KWESST Micro Systems Inc.: Form F-1/A - Filed by newsfilecorp.com

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

In connection with our application to list our Common Shares and Warrants on Nasdaq, we effected a one for seventy (1-for-70) reverse stock split of our Common Shares on October 28, 2022 (the “Reverse Split”). Accordingly, all shareholders of record at the opening of business on October 28, 2022, received one issued and outstanding post-Reverse Split Common Share of the Company in exchange for 70 outstanding pre-Reverse Split Common Shares of the Company. No fractional shares were issued in connection with the Reverse Split. All fractional shares created by the Reverse Split were rounded to the nearest whole number of common shares, with any fractional interest representing 0.5 or more Common Shares entitling holders thereof to receive one whole Common Share. At the opening of business on October 28, 2022, we had 778,801 outstanding Common Shares. Effective on the date of the Reverse Split, the exercise price and number of Common Shares issuable upon the exercise of outstanding stock options were proportionately adjusted to reflect the Reverse Split. The restricted share units (“RSUs”) and performance stock units (“PSUs”) have also been adjusted for the Reverse Split. While the number of outstanding warrants has not changed as a result of the Reverse Split; the conversion rate for each warrant was adjusted from one common share to 0.01428571 Common Share. All information respecting outstanding Common Shares and other securities of the Company, including net loss per share, in the current and comparative periods presented are on a Reverse Split basis.

On November 10, 2022, the closing price for our Common Shares on the OTCQB was USD$5.13. We have assumed a public offering price of USD$4.95 per Common Unit, approximately the midpoint of the estimated price range for this offering. The actual public offering price per Common Unit and Pre-funded Unit, as the case may be, will not be determined by any particular formula but will rather be determined through negotiations between us and the underwriter at the time of pricing. Therefore, the assumed public offering price used through this Prospectus may not be indicative of the final offering price.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The daily average exchange rate on November 10, 2022 as reported by the Bank of Canada for the conversion of USD into CAD was USD$1.00 equals CAD$1.3378.

PROSPECTUS SUMMARY

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

Overview of the Company

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

We focus on three niche market segments as follows:

Non-Lethal

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

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

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

Our non-lethal product suite includes the following:

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

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

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

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

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

Digitization

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

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

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

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

TASCS Indirect Fire Modules System ("TASCS IFM"): We have completed the development for TASCS IFM for the 81mm mortar system and have conducted extensive user testing with the United States military in the past year. We are also marketing this product to the Canadian forces and expect to conduct trials over the next twelve months. At this time, we do not expect further development unless funded by the military customer. We will proceed to production only upon receiving a customer order.
CIMS: Leveraging from our TAK integration experience with military customers, we are currently offering CIMS services to the public safety market. In July 2022, we won our first contract with CounterCrisis Technology Inc. to co-implement a national Ground Search and Rescue Incident Command System for Public Safety Canada, with the Ontario Provincial Police as technical advisory stakeholder for this project.

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

Counter-Threat

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

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

BLDS: We have completed the operational prototype development of our vehicle and squad laser detection product suite. We are currently conducting sensitivity and environmental testing in preparation for customer orders at which stage we will then move the operational prototypes to production.
Phantom: We have completed the development of Phantom Electromagnetic Spectrum Operations ("EMSO") operational prototypes. We have tested, and are currently undergoing testing, EMSO with the United States military. This may lead to further development to be funded by the military customer, upon receiving their specific requirements. We will proceed to production only upon receiving a customer order.
GhostNet: We are currently in the concept and designing phase.

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

Our Market Opportunity

Non-Lethal

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

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

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

Digitization

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

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

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

Counter-Threats

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

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

Competitive Strengths

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

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

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

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

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

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

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

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

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

Growth Strategies

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

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

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

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

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

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

Risk Factors

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Implications of Being an Emerging Growth Company

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

reduced executive compensation disclosure;
exemptions from the requirement to hold a non-binding advisory vote on executive compensation, including golden parachute compensation; and
an exemption from the auditor attestation requirement under Section 404 of Sarbanes-Oxley in the assessment of the emerging growth company's internal control over financial reporting.

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

Foreign Private Issuer Status

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

we are not required to provide as many Exchange Act reports, or as frequently, as a domestic public company;
for interim reporting, we are permitted to comply solely with our home country requirements, which may be less rigorous than the rules that apply to domestic public companies;
we are not required to provide the same level of disclosure on certain issues, such as executive compensation;
we are exempt from provisions of Regulation FD aimed at preventing issuers from making selective disclosures of material information;
we are not required to comply with the sections of the Exchange Act regulating the solicitation of proxies, consents, or authorizations in respect of a security registered under the Exchange Act; and

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

Corporate Information

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

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

THE OFFERING

Issuer

KWESST Micro Systems Inc.

Common Units offered by us

Up to 2,323,232 Common Units, each Common Unit consisting of one Common Share and one Warrant, with each Warrant exercisable for one Common Share. The Warrants offered as part of the Common Units are exercisable immediately, at an exercise price of USD$ , equal to 125% of the public offering price of one Common Unit, and expire five years from the date of issuance. The securities contained in the Common Units are immediately separable and will be issued separately in this offering.

This Prospectus also relates to the offering of the Common Shares issuable upon exercise of the Warrants.

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

Pre-funded Units offered by us

Each Pre-funded Unit will consist of a Pre-funded Warrant to purchase one Common Share at an exercise price of USD$0.01, per share and one Warrant. The purchase price of each Pre-funded Unit is equal to the price per Common Unit being sold to the public in this offering, minus USD$0.01. The Pre-funded Warrants will be immediately exercisable and may be exercised at any time. The securities contained in the Pre-funded Units are immediately separable and will be issued separately in this offering. For each Pre-funded Unit we sell, the number of Common Units we are offering will be decreased on a one-for-one basis.

Because we will issue one Warrant as part of each Common Unit or Pre-funded Unit, the number of Warrants sold in this offering will not change. The Pre-funded Warrants are subject to the Warrant Exercise Limitation.

This Prospectus also relates to the offering of the Common Shares issuable upon exercise of the Pre-funded Warrants.

Neither Company insiders nor Company affiliates have indicated an intention to purchase Pre-funded Units.

Underwriter's over-allotment option

The Over-Allotment Option purchase price to be paid per additional Common Share or Pre-funded Warrant by the underwriter shall be equal to the public offering price of one Common Unit or one Pre-funded Unit, as applicable less underwriting discount, and the purchase price to be paid per additional Warrant by the underwriter shall be USD$0.00001.

Common Shares to be outstanding after this offering⁽¹⁾

3,104,105 Common Shares (or 3,452,589 Common Shares if the underwriter exercises its option to purchase additional Common Units in full).

Including the Canadian Offering based on an assumed offering price of USD$4.95 per Canadian Unit, 3,710,165 Common Shares (or 4,058,649 Common Shares if the underwriter exercises its option to purchase additional Common Units in full).

Symbol and Listing

We have applied for listing of our Common Shares and Warrants on the Nasdaq Capital Market under the symbol “KWE” and “KWESW”, respectively. No assurance can be given that our application will be approved. In order to meet Nasdaq’s initial listing criteria, all 2,323,232 Common Units being offered in this offering as well as all 606,060 Canadian Units being offered in the Canadian Offering will need to be sold. It is also a condition precedent to the underwriter’s obligation to purchase the securities being offered in this offering, and a condition precedent to the Canadian Underwriter’s obligation to purchase the securities being offered in the Canadian Offering, that Nasdaq approve the listing of our Common Shares and Warrants. Accordingly, if Nasdaq does not approve the listing of our Common Shares and Warrants, we will not and cannot proceed with this offering.

In addition, we do not intend to apply for the listing of the Common Units, Pre-funded Units or Pre-funded Warrants on any national securities exchange or other trading market. Without an active trading market, the liquidity of the Pre-funded Warrants will be limited.

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

Use of proceeds

We expect to receive approximately USD$9.5 million in net proceeds from the sale of securities offered by us in this offering (approximately USD$11.1 million if the underwriter exercises its Over-Allotment Option in full), after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us of approximately USD$2.0 million, based on an assumed offering price of USD$4.95 per Common Unit and USD$4.94 per Pre-funded Unit.

We expect to receive approximately USD$2.3 million in additional net proceeds from the sale of securities in the Canadian Offering, after deducting estimated underwriting discounts and commissions and estimated Canadian Offering expenses payable by us of approximately USD$0.7 million, based on an assumed offering price of USD$4.95 per Canadian Unit.

We expect to receive approximately USD$11.8 million (approximately USD$13.4 million if the underwriter exercises its Over-Allotment Option in full) in combined net proceeds from this offering and the Canadian Offering, after deducting estimated underwriting discounts and commissions and estimated expenses payable by us in connection with this Offering and the Canadian Offering of approximately USD$2.7 million.

If the Over-Allotment Option is exercised solely in full for Common Shares or Pre-Funded Warrants, we will receive total approximate gross proceeds of USD$1.6 million, after underwriting discount of 7.5% and if the Over-Allotment Option is exercised solely in full for Warrants, will receive total approximate gross proceeds of USD$3.48.

We intend to use the net proceeds from this offering and the Canadian Offering for working capital (including commercial roll-out of PARA OPS in the United States), repayment of outstanding loans, and other general corporate purposes. We may also use of a portion of the net proceeds from this offering for acquisitions or strategic investments in complementary businesses or technologies. We have not allocated specific amounts of net proceeds for any of these purposes.

The proceeds from the Canadian Offering will be used principally to repay part or all of outstanding unsecured loans in the amount of CAD$2.0 million and USD$0.22 million.

There is no assurance that the Canadian Offering will close or that we will receive gross proceeds of USD$3.0 million from the Canadian Offering.

If the Canadian Offering does not close, USD$0.22 million of the net proceeds from this offering will be used to repay one of the two unsecured loans issued in August 2022.

Lock-up

Our directors, executive officers, and certain shareholders who own 5% or more of our outstanding Common Shares have agreed with the underwriter to not offer, issue, sell, contract to sell, encumber, grant any option for the sale of or otherwise dispose of any of our securities for a period of ninety (90) from the date of the offering. See Underwriting for additional information.

Risk Factors

Investing in our securities involves a high degree of risk. See Risk Factors in this Prospectus for a discussion of factors you should carefully consider before investing in our securities.

(1) The number of Common Shares shown above to be outstanding after this offering is based on 780,873 Common Shares outstanding as of November 10, 2022 and excludes as of such date (USD$ equivalent is based on a conversion rate of $1.3378):

warrants to purchase 191,673 Common Shares at a weighted average exercise price of $54.25 (USD$40.55) per share;
57,102 Common Shares issuable upon the exercise of outstanding but unexercised stock options to purchase Common Shares, under our Long-Term Performance Incentive Plan as approved by our shareholders on March 31, 2022 (“LTIP”) at a weighted average exercise price of $84.00 (USD$62.79) per share;

16,346 Common Shares issuable upon the conversion of 13,689 restricted share units (“RSUs”), and 2,657 share appreciation rights (“SARs”), under our LTIP;
837 Common Shares issuable upon the conversion of 837 agent option units at an exercise price of $87.50 (USD$65.41) per share, each unit comprised of one Common Share and seventy warrants exercisable at $1.75 (USD$1.31) per 0.01428571 common shares (70 warrants for one Common Share);
Up to 2,323,232 Common Shares issuable upon the exercise of the Pre-funded Warrants if Pre-funded Units are sold in lieu of Common Units;
Up to 116,162 Common Shares issuable upon the exercise of the Underwriter Warrants;
Up to 42,424 Common Shares issuable upon the exercise of the Canadian Compensation Options (as defined below); and
Up to approximately 44,444 Common Shares upon the repayment of the Second Loan (as defined below) by way of issuance of Common Shares if we elect to make application for such issuance with the TSX Venture Exchange and if such application if approved.

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

NON-IFRS FINANCIAL MEASURES

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

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

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

SUMMARY FINANCIAL DATA

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

($ in thousands, except per share)
Consolidated Statements of Operations and Comprehensive Loss Data		Year ended December 31, 2019			Nine months ended September 30, 2020			Year ended September 30, 2021			Nine months ended June 30, 2021 (Unaudited)			Nine months ended June 30, 2022 (Unaudited)
REVENUE	$	509		$	862		$	1,276		$	1,115		$	466
Cost of sales		(85	)		(247	)		(799	)		(718	)		(405	)
Gross profit		424			614			477			397			60
Gross margin %		83%			71%			37%			36%			13%
Operating expenses		1,438			4,106			9,679			6,754			7,953
Operating loss		(1,014	)		(3,491	)		(9,203	)		(6,356	)		(7,892	)
NET LOSS		(1,147	)		(3,537	)		(9,315	)		(6,431	)		(8,133	)
Net finance costs		245			61			108			61			304
Depreciation		102			104			141			88			225
EBITDA LOSS ⁽¹⁾		(800	)		(3,372	)		(9,067	)		(6,282	)		(7,604	)
Non-cash M&A costs ⁽²⁾		-			1,514			-			-			-
Stock-based compensation		-			283			2,463			1,399			1,876
Professional fees relating to U.S. financing		-			-			-			-			500
Gain on acquisition		-			-			-			-			(42	)
Fair value adjustments		(113	)		(29	)		-			-			-
Foreign exchange loss (gain)		1			14			4			14			(23	)
Loss on disposal		-			-			1			-			1
ADJUSTED EBITDA LOSS ⁽¹⁾		(912	)		(1,590	)		(6,599	)		(4,869	)		(5,292	)
Loss per Common Share, Basic and Diluted, as reported	$	4.61		$	8.03		$	14.72		$	10.44		$	11.32

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Form of Warrant Certificate and the form of Pre-funded Warrant Certificate designate the state and federal courts sitting in the City of New York, Borough of Manhattan as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by holders of Warrants or Pre-funded Warrants, as the case may be. The warrant agency agreement designates that disputes relating to such agreement may be litigated in courts located within the Borough of Manhattan in the City of New York. In all three instances, the forum provisions could limit the ability of holders of Warrants and Pre-funded Warrants, as applicable, to obtain a favorable judicial forum for disputes with the Company.

The Form of Warrant Certificate and Form of Pre-funded Warrant Certificate provide that (i) legal proceedings concerning the interpretation, enforcement and defense of the Warrant and Pre-funded Warrant, as applicable, will be commenced in the state and federal courts sitting in the City of New York, Borough of Manhattan and (ii) that the parties thereto irrevocably submit to such jurisdiction, which jurisdiction shall be the exclusive forum for any such action, proceeding or claim. The warrant agency agreement entered into with Continental Stock Transfer & Trust (the “Warrant Agency Agreement”) provides that actions and proceedings relating to or arising from, directly or indirectly, the Warrant Agency Agreement may be litigated in courts located within the Borough of Manhattan in the City and State of New York.

Notwithstanding the foregoing, these provisions will not apply to suits brought to enforce any liability or duty created by the Securities Act, Exchange Act or any other claim for which the federal district courts of the United States are the sole and exclusive forum.

Any person or entity purchasing or otherwise acquiring any interest in the Warrants or Pre-funded Warrants, as applicable, will be deemed to have notice of and to have consented to the forum provisions in the applicable agreement. If any action, the subject matter of which is within the scope the forum provisions of the applicable agreement, is filed in a court other than a court of the State of New York (a “foreign action”) in the name of any holder of the Warrants or Pre-funded Warrants, such holder shall be deemed to have consented to: (x) the personal jurisdiction of the state and federal courts located in the State of New York in connection with any action brought in any such court to enforce the forum provisions (an “enforcement action”), and (y) having service of process made upon such warrant holder in any such enforcement action by service upon such warrant holder’s counsel in the foreign action as agent for such warrant holder.

These forum provision may limit a warrant holder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with the Company, which may discourage such lawsuits. Alternatively, if a court were to find these provisions inapplicable or unenforceable with respect to one or more actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could materially and adversely affect our business, financial condition and results of operations. See “Description of our Securities” and “Market for our Common Shares.”

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

As of the date of this Prospectus, we have 1,376 Common Shares subject to escrow conditions pursuant to the CPC Escrow Agreement (as defined below), 2,750,000 Company 2024 Warrants exercisable for an aggregate of 39,285 Common Shares subject to escrow conditions pursuant to the Surplus Security Escrow Agreement (as defined below), 113,435 Common Shares subject to escrow conditions pursuant to the Surplus Security Escrow Agreement (as defined below), 15,000 Common Shares subject to escrow conditions pursuant to the Value Security Escrow Agreement (as defined below), and 1,050,000 Company 2024 Warrants exercisable for an aggregate 15,000 Common Shares subject to escrow conditions pursuant to the Value Security Escrow Agreement (as defined below) (collectively, the “Escrowed Securities”). The Escrowed Securities will be released in lots of 39,124 Common Shares and 1,275,000 Company 2024 Warrants on March 18, 2023, and 90,686 Common Shares and 2,525,000 Company 2024 Warrants on September 18, 2023. See Escrowed Securities and Material Contracts.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Approximately 0.2 million or 17% of the outstanding Common Shares as of November 10, 2022, subject to regulatory escrow imposed by the TSXV in connection with the Amalgamation (as defined below). These escrow and restrictions will gradually be lifted over a period ending on September 18, 2024. See Share Capital - Escrowed Securities.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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:

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

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

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

The information in the above table for the actual information and as adjusted basis as of June 30, 2022, excludes as of such date (USD$ equivalent is based on a conversion rate of $1.3378 as of November 10, 2022):

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

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

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

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

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

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

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.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

On October 24, 2019, the revenue sharing agreements and convertible debentures that we issued as part of the KWESST 2018 Financing were settled by the issuance of: (i) 44,350 Common Shares, and (ii) $234,515 in principal amount of convertible notes, bearing interest at a rate of 10% per annum (the “KWESST 2019 Convertible Notes”).

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

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

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

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

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

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

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

On May 8, 2020, we issued an aggregate amount of $1,115,034 in convertible notes comprised of (i) $1,081,504 in principal amount of convertible notes convertible at $31.50 per Common Share, bearing interest at a rate of 15% per annum (“KWESST May 2020 Private Placement Convertible Notes”) and (ii) a convertible note with a principal amount of $33,530 issued to a third party for services rendered in connection with the private placement, all of which convertible notes (including accrued interest thereon) were automatically converted into 37,275 Common Shares upon closing of the Qualifying Transaction on September 17, 2020. Additionally, as an inducement, the note holders were entitled to receive 25% of the principal amount in the form of Common Shares based on a stock price of $31.50 per share, resulting in the issuance of 8,583 Common Shares concurrently with the above conversion event.

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

On July 9, 2020, KWESST issued 62,994 subscription receipts of KWESST at $49.01 per subscription receipt for aggregate gross proceeds of approximately $3,087,138, before share issuance costs. As part of the Qualifying Transaction, in September 2020, the 62,994 subscription receipts were converted into Common Shares of KWESST, which were subsequently cancelled, and Common Shares were issued in exchange therefor.

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

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

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

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

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

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

On April 29, 2021, we completed a private placement of 51,087 units at a price of $87.50 per unit for gross proceeds of $4,470,071 (the “April 2021 Private Placement”), as amended in August 2021. Each unit consisted of one Common Share and seventy Common Share purchase warrants, exercisable to acquire 1/70 of a Common Share at a price of $1.75 each (70 warrants for one Common Share) for a period of 24 months. Following this closing, we also closed the acquisition of the PARA OPS system on same day.

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

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

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

On September 16, 2021, we completed a private placement of 10,714 units at a price of $140 per unit for gross proceeds of $1,500,000 (the “September 2021 Private Placement”). Each unit consisted of one Common Share and seventy Common Share purchase warrants, exercisable at a price of $2.35 for each 1/70 of a Common Share (70 warrants for one Common Share) for a period of 24 months.

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

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

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

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

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

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

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

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

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

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

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

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

On March 11, 2022, we closed a non-secured and non-convertible loan financing transaction with a syndicate of lenders for aggregate loan proceeds of $1.8 million and an additional $0.2 million on March 15, 2022, for a gross total of $2.0 million (the "Unsecured Loans"). The Unsecured Loans bear interest at a rate of 9.0% per annum, compounded monthly and not in advance, and have a maturity of thirteen months, with KWESST having the option to repay the whole or any part of the Unsecured Loans, without penalty or premium, at any time prior to the close of business on the maturity date. The principal amount is due only at maturity. As part of the terms of the Unsecured Loans, we issued an aggregate of 14,286 bonus Common Shares to the lenders. These Common Shares were issued pursuant to prospectus exemptions of applicable Canadian securities laws and therefore subject to a four-month plus one day trading restriction.

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

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

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

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

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

On July 14, 2022, we closed a non-brokered private placement, resulting in the issuance of 22,857 units of KWESST, at a price of $15.05 per unit, for aggregate gross proceeds of $0.34 million. Each unit consisted of one Common Share and seventy one-half Common Share purchase warrants, exercisable at a price of $0.285 each per share for a period of 24 months. Each Warrant converts into 0.01428571 Common Shares or 70 warrants for one Common Share. Certain of our directors and officers participated in the amount of $87,500.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

We incurred a net loss of $9.3 million or $14.72 per basic share for Fiscal 2021, compared to the net loss of $3.5 million or $8.03 per basic share for Fiscal 2020. The increase in net loss was primarily due to investments made to drive marketing and promotional activities about us and our product offerings, accelerating product development, and recruiting talent to position ourselves for success.

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

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

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

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

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

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

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

We incurred a net loss of $3.5 million or $8.03 per basic share for Fiscal 2020, compared to the net loss of $1.1 million or $4.61 per basic share for Fiscal 2019. The increase in net loss was primarily due to scaling-up our operations for growth, increasing R&D activities, and incurring non-recurring charges for going public in Canada.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Month Ended	Average
October 31, 2022	1.3700
September 30, 2022	1.3319
August 31, 2022	1.2922
July 31, 2022	1.2942
June 30, 2022	1.2814
May 31, 2022	1.2852
April 30, 2022	1.2628
March 31, 2022	1.2658
February 28, 2022	1.2716
January 31, 2022	1.2616
December 31, 2021	1.2794
November 30, 2021	1.2570

	As of June 30, 2022
*(CAD$ in thousands)*		Actual			As adjusted for Pre-IPO Transactions⁽¹⁾			As adjusted for IPO net of Loan Repayment⁽²⁾			As adjusted for IPO and Canadian Offerings, net of Loan Repayments⁽³⁾
Debt:
Lease obligations	$	292		$	292		$	292		$	292
Unsecured borrowings		1,753			2,192			1,962			210
Total debt		2,045			2,484			2,254			502

Equity:
Share capital		19,166			19,510			31,912			34,889
Warrants		1,902			1,902			1,902			1,902
Contributed surplus		3,474			3,474			3,474			3,474
Accumulated other comprehensive gain		(28	)		(28	)		(28	)		(28	)
Accumulated deficit		(23,522	)		(23,522	)		(23,579	)		(23,916	)
Total equity		992			1,335			13,681			16,321

TOTAL CAPITALIZATION	$	3,037		$	3,819		$	15,935		$	16,823

	Concept & Design	Prototype⁽¹⁾	Market Testing⁽²⁾	Pre- Production⁽³⁾	Commercialization⁽⁴⁾
PARA OPS– single shot device ⁽⁵⁾			Q4 FY22	Q4 FY22	Q1 FY23
PARA OPS– multi-shot device ⁽⁵⁾		Q4 FY22	Q4 FY22	Q1 FY23	Q2 FY23


PARA OPS – reciprocating devices	Q1 FY23	Q1 FY23	Q2FY23	Q2 FY23	Q3 FY23


TASCS IFM					To Be Determined
BLDS					To Be Determined
Phantom					To Be Determined

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

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

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

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

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


		Three months ended June 30,						Nine months ended June 30,
*(Unaudited)*		2022			2021⁽¹⁾			2022			2021⁽¹⁾

Revenue	$	282,432		$	521,724		$	466,148		$	1,115,757
Cost of sales		(238,350	)		(315,273	)		(405,841	)		(718,309	)
Gross profit		44,082			206,451			60,307			397,448
Gross margin %		*15.6%*			39.6%			*12.9%*			35.6%

Operating Expenses
General and administrative		1,322,730			1,236,988			3,410,887			2,909,349
Selling and marketing		851,705			882,261			2,931,460			2,195,647
R&D		350,689			678,622			1,610,445			1,648,711
Total operating expenses		2,525,124			2,797,871			7,952,792			6,753,707

Operating loss		(2,481,042	)		(2,591,420	)		(7,892,485	)		(6,356,259	)

Other expenses
Gain on acquisition		41,869			-			41,869			-
Net finance costs		(184,177	)		(27,780	)		(304,298	)		(60,857	)
Foreign exchange gain (loss)		22,901			(9,025	)		22,602			(14,189	)
Loss on disposals		-			-			(1,165	)		-
Net loss	$	(2,600,449	)	$	(2,628,225	)	$	(8,133,477	)	$	(6,431,305	)
EBITDA loss	$	(2,336,150	)	$	(2,587,006	)	$	(7,603,871	)	$	(6,281,964	)
Adjusted EBITDA loss(2)	$	(1,532,263	)	$	(2,057,558	)	$	(5,291,673	)	$	(4,868,894	)

Loss per share, basic and diluted, as reported	$	(3.50	)	$	(4.00	)	$	(11.32	)	$	(10.44	)
Weighted average common shares, basic, as reported		742,697			657,381			718,400			616,094


		Three months ended June 30,			Change		Nine months ended June 30,			Change
*(Unaudited)*		2022		2021	%		2022		2021	%
Digitization	$	157,900	$	497,792	-68%	$	314,515	$	1,080,933	-71%
ARWEN^TM		100,684		-	N/A		111,176		-	N/A
Training and services		23,495		-	N/A		39,169		-	N/A
Other		353		23,932	-99%		1,288		34,824	-96%
Total revenue	$	282,432	$	521,724	-46%	$	466,148	$	1,115,757	-58%

Gross profit	$	44,082	$	206,451		$	60,307	$	397,448
Gross margin		*15.6%*		39.6%			*12.9%*		35.6%



(Single shot)	(Multi-shot)



(Proprietary cartridge and projectile)



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

		Year ended September 30,			Nine months ended September 30,			Year ended December 31,		Change 2021 vs 2020 ⁽¹⁾		Change 2020 vs 2019 ⁽¹⁾
		2021			2020			2019			%		%
Revenue	$	1,275,804		$	861,917		$	509,148		11	%	126	%

Cost of sales		(798,888	)		(247,113	)		(85,101	)	142	%	287	%
Gross profit		476,916			614,804			424,047
Gross margin %		37.4	%		71.3	%		83.3	%	-39.9	%	-12.0	%

Operating Expenses
General and administrative		4,057,167			2,723,861			397,990		12	%	813	%
Selling and marketing		3,484,159			564,266			36,681		363	%	1951	%
R&D		2,138,138			817,584			1,003,705		96	%	9	%

Total operating expenses		9,679,464			4,105,711			1,438,376		77	%	281	%

Operating loss		(9,202,548	)		(3,490,907	)		(1,014,329	)	98	%	359	%

Loss on derivatives		-			29,463			113,178		-100	%	-65	%
Net finance costs		(107,751	)		(61,397	)		(245,147	)	32	%	-67	%
Foreign exchange loss		(3,742	)		(13,937	)		(982	)	-80	%	1792	%
Loss on disposals		(1,331	)		-			-
Net loss	$	(9,315,372	)	$	(3,536,778	)	$	(1,147,280	)	98	%	311	%
EBITDA	$	(9,066,631	)	$	(3,371,984	)	$	(799,991	)	102	%	462	%
Adjusted EBITDA	$	(6,599,351	)	$	(1,589,723	)	$	(912,187	)	211	%	132	%
Earnings (loss) per share - basic and diluted, as reported	$	(14.72	)	$	(8.03	)	$	(4.61	)	43	%	110	%
Weighted average common shares - basic, as reported		632,721			440,631			249,001		44	%	77	%

($ in thousands, except per share)	September 2020 (Q4 FY20)			December 2020 (Q1 FY21)			March 2021 (Q2 FY21)			June 2021 (Q3 FY21)			September 2021 (Q4 FY21)			December 2021 (Q1 FY22)			March 2022 (Q2 FY22)			June 2022 (Q3 FY22)
Revenue	$	213		$	146		$	448		$	522		$	160		$	17		$	166		$	282
Cost of sales	$	95		$	72		$	332		$	315		$	80		$	25		$	142		$	238
Gross profit	$	118		$	74		$	116		$	207		$	80		$	(8	)	$	24		$	44
Gross margin %		55.1	%		55.1	%		26.0	%		39.6	%		49.7	%		(45.9	)%		14.6	%		15.6	%
Operating expenses	$	2,392		$	1,580		$	2,376		$	2,798		$	2,925		$	3,196		$	2,231		$	2,525

Operating loss	$	(2,274	)	$	(1,506	)	$	(2,260)		$	(2,591	)	$	(2,845	)	$	(3,204	)	$	(2,207	)	$	(2,481	)
Other income (expenses)	$	248		$	(21	)	$	(17	)	$	(37	)	$	(38	)	$	(39	)	$	(83	)	$	(119	)

Net income (loss)	$	(2,026	)	$	(1,527	)	$	(2,277	)	$	(2,628	)	$	(2,883	)	$	(3,243	)	$	(2,290	)	$	(2,600	)
Net finance costs (income)	$	(45	)	$	18		$	15		$	28		$	19		$	48		$	72		$	184
Depreciation and amortization	$	15		$	39		$	35		$	13		$	53		$	72		$	73		$	81
EBITA loss	$	(2,056	)	$	(1,470	)	$	(2,227	)	$	(2,587	)	$	(2,811	)	$	(3,123	)	$	(2,145	)	$	(2336	)
Other adjustments:
Non-cash M&A costs	$	1,515		$	-		$	-		$	-		$	-		$	-		$	-		$	-
Stock-based compensation	$	137		$	274		$	605		$	555		$	998		$	928		$	423		$	525
Professional fees relating to U.S. financing	$	-		$	-		$	-		$	-		$	-		$	112		$	44		$	344
Gain on acquisition	$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	(42	)
Fair value adjustments on derivatives	$	(178	)	$	-		$	-		$	-		$	-		$	-		$	-		$	-
Foreign exchange loss (gain)	$	9		$	3		$	(5	)	$	15		$	(19	)	$	(9	)	$	9		$	(24	)
Loss on disposal	$	-		$	-		$	-		$	-		$	1		$	-		$	1		$
Adjusted EBITDA (loss)	$	(573	)	$	(1,193	)	$	(1,627	)	$	(2,017	)	$	(1,831	)	$	(2,204	)	$	(1,712	)	$	(1,532	)
Earnings (loss) per share - basic and diluted, as reported	$	(4.29	)	$	(2.58	)	$	(3.78	)	$	(4.00	)	$	(4.23	)	$	(4.63	)	$	(3.22	)	$	(3.50	)
Weighted average common shares - basic, as reported		472			591			602			657			682			700			712			743

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

Proforma available funds from April 29, 2021	$	5,703,838

		2020 Financing							2021 Financing
Use of Proceeds ⁽¹⁾		Expected Allocation of Net Proceeds ⁽²⁾		Estimated and Unaudited Actual Use of Funds from September 1, 2020 to April 28, 2021		Proceeds Unspent as at April 28, 2021			Expected Allocation of Net Proceeds		Estimated and Unaudited Actual Use of Funds from April 29, 2021 to June 30, 2022		Proceeds Unspent as at June 30, 2022
Products development: ⁽³⁾

TASCS NORS (formerly TASCS Sniper)	$	150,000	$	15,210	$	134,790		$	-	$	-	$	-
TASCS IFM ⁽⁴⁾		150,000		623,953		(473,953	)		400,000		311,085		88,915
BLDS		575,000		74,874		500,126			200,000		264,373		(64,373	)
Shot Counter		120,000		-		120,000			-		-		-
Phantom		150,000		134,743		15,257			500,000		574,913		(74,913	)
GreyGhost		250,000		91,284		158,716			200,000		15,840		184,160
ATAK		-		-		-			500,000		285,186		214,814
PARA OPS		-		-		-			500,000		571,606		(71,606	)

Total products development		1,395,000		940,064		454,936			2,300,000		2,023,003		276,997
Other specific allocations:
Costs related to complete QT		150,000		145,560		4,440			-		-		-
Broker commissions and fees relating to QT		189,520		189,520		-			-		-		-
Repayment of CEO and employee loans		114,049		31,252		82,797			191,600		191,600		-
Repayment of unsecured borrowings		-		-		-			310,527		310,527		-
Marketing costs		345,000		832,852		(487,852	)		-		-		-
Prepaid royalties to DEFSEC ⁽⁵⁾		150,000		-		150,000			150,000		150,000		-
Total allocated proceeds		2,343,569		2,139,248		204,321			2,952,127		2,675,130		276,997
Unallocated proceeds for working capital		1,746,237		1,715,213		31,024			2,516,366		2,793,363		(276,997	)
Transferred to 2021 Financing for working capital		-		235,345		(235,345	)		235,345		235,345		-
Total use of proceeds	$	4,089,806	$	4,089,806	$	-		$	5,703,838	$	5,703,838	$	-

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

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

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

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

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