KWESST Micro Systems (KWE) - 2025 Q2 - Quarterly Report

FINANCIAL STATEMENTS Unaudited Condensed Consolidated Interim Statements of Financial Position The company's financial position at March 31, 2025, shows a significant increase in total assets and shareholders' equity compared to September 30, 2024, primarily driven by a substantial rise in cash and cash equivalents, while current liabilities decreased, improving working capital | Metric | March 31, 2025 (CAD) | September 30, 2024 (CAD) | Change (%) | | :-------------------------- | :--------------------- | :----------------------- | :--------- | | Total Assets | 9,587,489 | 5,617,148 | 70.7% | | Cash and cash equivalents | 4,408,844 | 256,828 | 1610.4% | | Current assets | 6,451,384 | 1,842,355 | 250.2% | | Total Liabilities | 2,804,544 | 4,248,861 | -34.0% | | Current liabilities | 1,563,091 | 2,975,581 | -47.5% | | Total Shareholders' Equity | 6,782,945 | 1,368,287 | 395.7% | | Accumulated deficit | (47,569,880) | (42,653,358) | 11.5% | Unaudited Condensed Consolidated Interim Statements of Net Loss and Comprehensive Loss For the six months ended March 31, 2025, the company reported an increased net loss compared to the prior year, despite a significant rise in revenue, with operating loss decreasing but other expenses, particularly share issuance costs and changes in warrant liabilities, impacting the net loss | Metric (Six Months Ended March 31) | 2025 (CAD) | 2024 (CAD) | Change (%) | | :--------------------------------- | :----------- | :----------- | :--------- | | Revenue | 2,151,820 | 614,932 | 250.0% | | Cost of sales | (1,433,277) | (426,554) | 236.0% | | Gross margin | 718,543 | 188,378 | 281.4% | | Operating loss | (4,562,131) | (5,453,058) | -16.3% | | Share issuance costs | (1,807,686) | - | N/A | | Change in fair value of warrant liabilities | 1,437,396 | 1,497,832 | -4.0% | | Net loss | (4,916,522) | (3,939,176) | 24.8% | | Basic and diluted net loss per share | (16.11) | (144.63) | -88.9% | Unaudited Condensed Consolidated Interim Statements of Changes in Shareholders' Equity Shareholders' equity significantly increased from September 30, 2024, to March 31, 2025, primarily due to substantial share and warrant issuances from public offerings and private placements, which offset the accumulated deficit from net losses | Metric (Six Months Ended March 31, 2025) | Amount (CAD) | | :--------------------------------------- | :----------- | | Balance, September 30, 2024 | 1,368,287 | | Shares issued for public offering | 100,310 | | Shares issued for private placement | 371,154 | | Warrants issued for private placement | 2,394,955 | | Pre-funded warrants issued for public offering | 3,489,393 | | Pre-funded warrants issued for private placement | 4,579,154 | | Share offering costs | (1,835,961) | | Shares issued for debt | 100,000 | | Pre-funded warrants exercised | 789,173 | | Warrants exercised | 360,500 | | Net loss | (4,916,522) | | Balance, March 31, 2025 | 6,782,945 | Unaudited Condensed Consolidated Interim Statements of Cash Flows For the six months ended March 31, 2025, the company experienced a significant net increase in cash and cash equivalents, primarily driven by substantial cash inflows from financing activities, which more than offset the cash used in operating and investing activities | Metric (Six Months Ended March 31) | 2025 (CAD) | 2024 (CAD) | Change (CAD) | | :--------------------------------- | :----------- | :----------- | :----------- | | Net loss | (4,916,522) | (3,939,176) | (977,346) | | Cash flows used in operating activities | (4,851,931) | (4,979,109) | 127,178 | | Cash flows used in investing activities | (58,710) | (69,407) | 10,697 | | Cash flows provided by financing activities | 9,062,657 | (94,759) | 9,157,416 | | Net change in cash and cash equivalents | 4,152,016 | (5,143,275) | 9,295,291 | | Cash and cash equivalents, end of period | 4,408,844 | 263,734 | 4,145,110 | - Significant cash inflows from financing activities in 2025: - Proceeds from U.S. Public Offering-November 2024: $4,871,033 - Proceeds from Private Placement-November 2024: $3,421,635 - Proceeds from Private Placement-February 2025: $3,655,758[7] Notes to the Unaudited Condensed Consolidated Interim Financial Statements 1. Corporate information KWESST Micro Systems Inc. develops next-generation technology solutions for military, public safety, and personal defense markets, aiming to protect and save lives, with its stock listed on TSX-V, Nasdaq, and Frankfurt Stock Exchange, and having undergone two reverse stock splits in 2024 and 2025 - KWESST develops and commercializes next-generation technology solutions for military, public safety agencies, and personal defense markets, with a core mission to protect and save lives[10] - KWESST's common stock is listed on the TSX Venture Exchange (KWE), Nasdaq Capital Market (KWE), and Frankfurt Stock Exchange (62U), while warrants are listed on Nasdaq (KWESW) and TSX-V (KWE.WT.U)[11] - Effected a 10-for-1 reverse stock split on October 23, 2024, and a 21-for-1 reverse stock split on April 23, 2025 (Nasdaq) and April 24, 2025 (TSX-V), with all financial information retrospectively adjusted for these splits[12][13][14][15] 2. Basis of preparation The financial statements are prepared on a going concern basis, despite the company's history of significant losses and negative operating cash flows, with management's strategy focusing on revenue growth, product development, margin improvement, expense management, and securing additional capital to mitigate going concern risks, and the statements complying with IAS 34 and incorporating wholly-owned subsidiaries, with CAD as the functional currency - The financial statements are prepared assuming KWESST will continue as a going concern, despite incurring a $4.9 million net loss and $4.9 million negative operating cash flows for the six months ended March 31, 2025[16][17] Working Capital and Accumulated Deficit | Metric | March 31, 2025 (CAD) | September 30, 2024 (CAD) | | :--------------- | :------------------- | :----------------------- | | Working capital | 4.9 million | (1.1 million) | | Accumulated deficit | 47.6 million | 42.7 million | - The company's strategy to mitigate going concern risks includes focusing on revenue growth, product development, improving gross margin, managing operating expenses, and securing additional capital[18] - These unaudited condensed consolidated interim financial statements have been prepared in accordance with IAS 34, Interim Financial Reporting, as issued by the IASB[21] - KWESST consolidates its wholly-owned subsidiaries, including entities in Canada and the United States, and presents its financial statements in Canadian dollars (CAD), which is the parent company's functional currency[26][27] - Certain comparative figures for net loss and comprehensive loss were reclassified to conform to current period presentation, with no impact on net loss or shareholders' equity[34] 3. Material accounting policies The accounting policies applied during the six months ended March 31, 2025, are consistent with those used in the Annual Financial Statements - The accounting policies in these unaudited condensed consolidated interim financial statements are the same as those applied in the Annual Financial Statements[35] 4. Trade and other receivables Trade and other receivables significantly increased at March 31, 2025, compared to September 30, 2024, primarily driven by a rise in trade receivables, with an impairment of $8,096 recorded for the current period Trade and Other Receivables | Metric | March 31, 2025 (CAD) | September 30, 2024 (CAD) | Change (%) | | :---------------- | :------------------- | :----------------------- | :--------- | | Trade receivables | 997,553 | 455,049 | 119.2% | | Unbilled revenue | 150 | 42,248 | -99.6% | | Sales tax recoverable | 84,161 | 70,578 | 19.2% | | Total | 1,081,864 | 567,875 | 90.5% | - An impairment of trade and other receivables of $8,096 was recorded during the three and six months ended March 31, 2025[36] 5. Inventories Total inventories increased slightly at March 31, 2025, compared to September 30, 2024, mainly due to an increase in raw materials, while finished goods and work-in-progress saw minor decreases, with no impairment of inventories recorded Inventories Breakdown | Metric | March 31, 2025 (CAD) | September 30, 2024 (CAD) | Change (%) | | :-------------- | :------------------- | :----------------------- | :--------- | | Finished goods | 50,538 | 55,754 | -9.4% | | Work-in-progress | 49,416 | 59,519 | -17.0% | | Raw materials | 481,242 | 417,890 | 15.1% | | Total | 581,197 | 533,163 | 9.0% | - No impairment of inventories was recorded during the three and six months ended March 31, 2025[39] 6. Intangible assets Intangible assets decreased from $3,174,832 at September 30, 2024, to $2,725,138 at March 31, 2025, primarily due to amortization, with minor additions, and management concluded no impairment indication at March 31, 2025 Total Intangible Assets | Metric (Intangible Assets) | March 31, 2025 (CAD) | September 30, 2024 (CAD) | Change (%) | | :------------------------- | :------------------- | :----------------------- | :--------- | | Total Intangible Assets | 2,725,138 | 3,174,832 | -14.2% | - Additions to intangible assets totaled $26,675, while amortization amounted to $(476,369) for the period[41] - Management concluded there was no indication of impairment on the intangible assets at March 31, 2025[41] 7. Accounts payable and accrued liabilities Accounts payable and accrued liabilities significantly decreased from $1,660,637 at September 30, 2024, to $1,122,180 at March 31, 2025, driven by reductions in trade payables and accrued liabilities, partially offset by an increase in salary and vacation payable and the establishment of a warranty reserve Accounts Payable and Accrued Liabilities | Metric | March 31, 2025 (CAD) | September 30, 2024 (CAD) | Change (%) | | :-------------------------- | :------------------- | :----------------------- | :--------- | | Trade payable | 383,123 | 881,835 | -56.5% | | Accrued liabilities | 465,498 | 610,558 | -23.7% | | Warranty Reserve | 13,900 | - | N/A | | Salary and vacation payable | 259,659 | 168,244 | 54.3% | | Total | 1,122,180 | 1,660,637 | -32.5% | 8. Related party transactions Outstanding accounts payable and accrued liabilities due to officers and directors decreased significantly from September 30, 2024, to March 31, 2025, and a royalty payment of $200,000 due in April 2025 was paid early to a related party (DEFSEC) in December 2024 for a reduced net payment of $175,000 Related Party Payables | Metric | March 31, 2025 (CAD) | September 30, 2024 (CAD) | Change (%) | | :----------------------------------------- | :------------------- | :----------------------- | :--------- | | Accounts payable and accrued liabilities due to officers and directors | 96,651 | 471,465 | -79.5% | - An LEC royalty payment of $200,000 due in April 2025 was paid early in December 2024 to DEFSEC, a related party, for a reduced net payment of $175,000[43] 9. Contract liabilities Contract liabilities slightly increased from $120,571 at September 30, 2024, to $122,612 at March 31, 2025, with the company recognizing $41,072 of deferred revenue from the beginning of the period and invoicing/deferring $43,113 during the period Contract Liabilities Movement | Metric | March 31, 2025 (CAD) | September 30, 2024 (CAD) | Change (%) | | :-------------------------- | :------------------- | :----------------------- | :--------- | | Balance, beginning of period | 120,571 | 120,970 | -0.3% | | Amounts invoiced and revenue deferred | 43,113 | 108,573 | -60.3% | | Recognition of deferred revenue | (41,072) | (108,972) | -62.3% | | Balance, end of period | 122,612 | 120,571 | 1.7% | 10. Warrant liabilities Warrant liabilities significantly decreased from $847,295 at September 30, 2024, to $177,327 at March 31, 2025, primarily due to the initial recognition of new warrants, subsequent exercises, and a substantial transfer of pre-funded warrants to equity after their exercise price was converted to CAD denomination Warrant Liabilities Movement | Metric (Six Months Ended March 31, 2025) | Amount (CAD) | | :--------------------------------------- | :----------- | | Balance, beginning of period | 847,295 | | Initial recognition | 4,770,722 | | Exercised | (779,578) | | (Gain) Loss on revaluation of financial instruments | (1,437,396) | | Exchange (gain) loss on revaluation | 78,209 | | Extinguish Warrant Liability/Transfer to equity | (3,301,925) | | Balance, end of period | 177,327 | - Warrants are classified as financial liabilities under IFRS because their exercise price is denominated in U.S. dollars, differing from the company's functional currency (CAD)[48][52][57] - On November 12, 2024, pre-funded warrants were converted to CAD denomination, leading to their reclassification from warrant liabilities to equity, extinguishing $3,301,925 in liability[58] 11. Share Capital and Contributed Surplus Share capital and contributed surplus saw significant changes due to multiple public offerings and private placements, debt settlements, and warrant exercises, with the company issuing a substantial number of common shares and warrants, leading to increased share capital and contributed surplus, while also incurring significant share issuance costs Share Capital Movement | Metric (Share Capital) | March 31, 2025 (CAD) | September 30, 2024 (CAD) | | :------------------------------ | :------------------- | :----------------------- | | Balance at period end | 43,197,908 | 37,822,725 | | Issued for U.S. Public Offering | 100,310 | N/A | | Issued for U.S. Private Placement | 371,154 | N/A | | Issued for debt settlements | 100,000 | N/A | | Issued for warrant exercise | 4,967,918 | N/A | | Share issuance costs | (164,199) | N/A | Warrants Outstanding | Metric (Warrants) | March 31, 2025 | September 30, 2024 | | :-------------------------------- | :------------- | :----------------- | | Outstanding warrants | 22,243,051 | 11,600,598 | | Issued warrants | 19,521,653 | N/A | | Exercised warrants | (8,304,200) | N/A | | Expired warrants | (575,000) | N/A | | Weighted average exercise price | $4.00 | $3.23 | - 7,954,200 pre-funded warrants and 350,000 November 2024 Common Warrants were exercised, increasing share capital by $4,700,168[102] - Contributed surplus includes issued broker compensation options and cumulative amortized share-based compensation, with share-based compensation for the six months ended March 31, 2025, being $77,397[105][108] 12. Loss per share The basic and diluted net loss per share for the six months ended March 31, 2025, was $(16.11), an improvement from $(144.63) in the prior year, primarily due to a significant increase in the weighted average number of shares outstanding following multiple share issuances and reverse stock splits, with all dilutive securities being anti-dilutive due to the net loss Net Loss Per Share | Metric (Six Months Ended March 31) | 2025 (CAD) | 2024 (CAD) | | :--------------------------------- | :--------- | :--------- | | Net loss per share (Basic and diluted) | (16.11) | (144.63) | | Weighted average number of shares outstanding | 305,190 | 27,236 | - All dilutive securities (warrants, pre-funded warrants, and stock options) were anti-dilutive for the periods presented due to the net loss incurred[110] 13. Revenue Total revenue for the six months ended March 31, 2025, significantly increased to $2,151,820 from $614,932 in the prior year, primarily driven by strong growth in the Digitization product line, especially in the Canadian market - KWESST generates revenue from the sale of products to its customers[111] Revenue by Product Line and Geography | Metric (Six Months Ended March 31) | 2025 (CAD) | 2024 (CAD) | Change (%) | | :--------------------------------- | :---------- | :---------- | :--------- | | Total Revenue | 2,151,820 | 614,932 | 250.0% | | Major products / service lines: | | | | | Digitization | 1,785,769 | 373,486 | 378.2% | | Non-Lethal | 365,124 | 240,484 | 51.8% | | Primary geographical markets: | | | | | Canada | 2,056,456 | 541,844 | 279.5% | | United States | 95,364 | 73,088 | 30.5% | - Contracted not yet recognized revenue at March 31, 2025, was $109,181, with 100% expected to be recognized over the next 12 months[112] - For the six months ended March 31, 2025, three customers accounted for 64.76%, 9.96%, and 8.27% of revenue[113] 14. Net finance costs Net finance costs for the six months ended March 31, 2025, increased to $93,420 from $74,855 in the prior year, primarily due to higher accretion costs for accrued royalties liability and lease obligations, partially offset by increased interest income Net Finance Costs | Metric (Six Months Ended March 31) | 2025 (CAD) | 2024 (CAD) | Change (%) | | :--------------------------------- | :--------- | :--------- | :--------- | | Accretion cost - accrued royalties liability | 84,826 | 89,931 | -5.7% | | Lease obligations | 23,093 | 37,861 | -39.0% | | Total financing costs | 114,372 | 128,486 | -11.0% | | Interest income | (21,452) | (53,631) | -59.9% | | Net finance costs | 93,420 | 74,855 | 24.8% | 15. Financial instruments The company's financial risks remained largely unchanged, except for foreign currency and liquidity risks, with KWESST exposed to U.S. dollar currency fluctuations due to financing activities and operations, and managing liquidity with $4.4 million in cash and $4.9 million in working capital at March 31, 2025 - KWESST is exposed to U.S. dollar currency risk due to financing activities (public offerings, private placements) and operational transactions (revenues, raw materials) denominated in USD[116] Net US Dollar Exposure | Metric (March 31, 2025) | Amount (CAD) | | :---------------------- | :----------- | | Net US dollar exposure | 2,540,654 | | Impact to profit or loss if 5% movement in the US dollar | 127,033 | - The company recorded a foreign exchange gain of $191,106 for the six months ended March 31, 2025[117] Liquidity Position | Metric (Liquidity) | March 31, 2025 (CAD) | September 30, 2024 (CAD) | | :---------------------- | :------------------- | :----------------------- | | Cash and cash equivalents | 4.4 million | 0.3 million | | Working capital | 4.9 million | (1.1 million) | Contractual Obligations | Contractual Obligations (March 31, 2025) | Total (CAD) | | :--------------------------------------- | :---------- | | Minimum royalty commitments | 2,000,000 | | Accounts payable and accrued liabilities | 1,122,180 | | Lease obligations | 205,589 | | Total | 3,327,769 | 16. Supplemental cash flow information Non-cash working capital items resulted in a cash outflow of $(1,188,324) for the six months ended March 31, 2025, primarily due to increases in trade and other receivables, prepaid expenses, and decreases in accounts payable, with several non-cash items related to share issuance costs and warrant expiry excluded from the cash flow statements Changes in Non-Cash Working Capital | Changes in Non-Cash Working Capital (Six Months Ended March 31) | 2025 (CAD) | 2024 (CAD) | | :------------------------------------------------ | :----------- | :----------- | | Trade and other receivables | (513,989) | (261,971) | | Inventories | (48,034) | (70,451) | | Prepaid expenses and deposits | (154,074) | (118,178) | | Accounts payable and accrued liabilities | (464,191) | 107,564 | | Total | (1,188,324) | (368,103) | - Non-cash items excluded from the cash flow statements for the six months ended March 31, 2025, include shares issued for debt settlement ($100,000), non-cash share issuance costs ($187,468, $221,088, $114,046), and the expiry of 200,000 warrants[120] 17. Commitments and contingencies As of March 31, 2025, there were no commitments and contingencies other than the royalty payment disclosed in Note 15 - There were no commitments and contingencies at March 31, 2025, other than the royalty payment disclosed in Note 15[121] 18. Segmented information KWESST operates as a single operating segment, with its Chairman acting as the chief operating decision maker who evaluates performance and allocates resources at a consolidated level, and all property and equipment located in Canada, except for certain assets no longer held in the United States - KWESST has determined that it has only one operating segment, with its Chairman identified as the chief operating decision maker[122] - At March 31, 2025, all property and equipment are located in Canada, with the right-of-use asset and equipment in the United States no longer held[123] 19. Key management compensation Key management compensation for the six months ended March 31, 2025, significantly increased to $1,354,546 from $618,270 in the prior year, driven by higher short-term compensation and directors' fees Key Management Compensation | Metric (Six Months Ended March 31) | 2025 (CAD) | 2024 (CAD) | Change (%) | | :--------------------------------- | :---------- | :---------- | :--------- | | Short-term key management compensation | 929,583 | 274,167 | 239.1% | | Share-based payments | 49,963 | 59,103 | -15.4% | | Directors' fees | 375,000 | 285,000 | 31.6% | | Total | 1,354,546 | 618,270 | 119.1% | 20. Subsequent Events Subsequent to March 31, 2025, all 2,884,179 pre-funded warrants from the February 2025 Private Placement were exercised, resulting in the issuance of 137,342 common shares, leaving a total of 151,764 pre-funded warrants outstanding - Subsequent to March 31, 2025, all 2,884,179 pre-funded warrants from the February 2025 Private Placement were exercised at $0.021 per common share[125] - These exercises resulted in the issuance of 137,342 common shares, leaving 151,764 total remaining outstanding pre-funded warrants[125]