KWESST Micro Systems 6K Unaudited Condensed Consolidated Interim Financial Statements of | KWE 15 Aug 24

Unaudited Condensed Consolidated Interim Financial Statements of

KWESST MICRO SYSTEMS INC.

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

(Expressed in Canadian dollars)

KWESST MICRO SYSTEMS INC.

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

	Page

FINANCIAL STATEMENTS

Unaudited Condensed Consolidated Interim Statements of Financial Position	3

Unaudited Condensed Consolidated Interim Statements of Net Loss and Comprehensive Loss	4

Unaudited Condensed Consolidated Interim Statements of Changes in Shareholders' Equity (Deficit)	5

Unaudited Condensed Consolidated Interim Statements of Cash Flows	6

Notes to the Unaudited Condensed Consolidated Interim Financial Statements	7-25

KWESST MICRO SYSTEMS INC.

Unaudited Condensed Consolidated Interim Statements of Financial Position

At June 30, 2024 and September 30, 2023


In Canadian dollars	Notes		June 30, 2024			September 30, 2023

ASSETS
Cash and cash equivalents		$	1,178,879		$	5,407,009
Restricted short-term investment			30,000			30,000
Trade and other receivables	4		401,600			300,269
Inventories	5		618,862			542,388
Prepaid expenses and other			396,405			562,408
Deferred costs			44,377			-
Current assets			2,670,123			6,842,074

Property and equipment			340,268			417,296
Right-of-use assets			262,856			361,036
Deposit			28,098			26,076
Intangible assets	6		3,419,793			4,112,350
Deferred costs			20,522			-
Non-current assets			4,071,537			4,916,758
Total Assets		$	6,741,660		$	11,758,832

LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Accounts payable and accrued liabilities	7 and 8	$	1,582,679		$	1,649,876
Accrued royalties liability			200,000			150,000
Lease obligations			147,236			127,116
Contract liabilities	9		107,098			120,970
Warrant liabilities	10 and 11(b)		288,851			4,335,673
Current liabilities			2,325,864			6,383,635

Accrued royalties liability			1,074,137			1,137,170
Lease obligations			194,984			302,407
Non-current liabilities			1,269,121			1,439,577
Total Liabilities			3,594,985			7,823,212

Shareholders' Equity (Deficit)
Share capital	11(a)		37,420,394			33,379,110
Warrants	11(b)		1,127,861			1,042,657
Contributed surplus	11(c)		4,972,594			4,769,115
Accumulated other comprehensive loss			(57,444	)		(39,663	)
Accumulated deficit			(40,316,730	)		(35,215,599	)
Total Shareholders' Equity (Deficit)			3,146,675			3,935,620

Total Liabilities and Shareholders' Equity (Deficit)		$	6,741,660		$	11,758,832

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

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

On behalf of the Board of Directors:

(signed) Paul Mangano, Director		(signed) David Luxton , Director

KWESST MICRO SYSTEMS INC.

Unaudited Condensed Consolidated Interim Statements of Net Loss and Comprehensive Loss

Three and nine months ended June 30, 2024 and 2023


In Canadian dollars	Notes		Three Months Ended June 30, 2024			Three Months Ended June 30, 2023			Nine Months Ended June 30, 2024			Nine Months Ended June 30, 2023

Revenue	13	$	329,476		$	150,269		$	944,408		$	629,005
Cost of sales			(288,665	)		(113,471	)		(715,219	)		(381,689	)
Gross profit			40,811			36,798			229,189			247,316

Operating expenses
General and administrative			1,484,509			1,802,054			4,861,998			4,446,512
Selling and marketing			224,791			731,543			1,139,413			2,338,646
Research and development, net			516,289			457,028			1,865,614			1,026,537
Total operating expenses			2,225,589			2,990,625			7,867,025			7,811,695

Operating loss			(2,184,778	)		(2,953,827	)		(7,637,836	)		(7,564,379	)

Other income (expenses)
Share issuance costs	11(a)		(366,931	)		-			(366,931	)		(1,309,545	)
Net finance costs	14		(63,034	)		(40,826	)		(137,889	)		(595,510	)
Foreign exchange gain (loss)			(22,492	)		24,332			68,413			(125,708	)
Change in fair value of warrant liabilities	10		1,475,280			(481,704	)		2,973,112			2,707,691
Total other income (expenses), net			1,022,823			(498,198	)		2,536,705			676,928

Net loss		$	(1,161,955	)	$	(3,452,025	)	$	(5,101,131	)	$	(6,887,451	)

Other comprehensive income:
Items that are or may be reclassified subsequently to profit or loss:
Foreign currency translation differences			(14,578	)		4,713			(17,781	)		26,137
Total comprehensive loss		$	(1,176,533	)	$	(3,447,312	)	$	(5,118,912	)	$	(6,861,314	)

Net loss per share
Basic and diluted	12	$	(0.13	)	$	(0.81	)	$	(0.77	)	$	(2.04	)

Weighted average number of shares outstanding
Basic and diluted	12		8,803,585			4,272,663			6,600,267			3,374,705

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

KWESST MICRO SYSTEMS INC.

Unaudited Condensed Consolidated Interim Statements of Changes in Shareholders' Equity (Deficit)

Nine months ended June 30, 2024 and 2023

In Canadian dollars																		Total
	Notes								Contributed			Translation						Shareholders'
	Notes		Share capital			Warrants			surplus			reserve			Deficit			Equity (Deficit)
Balance, September 30, 2022		$	19,496,640		$	1,959,796		$	3,551,330		$	(101,418	)	$	(25,909,239	)	$	(1,002,891	)
Shares issued for public offering	11(a)		13,675,120			-			-			-			-			13,675,120
Share offering costs	11(a)		(3,050,278	)		189,592			125,086			-			-			(2,735,600	)
Shares issued for debt	11(a)		233,485			-			-			-			-			233,485
Warrants exercised			60,000			(60,000	)		-			-			-			-
Share-based compensation	11(c)		-			-			316,261			-			-			316,261
Shares for vested RSUs and PSUs			529,504			-			(529,504	)		-			-			-
Vested RSUs repurchased for withholding taxes			-			-			(612	)		-			-			(612	)
Stock options exercised			5,836			-			(1,789	)		-			-			4,047
Other comprehensive income			-			-			-			26,137			-			26,137
Net loss			-			-			-			-			(6,887,451	)		(6,887,451	)
Balance, June 30, 2023		$	30,950,307		$	2,089,388		$	3,460,772		$	(75,281	)	$	(32,796,690	)	$	3,628,496

Balance, September 30, 2023		$	33,379,110		$	1,042,657		$	4,769,115		$	(39,663	)	$	(35,215,599	)	$	3,935,620
Shares issued for public offering	11(a)		2,961,605			105,081			-			-			-			3,066,686
Share offering costs	11(a)		(691,560	)		-			-			-			-			(691,560	)
Warrants exercised	11(b)		1,771,239			-			-			-			-			1,771,239
Warrants expired	11(b)		-			(19,877	)		19,877			-			-			-
Share-based compensation	11(c)		-			-			183,602			-			-			183,602
Other comprehensive income			-			-			-			(17,781	)		-			(17,781	)
Net loss			-			-			-			-			(5,101,131	)		(5,101,131	)
Balance, June 30, 2024		$	37,420,394		$	1,127,861		$	4,972,594		$	(57,444	)	$	(40,316,730	)	$	3,146,675

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

KWESST MICRO SYSTEMS INC.

Unaudited Condensed Consolidated Interim Statements of Cash Flows

Nine months ended June 30, 2024 and 2023


			Nine months ended			Nine months ended
			June 30,			June 30,
In Canadian dollars	Notes		2024			2023

OPERATING ACTIVITIES
Net loss		$	(5,101,131	)	$	(6,887,451	)
Items not affecting cash:
Depreciation and amortization			963,050			609,634
Share-based compensation	11(c)		183,602			316,261
Change in fair value of warrant liabilities (including related foreign exchange gain)	10		(2,985,250	)		(2,788,423	)
Net finance costs	14		137,889			621,022
Changes in non-cash working capital items	16		(95,865	)		(3,091,999	)
Interest received (paid)			21,427			(125,364	)

Cash used in operating activities			(6,876,278	)		(11,346,320	)

INVESTING ACTIVITIES
Additions of property and equipment			(85,462	)		(243,528	)
Investments in intangible assets	6		(9,823	)		(598,525	)
Deposit for advanced royalties			-			(148,410	)

Cash flows used in investing activities			(95,285	)		(990,463	)

FINANCING ACTIVITIES
Repayments of lease obligations			(111,674	)		34,430
Proceeds from U.S. IPO and Canadian Offering, net	11(a)		-			16,346,768
Proceeds from U.S. Public Offering-April 2024	11(a)		1,356,743			-
Proceeds from U.S. Public Offering-June 2024	11(a)		2,312,916			-
Payments of share offering costs	11(a)		(921,246	)		(125,397	)
Payments of deferred financing fees			-			-
Repayment of borrowings			-			(2,333,315	)
Proceeds from exercise of warrants			106,694			-
Proceeds from exercise of stock options			-			4,052
Repurchase of vested RSUs and PSUs for withholding taxes			-			(612	)

Cash flows provided by financing activities			2,743,433			13,925,926

Net change in cash during the period			(4,228,130	)		1,589,143
Cash, beginning of period			5,407,009			170,545

Cash, end of period		$	1,178,879		$	1,759,688

Cash and cash equivalents consist of the following:
Cash held in banks			1,178,879			(1,270,262	)
Short-term guaranteed investment certificates			-			3,029,950
Cash and cash equivalents			1,178,879			1,759,688

See Note 16 Supplemental cash flow information.

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

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

1. Corporate information

a) Corporate information

KWESST Micro Systems Inc. (the "Company", "KWESST", "we", "our", and "us") was incorporated on November 28, 2017, under the laws of the Province of British Columbia. Our registered office is located at 550 Burrard Street, Suite 2900, Vancouver, British Columbia, Canada and our corporate office is located at Unit 1, 155 Terrence Matthews Crescent, Ottawa, Ontario, Canada. We have representative offices in the following foreign locations: Washington DC (United States), London (United Kingdom), and Abu Dhabi (United Arab Emirates).

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

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

b) Reverse Stock Split

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

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

2. Basis of preparation

(a) Going concern

These unaudited condensed consolidated interim financial statements have been prepared assuming we will continue as a going concern.

As an early-stage company, we have not yet reached commercial production for most of our products and have incurred significant losses and negative operating cash flows from inception that have primarily been funded from financing activities. We have incurred a $5.1 million net loss and negative operating cash flows of $6.9 million for the nine months ended June 30, 2024 (2023 - $6.9 million net loss and negative operating cash flows of $11.3 million). At June 30, 2024, we had $0.3 million in working capital (September 30, 2023 - $0.5 million) and $40.3 million in deficit (September 30, 2023 – $35.2 million).

Our ability to continue as a going concern and realize our assets and discharge our liabilities in the normal course of business is dependent upon closing timely additional sales orders, timely commercial launch of new products, and the ability to raise additional debt or equity financing, when required. There are various risks and uncertainties affecting our future financial position and our performance including, but not limited to:

The market acceptance and rate of commercialization of our product offerings;
Ability to successfully execute our business plan;
Ability to raise additional capital at acceptable terms; and
General local and global economic conditions, including the ongoing conflict in Gaza and the global disruption from Russia's invasion of Ukraine.

Our strategy to mitigate these material risks and uncertainties is to execute timely a business plan aimed at continued focus on revenue growth, product development and innovation, improving overall gross profit, managing operating expenses and working capital requirements, and securing additional capital, as needed.

Failure to implement our business plan could have a material adverse effect on our financial condition and/or financial performance. There is no assurance that we will be able to raise additional capital as they are required in the future. Accordingly, there are material risks and uncertainties that may cast substantial doubt about our ability to continue as a going concern.

These unaudited condensed consolidated interim financial statements do not include any adjustments to the carrying amounts and classification of assets, liabilities and reported expenses that may otherwise be required if the going concern basis was not appropriate.

(b) Statement of compliance

These unaudited condensed consolidated interim financial statements have been prepared in accordance with IAS 34, Interim Financial Reporting, ("IAS 34") as issued by the International Accounting Standards Board ("IASB") and the interpretations of the IFRS Interpretations Committee. They do not include all the information required for a complete set of financial statements prepared in accordance with International Financial Reporting Standards ("IFRS") and should be read in conjunction with our annual consolidated financial statements for the year ended September 30, 2023. However, selected explanatory notes are included to explain events and transactions that are material to an understanding of the changes in our financial position and performance since the last annual consolidated financial statements as at and for the year ended September 30, 2023.

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

(c) Basis of consolidation

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

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

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

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

(d) Functional and presentation currency

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

(e) Basis of measurement

The unaudited condensed consolidated interim financial statements have been prepared on a historical cost basis except for certain financial instruments measured at fair value. Historical cost is generally based on the fair value of the consideration given in exchange for assets.

(f) Use of estimates and judgments

The preparation of the unaudited condensed consolidated interim financial statements in accordance with IFRS requires management to make judgments, estimates, and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income, expenses, and disclosure of contingent liabilities. Actual results may differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to estimates are recognized prospectively.

Judgments

Information about judgments made in applying accounting policies that have the most material effects on the amounts recognized in these unaudited condensed consolidated interim financial statements are the same as disclosed in Note 2(f) of the consolidated financial statements for the year ended September 30, 2023.

Estimates

Information about assumptions and estimation uncertainties at June 30, 2024, that have a material risk of resulting in a material adjustment to the carrying amounts of assets and liabilities in the next financial year are the same as disclosed in Note 2(f) of the audited consolidated financial statements for the year ended September 30, 2023.

3. Significant accounting policies

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

4. Trade and other receivables

The following table presents trade and other receivables for KWESST:

		June 30, 2024		September 30, 2023

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

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

The following table presents changes in unbilled receivables:

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

5. Inventories

The following table presents a breakdown of inventories:

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

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

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

6. Intangible assets

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


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

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

7. Accounts payable and accrued liabilities

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

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

8. Related party transactions

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

9. Contract liabilities

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

		June 30, 2024			September 30, 2023

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

10. Warrant liabilities

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

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

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

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

U.S. IPO and Canadian Offering

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

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

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

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

Warrant liabilities

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

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

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

(2) Same fair value as calculated for Warrants.

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

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

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

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

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

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

December 2022 Debt Settlement

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

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

Private Placement (July 2023)

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

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

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

Warrant liabilities

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

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

Fair value per warrant (CAD)	$	0.99	$	1.98

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

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

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

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

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

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

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

US Public Offering (April 2024)

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

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

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

Warrant liabilities

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

11. Share capital and Contributed Surplus

a) Share capital

Authorized

KWESST is authorized to issue an unlimited number of common shares.

Issued Common Shares

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

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

U.S. IPO and Canadian Offering

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

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

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

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

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

Accounting Treatment

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

Brokers’ Compensation and Share Offering Costs

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

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

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

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

Debt Settlement (December 2022)

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

Private Placement (July 2023)

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

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

Brokers' Compensation and Share Offering Costs

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

Debt Settlement (January 2024)

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

US Public Offering (April 2024)

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

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

Brokers’ Compensation and Share Offering Costs

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

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

US Public Offering (June 2024)

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

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

Brokers' Compensation and Share Offering Costs

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

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

b) Warrants

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

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

Exercisable at June 30, 2024	7,206,973		$	2.38

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

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

U.S. Underwriter Warrants

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

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

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

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

	Number	Conversion ratio to
	outstanding	Common Shares		Book value	Expiry Date
Classified as Equity
LEC's warrants:
Exercise price of $0.70	500,000	70 for 1	$	425,000	April 29, 2026

Acquisition of Police Ordnance:
Exercise price of $1.72	200,000	70 for 1	$	132,000	December 15, 2024

July 2022 equity financing:
Exercise price of $0.285	800,000	70 for 1	$	72,000	July 14, 2024

December 2022 U.S. Underwriter Warrants:
Exercise price of US$5.1625	134,950	1 for 1	$	189,592	December 6, 2024

July 2023 U.S. Underwriter Warrants:
Exercise price of US$2.66	123,637	1 for 1	$	204,187	December 6, 2024

April 2024 U.S. Underwriter Warrants:
Exercise price of US$0.8125	76,925	1 for 1	$	43,869	April 9, 2029

June 2024 U.S. Underwriter Warrants
Exercise price of US$0.725	145,000	1 for 1	$	61,213	June 14, 2029
	1,980,512		$	1,127,861
Classified as liability
December 2022 public offerings:
Exercise price of US$5.00	3,226,392	1 for 1	$	117,024	December 9, 2027

December 2022 Option Warrants:
Exercise price of US$5.1625	375,000	1 for 1	$	13,601	December 9, 2024

December 2022 debt settlement:
Exercise price of US$5.00	56,141	1 for 1	$	2,036	December 9, 2027

July 2023 public offerings:
Exercise price of US$2.66	1,542,194	1 for 1	$	65,435	July 21, 2028

July 2023 Pre-Funded Warrants:
Exercise price of US$0.001	151,734	1 for 1	$	90,755	No expiry
	5,351,461			288,851
Total outstanding warrants	7,331,973		$	1,416,712

c) Contributed Surplus

Broker Compensation Options

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

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

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

Share-based compensation

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

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

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

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

12. Earnings (loss) per share

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

	Three months ended June 30, 2024	Three months ended June 30, 2023	Nine months ended June 30, 2024	Nine months ended June 30, 2023
Issued common shares, beginning of period	6,049,204	4,272,113	5,616,782	773,225

*Effect of shares issued from:*

December 2022 U.S. IPO and Canadian Offering (Note 11(a))	-	-	-	2,399,112
Over-allotment Pre-Funded Warrants (Note 10)	724,033	-	240,464	147,974
Debt settlements	-	-	13,807	40,923
April 2024 U.S. Public Offering (Note 11(a))	662,308	-	219,964	-
June 2024 U.S. Public Offering (Note 11(a))	509,890	-	169,343	-
Conversion of stock units	-	337	-	11,033
Exercise of options	-	213	-	70
Exercise of warrants	858,150	-	339,907	2,368
Weighted average number of basic common shares	8,803,585	4,272,663	6,600,267	3,374,705

Dilutive securities:	-	-	-	-
Weighted average number of dilutive common shares	8,803,585	4,272,663	6,600,267	3,374,705

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

13. Revenue

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

		Three months ended June 30, 2024		Three months ended June 30, 2023		Nine months ended June 30, 2024		Nine months ended June 30, 2023

Major products / service lines
Digitization	$	286,289	$	61,823	$	659,775	$	325,827
Non-Lethal		39,160		87,706		279,644		301,198
Training and services		1,028		-		1,028		-
Other		2,999		740		3,961		1,980
	$	329,476	$	150,269	$	944,408	$	629,005

Primary geographical markets
United States	$	19,536	$	2,364	$	92,624	$	29,683
Canada		309,940		147,905		851,784		599,322
	$	329,476	$	150,269	$	944,408	$	629,005

Timing of revenue recognition
Products and services transferred over time	$	287,317	$	61,823	$	660,803	$	325,827
Products transferred at a point in time		42,159		88,446		283,605		303,178
	$	329,476	$	150,269	$	944,408	$	629,005

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

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

14. Net finance costs

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

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

15. Financial instruments

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

Foreign currency risk

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

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

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

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

Liquidity risk

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

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

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

16. Supplemental cash flow information

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

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

The following is a summary of non-cash items that were excluded from the Statements of Cash Flows for the nine months ended June 30, 2024:

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

The following is a summary of non-cash items that were excluded from the Statements of Cash Flows for the nine months ended June 30, 2023:

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

17. Commitments and contingencies

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

18. Segmented information

Our Executive Chairman has been identified as the chief operating decision maker. Our Executive Chairman evaluates the performance of KWESST and allocates resources based on the information provided by our internal management system at a consolidated level. We have determined that we have only one operating segment.

At June 30, 2024, we had one right-of-use asset ($57,143) and some inventory ($153,087) in the United States while all other property and equipment are located in Canada. At June 30, 2023, we had one right-of-use asset ($87,317) and inventory ($411,269) in the United States while all remaining property and equipment was located in Canada.

19. Subsequent events

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

KWESST Micro Systems (KWE) 6-KUnaudited Condensed Consolidated Interim Financial Statements of