未監査の連結中間財務諸表

KWESST MICRO SYSTEMS INC.

2024年6月30日までの3か月と9か月、および2023年

（カナダドル）に表れた間隔集約損益および包括損失

KWESST MICRO SYSTEMS INC.

2024年6月30日および2023年の3か月および9か月を満了した内容の目次

注2(a)を参照してください　継続的存在と注17　契約と不測の事態

監査を受けていない圧縮された連結中間財務諸表に関する注記を参照してください。

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

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

See Note 16 Supplemental cash flow information.

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

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:

(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:

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:

5. Inventories

The following table presents a breakdown of inventories: 

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:

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:

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:

10. Warrant liabilities

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

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

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:

(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:

(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:

(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:

(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:

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:

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:

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:

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):

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:

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.

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:

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:

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: 

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:

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.