shall be made successively whenever such a record date is fixed; to the extent that no such rights or warrants are exercised prior to the expiration thereof, the Exercise Price shall be readjusted to the Exercise Price which would then be in effect if such record date had not been fixed or, if any such rights or warrants are exercised, to the Exercise Price which would then be in effect based upon the number of Common Shares (or securities convertible or exchangeable into Common Shares) actually issued upon the exercise of such rights or warrants, as the case may be. Upon any adjustment of the Exercise Price pursuant to this Section 4.1(b), the Exchange Rate will be adjusted immediately after such record date so that it will equal the rate determined by multiplying the Exchange Rate in effect on such record date by a fraction, of which the numerator shall be the Exercise Price in effect immediately prior to such adjustment and the denominator shall be the Exercise Price resulting from such adjustment. Such adjustment will be made successively whenever such a record date is fixed, provided that if two or more such record dates or record dates referred to in this Section 4.1(b) are fixed within a period of 25 Trading Days, such adjustment will be made successively as if each of such record dates occurred on the earliest of such record dates;

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(c)if and whenever at any time during the Adjustment Period the Corporation shall fix a record date for the making of a distribution to all or substantially all the holders of its outstanding Common Shares of (i) securities of any class, whether of the Corporation or any other entity (other than Common Shares), (ii) rights, options or warrants to subscribe for or purchase Common Shares (or other securities convertible into or exchangeable for Common Shares), other than pursuant to a Rights Offering; (iii) evidences of its indebtedness or (iv) any property or other assets then, in each such case, the Exercise Price shall be adjusted immediately after such record date so that it shall equal the price determined by multiplying the Exercise Price in effect on such record date by a fraction, of which the numerator shall be the total number of Common Shares outstanding on such record date multiplied by the Current Market Price on such record date, less the excess, if any, of the fair market value on such record date, as determined by the Corporation (whose determination shall be conclusive), of such securities or other assets so issued or distributed over the fair market value of any consideration received therefor by the Corporation from the holders of the Common Shares, and of which the denominator shall be the total number of Common Shares outstanding on such record date multiplied by such Current Market Price; and Common Shares owned by or held for the account of the Corporation shall be deemed not to be outstanding for the purpose of any such computation; such adjustment shall be made successively whenever such a record date is fixed; to the extent that such distribution is not so made, the Exercise Price shall be readjusted to the Exercise Price which would then be in effect if such record date had not been fixed. Upon any adjustment of the Exercise Price pursuant to this Section 4.1(c), the Exchange Rate will be adjusted immediately after such record date so that it will equal the rate determined by multiplying the Exchange Rate in effect on such record date by a fraction, of which the numerator shall be the Exercise Price in effect immediately prior to such adjustment and the denominator shall be the Exercise Price resulting from such adjustment;

(d)if and whenever at any time during the Adjustment Period, there is a reclassification of the Common Shares or a capital reorganization of the Corporation other than as described in Section 4.1(a) or a reclassification, change, capital reorganization, consolidation, amalgamation, arrangement or merger of the Corporation with or into any other body corporate, trust, partnership or other entity, or a sale or conveyance of the property and assets of the Corporation as an entirety or substantially as an entirety to any other body corporate, trust, partnership or other entity, any Registered Warrantholder who has not exercised its right of acquisition prior to the effective date of such reclassification, capital reorganization, consolidation, amalgamation, arrangement or merger, sale or conveyance, upon the exercise of such right thereafter, shall be entitled to receive upon payment of the Exercise Price and shall accept, in lieu of the number of Common Shares that prior to such effective date the Warrantholder would have been entitled to receive, the number of shares or other securities or property of the Corporation or of the body corporate, trust, partnership or other entity resulting from such reclassification, change, capital reorganization, consolidation, amalgamation, arrangement or merger, or to which such sale or conveyance may be made, as the case may be, that such Registered Warrantholder would have been entitled to receive on such reclassification, capital reorganization, consolidation, amalgamation, arrangement or merger, sale or conveyance, if, on the effective date thereof, as the case may be, the Registered Warrantholder had been the registered holder of the number of Common Shares to which prior to such effective date it was entitled to acquire upon the exercise of the Warrants. If determined appropriate by the Corporation, relying on advice of Counsel, to give effect to or to evidence the provisions of this Section 4.1(d), the Corporation, its successor, or such purchasing body corporate, partnership, trust or other entity, as the case may be, shall, prior to or contemporaneously with any such reclassification, capital reorganization, consolidation, amalgamation, arrangement, merger, sale or conveyance, enter into an indenture which shall provide, to the extent possible, for the application of the provisions set forth in this Indenture with respect to the rights and interests thereafter of the Registered Warrantholders to the end that the provisions set forth in this Indenture shall thereafter correspondingly be made applicable, as nearly as may reasonably be, with respect to any shares, other securities or property to which a Registered Warrantholder is entitled on the exercise of its acquisition rights thereafter. Any indenture entered into between the Corporation and the Warrant Agent pursuant to the provisions of this Section 4.1(d) shall be a supplemental indenture entered into pursuant to the provisions of Article 8 hereof. Any indenture entered into between the Corporation, any successor to the Corporation or such purchasing body corporate, partnership, trust or other entity and the Warrant Agent shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided in this Section 4.1 and which shall apply to successive reclassifications, changes, capital reorganizations, consolidations, amalgamations, arrangements, mergers, transfers, sales or conveyances;

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(e)in any case in which this Section 4.1 shall require that an adjustment shall become effective immediately after a record date for an event referred to herein, the Corporation may defer, until the occurrence of such event, issuing to the Registered Warrantholder of any Warrant exercised after the record date and prior to completion of such event the additional Common Shares issuable by reason of the adjustment required by such event before giving effect to such adjustment; provided, however, that the Corporation shall deliver to such Warrantholder an appropriate instrument evidencing such Registered Warrantholder's right to receive such additional Common Shares upon the occurrence of the event requiring such adjustment and the right to receive any distributions made on such additional Common Shares declared in favour of holders of record of Common Shares on and after the relevant date of exercise or such later date as such Registered Warrantholder would, but for the provisions of this Section 4.1(e), have become the holder of record of such additional Common Shares pursuant to Section 4.1;

(f)in any case in which Section 4.1(a)(iii), Section 4.1(b) or Section 4.1(c) require that an adjustment be made to the Exercise Price, no such adjustment shall be made if the Registered Warrantholders of the outstanding Warrants receive, subject to the approval of the Exchange if required, the rights or warrants referred to in Section 4.1(a)(iii), Section 4.1(b) or the shares, rights, options, warrants, evidences of indebtedness or assets referred to in Section 4.1(c), as the case may be, in such kind and number as they would have received if they had been holders of Common Shares on the applicable record date or effective date, as the case may be, by virtue of their outstanding Warrants having then been exercised into Common Shares at the Exercise Price in effect on the applicable record date or effective date, as the case may be;

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(g)the adjustments provided for in this Section 4.1 are cumulative, and shall, in the case of adjustments to the Exercise Price be computed to the nearest whole cent and shall apply to successive subdivisions, re-divisions, reductions, combinations, consolidations, distributions, issues or other events resulting in any adjustment under the provisions of this Section 4.1, provided that, notwithstanding any other provision of this Section 4.1, no adjustment of the Exercise Price shall be required unless such adjustment would require an increase or decrease of at least 1% in the Exercise Price then in effect; provided, however, that any adjustments which by reason of this Section 4.1(g) are not required to be made shall be carried forward and taken into account in any subsequent adjustment; and

(h)after any adjustment pursuant to this Section 4.1, the term "Common Shares" where used in this Indenture shall be interpreted to mean securities of any class or classes which, as a result of such adjustment and all prior adjustments pursuant to this Section 4.1, the Registered Warrantholder is entitled to receive upon the exercise of his Warrant, and the number of Common Shares indicated by any exercise made pursuant to a Warrant shall be interpreted to mean the number of Common Shares or other property or securities a Registered Warrantholder is entitled to receive, as a result of such adjustment and all prior adjustments pursuant to this Section 4.1, upon the full exercise of a Warrant.

4.2Entitlement to Common Shares on Exercise of Warrant.

All Common Shares or shares of any class or other securities, which a Registered Warrantholder is at the time in question entitled to receive on the permitted exercise of its Warrant, whether or not as a result of adjustments made pursuant to this Article 4, shall, for the purposes of the interpretation of this Indenture, be deemed to be Common Shares which such Registered Warrantholder is entitled to acquire pursuant to such Warrant.

4.3No Adjustment for Certain Transactions.

Notwithstanding anything in this Article 4, no adjustment shall be made in the acquisition rights attached to the Warrants if the issue of Common Shares is being made pursuant to this Indenture or in connection with (a) any share incentive plan or restricted share plan or share purchase plan in force from time to time for directors, officers, employees, consultants or other service providers of the Corporation; or (b) the satisfaction of existing instruments issued at the date hereof.

4.4Determination by Independent Firm.

In the event of any question arising with respect to the adjustments provided for in this Article 4 such question shall be conclusively determined by an independent firm of chartered accountants other than the Auditors, who shall have access to all necessary records of the Corporation, and such determination shall be binding upon the Corporation, the Warrant Agent, all holders and all other persons interested therein.

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4.5Proceedings Prior to any Action Requiring Adjustment.

As a condition precedent to the taking of any action which would require an adjustment in any of the acquisition rights pursuant to any of the Warrants, including the number of Common Shares which are to be received upon the exercise thereof, the Corporation shall take any action which may, in the opinion of Counsel, be necessary in order that the Corporation has unissued and reserved in its authorized capital and may validly and legally issue as fully paid and non-assessable all the Common Shares which the holders of such Warrants are entitled to receive on the full exercise thereof in accordance with the provisions hereof.

4.6Certificate of Adjustment.

The Corporation shall from time to time immediately after the occurrence of any event which requires an adjustment or readjustment as provided in Article 4, deliver a certificate of the Corporation to the Warrant Agent specifying the nature of the event requiring the same and the amount of the adjustment or readjustment necessitated thereby and setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. The Warrant Agent shall rely, and shall be protected in so doing, upon the certificate of the Corporation and any other document filed by the Corporation pursuant to this Article 4 for all purposes.

4.7Notice of Special Matters.

The Corporation covenants with the Warrant Agent that, so long as any Warrant remains outstanding, it will give notice to the Warrant Agent and to the Registered Warrantholders of its intention to fix a record date that is prior to the Expiry Date for any matter for which an adjustment may be required pursuant to Section 4.1. Such notice shall specify the particulars of such event and the record date for such event, provided that the Corporation shall only be required to specify in the notice such particulars of the event as shall have been fixed and determined on the date on which the notice is given. The notice shall be given in each case not less than 10 Business Days prior to such applicable record date. If notice has been given and the adjustment is not then determinable, the Corporation shall promptly, after the adjustment is determinable, file with the Warrant Agent a computation of the adjustment and give notice to the Registered Warrantholders of such adjustment computation.

4.8No Action after Notice.

The Corporation covenants with the Warrant Agent that it will not close its transfer books or take any other corporate action which might deprive the Registered Warrantholder of the opportunity to exercise its right of acquisition pursuant thereto during the period of 10 Business Days after the giving of the certificate or notices set forth in Section 4.6 and Section 4.7.

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4.9Other Action.

If the Corporation, after the date hereof, shall take any action affecting the Common Shares other than action described in Section 4.1, which in the reasonable opinion of the Directors would materially affect the rights of Registered Warrantholders, the Exercise Price and/or Exchange Rate, the number of Common Shares which may be acquired upon exercise of the Warrants shall be adjusted in such manner and at such time, by action of the Directors, acting reasonably and in good faith, in their sole discretion as they may determine to be equitable to the Registered Warrantholders in the circumstances, provided that no such adjustment will be made unless any requisite prior approval of the Exchange or any other stock exchange on which the Common Shares are listed for trading has been obtained.

4.10Protection of Warrant Agent.

The Warrant Agent shall not:

(a)at any time be under any duty or responsibility to any Registered Warrantholder to determine whether any facts exist which may require any adjustment contemplated by Section 4.1, or with respect to the nature or extent of any such adjustment when made, or with respect to the method employed in making the same;

(b)be accountable with respect to the validity or value (or the kind or amount) of any Common Shares or of any other securities or property which may at any time be issued or delivered upon the exercise of the rights attaching to any Warrant;

(c)be responsible for any failure of the Corporation to issue, transfer or deliver Common Shares or certificates for the same upon the surrender of any Warrants for the purpose of the exercise of such rights or to comply with any of the covenants contained in this Article 4; and

(d)incur any liability or be in any way responsible for the consequences of any breach on the part of the Corporation of any of the representations, warranties or covenants herein contained or of any acts of the directors, officers, employees, agents or servants of the Corporation.

4.11Participation by Warrantholder.

No adjustments shall be made pursuant to this Article 4 if the Registered Warrantholders are entitled to participate in any event described in this Article 4 on the same terms, mutatis mutandis, as if the Registered Warrantholders had exercised their Warrants prior to, or on the Effective Date or record date of, such event.

ARTICLE 5
RIGHTS OF THE CORPORATION AND COVENANTS

5.1Optional Purchases by the Corporation.

Subject to compliance with applicable securities legislation and approval of applicable regulatory authorities, the Corporation may from time to time purchase by private contract or otherwise any of the Warrants. Any such purchase shall be made at the lowest price or prices at which, in the opinion of the Directors, such Warrants are then obtainable, plus reasonable costs of purchase, and may be made in such manner, from such persons and on such other terms as the Corporation, in its sole discretion, may determine. In the case of Certificated Warrants, Warrant Certificates representing the Warrants purchased pursuant to this Section 5.1 shall forthwith be delivered to and cancelled by the Warrant Agent and reflected accordingly on the register of Warrants. In the case of Uncertificated Warrants, the Warrants purchased pursuant to this Section 5.1 shall be reflected accordingly on the register of Warrants in accordance with procedures prescribed by the Depository under the book entry registration system. No Warrants shall be issued in replacement thereof.

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5.2General Covenants.

The Corporation covenants with the Warrant Agent that so long as any Warrants remain outstanding:

(a)it will reserve and keep available a sufficient number of Common Shares for the purpose of enabling it to satisfy its obligations to issue Common Shares upon the exercise of the Warrants;

(b)it will cause the Common Shares from time to time acquired pursuant to the exercise of the Warrants to be duly issued and delivered in accordance with the Warrants and the terms hereof;

(c)upon payment of the aggregate Exercise Price therefor, all Common Shares which shall be issued upon exercise of the right to acquire provided for herein shall be fully paid and non-assessable, free and clear of all encumbrances;

(d)it will maintain its existence and carry on its business and that of its subsidiaries in the ordinary course, provided that this clause shall not be construed as limiting or restricting the Corporation from completing a consolidation, amalgamation, arrangement, takeover bid or merger that would result in the Corporation or any of its subsidiaries ceasing to exist;

(e)it will use reasonable commercial efforts to ensure that all Common Shares outstanding or issuable from time to time (including without limitation the Common Shares issuable on the exercise of the Warrants) continue to be or are listed and posted for trading on the Exchange (or such other Canadian stock exchange acceptable to the Corporation), provided that this clause shall not be construed as limiting or restricting the Corporation from completing a consolidation, amalgamation, arrangement, takeover bid or merger that would result in the Common Shares ceasing to be listed and posted for trading on the Exchange, so long as the holders of Common Shares receive securities of an entity which is listed on a stock exchange in Canada, or cash, or the holders of the Common Shares have approved the transaction in accordance with the requirements of applicable corporate and securities laws and the policies of the Exchange;

(f)generally, it will well and truly perform and carry out all of the acts or things to be done by it as provided in this Indenture;

(g)it will use commercially reasonable best efforts to maintain its status as a "reporting issuer" (or the equivalent thereof) not in default of the requirements of the securities laws in each of the provinces of Canada in which it is a reporting issuer; and

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(h)it will promptly notify the Warrant Agent and the Registered Warrantholders in writing of any default under the terms of this Warrant Indenture which remains unrectified for more than five days following its occurrence; and

(i)it will make all requisite filings under applicable Canadian and United States securities legislation in connection with the issue of the Warrants and the Common Shares.

5.3Warrant Agent's Remuneration and Expenses.

The Corporation covenants that it will pay to the Warrant Agent from time to time agreed remuneration for its services hereunder and will pay or reimburse the Warrant Agent upon its request for all reasonable expenses, disbursements and advances incurred or made by the Warrant Agent in the administration or execution of the duties hereby created (including the reasonable compensation and the disbursements of its Counsel and all other advisers and assistants not regularly in its employ) both before any default hereunder and thereafter until all duties of the Warrant Agent hereunder shall be finally and fully performed, except any such expense, disbursement or advance as may arise out of or result from the Warrant Agent's gross negligence, wilful misconduct, bad faith or fraud. Any amount owing hereunder and remaining unpaid after 30 days from the invoice date will bear interest at the then current rate charged by the Warrant Agent against unpaid invoices and shall be payable upon demand. This Section 5.3 shall survive the resignation or removal of the Warrant Agent and/or the termination of this Indenture.

5.4Performance of Covenants by Warrant Agent.

If the Corporation shall fail to perform any of its covenants contained in this Indenture, then the Corporation will notify the Warrant Agent in writing of such failure and upon receipt by the Warrant Agent of such notice, the Warrant Agent may notify the Registered Warrantholders of such failure on the part of the Corporation and may itself perform any of the covenants capable of being performed by it but, subject to Section 9.2, shall be under no obligation to perform said covenants or to notify the Registered Warrantholders of such performance by it. All sums expended or advanced by the Warrant Agent in so doing shall be repayable as provided in Section 5.3. No such performance, expenditure or advance by the Warrant Agent shall relieve the Corporation of any default hereunder or of its continuing obligations under the covenants herein contained.

5.5Enforceability of Warrants.

The Corporation covenants and agrees that it is duly authorized to create and issue the Warrants to be issued hereunder and that the Warrants, when issued and Authenticated as herein provided, will be valid and enforceable against the Corporation in accordance with the provisions hereof and the terms hereof and that, subject to the provisions of this Indenture, the Corporation will cause the Common Shares from time to time acquired upon exercise of Warrants issued under this Indenture to be duly issued and delivered in accordance with the terms of this Indenture.

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ARTICLE 6
ENFORCEMENT

6.1Suits by Registered Warrantholders.

All or any of the rights conferred upon any Registered Warrantholder by any of the terms of this Indenture may be enforced by the Registered Warrantholder by appropriate proceedings but without prejudice to the right which is hereby conferred upon the Warrant Agent to proceed in its own name to enforce each and all of the provisions herein contained for the benefit of the Registered Warrantholders or in the Warrant Certificates.

6.2Suits by the Corporation.

Subject to any rights or remedies available to the Warrant Agent and the Warrantholders under Applicable Law or otherwise, the Corporation shall have the right to enforce full payment of the Exercise Price of all Common Shares issued to a Warrantholder hereunder and shall be entitled to demand such payment from the Warrantholder or alternatively to cancel or cause to be cancelled the share certificates and amend the securities register accordingly.

6.3Immunity of Shareholders, etc.

The Warrant Agent and the Warrantholders hereby waive and release any right, cause of action or remedy now or hereafter existing in any jurisdiction against any incorporator or any past, present or future shareholder, trustee, employee or agent of the Corporation or any successor corporation on any covenant, agreement, representation or warranty by the Corporation herein.

6.4Waiver of Default.

Upon the happening of any default hereunder:

(a)the Registered Warrantholders of not less than 51% of the Warrants then outstanding shall have power (in addition to the powers exercisable by Extraordinary Resolution) by requisition in writing to instruct the Warrant Agent to waive any default hereunder and the Warrant Agent shall thereupon waive the default upon such terms and conditions as shall be prescribed in such requisition; or

(b)the Warrant Agent shall have power to waive any default hereunder upon such terms and conditions as the Warrant Agent may deem advisable, on the advice of Counsel, if, in the Warrant Agent's opinion, based on the advice of Counsel, the same shall have been cured or adequate provision made therefor;

provided that no delay or omission of the Warrant Agent or of the Registered Warrantholders to exercise any right or power accruing upon any default shall impair any such right or power or shall be construed to be a waiver of any such default or acquiescence therein and provided further that no act or omission either of the Warrant Agent or of the Warrantholders in the premises shall extend to or be taken in any manner whatsoever to affect any subsequent default hereunder of the rights resulting therefrom.

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ARTICLE 7
MEETINGS OF WARRANTHOLDERS

7.1Right to Convene Meetings.

The Warrant Agent may at any time and from time to time, and shall on receipt of a written request of the Corporation or of a Warrantholders' Request and upon being indemnified and funded to its reasonable satisfaction by the Corporation or by the Registered Warrantholders signing such Registered Warrantholders' Request against the costs which may be incurred in connection with the calling and holding of such meeting, convene a meeting of the Registered Warrantholders. If the Warrant Agent fails to so call a meeting within seven days after receipt of such written request of the Corporation or such Registered Warrantholders' Request and the indemnity and funding given as aforesaid, the Corporation or such Registered Warrantholders, as the case may be, may convene such meeting. Every such meeting shall be held in the City of Vancouver, British Columbia or at such other place as may be mutually approved or determined by the Warrant Agent and the Corporation. Any meeting held pursuant to this Article 7 may be done through a virtual or electronic meeting platform, subject to the Warrant Agent's capabilities at the time.

7.2Notice.

At least 21 days prior written notice of any meeting of Registered Warrantholders shall be given to the Registered Warrantholders in the manner provided for in Section 10.2 and a copy of such notice shall be sent by mail to the Warrant Agent (unless the meeting has been called by the Warrant Agent) and to the Corporation (unless the meeting has been called by the Corporation). Such notice shall state the time when and the place where the meeting is to be held, shall state briefly the general nature of the business to be transacted thereat and shall contain such information as is reasonably necessary to enable the Registered Warrantholders to make a reasoned decision on the matter, but it shall not be necessary for any such notice to set out the terms of any resolution to be proposed or any of the provisions of this Section 7.2.

7.3Chair.

An individual (who need not be a Registered Warrantholder) designated in writing by the Warrant Agent and the Corporation shall be chair of the meeting and if no individual is so designated, or if the individual so designated is not present within fifteen minutes from the time fixed for the holding of the meeting, the Registered Warrantholders present in person or by proxy shall choose an individual present to be chair.

7.4Quorum.

Subject to the provisions of Section 7.11, at any meeting of the Registered Warrantholders a quorum shall consist of Registered Warrantholder(s) present in person or by proxy and holding at least 20% of the aggregate number of all the then outstanding Warrants. If a quorum of the Warrantholders shall not be present within thirty minutes from the time fixed for holding any meeting, the meeting, if summoned by Registered Warrantholders or on a Registered Warrantholders' Request, shall be dissolved; but in any other case the meeting shall be adjourned to the same day in the next week (unless such day is not a Business Day, in which case it shall be adjourned to the next following Business Day) at the same time and place and no notice of the adjournment need be given. Any business may be brought before or dealt with at an adjourned meeting which might have been dealt with at the original meeting in accordance with the notice calling the same. No business shall be transacted at any meeting unless a quorum be present at the commencement of business. At the adjourned meeting the Registered Warrantholders present in person or by proxy shall form a quorum and may transact the business for which the meeting was originally convened, notwithstanding that they may not be holding at least 20% of the aggregate number of all then outstanding Warrants.

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7.5Power to Adjourn.

The chair of any meeting at which a quorum of the Registered Warrantholders is present may, with the consent of the meeting, adjourn any such meeting, and no notice of such adjournment need be given except such notice, if any, as the meeting may prescribe.

7.6Show of Hands.

Every question submitted to a meeting shall be decided in the first place by a majority of the votes given on a show of hands except that votes on an Extraordinary Resolution shall be given in the manner hereinafter provided. At any such meeting, unless a poll is duly demanded as herein provided, a declaration by the chair that a resolution has been carried or carried unanimously or by a particular majority or lost or not carried by a particular majority shall be conclusive evidence of the fact.

7.7Poll and Voting.

(1)On every Extraordinary Resolution, and on any other question submitted to a meeting and after a vote by show of hands when demanded by the chair or by one or more of the Registered Warrantholders acting in person or by proxy and holding in the aggregate at least 5% of all the Warrants then outstanding, a poll shall be taken in such manner as the chair shall direct. Questions other than those required to be determined by Extraordinary Resolution shall be decided by a majority of the votes cast on the poll.

(2)On a show of hands, every person who is present and entitled to vote, whether as a Registered Warrantholder or as proxy for one or more absent Registered Warrantholders, or both, shall have one vote. On a poll, each Registered Warrantholder present in person or represented by a proxy duly appointed by instrument in writing shall be entitled to one vote in respect of each Warrant then held or represented by it. A proxy need not be a Registered Warrantholder. The chair of any meeting shall be entitled, both on a show of hands and on a poll, to vote in respect of the Warrants, if any, held or represented by them.

7.8Regulations.

(1)The Warrant Agent, or the Corporation with the approval of the Warrant Agent, may from time to time make and from time to time vary such regulations as it shall think fit for:

(a)the setting of the record date for a meeting for the purpose of determining Registered Warrantholders entitled to receive notice of and to vote at the meeting;

(b)the deposit of instruments appointing proxies at such place and time as the Warrant Agent, the Corporation or the Warrantholders convening the meeting, as the case may be, may in the notice convening the meeting direct;

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(c)the deposit of instruments appointing proxies at some approved place or places other than the place at which the meeting is to be held and enabling particulars of such instruments appointing proxies to be mailed or telecopied before the meeting to the Corporation or to the Warrant Agent at the place where the same is to be held and for the voting of proxies so deposited as though the instruments themselves were produced at the meeting;

(d)the form of the instrument of proxy; and

(e)generally for the calling of meetings of Warrantholders and the conduct of business thereat.

(2)Any regulations so made shall be binding and effective and the votes given in accordance therewith shall be valid and shall be counted. Save as such regulations may provide, the only persons who shall be recognized at any meeting as a Registered Warrantholder, or be entitled to vote or be present at the meeting in respect thereof (subject to Section 7.9), shall be Registered Warrantholders or proxies of Warrantholders.

7.9Corporation and Warrant Agent May be Represented.

The Corporation and the Warrant Agent, by their respective directors, officers, agents and employees and the Counsel for the Corporation and for the Warrant Agent may attend any meeting of the Registered Warrantholders.

7.10Powers Exercisable by Extraordinary Resolution.

In addition to all other powers conferred upon them by any other provisions of this Indenture or by law, the Registered Warrantholders at a meeting shall, subject to the provisions of Section 7.11, have the power exercisable from time to time by Extraordinary Resolution:

(a)to agree to any modification, abrogation, alteration, compromise or arrangement of the rights of Registered Warrantholders or the Warrant Agent in its capacity as warrant agent hereunder (subject to the Warrant Agent's prior consent, acting reasonably) or on behalf of the Registered Warrantholders against the Corporation whether such rights arise under this Indenture or otherwise;

(b)to amend, alter or repeal any Extraordinary Resolution previously passed or sanctioned by the Warrantholders;

(c)to direct or to authorize the Warrant Agent, subject to Section 9.2(2) hereof, to enforce any of the covenants on the part of the Corporation contained in this Indenture or to enforce any of the rights of the Registered Warrantholders in any manner specified in such Extraordinary Resolution or to refrain from enforcing any such covenant or right;

(d)to waive, and to direct the Warrant Agent to waive, any default on the part of the Corporation in complying with any provisions of this Indenture either unconditionally or upon any conditions specified in such Extraordinary Resolution;

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(e)to restrain any Registered Warrantholder from taking or instituting any suit, action or proceeding against the Corporation for the enforcement of any of the covenants on the part of the Corporation in this Indenture or to enforce any of the rights of the Warrantholders;

(f)to direct any Registered Warrantholder who, as such, has brought any suit, action or proceeding to stay or to discontinue or otherwise to deal with the same upon payment of the costs, charges and expenses reasonably and properly incurred by such Registered Warrantholder in connection therewith;

(g)to assent to any change in or omission from the provisions contained in this Indenture or any ancillary or supplemental instrument which may be agreed to by the Corporation, and to authorize the Warrant Agent to concur in and execute any ancillary or supplemental indenture embodying the change or omission;

(h)with the consent of the Corporation, such consent not to be unreasonably withheld, to remove the Warrant Agent or its successor in office and to appoint a new warrant agent or warrant agents to take the place of the Warrant Agent so removed; and

(i)to assent to any compromise or arrangement with any creditor or creditors or any class or classes of creditors, whether secured or otherwise, and with holders of any shares or other securities of the Corporation.

7.11Meaning of Extraordinary Resolution.

(1)The expression "Extraordinary Resolution" when used in this Indenture means, subject as hereinafter provided in this Section 7.11 and in Section 7.14, a resolution proposed at a meeting of Registered Warrantholders duly convened for that purpose and held in accordance with the provisions of this Article 7 at which there are present in person or by proxy Registered Warrantholders holding at least 20% of the aggregate number of all then outstanding Warrants and passed by the affirmative votes of Warrantholders holding not less than 66 2/3% of the aggregate number of all then outstanding Warrants represented at the meeting and voted on the poll upon such resolution.

(2)If, at the meeting at which an Extraordinary Resolution is to be considered, Registered Warrantholders holding at least 20% of the aggregate number of all then outstanding Warrants are not present in person or by proxy within 30 minutes after the time appointed for the meeting, then the meeting, if convened by Registered Warrantholders or on a Registered Warrantholders' Request, shall be dissolved; but in any other case it shall stand adjourned to such day, being not less than 10 or more than 45 days later, and to such place and time as may be appointed by the chair. Not less than 7 days' prior notice shall be given of the time and place of such adjourned meeting in the manner provided for in Section 10.2. Such notice shall state that at the adjourned meeting the Registered Warrantholders present in person or by proxy shall form a quorum but it shall not be necessary to set forth the purposes for which the meeting was originally called or any other particulars. At the adjourned meeting the Registered Warrantholders present in person or by proxy shall form a quorum and may transact the business for which the meeting was originally convened and a resolution proposed at such adjourned meeting and passed by the requisite vote as provided in Section 7.11(1) shall be an Extraordinary Resolution within the meaning of this Indenture notwithstanding that Registered Warrantholders holding at least 20% of the aggregate number of all the then outstanding Warrants are not present in person or by proxy at such adjourned meeting.

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(3)Subject to Section 7.14, votes on an Extraordinary Resolution shall always be given on a poll and no demand for a poll on an Extraordinary Resolution shall be necessary.

7.12Powers Cumulative.

Any one or more of the powers or any combination of the powers in this Indenture stated to be exercisable by the Warrantholders by Extraordinary Resolution or otherwise may be exercised from time to time and the exercise of any one or more of such powers or any combination of powers from time to time shall not be deemed to exhaust the right of the Registered Warrantholders to exercise such power or powers or combination of powers then or thereafter from time to time.

7.13Minutes.

Minutes of all resolutions and proceedings at every meeting of Registered Warrantholders shall be made and duly entered in the books to be provided from time to time for that purpose by the Warrant Agent at the expense of the Corporation, and any such minutes as aforesaid, if signed by the chair or the secretary of the meeting at which such resolutions were passed or proceedings had shall be prima facie evidence of the matters therein stated and, until the contrary is proved, every such meeting in respect of the proceedings of which minutes shall have been made shall be deemed to have been duly convened and held, and all resolutions passed thereat or proceedings taken shall be deemed to have been duly passed and taken.

7.14Instruments in Writing.

All actions which may be taken and all powers that may be exercised by the Registered Warrantholders at a meeting held as provided in this Article 7 may also be taken and exercised by Registered Warrantholders holding at least 66 2/3% of the aggregate number of all then outstanding Warrants by an instrument in writing signed in one or more counterparts by such Registered Warrantholders in person or by attorney duly appointed in writing, and the expression "Extraordinary Resolution" when used in this Indenture shall include an instrument so signed.

7.15Binding Effect of Resolutions.

Every resolution and every Extraordinary Resolution passed in accordance with the provisions of this Article 7 at a meeting of Registered Warrantholders shall be binding upon all the Warrantholders, whether present at or absent from such meeting, and every instrument in writing signed by Registered Warrantholders in accordance with Section 7.14 shall be binding upon all the Registered Warrantholders, whether signatories thereto or not, and each and every Registered Warrantholder and the Warrant Agent (subject to the provisions for its indemnification, remuneration and protection herein contained) shall be bound to give effect accordingly to every such resolution and instrument in writing.

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7.16Holdings by Corporation Disregarded.

In determining whether Registered Warrantholders holding Warrants evidencing the required number of Warrants are present at a meeting of Warrantholders for the purpose of determining a quorum or have concurred in any consent, waiver, Extraordinary Resolution, Registered Warrantholders' Request or other action under this Indenture, Warrants owned legally or beneficially by the Corporation shall be disregarded in accordance with the provisions of Section 10.7.

ARTICLE 8
SUPPLEMENTAL INDENTURES

8.1Provision for Supplemental Indentures for Certain Purposes.

From time to time and without the consent of the holders of Warrants, the Corporation (when authorized by action of the Directors) and the Warrant Agent may, subject to Exchange approval and to the provisions hereof and they shall, when so directed in accordance with the provisions hereof, execute and deliver by their proper officers, indentures or instruments supplemental hereto, which thereafter shall form part hereof, for any one or more or all of the following purposes:

(a)providing for the issuance of additional Warrants hereunder and any consequential amendments hereto as may be required by the Warrant Agent relying on the advice of Counsel;

(b)setting forth any adjustments resulting from the application of the provisions of Article 4;

(c)adding to the provisions hereof such additional covenants and enforcement provisions as, in the opinion of Counsel, are necessary or advisable in the premises, provided that the same are not in the opinion of the Warrant Agent, relying on the advice of Counsel, prejudicial to the interests of the Warrantholders;

(d)giving effect to any Extraordinary Resolution passed as provided in Section 7.11;

(e)making such provisions not inconsistent with this Indenture as may be necessary or desirable with respect to matters or questions arising hereunder or for the purpose of obtaining a listing or quotation of the Warrants on any stock exchange, provided that such provisions are not, in the opinion of the Warrant Agent, relying on the advice of Counsel, prejudicial to the interests of the Warrantholders;

(f)adding to or altering the provisions hereof in respect of the transfer of Warrants, making provision for the exchange of Warrants, and making any modification in the form of the Warrant Certificates which does not affect the substance thereof;

(g)modifying any of the provisions of this Indenture, including relieving the Corporation from any of the obligations, conditions or restrictions herein contained, provided that such modification or relief shall be or become operative or effective only if, in the opinion of the Warrant Agent, relying on the advice of Counsel, such modification or relief in no way prejudices any of the rights of the Warrantholders or of the Warrant Agent, and provided further that the Warrant Agent may in its sole discretion decline to enter into any such supplemental indenture which in its opinion may not afford adequate protection to the Warrant Agent when the same shall become operative; and

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(h)for any other purpose not inconsistent with the terms of this Indenture, including the correction or rectification of any ambiguities, defective or inconsistent provisions, errors, mistakes or omissions herein, provided that in the opinion of the Warrant Agent, relying on the advice of Counsel, the rights of the Warrant Agent and of the Warrantholders are in no way prejudiced thereby.

8.2Successor Entities.

In the case of the consolidation, amalgamation, arrangement, merger or transfer of the undertaking or assets of the Corporation as an entirety or substantially as an entirety to or with another entity ("successor entity"), the successor entity resulting from such consolidation, amalgamation, arrangement, merger or transfer (if not the Corporation) shall expressly assume, by supplemental indenture satisfactory in form to the Warrant Agent and executed and delivered to the Warrant Agent, the due and punctual performance and observance of each and every covenant and condition of this Indenture to be performed and observed by the Corporation.

ARTICLE 9
CONCERNING THE WARRANT AGENT

9.1Indenture Legislation.

(1)If and to the extent that any provision of this Indenture limits, qualifies or conflicts with a mandatory requirement of Applicable Law, such mandatory requirement shall prevail.

(2)The Corporation and the Warrant Agent agree that each will, at all times in relation to this Indenture and any action to be taken hereunder, observe and comply with and be entitled to the benefits of Applicable Law.

9.2Rights and Duties of Warrant Agent.

(1)In the exercise of the rights and duties prescribed or conferred by the terms of this Indenture, the Warrant Agent shall act honestly and in good faith and exercise that degree of care, diligence and skill that a reasonably prudent warrant agent would exercise in comparable circumstances. The Warrant Agent shall not be liable for any action it takes or omits to take in good faith that it believes to be authorized or within the rights or powers conferred upon it by this Indenture. No provision of this Indenture shall be construed to relieve the Warrant Agent from liability for its own gross negligence, wilful misconduct, bad faith or fraud under this Indenture.

(2)The obligation of the Warrant Agent to commence or continue any act, action or proceeding for the purpose of enforcing any rights of the Warrant Agent or the Warrantholders hereunder shall be conditional upon the Warrantholders furnishing, when required by notice by the Warrant Agent, notice specifying the act, action or proceeding which the Warrant Agent is required to take, sufficient funds to commence or to continue such act, action or proceeding and an indemnity reasonably satisfactory to the Warrant Agent to protect and to hold harmless the Warrant Agent and its officers, directors, employees, affiliates and agents, against the costs, charges and expenses and liabilities to be incurred thereby and any loss and damage it may suffer by reason thereof. None of the provisions contained in this Indenture shall require the Warrant Agent to expend or to risk its own funds or otherwise to incur liability in the performance of any of its duties or in the exercise of any of its rights or powers unless indemnified and funded as aforesaid.

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(3)The Warrant Agent may, before commencing or at any time during the continuance of any such act, action or proceeding, require the Warrantholders, at whose instance it is acting to deposit with the Warrant Agent the Warrant Certificates held by them, for which Warrant Certificates the Warrant Agent shall issue receipts.

9.3Evidence, Experts and Advisers.

(1)If, in the administration of the duties of this Indenture, the Warrant Agent deems it necessary or desirable that any matter be proved or established by the Corporation, prior to taking or suffering any action hereunder, the Warrant Agent may accept, act, and rely upon, and shall be protected in accepting, acting, and relying upon, a certificate of the Corporation as conclusive evidence of the truth of any fact relating to the Corporation or its assets therein stated and proof of the regularity of any proceedings or actions associated therewith, but the Warrant Agent may in its discretion require further evidence or information before acting or relying on any such certificate.

(2)In addition to the reports, certificates, opinions and other evidence required by this Indenture, the Corporation shall furnish to the Warrant Agent such additional evidence of compliance with any provision hereof, and in such form, as may be prescribed by Applicable Law or as the Warrant Agent may reasonably require by written notice to the Corporation.

(3)In the exercise of its rights and duties hereunder, the Warrant Agent may, if it is acting in good faith, act and rely, and shall be protected in so acting and relying, as to the truth of the statements and the accuracy of the opinions expressed in statutory declarations, opinions, reports, written requests, consents, or orders of the Corporation, certificates of the Corporation or other evidence furnished to the Warrant Agent pursuant to a provision hereof or of applicable law or pursuant to a request of the Warrant Agent, provided that such evidence complies with applicable law and that the Warrant Agent examines the same and determines that such evidence complies with the applicable requirements of this Indenture. The Warrant Agent may nevertheless, in its discretion, require further proof in cases where it deems further proof desirable.

(4)Whenever it is provided in this Indenture or under Applicable Law that the Corporation shall deposit with the Warrant Agent resolutions, certificates, reports, opinions, requests, orders or other documents, it is intended that the truth, accuracy and good faith on the effective date thereof and the facts and opinions stated in all such documents so deposited shall, in each and every such case, be conditions precedent to the right of the Corporation to have the Warrant Agent take the action to be based thereon.

(5)The Warrant Agent may, at the Corporation's expense, employ or retain such Counsel, accountants, appraisers or other experts or advisers as it may reasonably require for the purpose of determining its rights and discharging its duties hereunder and may pay reasonable remuneration for all services so performed by any of them, without taxation of costs of any Counsel, and shall not be responsible for any misconduct or negligence on the part of any such experts or advisers who have been appointed with due care by the Warrant Agent. The Corporation shall pay or reimburse the Warrant Agent for any reasonable fees, expenses and disbursements of such Counsel, accountants, appraisers or other experts or advisers.

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(6)The Warrant Agent may act and rely and shall be protected in acting and relying in good faith on the opinion or advice of or information obtained from any Counsel, accountant, appraiser or other expert or adviser, whether retained or employed by the Corporation or by the Warrant Agent, in relation to any matter arising in the administration of the agency hereof.

(7)Proof of the execution of an instrument in writing, including a Warrantholders' Request, by any Warrantholder may be made by the certificate of a notary, solicitor or commissioner for oaths, or other officer with similar powers, that the person signing such instrument acknowledged to them the execution thereof, or by an affidavit of a witness to such execution or in any other manner which the Warrant Agent may consider adequate and in respect of a corporate Warrantholder, shall include a certificate of incumbency of such Warrantholder together with a certified resolution authorizing the person who signs such instrument to sign such instrument.

(8)Whenever Applicable Law requires that evidence referred to in this Section 9.3 be in the form of a statutory declaration, the Warrant Agent may accept such statutory declaration in lieu of a certificate of the Corporation required by any provision hereof. Any such statutory declaration may be made by any one or more duly authorized representative of the Corporation or by any other officer or director of the Corporation to whom such authority is delegated by the directors from time to time.

9.4Documents, Monies, etc. Held by Warrant Agent.

(1)Until released in accordance with this Indenture, any funds received hereunder shall be kept segregated in the records of the Warrant Agent and the Warrant Agent shall place the funds in any accounts of the Warrant Agent held at one or more of the Canadian Chartered Banks listed in Schedule 1 of the Bank Act (Canada) ("Approved Bank"). All amounts held by the Warrant Agent pursuant to this Indenture shall be held by the Warrant Agent for the Corporation and the delivery of the funds to the Warrant Agent shall not give rise to a debtor-creditor or other similar relationship. The amounts  held by the Warrant Agent pursuant to this Indenture are at the sole risk of the Corporation and, without limiting the generality of the foregoing, the Warrant Agent shall have no responsibility or liability for any diminution of the funds which may result from any deposit made with an Approved Bank pursuant to this section, including any losses resulting from a default by the Approved Bank or other credit losses (whether or not resulting from such a default).  The parties hereto acknowledge and agree that the Warrant Agent will have acted prudently in depositing the funds at any Approved Bank, and that the Warrant Agent is not required to make any further inquiries in respect of any such bank. The Warrant Agent may hold cash balances constituting part or all of such monies and may, but need not, invest the same in the deposit department of an Approved Bank; but none of the Warrant Agent, its Affiliates or any Approved Bank shall be liable to account for any profit to any parties to this Indenture or to any other person or entity.

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9.5Actions by Warrant Agent to Protect Interest.

The Warrant Agent shall have power to institute and to maintain such actions and proceedings as it may consider necessary or expedient to preserve, protect or enforce its interests and the interests of the Registered Warrantholders.

9.6Warrant Agent Not Required to Give Security.

The Warrant Agent shall not be required to give any bond or security in respect of the execution or administration of the agency, duties and powers of this Indenture or otherwise in respect of the premises.

9.7Protection of Warrant Agent.

By way of supplement to the provisions of any law for the time being relating to the Warrant Agent, it is expressly declared and agreed as follows:

(a)the Warrant Agent shall not be liable for or by reason of any statements of fact or recitals in this Indenture or in the Warrant Certificates (except the representation contained in Section 9.9) or be required to verify the same, but all such statements or recitals are and shall be deemed to be made by the Corporation;

(b)nothing herein contained shall impose any obligation on the Warrant Agent to see to or to require evidence of the registration or filing (or renewal thereof) of this Indenture or any instrument ancillary or supplemental hereto;

(c)the Warrant Agent shall not be bound to give notice to any person or persons of the execution hereof;

(d)the Warrant Agent is in no way responsible for the use by the Corporation of the proceeds of the issue hereunder, nor is the Warrant Agent bound to make any inquiry or investigation as to the performance by the Corporation of the Corporation's covenants hereunder;

(e)the Warrant Agent shall not incur any liability or responsibility whatever or be in any way responsible for the consequence of any breach on the part of the Corporation of any of its covenants herein contained or of any acts of any directors, officers, employees, agents or servants of the Corporation;

(f)the Warrant Agent shall retain the right not to act and shall not be liable for refusing to act if, the Warrant Agent, due to a lack of information or instructions, or otherwise in its sole judgment, acting reasonably, determines that such act is conflicting with or contrary to the terms of this Indenture or the law or regulation of any jurisdiction or any order or directive of any court, governmental agency or other regulatory body;

(g)in the absence of gross negligence, wilful misconduct, bad faith or fraud on its part, the Warrant Agent will not be liable for any action taken, suffered, or omitted by it or for any mistake, in fact or law, or error of judgment made by it in performance of its duties under this Indenture;

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(h)without limiting any protection or indemnity of the Warrant Agent under any other provision hereof, or otherwise at law, the Corporation hereby indemnifies and agrees to hold harmless the Warrant Agent, its affiliates, their current and former officers, directors, employees, agents, successors and assigns (collectively, the "Indemnified Parties") from and against any and all liabilities whatsoever, losses, damages, penalties, claims, demands, actions, suits, proceedings, costs, taxes, charges, assessments, judgments, expenses and disbursements, including legal fees and disbursements of whatever kind and nature which may at any time be imposed on or incurred by or asserted against the Indemnified Parties, or any of them, whether at law or in equity, groundless or otherwise, in any way caused by or arising, directly or indirectly, in respect of, from or out of any act, omission or error of the Warrant Agent in the execution of its duties hereunder. The Corporation agrees that its liability hereunder shall be absolute and unconditional regardless of the correctness of any representations of any third parties and regardless of any liability of third parties to the Indemnified Parties, and shall accrue and become enforceable without prior demand or any other precedent action or proceeding; provided that the Corporation shall not be required to indemnify the Indemnified Parties in the event of the gross negligence, wilful misconduct or fraud of the Warrant Agent, and this provision shall survive the resignation or removal of the Warrant Agent or the termination or discharge of this Indenture;

(i)notwithstanding the foregoing or any other provision of this Indenture, any liability of the Warrant Agent, other than gross negligence, wilful misconduct and fraud, shall be limited, in the aggregate, to the amount of annual retainer fees paid by the Corporation to the Warrant Agent under this Indenture in the twelve (12) months immediately prior to the Warrant Agent receiving the first notice of the claim. Notwithstanding any other provision of this Indenture, and whether such losses or damages are foreseeable or unforeseeable, the Warrant Agent shall not be liable under any circumstances whatsoever for any (a) breach by any other party of securities law or other rule of any securities regulatory authority, (b) lost profits or (c) special, indirect, incidental, consequential, exemplary, aggravated or punitive losses or damages;

(j)the Warrant Agent shall not be under any obligation to prosecute or to defend any action or suit in respect of the relationship which, in the opinion of its Counsel, may involve it in expense or liability, unless the Corporation shall, so often as required, furnish the Warrant Agent with satisfactory indemnity and funding against such expense or liability, and this provision shall survive the resignation or removal of the Warrant Agent or the termination or discharge of this Indenture;

(k)the forwarding of a cheque or the sending of funds by wire transfer by the Warrant Agent will satisfy and discharge the liability of any amounts due to the extent of the sum represented thereby unless such cheque is not honoured on presentation, provided that in the event of the non-receipt of such cheque by the payee, or the loss or destruction thereof, the Warrant Agent, upon being furnished with reasonable evidence of such non-receipt, loss or destruction and indemnity reasonably satisfactory to it, will issue to such payee a replacement cheque for the amount of such cheque; and

(l)in the event that any of the funds provided to the Warrant Agent hereunder are received by it in the form of an uncertified cheque or bank draft, the Warrant Agent shall be entitled to delay the time for release of such funds until such uncertified cheque has cleared at the financial institution upon which the same is drawn.

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9.8Replacement of Warrant Agent; Successor by Merger.

(1)The Warrant Agent may resign its agency and be discharged from all further duties and liabilities hereunder, subject to this Section 9.8, by giving to the Corporation not less than 60 days' prior notice in writing or such shorter prior notice as the Corporation may accept as sufficient. The Registered Warrantholders by Extraordinary Resolution shall have power at any time to remove the existing Warrant Agent and to appoint a new warrant agent. In the event of the Warrant Agent resigning or being removed as aforesaid or being dissolved, becoming bankrupt, going into liquidation or otherwise becoming incapable of acting hereunder, the Corporation shall forthwith appoint a new warrant agent unless a new warrant agent has already been appointed by the Registered Warrantholders; failing such appointment by the Corporation, the retiring Warrant Agent or any Registered Warrantholder may apply to a judge of the Province of British Columbia on such notice as such judge may direct, for the appointment of a new warrant agent; but any new warrant agent so appointed by the Corporation or by the Court shall be subject to removal as aforesaid by the Registered Warrantholders. Any new warrant agent appointed under any provision of this Section 9.8 shall be an entity authorized to carry on the business of a trust company in the Province of British Columbia and, if required by the Applicable Law for any other provinces, in such other provinces. On any such appointment the new warrant agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named herein as Warrant Agent hereunder.

(2)Upon the appointment of a successor warrant agent, the Corporation shall promptly notify the Registered Warrantholders thereof in the manner provided for in Section 10.2.

(3)Any Warrant Certificates Authenticated but not delivered by a predecessor Warrant Agent may be Authenticated by the successor Warrant Agent in the name of the predecessor or successor Warrant Agent.

(4)Any corporation into which the Warrant Agent may be merged or consolidated or amalgamated or to which all or substantially all of its corporate trust business is sold or otherwise transferred, or any corporation resulting therefrom to which the Warrant Agent shall be a party, or any corporation succeeding to substantially all of the corporate trust business of the Warrant Agent shall be the successor to the Warrant Agent hereunder without any further act on its part or any of the parties hereto, provided that such corporation would be eligible for appointment as successor Warrant Agent under Section 9.8(1).

9.9Conflict of Interest.

(1)The Warrant Agent represents to the Corporation, to the best of its knowledge, that at the time of execution and delivery hereof no material conflict of interest exists between its role as a warrant agent hereunder and its role in any other capacity and agrees that in the event of a material conflict of interest arising hereafter it will, within 60 days after ascertaining that it has such material conflict of interest, either eliminate the same or assign its agency hereunder to a successor Warrant Agent approved by the Corporation and meeting the requirements set forth in Section 9.8(1). Notwithstanding the foregoing provisions of this Section 9.9(1), if any such material conflict of interest exists or hereafter shall exist, the validity and enforceability of this Indenture and the Warrant Certificate shall not be affected in any manner whatsoever by reason thereof.

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(2)Subject to Section 9.9(1), the Warrant Agent, in its personal or any other capacity, may buy, lend upon and deal in securities of the Corporation and generally may contract and enter into financial transactions with the Corporation without being liable to account for any profit made thereby.

9.10Acceptance of Agency

The Warrant Agent hereby accepts the agency in this Indenture declared and provided for and agrees to perform the same upon the terms and conditions herein set forth. No trust is intended to be, or is or will be, created hereby and the Warrant Agent shall owe no duties hereunder as a trustee.

9.11Warrant Agent Not to be Appointed Receiver.

The Warrant Agent and any person related to the Warrant Agent shall not be appointed a receiver, a receiver and manager or liquidator of all or any part of the assets or undertaking of the Corporation.

9.12Warrant Agent Not Required to Give Notice of Default.

The Warrant Agent shall not be bound to give any notice or do or take any act, action or proceeding by virtue of the powers conferred on it hereby unless and until it shall have been required so to do under the terms hereof; nor shall the Warrant Agent be required to take notice of any default hereunder, unless and until notified in writing of such default, which notice shall distinctly specify the default desired to be brought to the attention of the Warrant Agent and in the absence of any such notice the Warrant Agent may for all purposes of this Indenture conclusively assume that no default has been made in the observance or performance of any of the representations, warranties, covenants, agreements or conditions contained herein. Any such notice shall in no way limit any discretion herein given to the Warrant Agent to determine whether or not the Warrant Agent shall take action with respect to any default.

9.13Anti-Money Laundering.

(1)Each party to this Indenture other than the Warrant Agent hereby represents to the Warrant Agent that any account to be opened by, or interest to be held by the Warrant Agent in connection with this Indenture, for or to the credit of such party, either (i) is not intended to be used by or on behalf of any third party; or (ii) is intended to be used by or on behalf of a third party, in which case such party hereto agrees to complete and execute forthwith a declaration in the Warrant Agent's prescribed form as to the particulars of such third party.

(2)The Warrant Agent shall retain the right not to act and shall not be liable for refusing to act if, due to a lack of information or for any other reason whatsoever, the Warrant Agent, in its sole judgment, determines that such act might cause it to be in non-compliance with any sanctions legislation or regulation or applicable anti-money laundering or anti-terrorist legislation, regulation or guideline. Further, should the Warrant Agent, in its sole judgment, determine at any time that its acting under this Indenture has resulted in its being in non-compliance with any sanctions legislation or regulation or applicable anti-money laundering or anti-terrorist legislation, regulation or guideline, then it shall have the right to resign on ten (10) days written notice to the other parties to this Indenture, provided (i) that the Warrant Agent's written notice shall describe the circumstances of such non-compliance to the extent permitted by such applicable sanctions legislation or regulation or applicable anti-money laundering or anti-terrorist legislation, regulation or guideline; (ii) that if such circumstances are rectified to the Warrant Agent's satisfaction within such ten (10) day period, then such resignation shall not be effective.

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9.14Compliance with Privacy Code.

The Corporation acknowledges that the Warrant Agent may, in the course of providing services hereunder, collect or receive financial and other personal information about such parties and/or their representatives, as individuals, or about other individuals related to the subject matter hereof, and use such information for the following purposes:

(a)to provide the services required under this Indenture and other services that may be requested from time to time;

(b)to help the Warrant Agent manage its servicing relationships with such individuals;

(c)to meet the Warrant Agent's legal and regulatory requirements; and

(d)if Social Insurance Numbers are collected by the Warrant Agent, to perform tax reporting and to assist in verification of an individual's identity for security purposes.

The Corporation acknowledges and agrees that the Warrant Agent may receive, collect, use and disclose personal information provided to it or acquired by it in the course of its acting as agent hereunder for the purposes described above and, generally, in the manner and on the terms described in its privacy code, which the Warrant Agent shall make available on its website or upon request, including revisions thereto. The Warrant Agent may transfer personal information to other companies in or outside of Canada that provide data processing and storage or other support in order to facilitate the services it provides.

Further, the Corporation agrees that it shall not provide or cause to be provided to the Warrant Agent any personal information relating to an individual who is not a party to this Indenture unless the Corporation has assured itself that such individual understands and has consented to the aforementioned uses and disclosures.

9.15Securities Exchange Commission Certification.

The Corporation represents and warrants that as of the date of execution of this Indenture it does have a class of securities registered pursuant to Section 12 of the U.S. Exchange Act and does have a reporting obligation pursuant to Section 15(d) of the U.S. Exchange Act.

ARTICLE 10
GENERAL

10.1Notice to the Corporation and the Warrant Agent.

(1)Unless herein otherwise expressly provided, any notice to be given hereunder to the Corporation or the Warrant Agent shall be deemed to be validly given if delivered, sent by registered letter, postage prepaid, email:

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(a)If to the Corporation:

KWESST MICRO SYSTEMS INC.

155 Terence Matthews Crescent
Kanata, Ontario
K2M 2A8

Attention: Steve Archambault, Chief Financial Officer
Email:archambault@kwesst.com

(b)If to the Warrant Agent:

TSX TRUST COMPANY
301-100 Adelaide Street West
Toronto, Ontario M5H 4H1

Attention:Vice-President, Trust Services

Email: tmxestaff-corporatetrust@tmx.com

and any such notice delivered in accordance with the foregoing shall be deemed to have been received and given on the date of delivery or, if mailed, on the fifth Business Day following the date of mailing such notice or, if emailed, on the next Business Day following the date of transmission.

(2)The Corporation or the Warrant Agent, as the case may be, may from time to time notify the other in the manner provided in Section 10.1(1) of a change of address which, from the Effective Date of such notice and until changed by like notice, shall be the address of the Corporation or the Warrant Agent, as the case may be, for all purposes of this Indenture.

(3)If, by reason of a strike, lockout or other work stoppage, actual or threatened, involving postal employees, any notice to be given to the Warrant Agent or to the Corporation hereunder could reasonably be considered unlikely to reach its destination, such notice shall be valid and effective only if it is delivered to the named officer of the party to which it is addressed, as provided in Section 10.1(1), or given by email or other means of prepaid, transmitted, electronic and recorded communication.

10.2Notice to Registered Warrantholders.

(1)Unless otherwise provided herein, notice to the Registered Warrantholders under the provisions of this Indenture shall be valid and effective if delivered or sent by ordinary post addressed to such holders at their addresses appearing on the register hereinbefore mentioned and shall be deemed to have been effectively received and given on the date of delivery or, if mailed, on the third Business Day following the date of mailing such notice. In the event that Warrants are held in the name of the Depository, a copy of such notice shall also be sent by electronic communication to the Depository and shall be deemed received and given on the day it is so sent.

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(2)If, by reason of a strike, lockout or other work stoppage, actual or threatened, involving postal employees, any notice to be given to the Registered Warrantholders hereunder could reasonably be considered unlikely to reach its destination, such notice shall be valid and effective only if it is delivered to such Registered Warrantholders to the address for such Registered Warrantholders contained in the register maintained by the Warrant Agent or such notice may be given, at the Corporation's expense, by means of publication in the Globe and Mail, National Edition, or any other English language daily newspaper or newspapers of general circulation in Canada, in each two successive weeks, and any such notice published shall be deemed to have been received and given on the latest date the publication takes place.

(3)Accidental error or omission in giving notice or accidental failure to mail notice to any Warrantholder will not invalidate any action or proceeding founded thereon.

10.3Ownership of Warrants.

The Corporation and the Warrant Agent may deem and treat the Registered Warrantholders as the absolute owner thereof for all purposes, and the Corporation and the Warrant Agent shall not be affected by any notice or knowledge to the contrary except where the Corporation or the Warrant Agent is required to take notice by statute or by order of a court of competent jurisdiction. The receipt of any such Registered Warrantholder of the Common Shares which may be acquired pursuant thereto shall be a good discharge to the Corporation and the Warrant Agent for the same and neither the Corporation nor the Warrant Agent shall be bound to inquire into the title of any such holder except where the Corporation or the Warrant Agent is required to take notice by statute or by order of a court of competent jurisdiction.

10.4Counterparts and Electronic Copies.

This Indenture may be executed (including electronically) in several counterparts and may be delivered by facsimile or email, each of which when so executed and delivered shall be deemed to be an original, and such counterparts together shall constitute one and the same instrument and notwithstanding their date of execution they shall be deemed to be dated as of the date hereof. Each of the parties hereto shall be entitled to rely on delivery of a facsimile or PDF copy of this Indenture and acceptance by each such party of any such facsimile or PDF copy shall be legally effective to create a valid and binding agreement between the parties hereto in accordance with the terms hereof.

10.5Satisfaction and Discharge of Indenture.

Upon the earlier of:

(a)the date by which there shall have been delivered to the Warrant Agent for exercise or cancellation all Warrants theretofore Authenticated hereunder, in the case of Certificated Warrants (or such other instructions, in a form satisfactory to the Warrant Agent), in the case of Uncertificated Warrants, or by way of standard processing through the book entry system in the case of a CDS Global Warrant; and

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(b)the Expiry Time,

this Indenture shall cease to be of further effect and the Warrant Agent, on demand of and at the cost and expense of the Corporation and upon delivery to the Warrant Agent of a certificate of the Corporation stating that all conditions precedent to the satisfaction and discharge of this Indenture have been complied with, shall execute proper instruments acknowledging satisfaction of and discharging this Indenture. Notwithstanding the foregoing, the indemnities provided to the Warrant Agent by the Corporation hereunder shall remain in full force and effect and survive the termination of this Indenture.

10.6Provisions of Indenture and Warrants for the Sole Benefit of Parties and Registered Warrantholders.

Nothing in this Indenture or in the Warrants, expressed or implied, shall give or be construed to give to any person other than the parties hereto and the Registered Warrantholders, as the case may be, any legal or equitable right, remedy or claim under this Indenture, or under any covenant or provision herein or therein contained, all such covenants and provisions being for the sole benefit of the parties hereto and the Registered Warrantholders.

10.7Warrants Owned by the Corporation - Certificate to be Provided.

For the purpose of disregarding any Warrants owned legally or beneficially by the Corporation in Section 7.16, the Corporation shall provide to the Warrant Agent, when requested by the Warrant Agent from time to time, a certificate of the Corporation setting forth as at the date of such certificate:

(a)the names (other than the name of the Corporation) of the Registered Warrantholders which, to the knowledge of the Corporation, are owned by or held for the account of the Corporation; and

(b)the number of Warrants owned legally or beneficially by the Corporation,

and the Warrant Agent, in making the computations in Section 7.16, shall be entitled to rely on such certificate without any additional evidence.

10.8Severability

If, in any jurisdiction, any provision of this Indenture or its application to any party or circumstance is restricted, prohibited or unenforceable, such provision will, as to such jurisdiction, be ineffective only to the extent of such restriction, prohibition or unenforceability without invalidating the remaining provisions of this Indenture and without affecting the validity or enforceability of such provision in any other jurisdiction or without affecting its application to other parties or circumstances.

10.9Force Majeure

No party shall be liable to the other, or held in breach of this Indenture, if prevented, hindered, or delayed in the performance or observance of any provision contained herein by reason of act of God, riots, terrorism, acts of war, epidemics, pandemics, governmental action or judicial order, earthquakes, or any other similar causes (including, but not limited to, mechanical, electronic or communication interruptions, disruptions or failures). Performance times under this Indenture shall be extended for a period of time equivalent to the time lost because of any delay that is excusable under this Section 10.9.

Page 50 of 52

10.10Assignment, Successors and Assigns

Neither of the parties hereto may assign its rights or interest under this Indenture, except as provided in Section 9.8 in the case of the Warrant Agent, or as provided in Section 8.2 in the case of the Corporation. Subject thereto, this Indenture shall enure to the benefit of and be binding upon the parties hereto and their respective successors and permitted assigns.

10.11Rights of Rescission and Withdrawal for Holders

Should a holder of Warrants exercise any legal, statutory, contractual or other right of withdrawal or rescission that may be available to it, and the holder's funds which were paid on exercise have already been released to the Corporation by the Warrant Agent, the Warrant Agent shall not be responsible for ensuring the exercise is cancelled and a refund is paid back to the holder. In such cases, the holder shall seek a refund directly from the Corporation and subsequently, the Corporation, upon surrender to the Corporation or the Warrant Agent of any underlying common shares or other securities that may have been issued, or such other procedure as agreed to by the parties hereto, shall instruct the Warrant Agent in writing, to cancel the exercise transaction and any such underlying common shares or other securities on the register, which may have already been issued upon the Warrant exercise.  In the event that any payment is received from the Corporation by virtue of the holder being a shareholder for such Warrants that were subsequently rescinded, such payment must be returned to the Corporation by such holder.  The Warrant Agent shall not be under any duty or obligation to take any steps to ensure or enforce the return of the funds pursuant to this Section 10.11, nor shall the Warrant Agent be in any other way responsible in the event that any payment is not delivered or received pursuant to this Section 10.11.  Notwithstanding the foregoing, in the event that the Corporation provides the refund to the Warrant Agent for distribution to the holder, the Warrant Agent shall return such funds to the holder as soon as reasonably practicable, and in so doing, the Warrant Agent shall incur no liability with respect to the delivery or non-delivery of any such funds.

[remainder of page left blank intentionally - signature page(s) follow]

Page 51 of 52

IN WITNESS WHEREOF the parties hereto have executed this Indenture under the hands of their proper officers in that behalf as of the date first written above.

KWESST MICRO SYSTEMS INC.
By:
	Name: Title:
TSX TRUST COMPANY
By:
	Authorized Signatory
By:
	Authorized Signatory

Page 52 of 52

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SCHEDULE "A"
FORM OF WARRANT

THE WARRANTS EVIDENCED HEREBY ARE EXERCISABLE AT OR BEFORE 5:00 P.M. (EASTERN TIME) ON [●], 2027, AFTER WHICH TIME THE WARRANTS EVIDENCED HEREBY SHALL BE DEEMED TO BE VOID AND OF NO FURTHER FORCE OR EFFECT.

UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF CDS CLEARING AND DEPOSITORY SERVICES INC. ("CDS") TO KWESST MICRO SYSTEMS INC. (THE "ISSUER") OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IN RESPECT THEREOF IS REGISTERED IN THE NAME OF CDS & CO., OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF CDS (AND ANY PAYMENT IS MADE TO CDS & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF CDS), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED HOLDER HEREOF, CDS & CO., HAS A PROPERTY INTEREST IN THE SECURITIES REPRESENTED BY THIS CERTIFICATE HEREIN AND IT IS A VIOLATION OF ITS RIGHTS FOR ANOTHER PERSON TO HOLD, TRANSFER OR DEAL WITH THIS CERTIFICATE.

THIS WARRANT MAY NOT BE EXERCISED BY OR ON BEHALF OF, OR FOR THE ACCOUNT OR BENEFIT OF, A PERSON IN THE UNITED STATES OR A U.S. PERSON UNLESS THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS OR AN EXEMPTION FROM SUCH REGISTRATION REQUIREMENTS IS AVAILABLE.

DELIVERY OF THIS CERTIFICATE MAY NOT CONSTITUTE "GOOD DELIVERY" IN SETTLEMENT OF TRANSACTIONS ON STOCK EXCHANGES IN CANADA.

WARRANT

To acquire Common Shares of

KWESST MICRO SYSTEMS INC.

(a company incorporated pursuant to the laws of British Columbia)

Warrant	_____________________
Certificate No. ⬤	Warrants, each entitling the holder to acquire one (1) Common Share (subject to adjustment as provided for in the Warrant Indenture (as defined below))
	CUSIP 501506125
	ISIN CA5015061255

THIS IS TO CERTIFY THAT, for value received,

- A-2 -

(the "Warrantholder") is the registered holder of the number of common share purchase warrants (the "Warrants") of KWESST MICRO SYSTEMS INC. (the "Corporation") specified above, and is entitled, on exercise of these Warrants upon and subject to the terms and conditions set forth herein and in the Warrant Indenture to purchase at any time before 5:00 p.m. (Eastern time) (the "Expiry Time") on [●], 2027 (the "Expiry Date") one fully paid and non-assessable common share without par value in the capital of the Corporation as constituted on the date hereof (a "Common Share") for each Warrant subject to adjustment in accordance with the terms of the Warrant Indenture.

The right to purchase Common Shares may only be exercised by the Warrantholder within the time set forth above by:

(a)duly completing and executing the exercise form (the "Exercise Form") attached hereto; and

(b)surrendering this warrant certificate (the "Warrant Certificate"), with the Exercise Form to the Warrant Agent at the principal office of the Warrant Agent, in the city of Vancouver, together with a certified cheque, bank draft or money order in the lawful money of Canada payable to or to the order of the Corporation in an amount equal to the purchase price of the Common Shares so subscribed for.

The surrender of this Warrant Certificate, the duly completed Exercise Form and payment as provided above will be deemed to have been effected only on personal delivery thereof to, or if sent by mail or other means of transmission on actual receipt thereof by, the Warrant Agent at its principal offices as set out above.

Subject to adjustment thereof in the events and in the manner set forth in the Warrant Indenture hereinafter referred to, the exercise price payable for each Common Share upon the exercise of Warrants shall be US$[●] per Common Share (the "Exercise Price").

These Warrants and the Common Shares issuable upon exercise hereof have not been and will not be registered under the United States Securities Act of 1933, as amended (the "U.S. Securities Act"), or the securities laws of any state of the United States. These Warrants may not be exercised by or on behalf of, or for the account or benefit of, a U.S. person or a person in the United States unless the Warrants and the Common Shares have been registered under the U.S. Securities Act and applicable state securities laws or an exemption from such registration requirements is available. Certificates representing Common Shares issued in the United States or to U.S. persons will bear a legend restricting the transfer and exercise of such securities under applicable United States federal and state securities laws. "United States" and "U.S. person" are as defined in Regulation S under the U.S. Securities Act.

Certificates for the Common Shares subscribed for will be mailed to the persons specified in the Exercise Form at their respective addresses specified therein or, if so specified in the Exercise Form, delivered to such persons at the office where this Warrant Certificate is surrendered. If fewer Common Shares are purchased than the number that can be purchased pursuant to this Warrant Certificate, the holder hereof will be entitled to receive without charge a new Warrant Certificate in respect of the balance of the Warrants not so exercised. No fractional Common Shares will be issued upon exercise of any Warrant, and no consideration shall be paid for any such fractional Warrant which is not issued.

This Warrant Certificate evidences Warrants of the Corporation issued or issuable under the provisions of a warrant indenture (which indenture together with all other instruments supplemental or ancillary thereto is herein referred to as the "Warrant Indenture") dated as of [●] between the Corporation and TSX Trust Company, as Warrant Agent, to which Warrant Indenture reference is hereby made for particulars of the rights of the holders of Warrants, the Corporation and the Warrant Agent in respect thereof and the terms and conditions on which the Warrants are issued and held, all to the same effect as if the provisions of the Warrant Indenture were herein set forth, to all of which the holder, by acceptance hereof, assents. The Corporation will furnish to the holder, on request and without charge, a copy of the Warrant Indenture. Capitalized terms used but not otherwise defined herein shall have the same meaning set forth in the Warrant Indenture.

- A-3 -

On presentation at the principal offices of the Warrant Agent as set out above, subject to the provisions of the Warrant Indenture and on compliance with the reasonable requirements of the Warrant Agent, one or more Warrant Certificates may be exchanged for one or more Warrant Certificates reflecting in the aggregate the same number of Warrants as the Warrant Certificate(s) so exchanged.

The Warrant Indenture contains provisions for the adjustment of the Exercise Price payable for each Common Share upon the exercise of Warrants and the number of Common Shares issuable upon the exercise of Warrants in the events and in the manner set forth therein.

The Warrant Indenture also contains provisions binding on all holders of Warrants outstanding thereunder resolutions passed at meetings of holders of Warrants held in accordance with the provisions of the Warrant Indenture and instruments in writing signed by Warrantholders holding a specific majority of the all then outstanding Warrants.

Nothing contained in this Warrant Certificate, the Warrant Indenture or elsewhere shall be construed as conferring upon the holder hereof any right or interest whatsoever as a holder of Common Shares or any other right or interest except as herein and in the Warrant Indenture expressly provided. In the event of any discrepancy between anything contained in this Warrant Certificate and the terms and conditions of the Warrant Indenture, the terms and conditions of the Warrant Indenture shall govern.

Warrants may only be transferred in compliance with the conditions of the Warrant Indenture on the register to be kept by the Warrant Agent in Vancouver, or such other registrar as the Corporation, with the approval of the Warrant Agent, may appoint at such other place or places, if any, as may be designated, upon surrender of this Warrant Certificate to the Warrant Agent or other registrar accompanied by a written instrument of transfer in form and execution satisfactory to the Warrant Agent or other registrar and upon compliance with the conditions prescribed in the Warrant Indenture and with such reasonable requirements as the Warrant Agent or other registrar may prescribe and upon the transfer being duly noted thereon by the Warrant Agent or other registrar. Time is of the essence hereof.

This Warrant Certificate will not be valid for any purpose until it has been countersigned by or on behalf of the Warrant Agent from time to time under the Warrant Indenture.

The parties hereto have declared that they have required that these presents and all other documents related hereto be in the English language.  Les parties aux présentes déclarent qu'elles ont exigé que la présente convention, de même que tous les documents s'y rapportant, soient rédigés en Anglais.

IN WITNESS WHEREOF the Corporation has caused this Warrant Certificate to be duly executed as of [●].

KWESST MICRO SYSTEMS INC.
By:
	Authorized Signatory

Countersigned and Registered by:

TSX TRUST COMPANY, as Warrant Agent

- A-4 -

By:
	Authorized Signatory
Date:

- A-5 -

FORM OF TRANSFER

ANY TRANSFER OF WARRANTS WILL REQUIRE COMPLIANCE WITH APPLICABLE SECURITIES LEGISLATION. TRANSFERORS AND TRANSFEREES ARE URGED TO CONTACT LEGAL COUNSEL BEFORE EFFECTING ANY SUCH TRANSFER.

FOR VALUE RECEIVED the undersigned hereby sells, assigns and transfers to ______________________________________________________
_____________________________________________________________________________________________________ (print name and address) the Warrants of KWESST MICRO SYSTEMS INC. (the "Corporation") represented by this Warrant Certificate and hereby irrevocably constitutes and appoints ____________________ as its attorney with full power of substitution to transfer the said securities on the appropriate register of the Warrant Agent. Terms used herein but not otherwise defined herein shall have the meaning set forth in the Warrant Indenture.

THE UNDERSIGNED TRANSFEROR HEREBY CERTIFIES AND DECLARES that the Warrants are not being offered, sold or transferred to, or for the account or benefit of, a U.S. Person (as defined in Regulation S under the U.S. Securities Act of 1933 as amended (the "U.S. Securities Act")) or a person within the United States unless registered under the U.S. Securities Act and any applicable state securities laws or unless an exemption from such registration requirements is available.

DATED this ____ day of_________________, 20__.

SPACE FOR GUARANTEES OF SIGNATURES (BELOW)	) ) )
	) ) )	Signature of Transferor
Guarantor's Signature/Stamp	)	Name of Transferor
	) )

Warrants shall only be transferable in accordance with the Warrant Indenture and all applicable laws. Without limiting the foregoing, if the Warrant Certificate bears a legend restricting the transfer of the Warrants except pursuant to an exemption from registration under the U.S. Securities Act, this Form of Transfer must be accompanied by a Form of Declaration for Removal of Legend in the form attached as Schedule "B" to the Warrant Indenture (or such other form as the Corporation may prescribe from time to time), or a written opinion of counsel of recognized standing in form and substance reasonably satisfactory to the Corporation to the effect that the transfer is exempt from registration under the U.S. Securities Act and applicable state securities laws.

- A-6 -

CERTAIN REQUIREMENTS RELATING TO TRANSFERS - READ CAREFULLY

The signature(s) of the transferor(s) must correspond with the name(s) as written upon the face of this certificate(s), in every particular, without alteration or enlargement, or any change whatsoever. The signature(s) on this form must be guaranteed in accordance with the transfer agent's then current guidelines and requirements at the time of transfer. Notarized or witnessed signatures are not acceptable as guaranteed signatures. As at the time of closing, you may choose one of the following methods (although subject to change in accordance with industry practice and standards):

• Canada and the USA: A Medallion Signature Guarantee obtained from a member of an acceptable Medallion Signature Guarantee Program (STAMP, SEMP, NYSE MSP). Many commercial banks, savings banks, credit unions, and all broker dealers participate in a Medallion Signature Guarantee Program. The Guarantor must affix a stamp bearing the actual words "Medallion Guaranteed", with the correct prefix covering the face value of the certificate.

• Canada: A Signature Guarantee obtained from an authorized officer of the Royal Bank of Canada, Scotia Bank or TD Canada Trust. The Guarantor must affix a stamp bearing the actual words "Signature Guaranteed". Signature Guarantees are not accepted from Treasury Branches, Credit Unions or Caisse Populaires unless they are members of a Medallion Signature Guarantee Program. For corporate holders, corporate signing resolutions, including certificate of incumbency, are also required to accompany the transfer, unless there is a "Signature & Authority to Sign Guarantee" Stamp affixed to the transfer (as opposed to a "Signature Guarantee" Stamp) obtained from an authorized officer of a major Canadian Schedule 1 chartered bank.

• Outside North America: For holders located outside North America, present the certificates(s) and/or document(s) that require a guarantee to a local financial institution that has a corresponding Canadian or American affiliate which is a member of an acceptable Medallion Signature Guarantee Program. The corresponding affiliate will arrange for the signature to be over-guaranteed.

- A-7 -

WARRANT EXERCISE FORM

ANY TRANSFER OF WARRANTS WILL REQUIRE COMPLIANCE WITH APPLICABLE SECURITIES LEGISLATION. TRANSFERORS AND TRANSFEREES ARE URGED TO CONTACT LEGAL COUNSEL BEFORE EFFECTING ANY SUCH TRANSFER.

TO:KWESST MICRO SYSTEMS INC. (the "Corporation")

AND TO:TSX TRUST COMPANY (the "Warrant Agent")
301-100 Adelaide Street West
Toronto, Ontario M5H 4H1

The undersigned holder of the Warrants evidenced by this Warrant Certificate hereby exercises the right to acquire _____________ (A) common shares of the Corporation.

Exercise Price Payable:________________________________________________
((A) multiplied by US$[●], subject to adjustment)

The undersigned hereby exercises the right of such holder to be issued, and hereby subscribes for, Common Shares that are issuable pursuant to the exercise of such Warrants on the terms specified in such Warrant Certificate and in the Warrant Indenture. Any capitalized term in this Exercise Form that is not otherwise defined herein, shall have the meaning ascribed thereto in the Warrant Indenture.

The undersigned hereby represents, warrants and certifies as follows (one (only) of the following must be checked):

A. ☐The undersigned holder at the time of exercise of the Warrants (a) is not in the United States; (b) is not a U.S. person and is not exercising the Warrants on behalf of, or for the account or benefit of, a U.S. person or a person in the United States; and (c) represents and warrants that the exercise of the Warrants and the acquisition of the Warrant Shares occurred in an "offshore transaction" (as defined under Regulation S under the United States Securities Act of 1933, as amended (the "U.S. Securities Act")).

B. ☐The undersigned holder (a) purchased Units directly from the Corporation for its own account or the account of another "accredited investor", as that term is defined in Rule 501(a) of Regulation D under the U.S. Securities Act (an "Accredited Investor"), pursuant to an executed unit subscription agreement for the purchase of Units; (b) is exercising the Warrants solely for its own account or the account of such other Accredited Investor for whose account such holder exercises sole investment discretion; (c) was an Accredited Investor, both on the date the Units were purchased from the Corporation and on the date of the exercise of the Warrants; and (d) if the Warrants are being exercised on behalf of another person, the undersigned holder represents, warrants and certifies that such person was the beneficial purchaser for whose account the undersigned holder originally acquired Units upon the exercise of which the Warrants were acquired and was an Accredited Investor, both on the date the Units were purchased from the Corporation and on the date of the exercise of the Warrants.

C. ☐The undersigned holder is the original U.S. Purchaser and (a) purchased the Units directly from the Corporation pursuant to the a duly executed Unit Subscription Agreement (the "Subscription Agreement"), which included a duly executed Qualified Institutional Buyer Letter (referred to herein, collectively with the Subscription Agreement, as the "Subscription Documents") for the purchase of Units; (b) is exercising the Warrants solely for its own account or for the account of the original beneficial purchaser, if any; (c) each of it and any beneficial purchaser was on the date the Units was purchased from the Corporation, has continued to be and is on the date of exercise of the Warrants, a "qualified institutional buyer" (within the meaning of Rule 144A under the U.S. Securities Act); and (d) all the representations, warranties and covenants set forth in the original written and duly executed Subscription Documents made by the undersigned for the purchase of Units from the Corporation continue to be true and correct as if duly executed as of the date hereof.

- A-8 -

D. ☐The undersigned holder has delivered to the Warrant Agent an opinion of counsel of recognized standing in form and substance reasonably satisfactory to the Corporation to the effect that the exercise of the Warrants and the issuance of the Common Shares does not require registration under the U.S. Securities Act or any applicable state securities laws.

The undersigned holder understands that unless Box A above is checked, the certificate representing the common shares will be issued in definitive physical certificated form and bear a legend restricting transfer without registration under the U.S. Securities Act and applicable state securities laws unless an exemption from registration is available (in the form set out in the Warrant Indenture and the subscription documents). "U.S. person" and "United States" are as defined under Regulation S under the U.S. Securities Act. "U.S. Purchaser" is (a) any U.S. person that purchased Units, (b) any person that purchased Units on behalf of any U.S. person or any person in the United States, (c) any purchaser of Units that received an offer of the Units while in the United States, (d) any person that was in the United States at the time the purchaser's buy order was made or the subscription agreement for Units was executed or delivered. "Units" means the units of the Corporation that were issued in a private placement financing which closed on •, with each unit consisting of one common share and one Warrant.

The undersigned hereby acknowledges that the undersigned is aware that the Common Shares received on exercise may be subject to restrictions on resale under applicable securities legislation. The undersigned hereby further acknowledges that the Corporation will rely upon our confirmations, acknowledgements and agreements set forth herein, and we agree to notify the Corporation promptly in writing if any of our representations or warranties herein ceases to be accurate or complete.

The undersigned hereby irrevocably directs that the said Common Shares be issued, registered and delivered as follows:

Name(s) in Full Address(es) Number of Common Shares

Please print full name in which certificates representing the Common Shares are to be issued. If any Common Shares are to be issued to a person or persons other than the registered holder, the registered holder must pay to the Warrant Agent all exigible transfer taxes or other government charges, if any, and the Form of Transfer must be duly executed.

Once completed and executed, this Exercise Form must be mailed or delivered to KWESST MICRO SYSTEMS INC. c/o TSX TRUST COMPANY (original copy).

- A-9 -

DATED this ____day of _____, 20__.

	) )
Witness	) ) ) ) ) )	(Signature of Warrantholder, to be the same as it appears on the face of this Warrant Certificate. If an entity, the signatory represents that he or she has authority to bind such entity and duly execute this form.)
		Name of Warrantholder

☐Please check if the certificates representing the Common Shares are to be delivered at the office where this Warrant Certificate is surrendered, failing which such certificates will be mailed to the address set out above. Certificates will be delivered or mailed as soon as practicable after the surrender of this Warrant Certificate to the Warrant Agent.

- B-1 -

SCHEDULE "B"
FORM OF DECLARATION FOR REMOVAL OF LEGEND

TO:TSX TRUST COMPANY

as registrar and transfer agent for the Warrants and Common Shares issuable upon exercise of the Warrants of KWESST MICRO SYSTEMS INC. (the "Corporation").

AND TO:The Corporation

The undersigned (A) acknowledges that the sale of the securities of KWESST MICRO SYSTEMS INC. represented by certificate number ______________ to which this declaration relates is being made in reliance on Rule 904 of Regulation S ("Regulation S") under the United States Securities Act of 1933, as amended (the "U.S. Securities Act"), and (B) certifies that (1) it is not an "affiliate" (as defined in Rule 405 under the U.S. Securities Act) of the Corporation; (2) the offer of such securities was not made to a person in the United States or to a U.S. person and either (a) at the time the buy order was originated, the buyer was outside the United States and was not a U.S. person, or the seller and any person acting on its behalf reasonably believe that the buyer was outside the United States and was not a U.S. person or (b) the transaction was executed on or through the facilities of a designated offshore securities market as designated by Rule 902(b) of Regulation S (such as the TSX Venture Exchange) and neither the seller nor any person acting on its behalf knows that the transaction has been prearranged with a buyer in the United States or a U.S. person, (3) neither the seller nor any person or agent acting on its behalf engaged or will engage in any directed selling efforts in connection with the offer and sale of such securities, (4) the sale is bona fide and not for the purpose of "washing off" the resale restrictions imposed because the securities are "restricted securities" (as that term is defined in Rule 144(a)(3) under the U.S. Securities Act), (5) the seller does not intend to replace the securities sold in reliance on Rule 904 of Regulation S under the U.S. Securities Act with fungible unrestricted securities, and (6) the contemplated sale is not a transaction, or part of a series of transactions which, although in technical compliance with Regulation S under the U.S. Securities Act, is part of a plan or scheme to evade the registration provisions of the U.S. Securities Act.

Unless otherwise specified, terms used herein have the meanings given to them by Regulation S under the U.S. Securities Act.

DATED this ____day of _____, 20__.

_________________________________________________
(Name of Seller)

By:____________________________________________
Name:

EX-4.7

THE COMPENSATION OPTIONS EVIDENCED BY THIS COMPENSATION OPTION CERTIFICATE ARE EXERCISABLE AT ANY TIME AND FROM TIME TO TIME UNTIL 5:00 P.M. (EASTERN TIME) [●], 2024, AFTER WHICH TIME THEY SHALL EXPIRE AND BE OF NO FURTHER FORCE OR EFFECT.

COMPENSATION OPTION TO PURCHASE
[●] UNITS OF

KWESST MICRO SYSTEMS INC.

(Incorporated under the Business Corporations Act (British Columbia))

CERTIFICATE NO. 2022-CO-[●]-[●] [●] Compensation Options entitling the holder to acquire, subject to adjustment, one (1) unit (each a "Unit") of KWESST Micro Systems Inc. (the "Corporation") for each Compensation Option represented hereby.

THIS COMPENSATION OPTION IS NON-TRANSFERABLE

THIS CERTIFIES that, for value received, [●] (the "Holder"), is the registered holder of  [●] compensation options (the "Compensation Options") each of which entitle the Holder, subject to the terms and conditions set forth in this Compensation Option certificate (the "Compensation Option Certificate"), to purchase from KWESST Micro Systems Inc. (the "Corporation"), one Unit, at any time until 5:00 p.m. (Toronto time) (the "Time of Expiry") on [●], 2024 (the "Expiry Date") on payment of $[●] per Unit (the "Exercise Price"). The number of Units which the Holder is entitled to acquire upon exercise of the Compensation Options and the Exercise Price are subject to adjustment as hereinafter provided.

Each Unit will consist of one common share in the capital of the Corporation (a "Share") and one Share purchase warrant (each whole Share purchase warrant, a "Warrant"). The Warrants shall be issued under and governed by the warrant indenture dated [●], 2022 entered into between the Company and TSX Trust Company.

These Compensation Options are issued under an underwriting agreement dated [●], 2022 between the Corporation and the Holder.

Exercise of Compensation Options

(a)Election to Purchase. The rights evidenced by this Compensation Option Certificate may be exercised by the Holder in whole or in part and in accordance with the provisions hereof by delivery of an Election to Purchase in substantially the form attached hereto as Schedule "A", properly completed and executed, together with payment by wire transfer, bank draft or certified cheque payable to or to the order of the Corporation in the amount of the Exercise Price multiplied by the number of Units specified in the Election to Purchase (the "Aggregate Exercise Price") delivered to the office of the Corporation at 155 Terence Matthews Crescent, Kanata, Ontario K2M 2A8 (Attention: Chief Executive Officer), or such other address in Canada as the Holder may be notified of in writing by the Corporation. In the event that the rights evidenced by this Compensation Option Certificate are exercised in part, the Corporation shall, contemporaneously with the issuance of the Units issuable on the exercise of the Compensation Options so exercised, issue to the Holder a new Compensation Option Certificate on identical terms in respect of that number of Compensation Option in respect of which the Holder has not exercised the rights evidenced by this Compensation Option Certificate.

- 2 -

(b)Exercise. The Corporation shall, on the date it receives a duly executed Election to Purchase and funds equal to the Aggregate Exercise Price by bank draft or certified cheque payable to or to the order of the Corporation for the number of Units specified in the Election to Purchase (the "Exercise Date"), issue that number of Units specified in the Election to Purchase, as fully paid and non-assessable.

(c)Certificates. As promptly as practicable after the Exercise Date and, in any event, within three business days of receipt of the Election to Purchase, the Corporation shall issue and deliver to the Holder, registered in such name or names as the Holder may direct or if no such direction has been given, in the name of the Holder, a certificate or certificates for the number of Shares and Warrants comprising the Units specified in the Election to Purchase. To the extent permitted by law, such exercise shall be deemed to have been effected as of the close of business on the Exercise Date, and provided that the entire amount of the Compensation Options have been exercised at such time the rights of the Holder with respect to the number of Compensation Options which have been exercised as such shall cease, and the person or persons in whose name or names any certificate or certificates for Shares and Warrants shall then be issuable upon such exercise shall be deemed to have become the holder or holders of record of the Shares and Warrants represented thereby. All costs, expenses, transfer taxes and other charges payable in connection with the issue and delivery of the Shares and Warrants shall be at the sole expense of the Corporation (other than withholding tax, if any).

(d)Fractional Shares. No fractional Units, Shares or Warrants shall be issued upon exercise of the Compensation Options and no payments or adjustment shall be made upon any exercise on account of any cash dividends previously paid on the Shares issued upon such exercise.

(e)Corporate Changes. If, after [●], 2022 (the "Closing Date") and prior to the Time of Expiry, the Corporation shall be a party to any reorganization, merger, dissolution or sale of all or substantially all of its assets, whether or not the Corporation is the surviving entity, the number of Compensation Options evidenced by this Compensation Option Certificate shall be adjusted so as to apply to the securities to which the holder of that number of Units of the Corporation subject to the unexercised Compensation Options would have been entitled by reason of such reorganization, merger, dissolution or sale of all or substantially all of its assets (the "Event"), and the Exercise Price shall be adjusted to be the amount determined by multiplying the Exercise Price in effect immediately prior to the Event by the number of Units subject to the unexercised Compensation Options immediately prior to the Event, and dividing the product thereof by the number of securities to which the holder of that number of Units subject to the unexercised Compensation Options would have been entitled to by reason of such Event.

(f)Subdivision or Consolidation of Shares

(i)In the event that, after the Closing Date and prior to the Time of Expiry, the Corporation shall subdivide its outstanding shares into a greater number of shares, the Exercise Price in effect immediately prior to such subdivision shall be proportionately reduced, and conversely, in case the outstanding shares of the Corporation shall be consolidated into a smaller number of shares, the Exercise Price in effect immediately prior to such consolidation shall be proportionately increased.

(ii)Upon each adjustment of the Exercise Price in paragraph (f)(i) above, the Holder shall thereafter be entitled to acquire, at the Exercise Price resulting from such adjustment, the number of Units (calculated to the nearest tenth of a Unit) obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of Units which may be acquired hereunder immediately prior to such adjustment and dividing the product thereof by the Exercise Price resulting from such adjustment.

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(g)Change, Exchange or Reclassification of Shares. In the event that, after the Closing Date and prior to the Time of Expiry, the Corporation shall change, exchange or reclassify its outstanding shares into a different class of securities, the rights evidenced by this Compensation Options Certificate shall be adjusted as follows so as to apply to the successor class of securities:

(i)the number of the successor class of securities which the Holder shall be entitled to acquire as part of the Units shall be that number of the successor class of securities which a holder of that number of Shares subject to the unexercised Compensation Options immediately prior to the change, exchange or reclassification would have been entitled to by reason of such change, exchange or reclassification; and

(ii)the Exercise Price shall be determined by multiplying the Exercise Price in effect immediately prior to the change, exchange or reclassification by the number of Units subject to the unexercised Compensation Options immediately prior to the change, exchange or reclassification, and dividing the product thereof by the number of Shares determined in paragraph (g)(i) hereof.

(h)Distribution of Assets. In case the Corporation shall distribute to all or substantially all holders of its Shares evidences of its indebtedness or assets excluding cash dividends or distributions payable out of consolidated earnings or earned surplus or rights, options or warrants, or convertible or exchangeable securities containing the right to subscribe for or purchase Shares, then in each case the number of Shares thereafter purchasable upon the exercise of each Unit shall be determined by multiplying the number of Shares theretofore purchasable upon the exercise of each Unit by a fraction, of which the numerator shall be the then Current Market Price per Share (as determined in paragraph (q) below) on the date of such distribution, and of which the denominator shall be the then Current Market Price per Share less the then fair value (as determined by the board of directors of the Corporation, acting reasonably and in good faith) of the portion of the assets or evidences of indebtedness so distributed or of such subscription rights, options or warrants, or of such convertible or exchangeable securities applicable to one Share. Such adjustment shall be made whenever any such distribution is made, and shall become effective on the date of distribution retroactive to the record date for the determination of shareholders entitled to receive such distribution.

In the event of the distribution by the Corporation to all or substantially all of the holders of its common shares or shares of a subsidiary or securities convertible or exercisable for such shares, then in lieu of an adjustment in the number of Shares purchasable upon the exercise or each Unit, the Holder of each Unit, upon the exercise thereof, shall receive from the Corporation, such subsidiary or both, as the Corporation shall reasonably determine, the shares or other securities to which such Holder would have been entitled if such Holder had exercised such Unit immediately prior thereto, all subject to further adjustment as provided herein, however, that no adjustment in respect of dividends or interest previously paid on such shares or other securities shall be made upon the exercise of a Unit.

(i)Rights Offering. If and whenever after the Closing Date and prior to the Time of Expiry the Corporation shall fix a record date for the distribution of rights, options or warrants to all or substantially all of the holders of common shares under which such holders are entitled, during a period expiring not more than 45 days after the record date for such issue to subscribe for or purchase common shares or securities or exercisable for or convertible into common shares at a price per share to the holder (or having a conversion price, exercise price or exchange price per common share) of less than 95% of the Current Market Price for the common shares on such record date (any such events being called a "Rights Offering"), then the Exercise Price shall be adjusted effective immediately after the record date for the Rights Offering to a price determined by multiplying the Exercise Price in effect on such record date by a fraction:

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(i)the numerator of which shall be the aggregate of:

A.the number of common shares outstanding as of the record date for the Rights Offering, and

B.a number determined by dividing either

I.the product of the number of common shares offered under the Rights Offering and the price at which such common shares are offered,

or, as the case may be,

II.the product of the exchange, exercise or conversion price per share of such securities offered and the maximum number of common shares for or into which the securities so offered pursuant to the Rights Offering may be exchanged, exercised or converted,

by the Current Market Price of the common shares as of the record date for the Rights Offering; and

(ii)the denominator of which shall be the aggregate of the number of common shares outstanding on such record date after giving effect to the Rights Offering and including the number of common shares offered pursuant to the Rights Offering (including shares issuable upon exercise of the rights, warrants or options under the Rights Offering or upon the exercise of the exchange, exercise or conversion rights contained in such exchangeable, exercisable or convertible securities under the Rights Offering).

Any common shares owned by or held for the account of the Corporation shall be deemed not to be outstanding for the purpose of any such calculation.  To the extent that such Rights Offering is not so made or any such rights, options or warrants are not exercised prior to the expiration thereof, the Exercise Price shall then be readjusted to the Exercise Price which would then be in effect if such record date had not been fixed or if such expired rights, options or warrants had not been issued.  From and after any adjustment of the Exercise Price pursuant to this Section (i), the number of Shares thereafter purchasable upon the exercise of each Unit shall be shall be adjusted contemporaneously with the adjustment of the Exercise Price by multiplying the number of Shares then otherwise purchasable on the exercise thereof by a fraction, the numerator of which shall be the Exercise Price in effect immediately prior to the adjustment and the denominator of which shall be the Exercise Price resulting from such adjustment.

(j)Other Events.  If and whenever at any time after the Closing Date and prior to the Time of Expiry, the Corporation takes any action affecting its common shares to which the foregoing provisions of Sections (e) through (i), in the opinion of the board of directors of the Corporation, acting reasonably and in good faith, are not strictly applicable, or if strictly applicable would not fairly adjust the rights of the Holder against dilution in accordance with the intent and purposes thereof, or would otherwise materially affect the rights of the Holder hereunder, then the Corporation shall execute and deliver to the Holder an amendment hereto providing for an adjustment in the application of such provisions so as to adjust such rights as aforesaid in such a manner as the board of directors of the Corporation, acting reasonably and in good faith, may determine to be equitable in the circumstances. The failure of the taking of action by the board of directors of the Corporation to so provide for any adjustment on or prior to the effective date of any action or occurrence giving rise to such state of facts will, absent manifest error, be conclusive evidence that the board of directors has determined that it is equitable to make no adjustment in the circumstances.

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(k)Carry Over of Adjustments. No adjustment of the Exercise Price shall be made if the amount of such adjustment shall be less than 1% of the Exercise Price in effect immediately prior to the event giving rise to the adjustment, provided, however, that in such case any adjustment that would otherwise be required then to be made shall be carried forward and shall be made at the time of and together with the next subsequent adjustment which, together with any adjustment so carried forward, shall amount to at least 1% of the Exercise Price.

(l)Notice of Adjustment. Upon any adjustment of the number of Units issuable hereunder and upon any adjustment of the Exercise Price, then and in each such case the Corporation shall give written notice thereof to the Holder, at least 20 days prior to the effective date or record date, as the case may be, which notice shall state the Exercise Price and the number of Units or other securities subject to the unexercised Compensation Options resulting from such adjustment, and shall set forth in reasonable detail the method of calculation and the facts upon which such calculation is based. Upon the request of the Holder there shall be transmitted promptly to the Holder a statement of the firm of independent chartered accountants retained to audit the financial statements of the Corporation to the effect that such firm concurs in the Corporation's calculation of the change.

(m)Other Notices. In case at any time after the Closing Date and prior to the Time of Expiry:

(i)the Corporation shall declare any dividend upon its shares payable in Shares;

(ii)the Corporation shall offer for subscription pro rata to the holders of its Shares any additional shares of any class or other rights, options or warrants;

(iii)there shall be any capital reorganization or reclassification of the capital stock of the Corporation, or consolidation, amalgamation or merger of the Corporation with, or sale of all or substantially all of its assets to, another corporation; or

(iv)there shall be a voluntary or involuntary dissolution, liquidation or winding-up of the Corporation,

then, in any one or more of such cases, the Corporation shall give to the Holder (A) at least 20 days' prior written notice of the date on which a record date shall be taken for such dividend, distribution or subscription rights or for determining rights to vote in respect of any such reorganization, reclassification, consolidation, merger, amalgamation, sale, dissolution, liquidation or winding-up and (B) in the case of any such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding-up, at least 20 days' prior written notice of the date when the same shall take place. Such notice in accordance with the foregoing clause (A) shall also specify, in the case of any such dividend, distribution or subscription rights, the date on which the holders of shares shall be entitled thereto, and such notice in accordance with the foregoing clause (B) shall also specify the date on which the holders of shares shall be entitled to exchange their shares for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, amalgamation, sale, dissolution, liquidation or winding-up, as the case may be.

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(n)Shares to be Reserved. The Corporation will at all times keep available, and reserve if necessary, out of its authorized shares, solely for the purpose of issue upon the exercise of the Compensation Options and the Warrants, such number of Shares as shall then be issuable upon the exercise of the Compensation Options and the Warrants. The Corporation covenants and agrees that all Shares which shall be so issuable will, upon issuance, be duly authorized and issued as fully paid and non-assessable. The Corporation will take all such actions as may be necessary to ensure that all such Shares may be so issued without violation of any applicable requirements of any exchange upon which the shares of the Corporation may be listed or in respect of which the Shares are qualified for unlisted trading privileges. The Corporation will take all such actions as are within its power to ensure that all such Shares may be so issued without violation of any applicable law.

(o)Issue Tax. The issuance of certificates for Shares and Warrants upon the exercise of Compensation Options shall be made without charge to the Holder for any issuance tax in respect thereto, provided that the Corporation shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any certificate in a name other than that of the Holder.

(p)Listing. The Corporation will, at its expense and as expeditiously as possible, use its best efforts to cause all Shares issuable upon the exercise of the Compensation Options and the Warrants, to be duly listed on the TSXV and Nasdaq Capital Markets ("Nasdaq") (and/or any other stock exchange upon which the shares of the Corporation may be then listed) prior to the issuance of such Shares.

(q)Current Market Price. For the purposes of any computation hereunder, the "Current Market Price" at any date shall be the weighted average sale price per share for the shares of the Corporation for the 20 consecutive trading days immediately before such date on the TSX Venture Exchange (the "TSXV") or such other stock exchange on which the shares of the Corporation may then be listed, or, if the shares or any other security in respect of which a determination of Current Market Price is being made are not listed on any stock exchange, the Current Market Price shall be determined by the directors, which determination shall be conclusive. The weighted average price shall be determined by dividing the aggregate sale price of all such shares sold on the said exchange during the said 20 consecutive trading days by the total number of such shares so sold.

Replacement

Upon receipt of evidence satisfactory to the Corporation of the loss, theft, destruction or mutilation of this Compensation Option Certificate and, if requested by the Corporation, upon delivery of a bond of indemnity satisfactory to the Corporation (or, in the case of mutilation, upon surrender of this Compensation Option Certificate), the Corporation will issue to the Holder a replacement certificate containing the same terms and conditions as this Compensation Option Certificate.

Expiry Date

The Compensation Options shall expire and all rights to purchase Units hereunder shall cease and become null and void at the Time of Expiry on the Expiry Date.

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Covenant

So long as any Compensation Options remain outstanding the Corporation covenants that it shall do or cause to be done all things necessary to maintain its status as a reporting issuer not in default in the provinces of Canada in which it is a reporting issuer on the date of issuance of the Compensation Options.

These Compensation Options may not be exercised in the United States or by or on behalf of a "U.S. Person" (as that term is defined in Regulation S adopted by the United States Securities Exchange Commission under the United States Securities Act of 1933, as amended ("U.S. Securities Act")) unless an exemption is available from the registration requirements of the U.S. Securities Act and applicable state securities laws and the holder of these Compensation Options has furnished an opinion of counsel of recognized standing in form and substance satisfactory to the Corporation to such effect.

Limitations on Transfer

Subject to applicable law and the policies of any stock exchange upon which the Shares may be listed from time to time, the Holder may not transfer the Compensation Options except with the prior written consent of the Corporation, which consent shall not be unreasonably withheld. Subject to the foregoing, the Corporation shall issue and mail as soon as practicable, and in any event within five business days of such delivery, a new Compensation Option certificate registered in the name of the transferee or as the transferee may direct and shall take all other necessary actions to effect the transfer as directed.

Not a Shareholder

Nothing in this Compensation Option Certificate or in the holding of a Compensation Options evidenced hereby shall confer or be construed as conferring upon the Holder any right or interest whatsoever as a shareholder or other holder of an equity interest in the Corporation, including but not limited to, the right to receive notice of, attend or vote at meetings of shareholders or any other proceedings of the Corporation.

No Obligations to Purchase

Nothing in this Compensation Option Certificate or in the holding of a Compensation Options evidenced hereby shall obligate the Holder to subscribe for or the Corporation to issue any Shares or Warrants except those Shares and Warrants in respect of which the Holder shall have exercised its right to purchase hereunder from its Compensation Options in the manner provided herein.

Governing Law

The laws of the Province of Ontario and the laws of Canada applicable therein shall govern the Compensation Options.

Severability

If any one or more of the provisions or parts thereof contained in this Compensation Option Certificate should be or become invalid, illegal or unenforceable in any respect in any jurisdiction, the remaining provisions or parts thereof contained herein shall be and shall be conclusively deemed to be, as to such jurisdiction, severable therefrom.

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Headings

The headings of the articles, sections, subsections and clauses of this Compensation Option Certificate have been inserted for convenience and reference only and do not define, limit, alter or enlarge the meaning of any provision of this Compensation Option Certificate.

Day not a Business Day

In the event that any day on or before which any action is required to be taken hereunder is not a business day, then such action shall be required to be taken on or before the requisite time on the next succeeding day that is a business day.

Successors

This Compensation Option Certificate shall enure to the benefit of and shall be binding upon the Holder and the Corporation and their respective successors.

Time of Essence

Time shall be of the essence hereof.

Electronic Transmission

This Compensation Option Certificate may be signed digitally or by other electronic means, which shall be deemed to be an original and shall be deemed to have the same legal effect and validity as this Compensation Option Certificate bearing an original signature. A signed copy of this Compensation Option Certificate transmitted by facsimile, email or other electronic transmission shall be deemed to have the same legal effect and validity as delivery of an originally executed copy of this Compensation Option Certificate, provided that if this Compensation Option Certificate bears a digital or electronic signature as contemplated above and the Corporation is delivering this Compensation Option Certificate by electronic transmission pursuant to this paragraph, then the Corporation represents to the Holder that the electronically transmitted Compensation Option Certificate is the only executed copy to be issued to the Holder by the Corporation.

[Signature page follows]

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IN WITNESS WHEREOF the Corporation has caused this Compensation Option Certificate to be signed by its duly authorized officers and its corporate seal hereto affixed.

DATED as of [●], 2022.

KWESST MICRO SYSTEMS INC.

Per:________________________________________
      Authorized Signatory

SCHEDULE "A"

ELECTION TO PURCHASE

Capitalized terms used herein have the meanings ascribed thereto in the Compensation Option certificate (the "Compensation Option Certificate") attached hereto.

The undersigned Holder hereby irrevocably elects to exercise the Compensation Options granted by the Corporation pursuant to the Compensation Options Certificate for the number of Units (or other property or securities contemplated in the Compensation Options Certificate) as set forth below:

(a)Number of Units to be acquired______________________

(b)Subscription Price (per Unit)$_____________________

(c)Aggregate Subscription Price$_____________________

The Holder hereby tenders a certified cheque, bank draft or cash for such aggregate Subscription Price and directs the securities to be registered and certificates therefor to be issued as directed below.

The undersigned hereby certifies that the undersigned (i) is not (and is not exercising the Compensation Options for the account or benefit of) a "U.S. Person", (ii) did not execute or deliver this exercise form in the United States and (iii) has in all other aspects complied with the terms of Regulation S of the United States Securities Act of 1933, as amended the ("U.S. Securities Act") or any successor rule or regulation of the United States Securities and Exchange Commission in effect. Alternatively, the undersigned is tendering with this exercise form a written opinion of counsel to the effect that the securities to be delivered upon exercise of the Compensation Options have been registered under the U.S. Securities Act and the securities laws of all applicable states of the United States or are exempt from registration thereunder. The term "U.S. Person" is as defined in Regulation S under the U.S. Securities Act and includes, but is not limited to, any natural person resident in the United States and any partnership or corporation organized or incorporated under the laws of the United States. "United States" means the United States of America, its territories and possessions, any state of the United States and the District of Columbia.

Direction as to Registration

Name of Registered Holder:________________________________________________________________________

Address of Registered Holder: _____________________________________________________________________

☐ PLEASE CHECK THIS BOX IF THE CERTIFICATES REPRESENTING THESE SECURITIES ARE TO BE DELIVERED AT THE OFFICE OF THE CORPORATION, FAILING WHICH THE CERTIFICATES WILL BE MAILED TO THE ADDRESS(ES) SET FORTH IN THE CERTIFICATE.

DATED this ______ day of ____________________________, 2______.

_____________________________________________	Per:_____________________________________________
Signature Guaranteed(1)
	Name:_____________________________________________
	Title:_____________________________________________

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(1)The signature of the registered holder must be guaranteed by an authorized officer of a Canadian chartered bank, or of a major Canadian trust company, or by a medallion signature guarantee from a member recognized under the Signature Medallion Guarantee Program, or from a similar entity in the United States, if this transfer is executed in the United States, or in accordance with industry standards.

EX-5.1

November 7, 2022

KWESST Micro Systems Inc.

155 Terence Matthews Crescent,

Unit #1, Ottawa, Ontario, K2M 2A8

Re:KWESST Micro Systems Inc.

Registration Statement on Form F-1 (File No. 333-266897)

Ladies and Gentlemen:

We have acted as British Columbia counsel to KWESST Micro Systems Inc., a corporation formed under the laws of British Columbia (the "Corporation"), in connection with the preparation of a Registration Statement on Form F-1, as amended from time to time, (the "Registration Statement") under the United States Securities Act of 1933, as amended (the "Securities Act").  The Registration Statement relates to, among other securities, the issuance and sale (the "Offering"), pursuant to the prospectus which forms part of the Registration Statement and a final prospectus to be filed by the Corporation, of an aggregate of up to US$13,225,000 of:

• common units of the Corporation (each, a "Common Unit"), each such Common Unit consisting of one common share of the Corporation, no par value per share (each, a "Common Unit Share") and one warrant of the Corporation (each, a "Warrant"), with each such Warrant entitling the holder to purchase one common share in the capital of the Corporation (each, a "Warrant Share") at an exercise price equal to 125% of the public offering price of one Common Unit, and expire five years from date of issuance; and/or

• pre-funded units of the Corporation (each, a "Pre-funded Unit"), each such Pre-funded Unit consisting of one pre-funded warrant (each, a "Pre-funded Warrant") to purchase one common share  in the capital of the Corporation (each, a "Pre-funded Warrant Share") at an exercise price of US$0.01 per share, and one Warrant,

including:

• common shares in the capital of the Corporation (each, an "Over-allotment Share"), representing up to 15% of the Common Unit Shares sold in the Offering; and/or

• pre-funded warrants of the Corporation (each, an "Over-allotment Pre-funded Warrant"), representing up to 15% of the Pre-funded Warrants sold in the Offering, each to purchase one common share in the capital of the Corporation (each, an "Over-allotment Pre-funded Warrant Share") at an exercise price of US$0.01 per share exercisable at any time; and/or

• warrants of the Corporation (each, an "Over-allotment Warrant"), representing up to 15% of the Warrants sold in the Offering, each to purchase one common share in the capital of the Corporation (each, an "Over-allotment Warrant Share"), at an exercise price equal to 125% of the public offering price of one Common Unit, and expire five years from date of issuance,

Page 2

in respect of the exercise of a 45-day over-allotment option granted by the Corporation to ThinkEquity LLC, as representative (the "Representative") of the several underwriters (the "Underwriters") named in Schedule I to the Underwriting Agreement (as defined below).

In addition, the Corporation has agreed to issue to the Representative, as compensation for its services pursuant to terms of an underwriting agreement by and between the Corporation and the Representative (the "Underwriting Agreement"), substantially in the form filed as Exhibit 1.1 to the Registration Statement, warrants of the Corporation (the "Representative Warrants"), representing up to 5% of the aggregate number of Common Unit Shares (or Pre-funded Warrants in lieu of Common Unit Shares) sold in the Offering to purchase up to the same number of common shares in the capital of the Corporation (each, a "Representative Warrant Share", and together with the Common Unit Shares, the Warrant Shares, the Pre-funded Warrant Shares, the Over-allotment Shares, the Over-allotment Pre-funded Warrant Shares and the Over-allotment Warrant Shares, the "Underlying Shares"), exercisable at an exercise price equal to 125% of the public offering price of one Common Unit which expire five  years from the date of issuance.

In rendering our opinions set forth below, we have assumed: (a) the authenticity of all documents submitted to us as originals, (b) the genuineness of all signatures, (c) the conformity to the authentic of all documents submitted to us as copies and the authenticity of the originals thereof, (d) that all facts, information, representation and warranties set forth in the records, documents and certificates we have reviewed , including official public records and certificates and other documents supplied by public officials or otherwise conveyed to us by public officials, (e) the due authorization, execution and delivery of all documents by all parties, other than the Corporation, and the validity, binding effect and enforceability thereof, (f) the legal capacity for all purposes relevant hereto of all natural persons, and (g) the issue price and exercise price, as applicable, for each Common Unit, Pre-funded Unit, Warrant, Pre-funded Warrant, Over-allotment Pre-funded Warrant, Over-allotment Warrant, Representative Warrant and Underlying Share will be set by the board of directors of the Corporation (the "Board") or the person, persons or committee duly authorized by the Board, prior to the issuance of any such Common Unit, Pre-funded Unit, Common Unit Warrant, Pre-funded Warrant, Warrant, Over-allotment Pre-funded Warrant, Over-allotment Warrant, Representative Warrant and Underlying Share in accordance with the Business Corporations Act (British Columbia), the Articles and any applicable resolution or authorization of the Board duly authorizing such person, persons or committee, as applicable, (the "Pricing Resolutions").

As to any facts material to the opinions expressed herein which were not independently established or verified, we have relied upon oral or written statements and representations of officers and other representatives of the Corporation and others and of public officials.  In making our examination of executed documents or documents to be executed, we have assumed that the parties thereto, including the Corporation, had or will have the power, corporate or other, to enter into and perform all obligations thereunder and have also assumed the due authorization by all requisite action, corporate or other, and execution and delivery by such parties of such documents and, the validity and binding effect on all such parties. In our capacity as counsel to the Corporation in connection with the registration of the Registration Statement, we are familiar with the proceedings taken and proposed to be taken by the Corporation in connection with the authorization and issuance of the Securities. For purposes of this opinion, we have assumed that such proceedings will be timely and properly completed, in accordance with all requirements of the Applicable Law (as defined below), in the manner presently proposed.

We are qualified to practice law in the Province of British Columbia, and our opinion herein is limited to the statutes and regulations of the Province of British Columbia and the federal laws of Canada applicable therein now in effect (the "Applicable Law"). We express no opinion as to whether the laws of any particular jurisdiction other than those identified above are applicable to the subject matter hereof. We assume no obligation to revise or supplement this opinion should any applicable laws be changed subsequent to the date hereof by legislative action, judicial decision or otherwise or if there is a change in any fact or facts after the date hereof. Where our opinion refers to any of the securities or shares as being "fully paid and non-assessable", no opinion is expressed as to actual receipt by the Corporation of the consideration for the issuance of such shares or as to the adequacy of any consideration received.

Page 3

Based on and subject to the foregoing assumptions and qualifications we are of the opinion that:

1.When issued and paid for, in such amount as shall be determined pursuant to the Pricing Resolutions, as contemplated in the Registration Statement in accordance with the terms of the Underwriting Agreement filed as Exhibit 1.1 to the Registration Statement, the Common Units and the Pre-funded Units will be duly authorized.

2.When issued and paid for, in such amount as shall be determined pursuant to the Pricing Resolutions, as contemplated in the Registration Statement in accordance with the terms of the Underwriting Agreement filed as Exhibit 1.1 to the Registration Statement, the Underlying Shares will be validly issued as fully paid and non-assessable common shares in the capital of the Corporation.

We hereby consent to the use of our name in, and the filing of this opinion as an exhibit to, the Registration Statement, and to the reference to our firm under the headings "Legal Matters" and "Advisors" in the prospectus constituting part of the Registration Statement. In giving this consent, we do not thereby admit that we are in the category of persons whose consent is required under the Securities Act or the rules and regulations promulgated thereunder. This opinion is expressed as of the date hereof unless otherwise expressly stated, and we disclaim any undertaking to advise you of any subsequent changes of the facts stated or assumed herein or any subsequent changes in Applicable Law.

Yours truly,

/s/ Fasken Martineau DuMoulin LLP

EX-5.2

Exhibit 5.2

November 7, 2022

KWESST Micro Systems Inc.

155 Terence Matthews Crescent,

Unit #1, Ottawa, Ontario, K2M 2A8

Re:Registration Statement on Form F-1 (File No. 333-266897)

Ladies and Gentlemen:

We have acted as United States counsel to KWESST Micro Systems Inc., a corporation incorporated under the laws of British Columbia, Canada (the "Company"), in connection with a Registration Statement on Form F-1 (File No. 333-266897) (the "Registration Statement") filed by the Company with the United States Securities and Exchange Commission (the "Commission") under the United States Securities Act of 1933, as amended (the "Securities Act"), relating to the offer and sale by the Company of an aggregate of up to US$13,225,000 of (i) common units (the "Common Units"), with each Common Unit consisting of one common share, no par value, of the Company (collectively, the "Common Shares") and one warrant to purchase one Common Share (collectively, the "Warrants"), and/or (ii) pre-funded units (collectively, the "Pre-funded Units"), with each Pre-funded Unit consisting of one pre-funded warrant to purchase one Common Share (collectively, the "Pre-funded Warrants") and one Warrant (the "Offering"), including Common Shares, representing up to 15% of the Common Shares sold in the Offering (the "Over-Allotment Shares"), Pre-funded Warrants (the "Over-Allotment Pre-funded Warrants"), representing up to 15% of the Pre-funded Warrants sold in the Offering and Warrants, representing up 15% of the Warrants sold in the Offering (the "Over-Allotment Warrants") pursuant to the over-allotment option granted to ThinkEquity LLC, as Representative (the "Representative") of the several underwriters (the "Underwriters") named in Schedule I to the Underwriting Agreement (as defined below).

In addition, the Company has agreed to issue to the Underwriter, as compensation for its services pursuant to an underwriting agreement to be entered into by and between the Company and the Underwriter (the "Underwriting Agreement"), substantially in the form filed as Exhibit 1.1 to the Registration Statement, warrants, representing up to 5% of the aggregate number of Common Shares (or Pre-funded Warrants in lieu of Common Shares) sold in the offering (the "Underwriter Warrants"), with each warrant exercisable to purchase one Common Share.

The Warrants and any Over-Allotment Warrants will be governed by the terms of the Form of Warrant and a warrant agent agreement (the "Warrant Agent Agreement") by and between the Company and Continental Stock Transfer & Trust, as warrant agent.

This opinion letter is furnished to you for filing with the Commission pursuant to Item 601 of Regulation S-K, promulgated under the Securities Act.

We have examined such documents and have reviewed such questions of law as we have considered necessary or appropriate for the purposes of our opinions set forth below. In rendering our opinions set forth below, we have assumed the authenticity of all documents submitted to us as originals, the genuineness of all signatures and the conformity to authentic originals of all documents submitted to us as copies. We have also assumed the legal capacity for all purposes relevant hereto of all natural persons. As to questions of fact material to our opinions, we have relied upon certificates or comparable documents of officers and other representatives of the Company and of public officials.

161 Bay Street | Suite 4310 | Toronto, ON M5J 2S1 Canada | T 416.367.7370 | F 416.367.7371 | dorsey.com

KWESST Micro Systems Inc.

November 7, 2022

Page 2

Based on the foregoing, we are of the opinion that the Warrants, Pre-Funded Warrants, Over-Allotment Warrants and Over-Allotment Pre-funded Warrants, when issued and delivered against payment of the consideration therefor, as contemplated in the Registration Statement and in accordance with the terms of the Underwriting Agreement (and Warrant Agent Agreement as applicable), and the Underwriter Warrants when issued and delivered, as contemplated in the Registration Statement and in accordance with the terms of the Underwriting Agreement, in each case, will constitute valid and binding obligations of the Company, enforceable against the Company in accordance with their terms.

Our opinions expressed above are limited to the corporate laws of the State of New York.

We hereby consent to the filing of this opinion as an exhibit to the Registration Statement, and to the reference to our firm under the headings "Legal Matters" and "Advisors" in the prospectus constituting part of the Registration Statement. In giving this consent, we do not admit that we are within the category of persons whose consent is required under Section 7 of the Securities Act or the rules and regulations of the Commission thereunder.

Very truly yours,

/s/ Dorsey & Whitney LLP

RBR/JDP/JBG

EX-8.1

Exhibit 8.1

November 7, 2022

KWESST Micro Systems Inc.

155 Terrence Matthews Crescent

Unit #1

Ottawa, Ontario

Canada, K2M 2A8

Ladies and Gentlemen:

We have acted as counsel to KWESST Micro Systems Inc., a British Columbia corporation (the "Company"), in connection with the filing of the Registration Statement on Form F-1 (File No. 333-266897) as amended and supplemented from time to time (the "Registration Statement"), with the Securities and Exchange Commission (the "Commission") pursuant to the Securities Act of 1933, as amended (the "Securities Act"). The Registration Statement relates to the proposed registration by the Company of up to 2,323,232 common units (the "Common Units") each consisting of one common share, no par value, of the Company (the "Common Shares") and one warrant, each warrant to purchase one Common Share (the "Warrants") and up to 2,323,232 pre-funded units ("Pre-Funded Units") each consisting of one pre-funded warrant to purchase one Common Share (the "Pre-Funded Warrants") and one Warrant to purchase one Common Share. The issuance of the Common Units, Pre-Funded Units, Common Shares, Warrants and Pre-Funded Warrants identified in the Registration Statement is referred to herein as the offering (the "Offering").

For purposes of this opinion, we have reviewed originals, or copies certified or otherwise identified to our satisfaction, of the Registration Statement and the exhibit thereto and such other documents and matters of law and fact as we have considered necessary or appropriate. In addition, we have not made an independent investigation or audit of the facts set forth in the above referenced documents or otherwise provided to us. We have assumed (i) the authenticity of all documents submitted to us as originals and the conformity to original documents of all documents submitted to us as copies, (ii) that the Offering will be consummated as described in the Registration Statement; (iii) that the statements concerning the terms of the Offering set forth in the Registration Statement are true, complete and correct and will remain true, complete and correct at all relevant times; and (iv) that any such statements made in the Registration Statement qualified by knowledge, intention, belief or any other similar qualification are true, complete and correct, and will remain true, complete and correct at all relevant times, in each case as if made without such qualification. We also have relied on certain written representations of the Company contained in an Officer's Certificate dated on or about the date hereof. If any of the above described assumptions are untrue for any reason, or if the Offering is consummated in a manner that is different from the manner described in the Registration Statement, our opinion as expressed below may be adversely affected.

Based upon and subject to the foregoing, and our consideration of such other matters of fact and law as we have considered necessary or appropriate, we hereby confirm to you that the statements set forth under the caption "MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS" in the Registration Statement, to the extent such statements summarize U.S. federal income tax law, and subject to the limitations, qualifications, exceptions, and assumptions set forth herein and therein, constitute our opinion as to the material United States federal income tax consequences of the Offering to U.S. holders of Common Units, Pre-Funded Units, Common Shares, Warrants and Pre-Funded Warrants. We express no opinion on any issue relating to the tax consequences of the transactions contemplated by the Registration Statement other than the opinion set forth above. Our opinion set forth above is based on the Internal Revenue Code of 1986, as amended, Treasury Regulations promulgated thereunder, administrative pronouncements and judicial precedents, all as of the date hereof. The foregoing authorities may be repealed, revoked or modified, and any such change may have retroactive effect. Any change in applicable laws or facts and circumstances surrounding the Offering, or any inaccuracy in the statements, facts, assumptions and representations on which we have relied may affect the validity of the opinion set forth herein. We assume no responsibility to inform the Company of any such change or inaccuracy that may occur or come to our attention.

701 Fifth Avenue | Suite 6100 | Seattle, WA 98104-7043 | Tel. 206-903.8800 | dorsey.com

KWESST Micro Systems Inc.

November 7, 2022

Page 2

Our opinion is not binding on the Internal Revenue Service or a court. There can be no assurance that the Internal Revenue Service will not take a contrary position or that a court would agree with our opinion if litigated.

We are furnishing this opinion in connection with the filing of the Registration Statement and this opinion is not to be relied upon for any other purpose without our prior written consent. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement.

Very truly yours,

/s/ Dorsey & Whitney LLP

KRF/JDH

EX-23.1

November 7, 2022

To:Whom it may concern:

Re: KWESST Micro Systems Inc.

In connection with the filing of this Amendment No.4 to Form F-1 dated November 7, 2022, to be filed under the Securities Act of 1934 (U.S.) of KWESST Micro Systems Inc. (the "Company"), we consent to being named and to the use of our report dated November 22, 2021 to the shareholders of the Company on the following consolidated financial statements:

a)Consolidated statements of financial position as at September 30, 2020 and December 31, 2019.

b)Consolidated statements of loss and comprehensive loss, changes in shareholders' equity and cash flows for the nine month ended September 30, 2020 and twelve months ended December 31, 2019, and a summary of significant accounting policies and other explanatory information.

We report that we have read the Amendment No.4 to Form F-1 and all information therein and have no reason to believe that there are any misrepresentations in the information contained therein that are derived from the financial statements upon which we have reported or that are within our knowledge as a result of our audit of such consolidated financial statements.

Sincerely,

/s/ Kreston GTA LLP

Chartered Professional Accountants, Licensed Public Accountants

Markham, Canada

Kreston GTA LLP | 8953 Woodbine Avenue, Markham, Ontario, Canada, L3R 0J9, T. 905.474.5593 | www.krestongta.com
A member of Kreston International | A global network of independent accounting firms

EX-23.2

Consent of Independent Registered Public Accounting Firm

The Board of Directors

KWESST Micro Systems Inc.

We, KPMG LLP, consent to the inclusion in this Amendment No.4 to Form F-1 Registration Statement of KWESST Micro Systems Inc. (the "Company") dated November 7, 2022 being filed with the United States Securities and Exchange Commission, of our report dated November 24, 2021, on the consolidated financial statements of the Company, which comprise the consolidated statement of financial position as at September 30, 2021, the related consolidated statements of net loss and comprehensive loss, changes in shareholders' equity and cash flows for the year ended September 30, 2021, and the related notes, which is included herein, and to the reference to our firm under the heading "Experts" included in the Amendment No.4 to Form F-1 Registration Statement.

/s/ KPMG LLP

Chartered Professional Accountants, Licensed Public Accountants

November 7, 2022

Ottawa, Canada