Mr. David Luxton reports

KWESST REPORTS ON PROGRESS OF DSEF CONTRACT

Kwesst Micro Systems Inc. has provided an update on the progress of the $136-million Department of Defence (DND) program in Canada with its joint venture partners, Thales and Akkodis, as announced May 2, 2023.

The Directorate Land Command Systems Program Management (DLCSPM) software engineering facility (DSEF) professional services program is the Canadian Army's central provider of command and control (C2) specialty applications in the areas of indirect fire control software, artillery fire control software, and sniper ballistics control software development and support services. As the Army's development cell for command and control (C2) software, the DSEF responds to new requirements as they emerge from the battlefield.

The DSEF program is now ramping up and Kwesst anticipates that it will begin contributing revenue in fiscal Q1 2024 which commenced Oct. 1, 2023. The customer has issued three statements of work (SOWs) for three initial taskings to commence transition from the program incumbent (ADGA). Kwesst is in the process of hiring, supplying and submitting for approval to the customer approximately 11 resources under these SOWs which would represent an annualized revenue of approximately $2.2-million. To date, five candidates have accepted offers conditional upon their approval by the client and the issuance of security clearances. An additional two candidates are currently undergoing evaluation, with plans to identify and screen the remaining candidates in the coming weeks.

The company expects that further work tasks will be issued by the customer once the transition from the program incumbent is complete. The company has previously estimated that once operating at scale, it will receive a minimum of $4-million annually from the contract, with potential for its workshare to be up to 20 per cent of the total contract value, or an average of up to approximately $5-million annually over the initial five-year term based on the terms of its agreement with its joint venture partners.

The company expects its gross margin on the initial set of work tasks to average between 18 per cent and 22 per cent in the first full year of work for these initial tasks. This is an estimate based on several factors, including annual salaries as well as one-time hiring costs of resources (and other related employment costs), and includes only direct costs. Management is committed to working to improve the efficiency and cost of hiring and therefore improve gross margin, as additional work tasks are issued by the customer and related hiring continues under the contract.

The contract includes five additional years of extension that may be exercised at the option of the customer. This embeds Kwesst strategically within DND's digital modernization program, and the company believes it could catalyze similar additional opportunities.

About Kwesst Micro Systems Inc.

Kwesst develops and commercializes breakthrough next-generation tactical systems for military and security forces. The company's current portfolio of offerings includes digitization of tactical forces for real-time shared situational awareness and targeting information from any source (including drones) streamed directly to users' smart devices and weapons. Other Kwesst products include countermeasures against threats such as electronic detection, lasers and drones. These systems can operate stand-alone or integrate seamlessly with original equipment manufacturer products and battlefield management systems, and all come integrated with TAK. The company also has a new proprietary non-lethal product line branded Para Ops with application across all segments of the non-lethal market, including law enforcement. The company is headquartered in Ottawa, Canada, with operations in Stafford, Va., and representative offices in London, United Kingdom, and Abu Dhabi, United Arab Emirates.

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