DEFSEC TECHNOLOGIES — Interim / Quarterly Report 2021

Jan 29, 2021

KWESST MICRO SYSTEMS INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS

Nine months ended September 30, 2020

(Expressed in Canadian Dollars)

DATED: January 28, 2021

All references in this management's discussion and analysis (the ''MD&A'') to ''KWESST'', ''we'', ''us'', ''our'', and the ''Company'' refer to KWESST Micro Systems Inc. and its subsidiary as at September 30, 2020. This MD&A has been prepared with an effective date of January 28, 2021.

Following the completion of the Qualifying Transaction (see below - Overview), the acquiror (KWESST Inc.) changed its fiscal year end from December 31st to September 30th. Accordingly, this MD&A for the nine months ended September 30, 2020 should be read in conjunction with our audited consolidated financial statements for the nine months ended September 30, 2020 (''Fiscal 2020''). The financial information presented in this MD&A is derived from these consolidated financial statements prepared in accordance with International Financial Reporting Standards (''IFRS'') as issued by the International Accounting Standards Board (''IASB''). This MD&A contains forward-looking statements involves risk, uncertainties and assumptions, including statements regarding anticipated developments in future financial periods and our future plans and objectives. There can be no assurance that such information will prove to be accurate, and readers are cautioned not to place undue reliance on such forward-looking statements. See ''Forward-Looking Statements''.

All references to \$ or dollar amounts in this MD&A are to Canadian currency unless otherwise indicated.

Additional information, including press releases, relating to KWESST is available for view on SEDAR at www.sedar.com.

NON-IFRS MEASURES

This MD&A makes reference to certain non-IFRS measures such as "EBITDA'' and "Adjusted EBITDA". These non-IFRS measures are not recognized, defined or standardized measures under IFRS. Our definitions for these non-IFRS measures will likely differ from that used by other companies and therefore comparability may be limited.

EBITDA and Adjusted EBITDA should not be considered a substitute for or in isolation form measures prepared in accordance with IFRS. These non-IFRS measures should be read in conjunction with our annual consolidated financial statements and the related notes thereto as at and for the nine months ended September 30, 2020. Readers should not place undue reliance on non-IFRS measures and should instead view them in conjunction with the most comparable IFRS financial measures. See the reconciliations to these IFRS measures in the ''Reconciliation of Non-IFRS Measures'' section of this MD&A.

GOING CONCERN

As an early-stage company, KWESST has incurred significant losses and negative operating cash flows from inception that have primarily been funded from financing activities. KWESST's audited consolidated financial statements for Fiscal 2020 have been prepared on the "going concern'' basis which presumes that KWESST will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future. While we have raised over \$3.1 million gross proceeds from equity issuances in September 2020, we may need to raise additional capital (debt and/or capital) to fund our business growth strategies over the next 12 months should actual sales for Fiscal 2021 be lower than projected or delayed due to the COVID-19 pandemic. Refer to Note 2(a) of the Fiscal 2020 consolidated financial statements for further information.

FORWARD-LOOKING STATEMENTS

Except for statements of historical fact relating to the Company, certain information contained herein constitutes forward-looking information under Canadian securities legislation. Forward-looking statements include, but are not limited to, statements with respect to the Company's proposed acquisitions and strategy, development

potential and timetable of the Company's products; the Company's ability to raise required funds; conclusions of economic evaluation; the timing and amount of estimated future products and development; costs of research and development; capital expenditures; success of production activities; currency exchange rates; government regulations; and environmental risks. Generally, forward-looking statements can be identified by the use of forward-looking terminology such as "plans", "expects" or "does not expect", "is expected", "budget", "scheduled", "estimates", "forecasts", "intends", "anticipates" or "does not anticipate", or "believes", or variations of such words and phrases or statements that certain actions, events or results "may", "could", "would", "might" or "will be taken", "occur" or "be achieved".

Forward-looking statements are based on the opinions and estimates of management as of the date such statements are made. Estimates regarding the anticipated timing, amount and cost of production activities are based on previous industry experience and regional political and economic stability. Capital and operating cost estimates are based on significant research of the Company, recent estimates of development costs and other factors that are set out herein. Forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may cause the actual results, level of activity, performance or achievements of the Company to be materially different from those expressed or implied by such forward-looking statements, including but not limited to risks related to:

• our expectations regarding our business, financial condition, and results of operations;
• the impact of the ongoing COVID-19 pandemic, including the duration, severity, scope of the outbreak and measures taken by governments and businesses to contain the pandemic;
• our anticipated cash needs over the next 12 months;
• our ability to protect, maintain, and enforce our intellectual property ("IP'') rights;
• our future growth plans, including expansion in international markets;
• the acceptance by our customers and the marketplace of our technologies and system solutions;
• our ability to attract new customers and develop and maintain existing customers;
• our ability to deliver on our marketing and business plans and short-term objectives;
• our ability to attract and retain personnel as well as to obtain required licenses;
• the unexpected events and delays during research and development;
• our ability to generate the anticipated investment returns from acquisitions;
• the future state of the legislative and regulatory regimes, both domestic and foreign, in which we conduct business and may conduct business in the future;
• our ability to raise timely external financing on acceptable terms, when required, to fund our business growth;
• our ability to govern effectively and efficiently as a new public company; and
• anticipated trends and challenges in our business and the markets in which we operate.

Although KWESST's management has attempted to identify important factors that could cause actual results to differ materially from those contained in forward-looking statements, there may be other factors that cause results not to be as anticipated, estimated or intended. There can be no assurance that such statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Accordingly, readers should not place undue reliance on forward-looking statements. KWESST does not undertake to update any forward-looking statements, except in accordance with applicable securities laws.

Refer to the "Risk Factors'' section of this MD&A for material risks and uncertainties relating to our business.

OVERVIEW

Corporate Information and Background

The Company is domiciled in Canada and was incorporated under the Business Corporations Act (British Columbia) on November 28, 2017. It was incorporated for the purposes of becoming a Capital Pool Company ("CPC") as defined in the TSX Venture Exchange ("TSX-V") Policy 2.4. The principal business of the Company was to identify and evaluate businesses and assets with a view to completing a Qualifying Transaction ("QT") pursuant to the policies of the TSX-V – see next section.

The Company's registered office is located at 550 Burrard St., Suite 2900, Vancouver, British Columbia, V6C 0A3, with its corporate office located at 155 Terence Matthews Crescent, Unit #1, Ottawa, Ontario, Canada, K2M 2A8.

Qualifying Transaction and Financing

On September 17, 2020, Foremost Ventures Corp ("Foremost'') completed its Qualifying Transaction ("QT") with KWESST Inc. pursuant to the policies of the TSX-V. Prior to the completion of the QT, Foremost effected a consolidation of its outstanding common shares on the basis of one post-consolidation common share for every 4.67 pre-consolidation common shares. The QT was done by way of a three-cornered amalgamation (the "Amalgamation") pursuant to which, among other things:

• (i) KWESST Inc. amalgamated with a wholly-owned subsidiary of Foremost, incorporated for the purposes of the Amalgamation, pursuant to the provisions of the Business Corporations Act (Ontario),
• (ii) Foremost changed its name to KWESST Micro Systems Inc., and
• (iii) all of the outstanding common shares of KWESST Inc. (the "KWESST Shares") were cancelled and, in consideration therefor, the holders thereof received post-consolidation common shares of KWESST Micro Systems Inc. on the basis of one KWESST Micro System Inc. share for each KWESST Share.

As part of the QT, the subscription receipts issued by KWESST Inc. on July 9, 2020 pursuant to a brokered private placement (the "KWESST Subscription Receipts"), were automatically converted into shares of KWESST. The private placement which was completed through PI Financial Corp. as agent, consisted of 4,409,553 KWESST Subscription Receipts issued at \$0.70 per KWESST Subscription Receipt for gross proceeds of about \$3.1 million before share issuance costs. See "Liquidity and Capital Resources'' section of this MD&A.

Following the QT, there were 41,266,176 shares of KWESST outstanding, of which 40,367,678 were held by the former shareholders of KWESST Inc. (representing approximately 97.8% of the outstanding shares of the Company) and 898,498 were held by the shareholders of Foremost prior to the QT. Accordingly, this transaction was accounted for as a reverse acquisition ("RTO'') where KWESST is the acquirer. As a result, the audited consolidated financial statements and MD&A for the nine months ended September 30, 2020 are a continuation of KWESST Inc.'s business activities. See Note 4(a) of the audited consolidated financial statements for Fiscal 2020.

KWESST's Core Business and Strategy

KWESST's mission is to be a leader in advancing the modern networked capability of soldiers and responders, including the networked Soldier Systems mission of NATO and its allies, with niche application that make a critical difference to safety and effective.

We develop and market proprietary technology for applications in the military and homeland security market. KWESST's core technology has multiple applications based on Micro Integrated Systems and Software Technology ("MIST"), a proprietary integration of miniaturized sensors, optics, ballistics and software that provides an advancement in affordable smart systems and mission capability. Current applications and offerings enable:

(i) real-time networked situational awareness for soldiers and their weapons systems; (ii) smart management of ordinance systems; (iii) solutions for countering drone attacks and countermeasures against weaponized lasers.

Our primary markets are the U.S. military, Canada military and the military of NATO countries. Within that market, certain countries, including the U.S., Turkey, Poland and Germany, have increased military spending. Another trend in the KWESST's market is increased funding for projects related to precision munitions for legacy weapons. We expect KWESST's products will benefit from these trends.

While KWESST is an early-stage company, during Fiscal 2020 we achieved revenue growth of 126% annualized over the prior year and made significant progress in gaining acceptance from a major U.S. military customer for our TASCS IFM system (Tactical Awareness and Situational Control System - Integrated Fires Modules). Following successful trials in Virginia held in September 2020 and in California in November 2020 for our TASCS IFM system on the 81mm mortar platform, the customer awarded a follow-on order of US\$800,000 or approximately \$1.1 million to expand the use of our TASCS IFM system in military exercises at two battalions. This is generally a precursor to wider adoption and formal customer acceptance.

During 2020, we expanded our product offerings with the acquisition of GhostStep® Technology from SageGuild LLC. (see "Acquisitions'' section of the MD&A). This acquisition enables us to offer an electronic decoy to protect ground forces from electronic detection; it is a portable, solider or air deployable electronic battlefield decoy (known as "Phantom'' system). Today, we have a first generation of this Phantom system and we are working on a second generation for further testing by U.S. military anticipated for mid-2021.

Additionally, we continue to work closely with the licensor of the DroneBullet, a drone whose principal function and operation is acting as a projectile to intercept aerial threats using kinetic force. A growing concern for deployed military and police forces is the proliferation of small drones and the potential hazards they pose to troops and the public at large. In many cases, jamming devices do not have the required range to defeat drones before they become a hazard. Using existing weapons systems to defeat small drones has proven relatively ineffective, and most countries are now looking to evaluate "kinetic" solutions to the drone problem. The DroneBullet is an inexpensive standalone capability that is within the financial means of most military and security forces. In late May 2020, the U.S. military issued a request for information on counter drone capability including a kinetic capability. In January 2021, we were invited to submit a white paper to the U.S. Department of Defense in response to its request for information on Kinetic Counter UAS capabilities for its Joint Command Demonstration 1 project.

Because we are a small and agile company, we believe we have the ability to rapidly react to these upcoming requirements and opportunities.

Additional information about KWESST and its product portfolio may be found at KWESST's website: www.kwesst.com.

COVID-19 Impact to Operations

While the COVID-19 pandemic has caused material changes to the global economic, political, and consumer landscape, we have been able to adapt quickly and remain focus on delivering on our key milestones during Fiscal 2020, including successful trials of our TASCS IFM and the completion of the QT. That being said, we are not immune by the impact of a prolonged COVID-19, including lockdowns, as it may impede our ability to do international travels for certain field trials, deployments, testing, data gathering, business development and sales activities due to government-imposed travel restrictions and the health risks that traveling during a time of significant uncertainty and risk would entail. Consequently, this may adversely affect our revenue and cash flows outlook for Fiscal 2021. To reduce this business risk, we are opening a U.S. office in Q2 Fiscal 2021 to accelerate our pursuit for U.S. military opportunities.

Outlook

With the closing of \$3.1 million gross proceeds from our equity raised in September 2020, we are well positioned to further advance our product development during Fiscal 2021, specifically TASCS IFM, DroneBullet, and Phantom systems with the goal of gaining broader customer acceptance by the end of Fiscal 2021.

Shortly after closing the LEC Technology (see "Acquisitions'' section of this MD&A), we will devote resources to commercialize this product in North America by the end of Fiscal 2021.

ACQUISITIONS

To accelerate our growth plans and respond to market opportunities, we have made the following technology acquisitions.

1) GhostStep® Technology

On June 12, 2020, we acquired all the IP rights for the Phantom technology from SageGuild LLC to expand our systems portfolio offerings for protecting soldiers in the battlefield.

The Phantom technology is portable, solider or air deployable electronic battlefield decoy that:

• Deflects, masks friendly force Electro Magnetic (EM) signature with numerous false phantom signatures;
• Spoofs adversaries to draw them out, slow their targeting of friendly forces, and commit and waste assets on phantom targets;
• Authentic emulation of voice, video, data and text signatures of NATO forces;
• Addresses next-generation NATO requirements; and
• Provides simultaneous waveform platform across all communications systems.

The IPs include the following:

• U.S. Patent application serial 16/116,914 filed on August 31, 2018 re Programmable Multi-Waveform RF Generator for Use of Battlefield Decoy;
• U.S. Patent application serial 16/686,095 filed on November 15, 2019 re Programmable Multi-Waveform RF Generator for US as Battlefield Decoy;
• U.S. Patent application serial 62/657,706 filed on April 13, 2018 re Programmable Multi-Waveform RF Generator for Use as Battlefield Decoy;
• Trademark name of "GhostStep";
• All other IP associated with this technology including source code/material, drawings, prototypes, data, algorithms, marketing materials, etc.

As announced on December 30, 2020, the U.S. Patent and Trademark Office ("USPTO'') issued a Notice of Allowance for a second patent covering Phantom to cover 11 additional claims for programmable multi-wave radio frequency generator plus associated tactics, techniques, and procedures ("TTPs'') for deploying our Phantom system. This follows from our October 5, 2020 announcement in which the USPTO issued a Notice of Allowance for a first patent covering 15 claims for a programmable multi-waveform radiofrequency generator capable of broadcasting and emulating all relevant military waveforms to create electronic battlefield decoys that deceive adversaries regarding the location of NATO friendly forces.

We have observed recently requirements for such a "phantom'' capability now appearing in NATO solicitations for future land Electronic Warfare ("EW'') systems, driven by contemporary experience in contested areas where forces have been located and destroyed at scale. We believe our Phantom system is well positioned to address this global market demand.

The total purchase consideration for the Phantom system was approximately \$481 thousands, including \$134 thousands in cash and the balance in shares and warrants. Additionally, we agreed to pay royalties up to USD \$20 million. Refer to Note 4(b) of the audited consolidated financial statements for further financial details.

2) LEC Technology

On June 6, 2020, we entered into a binding letter of agreement with DEFSEC to acquire the proprietary non-lethal munitions technology system referred to as Low Energy Cartridge technology ("LEC Technology'') from DEFSEC. The acquisition includes all IP rights for the LEC Technology. Because we did not close on this transaction by September 30, 2020, this pending transaction is not reflected in KWESST's audited consolidated financial statements for Fiscal 2020.

In January 2021, KWESST's Board of Directors approved this transaction, subject to TSX Venture Exchange (TSX-V) approval.

The LEC Technology is a proprietary non-lethal cartridge-based ordnance system to address four market segments that currently use a variety of dated "non-lethal'' or "less-lethal'' products, each having a vast global market. The four market segments as follows:

• i) Public order (riots and control of dangerous subjects);
• ii) Military and law enforcement training (realistic force-on-force training);
• iii)Personal defence (home, car, boat, RB, camping, hiking); and
• iv) High-action gaming.

With recent events of riots / widespread protests in the U.S. leading to fatalities, we believe this LEC Technology will position us well to address this potentially large market demand for non-lethal weapons.

We plan to complete its first prototype and customer acceptance by mid-summer 2021, with light production with an Original Equipment Manufacturer ("OEM'') by the fourth calendar quarter of 2021.

The purchase consideration for the LEC Technology is 1 million common shares of KWESST and 500,000 share purchase warrants of KWESST at \$0.70 each, as previously agreed on June 6, 2020. The warrants are subject to vesting with 25% on the first anniversary of the closing of the LEC Technology acquisition (only after TSX-V approval) and 25% on each of the subsequent three anniversaries. Additionally, at closing of the acquisition, we will pay \$150,000 as an advance on future royalties. Under the technology purchase agreement, KWESST will pay 7% royalty on annual sales of the LEC Technology, net of taxes, duties, customs brokerage fees, shipping and handling costs, customer credits, discounts and returns, up to a maximum of \$10 million ("Maximum Royalties''). Starting on the second anniversary of the LEC closing date, for each year until the Maximum Royalties have been paid, we agreed to pay the following annual minimum royalty payments:

• a) 2nd anniversary: \$150,000;
• b) 3rd anniversary: \$150,000;
• c) 4th anniversary: \$200,000;
• d) 5th anniversary: \$200,000;
• e) 6th anniversary: \$250,000;
• f) 7th anniversary: \$250,000;
• g) 8th anniversary: \$300,000;
• h) 9th anniversary: \$300,000;
• i) 10th anniversary: \$350,000; and
• j) 11th anniversary: \$350,000

This acquisition constitutes as a related party transaction because DEFSEC is a private company owned by David Luxton, our Executive Chairman. Mr. Luxton recused himself from the Board deliberations and approval of this acquisition.

RESULTS OF OPERATIONS

The following selected financial data has been extracted from the audited consolidated financial statements for Fiscal 2020.

Nine months Twelve months Twelve months
		Three months ended				ended		ended		ended
		September 30,				September 30,		December 31,		December 31,
		2020		2019		2020		2019 (2)		2018
								(restated)
Revenue	\$	212,485	\$	348,530	\$	861,917	\$	509,148	\$	103,457
Cost of sales		95,473		62,420		247,113		85,101		35,462
Gross profit		117,012		286,110		614,804		424,047		67,995
Gross margin %		55.1%		82.1%		71.3%		83.3%		65.7%
Operating expenses		2,473,119		241,896		4,122,629		1,438,376		803,643
Operating loss		(2,356,107)		44,214		(3,507,825)		(1,014,329)		(735,648)
Foreign exchange income (loss)		(4,982)		76,810		(13,937)		(982)		(100)
Gain on governtment grant		-		-		9,096		-		-
Gain on derivatives		207,589		-		29,463		113,178		-
Net finance costs		(42,612)		(18,173)		(82,056)		(245,147)		(121,941)
Net income (loss)	\$	(2,196,112)	\$	102,851	\$	(3,565,259) \$		(1,147,280)	\$	(857,689)
Adjusted EBITDA (1)	\$	(644,735)	\$	44,214	\$	(1,584,785)	\$	(912,186)	\$	(735,648)
Earnings (loss) per share - basic and diluted	\$	(0.07) \$		0.01	\$	(0.12) \$		(0.07) \$		(4,288.45)
Weighted average common shares - basic		33,024,736		18,090,310		30,843,542		17,430,077		200

(1) Adjusted EBITDA is a non-IFRS measure. See ''Non-IFRS Measures"'. See below for ''Reconciliation of Non-IFRS Measure''.

(2) As disclosed in Note 25 of the audited consolidated financial statements for Fiscal 2020, we have restated the 2019 operating expenses and net loss with a favorable adjustment of \$150,000 to correct the accounting for advanced royalties paid to ArielX by KWESST in the fourth quarter of 2019.

Reconciliation of Non-IFRS Measure

We have presented EBITDA and Adjusted EBITDA in this MD&A to provide readers with a supplemental measure of our operating performance and thus highlight trends in our core business that may not otherwise be apparent when relying solely on IFRS financial measure. We believe the securities analysts, investors, and other interest parties frequently use non-IFRS measures in evaluating company's performance. Management also uses non-IFRS measures in order to facilitate operating performance comparisons from period to period, prepare annual operating budgets and assess our ability to meet our capital expenditure and working capital requirements.

In the following table, we have reconciled the EBITDA and Adjusted EBITDA to the most comparable IFRS financial measure.

				Nine months		Twelve months		Twelve months
		Three months ended		ended		ended		ended
		September 30,		September 30,	December 31,		December 31,
	2020 2019		2020	2019			2018
						(restated)
Net loss as reported under IFRS	\$	(2,196,112)	\$ 102,851	\$ (3,565,259)	\$	(1,147,280)	\$	(857,689)
Net finance costs		42,612	18,173	82,056		245,147		121,941
Income tax expense		-	-	-		-		-
Depreciation		25,118	-	125,253		102,143		-
EBITDA		(2,128,382)	121,024	(3,357,950)		(799,990)		(735,748)
Other adjustments:
Non-cash M&A costs		1,514,703	-	1,514,703		-		-
Share-based compensation		171,551	-	283,084		-		-
Gain on derivatives		(207,589)	-	(29,463)		(113,178)		-
Gain on government grant		-	-	(9,096)		-		-
Foreign exchange loss (income)		4,982	(76,810)	13,937		982		100
Adjusted EBITDA	\$	(644,735)	\$ 44,214	\$ (1,584,785)	\$	(912,186)	\$	(735,648)

Revenue and Gross Profit

	Three months ended September 30,	Three months ended September 30,	2019 to 2020	September 30,	Nine months ended	Annualized (1)		Twelve months ended December 31,	2019 to Annualized 2020
	2020	2019	%		2020	2020		2019	%
TASCS systems Other	\$ 203,378 9,107	\$ 338,745 9,785	-40% NM	\$	835,097 26,820	\$ 1,113,462 35,760	\$ \$	472,749 36,399	136% NM
Total revenue	\$ 212,485	\$ 348,530	-39%	\$	861,917	\$ 1,149,222	\$	509,148	126%
Gross profit Gross margin	\$ 117,012 55%	\$ 286,110 82%		\$	614,804 71%		\$	424,047 83%

(1) Annualized is not indicative of actual results for calendar 2020. We have presented annualized figures to facilitate the comparison to the prior year.

NM – not meaningful

On an annualized basis, Fiscal 2020 total revenue increased by 126% over the prior year mainly due to an increase in demonstration sales for our TASCS IFM system with two U.S. military customers. For the most recent quarter, our total revenue decreased by 39% over the comparable prior period. Due to KWESST's early-stage, our revenue will be volatile from quarter to quarter and we expect our revenue will continue to be concentrated with limited number customers over the next 12 months.

Our gross margin was 55% for the three months ended September 30, 2020, compared to 82% for the same period in 2019. For the nine months ended September 30, 2020, our gross margin was 71% compared to 83% for the twelve months ended December 31, 2019. KWESST's gross margin will continue to fluctuate significantly from quarter to quarter, particularly during the pre-commercialization period as we do not capitalize R&D expenses for prototypes that may lead to future sales demonstrations to customers. For this reason, we attempt to recover some of our earlier R&D investment when bidding for new contracts.

Operating Expenses (OPEX)

	Three months	Three months		Nine months		Twelve months	2019 to
	ended	ended	2019 to	ended		ended	Annualized
	September 30,	September 30,	2020	September 30,	Annualized (1)	December 31,	2020
	2020	2019	%	2020	2020	2019	%
M&A costs	\$ 1,479,956	\$ -	NM	\$ 1,561,863	\$ 2,082,484	\$ -	NM
Personnel costs	279,917	155,311	NM	806,880	1,075,840	790,967	36%
Consulting fees	93,574	-	NM	325,237	433,649	130,900	231%
Business development	95,561	-	NM	295,057	393,409	13,500	2814%
Stock-based compensation	171,551	-	NM	283,084	377,445	-	NM
Professional fees	103,861	1,200	NM	190,399	253,865	97,853	159%
Investor relations	130,073	-	NM	177,883	237,177	-	NM
Depreciation and amortization	25,118	-	NM	125,253	167,004	102,143	64%
Travel and conferences	9,639	20,299	-53%	112,360	149,813	64,414	133%
General and administrative (G&A) expenses	48,819	28,415	72%	86,197	114,929	21,273	440%
R&D consulting and material costs, net	15,736	1,032	NM	79,747	106,329	164,526	-35%
Advertising and promotion	474	616	-23%	42,182	56,243	21,549	161%
Insurance	18,840	35,023	-46%	36,487	48,649	31,251	56%
Total operating expenss	\$ 2,473,119	\$ 241,896	922%	\$ 4,122,629	\$ 5,496,836	\$ 1,438,376	282%

(1) Annualized is not indicative of actual results for calendar 2020. We have presented annualized figures to facilitate the comparison to the prior year.

NM – not meaningful

Overall, our OPEX increased by 922% for the three months ended September 30, 2020, and 282% on an annualized basis compared to 2019. Excluding M&A costs, our OPEX increased by 311% for the three months ended September 30, 2020, and 137% on annualized basis compared to 2019. The increase in 2020 reflects the significant investment we have made throughout the organization to position KWESST for success, coupled with one-time costs for taking KWESST public via a QT (see "Acquisitions'' section of this MD&A).

The following table further breaks down our OPEX by function for the three and nine months ended September 30, 2020.

		Three months ended September 30, 2020				Nine months ended September 30, 2020
		Sales &					Sales &
	R&D	Marketing	Corporate		Total	R&D		Marketing Corporate		Total
M&A costs	\$	- - \$	\$	1,479,956	\$ 1,479,956	\$	- - \$	\$ 1,561,863	\$	1,561,863
Personnel costs	231,069	-		48,848	279,917	664,189	-	142,691		806,880
Consulting fees		- -		93,574	93,574		- -	325,237		325,237
Business development	-	95,561		-	95,561	-	295,057	-		295,057
Stock-based compensation	20,354	-		151,198	171,551	80,117	42,700	160,267		283,084
Professional fees		- -		103,861	103,861		- -	190,399		190,399
Investor relations		- -		130,073	130,073		- -	177,883		177,883
Depreciation and amortization	22,606	-		2,512	25,118	112,728	-	12,525		125,253
Travel and conferences	-	9,639		-	9,639	-	112,360	-		112,360
G&A expenses		- -		48,819	48,819		- -	86,197		86,197
R&D consulting and material costs, net	15,736	-		-	15,736	79,747	-	-		79,747
Advertising and promotion	-	474		-	474	-	42,182	-		42,182
Insurance		- -		18,840	18,840		- -	36,487		36,487
Total OPEX as reported under IFRS	\$ 289,765	\$ 105,674	\$	2,077,681	\$ 2,473,119	\$ 936,780	\$ 492,299	\$ 2,693,549	\$	4,122,629
Add back:
SR&ED investment tax credits	60,000	-		-	60,000	127,325	-	-		127,325
Total OPEX, gross	\$ 349,765	\$ 105,674	\$	2,077,681	\$ 2,533,119	\$ 1,064,105	\$ 492,299	\$ 2,693,549	\$	4,249,954
Total OPEX, gross excluding M&A costs	\$ 349,765	\$ 105,674	\$	597,725	1,053,163	\$ 1,064,105	\$ 492,299	\$ 1,131,686		2,688,091
% of total	33%	10%		57%	100%	40%	18%	42%		100%

			Three months ended September 30, 2019		Twelve months ended December 31, 2019
		Sales &				Sales &
	R&D	Marketing	Corporate	Total	R&D	Marketing Corporate		Total
M&A costs	\$	- - \$	\$ -	\$ -	\$	- - \$	\$ -	\$ -
Personnel costs	155,311	-	-	155,311	758,625	-	32,342	790,967
Consulting fees		- -	-	-		- -	130,900	130,900
Business development		- -	-	-	-	13,500	-	13,500
Stock-based compensation		- -	-	-		- -	-	-
Professional fees		- -	1,200	1,200		- -	97,853	97,853
Investor relations		- -	-	-		- -	-	-
Depreciation and amortization		- -	-	-	91,929	-	10,214	102,143
Travel and conferences	-	20,299	-	20,299	-	64,414	-	64,414
G&A expenses		- -	28,415	28,415		- -	21,273	21,273
R&D consulting and material costs, net	1,032	-	-	1,032	164,526	-	-	164,526
Advertising and promotion	-	616	-	616	-	21,549	-	21,549
Insurance		- -	35,023	35,023		- -	31,251	31,251
Total OPEX as reported under IFRS	\$ 156,343	\$ 20,915	\$ 64,638	\$ 241,896	\$ 1,015,080	\$ 99,463	\$ 323,833	\$ 1,438,376
Add back:
SR&ED investment tax credits		- -	-	-		- -	-	-
Total OPEX, gross	\$ 156,343	\$ 20,915	\$ 64,638	\$ 241,896	\$ 1,015,080	\$ 99,463	\$ 323,833	\$ 1,438,376
Total OPEX, gross excluding M&A costs	\$ 156,343	\$ 20,915	\$ 64,638	\$ 241,896	\$ 1,015,080	\$ 99,463	\$ 323,833	\$ 1,438,376
% of total	65%	9%	27%	100%	71%	7%	23%	100%

The following tables further break down our OPEX by function for the three months ended September 30, 2019 and twelve months ended December 31, 2019:

Research & Development ("R&D'')

During the three and nine months ended September 30, 2020, we have recognized \$60,000 and \$127,325, respectively, of Scientific Research and Experimental Development ("SR&ED'') investment tax credits relating to qualified R&D activities in 2019 and first nine months in 2020. We have not recognized any SR&ED investment tax credits in 2019 as management had not yet done the analysis on whether certain R&D projects qualified for the tax credit.

Excluding SR&ED investment tax credits, we increased our R&D investment by \$193,422 or 124% during the three months ended September 30, 2020 compared to same period in 2019. On an annualized basis, R&D investment increased by 40% in 2020 compared to 2019. This increase is consistent with our goals to accelerate product development to commercialization for Fiscal 2021.

As a percentage of total OPEX, excluding SR&ED investment tax credits and M&A costs, R&D accounted for 33% and 40% for the three and nine months ended September 30, 2020, compared to 65% and 71% for the three months ended September 30, 2019 and twelve months ended December 31, 2019. The decrease in percentage is largely due to making investments in investor relations and capital markets to position KWESST to go public in Fiscal 2020. We also began making an investment in our busines development to promote our TASCS systems in the United States.

Sales & Marketing

For the three months ended September 30, 2020, sales and marketing costs increased by \$84,759 or 405% over the same period in 2019. On an annualized basis, sales and marketing costs increased by 560% in Fiscal 2020 over 2019. In 2020, we entered into a consulting agreement with SageGuild LLC (see "Acquisition'' section of this MD&A) to assist us in promoting our TASCS systems in the United States. SageGuild is a U.S. private company with extensive experience in U.S. military contracts.

Corporate

Excluding M&A costs, corporate expenses increased by \$533,087 or 825% for the three months ended September 30, 2020, compared to same period in 2019 and by 366% annualized for Fiscal 2020 over 2019. As previously mentioned, we have significantly invested in positioning KWESST to be a successful public company, which led to higher consulting fees, professional fees, and investor relations costs.

We incurred \$1,479,956 and \$1,561,863 of M&A costs for the three and nine months ended September 30, 2020, respectively, of which \$1,514,703 is non-cash including \$814,702 listing expense associated with the reverse acquisition accounting for the QT. The following table provides a breakdown of our M&A costs:

Total M&A costs	\$ 1,561,863
Professional fees	47,160
Performance share bonus	700,000
Non-cash listing expense (1)	\$ 814,703

(1) See Note 4(a) of Fiscal 2020 consolidated financial statements.

In connection with the QT, we also issued \$700,000 of common shares to two capital market advisors for successfully achieving this milestone in accordance with their respective consulting agreements.

To motivate and retain employees and consultants we have implemented a stock option plan during the first calendar quarter of 2020. For the three and nine months ended September 30, 2020, we incurred a non-cash charge of \$171,551 and \$283,804, respectively, for stock options granted during 2020. Refer to Note 16 of the Fiscal 2020 consolidated financial statements for further information.

Gain on Derivatives

The gain on derivatives relates to the conversion feature of the 2019 Convertible Notes (see Note 15 of the audited consolidated financial statements for Fiscal 2020).

As a result of the QT, all the 2019 Convertible Notes were converted to KWESST's common shares, resulting in the recognition of a gain on derivatives of \$207,409 and \$29,463 for the three and nine months ended September 30, 2020, respectively. During the twelve months ended December 31, 2019, we recognized a positive fair value adjustment on these derivatives of \$113,178.

Net Finance Costs

The following table provides a breakdown of KWESST's net finance costs for the respective periods:

	Three months ended September 30,	Three months ended September 30,	2019 to 2020	Nine months ended September 30,		Annualized (1)		Twelve months ended December 31,	2019 to Annualized 2020
	2020	2019	%		2020		2020	2019	%
Interest expense from:
Lease obligations	\$ 14,548	\$ -	NM	\$	42,805	\$	57,073	\$ 24,523	133%
2019 convertible notes	25,341	14,811	71%		44,899		59,865	179,972	-67%
Related party loans	2,108	-	NM		8,448		11,264	26,363	-57%
Other	2,358	3,362	-30%		5,885		7,847	14,289	-45%
Total interest expense	44,355	18,173	144%		102,037		136,049	245,147	-45%
Interest income	(1,743)	-			(2,454)		(3,272)	-
Gain on termination of lease obligations	-	-			(17,527)		(23,369)	-
Net finance costs	\$ 42,612	\$ 18,173	134%	\$	82,056	\$	109,408	\$ 245,147	-55%

(1) Annualized is not indicative of actual results for calendar 2020. We have presented annualized figures to facilitate the comparison to the prior year.

NM – not meaningful

For the three months ended September 30, 2020, our net finance costs increased by 134% over the same period in 2019 primarily due to the accelerated charge of the deferred accretion expense on the 2019 convertible notes due to the conversion to equity in Fiscal 2020, coupled with a timing issue in recording the related finance charge on the lease obligations and related party loans in 2019 (accrued in the fourth calendar quarter of 2019).

On an annualized basis, for Fiscal 2020 our net finance costs decreased by 55% over 2019. While our finance cost for lease obligations increased by 133% (annualized), this was more than offset by savings from lower finance costs from 2019 convertible notes and related party loans. The significant finance costs in 2019 for the 2019 convertible notes was due to accretion expense charge resulting from converting the 2018 convertible notes to the 2019 convertible notes, coupled with higher related interest expense in 2019. As previously noted, the 2019 convertible notes were converted to KWESST's common shares in September 2020 and therefore no further interest will be incurred going forward. The gain on termination of the former lease is because of de-recognizing the lease obligations and related rights-of-use asset.

Net Loss and Adjusted EBITDA Loss

For the three months ended September 30, 2020, we incurred a net loss of \$2.2 million or \$0.07 per basic share, compared to net income of \$102,851 or \$0.00 per basic share for the same period in 2019.

For the nine months ended September 30, 2020, we incurred a net loss of \$3.6 million or \$0.12 per basic share, compared to the net loss of \$1.1 million or \$0.07 per share for the twelve months ended December 31, 2019.

The significant net loss incurred in Fiscal 2020 was primarily due to scaling-up the company for growth and going public. These results include significant non-cash and non-recurring items and accordingly we have also presented Adjusted EBITDA loss in this MD&A in order to help readers better understand our operating results. For the three and nine months ended September 30, 2020, Adjusted EBITDA loss was \$644,735 and \$1,584,785, respectively, compared to Adjusted EBITDA income of \$44,214 and Adjusted EBITDA loss of \$735,648 for the three months ended September 30, 2019 and twelve months ended December 31, 2019, respectively.

Key Balance Sheet Items

The following table summarizes our financial position:

	September 30,		December 31,
	2020	2019
			(restated) (1)
Assets
Current	\$ 3,994,888	\$	295,493
Non-current	1,512,123		404,594
Total assets	\$ 5,507,011	\$	700,087
Liabilities
Current	\$ 1,154,234	\$	603,446
Non-current	496,394		328,037
Total liabilities	\$ 1,650,628	\$	931,483
Net book value (deficit)	\$ 3,856,383	\$	(231,396)

(1) See Note 25 of the Fiscal 2020 consolidated financial statements.

Current assets increased by \$3.7 million since December 31, 2019 mainly due to the \$3.1 million increase in cash driven by equity raises during Fiscal 2020 (see Liquidity and Capital Resources section of this MD&A). Additionally, trade and other receivables increased by \$259,488 to \$479,291, including \$270,122 owed from the government for sales tax recoverable and SR&ED investment tax credits and prepaid expenses increased by \$387,762 to \$441,837 for D&O insurance and investor relations services.

Non-current assets increased by \$1.1 million since December 31, 2019, mainly due to an increase of \$335,968 in right-of-use assets for a new office lease and \$644,702 investment in intangible assets primarily driven by the acquisition of GhostStep® Technology.

Current liabilities increased by \$550,788 since December 31, 2019, mainly driven by the \$619,587 increase in accounts payable and accrued liabilities. The increase in liabilities is mainly relating to professional fees rendered relating to the QT and investor relation services.

Non-current liabilities increased by \$168,357 since December 31, 2019, mainly due to an increase in lease obligations for the new office; offset partially by the reduction in the 2019 convertible notes due to conversion to KWESST's common shares.

The following table shows a summary of the rights-of-use assets and related obligations as reported in the consolidated financial position:

	September 30,	December 31,
	2020		2019
Right-of-use assets	\$ 520,440	\$	184,472
Lease obligations:
Current	78,358		85,468
Non-current	496,394		117,218
Lease obligations	\$ 574,752	\$	202,686

The right-of-use assets excludes the lease deposit to be returned at the end of the lease. The deposit of \$38,212 was initially recorded at fair value and reported as other under non-current assets. At September 30, 2020, this carrying value was \$22,337.

SUMMARY OF QUARTERLY RESULTS

The following tables summarize selected results for the eight most recent completed quarters to September 30, 2020.

	2019 Q4	2020 Q1	2020 Q2	2020 Q3
Revenue	\$ 3,743	\$ 48,959	\$ 600,473	\$ 212,485
Cost of sales	\$ 7,887	\$ 8,104	\$ 143,536	\$ 95,473
Gross profit	\$ (4,144)	\$ 40,855	\$ 456,937	\$ 117,012
Gross margin %	-110.7%	83.4%	76.1%	55.1%
Operating expenses	\$ 505,537	\$ 577,436	\$ 1,072,075	\$ 2,473,119
Operating loss	\$ (509,681)	\$ (536,581)	\$ (615,138)	\$ (2,356,107)
Other income (expenses)	\$ (117,808)	\$ (107,953)	\$ (109,475)	\$ 159,995
Net income (loss)	\$ (627,489)	\$ (644,534)	\$ (724,613)	\$ (2,196,112)
Adjusted EBITDA (loss)	\$ (511,083)	\$ (483,765)	\$ (447,189)	\$ (644,735)
Earnings (loss) per share - basic and diluted	\$ (0.03)	\$ (0.02)	\$ (0.02)	\$ (0.07)
Weighted average common shares - basic	20,767,543	28,715,236	30,743,298	33,024,736

	2018 Q4	2019 Q1	2019 Q2	2019 Q3
Revenue	\$ 24,232	\$ 10,178	\$ 146,697	\$ 348,530
Cost of sales	\$ 9,753	\$ 9,669	\$ 5,125	\$ 62,420
Gross profit	\$ 14,479	\$ 509	\$ 141,572	\$ 286,110
Gross margin %	59.8%	5.0%	96.5%	82.1%
Operating expenses	\$ 266,425	\$ 458,364	\$ 232,579	\$ 241,896
Operating loss	\$ (251,946)	\$ (457,855)	\$ (91,007)	\$ 44,214
Other income (expenses)	\$ (30,652)	\$ (80,238)	\$ 6,458	\$ 58,637
Net income (loss)	\$ (282,598)	\$ (538,093)	\$ (84,549)	\$ 102,851
Adjusted EBITDA (loss)	\$ (251,946)	\$ (354,310)	\$ (91,007)	\$ 44,214
Earnings (loss) per share - basic and diluted	\$ (1,412.99)	\$ (0.06)	\$ (0.00)	\$ 0.01
Weighted average common shares - basic	200	9,750,600	17,200,200	18,090,310

Quarterly Results Trend Analysis

Our historical quarterly operating results have been volatile because we are an early-stage company. Since KWESST's incorporation in late 2017, we have devoted significant energy to developing our proprietary TASCS system, our signature app and snap-on weapon adaptor that enables real-time streaming of situational awareness data of any kind from any source, including drones, direct to smart devices and operational assets, for a common operating picture and networked engagement. During 2018 and 2019, we have also invested significant time in doing demonstrations of our early prototypes to U.S. customers which led to entering into two teaming agreements with AeroVironment Inc. and ManTech International Corporation. These agreements led to more meaningful revenues in the second half of 2019 and the last two quarters of Fiscal 2020.

The general trend of increased quarterly operating expenses reflects the investments being made to grow our business (an increase headcount and facility costs). In the last two quarters of Fiscal 2020, operating costs jumped primarily as a result of higher professional fees incurred for patents and trademarks, share-based compensation, investor relations costs and going public related costs.

Over the next 12 months, we expect continued volatility in our quarterly revenue, operating results, and cash flows for the foreseeable future as we continue to invest in our product development and bring products to market during Fiscal 2021.

LIQUIDITY AND CAPITAL RESOURCES

We have financed our operations to date through the issuance of common shares. To fund KWESST business growth, we may need to raise additional capital through various means including the issuance of equity and/or debt during Fiscal 2021.

Our approach to managing liquidity is to ensure, to the extent possible, that we always have sufficient liquidity to meet our liabilities as they come due. We do so by continuously monitoring cash flow and actual operating expenses.

KWESST's cash position increased to \$3.1 million at September 30, 2020, from \$21,615 at December 31, 2019, primarily due to approximately \$3.1 million gross proceeds from the concurrent financing upon closing the QT and approximately \$1.1 million gross proceeds from private placements during the nine months ended September 30, 2020 (see Note 16 of the audited consolidated financial statement for additional disclosure). This was partially offset by operating losses for this same period.

Our principal cash requirements are for working capital and R&D investments. KWESST's working capital as at September 30, 2020 was \$2.8 million.

The following table provides a summary of cash inflows and outflows by activity:

	Nine months	Twelve months
	ended	ended
	September 30,	December 31,
	2020	2019
Cash inflow (outflow) by activity:
Operting activities	\$ (1,791,654)	\$ (1,093,556)
Investing activities	(390,972)	(20,190)
Financing acitivities	5,234,771	1,135,361
Net cash inflows	\$ 3,052,145	\$ 21,615

Cash used by operating activities

As an early-stage company, we continued to invest significantly across our organization during the nine months ended September 30, 2020. Despite the 126% revenue growth over 2019 (on an annualized basis), it was not sufficient to cover our investment in personnel, business development and R&D, in addition to non-recurring professional fees relating to going public. Accordingly, this resulted in negative operating cash flows of \$1.8 million in Fiscal 2020, compared to negative \$1.1 million for twelve months in 2019.

Cash used by investing activities

During 2020, we made significant investments to our product development through R&D (building prototypes) and technology acquisition. At September 30, 2020, we capitalized \$163,230 of prototype assets for a future sale demonstration to a U.S. customer. As previously mentioned under the "Acquisitions'' section of this MD&A, we acquired the GhostStep® Technology from SageGuild LLC. The purchase consideration was principally in the form of KWESST common shares and share purchase warrants; however, it also included cash consideration of \$134,192. We have also invested in property and equipment and made a lease deposit during Fiscal 2020. Partially offsetting these cash outflows was \$78,589 cash acquired from the QT. Accordingly, these transactions resulted in negative investing cash flows of \$390,972 in Fiscal 2020, compared to negative \$20,190 for the twelve months in 2019.

Cash provided by financing activities

In the fourth quarter of 2019, we raised approximately \$1 million through issuance of common shares in a nonbrokered private placement. We continued to leverage from the strong market interest in KWESST's common stock during Fiscal 2020 by raising approximately \$5.4 million through issuances of common shares, including \$3.1 million from the brokered private placement upon closing the QT, and issuance of convertible notes. These convertible notes were also converted to KWESST's common shares upon closing of the QT. While our total share offering costs amounted to \$699,886 in Fiscal 2020, only \$164,716 was paid in cash with the balance settled in common shares and warrants. Our cash position also benefited from \$40,000 borrowings under the COVID-19 loan program and \$60,549 of exercised stock options. Partially offsetting these cash inflows, we repaid partially \$80,000 in related party loans and \$58,188 in lease obligations. Accordingly, these transactions resulted in a net cash generated by financing activities of \$5.2 million for the nine months ended September 30, 2020, compared to \$1.1 million for the twelve months ended December 31, 2019.

Contractual Commitments and Obligations

Our operating lease commitments are primarily for office premises, which will expire in March 2026. We have committed to minimum annual royalty payments to AerialX for its licensed drone (see Note 24(a) of the Fiscal 2020 consolidated financial statements).

At September 30, 2020, KWESST's contractual obligations and commitments were as follows:

Payment due:	Total	Within 1 Year	1 to 3 years	3 to 5 years
Minimum royalty commitments	\$ 1,550,000	\$ 150,000	\$ 500,000	\$ 900,000
Lease obligations	764,775	127,830	254,805	382,140
Accounts payable and accrued liabilities (1)	818,274	818,274	-	-
Borrowings (2)	40,000	-	40,000	-
Total with third parties	3,173,049	1,096,104	794,805	1,282,140
Related party loans	218,276	218,276	-	-
Total contractual obligations	\$ 3,391,325	\$ 1,314,380	\$ 794,805	\$ 1,282,140

(1) \$63,950 of these liabilities were subsequently settled in KWESST's common shares (see Outstanding Share Information below)

(2) While we expect to repay by December 31, 2022 to take advantage of the 25% forgivable amount, we have reflected the full loan amount.

The above table does not include the minimum annual royalty payments that will be due to DEFSEC once the acquisition has been approved by the TSX-V (see "Acquisitions'' section of this MD&A). Subsequent to September 30, 2020, we have increased our COVID-19 borrowings from \$40,000 to \$60,000, in which if repaid by December 31, 2022, \$20,000 shall be forgiven. We intend to repay this debt by this date to take advantage of the \$20,000 debt forgiveness.

Our estimated normalized monthly cash burn rate is approximately \$260,000 or \$3.1 million per annum.

As a result of the above working capital at September 30, 2020, subsequent capital raise (see below Outstanding Share Information) and the \$1.1 million follow-on sales order awarded in December 2020, KWESST has significant capital to finance its working capital requirements and contractual obligations over the next 12 months. However, we may need to raise additional capital (debt and/or equity) to accelerate our business strategies over the next 12 months should our actual sales for Fiscal 2021 be lower than projected or delayed due to the COVID-19 pandemic.

OFF-BALANCE SHEET ARRANGEMENTS

We have no off-balance sheet arrangements that have or are reasonably likely to have, a current or future effect on our results of operations, financial condition, revenues or expenses, liquidity, capital expenditures or capital resources.

RELATED PARTY TRANSACTIONS

We did not have any transactions during the nine months ended September 30, 2020 and the twelve months ended December 31, 2019 between KWESST and a related party outside normal course of business.

Refer to Note 10 of the Fiscal 2020 consolidated financial statements for comprehensive disclosure about KWESST's related party transactions in the normal course of business.

FINANCIAL INSTRUMENTS AND OTHER INSTRUMENTS

We recognize financial assets and liabilities when we become party to the contractual provisions of the instrument. On initial recognition, financial assets and liabilities are measured at fair value plus transaction costs directly attributable to the financial assets and liabilities, except for financial assets or liabilities at fair value through profit and loss, whereby the transactions costs are expensed as incurred.

Refer to Note 20 of the Fiscal 2020 consolidated financial statements for comprehensive disclosure on our financial instruments.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Refer to Note 2(f) of the Fiscal 2020 consolidated financial statements for a discussion of the accounting policies and estimates that are critical to the understanding of our business operations and the results of our operations.

OUTSTANDING SHARE INFORMATION

At September 30, 2020, our authorized capital consists of an unlimited number of common shares with no stated par value.

The following table shows the changes in common shares, options, and warrants since September 30, 2020 to the date of this MD&A:

	September 30,				January 27,
	2020	Exercised	Granted	Issued	2021
Common shares	41,266,176			825,812	42,091,988
Warrants	9,585,050	(250,000)			9,335,050
Stock options	2,018,714	(484,456)	1,652,500		3,186,758
Total securities	52,869,940	(734,456)	1,652,500	825,812	54,613,796

The common share issuances relate to exercised warrants and stock options, coupled with 91,356 common shares for debt settlement of \$63,950. Since September 30, 2020, we raised \$300,957 from exercised stock options and we have granted 1,652,500 stock options to employees, directors and consultants at exercise price ranging from \$0.70 to \$1.72 each.

RISK FACTORS

KWESST is exposed to risks and uncertainties in our business, including the following significant risk factors:

Risks Relating to the Company's Business

The Company currently has limited financial history and operating cash flow

Since incorporation in 2017, the Company has limited financial activity and negative cash flow from operations and has financed operations in great part through equity financing. There can be no certainty that the Company will ever achieve or sustain profitability or positive cash flow from its operating activities. In addition, the Company's working capital and funding needs may vary significantly depending upon a number of factors including, but not limited to:

• progress of the Company's manufacturing, licensing, and distribution activities;
• collaborative license agreements with third parties;
• opportunities to license-in beneficial technologies or potential acquisitions;
• potential milestone or other payments that the Company may make to licensors or corporate partners;
• technological and market consumption and distribution models or alternative forms of proprietary technology for game-changing applications in the military and homeland security market that affect the Company's potential revenue levels or competitive position in the marketplace;
• the level of sales and gross profit;
• costs associated with production, labour and services costs, and the Company's ability to realize operation and production efficiencies;
• fluctuations in certain working capital items, including product inventory, short-term loans, and accounts receivable, that may be necessary to support the growth of the Company's business; and
• expenses associated with litigation.

Early Stage

The Company is an early stage company and as such, the Company is subject to many risks including under-capitalization, cash shortages, and limitations with respect to personnel, financial and other resources and the lack of revenue. There is no assurance that the Company will be successful in achieving a return on shareholders' investment and the likelihood of success must be considered in light of its early stage of operations. The Company's prospects must be considered speculative in light of the risks, expenses, and difficulties frequently encountered by companies in their early stages of operations, particularly in the highly competitive and rapidly evolving markets in which the Company operates. To attempt to address these risks, the Company must, among other things, successfully implement its business plan, marketing, and commercialization strategies, respond to competitive developments, and attract, retain, and motivate qualified personnel. A substantial risk is involved in investing in the Company because, as a smaller commercial enterprise that has fewer resources than an established company, the Company's management may be more likely to make mistakes, and the Company may be more vulnerable operationally and financially to any mistakes that may be made, as well as to external factors beyond the Company's control.

The Company May Not be Able to Successfully Execute its Business Plan

The execution of the Company's business plan poses many challenges and is based on a number of assumptions. The Company may not be able to successfully execute its business plan. If the Company experiences significant cost overruns, or if its business plan is more costly than it anticipates, certain activities may be delayed or eliminated, resulting in changes or delays to its current plans as set out under the heading Milestones and Business of the Company Also, the Company may be compelled to secure additional funding (which may or may not be available or available at conditions unfavorable to the Company) to execute its business plan. The Company cannot predict with certainty its future revenues or results from its operations. If the assumptions on which its revenues or expenditures forecasts are based change, the benefits of the Company's business plan may change as well. In addition, the Company

may consider expanding its business beyond what is currently contemplated in its business plan. Depending on the financing requirements of a potential business expansion, the Company may be required to raise additional capital through the issuance of equity or debt. If the Company is unable to raise additional capital on acceptable terms, it may be unable to pursue a potential business expansion.

Uncertainty of Revenue Growth

There can be no assurance that the Company can generate substantial revenue growth, or that any revenue growth that is achieved can be sustained. Revenue growth that the Company has achieved or may achieve may not be indicative of future operating results. In addition, the Company may increase further its operating expenses in order to fund higher levels of research and development, increase its sales and marketing efforts and increase its administrative resources in anticipation of future growth. To the extent that increases in such expenses precede or are not subsequently followed by increased revenues, the Company's business, operating results and financial condition will be materially adversely affected.

The Company may not be able to fully develop its products or to successfully commercialize them, which could prevent it from ever becoming profitable.

If the Company cannot successfully fully develop, manufacture and successfully commercialize its products. If the Company experiences difficulties in the development process, such as capacity constraints, quality control problems or other disruptions, the Company may not be able to fully develop market-ready commercial products at acceptable costs, which would adversely affect the Company's ability to effectively enter the market. A failure by the Company to achieve a low-cost structure through economies of scale or improvements in cultivation and manufacturing processes would have a material adverse effect on the Company's commercialization plans and the Company's business, prospects, results of operations and financial condition. If the current marketing strategy of the Company fails, prospects for revenues will be negatively affected.

There is no assurance that the Company's products will be accepted in the marketplace and that it will turn a profit or generate immediate revenues.

There is no assurance as to whether the Company's products will be accepted in the marketplace. While the Company believes its products address customer needs, the acceptance of its products may be delayed or not materialize. The Company has incurred and anticipates that it will continue to incur substantial expenses relating to the development of its products, the marketing of its products and initial operations of its business. The revenues and possible profits of the Company will depend upon, among other things, the Company successfully marketing its products to clients, results of operations, cash flow, financial condition, and operating and capital requirements. There is no assurance that revenues and profits will be generated.

Negative Operating Cash Flow

Although the Company expects to become profitable, there is no guarantee that will happen, and the Company may never become profitable. The Company currently has a negative operating cash flow and may continue to have that for the foreseeable future. To date, the Company has generated limited revenues and a large portion of its expenses are fixed, including expenses related to facilities, equipment, contractual commitments and personnel. As a result, the Company expects its net losses from operations to improve. The Company's ability to generate additional revenues and potential to become profitable will depend largely on its ability to manufacture and market its products. There can be no assurance that

any such events will occur or that the Company will ever become profitable. Even if the Company achieves profitability, it cannot predict the level of such profitability. If the Company sustains losses over an extended period of time, it may be unable to continue our business.

Dependence on Key Suppliers

The Company may be able to purchase certain key components of its products from a limited number of suppliers. Failure of a supplier to provide sufficient quantities on favorable terms or on a timely basis could result in possible lost sales or uncompetitive product pricing.

Product Liability

The Company may be subject to proceedings or claims that may arise in the ordinary conduct of the business, which could include product and service warranty claims, which could be substantial. If its products fail to perform as warranted and it fails to quickly resolve product quality or performance issues in a timely manner, sales may be lost and it may be forced to pay damages. Any failure to meet customer requirements could materially affect its business, results of operations and financial condition. Product liability for the Company is a major risk as some of its products will be used by military personnel in theaters-of-war. The occurrence of product defects and the inability to correct errors could result in the delay or loss of market acceptance of its products, material warranty expense, diversion of technological and other resources from its product development efforts, and the loss of credibility with customers, manufacturer's representatives, distributors, value-added resellers, systems integrators, original equipment manufacturers and end-users, any of which could have a material adverse effect on the Company's business, operating results and financial conditions.

The Company will be reliant on information technology systems and may be subject to damaging cyber-attacks.

The Company utilizes third parties for certain hardware, software, telecommunications and other IT services in connection with its operations. The Company's operations depend, in part, on how well it and its suppliers protect networks, equipment, IT systems and software against damage from a number of threats, including, but not limited to, cable cuts, damage to physical plants, natural disasters, intentional damage and destruction, fire, power loss, hacking, computer viruses, vandalism and theft. The Company's operations also depend on the timely maintenance, upgrade and replacement of networks, equipment, IT systems and software, as well as pre-emptive expenses to mitigate the risks of failures. Any of these and other events could result in information system failures, delays and/or increase in capital expenses. The failure of information systems or a component of information systems could, depending on the nature of any such failure, adversely impact the Company's reputation and results of operations. The Company has not experienced any material losses to date relating to cyber-attacks or other information security breaches, but there can be no assurance that the Company will not incur such losses in the future. The Company's risk and exposure to these matters cannot be fully mitigated because of, among other things, the evolving nature of these threats. As a result, cyber security and the continued development and enhancement of controls, processes and practices designed to protect systems, computers, software, data and networks from attack, damage or unauthorized access is a priority. As cyber threats continue to evolve, the Company may be required to expend additional resources to continue to modify or enhance protective measures or to investigate and remediate any security vulnerabilities.

In certain circumstances, the Company's reputation could be damaged.

Damage to the Company's reputation can be the result of the actual or perceived occurrence of any number of events, and could include any negative publicity, whether true or not. Reputational risk for the Company is a major risk as some of its products will be used by military personnel in theaters-ofwar. The increased usage of social media and other web-based tools used to generate, publish and discuss user-generated content and to connect with other users has made it increasingly easier for individuals and groups to communicate and share opinions and views regarding the Company and its activities, whether true or not. Although the Company believes that it operates in a manner that is respectful to all stakeholders and that it takes care in protecting its image and reputation, the Company does not ultimately have direct control over how it is perceived by others. Reputation loss may result in decreased investor confidence, increased challenges in developing and maintaining community relations and an impediment to the Company's overall ability to advance its projects, thereby having a material adverse impact on financial performance, financial condition, cash flows and growth prospects.

Strategic Alliances

The Company relies upon, and expects to rely upon, strategic alliances with OEMs for the manufacturing and distribution of its products. There can be no assurance that such strategic alliances can be achieved or will achieve their goals.

Marketing and Distribution Capabilities

In order to successfully commercialize its products, the Company must continue to develop its internal marketing and sales force with technical expertise and with supporting distribution capabilities or arrange for third parties to perform these services. In order to successfully commercialize any of its products, the Company must have an experienced sales and distribution infrastructure. The continued development of its sales and distribution infrastructure will require substantial resources, which may divert the attention of its management and key personnel and defer its product development and commercialization efforts. To the extent that the Company enters into marketing and sales arrangements with other companies, its revenues will depend on the efforts of others. These efforts may not be successful. If the Company fails to continue to develop substantial sales, marketing and distribution channels, or to enter into arrangements with third parties for those purposes, it will experience delays in product sales.

Health and Safety

Health and safety issues related to its products may arise that could lead to litigation or other action against the Company or to regulation of certain of its product components. Health and safety risks for the Company are major risks as some of its products will be used by military personnel in theaters-ofwar and by its employees during testing and demonstrations to potential customers. The Company may be required to modify its technology and may not be able to do so. It may also be required to pay damages that may reduce its profitability and adversely affect its financial condition. Even if these concerns prove to be baseless, the resulting negative publicity could affect the Company's ability to market certain of its products and, in turn, could harm its business and results from operations.

The Company's Results of Operations are Difficult to Predict and Depend on a Variety of Factors

There is no assurance that the production, technology acquisitions, and the commercialization of proprietary technology for game-changing applications in the military and homeland security market

will be managed successfully. Any inability to achieve such commercial success could have a material adverse effect on the Company's business, financial condition, operating results, liquidity, and prospects. Operating results also fluctuate due to accounting practices which may recognize the acquisition and sale of products in different periods than the recognition of related revenues, which may occur in later periods. In addition, the comparability of results may be affected by changes in accounting guidance or changes in the Company's ownership of certain assets. Accordingly, the results of operations from year to year may not be directly comparable to prior reporting periods. As a result of the foregoing and other factors, the results of operations may fluctuate significantly from period to period, and the results of any one period may not be indicative of the results for any future period.

Protecting and Defending Against Intellectual Property Claims May Have a Material Adverse Effect on the Company's Business

The Company's ability to compete depends, in part, upon successful protection of its intellectual property. The Company has to date primarily relied on trade secrets to protect its technology, which is inherently risky. In the future, the Company may attempt to protect proprietary and intellectual property rights to its technologies through available copyright and trademark laws, patents and licensing and distribution arrangements with reputable international companies in specific territories and media for limited durations. Despite these precautions, existing copyright, trademark and patent laws afford only limited practical protection in certain countries where the Company distributes its products. As a result, it may be possible for unauthorized third parties to copy and distribute the Company's products or certain portions or applications of its intended products, which could have a material adverse effect on its business, financial condition, operating results, liquidity, and prospects.

Litigation may also be necessary to enforce the Company's intellectual property rights, to protect its trade secrets, or to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement or invalidity. Any such litigation, infringement or invalidity claims could result in substantial costs and the diversion of resources and could have a material adverse effect on the Company's business, financial condition, operating results, liquidity, and prospects.

The Company Faces Risks from Doing Business Internationally

The Company commercialization strategies for its products include sales efforts outside Canada and deriving revenues from international sources. As a result, the Company's business is subject to certain risks inherent in international business, many of which are beyond its control.

These risks may include:

• laws and policies affecting trade, investment and taxes, including laws and policies relating to the repatriation of funds and withholding taxes, and changes in these laws;
• anti-corruption laws and regulations such as the Foreign Corrupt Practices Act that impose strict requirements on how the Company conducts its foreign operations and changes in these laws and regulations;
• changes in local regulatory requirements, including restrictions on content and differing cultural tastes and attitudes;
• international jurisdictions where laws are less protective of intellectual property and varying attitudes towards the piracy of intellectual property;
• financial instability and increased market concentration of buyers in foreign markets;

• the instability of foreign economies and governments;

• fluctuating foreign exchange rates;

• the spread of communicable diseases in such jurisdictions, which may impact business in such jurisdictions; and
• war and acts of terrorism.

Events or developments related to these and other risks associated with international trade could adversely affect the Company's revenues from non-Canadian sources, which could have a material adverse effect on its business, financial condition, operating results, liquidity, and prospects. Protection of electronically stored data is costly and if the Company's data is compromised in spite of this protection, the Company may incur additional costs, lost opportunities, and damage to its reputation.

The Company maintains information in digital form as necessary to conduct its business, including confidential and proprietary information and personal information regarding its employees.

Data maintained in digital form is subject to the risk of intrusion, tampering, and theft. The Company develops and maintains systems to prevent this from occurring, but it is costly and requires ongoing monitoring and updating as technologies change and efforts to overcome security measures become more sophisticated. Moreover, despite the Company's efforts, the possibility of intrusion, tampering, and theft cannot be eliminated entirely, and risks associated with each of these acts remain. In addition, the Company provides confidential information, digital content and personal information to third parties when it is necessary to pursue business objectives. While the Company obtains assurances that these third parties will protect this information and, where appropriate, monitor the protections employed by these third parties, there is a risk that data systems of these third parties may be compromised. If the Company's data systems or data systems of these third parties are compromised, the Company's ability to conduct its business may be impaired, it may lose profitable opportunities or the value of those opportunities may be diminished and it may lose revenue as a result of unlicensed use of its intellectual property. A breach of the Company's network security or other theft or misuse of confidential and proprietary information, digital content or personal employee information could subject the Company to business, regulatory, litigation, and reputation risk, which could have a materially adverse effect on its business, financial condition, and results of operations.

The Company Incurs Expenditures in Foreign Currency and Does Not Hedge Against Foreign Currency Risks

The Company operates in Canada and the United States (and eventually internationally) and is therefore exposed to foreign exchange risk arising from transactions denominated in a foreign currency. The operating results and the financial position of the Company are reported in Canadian dollars but a portion, possibly a significant portion, of expected revenues, could be in U.S. dollars or other currencies. The fluctuations of the United States dollar and other currencies as the operating currency in relation to the Canadian dollar will, consequently, have an impact upon the reporting results of the Company and may also affect the value of the Company's assets and liabilities.

Dependence on Management and Key Personnel

The Company's success depends largely upon the continued services of its executive officers and other key employees. From time to time, there may be changes in the Company's executive management team resulting from the hiring or departure of executives, which could disrupt its business. If the Company is unable to attract and retain top talent, its ability to compete may be harmed. The Company's success is also highly dependent on its continuing ability to identify, hire, train, retain and motivate highly qualified

personnel. Competition for highly skilled executives and other employees is high in the Company's industry, especially from larger and better capitalized defence and security companies. The Company may not be successful in attracting and retaining such personnel. Failure to attract and retain qualified executive officers and other key employees could have a material adverse effect on its business, prospects, financial condition, results of operations, and cash flows.

Conflicts of Interest

Certain of the directors, officers, and other members of management of the Company serve (and may in the future serve) as directors, officers, and members of management of other companies and therefore, it is possible that a conflict may arise between their duties as a director, officer or member of management of the Company and their duties as a director, officer or member of management of such other companies. The directors and officers of the Company are aware of the existence of laws governing accountability of directors and officers for corporate opportunity and requiring disclosures by directors of conflicts of interest and the Company will rely upon such laws in respect of any directors' and officers' conflicts of interest or in respect of any breaches of duty by any of its directors or officers. All such conflicts will be disclosed by such directors or officers in accordance with the BCBCA and they will govern themselves in respect thereof to the best of their ability in accordance with the obligations imposed upon them by law.

It May Not Be Possible for Foreign Investors to Enforce Actions Against the Company, and its Directors and Officers

The Company is a corporation organized under the laws of the Province of British Columbia, and its subsidiary the Company, is organized under the laws of Ontario. All of the Company's directors and executive officers reside principally in Canada. Because all or a substantial portion of the Company's assets and the assets of these persons are located in Canada, it may not be possible for foreign investors, including United States investors, to effect service of process from outside of Canada upon the Company or those persons. Furthermore, it may not be possible to enforce against the Company foreign judgments obtained in courts outside of Canada based upon the civil liability provisions of the securities laws or other laws in those jurisdictions.

Any Disruption at the Company's Places of Business Could Delay Revenues or Increase its Expenses

Most of the Company's operations are conducted at locations in Ontario. The Company maintains a significant business development operation in the U.S., through its relationship with SageGuild, as described under the header KWESST Acquisition. A natural disaster, such as a fire, flood or earthquake, could cause substantial delays in the Company's operations, damage or destroy its offices, and cause the Company to incur additional expenses.

In addition, because the Company does not maintain "key person" life insurance on any of its executive officers, employees or consultants, any delay in replacing such persons, or an inability to replace them with persons of similar expertise, would have a material adverse effect on the Company's business, financial condition, and results of operations.

Coronavirus (COVID-19)

As of the date of this MD&A, markets, governments and health organizations around the world are working to contain the outbreak of the coronavirus (COVID-19). COVID-19 presents a wide range of

potential issues or complications for the Company, most of which the Company is not able to know the full extent of at the time of this Form. The following is a summary of what the Company believes may impact their business as a result of COVID-19: disruptions to business operations resulting from quarantines of employees, customers and third-party service providers in areas affected by the outbreak; disruptions to business operations resulting from travel restrictions, including travel to industry tradeshows; and uncertainty around the duration of the virus' impact. At the time of this MD&A it is unclear as to whether COVID-19 represents a material disruption of the Company's business.

The Company's Systems are Vulnerable to Damage and Failure

Despite the implementation of security measures and backup storage, the Company's internal computer systems are vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war, and telecommunication and electrical failure. Any system failure, accident or security breach that causes interruption in the Company's operations could result in a material disruption of its projects. To the extent that any disruption or security breach results in a loss or damage to the Company's data or applications, or inappropriate disclosure of confidential or proprietary information, the Company may incur liability as a result. In addition, the Company's technology program may be adversely affected and the further development of its technology may be delayed. The Company may also incur additional costs to remedy the damages caused by these disruptions or security breaches.

Business Interruptions Could Adversely Affect Office Operations

The Company's operations are vulnerable to outages and interruptions due to fire, floods, power loss, telecommunications failures, and similar events beyond its control. Although the Company has developed certain plans to respond in the event of a disaster, there can be no assurance that they will be effective in the event of a specific disaster. Although the Company currently carries business interruption insurance for potential losses (including earthquake-related losses), there can be no assurance that such insurance will be sufficient to compensate the Company for losses that may occur or that such insurance may continue to be available on affordable terms. Any losses or damages incurred by the Company could have a material adverse effect on its business and results of operations.

The Company is Subject to Risks Associated with Possible Acquisitions, Licensing, Business Combinations, or Joint Ventures

While to date the Company has mainly focused on developing its own products, from time to time, the Company could be engaged in discussions and activities with respect to possible business and/or technology acquisitions or licensing, sale of assets, business combinations, or joint ventures with the view of either complementing or expanding the Company's internally developed products. These acquisitions and licensing activities are not crucial to the Company's long-term business success. The anticipated benefit from any of the transactions the Company may pursue may not be realized as expected. Regardless of whether any such transaction is consummated, the negotiation of a potential transaction and the integration of the acquired business or technology, acquired or licensed, could incur significant costs and cause diversion of management's time and resources. Any such transaction could also result in impairment of goodwill and other intangibles, development write-offs, and other related expenses. Such transactions may pose challenges in the consolidation and integration of information technology, accounting systems, personnel, and operations. The Company may have difficulty managing the combined entity in the short term if it experiences a significant loss of management personnel during the transition period after a significant acquisition. The Company may also have difficulty managing the

product development and commercialization following a technology acquisition or licensing. No assurance can be given that expansion, licensing or acquisition opportunities will be successful, completed on time, or that the Company will realize expected operating efficiencies, cost savings, revenue enhancements, synergies or other benefits. Any of the foregoing could have a material adverse effect on the business, financial condition, operating results, liquidity, and prospects of the Company.

Claims Against the Company Relating to Any Acquisition, Licensing or Business Combination May Necessitate Seeking Claims Against the Seller for which the Seller May Not Indemnify the Company or that May Exceed the Seller's or Licensor's Indemnification Obligations

There may be liabilities assumed in any technology acquisition or licensing or business combination that the Company did not discover or that it underestimated in the course of performing its due diligence. Although a seller or licensor generally will have indemnification obligations to the Company under a licensing, acquisition or merger agreement, these obligations usually will be subject to financial limitations, such as general deductibles and maximum recovery amounts, as well as time limitations. There is no assurance that the Company's right to indemnification from any seller or licensors will be enforceable, collectible or sufficient in amount, scope or duration to fully offset the amount of any undiscovered or underestimated liabilities that the Company may incur. Any such liabilities could have a material adverse effect on the business, financial condition, operating results, liquidity, and prospects of the Company.

Growth May Cause Pressure on the Company's Management and Systems

The Company's future growth may cause significant pressure on its management, and its operational, financial, and other resources and systems. The Company's ability to manage its growth effectively will require the company to implement and improve its operational, financial, manufacturing, and management information systems, hire new personnel and then train, manage, and motivate these new employees. These demands may require the hiring of additional management personnel and the development of additional expertise within the existing management team. Any increase in resources devoted to production, business development, and distribution efforts without a corresponding increase in the Company's operational, financial, and management information systems could have a material adverse effect on its business, financial condition, and results of operations.

Risks Relating to the Company's Industry

Rapid Technological Development

The markets for the Company's products are characterized by rapidly changing technology and evolving industry standards, which could result in product obsolescence or short product life cycles. Accordingly, the Company's success is dependent upon its ability to anticipate technological changes in the industries it serves and to successfully identify, obtain, develop and market new products that satisfy evolving industry requirements. There can be no assurance that the Company will successfully develop new products or enhance and improve its existing products or that any new products and enhanced and improved existing products will achieve market acceptance. Further, there can be no assurance that competitors will not market products that have perceived advantages over the Company's products or which render the products currently sold by the Company obsolete or less marketable.

The Company must commit significant resources to developing, testing and demonstrating new products before knowing whether its investments will result in products the market will accept. To remain competitive, the Company may be required to invest significantly greater resources than currently anticipated in research and development and product enhancement efforts, and result in increased operating expenses.

Competition

The Company's industry is highly competitive and composed of many domestic and foreign companies. The Company has experienced and expects to continue to experience, substantial competition from numerous competitors whom it expects to continue to improve their products and technologies. Competitors may announce and introduce new products, services or enhancements that better meet the needs of end-users or changing industry standards, or achieve greater market acceptance due to pricing, sales channels or other factors. Competitors may be able to respond more quickly than the Company to changes in end-user requirements and devote greater resources to the enhancement, promotion and sale of their products. Potential competitors to the Company may include large and very-well capitalized defense and security contractors.

Regulation

The Company is subject to numerous federal, provincial, state and local environmental, health and safety legislation and measures relating to the manufacture of ammunition. There can be no assurance that the Company will not experience difficulties with its efforts to comply with applicable regulations as they change in the future or that its continued compliance efforts (or failure to comply with applicable requirements) will not have a significant material adverse effect on the Company's business, including results of operations, business, prospects and financial condition. The Company's continued compliance with present and changing future laws could restrict the Company's ability to modify or expand its facilities or continue production and could require the Company to acquire costly equipment or to incur other significant expense.

Intellectual Property

The Company's ability to compete effectively will depend, in part, on its ability to maintain the proprietary nature of its technology and manufacturing processes. The Company has to date primarily relied on trade secrets to protect its technology, which is inherently risky. Although the Company considers certain of its product designs as well as manufacturing processes involving certain of its products to be proprietary, patents or copyrights do not protect all design and manufacturing processes. the Company has adopted procedures to protect its intellectual property and maintain secrecy of its confidential business information and trade secrets. However, there can be no assurance that such procedures will afford complete protection of such intellectual property, confidential business information and trade secrets. There can be no assurance that the Company's competitors will not independently develop technologies that are substantially equivalent or superior to the Company's technology. Furthermore, there can be no assurance that any patents filed by the Company will be allowed or granted. To protect the Company's intellectual property, it may become involved in litigation, which could result in substantial expenses, divert the attention of its management, cause significant delays and materially disrupt the conduct of its business.

Infringement of Intellectual Property Rights

At this stage, the Company has elected to protect its technology and products as trade secrets as opposed to seeking to patent its technology and products. The Company may, in future, elect to seek patent protection for some of its future products. While the Company believes that its products and other intellectual property do not infringe upon the proprietary rights of third parties, its commercial success depends, in part, upon the Company not infringing intellectual property rights of others. A number of the Company's competitors and other third parties have been issued or may have filed patent applications or may obtain additional patents and proprietary rights for technologies similar to those utilized by the Company. Some of these patents may grant very broad protection to the owners of the patents. The Company has not undertaken a review to determine whether any existing third-party patents or the issuance of any third-party patents would require the Company to alter its technology, obtain licenses or cease certain activities. The Company may become subject to claims by third parties that its technology infringes their intellectual property rights due to the growth of products in its target markets, the overlap in functionality of those products and the prevalence of products. The Company may become subject to these claims either directly or through indemnities against these claims that it provides to end-users, manufacturer's representatives, distributors, value-added resellers, system integrators and original equipment manufacturers. Litigation may be necessary to determine the scope, enforceability and validity of third-party proprietary rights or to establish the Company's proprietary rights. Some of its competitors have, or are affiliated with companies having, substantially greater resources than the Company and these competitors may be able to sustain the costs of complex intellectual property litigation to a greater degree and for a longer period of time than the Company. Regardless of their merit, any such claims could be time consuming to evaluate and defend, result in costly litigation, cause product shipment delays or stoppages, divert management's attention and focus away from the business, subject the Company to significant liabilities and equitable remedies, including injunctions, require the Company to enter into costly royalty or licensing agreements and require the Company to modify or stop using infringing technology.

The Company may be prohibited from developing or commercializing certain technologies and products unless it obtains a license from a third party. There can be no assurance that it will be able to obtain any such license on commercially favorable terms or at all. If it does not obtain such a license, it could be required to cease the sale of certain of its products.

Global Economic Turmoil and Regional Economic Conditions in the United States Could Adversely Affect its Business

In addition to the risks pertaining to COVID-19 disclosed above, global economic turmoil may cause a general tightening in the credit markets, lower levels of liquidity, increases in the rates of default and bankruptcy, levels of intervention from the United States federal government and other foreign governments, decreased consumer confidence, overall slower economic activity, and extreme volatility in credit, equity, and fixed income markets. A decrease in economic activity in the United States or in other regions of the world in which the Company does business could adversely affect demand for its products, thus reducing its revenues and earnings. A decline in economic conditions could reduce sales of the Company's products.

Risks Relating to the Company's Financial Condition

The Company Faces Substantial Capital Requirements and Financial Risk

To be successful, the Company's business requires a substantial investment of capital. The production, acquisition, and distribution of proprietary technology for game-changing applications in the military and homeland security market requires substantial capital. A significant amount of time may elapse between the Company's expenditure of funds and the receipt of revenues. This may require a significant portion of funds from equity, credit, and other financing sources to fund the business. There can be no assurance that these arrangements will continue to be successfully implemented or will not be subject to substantial financial risks relating to the production, acquisition, and distribution of proprietary technology for game-changing applications in the military and homeland security market. In addition, if demand increases through internal growth or acquisition, there may be an increase to overhead and/or larger up-front payments for production and, consequently, these increases bear greater financial risks. Any of the foregoing could have a material adverse effect on the Company's business, financial condition, operating results, liquidity, and prospects.

Additional Capital Requirements

The Company may need to engage in equity or debt financings to secure additional funds. If the Company raises additional funds through further issuances of equity or convertible debt securities, the Company's existing shareholders could suffer significant dilution, and any new equity securities the Company issues could have rights, preferences, and privileges superior to those of holders of the Company Shares. Any debt financing secured by the Company in the future could involve restrictive covenants relating to its capital-raising activities and other financial and operational matters, which might make it more difficult for it to obtain additional capital and to pursue business opportunities.

The Company can provide no assurance that sufficient debt or equity financing will be available on reasonable terms or at all to support its business growth and to respond to business challenges and failure to obtain sufficient debt or equity financing when required could have a material adverse effect on its business, prospects, financial condition, results of operations, and cash flows.

The Company expects to incur short-term losses and generate negative cash flow until it can produce sufficient revenues to cover its costs. The Company may never become profitable. Even if it does achieve profitability, the Company may be unable to sustain or increase its profitability in the future. For the reasons discussed in more detail below, there are substantial uncertainties associated with the Company achieving and sustaining profitability. The Company expects its cash reserves will be reduced due to future operating losses and working capital requirements, and it cannot provide certainty as to how long its cash reserves will last or that it will be able to access additional capital if and when necessary.

Any Additional Equity Financings May Be Dilutive to the Company's Existing Stockholders

If sufficient capital is not available, the Company may be required to delay, reduce the scope of, eliminate or divest one or more of its assets or products, any of which could have a material adverse effect on the Company's business, financial condition, prospects, or results of operations.

The Company Has Broad Discretion Over the Use of Net Proceeds

The Company will have broad discretion over the use of the net proceeds from any future capital raises. Because of the number and variability of factors that will determine the Company's use of such proceeds,

the ultimate use might vary substantially from the planned use. Investors may not agree with how the Company allocates or spends the proceeds from future capital raises. The Company may pursue collaborations that ultimately do not result in an increase in the market value of the common shares and that instead increase the Company's losses.

Currency Fluctuations

Fluctuations in the exchange rate between the United States dollar, other currencies and the Canadian dollar may have a material effect on the Company's results of operations. To date, the Company has not engaged in exchange rate-hedging activities. To the extent that the Company may seek to implement hedging techniques in the future with respect to its foreign currency transactions, there can be no assurance that the Company will be successful in such hedging activities.

Stress in the global financial system may adversely affect the Company's finances and operations in ways that may be hard to predict or to defend against

Recent events have demonstrated that businesses and industries throughout the world are very tightly connected to each other. Thus, events seemingly unrelated to the Company, or to its industry, may adversely affect its finances or operations in ways that are hard to predict or defend against. For example, credit contraction in financial markets may hurt the Company's ability to access credit when it is needed or rapid changes in foreign exchange rates may adversely affect financial results. Finally, a reduction in credit, combined with reduced economic activity, may adversely affect businesses and industries that collectively constitute a significant portion of the Company's customer base. As a result, these customers may need to reduce their purchases of the Company's products, or there may be greater difficulty in receiving payment for the products that these customers purchase from the Company. Any of these events, or any other events caused by turmoil in world financial markets, may have a material adverse effect on the business, operating results, and financial condition.

Insurance and Uninsured Risks

The Company's business is subject to a number of risks and hazards including industrial accidents, labour disputes and changes in the regulatory environment. Such occurrences could result in damage to equipment, personal injury or death, monetary losses and possible legal liability. Although the Company maintains liability insurance in amounts which it considers adequate, the nature of these risks is such that liabilities might exceed policy limits, the liabilities and hazards might not be insurable, or the Company may elect not to insure against such liabilities due to high premium costs or other reasons, in which event the Company could incur significant costs that could have a materially adverse effect upon its financial position. The Company products will be used by military personnel in theaters-of-war and by its employees during testing and demonstrations to potential customers, which is inherently risky.

Risks Relating to the Ownership of Company Shares

Market Price of Company Shares and Volatility

The market price for the Company Shares may be volatile and subject to wide fluctuations in response to numerous factors, many of which are beyond the Company's control, including, but not limited to, the following: (i) actual or anticipated fluctuations in the Company's quarterly results of operations; (ii) recommendations by securities research analysts; (iii) changes in the economic performance or market valuations of other issuers that investors deem comparable to the Company; (iv) departure of executive

officers and other key personnel of the Company; (v) issuances or anticipated issuances of additional Company Shares; (vi) significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving the Company or its competitors; and (vii) news reports relating to trends, concerns, technological or competitive developments, regulatory changes and other related issues in the Company's industry or target markets. Financial markets have historically experienced significant price and volume fluctuations that have particularly affected the market prices of equity securities of public entities and that have, in many cases, been unrelated to the operating performance, underlying asset values or prospects of such entities. Accordingly, the market price of the Company Shares may decline even if the Company's operating results, underlying asset values or prospects have not changed. Additionally, these factors, as well as other related factors, may cause decreases in asset values that are deemed to be other than temporary, which may result in impairment losses. There can be no assurance that continuing fluctuations in price and volume will not occur. If such increased levels of volatility and market turmoil continue for a protracted period of time, the trading price of the Company Shares may be materially adversely affected.

No Assurance of Active Market for Shares

KWESST Shares are listed on the TSX-V since September 22, 2020. There can be no assurance that an active and liquid market for the Company Shares will be maintained. Approximately 17.2 million or 40.8% of the outstanding Company Shares are currently subject to regulatory escrow imposed by the TSXV in connection with the Amalgamation. These escrow will gradually be lifted over a period ending on September 18, 2024.

If an active public market is not maintained, shareholders of the Company may have difficulty selling the Company Shares.