Mr. Sean Homuth reports

KWESST MICRO SYSTEMS ANNOUNCES Q1 2024 FINANCIAL RESULTS AND PROVIDES CORPORATE UPDATE

Kwesst Micro Systems Inc. has released the highlights of its fiscal 2024 first quarter results. This announcement is a summary only and should be read in conjunction with Kwesst's unaudited condensed consolidated financial statements and related management discussion and analysis, for the three-month period ended Dec. 31, 2023 (Q1 2024 FS). Q1 2024 FS have been filed on SEDAR+ and will be filed on EDGAR in due course.

In Q1 2024, Kwesst's total revenue and gross profit decreased by $200,000 and $200,000, respectively, in the three-month period versus the comparable prior-year period, driven mainly by a reduction in the sales of Arwen products while the company was restructuring the business line along with additional hours spent on digitization projects than originally anticipated. Kwesst's operating loss increased by 65 per cent compared with the prior-year period due mainly to reaching commercial feasibility for the Para OPS products resulting in the expensing of all related costs in the quarter as compared with the costs being capitalized as development costs in fiscal 2023, along with increased G&A (general and administrative) expenses.

Kwesst Q1 2024, along with its fiscal 2023 performance, reflects the company's strategy of focused investments in key areas: securing large defence contracts and the commercialization of its line of non-lethal munition systems including the Para OPS next-generation non-lethal system, and a new Arwen 40-millimetre munition. Operating expenses for the period increased due to selected impairment charges, corporate headcount growth and compliance-related costs following the company's listing on the Nasdaq. The company has in parallel implemented cost reductions through the elimination of consultant fees and a more focused approach on its R&D (research and development) spending.

"Our strategy is to pursue and win large defence contracts with prime defense contractors for programmatic revenue visibility several years out, while at the same time exploiting book-and-ship business in the public safety market where it is possible to drive sales and where the sales cycle is typically shorter."

For Q1 fiscal 2024, Kwesst's net loss was $400,000. Q1 fiscal 2024 adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) loss was $2.1-million, an increase of $800,000 over the comparable prior period mainly due to decreased revenue as described herein and increased operating expenses driven by increased personnel costs, professional fees, insurance costs, and regulatory and compliance costs. The adjustments to EBITDA loss for Q1 fiscal 2024 included the change in fair value of derivative liabilities. Due to the lower volume of stock-based grants in the last 12 months immediately prior to Dec. 31, 2023, compared with same prior period, this has resulted in a reduction in stock-based compensation expense in the current quarter compared with Q1 fiscal 2023.

Revenue

Total revenue decreased by $200,000 in the first quarter compared with Q1 fiscal 2023, mainly due to reduction in the sale of Arwen products in Q1 2024 compared with Q1 2023 that had an additional $100,000 generated from our digitization business line and $100,000 from the company's non-lethal business line (driven from sale of Arwen products).

The company expects revenue to increase as it continues hiring and deploying resources under the recently announced Canadian government contract which saw revenue commence in Q1 2024. As the transition from the incumbent continues, the company expects to receive, and hire and staff against additional work tasks. Kwesst also expects revenue to increase as the company works through current order backlog from Arwen as well as expected demand/future order for the new Arwen 40 mm ammunition and Para OPS products.

Gross profit

In Q1 fiscal 2024, the gross profit was a negative $100,000, compared with a profit of $200,000 in the same period in 2023. In Q1 2024, on a fixed-price digitization contract the company spents more hours than anticipated and as compared with Q1 2023, resulting in a loss for the three-month period ended Dec. 31, 2023. Also contributing are the indirect costs associated with the ramp-up of the Canadian government contracts. There were no such losses in Q1 2023. The company expects gross profit/margin to be positive and increase during fiscal 2024 as the company ramps up anticipated revenue in the year on the Canadian government as well as the other product lines described herein.

Operating expenses (opex)

Total opex was $2.5-million for Q1 fiscal 2024 compared with $1.7-million in Q1 fiscal 2023 for a total increase of $800,000 over the comparable prior year due to the following factors:

• G&A increased by $400,000, primarily due to the amortization of the LEC intangible in Q1 2024 ($300,000), as well as an increase in senior management and directors compensation to be in line with market and additional personnel as compared with Q1 2023.
• S&M (sales and marketing) increased by less than $100,000, primarily due to an increase in consulting fees in Q1 2024, as compared with Q1 2023.
• R&D increased by $400,000, primarily due to the fact that the LEC has reached commercial feasibility and any associated costs are no longer being capitalized, while it was still in the development stage in Q1 2023.

Other income (expenses), net

For Q1 2024, the company's total other income was $2.1-million, compared with total other expenses of $700,000 for Q1 2023. The change in other income (expenses), net was driven mainly by the $700,000 favourable change in fair value of warrant liabilities as a result of the remeasurement of the warrant liabilities at Dec. 31, 2023, driven by a decrease in the underlying common share price on Dec. 31, 2023. Under IFRS (international financial reporting standards), the company is required to remeasure the warrant liabilities at each reporting date until they are exercised or expired. This was also explained by:

• A $500,000 decrease in net finance costs is primarily due to the Q1 2023 recognition of the remaining unamortized accretion costs and interest expense relating to the repayment of all outstanding loans, following the closing of the United States IPO (initial public offering) and Canadian offering.
• Q1 2023 had $1.4-million in share offering costs relating to the U.S. IPO and Canadian offering. There were no offerings in Q1 2024.
• $200,000 increase in foreign exchange gain due to depreciation in the U.S. currency during the period.

Major highlights -- quarter ended Dec. 31, 2023 (Q1 fiscal 2024)

This is a summary of the major highlights that occurred during the quarter ended Q1 fiscal 2024:

• On Oct. 18, the company announced its Lightning scalable situational awareness solution for public safety market agencies during a critical incident. Kwesst Lightning will improve interoperability between agencies with lightning-fast time to engagement, offered as fully cloud-based software-as-a-service (SaaS) product. Built using the TAK -- the U.S. government Team Awareness Kit software -- at the foundation, the solution addresses the issues of scalability, interoperability and time to engagement while customizing the user experience to meet the demands of the specific mission sets that responders encounter.
• On Oct. 31, the company announced that it intended to issue 46,706 common shares at a deemed price per share of $2.09 in settlement of a debt in an amount of approximately $97,615.
• On Oct. 24, the company announced that it received notice of allowance for the Luxton Low Energy Cartridge (LEC) patent from USPTO and notification that the USPTO will issue the patent Oct. 31, 2023.
• On Nov. 13, the company announced plans to expand its Arwen business, including the introduction of a new 40 mm cartridge for third party riot control launchers, which constitute the bulk of launchers worldwide. In order to scale supply and deliver orders in a more responsive fashion the company announced a planned reorganization of the business to satisfy the backlog of Arwen orders and drive sales growth.

The company also reported on the scale-up of Para OPS production on the heels of successful demonstrations to law enforcement agencies over the summer and fall of 2023.

• On Nov. 27, the company announced its board of directors had appointed Sean Homuth as president and chief executive officer, and Kris Denis as interim chief financial officer and chief compliance officer.
• On Dec. 6, the company announced the appointment of General (retired) Rick Hillier to the board of directors. Gen. Hillier is the former chief of defence staff of the Canadian Armed Forces.
• On Dec. 13, the company announced that its non-lethal Para OPS and Arwen products will be available for law enforcement agencies to purchase on-line (with link from Kwesst website) on Monday, Dec. 18, 2023. Para OPS has been in initial production through the fall of 2023, and the company plans to ramp up for volume production in early calendar 2024 in conjunction with the promotion of Para OPS at the 2024 SHOT Show held in Las Vegas, Jan. 23 to Jan. 26. Kwesst also introduced its new Arwen 40 mm cartridge at the SHOT Show in response to substantial interest from many law enforcement agencies.

This is a summary of major highlights that occurred since Q1 fiscal 2024:

• On Feb. 2, 2024, the company announced that Dave Ibbetson, former general manager of General Dynamics C4 Systems International, and General Dynamics Mission Systems International (GDMS), has been engaged as a strategic defence adviser.
• On Feb. 5, 2024, the company announced highlights from the company's attendance at SHOT Show 2024. This included many law enforcement agencies at the federal, state and local level, plus foreign distributors from Europe, Asia, Latin America and the Middle East, specifically seeking out the company to view the new products. The company has started receiving initial small quantity orders for test and evaluation of its 40 mm baton ammunition as well as requests from various agencies for live demonstrations of the Para OPS products.

Corporate updates

• The company announced the appointment of Harry Webster as chief operating officer effective immediately. Mr. Webster joined the company in August, 2023, as general manager. Mr. Webster is an experienced business leader with over 20 years of experience in aerospace and defence. Harry has held senior leadership positions at General Dynamics, DRS Technologies, and MacDonald Dettwiler and Associates. His leadership has driven successful execution of some of Canada's premiere acquisition programs such as the Canadian Space Agency's Canadarm3 Program and the Canadian Navy's CH-148 Cyclone Maritime Helicopter Program. Additionally, he has a proven record of delivery of advanced products into many of the U.S. Army and Marine Corps' ground combat platforms such as M1A1 Main Battle Tank, the Stryker Family of Vehicles, Bradley Fighting Vehicle, Joint Light Tactical Vehicle and M777 Towed Howitzer. Mr. Webster holds advanced degrees in business administration and engineering, and licenses as professional engineer and project management professional.
• The company anticipates being under subcontract in the next 90 days with a global defence contractor to provide digitization services for a G7 government military program. If successfully concluded, the company anticipates that the subcontract would be of similar scale as the previously announced DSEF contract with the Canadian Department of National Defense (see news release dated May 2, 2023). The outcome and amount of this subcontract remains subject to a series of conditions beyond the company's control.

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 representative offices in London, United Kingdom, and Abu Dhabi, United Arab Emirates.

We seek Safe Harbor.