0001062993-24-015179.txt : 20240815 0001062993-24-015179.hdr.sgml : 20240815 20240815163432 ACCESSION NUMBER: 0001062993-24-015179 CONFORMED SUBMISSION TYPE: 6-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20240630 FILED AS OF DATE: 20240815 DATE AS OF CHANGE: 20240815 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KWESST Micro Systems Inc. CENTRAL INDEX KEY: 0001889823 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] ORGANIZATION NAME: 06 Technology IRS NUMBER: 000000000 STATE OF INCORPORATION: A1 FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 6-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-41566 FILM NUMBER: 241212932 BUSINESS ADDRESS: STREET 1: 155 TERENCE MATTHEWS CRESCENT, UNIT #1 CITY: KANATA STATE: A6 ZIP: K2M 2A8 BUSINESS PHONE: 613-319-0537 MAIL ADDRESS: STREET 1: 155 TERENCE MATTHEWS CRESCENT, UNIT #1 CITY: KANATA STATE: A6 ZIP: K2M 2A8 6-K 1 form6k.htm FORM 6-K KWESST Micro Systems Inc.: Form 6-K - Filed by newsfilecorp.com

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 6-K

REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16
UNDER THE SECURITIES EXCHANGE ACT OF 1934

For the month of August, 2024.

Commission File Number: 001-41566



KWESST Micro Systems Inc.
(Exact Name of Registrant as Specified in Charter)

155 Terence Matthews Crescent, Unit #1, Ottawa, Ontario, K2M 2A8

(Address of principal executive offices)

Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.

Form 20-F ⊠  Form 40-F ☐

INCORPORATION BY REFERENCE

Exhibits 99.1 and 99.2 of this Form 6-K are incorporated by reference into the Registrant's Registration Statement on Form F-3 (File No. 333-277196).


SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

    KWESST MICRO SYSTEMS INC.
    (Registrant)
       
Date: August 15, 2024 By: /s/ Sean Homuth                        
    Name: Sean Homuth
    Title: President and Chief Executive Officer


EXHIBIT INDEX

99.1

Condensed Consolidated Interim Financial Statements for the three and nine months ended June 30, 2024 and 2023

99.2 Management's Discussion and Analysis for the three and nine months ended June 30, 2024
99.3 Certification of Interim Filings by CEO dated August 14, 2024
99.4 Certification of Interim Filings by CFO dated August 14, 2024


EX-99.1 2 exhibit99-1.htm EXHIBIT 99.1 KWESST Micro Systems Inc.: Exhibit 99.1 - Filed by newsfilecorp.com

 

Unaudited Condensed Consolidated Interim Financial Statements of

KWESST MICRO SYSTEMS INC.

Three and nine months ended June 30, 2024, and 2023

(Expressed in Canadian dollars)

 


KWESST MICRO SYSTEMS INC.

Table of contents for the three and nine months ended June 30, 2024, and 2023

  Page
   
FINANCIAL STATEMENTS  
   
Unaudited Condensed Consolidated Interim Statements of Financial Position 3
   
Unaudited Condensed Consolidated Interim Statements of Net Loss and Comprehensive Loss 4
   
Unaudited Condensed Consolidated Interim Statements of Changes in Shareholders' Equity (Deficit) 5
   
Unaudited Condensed Consolidated Interim Statements of Cash Flows 6
   
Notes to the Unaudited Condensed Consolidated Interim Financial Statements 7-25


KWESST MICRO SYSTEMS INC.
Unaudited Condensed Consolidated Interim Statements of Financial Position
At June 30, 2024 and September 30, 2023
 

               
In Canadian dollars Notes      June 30,
  2024
    September 30,
2023
 
               
ASSETS              
  Cash and cash equivalents   $ 1,178,879   $ 5,407,009  
  Restricted short-term investment     30,000     30,000  
  Trade and other receivables 4   401,600     300,269  
  Inventories 5   618,862     542,388  
  Prepaid expenses and other     396,405     562,408  
  Deferred costs     44,377     -  
Current assets     2,670,123     6,842,074  
               
  Property and equipment     340,268     417,296  
  Right-of-use assets     262,856     361,036  
  Deposit     28,098     26,076  
  Intangible assets 6   3,419,793     4,112,350  
  Deferred costs     20,522     -  
Non-current assets     4,071,537     4,916,758  
Total Assets   $ 6,741,660   $ 11,758,832  
               
LIABILITIES AND SHAREHOLDERS' EQUITY               
Liabilities              
  Accounts payable and accrued liabilities 7 and 8 $ 1,582,679   $ 1,649,876  
  Accrued royalties liability     200,000     150,000  
  Lease obligations     147,236     127,116  
  Contract liabilities 9   107,098     120,970  
  Warrant liabilities 10 and 11(b)   288,851     4,335,673  
Current liabilities     2,325,864     6,383,635  
               
  Accrued royalties liability     1,074,137     1,137,170  
  Lease obligations     194,984     302,407  
Non-current liabilities     1,269,121     1,439,577  
Total Liabilities     3,594,985     7,823,212  
               
Shareholders' Equity (Deficit)              
  Share capital 11(a)   37,420,394     33,379,110  
  Warrants 11(b)   1,127,861     1,042,657  
  Contributed surplus 11(c)    4,972,594     4,769,115  
  Accumulated other comprehensive loss     (57,444 )   (39,663 )
  Accumulated deficit     (40,316,730 )   (35,215,599 )
Total Shareholders' Equity (Deficit)     3,146,675     3,935,620  
               
Total Liabilities and Shareholders' Equity (Deficit)   $ 6,741,660   $ 11,758,832  

See Note 2(a) Going concern and Note 17 Commitments and contingencies.

See accompanying notes to the unaudited condensed consolidated interim financial statements.

On behalf of the Board of Directors:    
     
(signed) Paul Mangano, Director   (signed) David Luxton , Director


KWESST MICRO SYSTEMS INC.
Unaudited Condensed Consolidated Interim Statements of Net Loss and Comprehensive Loss
Three and nine months ended June 30, 2024 and 2023
 

                           
In Canadian dollars Notes   Three Months
Ended
June 30,
2024
    Three Months
Ended
June 30,
2023
    Nine Months
Ended
June 30,
2024
    Nine Months
Ended
June 30,
2023
 
                           
Revenue 13 $ 329,476   $ 150,269   $ 944,408   $ 629,005  
Cost of sales     (288,665 )   (113,471 )   (715,219 )   (381,689 )
Gross profit     40,811     36,798     229,189     247,316  
                           
Operating expenses                          
  General and administrative      1,484,509     1,802,054     4,861,998     4,446,512  
  Selling and marketing     224,791     731,543     1,139,413     2,338,646  
  Research and development, net     516,289     457,028     1,865,614     1,026,537  
Total operating expenses     2,225,589     2,990,625     7,867,025     7,811,695  
                           
Operating loss     (2,184,778 )   (2,953,827 )   (7,637,836 )   (7,564,379 )
                           
Other income (expenses)                          
  Share issuance costs 11(a)   (366,931 )   -     (366,931 )   (1,309,545 )
  Net finance costs 14   (63,034 )   (40,826 )   (137,889 )   (595,510 )
  Foreign exchange gain (loss)     (22,492 )   24,332     68,413     (125,708 )
  Change in fair value of warrant liabilities 10   1,475,280     (481,704 )   2,973,112     2,707,691  
Total other income (expenses), net     1,022,823     (498,198 )   2,536,705     676,928  
                           
Net loss    $ (1,161,955 ) $ (3,452,025 ) $ (5,101,131 ) $ (6,887,451 )
                           
Other comprehensive income:                          
Items that are or may be reclassified subsequently to profit or loss:                          
  Foreign currency translation differences     (14,578 )   4,713     (17,781 )   26,137  
Total comprehensive loss   $ (1,176,533 ) $ (3,447,312 ) $ (5,118,912 ) $ (6,861,314 )
                           
Net loss per share                          
  Basic and diluted 12 $ (0.13 ) $ (0.81 ) $ (0.77 ) $ (2.04 )
                           
Weighted average number of shares outstanding                          
  Basic and diluted 12   8,803,585     4,272,663     6,600,267     3,374,705  

See accompanying notes to the unaudited condensed consolidated interim financial statements.


KWESST MICRO SYSTEMS INC.
Unaudited Condensed Consolidated Interim Statements of Changes in Shareholders' Equity (Deficit)
Nine months ended June 30, 2024 and 2023
 
In Canadian dollars                                   Total  
  Notes               Contributed     Translation           Shareholders'  
    Share capital   Warrants   surplus     reserve     Deficit   Equity (Deficit)  
Balance, September 30, 2022   $ 19,496,640   $ 1,959,796   $ 3,551,330   $ (101,418 ) $ (25,909,239 ) $ (1,002,891 )
Shares issued for public offering 11(a)   13,675,120     -     -     -     -     13,675,120  
Share offering costs 11(a)   (3,050,278 )   189,592     125,086     -     -     (2,735,600 )
Shares issued for debt 11(a)   233,485     -     -     -     -     233,485  
Warrants exercised     60,000     (60,000 )   -     -     -     -  
Share-based compensation 11(c)   -     -     316,261     -     -     316,261  
Shares for vested RSUs and PSUs     529,504     -     (529,504 )   -     -     -  
Vested RSUs repurchased for withholding taxes     -     -     (612 )   -     -     (612 )
Stock options exercised     5,836     -     (1,789 )   -     -     4,047  
Other comprehensive income     -     -     -     26,137     -     26,137  
Net loss     -     -     -     -     (6,887,451 )   (6,887,451 )
Balance, June 30, 2023   $ 30,950,307   $ 2,089,388   $ 3,460,772   $ (75,281 ) $ (32,796,690 ) $ 3,628,496  
                                       
Balance, September 30, 2023   $ 33,379,110   $ 1,042,657   $ 4,769,115   $ (39,663 ) $ (35,215,599 ) $ 3,935,620  
Shares issued for public offering 11(a)   2,961,605     105,081     -     -     -     3,066,686  
Share offering costs 11(a)   (691,560 )   -     -     -     -     (691,560 )
Warrants exercised 11(b)   1,771,239     -     -     -     -     1,771,239  
Warrants expired 11(b)   -     (19,877 )   19,877     -     -     -  
Share-based compensation 11(c)   -     -     183,602     -     -     183,602  
Other comprehensive income     -     -     -     (17,781 )   -     (17,781 )
Net loss     -     -     -     -     (5,101,131 )   (5,101,131 )
Balance, June 30, 2024   $ 37,420,394   $ 1,127,861   $ 4,972,594   $ (57,444 ) $ (40,316,730 ) $ 3,146,675  

See accompanying notes to the unaudited condensed consolidated interim financial statements.


KWESST MICRO SYSTEMS INC.
Unaudited Condensed Consolidated Interim Statements of Cash Flows
Nine months ended June 30, 2024 and 2023
 

               
      Nine months ended     Nine months ended  
      June 30,     June 30,  
In Canadian dollars Notes   2024     2023  
               
OPERATING ACTIVITIES              
Net loss   $ (5,101,131 ) $ (6,887,451 )
Items not affecting cash:              
Depreciation and amortization     963,050     609,634  
Share-based compensation 11(c)   183,602     316,261  
Change in fair value of warrant liabilities (including related foreign exchange gain) 10   (2,985,250 )   (2,788,423 )
Net finance costs 14   137,889     621,022  
Changes in non-cash working capital items 16   (95,865 )   (3,091,999 )
Interest received (paid)     21,427     (125,364 )
               
Cash used in operating activities     (6,876,278 )   (11,346,320 )
               
INVESTING ACTIVITIES              
Additions of property and equipment     (85,462 )   (243,528 )
Investments in intangible assets 6   (9,823 )   (598,525 )
Deposit for advanced royalties     -     (148,410 )
               
Cash flows used in investing activities     (95,285 )   (990,463 )
               
FINANCING ACTIVITIES              
Repayments of lease obligations     (111,674 )   34,430  
Proceeds from U.S. IPO and Canadian Offering, net 11(a)   -     16,346,768  
Proceeds from U.S. Public Offering-April 2024 11(a)   1,356,743     -  
Proceeds from U.S. Public Offering-June 2024 11(a)   2,312,916     -  
Payments of share offering costs 11(a)   (921,246 )   (125,397 )
Payments of deferred financing fees     -     -  
Repayment of borrowings     -     (2,333,315 )
Proceeds from exercise of warrants     106,694     -  
Proceeds from exercise of stock options     -     4,052  
Repurchase of vested RSUs and PSUs for withholding taxes     -     (612 )
               
Cash flows provided by financing activities     2,743,433     13,925,926  
               
Net change in cash during the period     (4,228,130 )   1,589,143  
Cash, beginning of period     5,407,009     170,545  
               
Cash, end of period   $ 1,178,879   $ 1,759,688  
               
Cash and cash equivalents consist of the following:              
Cash held in banks     1,178,879     (1,270,262 )
Short-term guaranteed investment certificates     -     3,029,950  
Cash and cash equivalents     1,178,879     1,759,688  

See Note 16 Supplemental cash flow information.

See accompanying notes to the unaudited condensed consolidated interim financial statements.


KWESST MICRO SYSTEMS INC.
Notes to unaudited Condensed Consolidated Interim Financial Statements
Three and nine months ended June 30 2024, and 2023
(Expressed in Canadian dollars, except share amounts)

1. Corporate information

a) Corporate information

KWESST 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, on the Nasdaq Capital Market ("Nasdaq") under the stock symbol of KWE and on the Frankfurt Stock Exchange under the stock symbol of 62U.  Additionally, warrants issued in the United States are also listed on the Nasdaq under the stock symbol of KWESW.  Effective May 1, 2023, the warrants issued in Canada are listed on the TSX-V under the stock symbol of KWE.WT.U.

b) Reverse Stock Split

In August 2022, we submitted a Form F-1 Registration Statement to the U.S. Securities and Exchange Commission and applied to have its common shares listed on Nasdaq. In connection with KWESST's listing application on Nasdaq, we effected a one for seventy (1-for-70) reverse stock split of its common stock on October 28, 2022 (the "Reverse Split").  Accordingly, all shareholders of record at the opening of business on October 28, 2022, received one issued and outstanding common share of KWESST in exchange for seventy outstanding common shares of KWESST.  No fractional shares were issued in connection with the Reverse Split.  All fractional shares created by the Reverse Split were rounded to the nearest whole number of common shares, with any fractional interest representing 0.5 or more common shares entitling holders thereof to receive one whole common share. 

Effective on the date of the Reverse Split, the exercise price and number of common shares issuable upon the exercise of outstanding stock options were proportionately adjusted to reflect the Reverse Split. The restricted share units ("RSUs") and performance stock units ("PSUs") have also been adjusted for the Reverse Split.  While the number of warrants has not changed as a result of the Reverse Split; the conversion rate for each warrant was adjusted from one common share to 0.01428571 common share.  All information respecting outstanding common shares and other securities of KWESST, including net loss per share, in the current and comparative periods presented herein give effect to the Reverse Split.

2. Basis of preparation

(a) Going concern

These unaudited condensed consolidated interim financial statements have been prepared assuming we 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 a $5.1 million net loss and negative operating cash flows of $6.9 million for the nine months ended June 30, 2024 (2023 - $6.9 million net loss and negative operating cash flows of $11.3 million). At June 30, 2024, we had $0.3 million in working capital (September 30, 2023 - $0.5 million) and $40.3 million in deficit (September 30, 2023 – $35.2 million).


KWESST MICRO SYSTEMS INC.
Notes to unaudited Condensed Consolidated Interim Financial Statements
Three and nine months ended June 30 2024, and 2023
(Expressed in Canadian dollars, except share amounts)

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, timely commercial launch of new products, and the ability to raise additional debt or equity financing, when required. There are various risks and uncertainties affecting our future financial position and our 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; and
  • General local and global economic conditions, including the ongoing conflict in Gaza and the global disruption from Russia's invasion of Ukraine.

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 substantial doubt about our ability to continue as a going concern.

These unaudited 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.

(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") and the interpretations of the IFRS Interpretations Committee.  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, 2023. However, selected explanatory notes are included to explain events and transactions that are material 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, 2023.

These unaudited condensed consolidated interim financial statements were authorized for issue by the Board of Directors on August 14, 2024.

(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.


KWESST MICRO SYSTEMS INC.
Notes to unaudited Condensed Consolidated Interim Financial Statements
Three and nine months ended June 30 2024, and 2023
(Expressed in Canadian dollars, except share amounts)

At June 30, 2024, we have the following wholly owned subsidiaries:

  Location Equity %
KWESST Inc. Ottawa, Canada 100%
2720178 Ontario Inc. Guelph, Canada 100%
Police Ordnance Company Inc. Guelph, Canada 100%
KWESST U.S. Holdings Inc. Delaware, United States 100%
KWESST Defense Systems U.S. Inc. North Carolina, United States 100%
KWESST Public Safety Systems U.S. Inc. North Carolina, United States 100%
KWESST Public Safety Systems Canada Inc. Ottawa, Canada 100%

(d) Functional and presentation currency

These unaudited condensed consolidated interim financial statements are presented in Canadian dollars ("CAD"), our functional currency and presentation currency.

(e) Basis of measurement

The unaudited condensed consolidated interim financial statements have been prepared on a 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) 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 material effects on the amounts recognized in these unaudited condensed consolidated interim financial statements are the same as disclosed in Note 2(f) of the consolidated financial statements for the year ended September 30, 2023.

Estimates

Information about assumptions and estimation uncertainties at June 30, 2024, that have a material 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(f) of the audited consolidated financial statements for the year ended September 30, 2023.

3. Significant accounting policies

During the nine months ended June 30, 2024, the accounting policies in these unaudited condensed consolidated interim financial statements are the same as those applied in KWESST's consolidated financial statements as at and for the year ended September 30, 2023.

4. Trade and other receivables

The following table presents trade and other receivables for KWESST:


KWESST MICRO SYSTEMS INC.
Notes to unaudited Condensed Consolidated Interim Financial Statements
Three and nine months ended June 30 2024, and 2023
(Expressed in Canadian dollars, except share amounts)

    June 30, 
2024
    September 30,
2023
 
             
Trade receivables $ 309,873   $ 68,530  
Unbilled revenue   28,582     5,211  
Sales tax recoverable   63,145     226,528  
Total  $ 401,600   $ 300,269  

There was no impairment of trade and other receivables during the three and nine months ended June 30, 2024 (2023 - $nil).

The following table presents changes in unbilled receivables:

    June 30, 
2024
    September 30,
2023
 
Balance, beginning of period $ 5,211   $ 8,881  
Revenue billed during the period   -     (3,670 )
Revenue in excess of billings, net of amounts transferred    to trade receivables   23,371     -  
Balance, end of period $ 28,582   $ 5,211  
Current $ 28,582   $ 5,211  

5. Inventories

The following table presents a breakdown of inventories: 


    June 30,     September 30,  
    2024     2023  
Finished goods $ 79,852   $ 62,730  
Work-in-progress   62,276     116,435  
Raw materials   476,734     363,223  
Total $ 618,862   $ 542,388  

There was no impairment of inventories during the three and nine months ended June 30, 2024 (2023 - $nil).

$0.1 million and $0.6 million of inventory was released to cost of goods sold for the three and nine months ended June 30, 2024, respectively (2023 - $0.1 million and $0.3 million, respectively).

6. Intangible assets

The following table shows the movement in intangible assets since September 30, 2023:

                                     
    PARA OPSTM     PARA OPSTM     ARWENTM     Customer     Purchase        
Cost   System     Patent     Tradename     Relationships     Orders     Total  
Balance at September 30, 2023 $ 3,998,395   $ 40,295   $ 28,232   $ 41,041   $ 4,387   $ 4,112,350  
Additions   -     9,823     -     -     -     9,823  
Amortization   (692,030 )   -     (6,600 )   (3,750 )   -     (702,380 )
Balance at June 30, 2024 $ 3,306,365   $ 50,118   $ 21,632   $ 37,291   $ 4,387   $ 3,419,793  

At June 30, 2024, management concluded there was no indication of impairment on the intangible assets (2023 - $nil).


KWESST MICRO SYSTEMS INC.
Notes to unaudited Condensed Consolidated Interim Financial Statements
Three and nine months ended June 30 2024, and 2023
(Expressed in Canadian dollars, except share amounts)

7. Accounts payable and accrued liabilities

The following table presents a breakdown of our accounts payable and accrued liabilities:

    June 30,     September 30,  
    2024     2023  
Trade payable $ 713,817   $ 367,128  
Accrued liabilities   585,603     1,189,678  
Salary and vacation payable   283,259     93,070  
Total $ 1,582,679   $ 1,649,876  

8.  Related party transactions

At June 30, 2024, there was $330,114 (September 30, 2023 - $216,730) outstanding amount in accounts payable and accrued liabilities due to our officers and directors for unpaid wages, bonuses, director fees, and expense reimbursements.

9. Contract liabilities

The following is a reconciliation of contract liabilities since September 30, 2023:

    June 30,
2024
    September 30,
2023
 
             
Balance, beginning of period $ 120,970   $ 47,271  
Amounts invoiced and revenue deferred   47,125     120,970  
Recognition of deferred revenue included in the  balance at the beginning of period   (60,997 )   (47,271 )
Balance, end of period $ 107,098   $ 120,970  

10. Warrant liabilities

The following table shows a breakdown and balance of warrant liabilities at June 30, 2024:

    U.S. IPO and Canadian Offering     Private Placement     Debt Settlement     Public Offering        
          Over-allotment                                      
          Pre-Funded
    Over-allotment     2023     Pre-Funded           Pre-Funded        
    2022 Warrants     Warrants     Warrants     Warrants     Warrants     Warrants     Warrants     Total  
Balance, beginning of period $ 1,042,538   $ 414,334   $ 121,173   $ 798,573   $ 1,940,914   $ 18,141   $ -   $ 4,335,673  
Initial recognition   -     -     -     -     -     -     708,054     708,054  
Exercised   -     (119,257 )   -     -     (829,720 )   -     (820,649 )   (1,769,626 )
(Gain) Loss on revaluation of financial instruments   (923,382 )   (295,186 )   (107,252 )   (724,119 )   (1,011,296 )   (16,104 )   104,227     (2,973,112 )
Exchange (gain) loss on revaluation   (2,133 )   109     (320 )   (9,019 )   (9,143 )   -     8,368     (12,138 )
Balance, end of period $ 117,023   $ -   $ 13,601   $ 65,435   $ 90,755   $ 2,037   $ -   $ 288,851  
Number of outsanding securities as at June 30, 2024   3,226,392     -     375,000     1,542,194     151,734     56,141     -     5,351,461  


KWESST MICRO SYSTEMS INC.
Notes to unaudited Condensed Consolidated Interim Financial Statements
Three and nine months ended June 30 2024, and 2023
(Expressed in Canadian dollars, except share amounts)

The following table shows a breakdown and balance of warrant liabilities at June 30, 2023:

    U.S. IPO and Canadian Offering     Debt Settlement        
          Over-allotment                    
    2022     Pre-Funded     Over-allotment              
    Warrants     Warrants     Warrants     Warrants     Total  
Balance, beginning of period $ -   $ -   $ -   $ -   $ -  
Initial recognition   4,617,451     832,698     536,681     80,617     6,067,447  
(Gain) Loss on revaluation of financial instruments   (2,641,798 )   34,659     (305,270 )   (47,158 )   (2,959,567 )
Exchange gain on revaluation   (52,788 )   (20,026 )   (7,918 )   -     (80,732 )
Balance, end of period $ 1,922,865   $ 847,331   $ 223,493   $ 33,459   $ 3,027,148  
Number of outsanding securities as at June 30, 2023   3,226,392     199,000     375,000     56,141     3,856,533  

U.S. IPO and Canadian Offering

On December 9, 2022, we closed an underwritten U.S. public offering (the "U.S. IPO") and an underwritten Canadian offering (the "Canadian Offering") for aggregate gross proceeds of CAD$19.4 million (US$14.1 million) (see Note 11(a)). As part of the U.S. IPO and Canadian Offering, we have issued 3,226,392 warrants (the "2022 Warrants") with an exercise price of US$5.00 per share.  Additionally, the U.S. underwriter exercised its over-allotment option to purchase:

  • 199,000 Pre-Funded Warrants with an exercise price of US$0.01 per share for $3.81024 per pre-funded warrant (net of underwriter discount);
  • 375,000 warrants with exercise price of US$5.00 per share for $0.0001 per warrant;

Refer to Note 11(a) for further information on the U.S. IPO and Canadian Offering.

In accordance with IFRS, the above securities are classified as financial liabilities (referred herein as "warrant liabilities") because the exercise price is denominated in U.S. dollars, which is different to our functional currency (Canadian dollars). Accordingly, the ultimate proceeds in Canadian dollars from the potential exercise of the above securities are not known at inception. These financial liabilities are classified and measured at FVTPL (see Note 3(c) of the audited consolidated financial statements for the year ended September 30, 2023). Gains on revaluation of the warrant liabilities are presented in Other income (expenses) on the unaudited condensed consolidated interim statements of net loss and comprehensive loss.

Warrant liabilities

While the warrants issued in the U.S. IPO were listed on Nasdaq and closed at US$0.90 per warrant on December 9, 2022, management concluded that this closing price was not reflective of an active market due to short trading window and therefore not representative of fair value. Accordingly, at inception, the 2022 Warrants were measured at fair value using the Black Scholes option pricing model (Level 2). We used the following assumptions:


KWESST MICRO SYSTEMS INC.
Notes to unaudited Condensed Consolidated Interim Financial Statements
Three and nine months ended June 30 2024, and 2023
(Expressed in Canadian dollars, except share amounts)

    2022
Warrants
    Over-allotment
Pre-Funded
Warrants (1)
    Over-allotment
Warrants (2)
 
Number of dilutive securities   3,282,533     199,000     375,000  
Exercise price (in USD) $ 5.00   $ 0.01        
Share price (in USD) $ 4.13   $ 3.08        
Expected life   2.50              
Dividend $ -              
Volatility   75%              
Risk free rate   4.20%              
Exchange rate (USD/CAD) $ 1.363              
Fair value per warrant (CAD) $ 1.43   $ 4.18   $ 1.43  

(1) Fair value is measured at the underlying common share closing price on Nasdaq on December 9, 2022, less US$0.01 exercise price.

(2) Same fair value as calculated for Warrants.

The share price (in USD) for the over-allotment pre-funded warrants was based on the estimated fair value of the common shares issued on December 9, 2022, by deducting the fair value of the warrants of US$1.05 from the US$4.13 Unit price and the exercise price of US$0.01 (see Note 11(a)).

Based on the above fair value, the issuance of the over-allotment pre-funded warrants and warrants to the underwriter resulted in a non-cash charge of $251,877, which is included in the change in fair value of warrant liabilities in the unaudited condensed consolidated interim statements of net loss and comprehensive loss for the three months ended December 31, 2022.

At June 30,2024, the fair value of the warrants was remeasured using the following assumptions:

    2022
Warrants (1)
    Over-allotment
Pre-Funded
Warrants
    Over-allotment
Warrants (1)
 
Number of securities   3,282,533     -     375,000  
Nasdaq closing price (in USD) $ 0.03   $ -   $ 0.03  
Exchange rate (USD/CAD) $ 1.3687   $ -   $ -  
Fair value per warrant (CAD) $ 0.04   $ -   $ 0.04  

(1) Fair value is based on the Nasdaq closing pricing on June 28, 2024, for the warrants.

We recognized a gain of $678,172 and $1,325,820 in fair value of warrant liabilities during the three and nine months ended June 30,2024, respectively, which was reported in the unaudited condensed consolidated net loss and comprehensive loss.

December 2022 Debt Settlement

On December 13, 2022, we had entered into share for debt arrangements with existing lenders (see Note 11(a)), which resulted in issuing 56,141 Units, same terms as the Units as issued in the Canadian Offering except that the underlying securities are subject to a four-month hold period. Accordingly, this resulted in issuing 56,141 common shares and 56,141 warrant liabilities with an exercise price of US$5.00 per share and maturing on December 13, 2027. We initially recorded the fair value of the warrant liabilities using the Black Scholes option pricing model with an underlying stock price equivalent to the unit price of US$4.13.


KWESST MICRO SYSTEMS INC.
Notes to unaudited Condensed Consolidated Interim Financial Statements
Three and nine months ended June 30 2024, and 2023
(Expressed in Canadian dollars, except share amounts)

At June 30 2024, we remeasured the fair value of these warrant liabilities using the Nasdaq closing price on June 28, 2024, of US$0.0265. The remeasurement resulted in a change in fair value of warrant liabilities of $7,092 and $16,104 for the three and nine months ended June, 30, 2024, respectively, which was reported in the unaudited condensed consolidated net loss and comprehensive loss.

Private Placement (July 2023)

On July 21, 2023, we closed an underwritten U.S. private placement for gross proceeds of CAD$7.4 million (US$5.59 million) (see Note 11(a)). As part of the private placement, we have issued 1,542,194 warrants (the "2023 Warrants") with an exercise price of US$2.66 per share. Additionally, 930,548 pre-funded Warrants with an exercise price of US$0.001 per share for US$2.259 per pre-funded warrant were issued.

Refer to Note 11(a) for further information on the private placement.

Under IFRS, the above securities are classified as financial liabilities (referred herein as "warrant liabilities") because the exercise price is denominated in U.S. dollars, which is different to our functional currency (Canadian dollars). Accordingly, the ultimate proceeds in Canadian dollars from the potential exercise of the above securities are not known at inception. These financial liabilities are classified and measured at FVTPL (see Note 3(c) of the audited consolidated financial statements for the year ended September 30, 2023). Gains on revaluation of the warrant liabilities are presented in other income (expenses) on the consolidated statements of net loss and comprehensive loss.

Warrant liabilities

The 2023 warrants issued in the private placement were not listed on Nasdaq and does not represent an active market Level 1 input. Accordingly, at inception, the 2023 Warrants were measured at fair value using the Black Scholes option pricing model (Level 2). We used the following assumptions:

    2023     Pre-Funded  
    Warrants     Warrants (1)  
Number of dilutive securities   1,542,194     930,548  
Exercise price (in USD) $ 2.66   $ 0.001  
Share price (in USD) $ 2.08   $ 2.08  
Expected life   2.50        
Dividend $ -        
Volatility   67%        
Risk free rate   4.44%        
Exchange rate (USD/CAD) $ 1.321   $ 1.321  
             
Fair value per warrant (CAD) $ 0.99   $ 1.98  

(1) Fair value is measured at the underlying common share closing price on Nasdaq on July 21, 2023, less US$0.001 exercise price.

The share price (in USD) for the pre-funded warrants was based on the estimated fair value of the common shares issued on July 21, 2023, by deducting the fair value of the warrants of US$0.75 from the US$2.26 Unit price and the exercise price of US$0.001 (see Note 11(a)).


KWESST MICRO SYSTEMS INC.
Notes to unaudited Condensed Consolidated Interim Financial Statements
Three and nine months ended June 30 2024, and 2023
(Expressed in Canadian dollars, except share amounts)

At June 30, 2024, we remeasured the fair value of these warrants using the following assumptions:

    2023 Warrants
(1)
    Pre-Funded
Warrants (2)
 
Number of securities   1,542,194     151,734  
Nasdaq closing price (in USD) $ -   $ 0.438  
Black Scholes fair value (in USD) $ 0.03        
Volatility   91%        
Risk free rate   4.00%        
Exchange rate (USD/CAD) $ 1.3687   $ 1.3687  
Fair value per warrant (CAD) $ 0.04   $ 0.59  

(1) Fair value is based on the Black Scholes model on June 30, 2024, for the warrants.

(2) Fair value is measured at the Nasdaq closing price on June 28, 2024, for the underlying common stock less US$0.001 exercise price.

We recognized a gain of $894,242 and $1,735,414 in fair value of warrant liabilities during the three and nine months ended June 30, 2024 respectively, which was reported in the unaudited condensed consolidated net loss and comprehensive loss.

US Public Offering (April 2024)

On April 9, 2024, we closed an underwritten U.S. public offering for gross proceeds of CAD$1.4 million (US$1 million) (see Note 11(a)). In this offering, 803,500 pre-funded Warrants with an exercise price of US$0.001 per share for US$0.649 per pre-funded warrant were issued.

Refer to Note 11(a) for further information on the offering.

Under IFRS, the above securities are classified as financial liabilities (referred herein as "warrant liabilities") because the exercise price is denominated in U.S. dollars, which is different to our functional currency (Canadian dollars). Accordingly, the ultimate proceeds in Canadian dollars from the potential exercise of the above securities are not known at inception. These financial liabilities are classified and measured at FVTPL. Gains on revaluation of the warrant liabilities are presented in other income (expenses) on the consolidated statements of net loss and comprehensive loss.

Warrant liabilities

All 803,500 warrants were subsequently exercised and we recognized a loss of $75,861 in fair value of warrant liabilities during the three and nine months ended June 30, 2024 respectively, which was reported in the unaudited condensed consolidated net loss and comprehensive loss.

11. 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, 2023:


KWESST MICRO SYSTEMS INC.
Notes to unaudited Condensed Consolidated Interim Financial Statements
Three and nine months ended June 30 2024, and 2023
(Expressed in Canadian dollars, except share amounts)

    Number      Amount  
Balance at September 30, 2023   5,616,782   $ 33,379,110  
Issued for U.S. Public Offering   3,635,000   $ 2,961,605  
Issued for debt settlements   46,706     97,615  
Issued for warrant exercise   1,778,254   $ 1,771,239  
Less: share offering costs for the period         (789,176 )
Balance at June 30, 2024   11,076,742   $ 37,420,394  

U.S. IPO and Canadian Offering

On December 9, 2022, we closed the U.S. IPO and the Canadian Offering. In the U.S. IPO, we sold 2.5 million units at a public offering price of USD $4.13 per unit (the "Unit"), consisting of one share of common stock and one warrant to purchase one share of common stock ("Warrant"). The Warrants have a per share exercise price of USD $5.00 and can be exercised immediately. In connection with the closing of the U.S. IPO, the underwriter partially exercised its over-allotment option to purchase an additional 199,000 pre-funded common share purchase warrants ("Pre-Funded Warrants") at US$4.12 (before underwriter discount) and 375,000 option warrants to purchase common shares at US$0.0001 each. A Pre-Funded Warrant is a financial instrument that requires the holder to pay little consideration (exercise price of US$0.01) to receive the common share upon exercise of the Pre-Funded Warrant.  The holder of Pre-Funded Warrants has no voting rights. All these warrants expire on December 9, 2027.

In the Canadian Offering, we sold 726,392 units, each consisting of one common share and one warrant to purchase one common share, at a price to the public of USD $4.13 per unit. The warrants will have a per common share exercise price of USD $5.00, are exercisable immediately and expire in five years on December 9, 2027. Effective May 1, 2023, the warrants are listed on the TSX-V under the stock symbol of KWE.WT.U.

The closing of the U.S. IPO and Canadian Offering resulted in aggregate gross proceeds of CAD$19.4 million (USD $14.1 million), before deducting underwriting discounts and offering expenses.

The common shares of KWESST and the Warrants sold in the U.S. IPO began trading on the Nasdaq Capital Market under the symbols "KWE" and "KWESW", respectively, on December 7, 2022.

ThinkEquity acted as sole book-running manager for the U.S. IPO and PI Financial acted as sole book-running manager for the Canadian Offering.

Accounting Treatment

Refer to Note 10 for the accounting of the warrants issued in the U.S. IPO and Canadian Offering.

Brokers’ Compensation and Share Offering Costs

As consideration for the services provided in connection with the U.S. IPO, ThinkEquity received: (a) a broker-dealer cash commission of US$835,000 (or CAD$1,138,105) equal to 7.5% of the gross offering proceeds of the U.S. Offering and (b) underwriter warrants (the "U.S. Underwriter Warrants") to purchase up to 134,950 common shares equal to 5% of the common shares and pre-funded common share purchase warrants issued under the U.S. Offering. Each U.S. Underwriter Warrant is exercisable to acquire one common share at a price of US$5.1625, exercisable as of June 4, 2023, and expiring on December 9, 2027.

As consideration for the services provided in connection with the Canadian Offering, PI Financial received: (a) a cash commission of approximately US$210,000 (or CAD$286,230); and (b) 50,848 compensation options (the "Canadian Compensation Options"). Each Canadian Compensation Option is exercisable to acquire one Canadian Unit at a price of US$4.13 and expiring on December 9, 2024.


KWESST MICRO SYSTEMS INC.
Notes to unaudited Condensed Consolidated Interim Financial Statements
Three and nine months ended June 30 2024, and 2023
(Expressed in Canadian dollars, except share amounts)

In addition to the above brokers' compensation, we also incurred US$2.1 million share offering costs (or CAD$2.8 million) for the U.S. IPO and Canadian Offering, of which CAD$628,262 was incurred and deferred at September 30, 2022.

The total brokers compensation (including fair value of U.S. Underwriter Warrants and Canadian Compensation Options) and share offering costs was US$3.2 million (or CAD$4.4 million). This total was allocated proportionately to the fair value of common shares and warrant liabilities. Accordingly, CAD$1.3 million allocated to warrant liabilities was reported in the unaudited condensed consolidated net loss and comprehensive loss.

Debt Settlement (December 2022)

We have entered into share for debt arrangements with existing lenders, which closed on December 13, 2022, following TSXV's conditional approval.  This resulted in issuing 56,141 Units to settle $12,000 of the March 2022 Loans and USD$223,321 (or CAD$302,197) of the August 2022 Loans, including unpaid accrued interest and 10% premium at maturity (the "Debt Settlements"). The terms of the Units are the same as the Units issued in the Canadian Offering.

Private Placement (July 2023)

On July 21, 2023, we closed a brokered private placement, resulting in the issuance of 1,542,194 common shares of KWESST, for aggregate gross proceeds of USD$5,588,397 (approximately CAD$7.4M) (the "July 2023 Offering").

As a part of the July 2023 Offering, the Company issued 1,542,194 common shares at a price of US$2.26 (CAD$2.98) per common share (each a "Common Share") and 930,548 pre-funded warrants at a price of US$2.259 (CAD$2.979) per pre-funded warrant (each a "Pre-funded Warrant"), with each Common Share and Pre-funded Warrant being bundled with one common share purchase warrant of the Company (each a "Common Warrant"). Each Pre-Funded Warrant entitles the holder to acquire one Common Share at an exercise price of US$0.001 per Common Share, and each Common Warrant is immediately exercisable and entitles the holder to acquire one Common Share at an exercise price of US$2.66 (CAD$3.50) per Common Share for a period of 60 months following the closing of the July 2023 Offering. Although the Common Shares and Pre-funded Warrants are each bundled with a Common Warrant, each security is issued separately.

Brokers' Compensation and Share Offering Costs

ThinkEquity acted as sole placement agent for the Offering. As compensation for services rendered, the Company paid to ThinkEquity a cash fee of $475,013.14 representing 8.5% of the aggregate gross proceeds of the Offering and issued 123,637 warrants to purchase a number of Common Shares (the "Placement Agent Warrants"), representing 5% of the Common Shares and Pre-Funded Warrants sold in the Offering. The Placement Agent Warrants will be exercisable, in whole or in part, immediately upon issuance and will expire 60 months after the closing date of the Offering at an initial exercise price of US$2.66 (CAD$3.50) per Common Share.

Debt Settlement (January 2024)

On January 10, 2024, we issued 46,709 common shares in a settlement of debt in an amount of approximately $97,615. The debt resulted in a trail obligation relating to services rendered by a third-party consultant, which the Company has elected to pay in common shares. The common shares issued pursuant to the Debt Settlement (signed October 31, 2023) are subject to a four-month hold period pursuant to applicable securities legislation and the policies of the TSX Venture Exchange.


KWESST MICRO SYSTEMS INC.
Notes to unaudited Condensed Consolidated Interim Financial Statements
Three and nine months ended June 30 2024, and 2023
(Expressed in Canadian dollars, except share amounts)

US Public Offering (April 2024)

On April 9, 2024, we closed a brokered US public offering, resulting in the issuance of 735,000 common shares of KWESST, for aggregate gross proceeds of USD$1,000,025 (approximately CAD$1.4M) (the "April 2024 Public Offering").

As a part of the April 2024 Public Offering, the Company issued 735,000 common shares and 803,500 pre-funded warrants with an exercise price of $0.001 ("Pre-funded Warrants") at a public offering price of US$0.65 (CAD$0.88) per share and US$0.649 (CAD$0.881) per Pre-funded Warrant, less the underwriting discount.

Brokers’ Compensation and Share Offering Costs

ThinkEquity acted as sole book-running manager for the April 2024 Public Offering. As compensation for services rendered, the placement agent fees represent $0.04875 per unit (being an aggregate of US$75,002 or 7.5% of the public offering price of the securities). In addition the Company issued 76,925 warrants to purchase a number of Common Shares (the "Placement Agent Warrants"), representing 5% of the Common Shares and Pre-Funded Warrants sold in the April 2024 Public Offering at an initial exercise price of US$0.8125 (CAD$1.1032) per Common Share. The share offering costs related to the April 2024 Public Offering that was recognized in the unaudited condensed consolidated statements of net loss and comprehensive loss was $343,359 and recognized in equity was $314,087.

The fair value of the broker compensation warrants at the closing of the April 2024 Public Offering was CAD $43,868 and total share offering costs were CAD $657,447.

US Public Offering (June 2024)

On June 14, 2024, we closed a brokered US public offering, resulting in the issuance of 2,900,000 common shares of KWESST, for aggregate gross proceeds of approximately USD$1,682,000 (approximately CAD$2.3M) (the "June 2024 Public Offering").

As a part of the June 2024 Public Offering, the Company issued 2,900,000 common shares at a public offering price of US$0.58 (CAD$0.80) per share, less the placement agent fees.

Brokers' Compensation and Share Offering Costs

ThinkEquity acted as sole book-running manager for the June 2024 Public Offering. As compensation for services rendered, the placement agent fees represent $0.0435 per common share (being an aggregate of US$126,150 or 7.5% of the public offering price of the securities). In addition, the Company issued to the placement agent 145,000 common share purchase warrants with an exercise price of US$0.725 (CAD$1.00) per Common Share, exercisable, in whole or in part, immediately upon issuance and will expire 60 months after the closing date of the June 2024 Public Offering. All of the share offering costs related to the June 2024 Public Offering were recognized in equity.

The fair value of the broker compensation warrants at the closing of the June 2024 Public Offering was CAD $61,213 and total share offering costs were CAD $401,776.


KWESST MICRO SYSTEMS INC.
Notes to unaudited Condensed Consolidated Interim Financial Statements
Three and nine months ended June 30 2024, and 2023
(Expressed in Canadian dollars, except share amounts)

b) Warrants

The following is a summary of changes in outstanding warrants since September 30, 2023:

    Number of
warrants
    Weighted
average exercise
price
 
Outstanding at September 30, 2023   15,507,862   $ 2.49  
Issued (Note 11(a))   1,025,425     0.03  
Exercised  (1)   (1,781,314 )   -  
Expired   (7,420,000 )   (0.20 )
Outstanding at June 30, 2024   7,331,973   $ 2.35  
             
Exercisable at June 30, 2024   7,206,973   $ 2.38  

The table below outlines the ratio upon which the above warrants are converted into common shares. 

(1) The Pre-Funded Warrants exercised in Fiscal 2024 had a strike price of $0.001.

U.S. Underwriter Warrants

In the U.S. IPO, we issued 134,950 warrants ("U.S. Underwriter Warrants").  Each U.S. Underwriter Warrant is exercisable to acquire one common share at US$5.1625 for a period of 5 years (expiring on December 9, 2027). Management estimated the fair value of these warrants using the Black Scholes option model with the following inputs:

Number of dilutive securities   134,950  
Exercise price (in USD) $ 5.16  
Share price (in USD) $ 3.08  
Expected life   2.50  
Dividend $ -  
Volatility   75%  
Risk free rate   4.20%  
Exchange rate (USD/CAD) $ 1.363  
Fair value per warrant (CAD) $ 1.40  

We recorded $189,592 as the fair value for the U.S. Underwriter Warrants at initial recognition in December 2022, with an equal offset to share offering costs (a non-cash transaction).

The following table provides additional information on the total outstanding warrants at June 30,2024:


KWESST MICRO SYSTEMS INC.
Notes to unaudited Condensed Consolidated Interim Financial Statements
Three and nine months ended June 30 2024, and 2023
(Expressed in Canadian dollars, except share amounts)


    Number     Conversion ratio to              
    outstanding     Common Shares     Book value     Expiry Date  
Classified as Equity                        
LEC's warrants:                        
Exercise price of $0.70   500,000     70 for 1   $ 425,000     April 29, 2026  
                         
Acquisition of Police Ordnance:                        
Exercise price of $1.72   200,000     70 for 1   $ 132,000     December 15, 2024  
                         
July 2022 equity financing:                        
Exercise price of $0.285   800,000     70 for 1   $ 72,000     July 14, 2024  
                         
December 2022 U.S. Underwriter Warrants:                        
Exercise price of US$5.1625   134,950     1 for 1   $ 189,592     December 6, 2024  
                         
July 2023 U.S. Underwriter Warrants:                        
Exercise price of US$2.66   123,637     1 for 1   $ 204,187     December 6, 2024  
                         
April 2024 U.S. Underwriter Warrants:                        
Exercise price of US$0.8125   76,925     1 for 1   $ 43,869     April 9, 2029  
                         
June 2024 U.S. Underwriter Warrants                        
Exercise price of US$0.725   145,000     1 for 1   $ 61,213     June 14, 2029  
    1,980,512         $ 1,127,861        
Classified as liability                        
December 2022 public offerings:                        
Exercise price of US$5.00   3,226,392     1 for 1   $ 117,024     December 9, 2027  
                         
December 2022 Option Warrants:                        
Exercise price of US$5.1625   375,000     1 for 1   $ 13,601     December 9, 2024  
                         
December 2022 debt settlement:                        
Exercise price of US$5.00   56,141     1 for 1   $ 2,036     December 9, 2027  
                         
July 2023 public offerings:                        
Exercise price of US$2.66   1,542,194     1 for 1   $ 65,435     July 21, 2028  
                         
July 2023 Pre-Funded Warrants:                        
Exercise price of US$0.001   151,734     1 for 1   $ 90,755     No expiry  
    5,351,461           288,851        
Total outstanding warrants   7,331,973         $ 1,416,712        

c) Contributed Surplus 

Broker Compensation Options

In the Canadian Offering, we issued 50,848 Canadian Compensation Options. Each Canadian Compensation Option is exercisable to acquire one Unit, as defined in Note 11(a), at a price equal to US$4.13 for a period of two years (expiring on December 9, 2024).  Based on the structure of the Compensation Option, management estimated its fair value using the Monte Carlo method (Level 2).  We used the following key inputs in the Monte Carlo model (100,000 simulations):


KWESST MICRO SYSTEMS INC.
Notes to unaudited Condensed Consolidated Interim Financial Statements
Three and nine months ended June 30 2024, and 2023
(Expressed in Canadian dollars, except share amounts)

 

    Initial
Recognition
 
Number of securities   50,848  
Exercise price - compensation option (in USD) $ 4.13  
1-Year CAD/USD Forward Exchange Rate $ 1.3560  
Exercise price - compensation warrant (in USD) $ 5.00  
2-Year CAD/USD Forward Exchange Rate $ 1.3483  
Share price (in CAD) $ 4.20  
Expected life - compensation option   1.00  
Expected life - compensation warrant   2.50  
Dividend $ -  
Volatility - compensation option   90%  
Volatility - compensation warrant   75%  
Risk free rate - compensation option   4.38%  
Risk free rate - compensation warrant   3.15%  
Fair value per compensation option (CAD) $ 2.46  

We recorded $125,086 of Canadian Compensation Options in contributed at initial recognition in December 2022, with an equal offset to share offering costs (a non-cash transaction).

Share-based compensation

On March 31, 2023, KWESST shareholders approved the renewal of the Long-Term Incentive Plan (the "LTIP").  Additionally, the disinterested shareholders (shareholders that are not directors, officers, or other insiders of the Company) of KWESST approved an amendment to the LTIP to increase the number of RSUs, PSUs, DSUs, and SARs (collectively "Share Units") authorized for issuance pursuant to the LTIP from 60,682 to 407,274 Share Units. Accordingly, we have 17,367 Share Units available for future grants.

Further, the disinterested shareholders of KWESST approved to revise the exercise price of 50,981 stock options to $3.60, the closing price of KWESST common shares on the TSX-V on March 31, 2023. In accordance with IFRS 2, this resulted in an immediate fair value increase of $77,001 included in share-based compensation, with an offset to contributed surplus for the three and six months ended March 31, 2023.

We did not grant any stock options, RSUs, PSUs, and SARs, pursuant to our LTIP during the nine months ended June 30, 2024. Accordingly, we had 389,907 outstanding stock options at June 30, 2024, we have 717,767 stock option units available for future grants.

For the three and nine months ended June 30, 2024, we recorded share-based compensation of $59,131 and $183,602, respectively (2023 - $39,214 and $316,261).

12. 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 unaudited condensed consolidated interim statements of net loss and comprehensive loss:


KWESST MICRO SYSTEMS INC.
Notes to unaudited Condensed Consolidated Interim Financial Statements
Three and nine months ended June 30 2024, and 2023
(Expressed in Canadian dollars, except share amounts)

    Three months
ended
June 30,

 2024
    Three months
ended
June 30,
 2023
    Nine months
ended
June 30,
2024
    Nine months
ended
June 30,
 2023
 
Issued common shares,  beginning of period   6,049,204     4,272,113     5,616,782     773,225  
                         
Effect of shares issued from:                        
                         
December 2022 U.S. IPO and Canadian Offering (Note 11(a))   -     -     -     2,399,112  
Over-allotment Pre-Funded Warrants (Note 10)   724,033     -     240,464     147,974  
Debt settlements   -     -     13,807     40,923  
April 2024 U.S. Public Offering (Note 11(a))   662,308     -     219,964     -  
June 2024 U.S. Public Offering (Note 11(a))   509,890     -     169,343     -  
Conversion of stock units   -     337     -     11,033  
Exercise of options   -     213     -     70  
Exercise of warrants   858,150     -     339,907     2,368  
Weighted average number of basic common shares   8,803,585     4,272,663     6,600,267     3,374,705  
                         
Dilutive securities:   -     -     -     -  
Weighted average number of dilutive common shares   8,803,585     4,272,663     6,600,267     3,374,705  

At June 30, 2024 and 2023, all dilutive securities were anti-dilutive because we incurred a net loss for the above periods.

13. 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,
 2024
    Three months
ended
June 30,
2023
    Nine months
 ended
June 30,
 2024
    Nine months
ended
June 30,
 2023
 
                         
Major products / service lines                        
Digitization $ 286,289   $ 61,823   $ 659,775   $ 325,827  
Non-Lethal   39,160     87,706     279,644     301,198  
Training and services   1,028     -     1,028     -  
Other   2,999     740     3,961     1,980  
  $ 329,476   $ 150,269   $ 944,408   $ 629,005  
                         
Primary geographical markets                        
United States $ 19,536   $ 2,364   $ 92,624   $ 29,683  
Canada   309,940     147,905     851,784     599,322  
  $ 329,476   $ 150,269   $ 944,408   $ 629,005  
                         
Timing of revenue recognition                        
Products and services transferred over time $ 287,317   $ 61,823   $ 660,803   $ 325,827  
Products transferred at a point in time   42,159     88,446     283,605     303,178  
  $ 329,476   $ 150,269   $ 944,408   $ 629,005  

At June 30, 2024, KWESST's contracted not yet recognized revenue was $208,886 (2023 - $1,013,841), of which 100% of this amount is expected to be recognized over the next 12 months.


KWESST MICRO SYSTEMS INC.
Notes to unaudited Condensed Consolidated Interim Financial Statements
Three and nine months ended June 30 2024, and 2023
(Expressed in Canadian dollars, except share amounts)

For the three months ended June 30, 2024, three customers accounted for 69.70%, 12.47%, and 3.71% (2023 - three customers accounted for 48.67%, 31.47%, and 9.68%) of revenue. For the nine months ended June 30, 2024, three customers accounted for 44.63%, 17.66%, and 14.66% (2023 - four customers accounted for 35.84%, 14.11%, 11.63%, and 8.03%) of revenue.

14. Net finance costs

The following table presents a breakdown of net finance costs for the following periods:

    Three months ended     Three months ended     Nine months ended     Nine months ended  
    June 30,     June 30,     June 30,     June 30,  
    2024     2023     2024     2023  
Finance costs from:                        
Unsecured loans $ -   $ -   $ -   $ 453,983  
Accretion cost - accrued royalties liability   47,036     41,093     136,967     127,408  
Lease obligations   17,007     7,810     54,868     20,895  
Other   -     -     694     63,204  
Total financing costs   64,043     48,903     192,529     665,490  
Interest income   (1,009 )   (8,077 )   (54,640 )   (59,550 )
Gain on debt settlement   -     -     -     (430 )
Gain on government grant   -     -     -     (10,000 )
Net finance costs $ 63,034   $ 40,826   $ 137,889   $ 595,510  

15. Financial instruments

For the three and nine months ended June 30, 2024, there were no material changes to our financial risks as disclosed in Note 23 of the audited consolidated financial statements for the year ended September 30, 2023, except for the following:

Foreign currency risk

For the three and nine months ended June 30, 2024, we raised combined grossed proceeds of US$2.7 million in an April and June US Public Offering (see Note 11), including the issuance of warrants with exercise price denominated in U.S. dollar in the April US Public Offering (see Note 10). Warrants exercised in Fiscal 2024 resulted in proceeds of US$1.3 million. Also, certain of our revenues were denominated in U.S. dollar and we also procure certain raw materials denominated in U.S. dollar for product development. In Fiscal 2023, we raised gross proceeds of US$14.1 million in the U.S. IPO and Canadian Offering (see Note 11), including the issuance of warrants with exercise price denominated in U.S. dollar (see Note 10), along with a brokered private placement, resulting in the issuance common shares of KWESST for aggregate gross proceeds of US$5.6 million (see Note 11), including the issuance of warrants with exercise price denominated in U.S. dollar (see Note 10). Accordingly, we are exposed to the U.S. dollar currency. Where a natural hedge cannot be achieved, a significant change in the U.S. dollar currency could have a significant effect on our financial performance, financial position and cash flows. Currently, we do not use derivative instruments to hedge its U.S. dollar exposure. 

At June 30, 2024, we had the following net U.S. dollar exposure:

    Total USD  
Net liabilities in U.S. subsidiary $ -  
US denominated from other:      
Assets $ 730,069  
Liabilities   (505,188 )
    224,881  
Total net US dollar exposure  $ 224,881  
Impact to profit  or loss if 5% movement in the US dollar $ 11,244  


KWESST MICRO SYSTEMS INC.
Notes to unaudited Condensed Consolidated Interim Financial Statements
Three and nine months ended June 30 2024, and 2023
(Expressed in Canadian dollars, except share amounts)

During the three and nine months ended June 30, 2024, we recorded a foreign exchange loss of $22,492 and gain of $68,413, respectively (2023 - gain of $24,332 and a loss of $125,708).

Liquidity risk

At June 30, 2024, our contractual obligations were as follows: 

                            5 years and  
Payment due:   Total     Within 1 Year     1 to 3 years     3 to 5 years     beyond  
Minimum royalty commitments $ 2,200,000   $ 200,000   $ 450,000   $ 550,000   $ 1,000,000  
Accounts payable and accrued liabilities   1,582,679     1,582,679     -     -     -  
Lease obligations   342,220     147,236     194,984     -     -  
Total contractual obligations $ 4,124,899   $ 1,929,915   $ 644,984   $ 550,000   $ 1,000,000  

At June 30, 2024, we had $1.2 million in cash and $0.3 million in working capital (see Note 2(a)).

16.   Supplemental cash flow information

The following table presents changes in non-cash working capital:

    Nine months     Nine months  
    ended     ended  
    June 30, 2024     June 30, 2023  
Trade and other receivables $ (101,331 ) $ (126,176 )
Inventories   (76,474 )   (1,197,449 )
Prepaid expenses and other   166,003     (1,128,977 )
Intangible assets   -     7,811  
Accounts payable and accrued liabilities   (43,305 )   (928,614 )
Contract liabilities   (13,872 )   281,407  
Deferred costs   (26,886 )   -  
  $ (95,865 ) $ (3,091,998 )

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, 2024:

  • 46,706 shares issued for debt settlement. The debt resulted in a trail obligation relating to services rendered by a third-party consultant;
  • 778,814 warrants exercised in connection with the July 2023 Prive Placement (see Note 11);
  • 199,000 warrants exercised in connection with the U.S. IPO and Canadian Offering (see Note 11); and
  • 803,500 warrants exercised in connection with the April 2023 US Public Offering (see Note 11).

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, 2023:

  • $2,924,880 non-cash share offering costs and $453,102 accounts payables as part of the net proceeds settlement at the closing of the U.S. IPO and Canadian Offering;
  • 250,000 warrants exercised in connection with the GhostStepTM acquisition in June 2020; and
  • $529,504 of shares issued for vested RSUs and PSUs.

17. Commitments and contingencies

There was no material change to the commitments and contingencies as disclosed in Note 27 of the audited consolidated financial statements for the year ended September 30, 2023.


KWESST MICRO SYSTEMS INC.
Notes to unaudited Condensed Consolidated Interim Financial Statements
Three and nine months ended June 30 2024, and 2023
(Expressed in Canadian dollars, except share amounts)

18. Segmented information

Our Executive Chairman has been identified as the chief operating decision maker. Our Executive Chairman evaluates the performance of KWESST 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, 2024, we had one right-of-use asset ($57,143) and some inventory ($153,087) in the United States while all other property and equipment are located in Canada. At June 30, 2023, we had one right-of-use asset ($87,317) and inventory ($411,269) in the United States while all remaining property and equipment was located in Canada.

19. Subsequent events

On August 12, 2024, the Company announced that it has entered into definitive agreements for the purchase and sale of 4,715,000 common shares at a purchase price of US$0.20 per common share in a registered direct offering. The gross proceeds to the Company from the offering were approximately US$943,000 before deducting placement agent fees and other offering expenses payable by the Company. In a concurrent private placement, the Company issued unregistered warrants to purchase up to 4,715,000 common shares at an exercise price of US$0.25 per share that were immediately exercisable upon issuance and will expire five years following the date of issuance. In connection with the closing, the Company will pay a cash fee equal to 7.5% of the aggregate gross proceeds raised the placement agent as well as issue warrants to purchase up to an aggregate of 353,625 common shares (equal to 7.5% of common shares issued) at an exercise price of $0.25 per share, which warrants are exercisable upon issuance and have a termination date of August 9, 2029. The registered direct offering was closed on August 13, 2024.

 


EX-99.2 3 exhibit99-2.htm EXHIBIT 99.2 KWESST Micro Systems Inc.: Exhibit 99.2 - Filed by newsfilecorp.com

 

KWESST MICRO SYSTEMS INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS

Three and nine months ended June 30, 2024

(Expressed in Canadian Dollars)

 


KWESST MICRO SYSTEMS INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
THREE AND NINE MONTHS ENDED JUNE 30, 2024

All references in this management's discussion and analysis (the "MD&A") to "KWESST", "we", "us", "our", and the "Company" refer to KWESST Micro Systems Inc. and its subsidiaries as at June 30, 2024. This MD&A has been prepared with an effective date of August 14, 2024.

This MD&A should be read in conjunction with our unaudited condensed consolidated interim financial statements for the three and nine months ended June 30, 2024 ("Q3 Fiscal 2024 FS") and the annual audited consolidated financial statements and related notes for the year ended September 30, 2023 ("Fiscal 2023 FS"). The financial information presented in this MD&A is derived from these unaudited condensed consolidated interim financial statements prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB"). This MD&A contains forward-looking statements that involves risk, uncertainties and assumptions, including statements regarding anticipated developments in future financial periods and our future plans and objectives. There can be no assurance that such information will prove to be accurate, and readers are cautioned not to place undue reliance on such forward-looking statements. See "Forward-Looking Statements".

All references to $ or dollar amounts in this MD&A are to Canadian currency unless otherwise indicated.

Additional information, including press releases, relating to KWESST is available for view on SEDAR at www.sedar.com.

NON-IFRS MEASURES

In this MD&A, we have presented earnings before interest, taxes, depreciation and amortization ("EBITDA") and EBITDA that has been adjusted for the removal of share-based compensation, foreign exchange loss (gain), change in fair value of derivative liabilities, and any 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 be 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.

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. KWESST's Q3 Fiscal 2024 FS have been prepared on the "going concern" basis which presumes that KWESST will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future. 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, timely commercial launch of new products, and the ability to raise additional debt or equity financing, when required. There are various risks and uncertainties affecting our future financial position and our performance. Refer to Note 2(a) of the Q3 Fiscal 2024 FS for further information.

 


KWESST MICRO SYSTEMS INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
THREE AND NINE MONTHS ENDED JUNE 30, 2024

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 MD&A 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 MD&A 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.

FORWARD-LOOKING STATEMENTS

Certain statements in this document constitute "forward-looking statements" and "forward-looking information" within the meaning of applicable Canadian and United States securities laws (together, "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 ability to deliver under contracts with customers;
  • anticipated revenue from professional service contracts with customers;
  • 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, some of which are discussed in greater detail under the section "Risk Factors" in our Annual Report on Form 20-F dated January 17, 2024:

  • limited operating history;

KWESST MICRO SYSTEMS INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
THREE AND NINE MONTHS ENDED JUNE 30, 2024
  • 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;
  • potential cancellation or loss of customer contracts if we are unable to meet contract performance requirements;
  • 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 regarding public or employee health and safety regulations, including public health measures in the event of pandemics or epidemics;
  • regulatory or agency proceedings, investigations and audits;
  • additional capital requirements to support our operations and growth plans, leading to further dilution to shareholders;
  • the terms of additional capital raises;
  • conflicts of interest;
  • litigation;
  • risks related to United States' and other international activities, including regional conflicts that may impact our operations;
  • risks related to security clearances;
  • risks relating to the ownership of our securities, such as potential extreme volatility in the price of our securities;
  • risks related to our foreign private issuer status;
  • risks related to our emerging growth status; and
  • risks related to our failure to meet the continued listing requirements of the Nasdaq Capital Market ("Nasdaq").

Although the forward-looking statements contained herein 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.

Consequently, all the forward-looking statements contained herein are qualified by the foregoing cautionary statements, and there can be no guarantee that the results or developments that we anticipate will be realized or, even if substantially realized, that they will have the expected consequences or effects on our business, financial condition or results of operation. Unless otherwise noted or the context otherwise indicates, the forward-looking statements contained herein are provided as of the date hereof, and we do not undertake to update or amend such forward-looking statements whether as a result of new information, future events or otherwise, except as may be required by applicable law.


KWESST MICRO SYSTEMS INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
THREE AND NINE MONTHS ENDED JUNE 30, 2024

BUSINESS OVERVIEW

Corporate Information

We are a Canadian corporation 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).

KWESST Micro Systems Inc. is an early-stage technology company that develops and commercializes next-generation tactical systems for military and security forces and public safety markets.

Our product development has focused on three niche market segments as follows:

Our core mission is to protect and save lives.  At Fiscal Year-End 2023, we began to group our offerings for commercialization purposes into Military and Public Safety missions, as shown on our web site at www.kwesst.com


KWESST MICRO SYSTEMS INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
THREE AND NINE MONTHS ENDED JUNE 30, 2024

KWESST's Military offerings are comprised of:

  • Digitization: real-time data sharing at the tactical level, including integration with Battlefield Management Applications (BMS) including ATAK and TAK.
  • Digitized firing platforms ("Digital Fires" or "Joint Fires").
  • Battlefield Laser Detection Systems ("BLDS").
  • Digitized Electro Magnetic Spectrum Operations ("EMSO").

KWESST's Public Safety offerings are comprised of:

  • KWESST Lightning:  leverages the Company's military digitization technology to provide responders to any type of incident with instant onboarding to the mission and TAK-enabled real-time situational awareness software as a service (SaaS). The Company is currently engaging in trials and pilots of the product as it continues development towards the commercial release that is currently expected to be available early in calendar 2025.
  • Non-Lethal Munitions Systems
  • PARA OPSTM, a next-generation non-lethal system just being introduced to market now.
  • ARWENTM 37mm system, plus a new 40mm munition.

Strategy

Our strategy is to pursue and win large defense contracts for multi-year revenue visibility with prime defense contractors for next-generation situational awareness, with a particular focus on ATAK applications that can be leveraged to address similar requirements in the Public Safety Market complemented by our proprietary ARWEN and PARA OPSTM  non-lethal products, where it is possible to drive sales and where the sales cycle is typically shorter than the more programmatic defense market. 

Major Highlights - Quarter ended June 30, 2024 ("Q3 Fiscal 2024")

The following is a summary of the major highlights that occurred during the quarter ended Q3 Fiscal 2024:

  • On April 3, we announced that the Company intends to offer to sell common shares (and/or pre-funded warrants ("Pre-funded Warrants") in lieu thereof) in an underwritten United States public offering.

  • On April 4, we announced the pricing of its underwritten public offering of 1,538,500 common shares (or pre-funded warrants ("Pre-funded Warrants") in lieu thereof) at a public offering price of US$0.65 per share, for gross proceeds of approximately US$1,000,000, before deducting underwriting discounts, commissions and offering expenses.

  • On April 9, we announced the closing of the previously announced underwritten public offering of 735,000 common shares and 803,500 pre-funded warrants with an exercise price of $0.001 ("Pre-funded Warrants") at a public offering price of US$0.65 per share and US$0.649 per Pre-funded Warrant, less the underwriting discount.

  • On April 30, we provided a corporate update ahead of our fiscal Q2 result, highlighting status of our military digitization contracts through 2028, an MOU signed with the University of Ottawa to hire software coding graduates, work with a large Canadian police agency as first adopter of KWESST LightningTM in advance of full market release, ARWEN scaling to multiples of historical revenue and, major agencies continue evaluations of PARA OPS.

  • On May 17, we announced that it has been awarded a contract with its teaming partner CounterCrisis Tech ("CCT") for a proof of concept project (the "Project") to provide a situational awareness app in support of Canadian Red Cross ("CRC") emergency and disaster relief operations.


KWESST MICRO SYSTEMS INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
THREE AND NINE MONTHS ENDED JUNE 30, 2024
  • On May 20, we announced today that the Company received written notification from The Nasdaq Stock Market LLC ("Nasdaq") on May 16, 2024, indicating that the Company is not in compliance with the minimum bid price requirement set forth in the Nasdaq rules for continued listing on Nasdaq, which requires listed securities to maintain a minimum bid price of US$1.00 per share.

  • On June 10, we reported that it has been awarded a sub-contract by Thales Canada. Under the sub-contract, KWESST will deliver specialized software services for work under the Canadian Department of National Defence Land C4ISR series of contracts to modernize the Canadian Army's capabilities through advanced land command, control, communications, computers, intelligence, surveillance and reconnaissance (C4ISR) systems.

  • On June 12, we announced that it intends to offer to sell common shares (and/or pre-funded warrants ("Pre-funded Warrants") in lieu thereof) in a best efforts United States public offering.

  • On June 12, we announced the pricing of its best efforts public offering of 2,900,000 common shares at a public offering price of US$0.58 per share, for gross proceeds of approximately US$1,682,000, before deducting placement agent fees and offering expenses. All of the common shares are being offered by the Company.

  • On June 14, we announced the closing of its previously announced public offering of 2,900,000 common shares at a public offering price of US$0.58 per share, less the placement agent fees. The gross proceeds from the offering, before deducting placement agent fees of $0.0435 per common share (being an aggregate of US$126,150 or 7.5% of the public offering price of the securities) and estimated offering expenses payable by the Company, were approximately US$1,682,000.

The following is a summary of major highlights that occurred after June 30, 2024:

  • On August 7, the Company announced that a G7 capital city police service (the "Agency") has taken delivery of three T-SASTM systems and in conjunction has entered into an agreement (at the close of business on August 6) with the Company for a limited time free trial of KWESST LightningTM. The trial has been initially rolled out to a team within the Tactical unit of the Agency to stress-test the equipment and services provide valuable user feedback that will shape the full commercial version once released, and as part of the trial, KWESST will provide training and support to obtain maximum user engagement. During the three-month trial period, the Agency will have access to the full capability of command, communication, and critical-incident management through the KWESST LightingTM interface on all Android-based devices and leverage peer-to-peer and cloud-based secure networked tactical video streams across KWESST's secure SaaS ("Service as a Software") cloud service.

  • On August 12, the Company announced that it has entered into definitive agreements for the purchase and sale of 4,715,000 common shares at a purchase price of US$0.20 per common share in a registered direct offering. The gross proceeds to the Company from the offering were approximately US$943,000 before deducting placement agent fees and other offering expenses payable by the Company. In a concurrent private placement, the Company issued unregistered warrants to purchase up to 4,715,000 common shares at an exercise price of US$0.25 per share that were immediately exercisable upon issuance and will expire five years following the date of issuance. The registered direct offering was closed on August 13, 2024.

RESULTS OF OPERATIONS

The following selected financial data has been extracted from Q3 Fiscal 2024 FS.


KWESST MICRO SYSTEMS INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
THREE AND NINE MONTHS ENDED JUNE 30, 2024

THREE AND NINE MONTHS ENDED JUNE 30, 2024

    Three months ended June 30,     Nine months ended June 30,     Change  
    2024     2023     2024     2023     %  
Revenue $ 329,476   $ 150,269     944,408   $ 629,005     50%  
Cost of sales   (288,665 )   (113,471 )   (715,219 )   (381,689 )   87%  
Gross profit   40,811     36,798     229,189     247,316     -7%  
Gross margin %   12.4%     24.5%     24.3%     39.3%        
                               
Operating Expenses                              
   General and administrative ("G&A")   1,484,509     1,802,054     4,861,998     4,446,512     9%  
   Selling and marketing ("S&M")   224,791     731,543     1,139,413     2,338,646     -51%  
   Research and development ("R&D")   516,289     457,028     1,865,614     1,026,537     82%  
Total operating expenses   2,225,589     2,990,625     7,867,025     7,811,695     1%  
                               
Operating loss   (2,184,778 )   (2,953,827 )   (7,637,836 )   (7,564,379 )   1%  
                               
Other expenses                              
   Share issuance costs   (366,931 )   -     (366,931 )   (1,309,545 )   -72%  
   Net finance costs   (63,034 )   (40,826 )   (137,889 )   (595,510 )   -77%  
   Foreign exchange gain (loss)   (22,492 )   24,332     68,413     (125,708 )   -154%  
   Change in fair value of warrant liabilities   1,475,280     (481,704 )   2,973,112     2,707,691     10%  
Total other expenses, net   1,022,823     (498,198 )   2,536,705     676,928     275%  
Net loss $ (1,161,955 ) $ (3,452,025 ) $ (5,101,131 ) $ (6,887,451 )   -26%  
EBITDA loss (1) $ (776,947 ) $ (3,125,443 ) $ (4,000,193 ) $ (5,682,307 )   -30%  
Adjusted EBITDA loss(1) $ (1,901,288 ) $ (2,628,857 ) $ (6,491,185 ) $ (6,638,484 )   -2%  
Loss per share - basic and diluted $ (0.13 ) $ (0.81 ) $ (0.77 ) $ (2.04 )   -62%  
                               
Weighted average common shares - basic   8,803,585     4,272,663     6,600,267     3,374,705     96%  

(1) EBITDA and Adjusted EBITDA are non-IFRS measures. See "Non-IFRS Measures". See below for "Reconciliation of Non-IFRS Measure".

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

    Three months ended June 30,     Nine months ended June 30,   
    2024     2023     2024     2023  
                         
Net loss as reported under IFRS $ (1,161,955 ) $ (3,452,025 ) $ (5,101,131 ) $ (6,887,451 )
                         
Net finance costs   63,034     40,826     137,889     595,510  
Depreciation and amortization   321,974     285,756     963,049     609,634  
EBITDA loss   (776,947 )   (3,125,443 )   (4,000,193 )   (5,682,307 )
Other adjustments:                        
Share issuance costs   269,316     -     366,931     1,309,545  
Stock-based compensation   59,131     39,214     183,602     316,261  
Change in fair value of warrant liabilities   (1,475,280 )   481,704     (2,973,112 )   (2,707,691 )
Foreign exchange loss (gain)   22,492     (24,332 )   (68,413 )   125,708  
Adjusted EBITDA loss $ (1,901,288 ) $ (2,628,857 ) $ (6,491,185 ) $ (6,638,484 )

Current Quarter Variance Analysis (Q3 Fiscal 2024 vs. Q3 Fiscal 2023)

For Q3 and YTD Fiscal 2024, KWESST's net loss was $1.2 million and $5.1 million, respectively. Q3 and YTD Fiscal 2024 EBITDA loss was $0.8 million and $4.0 million, respectively, a decrease of 75% and 30%, respectively over the comparable prior period mainly due to an increase in revenue and gross profits from our digitization contracts combined with a decrease in operating expenses mainly due to a reduction in consulting fees and investor relations costs over the three-month period end, and a decrease in share issuance costs over the nine-month period end. The adjustments to EBITDA loss for Q3 and YTD Fiscal 2024 included the change in fair value of derivative liabilities. Due to the lower volume of stock-based grants in the last 12 months, compared to same prior period, there is a reduction in stock-based compensation expense in the YTD Fiscal 2024 period compared to YTD Fiscal 2023. There were share issuance costs in Q3 2024 relating to two US public offerings whereas no financing activities occurred in the comparable quarter Fiscal 2023. The lower share issuance costs YTD Fiscal 2024 over the comparable prior period is mainly due to the U.S. IPO and Canadian Offering in Fiscal 2023 YTD. The decrease in net financing costs YTD Fiscal 2024 over the comparable prior period is due to the costs related to the unsecured loans in Fiscal 2023 whereas the loans were repaid, and no such costs were incurred YTD Fiscal 2024.


KWESST MICRO SYSTEMS INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
THREE AND NINE MONTHS ENDED JUNE 30, 2024

Revenue

Total revenue increased by $0.2 million in the third quarter compared to Q3 Fiscal 2023, mainly due to an additional $0.2 million generated from our digitization business line, offset by a negligible reduction from our non-lethal business line (driven from the sale of ARWEN products).

Total revenue increased by $0.3 million in YTD Fiscal 2024 compared to YTD Fiscal 2023, mainly due to an additional $0.3 million generated from our digitization business line. At the nine-month period ended June 30, 2024, we had sales from our non-lethal business line (driven from the sale of ARWEN products) of $280K, a decrease of $21K from the comparable prior period.

We expect revenue to increase with the commercial launch of KWESST LightningTM which we expect to be early in calendar 2025, with the expected demand/future orders for the new ARWEN 40mm ammunition and PARA OPS products, as well as from the recently announced LC4ISR ("Land command, control, communications, computers, intelligence, surveillance and reconnaissance") subcontract. Management continues to work with our industry partners to determine the outlook for ramp-up on the DSEF program. The Company continues to expect no material impact to the overall potential revenue over the life of the contract.

Gross Profit

In Q3 Fiscal 2024, similar to the same period in Fiscal 2023, the gross profit was negligible. For YTD Fiscal 2024, we earned $0.2 million or gross margin of 24.3%, compared to $0.2 million or gross margin of 39.3% in the same period in 2023.

In Fiscal 2024, indirect costs associated with the ramp up of the Canadian Government contracts in Q1 resulted in lower gross margin as compared to the same period in 2023. We expect gross profit / margin to continue to increase during Fiscal 2024 from the other product lines described above as well as continued ramp up on the Canadian Government contracts.

Operating Expenses ("OPEX")

Total OPEX decreased by $0.8 million from the comparable prior period in the three months ended June 30, 2024 due to the following factors:

  • S&M decreased by $0.5 million, primarily due to a decrease in investor relations costs and related sales and marketing costs ($0.4 million) in Fiscal 2024 as compared to Fiscal 2023;

  • G&A decreased by $0.3 million, primarily due to a decrease in professional fees and general office expenses, offset by an increase in senior management and directors compensation due to market adjustments and additional personnel as compared to Fiscal 2023; offset by

  • R&D increased by $0.1 million, primarily due to an increase in personnel costs advancing the KWESST LightningTM and BLDS projects in Fiscal 2024.


KWESST MICRO SYSTEMS INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
THREE AND NINE MONTHS ENDED JUNE 30, 2024

Total OPEX was $7.9 million for YTD Fiscal 2024 compared to $7.8 million in YTD Fiscal 2023, an increase of $ 0.2 million over the comparable prior year due to the following factors:

  • R&D increased by $0.8 million, primarily due to the fact that the LEC has reached commercial feasibility, and any associated costs are no longer being capitalized, while it was still in the development stage in Fiscal 2023 ($0.5 million), coupled with an increase in personnel costs advancing the KWESST LightningTM and BLDS projects in Fiscal 2024 ($0.7 million), offset by a reduction in consulting fees compared to the comparable prior year period ($0.3 million);

  • G&A increased by $0.4 million, primarily due to the amortization of the LEC intangible in Fiscal 2024 ($0.4 million), an increase in senior management and directors compensation to be in line with market and additional personnel as compared to Fiscal 2023 ($0.3 million), offset by a reduction in consulting & professional fees compared to the comparable prior year period ($0.2 million); offset by

  • S&M decreased by $1.2 million, primarily due to a decrease in investor relations costs and related sales and marketing costs ($1.0 million), and a decrease in business development costs ($0.2 million).

Other income (expenses), net

For Q3 Fiscal 2024, our total other income was $1.0 million, compared to total other expenses of $0.5 million in Q3 Fiscal 2023. This change in other income (expenses) net is mainly due to the favorable $2.0 million change in fair value of warrant liabilities as a result of the remeasurement of the warrant liabilities at June 30, 2024, driven by a decrease in the underlying common share price on June 30, 2024, offset by a $0.4 million increase in share issuance costs associated with the two US public offering financing activities in Q3 Fiscal 2024.

For YTD 2024, our total other income was $2.5 million, compared to total other income of $0.7 million for the same period 2023 resulting in an increase of $1.8 million. The change in other income (expenses) was driven mainly by:

  • $0.3 million favorable change in fair value of warrant liabilities as a result of the remeasurement of the warrant liabilities at June 30, 2024, driven by a decrease in the underlying common share price on June 30, 2024. Under IFRS, we are required to remeasure the warrant liabilities at each reporting date until they are exercised or expired;

  • A decrease of $0.9 million in Share Offering Costs as $1.3 million related to the U.S. IPO and Canadian Offering in Fiscal 2023, compared to $0.4 million associated with the two US public offering financing activities in April and June 2024;

  • $0.5 million decrease in net finance costs is primarily due to the Fiscal 2023 recognition of the remaining unamortized accretion costs and interest expense relating to the repayment of all outstanding loans, following the closing of the U.S. IPO and Canadian Offering; and

  • $0.2 million increase in foreign exchange gain due to appreciation in the U.S. currency during the period.

SUMMARY OF QUARTERLY RESULTS

The following tables summarize selected results for the eight most recent completed quarters to June 30, 2024 (unaudited):


KWESST MICRO SYSTEMS INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
THREE AND NINE MONTHS ENDED JUNE 30, 2024

    2024     2023     2022  
($ in thousands)   Q3     Q2     Q1     Q4     Q3     Q2     Q1     Q4  
Revenue   329     486     129     606     150     161     317     255  
Net loss   (1,162 )   (3,540 )   (399 )   (2,419 )   (3,452 )   (1,227 )   (2,208 )   (2,345 )

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

Quarterly Results Trend Analysis

There is no material change to our quarterly results trend from our disclosure in our annual MD&A dated January 17, 2024, except that we expect further volatility with our quarterly revenue during Fiscal 2024 due to uncertain magnitude and timeline of ramp up on our military government contracts as well as ramp of revenue for new Arwen products and PARA OPS. Additionally, we expect further volatility with our quarterly net loss due to the remeasurement of warrant liabilities at each reporting period, with the change in fair value recorded through P&L.

FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES

FINANCIAL CONDITION

The following table summarizes our financial position:

    June 30,     September 30,  
    2024     2023  
Assets            
Current $ 2,670,123   $ 6,842,074  
Non-current   4,071,537     4,916,758  
Total assets $ 6,741,660   $ 11,758,832  
             
Liabilities            
Current $ 2,325,864   $ 6,383,635  
Non-current   1,269,121     1,439,577  
Total liabilities   3,594,985     7,823,212  
Net assets $ 3,146,675   $ 3,935,620  
             
Working capital (1) $ 344,259   $ 458,439  

  (1) Working capital is calculated as current assets less current liabilities.

Our working capital was $0.3 million at June 30, 2024, a $0.1 million decrease from September 30, 2023. The decrease was primarily due to the net operating loss for YTD Fiscal 2024, offset by proceeds from two financing activities in the current quarter of Fiscal 2024. Current liabilities include warrant liabilities, a non-cash liability item (see Note 10 of the Q3 Fiscal 2024 financial statements). Excluding warrant liabilities, we would have working capital of $0.6 million. These warrant liabilities will be extinguished when the warrants are exercised or expired. If exercised, the proceeds will provide us with additional capital to fund our future working capital requirements. There is no assurance that any warrants will be exercised.

Total assets decreased by $5.0 million from September 30, 2023, mainly due to a decrease in cash of $4.2 million and a decrease in the unamortized value of non-current assets of $0.8 million.


KWESST MICRO SYSTEMS INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
THREE AND NINE MONTHS ENDED JUNE 30, 2024

Total liabilities decreased by $4.2 million from September 30, 2023, mainly due a decrease in the warrant liabilities of $4.0 million, a $0.1 million decrease in trade payables and accrued liabilities due to the timing of payments to suppliers, and a $0.1 million decrease in existing lease obligations.

LIQUIDITY AND CAPITAL RESOURCES

Available Liquidity

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.

On December 9, 2022, we closed both the U.S. IPO and Canadian Offering pursuant to which we received aggregate gross proceeds of USD$14.1 million (or CAD$19.4 million), before underwriting and offering costs (refer to the annual MD&A dated January 17, 2024 for further details including our expected use of proceeds). On July 21, 2023, we closed the Private Placement pursuant to which we received aggregate gross proceeds of USD$5.59 million (or CAD$7.4 million), before underwriting and offering costs (refer to the annual MD&A dated January 17, 2024 for further details including our expected use of proceeds). On April 9, 2024, we closed a US Public Offering pursuant to which we received aggregate gross proceeds of USD$1.0 million (or CAD$1.4 million), before underwriting and offering costs. On June 14, 2024, we closed a US Public Offering pursuant to which we received aggregate gross proceeds of USD$1.7 million (or CAD$2.3 million), before underwriting and offering costs

At June 30, 2024, our cash position was $1.2 million, a decrease of $4.2 million since September 30, 2023 primarily due to cash used in operations of $6.9 million, offset by net proceeds of $2.6 million from two US Public Offering financing activities in April 2024 and June 2024, respectively.

As an early-stage company, we have not yet reached commercial production for most of our other products and have incurred significant losses and negative operating cash flows from inception that have primarily been funded from financing activities. 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, timely commercial launch of new products, and the ability to raise additional debt or equity financing, when required. There are various risks and uncertainties affecting our future financial position and our performance. However, we may require additional capital in the event we fail to implement our business plan, which 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. 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.

Consolidated Statements of Cash Flows

The following table summarizes our consolidated statements of cash flows for the respective periods:


KWESST MICRO SYSTEMS INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
THREE AND NINE MONTHS ENDED JUNE 30, 2024

    Nine months ended June 30,
    2024     2023  
Cash inflows (outflows) by activity:            
Operating activities $ (6,876,278 ) $ (11,346,319 )
Investing activities   (95,285 )   (990,463 )
Financing activities   2,743,433     13,925,926  
Net cash inflows (outflows) $ (4,228,130 ) $ 1,589,143  
Cash, beginning of period   5,407,009     170,545  
Cash, end of period $ 1,178,879   $ 1,759,688  

Cash used by operating activities

Cash flow used in operating activities decreased by $4.5 million to $6.9 million for the nine months ended June 30, 2024 primarily due to payments on overdue payables as well as unpaid voluntary deferred wages, consulting fees, and bonuses in Fiscal 2023 after the close of the U.S. IPO and Canadian Offering in December 2022, coupled with significant prepaid expenses during the nine months ended June 30, 2023 including retention bonus for our head of PARA OPS (refundable in the event he voluntarily terminates prior to a specified date as set by us), compared to regular operating activities in Fiscal 2024, with no significant transactions.

Cash used by investing activities

Cash flow used in investing activities decreased by $0.9 million to $0.1 million for the nine months ended June 30, 2024 mainly due to the Fiscal 2023 additional investment in the product development of our PARA OPS, coupled with additional low-rate initial production equipment for PARA OPS, whereas there were no significant investments in equipment in Fiscal 2024.

Cash (used) provided by financing activities

Cash flow used by financing activities was less than $2.8 million for the nine months ended June 30, 2024 mainly from the net proceeds received from two US Public Offering financing activities in Fiscal 2024, compared to cash flow provided by financing activities of $13.9 million in Fiscal 2023 primarily due to net proceeds generated from the U.S. IPO and Canadian Offering, partially offset by repayment of all outstanding borrowings during the Fiscal 2023 period to date.

Capital Resources

Our objective in managing our capital is to safeguard our ability to continue as a going concern and to sustain future development of the business. Our 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. Our Board of Directors is responsible for overseeing this process. From time to time, we could issue new common shares or debt to maintain or adjust our capital structure. We are not subject to any externally imposed capital requirements.

Our primary sources of capital to date have been borrowings, security offerings, exercise of stock options and warrants, and, to a lesser extent, pre-commercial revenue.  The following is a breakdown of our capital:


KWESST MICRO SYSTEMS INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
THREE AND NINE MONTHS ENDED JUNE 30, 2024

    June 30,     September 30,  
    2024     2023  
Debt:            
Lease obligations $ 342,220   $ 429,523  
Warrant liabilities   288,851     4,335,673  
             
Equity:            
Share capital   37,420,394     33,379,110  
Warrants   1,127,861     1,042,657  
Contributed surplus   4,972,594     4,769,115  
Accumulated other comprehensive loss   (57,444 )   (39,663 )
Accumulated deficit   (40,316,730 )   (35,215,599 )
Total capital $ 3,777,746   $ 8,700,816  

Contractual Obligations and Commitments

At June 30, 2024, our contractual obligations and commitments were as follows:

                            5 years and  
Payment due:   Total   Within 1 Year     1 to 3 years     3 to 5 years     beyond  
Minimum royalty commitments $ 2,200,000   $ 200,000   $ 450,000   $ 550,000   $ 1,000,000  
Accounts payable and accrued liabilities   1,582,679     1,582,679     -     -     -  
Lease obligations   413,505     206,341     207,164     -     -  
Total contractual obligations $ 4,196,184   $ 1,989,020   $ 657,164   $ 550,000   $ 1,000,000  

Shares Outstanding

At June 30, 2024, our authorized capital consists of an unlimited number of Common Shares with no stated par value.

The following table shows the outstanding Common Shares and dilutive securities at June 30, 2024:

    June 30,
2024(1)
    Average
price
(CAD $)
    Proceeds if
Exercised
 
Common shares   11,076,742              
Founders' warrants   -   $ -   $ -  
Warrants   21,429   $ 0.61   $ 13,072  
Pre-funded warrants   151,734   $ 0.01   $ 1,517  
Warrant liabilities   4,824,727   $ 5.82   $ 28,079,911  
Over-allotment warrants   375,000   $ 6.84   $ 2,565,000  
U.S. Underwriter warrants   480,512   $ 3.34   $ 1,604,910  
Stock options   389,907   $ 2.72   $ 1,060,480  
Restricted stock units (RSUs)   1,071   $ -   $ -  
Agents' compensation options:                  
  Common shares   50,848   $ 5.65   $ 287,291  
  Warrants   50,848   $ 6.84   $ 347,800  
                   
Total common shares and dilutive securities   17,422,818         $ 33,959,981  

(1) Represents the number of shares to be issued upon exercise.


KWESST MICRO SYSTEMS INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
THREE AND NINE MONTHS ENDED JUNE 30, 2024

U.S. IPO and Canadian Offering

On December 9, 2022, we closed an underwritten U.S. public offering (the "U.S. IPO") and an underwritten Canadian offering (the "Canadian Offering"). In the U.S. IPO, we sold 2.5 million units at a public offering price of US$4.13 per unit (the "Unit"), consisting of one share of common stock and one warrant to purchase one share of common stock ("Warrant"). The Warrants have a per share exercise price of US$5.00, can be exercised immediately, and expire five years from the date of issuance. In connection with the closing of the U.S. IPO, the underwriter partially exercised its over-allotment option to purchase an additional 199,000 pre-funded common share purchase warrants and 375,000 warrants to purchase Common Shares. All these warrants will expire on December 8, 2027.

In the Canadian Offering, we sold 726,392 units, each consisting of one Common Share and one warrant to purchase one Common Share, at a price to the public of US$4.13 per unit. The warrants will have a per Common Share exercise price of US$5.00, are exercisable immediately and expire five years from the date of issuance.

The closing of the U.S. IPO and Canadian Offering resulted in aggregate gross proceeds of US$14.1 million (CAD $19.4 million).  After underwriting discounts and offering expenses, the net proceeds were US$11.2 million (CAD $15.2 million).  See Note 11(a) of Q3 Fiscal 2024 FS for further details.

For the estimated use of proceeds from the U.S. IPO and Canadian Offering, refer to our annual MD&A for Fiscal 2023 dated January 17, 2024.

Shares for Debt Settlement - December 2022

On December 13, 2022, we issued 56,141 Units to settle $12,000 of the March 2022 loans and USD$223,321 of the August 2022 loans, including unpaid accrued interest and 10% premium at maturity.  See Note 11(a) of the Q3 Fiscal 2024 financial statements for further details.

Private Placement - July 2023

On July 21, 2023, we closed a brokered private placement, resulting in the issuance of 1,542,194 common shares of KWESST, for aggregate gross proceeds of USD$5,588,397 (approximately CAD$7.4M) (the "July 2023 Offering").

As a part of the July 2023 Offering, the Company issued 1,542,194 common shares at a price of US$2.26 (CAD$2.98) per common share (each a "Common Share") and 930,548 pre-funded warrants at a price of US$2.259 (CAD$2.979) per pre-funded warrant (each a "Pre-funded Warrant"), with each Common Share and Pre-funded Warrant being bundled with one common share purchase warrant of the Company (each a "Common Warrant"). Each Pre-Funded Warrant entitles the holder to acquire one Common Share at an exercise price of US$0.001 per Common Share, and each Common Warrant is immediately exercisable and entitles the holder to acquire one Common Share at an exercise price of US$2.66 (CAD$3.50) per Common Share for a period of 60 months following the closing of the July 2023 Offering. Although the Common Shares and Pre-funded Warrants are each bundled with a Common Warrant, each security is issued separately. See Note 11(a) of Q3 Fiscal 2024 FS for further details.

Shares for Debt Settlement - January 2024

On January 10, 2024, we issued 46,709 common shares in a settlement of debt in an amount of approximately $97,615. See Note 11(a) of the Q3 Fiscal 2024 financial statements for further details.

US Public Offering - April 2024

On April 9, 2024, we closed a brokered US public offering, resulting in the issuance of 735,000 common shares of KWESST, for aggregate gross proceeds of USD$1,000,025 (approximately CAD$1.4M) (the "April 2024 Public Offering"). See Note 11(a) of the Q3 Fiscal 2024 financial statements for further details.


KWESST MICRO SYSTEMS INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
THREE AND NINE MONTHS ENDED JUNE 30, 2024

US Public Offering - June 2024

On June 14, 2024, we closed a brokered US public offering, resulting in the issuance of 2,900,000 common shares of KWESST, for aggregate gross proceeds of approximately USD$1,682,000 (approximately CAD$2.3M) (the "June 2024 Public Offering"). See Note 11(a) of the Q3 Fiscal 2024 financial statements for further details.

OFF-BALANCE SHEET ARRANGEMENTS

We have no off-balance sheet arrangements that have or are reasonably likely to have, a current or future effect on our results of operations, financial condition, revenues or expenses, liquidity, capital expenditures or capital resources.

RELATED PARTY TRANSACTIONS

Refer to Note 8 of the Q3 Fiscal 2024 financial statements for disclosure about KWESST's related party transactions conducted in the normal course of business.

FINANCIAL INSTRUMENTS AND OTHER INSTRUMENTS

We recognize financial assets and liabilities when we become party to the contractual provisions of the instrument. On initial recognition, financial assets and liabilities are measured at fair value plus transaction costs directly attributable to the financial assets and liabilities, except for financial assets or liabilities at fair value through profit and loss, whereby the transactions costs are expensed as incurred.

Refer to Note 15 of the Q3 Fiscal 2024 financial statements for further disclosure our financial instruments.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Refer to Note 2(f) of the Fiscal 2023 audited consolidated financial statements for a discussion of the accounting policies and estimates that are critical to the understanding of our business operations and the results of our operations.

OUTSTANDING SHARE INFORMATION

At June 30, 2024, KWESST's authorized capital consists of an unlimited number of common shares with no stated par value. There were 11,076,742 outstanding and issued common shares as at June 30, 2024.

SUBSEQUENT EVENTS

On August 7, 2024, the Company announced that a G7 capital city police service (the "Agency") has taken delivery of three T-SASTM systems and in conjunction has entered into an agreement (at the close of business on August 6) with the Company for a limited time free trial of KWESST LightningTM. The trial has been initially rolled out to a team within the Tactical unit of the Agency to stress-test the equipment and services provide valuable user feedback that will shape the full commercial version once released, and as part of the trial, KWESST will provide training and support to obtain maximum user engagement. During the three-month trial period, the Agency will have access to the full capability of command, communication, and critical-incident management through the KWESST LightingTM interface on all Android-based devices and leverage peer-to-peer and cloud-based secure networked tactical video streams across KWESST's secure SaaS ("Service as a Software") cloud service.


KWESST MICRO SYSTEMS INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
THREE AND NINE MONTHS ENDED JUNE 30, 2024

On August 12, 2024, the Company announced that it has entered into definitive agreements for the purchase and sale of 4,715,000 common shares at a purchase price of US$0.20 per common share in a registered direct offering. The gross proceeds to the Company from the offering were approximately US$943,000 before deducting placement agent fees and other offering expenses payable by the Company. In a concurrent private placement, the Company issued unregistered warrants to purchase up to 4,715,000 common shares at an exercise price of US$0.25 per share that were immediately exercisable upon issuance and will expire five years following the date of issuance. In connection with the closing, the Company will pay a cash fee equal to 7.5% of the aggregate gross proceeds raised the placement agent as well as issue warrants to purchase up to an aggregate of 353,625 common shares (equal to 7.5% of common shares issued) at an exercise price of $0.25 per share, which warrants are exercisable upon issuance and have a termination date of August 9, 2029. The registered direct offering was closed on August 13, 2024.

DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROLS OVER FINANCIAL REPORTING

As required by National Instrument 52-109 Certification of Disclosure in Issuers Annual and Interim Filings and Rule 13a-15(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), as amended, we have evaluated, under the supervision and with the participation of our management, including out Chief Executive Officer and Chief Financial Officer, the design of our disclosure controls and procedures ("DC&P") (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) as of the end of the quarter.  These DC&P are designed to provide reasonable assurance that information required to be publicly disclosed is recorded, processed, summarized and reported on a timely basis.

Based upon the evaluation, our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") have concluded that our disclosure controls and procedures were not effective as of June 30, 2024 at the reasonable assurance level due to the material weaknesses described below under "Management's Assessment on Internal controls over Financial Reporting". As a result of the material weaknesses identified, we performed additional analysis and other post-closing procedures. Notwithstanding these material weaknesses, management has concluded that the condensed consolidated financial statements present fairly, in all material respects, the financial position of the Company as at June 30, 2024 in conformance with IFRS.

Management's Assessment on Internal Controls over Financial Reporting

In accordance with National Instrument 52-109 Certification of Disclosure in Issuer's Annual and Interim Filings and as required by Rule 13a-15(f) of the Securities Exchange Act of 1934 (the "Exchange Act"), as amended, management is responsible for establishing and maintaining adequate internal controls over financial reporting ("ICFR"), The Company's management, including the CEO and CFO, and designed ICFR based on the 2013 Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the "COSO Framework") to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with IFRS.

Internal Controls over Financial Reporting ("ICFR")

ICFR is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. ICFR has inherent limitations. ICFR is a process that involves human diligence and compliance and is subject to lapses in judgement and breakdowns resulting from human failures. ICFR also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements will not be prevented or detected on a timely basis by ICFR. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

As at June 30, 2024, management assessed the design of our ICFR and concluded that our ICFR includes material weaknesses, described below.  These material weaknesses create a reasonable possibility that material misstatements in interim or annual financial statements would not be prevented or detected on a timely basis. To compensate for this material weakness, management continues to perform additional account reconciliations and other analytical and substantive procedures to ensure reliable financial reporting and the preparation of financial statements in accordance with IFRS. The material weakness will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.


KWESST MICRO SYSTEMS INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
THREE AND NINE MONTHS ENDED JUNE 30, 2024

Management, under the supervision, and with the participation, of our CEO and CFO and oversight of the Board of Directors, evaluated the effectiveness of our ICFR as at September 30, 2023 and evaluated the design at June 30, 2024 against the COSO Framework. Based on these evaluations, Management concluded that material weaknesses existed as of June 30, 2024, as described below, and due to these material weaknesses, ICFR is not effective as of June 30, 2024.

Ineffective control environment: The Company did not have an effective control environment due to the lack of a sufficient complement of fully trained personnel in financial reporting, accounting and IT with assigned responsibility and accountability related to ICFR. This material weakness contributed to the other material weaknesses below.

Spreadsheet Controls: The Company did not implement and maintain effective controls surrounding certain spreadsheets. Spreadsheets are inherently prone to error due to the manual nature, which increases the risk of human error. The Company's controls related to complex spreadsheets did not address all identified risks associated with manual data entry, review of inputs into management assumptions and estimates, completeness of data entry, and the accuracy of mathematical formulas, impacting complex spreadsheets used in revenue, inventory, impairment and financial closing processes.

IT General Controls: The Company had an aggregation of deficiencies within its IT general controls across multiple systems, including deficiencies related to segregation of duties, user access and change management. As a result, the Company concluded that its process-level automated and manual controls in the areas of journal entries and financial reporting that are dependent on IT general controls, information, and data derived from affected IT systems were also ineffective because they could have been adversely impacted.

Management Review Controls: The Company did not consistently have documented evidence of management review controls and did not always maintain segregation of duties between preparing and reviewing analyses and reconciliations with respect to revenue, inventory, purchasing, and financial closing.

Changes to Internal Controls over Financial Reporting

In fiscal 2023 and Q3 2024 to date, the Company underwent a series of changes that materially affected areas reasonably likely to continue to materially affect the Company's internal controls over financial reporting ("ICFR"). Management has continued efforts to develop and enhance the performance of ICFR. The addition of additional qualified finance and HR staff as well as the appointment of its CFO and CEO who are both experienced and qualified CPAs, will have a positive effect on the Company's ability to remediate its internal control deficiencies.

Remediation Plan

Late in the second half of fiscal year 2023, and subsequent to the fiscal year-end 2023, the Company strengthened its ability to remediate the above noted material weaknesses with the addition of:

- Additional qualified finance and HR staff;

- Addition of qualified CPAs in both the CFO and CEO roles;

- Engagement of an external IT consultant and reorganizing accountability for IT general controls within the Company's management team with a qualified internal leader.

These measures have made improvements to the deficiencies that aggregate to form the material weaknesses identified above. Management, with oversight from the Audit Committee will continue to implement remediation measures related to the identified material weaknesses with a focus on enhancing business processes and controls as the Company continues to mature. Management will additionally:


KWESST MICRO SYSTEMS INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
THREE AND NINE MONTHS ENDED JUNE 30, 2024

- Review its IT strategy and investigating ways to improve key software applications.

- Review key business processes and controls to determine where further system reliance can potentially mitigate the use of complex spreadsheets, improve segregation of duties, and reduce reliance on manual management review controls.

- Improve control tools and templates to aide with the sufficient and consistent documentation of review controls and procedures.

We believe these measures, and others that may be implemented, will remediate the material weaknesses in ICFR described above. 


EX-99.3 4 exhibit99-3.htm EXHIBIT 99.3 KWESST Micro Systems Inc.: Exhibit 99.3 - Filed by newsfilecorp.com

FORM 52-109F2

CERTIFICATION OF INTERIM FILINGS

FULL CERTIFICATE

I, Sean Homuth, Chief Executive Officer of KWESST Micro Systems Inc., certify the following:

1. Review: I have reviewed the interim financial report and interim MD&A (together, the "interim filings") of KWESST Micro Systems Inc. (the "issuer") for the financial quarter ended June 30, 2024.

2. No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings.

3. Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings.

4. Responsibility: The issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as those terms are defined in National Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings, for the issuer.

5. Design: Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer's other certifying officer(s) and I have, as at the end of the period covered by the interim filings

(a) designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that

(i) material information relating to the issuer is made known to us by others, particularly during the period in which the interim filings are being prepared; and

(ii) information required to be disclosed by the issuer in its annual filings, interim

filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and

(b) designed ICFR, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer's GAAP.

5.1 Control framework: The control framework the issuer's other certifying officer(s) and I used to design the issuer's ICFR is the Internal Control - Integrated Framework (COSO Framework 2013) published by The Committee of Sponsoring Organizations of the Treadway Commission (COSO).

5.2 ICFR - material weakness relating to design: N/A or The issuer has disclosed in its interim MD&A for each material weakness relating to design existing at the end of the interim period:

(a) a description of the material weakness;

(b) the impact of the material weakness on the issuer's financial reporting and its ICFR; and

(c) the issuer's current plans, if any, or any actions already undertaken, for remediating the material weakness.


-2-

5.3 Limitation on scope of design: N/A

6.    Reporting changes in ICFR: The issuer has disclosed in its interim MD&A any change in the issuer's ICFR that occurred during the period ended June 30, 2024 that has materially affected, or is reasonably likely to materially affect, the issuer's ICFR.

Date: August 14, 2024


/s/ Sean Homuth
_____________________________

Sean Homuth
Chief Executive Officer


EX-99.4 5 exhibit99-4.htm EXHIBIT 99.4 KWESST Micro Systems Inc.: Exhibit 99.4 - Filed by newsfilecorp.com

FORM 52-109F2

CERTIFICATION OF INTERIM FILINGS

FULL CERTIFICATE

I, Kris Denis, interim Chief Financial Officer and Chief Compliance Officer of KWESST Micro Systems Inc., certify the following:

1. Review: I have reviewed the interim financial report and interim MD&A (together, the "interim filings") of KWESST Micro Systems Inc. (the "issuer") for the financial quarter ended June 30, 2024.

2. No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings.

3. Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings.

4. Responsibility: The issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as those terms are defined in National Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings, for the issuer.

5. Design: Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer's other certifying officer(s) and I have, as at the end of the period covered by the interim filings

(a) designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that

(i) material information relating to the issuer is made known to us by others, particularly during the period in which the interim filings are being prepared; and

(ii) information required to be disclosed by the issuer in its annual filings, interim

filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and

(b) designed ICFR, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer's GAAP.

5.1 Control framework: The control framework the issuer's other certifying officer(s) and I used to design the issuer's ICFR is the Internal Control - Integrated Framework (COSO Framework 2013) published by The Committee of Sponsoring Organizations of the Treadway Commission (COSO).

5.2 ICFR - material weakness relating to design: N/A or The issuer has disclosed in its interim MD&A for each material weakness relating to design existing at the end of the interim period:

(a) a description of the material weakness;

(b) the impact of the material weakness on the issuer's financial reporting and its ICFR; and

(c) the issuer's current plans, if any, or any actions already undertaken, for remediating the material weakness.


-2-

5.3 Limitation on scope of design: N/A

6.    Reporting changes in ICFR: The issuer has disclosed in its interim MD&A any change in the issuer's ICFR that occurred during the period ended June 30, 2024 that has materially affected, or is reasonably likely to materially affect, the issuer's ICFR.

Date: August 14, 2024

/s/ Kris Denis
_____________________________

Kris Denis
Interim CFO and Chief Compliance Officer


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