Skip to main content
Equibles

DFSC 6-K

DEFSEC Technologies Inc. (DFSC)

6-K 2025-05-16 For: 2025-03-31
View Original
Added on April 07, 2026

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 May, 2025.

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: May 16, 2025 By: /s/ Jennifer Welsh
Name: Jennifer Welsh
Title: Chief Financial Officer

EXHIBIT INDEX

99.1 Condensed Consolidated Interim Financial Statements for the three and six months ended March 31, 2025 and 2024
99.2 Management's Discussion and Analysis for the three and six months ended March 31, 2025
99.3 Certification of Interim Filings by CEO dated May 15, 2025
99.4 Certification of Interim Filings by CFO dated May 15, 2025 
KWESST Micro Systems Inc.: Exhibit 99.1 - Filed by newsfilecorp.com

Unaudited Condensed Consolidated Interim Financial Statements of

KWESST MICRO SYSTEMS INC.

Three and six months ended March 31, 2025 and 2024

(Expressed in Canadian dollars)

KWESST MICRO SYSTEMS INC.

Table of contents for the three and six months ended March 31, 2025 and 2024

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 5
Unaudited Condensed Consolidated Interim Statements of Cash Flows 6
Notes to the Unaudited Condensed Consolidated Interim Financial Statements 7-28

KWESST MICRO SYSTEMS INC. Unaudited Condensed Consolidated Interim Statements of Financial Position At March 31, 2025 and September 30, 2024

In Canadian dollars Notes March 31,2025 September 30,<br>2024
ASSETS
Cash and cash equivalents $ 4,408,844 $ 256,828
Restricted short-term investment 30,000 30,000
Trade and other receivables 4 1,081,864 567,875
Inventories 5 581,197 533,163
Prepaid expenses and deposits 333,125 179,051
Deferred costs 16,354 275,438
Current assets 6,451,384 1,842,355
Property and equipment 248,738 311,712
Right-of-use assets 62,923 230,124
Deposit 30,276 28,806
Intangible assets 6 2,725,138 3,174,832
Deferred costs 69,030 29,319
Non-current assets 3,136,105 3,774,793
Total Assets $ 9,587,489 $ 5,617,148
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Accounts payable and accrued liabilities 7 and 8 $ 1,122,180 $ 1,660,637
Accrued royalties liability - 200,000
Lease obligations 140,972 147,078
Contract liabilities 9 122,612 120,571
Warrant liabilities 10 and 11(b) 177,327 847,295
Current liabilities 1,563,091 2,975,581
Accrued royalties liability 1,202,961 1,118,135
Lease obligations 38,492 155,145
Non-current liabilities 1,241,453 1,273,280
Total Liabilities 2,804,544 4,248,861
Shareholders' Equity
Share capital 11(a) 43,197,908 37,822,725
Warrants 11(b) 5,926,182 1,084,687
Contributed surplus 11(c) 5,362,150 5,152,753
Accumulated other comprehensive loss (133,415 ) (38,520 )
Accumulated deficit (47,569,880 ) (42,653,358 )
Total Shareholders' Equity 6,782,945 1,368,287
Total Liabilities and Shareholders' Equity $ 9,587,489 $ 5,617,148

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

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

KWESST MICRO SYSTEMS INC. Unaudited Condensed Consolidated Interim Statements of Net Loss and Comprehensive Loss Three and six months ended March 31, 2025 and 2024

In Canadian dollars Notes Three Months<br>Ended<br>March 31, <br>2025 Three Months<br>Ended<br>March 31, <br>2024 Six Months<br>Ended<br>March 31, <br>2025 Six Months<br>Ended<br>March 31, <br>2024
(Reclassification <br>Note 2(g)) (Reclassification <br>Note 2(g))
Revenue 13 $ 1,264,162 $ 485,864 $ 2,151,820 $ 614,932
Cost of sales (950,141 ) (243,681 ) (1,433,277 ) (426,554 )
Gross margin 314,021 242,183 718,543 188,378
Operating expenses **** ****
General and administrative 1,102,261 1,682,698 2,613,705 2,684,994
Selling and marketing 334,114 418,027 1,016,661 900,968
Research and development 299,916 705,640 972,491 1,289,928
Share-based compensation 26,342 60,982 77,397 124,471
Depreciation and amortization 285,929 319,654 600,420 641,075
Total operating expenses 2,048,562 3,187,001 5,280,674 5,641,436
Operating loss (1,734,541 ) (2,944,818 ) (4,562,131 ) (5,453,058 )
Other income (expenses) **** ****
Share issuance costs 11(a) - - (1,807,686 ) -
Net finance costs 14 (31,361 ) (61,658 ) (93,420 ) (74,855 )
Foreign exchange gain (loss) 77,823 (805 ) 191,106 90,905
Impairment of right-of-use assets 6,809 - (81,787 ) -
Change in fair value of warrant liabilities 10 221,763 (532,922 ) 1,437,396 1,497,832
Total other income (expenses), net 275,034 (595,385 ) (354,391 ) 1,513,882
Net loss $ (1,459,507 ) $ (3,540,203 ) $ (4,916,522 ) $ (3,939,176 )
Other comprehensive income (loss): **** ****
Items that are or may be reclassified subsequently to profit or loss: **** ****
Foreign currency translation differences 1,381 (34,497 ) (94,895 ) (3,203 )
Total comprehensive loss $ (1,458,126 ) $ (3,574,700 ) $ (5,011,417 ) $ (3,942,379 )
Net loss per share **** ****
Basic and diluted 1(b)(c) and 12 $ (6.16 ) $ (127.66 ) $ (16.11 ) $ (144.63 )
Weighted average number of shares outstanding **** ****
Basic and diluted 1(b)(c) and 12 237,039 27,732 305,190 27,236

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 Six months ended March 31, 2025 and 2024

In Canadian dollars
Notes Number of<br>Shares^(1)^ Share capital Warrants Contributedsurplus Translationreserve Deficit TotalShareholders'Equity
Balance, September 30, 2023 26,969 $ 33,379,110 $ 1,042,657 $ 4,769,115 $ (39,663 ) $ (35,215,599 ) $ 3,935,620
Warrants exercised 11(b) 1,837 594,667 - - - - 594,667
Warrants expired 11(b) - (1,012 ) 1,012 - - -
Share-based compensation 11(c) - - 124,471 - - 124,471
Other comprehensive loss - - - (3,203 ) - (3,203 )
Net loss - - - - (3,939,176 ) (3,939,176 )
Balance, March 31, 2024 28,806 $ 33,973,777 $ 1,041,645 $ 4,894,598 $ (42,866 ) $ (39,154,775 ) $ 712,379
Balance, September 30, 2024 75,199 $ 37,822,725 $ 1,084,687 $ 5,152,753 $ (38,520 ) $ (42,653,358 ) $ 1,368,287
Shares issued for public offering 11(a) 3,810 100,310 - - - - 100,310
Shares issued for private placement 11(a) 50,248 371,154 - - - - 371,154
Warrants issued for private placement 11(a) - - 2,394,955 - - - 2,394,955
Pre-funded warrants issued for public offering 11(a) - - 3,489,393 - - - 3,489,393
Pre-funded warrants issued for private placement 11(a) - - 4,579,154 - - - 4,579,154
Share offering costs 11(a) - (164,199 ) (1,671,762 ) - - - (1,835,961 )
Shares issued for debt 11(a) 5,669 100,000 - - - - 100,000
Pre-funded warrants exercised 11(b) 378,771 4,339,668 (3,550,495 ) - - - 789,173
Warrants exercised 11(b) 16,667 628,250 (267,750 ) - - - 360,500
Warrants expired 11(b) - - (132,000 ) 132,000 - - -
Share-based compensation 11(c) - - - 77,397 - - 77,397
Other comprehensive loss - - - - (94,895 ) - (94,895 )
Net loss - - - - - (4,916,522 ) (4,916,522 )
Balance, March 31, 2025 **** 530,364 $ 43,197,908 $ 5,926,182 $ 5,362,150 $ (133,415 ) $ (47,569,880 ) $ 6,782,945

KWESST MICRO SYSTEMS INC. Unaudited Condensed Consolidated Interim Statements of Cash Flows Six months ended March 31, 2025 and 2024

In Canadian dollars Notes Six months ended<br>March 31,<br>2025 Six months ended<br>March 31,<br>2024
OPERATING ACTIVITIES
Net loss $ (4,916,522 ) $ (3,939,176 )
Items not affecting cash: ****
Depreciation and amortization 600,420 641,075
Share-based compensation 11(c) 77,397 124,471
Change in fair value of warrant liabilities (including related <br>   foreign exchange gain) 10 (1,359,187 ) (1,539,317 )
Net finance costs 14 93,420 74,855
Changes in non-cash working capital items 16 (1,188,324 ) (368,103 )
Impairment of ROU asset 82,954 -
Payments of share issuance costs 1,807,686 -
Gain on debt settlement (500 ) -
Changes in non-current deferred costs (39,711 ) -
Interest received (paid) (9,564 ) 27,086
Cash flows used in operating activities (4,851,931 ) (4,979,109 )
INVESTING ACTIVITIES ****
Additions of property and equipment (32,035 ) (64,370 )
Investments in intangible assets 6 (26,675 ) (5,037 )
Cash flows used in investing activities (58,710 ) (69,407 )
FINANCING ACTIVITIES ****
Proceeds from U.S. Public Offering-November 2024 11(a) 4,871,033 (74,437 )
Proceeds from Private Placement-November 2024 11(a) 3,421,635 -
Proceeds from Private Placement-February 2025 11(a) 3,655,758 -
Repayments of lease obligations (67,554 ) (74,437 )
Payments of share issuance costs 11(a) (3,188,310 ) -
Payments of deferred financing fees - (20,844 )
Proceeds from exercise of warrants 370,095 522
Cash flows provided by financing activities 9,062,657 (94,759 )
Net change in cash and cash equivalents during the period 4,152,016 (5,143,275 )
Cash and cash equivalents, beginning of period 256,828 5,407,009
Cash and cash equivalents, end of period $ 4,408,844 $ 263,734
Cash and cash equivalents consist of the following: ****
Cash held in banks $ 4,378,844 $ 263,734
Short-term guaranteed investment certificates 30,000 -
Cash and cash equivalents $ 4,408,844 $ 263,734

See Note 16 Supplemental cash flow information.

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

KWESST MICRO SYSTEMS INC.<br>Notes to the Unaudited Condensed Consolidated Interim Financial Statements<br>Three and six months ended March 31, 2025 and 2024<br>(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 Terence Matthews Crescent, Ottawa, Ontario, Canada. We have representative offices in the following foreign locations: 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) 2024 Reverse Stock Split

On October 23, 2024, KWESST effected a ten for one (10-for-1) reverse stock split of its common stock (the "2024 Reverse Split"). Accordingly, all shareholders of record at the opening of business on October 23, 2024, received one issued and outstanding common share of KWESST in exchange for ten outstanding common shares of KWESST. No fractional shares were issued in connection with the 2024 Reverse Split. All fractional shares created by the 2024 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 2024 Reverse Split, the exercise price and number of common shares issuable upon the exercise of outstanding stock options were proportionately adjusted to reflect the 2024 Reverse Split. 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 2024 Reverse Split.

c) 2025 Reverse Stock Split (applied retrospectively)

On April 23, 2025, on Nasdaq and on April 24, 2025, on the TSX-V, KWESST effected a twenty-one for one (21-for-1) reverse stock split of its common stock (the "2025 Reverse Split"). Accordingly, all shareholders of record at the opening of business on April 23, 2025, received one issued and outstanding common share of KWESST in exchange for twenty-one outstanding common shares of KWESST. No fractional shares were issued in connection with the 2025 Reverse Split. All fractional shares created by the 2025 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 2025 Reverse Split, the exercise price and number of common shares issuable upon the exercise of outstanding stock options were proportionately adjusted to reflect the 2025 Reverse Split. 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 2025 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. The going concern basis of presentation assumes we will continue in operation for the foreseeable future and can realize our assets and discharge our liabilities and commitments in the normal course of business.

KWESST MICRO SYSTEMS INC.<br>Notes to the Unaudited Condensed Consolidated Interim Financial Statements<br>Three and six months ended March 31, 2025 and 2024<br>(Expressed in Canadian dollars, except share amounts)

As an early-stage company, we have not yet reached significant revenue levels 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 $4.9 million net loss and negative operating cash flows of $4.9 million for the six months ended March 31, 2025 (2024 - $3.9 million net loss and negative operating cash flows of $5.0 million). At March 31, 2025, we had $4.9 million in working capital (September 30, 2024 - negative $1.1 million) and $47.6 million in accumulated deficit (September 30, 2024 - $42.7 million).

Our ability to continue as a going concern and realize our assets and discharge our liabilities in the normal course of business is dependent upon closing timely additional sales orders, 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 sales of our product offerings;
  • Ability to successfully execute our business plan;
  • Ability to raise additional capital at acceptable terms;
  • General local and global economic conditions, including the ongoing conflict in Gaza and the global disruption from Russia's invasion of Ukraine; and
  • Instability in Canada's elected leadership and the threatened tariffs from President Donald Trump.

Our strategy to mitigate these material risks and uncertainties is to execute on a timely basis a business plan aimed at continued focus on revenue growth, product development and innovation, improving overall gross margin, 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 should it be 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 IFRS® Accounting ("IFRS") and should be read in conjunction with our annual audited Consolidated Financial Statements for the year ended September 30, 2024 ("Annual Financial Statements"). 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 audited Consolidated Financial Statements as at and for the year ended September 30, 2024.

These unaudited condensed consolidated interim financial statements were authorized for issue by the Board of Directors on May 15, 2025.

(c) Basis of consolidation

These unaudited condensed consolidated interim financial statements incorporate the financial statements of KWESST and the entities it controls.

KWESST MICRO SYSTEMS INC.<br>Notes to the Unaudited Condensed Consolidated Interim Financial Statements<br>Three and six months ended March 31, 2025 and 2024<br>(Expressed in Canadian dollars, except share amounts)

Control is achieved where we have the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities, are exposed to, or have rights to, variable returns from our involvement with the entity and have the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to us until the date on which control ceases. Profit or loss of subsidiaries acquired during the year are recognized from the date of acquisition or effective date of disposal as applicable. All intercompany transactions and balances have been eliminated.

At March 31, 2025, we have the following wholly owned subsidiaries:

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

While each of the Company's subsidiaries has its own functional currency, the functional currency of the parent company, KWESST Micro Systems Inc., is CAD as this is the currency of the primary economic environment in which the Company operates. Most of the revenues, cost of sales and operating expenses from significant subsidiaries are denominated in CAD.

(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 Annual Financial Statements for the year ended September 30, 2024.

KWESST MICRO SYSTEMS INC.<br>Notes to the Unaudited Condensed Consolidated Interim Financial Statements<br>Three and six months ended March 31, 2025 and 2024<br>(Expressed in Canadian dollars, except share amounts)

Estimates

Information about assumptions and estimation uncertainties at March 31, 2025, that have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities in the next financial year are the same as those disclosed in Note 2(f) of the Annual Financial Statements for the year ended September 30, 2024.

(g) Reclassification

Certain comparative figures on the unaudited condensed interim statements of net loss and comprehensive loss have been reclassified to conform to the current period presentation. These reclassifications have no effect on net loss or shareholders’ equity as previously reported. An adjustment has been made to reduce the general and administrative, selling and marketing and research and development to break out the share-based compensation and depreciation and amortization. General and administrative expenses were reduced by $361,791 and $692,495 for the three and six month periods ended March 31, 2024, respectively. Selling and marketing expenses were reduced by nil and $13,654 for the three and six month periods ended March 31, 2024, respectively. Research and development expenses were reduced by $18,845 and $59,397 for the three and six month periods ended March 31, 2024, respectively. Share-based compensation expense was increased by $60,982 and $124,471 for the three and six month periods ended March 31, 2024. Depreciation and amortization expense was increased by $319,654 and $641,075 for the three and six month periods ended March 31, 2024.

3. Material accounting policies

During the six months ended March 31, 2025, the accounting policies in these unaudited condensed consolidated interim financial statements are the same as those applied in the Annual Financial Statements.

4. Trade and other receivables

The following table presents trade and other receivables for KWESST:

March 31, <br>2025 September 30, <br>2024
Trade receivables $ 997,553 $ 455,049
Unbilled revenue 150 42,248
Sales tax recoverable 84,161 70,578
Total $ 1,081,864 $ 567,875

There was an impairment of trade and other receivables during the three and six months ended March 31, 2025, of $8,096 and $8,096, respectively (2024 - nil and nil).

The following table presents changes in unbilled receivables:

March 31, <br>2025 September 30, <br>2024
Balance, beginning of period $ 42,248 $ 5,211
Revenue billed during the period (42,248 ) (5,211 )
Revenue in excess of billings, net of amounts transferred <br>  to trade receivables 150 42,248
Balance, end of period $ 150 $ 42,248
Current $ 150 $ 42,248
Non-current $ - $ -

5. Inventories

The following table presents a breakdown of inventories:

KWESST MICRO SYSTEMS INC.<br>Notes to the Unaudited Condensed Consolidated Interim Financial Statements<br>Three and six months ended March 31, 2025 and 2024<br>(Expressed in Canadian dollars, except share amounts)
March 31, <br>2025 September 30, <br>2024
--- --- --- --- ---
Finished goods $ 50,538 $ 55,754
Work-in-progress 49,416 59,519
Raw materials 481,242 417,890
Total $ 581,197 $ 533,163

There was no impairment of inventories during the three and six months ended March 31, 2025 (2024 - nil).

At March 31, 2025, a total of $0.1 million (2024 - $0.1 million) of inventory was included in profit or loss as an expense as part of cost of sales.

6. Intangible assets

The following table shows a breakdown of our intangible assets:

KWE PSSC KWE PSSC POC POC POC POC
Cost PARA OPS^TM^System PARA OPS^TM^Patent ARWEN^TM^Tradename CustomerRelationships PurchaseOrders ARWEN^TM^40mm Patent Total
Balance at September 30, 2024 $ 3,074,677 $ 40,295 $ 19,432 $ 36,041 $ 4,387 $ - $ 3,174,832 ****
Additions - - - - - 26,675 **** 26,675 ****
Amortization (460,343 ) (6,903 ) (4,400 ) (2,500 ) - (2,223 ) **** (476,369 )
Balance at March 31, 2025 $ 2,614,334 $ 33,392 $ 15,032 $ 33,541 $ 4,387 $ 24,452 $ 2,725,138

At March 31, 2025, management concluded there was no indication of impairment on the intangible assets.

7. Accounts payable and accrued liabilities

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

March 31, <br>2025 September 30, <br>2024
Trade payable $ 383,123 $ 881,835
Accrued liabilities 465,498 610,558
Warranty Reserve 13,900 -
Salary and vacation payable 259,659 168,244
Total $ 1,122,180 $ 1,660,637

8. Related party transactions

At March 31, 2025, there was $96,651 (September 30, 2024 - $471,465) outstanding in accounts payable and accrued liabilities due to officers and directors for accrued wages and vacation, consulting fees, directors' fees and expense reimbursements.

In December 2024, the LEC royalty payment that was due April 2025, in the amount of $200,000, was paid early to DEFSEC, a related party to the Company, in exchange for a $25,000 reduction, resulting in a net payment of $175,000.

9. Contract liabilities

The following table presents the changes in contract liabilities:

KWESST MICRO SYSTEMS INC.<br>Notes to the Unaudited Condensed Consolidated Interim Financial Statements<br>Three and six months ended March 31, 2025 and 2024<br>(Expressed in Canadian dollars, except share amounts)
March 31, <br>2025 September 30, <br>2024
--- --- --- --- --- --- ---
Balance, beginning of period $ 120,571 $ 120,970
Amounts invoiced and revenue deferred 43,113 108,573
Recognition of deferred revenue included in the <br>    balance at the beginning of period (41,072 ) (108,972 )
Balance, end of period $ 122,612 $ 120,571

10. Warrant liabilities

The following table shows a breakdown and balance of warrant liabilities for the six months ended March 31, 2025:

U.S. IPO and Canadian Offering Private Placement Debt Settlement Direct OfferingAug'24 Public OfferingNov'24
2022 Warrants Over-allotmentWarrants 2023 <br>Warrants Pre-Funded<br>Warrants Warrants Warrants Pre-Funded<br>Warrants Total
Balance, beginning of period $ 65,765 $ 7,644 $ 60,373 $ 31,338 $ 1,145 $ 681,030 $ - $ 847,295
Initial recognition - - - - - - 4,770,722 4,770,722
Exercised - - - - - - (779,578 ) (779,578 )
(Gain) Loss on revaluation of financial instruments 39,479 (8,148 ) (62,124 ) (27,746 ) 744 (664,689 ) (714,912 ) (1,437,396 )
Exchange (gain) loss on revaluation 3,293 504 3,968 89 - 44,662 25,693 78,209
Extinguish Warrant Liability/Transfer to equity - - - - - - (3,301,925 ) (3,301,925 )
Balance, end of period $ 108,537 $ - $ 2,217 $ 3,681 $ 1,889 $ 61,003 $ - $ 177,327
Number of outstanding securities as at March 31, 2025 3,226,392 - 1,542,194 151,734 56,141 4,715,000 - 9,691,461

The following table shows a breakdown and balance of warrant liabilities for the year ended September 30, 2024:

U.S. IPO and Canadian Offering Private Placement DebtSettlement PublicOffering DirectOffering
2022 Warrants Over-allotmentPre-FundedWarrants Over- allotmentWarrants 2023 <br>Warrants Pre-Funded<br>Warrants Warrants Pre-Funded<br>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 - - - - - - 708,054 647,039 1,355,093
Exercised - (119,257 ) - - (829,720 ) - (820,649 ) - (1,769,626 )
(Gain) Loss on revaluation of financial instruments (973,396 ) (295,186 ) (113,022 ) (728,282 ) (1,069,466 ) (16,996 ) 104,227 44,553 (3,047,568 )
Exchange (gain) loss on revaluation (3,377 ) 109 (507 ) (9,918 ) (10,390 ) - 8,368 (10,562 ) (26,277 )
Balance, end of period $ 65,765 $ - $ 7,644 $ 60,373 $ 31,338 $ 1,145 $ - $ 681,030 $ 847,295
Number of outstanding securities as at September 30, 2024 3,226,392 - 375,000 1,542,194 151,734 56,141 - 4,715,000 10,066,461

U.S. Public Offering (April 2024)

On April 9, 2024, we closed an underwritten U.S. public offering for gross proceeds of $1.4 million (US$1 million) (see Note 11(a)). In this offering, 803,500 pre-funded warrants with an exercise price of US$0.21 per common share for US$0.649 per pre-funded warrant were issued.

Refer to Note 11(a) for further information on the offering and to Note 1 (b) and (c) for further information on the share consolidations.

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 from 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 Fair Value through Profit and Loss ("FVTPL") (see Note 3(c) of the Annual Financial Statements). 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.

KWESST MICRO SYSTEMS INC.<br>Notes to the Unaudited Condensed Consolidated Interim Financial Statements<br>Three and six months ended March 31, 2025 and 2024<br>(Expressed in Canadian dollars, except share amounts)

Warrant liabilities

All 803,500 warrants were subsequently exercised at a weighted average exercise price of US$0.001 per warrant and we recognized a loss of $104,227 in fair value of warrant liabilities during the year ended September 30, 2024, which was reported in the consolidated statements of net loss and comprehensive loss.

U.S. Registered Direct Offering (August 2024)

On August 13, 2024, we closed a direct offering for the purchase and sale of 22,452 common shares at a purchase price of $56.70 (US$42.00) per common share for gross proceeds of $1.3 million (US$0.9 million) (see Note 11(a)). In a concurrent private placement, we issued 4,715,000 unregistered warrants to purchase common shares at an exercise price of $72.03 (US$52.50) per common share. This was a unit offering consisting of a share and a warrant. The fair value of the warrants attached to the units are valued based on the Black-Scholes model and the difference between the proceeds raised and the value assigned to the warrants is the residual fair value of the shares.

Refer to Note 11(a) for further information on the offering and to Note 1 (b) and (c) for further information on the share consolidations.

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 from 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 Annual Financial Statements). 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

At March 31, 2025, we remeasured the fair value of these warrants using the following assumptions:

2024 Warrants ^(1)^
Number of warrants 4,715,000
Exercise price per warrant (in USD) $ 0.25
Nasdaq closing price (in USD) $ 0.27
Black Scholes fair value (in USD) $ 0.009
Volatility 100%
Risk free rate 2.76%
Exchange rate (USD/CAD) $ 1.4376
Fair value per warrant (CAD) $ 0.013

^(1)^ ^Fair value is based on the Black Scholes model on^^March^^31, 202^^5^^, for the warrants.^

We recognized a gain of $203,349 and $664,689 (2024 - nil and nil) in fair value of warrant liabilities during the three and six months ended March 31, 2025, respectively, which was reported in the unaudited condensed consolidated interim statements of net loss and comprehensive loss.

U.S. Public Offering (November 2024)

KWESST MICRO SYSTEMS INC.<br>Notes to the Unaudited Condensed Consolidated Interim Financial Statements<br>Three and six months ended March 31, 2025 and 2024<br>(Expressed in Canadian dollars, except share amounts)

On November 1, 2024, the Company announced the closing of a public offering of 3,810 common shares and 3,809,000 pre-funded warrants (“PFW”) at a public offering price of $26.25 (US$18.90) per common share and $1.25 (US$0.90) per pre-funded warrant. The gross proceeds from the offering were $4.9 million (US$3.5 million). The fair value of the pre-funded warrants on initial recognition was $1.249, which is the purchase price less the per warrant exercise price of $0.001.

Refer to Note 11(a) for further information on the offering and to Note 1 (b) and (c) for further information on the share consolidations.

Under IFRS, the pre-funded warrants are classified as financial liabilities (referred herein as "warrant liabilities") because the exercise price is denominated in U.S. dollars, which is different from 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 unaudited condensed consolidated interim statements of net loss and comprehensive loss.

Warrant liabilities

639,000 pre-funded warrants were subsequently exercised at a weighted average exercise price of US$0.021 per common share. On November 12, 2024, we converted the remaining 3,170,000 pre-funded warrants to CAD denomination which led to the transfer of pre-funded warrants to equity and extinguishing the related warrant liability. On November 12, 2024, we recognized a gain of $693,328 in the change in fair value of warrant liabilities, before reclassifying the pre-funded warrants to equity, which was reported in the unaudited condensed consolidated interim statements of net loss and comprehensive loss.

11. Share Capital and Contributed Surplus

As disclosed in Note 1(b) and (c), the 2024 Reverse Split and 2025 Reverse Split have been applied retrospectively herein.

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, 2024:

Number Amount
Balance at September 30, 2024 75,199 $ 37,822,725
Issued for U.S. Public Offering 3,810 100,310
Issued for U.S. Private Placement 50,248 371,154
Issued for debt settlements 5,669 100,000
Issued for warrant exercise 395,438 4,967,918
Less: share issuance costs for the period - (164,199 )
Balance at March 31, 2025 530,364 $ 43,197,908
KWESST MICRO SYSTEMS INC.<br>Notes to the Unaudited Condensed Consolidated Interim Financial Statements<br>Three and six months ended March 31, 2025 and 2024<br>(Expressed in Canadian dollars, except share amounts)
---

Debt Settlement (January 2024)

On January 10, 2024, we issued 222 common shares in a settlement of debt in an amount of approximately $97,615. The debt resulted from a tail 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) were subject to a four-month hold period pursuant to applicable securities legislation and the policies of the TSX Venture Exchange.

U.S. Public Offering (April 2024)

On April 9, 2024, we closed a brokered U.S. public offering, resulting in the issuance of 3,500 common shares of KWESST, for aggregate gross proceeds of $1.4M (US$1.0M) (the "April 2024 Public Offering").

As a part of the April 2024 Public Offering, the Company issued 3,500 common shares and 803,500 pre-funded warrants with an exercise price of $0.21 per share at a public offering price of $184.80 (US$136.50) per common share and $0.881 (US$0.649) per pre-funded warrant, less the underwriting discount.

Brokers' Compensation and Share Issuance Costs

ThinkEquity acted as sole book-running manager for the April 2024 Public Offering. As compensation for services rendered, the placement agent fees represent $0.4875 per unit (being an aggregate of $101,838 (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. The Placement Agent Warrants will be exercisable, in whole or in part, immediately upon issuance and will expire 60 months after the closing of the April 2024 Public Offering at an initial exercise price of $231.63 (US$170.63) per common share. The share issuance costs related to the April 2024 Public Offering that was recognized in the consolidated statements of net loss and comprehensive loss was $339,324 and recognized in equity was $269,400.

The fair value of the broker compensation warrants at the closing of the April 2024 Public Offering was $43,868, calculated using the Black Scholes model, and total share issuance costs were $608,724.

InitialRecognition
Number of Warrants 76,925
Nasdaq closing price (in ) 0.75
Exercise price per warrant (in ) 0.89
Black Scholes fair value (in ) 0.42
Volatility 66%
Dividend Yield Nil
Risk-free interest rate 3.86%
Expected life 5
Exchange rate (/CAD) 1.3578
Weighted average fair value per warrant (CAD) 0.57

All values are in US Dollars.

U.S. Public Offering (June 2024)

On June 14, 2024, we closed a brokered U.S. public offering, resulting in the issuance of 13,810 common shares of KWESST for aggregate gross proceeds of approximately $2.3M (US$1.7M) (the "June 2024 Public Offering").

KWESST MICRO SYSTEMS INC.<br>Notes to the Unaudited Condensed Consolidated Interim Financial Statements<br>Three and six months ended March 31, 2025 and 2024<br>(Expressed in Canadian dollars, except share amounts)

As a part of the June 2024 Public Offering, the Company issued 13,810 common shares at a public offering price of $168.00 (US$121.80) per share, less the placement agent fees.

Brokers' Compensation and Share Issuance Costs

ThinkEquity acted as sole book-running manager for the June 2024 Public Offering. As compensation for services rendered, the placement agent fees represent $0.435 per common share (being an aggregate of $173,469 (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 $210.00 (US$152.25) per common share, exercisable, in whole or in part, immediately upon issuance and will expire 60 months after the closing of the June 2024 Public Offering. All of the share issuance 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 $61,213, calculated using the Black Scholes model, and total share issuance costs were $384,509.

InitialRecognition
Number of Warrants 145,000
Nasdaq closing price (in ) 0.58
Exercise price per warrant (in ) 0.73
Black Scholes fair value (in ) 0.31
Volatility 66%
Dividend Yield Nil
Risk-free interest rate 3.86%
Expected life (in years) 5.00
Exchange rate (/CAD) 1.3751
Weighted average fair value per warrant (CAD) 0.42

All values are in US Dollars.

U.S. Registered Direct Offering (August 2024)

On August 13, 2024, we closed a registered direct offering for the purchase and sale of 22,452 common shares at a purchase price of $57.54 (US$44.00) per common share for gross proceeds of $1.4M (US$0.9M) (the “August 2024 Offering”). In a concurrent private placement, the Company issued 4,715,000 unregistered warrants to purchase common shares at an exercise price of $72.03 (US$52.50) per common share that are immediately exercisable upon issuance and will expire five years following the date of issuance.

Brokers' Compensation and Share Issuance Costs

H.C. Wainwright & Co. (“Wainwright”) acted as the exclusive placement agent for the August 2024 Offering. As compensation for services rendered, the placement agent fees were US$70,725 or 7.5% of the public offering price of the securities. In connection with the closing of the August 2024 Offering, we issued Wainwright or its designees warrants to purchase up to an aggregate of 353,625 common shares at an exercise price of $72.03 (US$52.50) per common share, the warrants are exercisable upon issuance and have an expiry date of August 9, 2029. The shares offered as Brokers’ Compensation related to the August 2024 Offering were recognized in equity.

The fair value of the broker compensation warrants at the closing of the August 2024 Offering was $28,632, calculated using the Black Scholes model. The share issuance costs related to the August 2024 Offering that was recognized in the consolidated statements of net loss and comprehensive loss was $202,242 and recognized in equity was $281,869.

KWESST MICRO SYSTEMS INC.<br>Notes to the Unaudited Condensed Consolidated Interim Financial Statements<br>Three and six months ended March 31, 2025 and 2024<br>(Expressed in Canadian dollars, except share amounts)
InitialRecognition
--- ---
Number of Warrants 353,625
Nasdaq closing price (in ) 0.14
Exercise price per warrant (in ) 0.25
Black Scholes fair value (in ) 0.06
Volatility 91%
Dividend Yield Nil
Risk-free interest rate 3.12%
Expected life (in years) 2.50
Exchange rate (/CAD) 1.3751
Weighted average fair value per warrant (CAD) 0.08

All values are in US Dollars.

U.S. Public Offering (November 2024)

On November 1, 2024, the Company announced the closing of a public offering of 3,810 common shares and 3,809,000 pre-funded warrants at a public offering price of $26.25 (US$18.90) per common share and $1.25 (US$0.90) per pre-funded warrant (the “November 2024 Offering”). The gross proceeds from the offering were approximately $4.9 million (US$3.5 million), before deducting placement agent fees of $1.974 (US$1.4175) per common share and $0.094 (US$0.0675) per pre-funded warrant (being an aggregate of $365,726 (US$262,508) or 7.5% of the public offering price of the securities). In addition, the Company issued to the placement agent as compensation for its services 194,450 common share purchase warrants with an exercise price of $32.907 (US$23.625) per common share.

On November 12, 2024, we amended the pre-funded warrants whereas the exercise price of the warrants, along with all the other settlement amounts, were amended to be denominated in CAD currency, which is consistent with the Company's functional and presentation currency. As a result, we reclassified the remaining unexercised pre-funded warrants as equity instruments under IAS 32. This resulted in a transfer of $3,301,925 from warrant liabilities to equity warrants. The amendments effectively remove the cashless exercise option and ensure settlement in CAD, thereby meeting the criteria for equity classification. We also applied IFRIC 19 to appropriately derecognize the liabilities and recognize the equity effective November 12, 2024.

Accounting Treatment

Refer to Note 10 for the accounting of the warrants issued in the November 2024 Offering accounted for as warrant liabilities up to November 11, 2024.

The remaining 3,170,000 pre-funded warrants were subsequently exercised at a weighted average exercise price of $0.021 per common share, for proceeds of $3,170, during the six months ended March 31, 2025.

Brokers' Compensation and Share Issuance Costs

In connection with the August 2024 Offering, Wainwright was also granted a tail obligation resulting in earning 7.5% on any equity financing raised from investors introduced to the Company as part of the offering. The November 1, 2024, financing fell entirely within the scope of the tail obligation and resulted in a payment of $362,618 (US$260,661), representing 7.5% of the $4.9 million (US$3.5 million) gross proceeds to Wainwright upon closing of the transaction.

KWESST MICRO SYSTEMS INC.<br>Notes to the Unaudited Condensed Consolidated Interim Financial Statements<br>Three and six months ended March 31, 2025 and 2024<br>(Expressed in Canadian dollars, except share amounts)

ThinkEquity acted as the sole placement agent for the November 2024 Offering. As compensation for services rendered, the placement agent fees were $365,725 (US$262,508) or 7.5% of the public offering price of the securities). In addition, the Company issued to the placement agent as compensation for its services 194,450 common share purchase warrants with an exercise price of $32.907 (US$23.625) per common share. The warrants are exercisable upon issuance and have an expiry date of November 1, 2029. The shares offered as Brokers’ Compensation related to the November 2024 Offering were recognized in equity.

The fair value of the broker compensation warrants at the closing of the November 2024 Offering was $187,468, calculated using the Black Scholes model.

The share issuance costs related to the November 2024 Offering that were recognized in the unaudited condensed consolidated statements of net loss and comprehensive loss was $1,807,686 and recognized in equity were $227,557, inclusive of the broker compensation warrants.

InitialRecognition
Number of Warrants 194,450
Nasdaq closing price (in USD) $ 0.93
Exercise price per warrant (in USD) $ 1.13
Black Scholes fair value (in USD) $ 0.69
Volatility 103%
Divident yield Nil
Risk-free interest rate 2.92%
Expected life (in years) 5.00
Exchange rate (USD/CAD) $ 1.3932
Fair value per warrant (CAD) $ 0.96

Debt Settlement (November 2024)

On November 11, 2024, we issued 5,669 common shares at a deemed price per common share of $17.64 per share, representing a 20% discount on the closing price of the Shares on the TSX Venture Exchange on the last trading day prior to the news release, for settlement of business expenses incurred while representing the Company in an aggregate amount of $100,000 owed to a company controlled by Mr. David Luxton, Chairman of the Company.

Private Placement (November 2024)

On November 12, 2024, we closed a brokered private placement offering to an institutional accredited investor for aggregate gross proceeds of approximately $3.4 million (approximately US$2.5 million) (the "November 2024 PP").

As a part of the November 2024 PP, the Company issued 4,145,200 pre-funded warrants to acquire common shares of the Company on a basis of twenty-one warrants to one common share, with no par value at a price of $0.824 (US$0.592) per pre-funded warrant, inclusive of the exercise price of $0.021 per common share. Each pre-funded warrant was bundled with one common share purchase warrant (“November 2024 Common Warrant”) of the Company. Each November 2024 Common Warrant was immediately exercisable on the basis of twenty-one warrants to one common share at an exercise price of $21.63 (US$15.54) per common share for a period of 60 months following the closing of the November 2024 PP. Although the pre-funded warrants are each bundled with a November 2024 Common Warrant, each security is issued separately. Since the instruments were bundled, the Company uses the bifurcation method to determine the fair value of each security. The Black Scholes model was used to determine the fair value of the underlying November 2024 Common Warrant and the remainder of the purchase price was allocated to the pre-funded warrant, resulting in a fair value of the November 2024 Common Warrants of $0.765 and a fair value of $0.06 for the pre-funded warrants.

KWESST MICRO SYSTEMS INC.<br>Notes to the Unaudited Condensed Consolidated Interim Financial Statements<br>Three and six months ended March 31, 2025 and 2024<br>(Expressed in Canadian dollars, except share amounts)
InitialRecognition
--- --- ---
Number of Warrants 4,145,200
Nasdaq closing price (in CAD) $ 1.00
Exercise price per warrant $ 1.03
Black Scholes fair value $ 0.765
Volatility 103%
Divident yield Nil
Risk-free interest rate 2.92%
Expected life (in years) 5.00
Fair value per warrant (CAD) $ 0.765

The 4,145,000 pre-funded warrants and 350,000 November 2024 Common Warrants were subsequently exercised at a weighted average exercise price of $0.08, for proceeds of $364,645, during the six months ended March 31, 2025.

Brokers' Compensation and Share Issuance Costs

In connection with the August 2024 Offering, Wainwright was also granted a tail obligation resulting in earning 7.5% on any equity financing raised from investors introduced to the Company as part of the offering. The November 12, 2024, financing fell entirely within the scope of the tail obligation and resulted in a payment of $259,534 (US$184,047), representing 7.5% of the $3.4 million (US$2.5 million) gross proceeds to Wainwright upon closing of the transaction.

ThinkEquity acted as sole placement agent for the Offering. As compensation for services rendered, the Company (i) paid to ThinkEquity, at the closing of the November 2024 PP, a cash fee equal of $274,027 (US$196,400), representing 8.0% of the aggregate gross proceeds of the November 2024 PP; and (ii) issued to ThinkEquity or its designees 207,260 warrants (“Placement Agent Warrants”) to purchase common shares on the basis of twenty-one warrants to one common share, equal to 5% of the pre-funded warrants sold in the November 2024 PP. The Placement Agent Warrants are immediately exercisable, and entitle the holder to acquire one common share at an exercise price of $1.03 (US$0.74) per common share for a period of 60 months following the closing of the November 2024 PP.

The fair value of the broker compensation warrants at the closing of the November 2024 PP was $158,554, calculated using the Black Scholes model.

The share issuance costs related to the November 2024 PP that were recognized in equity were $681,185, inclusive of the broker compensation warrants.

KWESST MICRO SYSTEMS INC.<br>Notes to the Unaudited Condensed Consolidated Interim Financial Statements<br>Three and six months ended March 31, 2025 and 2024<br>(Expressed in Canadian dollars, except share amounts)
InitialRecognition
--- --- ---
Number of Warrants 207,260
Nasdaq closing price (in CAD) $ 1.00
Exercise price per warrant $ 1.03
Black Scholes fair value $ 0.765
Volatility 103%
Dividend yield Nil
Risk-free interest rate 2.92%
Expected life (in years) 5.00
Fair value per warrant (CAD) $ 0.765

Private Placement (February 2025)

On February 21 and February 25, 2025, we closed the first and second tranche, respectively, of a brokered private placement offering for aggregate gross proceeds of approximately $3.7 million (the "February 2025 PP").

As part of the February 2025 PP, the Company issued 50,248 common shares and 2,884,179 pre-funded warrants to acquire one common share of the Company. The common shares and pre-funded warrants had a no par value per share at a price of $19.488 per common share and $0.928 per pre-funded warrant, inclusive of the exercise price of $0.021 per common share. Each common share and pre-funded warrant was bundled with one common share purchase warrant (“February 2025 Common Warrant”) of the Company. Each February 2025 Common Warrant is immediately exercisable and entitles the holder to acquire one common share for every 21 February 2025 Common Warrant exercised at an exercise price of $24.36 per common share for a period of 60 months following the closing of the February 2025 PP. Although the common shares and pre-funded warrants are each bundled with a February 2025 Common Warrant, each security is issued separately. Since the instruments were bundled, the Company uses the bifurcation method to determine the fair value of each security. The Black Scholes model was used to determine the fair value of the underlying February 2025 Common Warrant and the remainder of the purchase price was allocated to the common share or pre-funded warrant, resulting in a fair value of the first tranche of the February 2025 Common Warrants of $0.58 and $0.55 and a fair value of $7.308 for the common shares and $0.348 for the pre-funded warrants.

February 21 Tranche InitialRecognition
Number of Warrants 3,787,879
Nasdaq closing price (in CAD) $ 0.80
Exercise price per warrant $ 1.16
Black Scholes fair value $ 0.58
Volatility 104%
Divident yield Nil
Risk-free interest rate 2.76%
Expected life (in years) 5.00
Fair value per warrant (CAD) $ 0.58
KWESST MICRO SYSTEMS INC.<br>Notes to the Unaudited Condensed Consolidated Interim Financial Statements<br>Three and six months ended March 31, 2025 and 2024<br>(Expressed in Canadian dollars, except share amounts)
---
February 25 Tranche InitialRecognition
--- --- ---
Number of Warrants 151,515
Nasdaq closing price (in CAD) $ 0.77
Exercise price per warrant $ 1.16
Black Scholes fair value $ 0.55
Volatility 104%
Divident yield Nil
Risk-free interest rate 2.65%
Expected life (in years) 5.00
Fair value per warrant (CAD) $ 0.55

Brokers' Compensation and Share Issuance Costs

In connection with the August 2024 Offering, Wainwright was also granted a tail obligation resulting in earning 7.5% on any equity financing raised from investors introduced to the Company as part of the offering. The February 2025 PP fell mostly within the scope of the tail obligation and resulted in a payment of $244,128, representing 7.5% of the gross proceeds, within the scope of the tail obligation, to Wainwright upon closing of the transaction.

ThinkEquity acted as sole placement agent for the Offering. As compensation for services rendered, the Company (i) paid to ThinkEquity, at the closing of the February 2025 PP, a cash fee equal to $279,338, representing 7.5% of the aggregate gross proceeds of the February 2025 PP; and (ii) issued to ThinkEquity or its designees 196,970 warrants (“February 2025 Placement Agent Warrants”) equal to 105% of the common shares and 5% of the pre-funded warrants sold in the February 2025 PP. The February 2025 Placement Agent Warrants are immediately exercisable, and entitle the holder to acquire one common share for every 21 February 2025 Placement Agent Warrants exercised at an exercise price of $24.36 per common share for a period of 60 months following the closing of the February 2025 PP.

The fair value of the broker compensation warrants at the closing of the February 2025 PP was $114,046, calculated using the Black Scholes model.

The share issuance costs related to the February 2025 PP that were recognized in equity were $927,219, inclusive of the broker compensation warrants.

February 21 Tranche InitialRecognition
Number of Warrants 189,394
Nasdaq closing price (in CAD) $ 0.80
Exercise price per warrant $ 1.16
Black Scholes fair value $ 0.58
Volatility 104%
Divident yield Nil
Risk-free interest rate 2.76%
Expected life (in years) 5.00
Fair value per warrant (CAD) $ 0.58
KWESST MICRO SYSTEMS INC.<br>Notes to the Unaudited Condensed Consolidated Interim Financial Statements<br>Three and six months ended March 31, 2025 and 2024<br>(Expressed in Canadian dollars, except share amounts)
---
February 25 Tranche InitialRecognition
--- --- ---
Number of Warrants 7,576
Nasdaq closing price (in CAD) $ 0.77
Exercise price per warrant $ 1.16
Black Scholes fair value $ 0.55
Volatility 104%
Dividend yield Nil
Risk-free interest rate 2.65%
Expected life (in years) 5.00
Fair value per warrant (CAD) $ 0.55

b) Warrants

The following is a summary of changes in outstanding warrants since September 30, 2024:

Number of warrants Weighted<br>average<br>exercise price
Outstanding at September 30, 2024 11,600,598 $ 3.23
Issued (Note 11(a)) 19,521,653 0.49
Exercised (1) (8,304,200 ) 0.04
Expired (575,000 ) 5.01
Outstanding at March 31, 2025 22,243,051 $ 4.00
Exercisable at March 31, 2025 22,243,051 $ 4.00

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

(1) The Pre-Funded Warrants exercised in Fiscal 2025 had a strike price of $0.001.

In the six months ended March 31, 2025, there were 7,954,200 pre-funded warrants and 350,000 November 2024 Common Warrants exercised, resulting in an increase to share capital of $4,700,168, a decrease to warrants of $3,818,245 and a decrease to warrant liabilities of $667,634 with the difference being recorded in the change in fair value of the warrant liabilities that was recognized in the unaudited condensed consolidated statements of net loss and comprehensive loss.

In the six months ended March 31, 2025, there were 575,000 warrants that expired resulting in $132,000 being recorded to contributed surplus.

KWESST MICRO SYSTEMS INC.<br>Notes to the Unaudited Condensed Consolidated Interim Financial Statements<br>Three and six months ended March 31, 2025 and 2024<br>(Expressed in Canadian dollars, except share amounts)

The following table provides additional information on the total outstanding warrants at March 31, 2025:

Number ofwarrantsoutstanding Conversion ratio toCommon Shares Underlying <br>Securities Book value^^ Expiry date
Classified as equity
LEC's Warrants:
Exercise price of CAD$0.70 500,000 14,700 for 1 34 $ 425,000 April 29, 2026
December 2022 U.S. Underwriter Warrants
Exercise price of US$5.1625 134,950 210 for 1 643 $ 189,592 December 9, 2027
July 2023 U.S. Underwriter Warrants
Exercise price of US$2.66 123,637 210 for 1 589 $ 204,187 July 21, 2028
April 2024 U.S. Underwriter Warrants
Exercise price of US$0.8125 76,925 210 for 1 366 $ 43,869 April 9, 2029
June 2024 U.S. Underwriter Warrants
Exercise price of US$0.725 145,000 210 for 1 690 $ 61,213 June 14, 2029
August 2024 U.S. Underwriter Warrants
Exercise price of US$0.25 353,625 210 for 1 1,684 $ 28,826 August 9, 2029
November 2024 U.S. Underwriter Warrants
Exercise price of US$1.125 194,450 21 for 1 9,260 $ 187,468 November 1, 2029
November 2024 Private Placement Warrants
Exercise price of CAD$1.03 3,795,200 21 for 1 180,724 $ 2,903,470 November 12, 2029
November 2024 PP Underwriter Warrants
Exercise price of CAD$1.03 207,260 21 for 1 9,870 $ 158,554 November 12, 2029
February 21, 2025 Private Placement Warrants
Exercise price of CAD$1.16 3,787,879 21 for 1 180,375 $ 2,196,970 February 21, 2030
February 21, 2025 Pre-Funded Warrants
Exercise price of CAD$0.001 2,884,179 21 for 1 137,342 $ 1,000,810 No expiry
February 21, 2025 PP Underwriter Warrants
Exercise price of CAD$1.16 189,394 21 for 1 9,019 $ 109,849 February 21, 2030
February 25, 2025 Private Placement Warrants
Exercise price of CAD$1.16 151,515 21 for 1 7,215 $ 83,939 February 25, 2030
February 25, 2025 PP Underwriter Warrants
Exercise price of CAD$1.16 7,576 21 for 1 361 $ 4,197 February 25, 2030
Costs related to the Nov 2024 Public Offering Warrants $ (187,468 )
Costs related to the Nov 2024 Private Placement Warrants and PFWs $ (681,185 )
Costs related to the Feb 2025 Private Placement Warrants and PFWs $ (803,109 )
12,551,590 538,172 $ 5,926,182
Classified as liability
December 2022 Public Offerings:
Exercise price of US$5.00 3,226,392 210 for 1 15,364 $ 108,537 December 9, 2027
December 2022 Debt Settlement
Exercise price of US$5.00 56,141 210 for 1 267 $ 1,889 December 9, 2027
July 2023 Public Offerings:
Exercise price of US$2.66 1,542,194 210 for 1 7,344 $ 2,217 July 21, 2028
July 2023 Pre-Funded Warrants
Exercise price of US$0.001 151,734 210 for 1 723 $ 3,681 No expiry
August 2024 Public Offering
Exercise price of US$0.25 4,715,000 210 for 1 22,452 $ 61,003 August 9, 2029
9,691,461 46,150 177,327
Total outstanding warrants 22,243,051 584,322 $ 6,103,509
KWESST MICRO SYSTEMS INC.<br>Notes to the Unaudited Condensed Consolidated Interim Financial Statements<br>Three and six months ended March 31, 2025 and 2024<br>(Expressed in Canadian dollars, except share amounts)
---

c) Contributed Surplus

Contributed surplus consists of issued broker compensation options at fair value, the cumulative amortized fair value of share-based compensation grants since inception, less amounts transferred to share capital for exercises. If outstanding options expire or are forfeited, there is no reversal of contributed surplus.

Share-based compensation

On August 26, 2024, KWESST shareholders approved the renewal of the Long-Term Incentive Plan (the "LTIP"). The number of RSUs, PSUs, deferred share units ("DSUs"), and stock appreciation rights ("SARs") (collectively "Share Units") authorized for issuance pursuant to the LTIP is 1,939 Share Units. Accordingly, we have 882 Share Units available for future grants.

We did not grant any stock options, RSUs, PSUs, and SARs, pursuant to our LTIP during the six months ended March 31, 2025. Accordingly, we had 1,057 outstanding stock options at March 31, 2025, we have 51,979 stock option units available for future grants.

Number of<br>options Weighted<br>average<br>exercise price
Outstanding at September 30, 2024 1,229 $ 554.40
Cancelled (172 ) $ 664.41
Outstanding at March 31, 2025 1,057 $ 554.95
Options exercisable at March 31, 2025 816 $ 560.69

For the three and six months ended March 31, 2025, we recorded share-based compensation of $26,342 and $77,397 (2024 - $60,981 and $124,471).

12. Loss per share

As disclosed in Note 1(b) and (c), the 2024 Reverse Split and 2025 Reverse Split has been applied retrospectively herein.

The following table summarizes the calculation of the weighted average basic number of basic and diluted common shares to calculate the loss per share as reported in the unaudited condensed consolidated interim statements of net loss and comprehensive loss:

Three months endedMarch 31, 2025 Three months<br>ended<br>March 31,<br> 2024 Six months <br>ended <br>March 31, <br>2025 Six months <br>ended<br>March 31,<br> 2024
Issued common shares,  beginning of period 144,391 26,747 75,199 26,747
Effect of shares issued from:
November 2024 U.S. Public Offering (Note 11(a)) - - 3,140 -
February 2025 U.S. Private Placement (Note 11(a)) 20,441 - 10,333 -
Debt settlements - 198 4,361 98
Exercise of warrants 72,207 787 212,157 391
Weighted average number of dilutive common shares 237,039 27,732 305,190 27,236
KWESST MICRO SYSTEMS INC.<br>Notes to the Unaudited Condensed Consolidated Interim Financial Statements<br>Three and six months ended March 31, 2025 and 2024<br>(Expressed in Canadian dollars, except share amounts)
---

At March 31, 2025 and 2024, all dilutive securities, being warrants, pre-funded warrants and stock options, were anti-dilutive because we incurred a net loss for the above periods.

13. Revenue

a) Revenue streams

KWESST generates revenue from the sale of products to its customers.

b) Disaggregation of revenue from contracts with customers

In the following table, revenue from contracts with customers is disaggregated by primary geographical market, major products and service lines, and timing of revenue recognition.

Three months<br>ended<br>March 31, <br>2025 Three months <br>ended<br>March 31,<br>2024 Six months<br>ended<br>March 31, <br>2025 Six months<br>ended<br>March 31,<br> 2024
Major products / service lines
Digitization $ 1,066,786 $ 280,717 $ 1,785,769 $ 373,486
Non-Lethal 197,376 204,972 365,124 240,484
Other - 175 927 962
$ 1,264,162 $ 485,864 $ 2,151,820 $ 614,932
Primary geographical markets
Canada $ 1,207,168 $ 412,776 $ 2,056,456 541,844
United States 56,994 73,088 95,364 $ 73,088
$ 1,264,162 $ 485,864 $ 2,151,820 $ 614,932
Timing of revenue recognition
Products and services transferred over time $ 1,066,786 $ 280,717 $ 1,785,769 $ 373,486
Products transferred at a point in time 197,376 205,147 366,051 241,446
$ 1,264,162 $ 485,864 $ 2,151,820 $ 614,932

Revenue allocated to remaining performance obligations represents contracted revenue that has not yet been recognized ("contracted not yet recognized") and includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods. At March 31, 2025, KWESST's contracted not yet recognized revenue was $109,181 (2024 - $302,617), of which 100% of this amount is expected to be recognized over the next 12 months.

For the three months ended March 31, 2025, three customers accounted for 68.95%, 9.27% and 6.99% (2024 - three customers accounted for 35.53%, 25.98%, and 13.22%) of revenue. For the six months ended March 31, 2025, three customers accounted for 64.76%, 9.96% and 8.27% (2024 - three customers accounted for 31.19%, 20.53%, and 20.45%) of revenue.

14. Net finance costs

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

KWESST MICRO SYSTEMS INC.<br>Notes to the Unaudited Condensed Consolidated Interim Financial Statements<br>Three and six months ended March 31, 2025 and 2024<br>(Expressed in Canadian dollars, except share amounts)
Three months ended <br>March 31, Three months ended <br>March 31, Six months ended <br>March 31, Six months ended <br>March 31,
--- --- --- --- --- --- --- --- --- --- --- --- ---
2025 2024 2025 2024
Finance costs from: **** ****
Accretion cost - accrued royalties liability $ 39,309 $ 45,483 $ 84,826 $ 89,931
Lease obligations 9,052 18,326 23,093 37,861
Other 2,148 341 6,453 694
Total financing costs 50,509 64,150 114,372 128,486
Interest income (19,148 ) (2,492 ) (21,452 ) (53,631 )
Gain on debt settlement - - 500 -
Net finance costs $ 31,361 $ 61,658 $ 93,420 $ 74,855

15. Financial instruments

For the three and six months ended March 31, 2025, there were no material changes to our financial risks as disclosed in Note 23 of the Annual Financial Statements, except for the following:

Foreign currency risk

For the three and six months ended March 31, 2025, we raised gross proceeds of $4.9 million (US$3.5 million) in the November 2024 Offering (see Note 11(a)), including the issuance of warrants with an exercise price denominated in U.S. dollars in the November U.S. Public Offering (see Note 10). Warrants exercised in the first quarter of fiscal 2025 resulted in proceeds of $0.8 million (US$0.6 million). On November 12, 2024, the warrants were subsequently converted to CAD denomination and extinguished from liabilities as they were transferred to equity. We also raised gross proceeds of $3.4 million (US$2.5 million) in the November 2024 PP (see Note 11(a)), including the issuance of warrants with an exercise price denominated in CAD dollars in the November Private Placement (see Note 11(a)). Although the financing was denominated in CAD, the terms of the deal allowed for the proceeds to be sent to the Company in U.S. dollars for convenience. We also raised gross proceeds of $3.7 million in the February 2025 PP (see Note 11(a)), including the issuance of warrants with an exercise price denominated in CAD dollars in the February Private Placement (see Note 11(a)). Although the financing was denominated in CAD, the terms of the deal allowed for the proceeds to be sent to the Company in U.S. dollars for convenience. Also, certain of our revenues were denominated in U.S. dollars and we also procure certain raw materials denominated in U.S. dollars for product development. 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 the U.S. dollar exposure. Throughout the year we maintained the majority of our cash assets in U.S. dollars and converted to CAD as needed as we primarily received funds from financing in U.S. dollars.

At March 31, 2025, we had the following net U.S. dollar exposure:

Total
Net assets in U.S. subsidiary $ -
US denominated from other:
Assets $ 2,899,196
Liabilities (358,542
Net US dollar exposure $ 2,540,654
Impact to profit or loss if 5% movement in the US dollar $ 127,033

All values are in US Dollars.

During the three and six months ended March 31, 2025, we recorded a foreign exchange gain of $77,823 and $191,106, respectively (2024 - loss of $805 and gain of $90,905).

KWESST MICRO SYSTEMS INC.<br>Notes to the Unaudited Condensed Consolidated Interim Financial Statements<br>Three and six months ended March 31, 2025 and 2024<br>(Expressed in Canadian dollars, except share amounts)

Liquidity risk

At March 31, 2025, our contractual obligations were as follows:

Payment due: Total Within 1 Year 1 to 3 years 3 to 5 years 5 years andbeyond
Minimum royalty commitments $ 2,000,000 $ - $ 450,000 $ 550,000 $ 1,000,000
Accounts payable and accrued liabilities 1,122,180 1,122,180 - - -
Lease obligations 205,589 163,881 41,708 - -
Total contractual obligations $ 3,327,769 $ 1,286,061 $ 491,708 $ 550,000 $ 1,000,000

At March 31, 2025, we had $4.4 million in cash and $4.9 million in working capital (current assets less current liabilities) (September 30, 2024 - $0.3 million in cash and negative $1.1 million in working capital).

16. Supplemental cash flow information

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

Six months <br>ended<br>March 31, 2025 Six months <br>ended <br>March 31, 2024
Trade and other receivables $ (513,989 ) $ (261,971 )
Inventories (48,034 ) (70,451 )
Prepaid expenses and deposits (154,074 ) (118,178 )
Deferred costs (10,077 ) -
Accounts payable and accrued liabilities (464,191 ) 107,564
Contract liabilities 2,041 (25,067 )
$ (1,188,324 ) $ (368,103 )

The following is a summary of non-cash items that were excluded from the Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2025:

  • 119,047 shares issued for debt settlement of business expenses incurred while representing the Company in an aggregate amount of $100,000 owed to a company controlled by Mr. David Luxton, Chairman of the Company;
  • $187,468 non-cash share issuance costs as part of the net proceeds settlement at the closing of the November 1, 2024 U.S. Public Offering (see Note 11(a));
  • $221,088 non-cash share issuance costs as part of the net proceeds settlement at the closing of the November 12, 2024 Private Placement (see Note 11(a));
  • $114,046 non-cash share issuance costs as part of the net proceeds settlement at the closing of the February 2025 Private Placement (see Note 11(a)); and
  • Expiry of 200,000 warrants in connection with the acquisition of Police Ordnance Company (see Note 4 of the Annual Financial Statements) expired December 15, 2024.

The following is a summary of non-cash items that were excluded from the Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2024:

  • 46,706 shares issued for debt settlement. The debt resulted in a tail obligation relating to services rendered by a third-party consultant; and
  • 385,716 warrants exercised in connection with the July 2023 Private Placement.
KWESST MICRO SYSTEMS INC.<br>Notes to the Unaudited Condensed Consolidated Interim Financial Statements<br>Three and six months ended March 31, 2025 and 2024<br>(Expressed in Canadian dollars, except share amounts)

17. Commitments and contingencies

There were no commitments and contingencies at March 31, 2025 other than the royalty payment disclosed in Note 15.

18. Segmented information

Our Chairman has been identified as the chief operating decision maker. Our 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 March 31, 2025, we no longer have the right-of-use asset (2024 - $64,782) and equipment ($56,187) (2024 - $nil) in the United States while all other property and equipment are located in Canada.

19. Key management compensation

Key management personnel are those persons having the authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly. The key management personnel of the Company are the members of the Company's executive management team and Board of Directors.

Key management compensation for the three and six months ended March 31, 2025 and 2024 were as follows:

Three months<br>ended<br>March 31, 2025 Three months <br>ended<br>March 31, 2024 Six months<br>ended<br>March 31, 2025 Six months<br>ended<br>March 31, 2024
Short-term key management compensation $ 217,083 $ 166,250 $ 929,583 $ 274,167
Share-based payments 21,370 30,396 49,963 59,103
Directors' fees 122,500 152,500 375,000 285,000
$ 360,953 $ 349,146 $ 1,354,546 $ 618,270

20. Subsequent Events

Exercise of warrants

Subsequent to March 31, 2025, all 2,884,179 pre-funded warrants from the February 2025 Private Placement were exercised at their exercise price of $0.021 per common share. These exercises resulted in the issuance of 137,342 common shares of the Company. After these exercises, there are 151,764 total remaining outstanding pre-funded warrants of the Company.

KWESST Micro Systems Inc.: Exhibit 99.2 - Filed by newsfilecorp.com

KWESST MICRO SYSTEMS INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

For the three and six months ended March 31, 2025

May 15, 2025

KWESST MICRO SYSTEMS INC.<br>MANAGEMENT’S DISCUSSION AND ANALYSIS<br>THREE AND SIX MONTHS ENDED MARCH 31, 2025

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 March 31, 2025. This MD&A has been prepared with an effective date of May 15, 2025.

This MD&A should be read in conjunction with our unaudited condensed consolidated interim financial statements for the three and six months ended March 31, 2025 ("Q2 Fiscal 2025 FS") and the annual audited consolidated financial statements and related notes for the years ended September 30, 2024 and 2023 ("Fiscal 2024 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.sedarplus.ca.

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 non-recurring 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 significant revenue levels 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 Q2 Fiscal 2025 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 Q2 Fiscal 2025 FS for further information.

2 Page
KWESST MICRO SYSTEMS INC.<br>MANAGEMENT’S DISCUSSION AND ANALYSIS<br>THREE AND SIX MONTHS ENDED MARCH 31, 2025
---

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/or 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 and related margin 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 20-F dated December 27, 2024:

  • limited operating history;
  • failure to realize our growth strategy;
  • failure to complete transactions or realize anticipated benefits;
3 Page
KWESST MICRO SYSTEMS INC.<br>MANAGEMENT’S DISCUSSION AND ANALYSIS<br>THREE AND SIX MONTHS ENDED MARCH 31, 2025
---
  • 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 flows;
  • management of growth;
  • product liability;
  • product recalls;
  • environmental regulations and risks;
  • ownership and protection of intellectual property;
  • constraints on marketing products;
  • fraudulent or illegal activity by our employees, contractors and/or 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/or 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;
  • risks related to our failure to meet the continued listing requirements of the Nasdaq Capital Market ("Nasdaq"), particularly the minimum bid price requirements within the second extension period (see subsequent events section for more information);
  • risks related to the shareholder vote required for a share consolidation to remediate our current Nasdaq minimum bid price deficiency (see the summary of major highlights that occurred since Q2 Fiscal 2025 for more information);
  • risks related to the liquidity of our common shares (the "Common Shares");
  • significant changes or developments in United States trade policies and tariffs which may have a material adverse effect on our business and financial statements;
  • risks related to United States tariffs, including potential supply chain disruptions, required operational adjustments, increased costs and potential logistical disruptions;
  • risks related specifically to United States tariffs on aluminum and steel; and
  • risks related to retaliatory tariffs imposed by Canada’s government affecting potential foreign sales.

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.

4 Page
KWESST MICRO SYSTEMS INC.<br>MANAGEMENT’S DISCUSSION AND ANALYSIS<br>THREE AND SIX MONTHS ENDED MARCH 31, 2025
---

Consequently, all of 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 operations. 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.

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 Terence Matthews Crescent, Ottawa, Ontario, Canada. We have representative offices in 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. We group our offerings for commercialization purposes into Military and Public Safety missions, as shown on our website at www.kwesst.com.

5 Page
KWESST MICRO SYSTEMS INC.<br>MANAGEMENT’S DISCUSSION AND ANALYSIS<br>THREE AND SIX MONTHS ENDED MARCH 31, 2025
---

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"); and

  • 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 in Fiscal 2025.

  • Less-Lethal Munitions Systems:

  • PARA OPS^TM^, a next-generation less-lethal system just being introduced to market.

  • ARWEN^TM^ 37mm system, plus a new 40mm ammunition.

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^TM^ and PARA OPS^TM^  less-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 March 31, 2025 ("Q2 Fiscal 2025")

The following is a summary of the major highlights that occurred during Q2 Fiscal 2025:

  • On January 6, 2025, the Company announced the appointment of Mrs. Jennifer Welsh as Chief Financial Officer and Chief Compliance Officer of the Company effective February 3, 2025, replacing Mr. Kris Denis, who transitioned to a new role within the KWESST finance team reporting to Jennifer. In connection with her new role, Jennifer resigned from the Board of Directors and as Chair of the Audit Committee of the Company effective January 6, 2025. The Company also announced the appointment of Mr. James Yersh as a director of the Company and Chair of the Audit Committee effective January 6, 2025.
  • On February 19, 2025, the Company announced that it had entered into a definitive securities purchase agreement for gross proceeds of approximately $3.5 million. As part of the Offering, the Company issued 3,787,879 common shares, with no par value per share, and/or pre-funded warrants to acquire one Common Share of the Company in lieu thereof, at a price of $0.928 per Common Share and/or Pre-Funded Warrant, inclusive of the exercise price of $0.001 per Pre-Funded Warrant. Each Common Share, or Pre-funded Warrant, is bundled with one common share purchase warrant of the Company. Each common share purchase warrant is immediately exercisable and entitles the holder to acquire one Common Share at an exercise price of $1.16 per common share purchase warrant for a period of 60 months following the closing of the Offering. Subsequent to the share consolidation on April 24, 2025, the holder must exercise 21 common share purchase warrants to acquire one Common Share (see the summary of major highlights that occurred since Q2 Fiscal 2025 for more information).
  • On February 21, 2025, the Company announced the closing of the first tranche of a private placement of its securities for aggregate gross proceeds of $3,515,152. Due to investor interest, the Company increased the size of the offering with a second tranche totaling $140,606 which closed on February 25, 2025. Under this offering the Company issued 151,515 common shares and an equivalent number of common share purchase warrants under the same terms as the first tranche of the offering.
6 Page
KWESST MICRO SYSTEMS INC.<br>MANAGEMENT’S DISCUSSION AND ANALYSIS<br>THREE AND SIX MONTHS ENDED MARCH 31, 2025
---
  • On March 18, 2025, the Company announced that it had filed notice of a meeting of shareholders, a management information circular, and related documents to convene a special meeting of shareholders. Shareholders of the Company were asked to approve a resolution, authorizing, if deemed advisable by the board of directors, the consolidation of the issued and outstanding common shares of the Company on the basis of one share for a maximum of every twenty-five (25) common shares issued and outstanding. The resolution was related to regaining compliance with the minimum bid price requirement on the Nasdaq. The Meeting took place on March 31, 2025.
  • On March 28, 2025, the Company announced a strategic partnership with a contract manufacturer in the United States to bring elements of its production stateside under the signing of a non-binding memorandum of understanding dated March 27, 2025.  The parties are working towards a manufacturing agreement that will outline the terms of a long-term contract manufacturing arrangement by June 1, 2025.

The following is a summary of major highlights that occurred since Q2 Fiscal 2025:

  • On April 1, 2025, the Company announced the results of its special meeting of shareholders. The consolidation resolution was approved by a majority of the votes cast by the holders of common shares of the Company, either present in person or represented by proxy.
  • On April 21, 2025, the Company announced that it will effect a consolidation of the Company's issued and outstanding common shares on the basis of twenty-one (21) pre-consolidation Shares for each one (1) post-consolidation Share. The Consolidation was effective at 12:01 a.m. Eastern Daylight Time April 23, 2025, on the Nasdaq and was effective at 12:01 a.m. Eastern Daylight Time on April 24, 2025, on the TSX Venture Exchange. While the Shares were expected to begin trading on the Nasdaq market on a consolidated basis on or around April 23, 2025, due to the discrepancy in the effective date of the consolidation on both markets, trading in the securities of the Company was halted on April 23, 2025 and resumed trading on a consolidated basis on the Nasdaq and the TSX Venture Exchange at market open on April 24, 2025
  • On May 8, 2025, the Company announced that it received a notification letter from the Listing Qualifications Department of The Nasdaq Stock Market LLC notifying the Company that it has regained compliance with the minimum bid price requirement set forth under Nasdaq Listing Rule 5550(a)(2). The Notification Letter confirmed that the Company evidenced a closing bid price at or greater than the USD$1.00 per common share minimum requirement for 10 consecutive business days from April 24, 2025, to May 7, 2025. As a result, the listing matter has been closed.
7 Page
KWESST MICRO SYSTEMS INC.<br>MANAGEMENT’S DISCUSSION AND ANALYSIS<br>THREE AND SIX MONTHS ENDED MARCH 31, 2025
---

RESULTS OF OPERATIONS

The following selected financial data has been extracted from the unaudited condensed consolidated interim financial statements for the three and six months ended March 31, 2025 and 2024.

Three months ended March 31, Change Six months ended March 31, Change
2025 2024 % 2025 2024 %
Revenue $ 1,264,162 $ 485,864 160% $ 2,151,820 $ 614,932 250%
Cost of sales (950,141 ) (243,681 ) 290% (1,433,277 ) (426,554 ) 236%
Gross margin 314,021 242,183 30% 718,543 188,378 281%
Gross margin % 24.8% 49.8% 33.4% 30.6%
Operating Expenses **** ****
General and administrative ("G&A") 1,102,261 1,682,698 -34% 2,613,705 2,684,994 -3%
Selling and marketing ("S&M") 334,114 418,027 -20% 1,016,661 900,968 13%
Research and development ("R&D") 299,916 705,640 -57% 972,491 1,289,928 -25%
Share-based compensation 26,342 60,982 -57% 77,397 124,471 -38%
Depreciation and amortization 285,929 319,654 -11% 600,420 641,075 -6%
Total operating expenses 2,048,562 3,187,001 -36% 5,280,674 5,641,436 -6%
Operating loss (1,734,541 ) (2,944,818 ) -41% (4,562,131 ) (5,453,058 ) -16%
Other income (expenses) **** ****
Share issuance costs - - 100% (1,807,686 ) - 100%
Net finance costs (31,361 ) (61,658 ) -49% (93,420 ) (74,855 ) 25%
Foreign exchange gain (loss) 77,823 (805 ) -9767% 191,106 90,905 110%
Impairment of Right-of-use assets 6,809 - 100% (81,787 ) - 100%
Change in fair value of warrant liabilities 221,763 (532,922 ) -142% 1,437,396 1,497,832 -4%
Total other income (expenses), net 275,034 (595,385 ) -146% (354,391 ) 1,513,882 -123%
Net loss $ (1,459,507 ) $ (3,540,203 ) -59% $ (4,916,522 ) $ (3,939,176 ) 25%
EBITDA loss ^(1)^ $ (1,142,217 ) $ (3,158,891 ) -64% $ (4,222,682 ) $ (3,223,246 ) 31%
Adjusted EBITDA loss^(1)^ $ (1,422,270 ) $ (2,466,567 ) -42% $ (3,884,314 ) $ (4,589,897 ) -15%
Loss per share - basic and diluted^(2)^ $ (6.16 ) $ (127.66 ) -95% $ (16.11 ) $ (144.63 ) -89%
Weighted average common shares - basic 237,039 27,732 755% 305,190 27,236 1021%

^(1)^ ^EBITDA and^^Adjusted EBITDA^^are^^non-IFRS measure^^s^^.^ ^See^^"^^Non-IFRS Measures^^"^^.^ ^See below for^^r^^econciliation of Non-IFRS Measure^^s^^.^

^(2)^ ^See share consolidation in the summary of major highlights that occurred since Q2 Fiscal 2025 for more information.^

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

Three months ended March 31, Six months ended March 31,
2025 2024 2025 2024
Net loss as reported under IFRS $ (1,459,507 ) $ (3,540,203 ) $ (4,916,522 ) $ (3,939,176 )
Net finance costs 31,361 61,658 93,420 74,855
Depreciation and amortization 285,929 319,654 600,420 641,075
EBITDA loss (1,142,217 ) (3,158,891 ) (4,222,682 ) (3,223,246 )
Other adjustments: **** ****
Share issuance costs - 97,615 1,807,686 97,615
Stock-based compensation 26,342 60,982 77,397 124,471
Foreign exchange loss (gain) (77,823 ) 805 (191,106 ) (90,905 )
Impairment of right-of-use assets (6,809 ) - 81,787 -
Change in fair value of warrant liabilities (221,763 ) 532,922 (1,437,396 ) (1,497,832 )
Adjusted EBITDA loss $ (1,422,270 ) $ (2,466,567 ) $ (3,884,314 ) $ (4,589,897 )
8 Page
---
KWESST MICRO SYSTEMS INC.<br>MANAGEMENT’S DISCUSSION AND ANALYSIS<br>THREE AND SIX MONTHS ENDED MARCH 31, 2025
---

Current Quarter Variance Analysis (Q2 Fiscal 2025 vs. Q2 Fiscal 2024)

The Q2 Fiscal 2025 net loss was $1.5 million compared to $3.5 million in Q2 Fiscal 2024. The decrease in net loss of $2.0 million is due primarily to a decrease in operating expenses of $1.1 million, an increase in other income of $0.9 million along with an increase in gross margin of $0.1 million. Q2 Fiscal 2025 EBITDA loss was $1.1 million, a decrease of $2.1 million over the comparable prior year period mainly due to a decrease in operating expenses of $1.1 million and an increase in the gain on the change in fair value of the warrant liabilities of $0.8 million which fluctuates depending on the Company’s stock price.

Revenue

Total revenue increased by $0.8 million in Q2 Fiscal 2025 compared to Q2 Fiscal 2024, mainly due to an additional $0.8 million generated from the digitization business line. The increase is due to the significant ramp-up on the land command, control, communications, computers, intelligence, surveillance and reconnaissance (“Land C4ISR”) contract in the first quarter of fiscal 2025.

Gross Margin

Gross margin percentage decreased from 50% in Q2 Fiscal 2024 to 25% in Q2 Fiscal 2025 mainly due to unplanned extra effort expended in the quarter to close out a long-term project. The extra effort during this project directly benefited IP which is core to the Lightning project.

Outlook

Management expects revenue to continue to increase with the ramp-up of its Canadian Government Defence programs.  Management continues to work closely with industry partners and prime contractors on the outlook for growth.  The Company also expects revenue to increase with the expected demand/future orders for the new ARWEN 40mm ammunition and PARA OPS products as well as the commercial launch of KWESST Lightning^TM^.

Operating Expenses (“OPEX”)

Total OPEX decreased by $1.1 million from the comparable prior year period for the three months ended March 31, 2025 due to the following factors:

  • General and administrative expenses decreased by $0.6 million, primarily due to a decrease in professional fees due to a difference in timing on filings year over year, a reduction in insurance premiums as well as a decrease in travel and conference attendance;
  • Sales and marketing expenses decreased by $0.1 million, due to a decrease in travel and conferences along with a decrease in consulting costs offset by increased headcount to reduce the reliance on consultants; and
  • Research and development expenses decreased by $0.4 million, primarily due to a decrease in personnel costs along with a decrease in engineering costs related to the PARA OPS products because the Company is now in the commercialization stage and planning for production as compared to product development costs being incurred in the comparative prior year period.
9 Page
KWESST MICRO SYSTEMS INC.<br>MANAGEMENT’S DISCUSSION AND ANALYSIS<br>THREE AND SIX MONTHS ENDED MARCH 31, 2025
---

Other income (expenses), net

For Q2 Fiscal 2025, total other income was $0.3 million, compared to total other expenses of $0.6 million in Q2 Fiscal 2024 resulting in an increase of $0.9 million. The change in other income (expenses) was driven mainly by:

  • a $0.8 million favorable change in the fair value of warrant liabilities as a result of the remeasurement of the warrant liabilities at March 31, 2025. Under IFRS®, we are required to remeasure the warrant liabilities at each reporting date until they are exercised or expired; and

  • $0.1 million increase in the foreign exchange gain due to the fluctuations in the CAD/USD exchange rate in the current period as the majority of the Company's cash is held in USD.

SUMMARY OF QUARTERLY RESULTS

The following table summarize selected results for the eight most recently completed quarters to March 31, 2025 (unaudited):

2025 2024 2023
($ in thousands) Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3
Revenue 1,264 888 560 329 486 129 606 150
Net loss (1,460 ) (3,457 ) (2,337 ) (1,162 ) (3,540 ) (399 ) (2,419 ) (3,452 )
Net loss per share (basic and diluted) (6.16 ) (23.94 ) (59.33 ) (27.30 ) (127.66 ) (149.10 ) (124.44 ) (170.10 )

Quarterly Results Trend Analysis

There is no material change to our quarterly results trend from our disclosure in our annual MD&A dated December 27, 2024 except that we expect further volatility with our quarterly revenue during Fiscal 2025 due to the uncertain magnitude and timeline of ramp-up on our military government contracts, ramp-up of revenue for new ARWEN and PARA OPS products, as well as the uncertain magnitude and timeline of any equity financings and related share issuance costs.

FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES

FINANCIAL CONDITION

The following table summarizes our financial position:

March 31,<br>2025 September 30,<br>2024
Assets
Current $ 6,451,384 $ 1,842,355
Non-current 3,136,105 3,774,793
Total assets $ 9,587,489 $ 5,617,148
Liabilities ****
Current $ 1,563,091 $ 2,975,581
Non-current 1,241,453 1,273,280
Total liabilities 2,804,544 4,248,861
Net assets $ 6,782,945 $ 1,368,287
Working capital ^(1)^ $ 4,888,293 $ (1,133,226 )

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

10 Page
KWESST MICRO SYSTEMS INC.<br>MANAGEMENT’S DISCUSSION AND ANALYSIS<br>THREE AND SIX MONTHS ENDED MARCH 31, 2025
---

Our working capital was $4.9 million at March 31, 2025, a $6.0 million increase from September 30, 2024. The increase was primarily due to the proceeds from two financings in Q1 Fiscal 2025 and one in Q2 Fiscal 2025 along with a decrease in accounts payable and royalties payable. Current liabilities include warrant liabilities, a non-cash liability item (see Note 10 of the Q2 Fiscal 2025 FS). Excluding warrant liabilities, working capital would be $5.1 million (September 30, 2024 – negative $0.3 million). These warrant liabilities will be extinguished when the warrants are exercised or expired. If exercised, the proceeds will provide additional capital to fund future working capital requirements. There is no assurance that any warrants will be exercised.

Total assets increased by $4.0 million from September 30, 2024, mainly due to an increase in cash of $4.2 million from three financing activities in the first six months of Fiscal 2025 and an increase in accounts receivable of $0.5 million due to the digitization contracts and an increase in prepaid expenses of $0.2 million due to the timing of renewals, offset by a decrease in the unamortized value of non-current assets of $0.4 million, a decrease in right-of-use assets written off of $0.2 million and a decrease in the deferred financing costs recognized in Q1 Fiscal 2025 of $0.3 million.

Total liabilities decreased by $1.4 million from September 30, 2024, mainly due to a decrease in accounts payable and accrued liabilities of $0.5 million due to the timing of payments to suppliers, a $0.2 million decrease in royalties payable due to an early repayment in Q1 Fiscal 2025 resulting in a $25,000 discount. The royalty payable is from the purchase of the LEC patents from a company owned by the Company's Chairman. There was also a decrease in warrant liabilities of $0.7 million due to the exercise of warrants and the fluctuation in the Company's stock.

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 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 November 1, 2024, we closed a public offering pursuant to which we received aggregate gross proceeds of $4.9 million (USD$3.5 million), before underwriting and offering costs. On November 12, 2024, we closed a private placement pursuant to which we received aggregate gross proceeds of $3.4 million, before underwriting and offering costs. On February 21 and 25, 2025, we closed a private placement for which we received aggregate gross proceeds of $3.7 million, before underwriting and offering costs.

At March 31, 2025, our cash position was $4.4 million, an increase of $4.2 million since September 30, 2024, primarily due to three financing activities of $12.0 million before underwriting and offering costs and proceeds from the exercise of warrants of $0.4 million, offset by the underwriting and offering costs of $3.2 million along with the cash used in operations of $4.9 million.

11 Page
KWESST MICRO SYSTEMS INC.<br>MANAGEMENT’S DISCUSSION AND ANALYSIS<br>THREE AND SIX MONTHS ENDED MARCH 31, 2025
---

As an early-stage company, we have not yet reached significant revenue levels 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. On October 23, 2024, the Company entered into a receivable factoring agreement. The facility provides up to $250,000 advanced at a rate of 2.5% for the first thirty days and 1% for each ten days thereafter until receipt of funds from the receivable payee and limited to a total of 20% of the value of the receivable funded. Funds are advanced at 80% up front of the face value of the receivable with a 20% fee deposit retained by the financing company until the amount funded is fully repaid, following which any balance remaining of the 20% fee deposit is returned to KWESST Inc. The agreement grants security against KWESST Inc.'s receivables and other assets for funds advanced by the financing company. The initial term is for 12 months and may be terminated within the term by KWESST Inc. subject to the payment of an early termination fee of 3% of the total limit of the facility. In our view, the availability of capital will be affected by, among other things, capital market conditions, the success of our PARA OPS system market development efforts, timing of winning new customer contracts, potential acquisitions, and other relevant considerations. 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:

Six months ended March 31,
2025 2024
Cash inflows (outflows) by activity:
Operating activities $ (4,851,931 ) $ (4,979,109 )
Investing activities (58,710 ) (69,407 )
Financing activities 9,062,657 (94,759 )
Net cash inflows (outflows) $ 4,152,016 $ (5,143,275 )
Cash and cash equivalents, beginning of period 256,828 5,407,009
Cash and cash equivalents, end of period $ 4,408,844 $ 263,734

Cash used in operating activities

Cash flow used in operating activities decreased by $0.1 million to $4.9 million for the six months ended March 31, 2025, primarily due to payments on payables, an increase in receivables, offset by the share issuance costs in the period, compared to regular operating activities in the first six months of Fiscal 2024, with no significant transactions.

Cash used in investing activities

Cash flow used in investing activities in the first six months of Fiscal 2025 was comparable to the first six months of Fiscal 2024, consisting of minor investments in property and equipment as well as related patents.

Cash provided by (used in) financing activities

Cash flow provided by financing activities was $9.1 million in the first six months of Fiscal 2025 compared to an insignificant amount of cash flows used in financing activities in the first six months of Fiscal 2024 related to the repayment of lease obligations. The increase was due to the three financing activities with gross proceeds of $12.0 million along with proceeds from the exercise of warrants of $0.4 million, offset by share issuance costs of $3.2 million and lease repayments of $0.1 million.

12 Page
KWESST MICRO SYSTEMS INC.<br>MANAGEMENT’S DISCUSSION AND ANALYSIS<br>THREE AND SIX MONTHS ENDED MARCH 31, 2025
---

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. Senior management is responsible for managing capital through regular review of financial information to ensure sufficient resources are available to meet operating requirements and investments to support the 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 warrants and, to a lesser extent, revenue.  The following is a breakdown of our capital:

March 31, <br>2025 September 30, <br>2024
Debt:
Lease obligations $ 179,464 $ 302,223
Warrant liabilities 177,327 847,295
Equity: ****
Share capital 43,197,908 37,822,725
Warrants 5,926,182 1,084,687
Contributed surplus 5,362,150 5,152,753
Accumulated other comprehensive loss (133,415 ) (38,520 )
Accumulated deficit (47,569,880 ) (42,653,358 )
Total capital $ 7,139,736 $ 2,517,805

Contractual Obligations and Commitments

At March 31, 2025, our contractual obligations and commitments were as follows:

Payment due: Total Within 1 Year 1 to 3 years 3 to 5 years 5 years andbeyond
Minimum royalty commitments $ 2,000,000 $ - $ 450,000 $ 550,000 $ 1,000,000
Accounts payable and accrued liabilities 1,122,180 1,122,180 - - -
Lease obligations 205,589 163,881 41,708 - -
Total contractual obligations $ 3,327,769 $ 1,286,061 $ 491,708 $ 550,000 $ 1,000,000

Shares Outstanding

At March 31, 2025, 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 March 31, 2025:

# of securitiesoutstanding UnderlyingCommonShares^(1)^ Averageprice(CAD ) Proceeds ifExercised
Common shares 530,364 530,364
Warrants 8,234,594 368,348 $ 1.07 8,811,016
Pre-funded warrants 3,035,913 138,065 $ 0.002 5,066
Warrant liabilities 9,539,727 45,427 $ 3.27 31,194,907
U.S. Underwriter warrants 1,432,817 32,482 $ 1.81 2,593,399
Stock options 1,057 1,057 $ 555 586,582
Total common shares and dilutive securities 1,115,743 43,190,970

All values are in US Dollars.

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

13 Page
KWESST MICRO SYSTEMS INC.<br>MANAGEMENT’S DISCUSSION AND ANALYSIS<br>THREE AND SIX MONTHS ENDED MARCH 31, 2025
---

The following table shows the outstanding Common Shares and dilutive securities at May 15, 2025:

# of securitiesoutstanding UnderlyingCommonShares^(1)^ Averageprice(CAD ) Proceeds ifExercised
Common shares 667,706 667,706 ****
Warrants 8,234,594 368,348 $ 1.07 8,811,016
Pre-funded warrants 151,734 723 $ 0.014 2,119
Warrant liabilities 9,539,727 45,427 $ 3.18 30,336,332
U.S. Underwriter warrants 1,432,817 32,482 $ 1.77 2,536,086
Stock options 1,057 1,057 $ 555 586,582
Total common shares and dilutive securities **** 1,115,743 42,272,135

All values are in US Dollars.

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

Shares for Debt Settlement - January 2024

On January 10, 2024, we issued 222 Common Shares in a settlement of debt in an amount of approximately $97,615. See Note 11(a) of the Q2 Fiscal 2025 FS for further details.

US Public Offering - April 2024

On April 9, 2024, we closed a brokered US public offering, resulting in the issuance of 3,500 Common Shares, for aggregate gross proceeds of $1.4 million (US$1.0 million) (the “April 2024 Public Offering”). See Note 11(a) of the Q2 Fiscal 2025 FS for further details.

The following table shows the use of net proceeds from the April 2024 Public Offering:

Use of proceeds (as disclosed) Intended Amount Actual Amount Used
Working capital requirements and general corporate purposes $ 1,357,834 $ 1,357,834

A first-in first-out assumption is used to determine the use of proceeds.

US Public Offering - June 2024

On June 14, 2024, we closed a brokered US public offering, resulting in the issuance of 13,810 Common Shares, for aggregate gross proceeds of $2.3 million (US$1.7 million) (the “June 2024 Public Offering”). See Note 11(a) of the Q2 Fiscal 2025 FS for further details.

The following table shows the use of net proceeds from the June 2024 Public Offering:

Use of proceeds (as disclosed) Intended Amount Actual Amount Used
Working capital requirements and general corporate purposes $ 2,312,918 $ 2,312,918

A first-in first-out assumption is used to determine the use of proceeds.

US Registered Direct Offering - August 2024

On August 13, 2024, we closed the August 2024 Offering for the purchase and sale of 22,452 Common Shares for aggregate gross proceeds of $1.4 million (US$0.9 million) (the “August 2024 Direct Offering”). See Note 11(a) of the Q2 Fiscal 2025 FS for further details.

14 Page
KWESST MICRO SYSTEMS INC.<br>MANAGEMENT’S DISCUSSION AND ANALYSIS<br>THREE AND SIX MONTHS ENDED MARCH 31, 2025
---

The following table shows the use of net proceeds from the August 2024 Direct Offering:

Use of proceeds (as disclosed) Intended Amount Actual Amount Used
Working capital requirements and general corporate purposes $ 1,293,589 $ 1,293,589

A first-in first-out assumption is used to determine the use of proceeds.

US Public Offering - November 2024

On November 1, 2024, we closed the November 2024 Public Offering for the purchase and sale of 3,809,000 pre-funded warrants and 3,810 Common Shares for aggregate gross proceeds of $4.9 million (US$3.5 million). See Note 11(a) of the Q2 Fiscal 2025 FS for further details.

The following table shows the use of net proceeds from the November 2024 Public Offering:

Use of proceeds (as disclosed) Intended Amount Actual Amount Used
Product and business development $ 1,528,750 $ 1,528,750
Working capital requirements and general corporate purposes $ 1,528,750 $ 1,528,750

A first-in first-out assumption is used to determine the use of proceeds.

Shares for Debt Settlement - November 2024

On November 11, 2024, we issued 5,669 Common Shares in a settlement of debt in an amount of $100,000. See Note 11(a) of the Q2 Fiscal 2025 FS for further details.

Private Placement - November 2024

On November 12, 2024, we closed the November 2024 Private Placement for the purchase and sale of 4,145,200 pre-funded warrants for aggregate gross proceeds of $3.4 million. Each pre-funded warrant was bundled with one November 2024 Private Placement Common Share purchase warrant of the Company. See Note 11(a) of the Q2 Fiscal 2025 FS for further details.

The following table shows the use of net proceeds from the November 2024 Private Placement:

Use of proceeds (as disclosed) Intended Amount Actual Amount Usedto Date
Working capital requirements and general corporate purposes $ 2,972,312 $ 2,628,284

A first-in first-out assumption is used to determine the use of proceeds.

Private Placement - February 2025

On February 21, 2025, we closed the first tranche of the February 2025 Private Placement for the purchase and sale of 43,033 Common Shares and 2,884,175 pre-funded warrants and on February 25, 2025, we closed the second tranche of the private placement for the purchase and sale of 7,215 Common Shares, all for aggregate gross proceeds of $3.7 million. Each Common Share and pre-funded warrant was bundled with one common share purchase warrant of the Company. See Note 11(a) of the Q2 Fiscal 2025 FS for further details.

15 Page
KWESST MICRO SYSTEMS INC.<br>MANAGEMENT’S DISCUSSION AND ANALYSIS<br>THREE AND SIX MONTHS ENDED MARCH 31, 2025
---

The following table shows the use of net proceeds from the February 2025 Private Placement:

Use of proceeds (as disclosed) Intended Amount Actual Amount Usedto Date
Working capital requirements and general corporate purposes $ 2,842,584 $ -

A first-in first-out assumption is used to determine the use of proceeds.

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 Q2 Fiscal 2025 FS 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 Q2 Fiscal 2025 FS for further disclosure of our financial instruments.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Refer to Note 2(f) of the Fiscal 2024 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 March 31, 2025, KWESST's authorized capital consists of an unlimited number of Common Shares with no stated par value. There were 530,364 issued and outstanding Common Shares as at March 31, 2025.

SUBSEQUENT EVENTS

Subsequent to March 31, 2025, all 2,884,179 pre-funded warrants from the February 2025 Private Placement were exercised at their exercise price of $0.021 per common share. These exercises resulted in the issuance of 137,342 Common Shares of the Company. After these exercises, there are 151,764 total remaining outstanding pre-funded warrants of the Company.

As described in the summary of major highlights that occurred since Q2 Fiscal 2025, on April 24, 2025, the Company had a share consolidation on the basis of twenty-one (21) pre-consolidation Shares for each one (1) post-consolidation Share.

On May 8, 2025, the Company announced that it received a notification letter from the Listing Qualifications Department of The Nasdaq Stock Market LLC notifying the Company that it has regained compliance with the minimum bid price requirement and that the listing matter was closed.

16 Page
KWESST MICRO SYSTEMS INC.<br>MANAGEMENT’S DISCUSSION AND ANALYSIS<br>THREE AND SIX MONTHS ENDED MARCH 31, 2025
---

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 management, including our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), the effectiveness of the design and operation 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 CEO and CFO have concluded that the operation of our DC&P were effective as of September 30, 2024.  Since the September 30, 2024 evaluation, there have been no changes in our DC&P that materially affected or are reasonably likely to materially affect our DC&P, accordingly their design remains effective.

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, the CEO and CFO are responsible for establishing and maintaining adequate internal controls over financial reporting ("ICFR"), The Company's management, including the CEO and CFO, 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.

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.

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, 2024 against the COSO Framework. Based on these evaluations, our management, including our CEO and CFO, concluded that no material weaknesses existed and our ICFR were effective as of September 30, 2024.  During the first six months ended on March 31, 2025, there have been no changes that have materially affected or is reasonably likely to materially affect our ICFR, accordingly their design remains effective.

Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements on a timely basis. Additionally, projections of any evaluation of the effectiveness of internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

APPROVAL

The directors of KWESST have approved the disclosures in this MD&A.

17 Page 
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 March 31, 2025.

  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) published by The Committee of Sponsoring Organizations of the Treadway Commission (COSO).

5.2 ICFR - material weakness relating to design: 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

  1. 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 March 31, 2025 that has materially affected, or is reasonably likely to materially affect, the issuer's ICFR.

Date: May 15, 2025

/s/ Sean Homuth
Sean Homuth
Chief Executive Officer 
KWESST Micro Systems Inc.: Exhibit 99.4 - Filed by newsfilecorp.com

FORM 52-109F2

CERTIFICATION OF INTERIM FILINGS

FULL CERTIFICATE

I, Jennifer Welsh, Chief Financial 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 March 31, 2025.

  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) published by The Committee of Sponsoring Organizations of the Treadway Commission (COSO).

5.2 ICFR - material weakness relating to design: 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.

5.3 Limitation on scope of design: N/A

  1. 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 March 31, 2025 that has materially affected, or is reasonably likely to materially affect, the issuer's ICFR.

Date: May 15, 2025

/s/ Jennifer Welsh
Jennifer Welsh
Chief Financial Officer

Report a Problem

Category
Description
Email (optional, for follow-up)