© 20 21 Fundamental Research Corp. “1 8 + Years of Bringing Undiscovered Investment Opportunities to the Forefront ” www.researchfrc.com September 15 , 2021 K WESST Micro S ystems Inc ( TSXV : KWE / OTCQB: KWEMF ) Launching a New Non - Lethal Firing System - Initiating Coverage BUY Current Price: C $ 2 15 Fair Value: C$4. 28 Risk * : 4 Sector/Industry : Industrial/Defen s e Click here for more research on the company and to share your views YTD 12 M KWE 64 % 179 % TSXV 2 % 2 2 % 52 - Week Range C $ 0. 6 5 – $ 2 68 Shares O/S 4 8 M Market Cap. C $ 1 03 M Current Yield N/A P/E (forward) N/A P/B 19x Key Financial Data (C$) YE Sep 30 2020 (9M) 2021E 2022E Cash $ 3,073,760 $ 1,431,632 $ 1,140,493 Working Capital $ 2,840,654 $ 1,709,217 $ 1,762,595 Total Assets $ 5,507,011 $ 6,895,338 $ 6,609,038 Debt $ - $ - $ - Shareholders' Equity $ 3,856,383 $ 4,409,556 $ 4,401,281 Revenue $ 861,917 $ 1,582,033 $ 5,192,882 Net Income $ - 3,565,259 $ - 7,838,766 $ - 5,008,276 EPS $ - 0.12 $ - 0.16 $ - 0.10 * See last page for important disclosures, rating, and risk definition s . All figures in C $ unless otherwise specified. 0 200000 400000 600000 800000 1000000 1200000 0 0.5 1 1.5 2 2.5 3 Close Volume Highlights ➢ KWESST develops and markets proprietary technologies for applications in personal protection, law enforcement, and the military. ➢ In April 2021, t he company acquired the Low Energy Cartridge (LEC) technology developed by a company controlled by the Executive Chairman , David Luxton LEC has potential to be a breakthrough over existing non - lethal firing systems, which are considered to be dangerous , and are better described as “less lethal” than non - lethal. ➢ The global non - lethal weapons market is estimated to grow at 4.56% p.a. to US$5.67B by 2026 ( reportlinker.com ) Demand for non - lethal weapons is growing due to rising instances of armed violence and protests. G overnments are looking at arm ing their military and police with non - lethal weapons to minimize fatalities and casualties in these events. ➢ Non - lethal weapons are used by law - enforcement, ordinary citizens, and the military. According to management, LEC is superior to air - powered systems, tasers, and pepper spray s in terms of range, maintenance, resistance to malfunction/ damage from heat or cold , number of shots, and a non - lethal projectile velocity of below 400 feet per second ( fps ) vs 550 to 1,500 fps for its competitors ➢ In addition to sales of its firing systems, KWE can generate recurring revenues from ammo sales. ➢ To keep upfront costs low , KWE plans to outsource production in initial years. Distribution and marketing will be primarily done through e - commerce , social media , and influencer s. ➢ The closest comparable to LEC is the Byrna HD /Home Defense ( NASDAQ: BYRN /MCAP of US$6 27M ) air - powered pistol , which generated US$13.40M in revenue in Q2 - 2021, up from just US$0.91M in FY - 2019. ➢ KWE also has other products (targeting military applications) that generat ed revenue of $0.86M in 2020 , and $1.12 M in 2021 (9M) ➢ Key catalysts include upcoming trade shows, and the official launch of LEC at the SHOT Show in Las Vegas in January 2022. Risks ➢ C urrently generates minimal revenue s. ➢ Potential for share dilution through equity financings. ➢ T echnology must be kept up - to - date constantly to remain ahead of the curve. ➢ There is no guarantee that LEC will gain traction. ➢ The company will have to allocate large marketing budgets to captur e market share . BYRNA had spent US$1 M for marketing in 2020. KWESST Price and Volume Company Data Sid Rajeev, B.Tech, MBA , CFA Head of Research Alexis Cabel , B.A.Econ Equity Analyst Equity Research Page 2 of 15 © 20 21 Fundamental Research Corp. “1 8 + Years of Bringing Undiscovered Investment Opportunities to the Forefront ” www.researchfrc.com Went public through a reverse takeover in 2020 T actical and digitization products generated $1.12M in revenue in FY 2021 (9M) ended June 2021 LEC has longer range, low maintenance, resistant to malfunction/ damage from heat and cold, has more shots and payload option s , and is less dangerous Company Background KWESST was incorporated in 2017 , and has offices in Ott a wa and Stafford, Virginia. The company develops and markets proprietary technolog ies for applications in personal protection, law enforcement, and the military. T hree business lines : • Flagship: The non - lethal Low Energy Cartridge (LEC) system is a potential breakthrough technology , with broad application s in law enforcement and personal defence • Tactical and digitization products - current revenue primarily come s from this division ’s main product, Tactical Awareness Sit uational Control System (TASCS). • Counter - measures against threats such as drones (GreyGhost) , lasers , and electronic detection (Phantom) Of the t hree business lines , LEC is considered to have the quickest path to profitability given its shorter sales cycle , broader target market s , and ability to generate recurring sales The other products have long sal es cycles, as they are currently sold through contracts with the U.S. military Low Energy Cartridge (LEC) KWESST acqui red the LEC technology in April 2021 , from DEFSEC Corp ., an Ottawa - based private company owned by David Luxton, KWE’s Executive Chairman. LEC was developed by Mr. Luxton. The company will pay a 7% royalty on sales of LEC to DEFSEC The table below compares LEC with other non - lethal weapons Source : FRC, KWESST and Various LEC Air-Powered Tasers Pepper Spray Range Short to Long Short to Long Short Close Maintenance Low High Low Low Temp-Resist Yes Reliability wanes Yes Yes from cold Shots Multiple Multiple 1 to 2 Multiple Maximum fps <400 550-1,000 NA NA Comparison of Non-Lethal Weapons Equity Research Page 3 of 15 © 20 21 Fundamental Research Corp. “1 8 + Years of Bringing Undiscovered Investment Opportunities to the Forefront ” www.researchfrc.com Byrna and Pepperball’s products are air - powered Bruzer and Defenzia have limited shots of two and four , respectively LEC is low - maintenance , allows m ultiple shots , and is less dangerous compared to the rest Byrna’s own website notes product limitations from cold weather Existing non - lethal weapons are dangerous to user s and assailant s Competitively priced LEC provides spin to the projectile when fired , minimizing force Source : FRC, KWESST and Various A key weakness of air - powered systems is that its parts are made of rubber and synthetic sealants , and O - rings These parts deteriorate over time from h o t and cold temperatures , giving resulting in faster wear and tear. Also, projectile s of some products have high fps velocity that can be lethal Other alternatives such as t asers, pepper sprays, and stun guns are only for close encounters , increasing the probability of disarmament by assailants. LEC has two provisional patents filed and has three main features : 1. A n inexpensive dedicated firing platform - The proprietary LEC system has a firing device that fires only LEC cartridges Although management has not disclosed pricing, they did indicate that their devices will be priced competitively LEC does not contain any gun power. What propels the projectile is a chemical compound inside an energy actuator ( known as a prime r cap ) at the bottom of the cartridge. LEC firing platforms are offered in various designs that replicate the look of a real firearm, or avoid the appearance of a firearm altogether. 2. A low energy cartridge case with velocities and muzzle energy far below the “lethal” threshold - The LEC cartridge generates a lower speed and power far below the “lethal” threshold of 400 feet per second (fps). 3. N on - lethal polymer projectile s for various applications - LEC's soft frangible projectiles come with various payloads, including colour ed marking agent s , inert powder , or a safe but powerful irritant powder that temporarily incapacitates subjects. Company Weapon Shots Projectiles Range (ft) Bruzer Less Lethal ML12 pistol 2 bean bag (40g fabric 15-35 pillow with lead balls) Byrna Technologies, Inc. HD, SD 5 regular round, pepper 60 pistols and rifle Defenzia LLC M09 pistol 4 rubber bullet, pepper 33-90 flash bang (light flash with loud bang sound) Pepperball Technologies, Various multiple regular round, pepper 150 Inc. pistols and rifles KWESST LEC single to regular round, pepper not yet multiple disclosed Comparison of Long Range Non-Lethal Weapons Equity Research Page 4 of 15 © 20 21 Fundamental Research Corp. “1 8 + Years of Bringing Undiscovered Investment Opportunities to the Forefront ” www.researchfrc.com KWE’s p rojectiles are encased in a soft material In comparison, B ryna ’s projectiles have no casing A growing market According to the FBI , U.S. gun sales surged 40% YoY to 39.7M in 2020 Sales were just 25M in 2016 , and 10M in 2006 LEC expected to be classified as a non - lethal weapon before the year - end Here is a link to a video on LEC’s first public live demo Source: Company Market According to reportlinker .com, t he global non - lethal weapons market will have an estimated CAGR of 4.56% from 2021 to 2026. The market is projected to grow from US $ 4.33 B in 2020 , to US $ 5.67 B by 2026. The U S accounted for one - third of the global market in 2020 , especially with p rotests related to Black Lives Matter increas ing the purchase of non - lethal weapons G lobal demand for non - lethal weapons is also growing due to rising instances of armed violence and p rotests. G overnments are looking at arm ing the ir military and police with non - lethal weapons to minimize fatalities and casualties in these events. U nlike guns, purchasing non - lethal weapons does not require permits , license s , waitin g period s , and backg r oun d checks . We note that Canada and some states in the U.S. require permits/registrations/background checks to purchase guns . Air - powered non - lethal weapons , like the Pepperball TCP and Byrna HD , can be directly purchased, and are available in physical and online stores , such as Amazon (NASDAQ: AMZN). LEC ’s classifica tion will be determined by the Bureau of Alcohol, Tobacco, Firearms, and Explosives (ATF) before the end of the year . KWE expect s its products to be classified as a non - lethal device, similar to the Byrna HD and paintball devices. Equity Research Page 5 of 15 © 20 21 Fundamental Research Corp. “1 8 + Years of Bringing Undiscovered Investment Opportunities to the Forefront ” www.researchfrc.com Tradeshows lined up KWE is trading significantly below its competitors C onsumers will be able to pre - order LEC firing platforms and ammo on the KWESST website towards the end of the year. Following the official commercial launch at the SHOT Show in Las Vegas in January 2022, LEC will be available for sale on the company’s website SHO T Show is considered to be one of the biggest firearms - related tradeshows in the world. Sourc e: KWESST Competitors KWESST’s c ompetition for LEC comes from OEMs that manufacture and sell training munitions, less lethal munitions, and high - action gaming equipment (p aintball) Source: FRC / S&P Capital IQ The closest pr ecedent to LEC is Byrna HD Byrna’s devices are priced at US$359. Projectiles are priced at US$29.99 - US$34.99 (30c/round) Byrna launched Byrna HD on February 10, 2019 , in the U.S. The company reported revenues of US$0.92M for the FY - end ed November 2019 , increasing to US$16.5 7 M in FY - 2020 , and US$13.40M in Q2 - 2021 end ed May 2021 They sold 2,640 units in 2019, 46,145 in 2020 , and 37,329 in Q2 - 2021 , reflecting t he strong demand for non - lethal weapons. Byrna primarily use s e - commerce platforms (accounting for 85% of sales) to sell Byrna HD , and initiated its marketing campaign by launching the product in tradeshows in 2019. KWE is a planning to adopt a similar stra tegy. Upcoming Tradeshow Location Defence & Security Equipment International (DSEI) London Association of the United States Army (AUSA) Washington DC SHOT Show Las Vegas Equity Research Page 6 of 15 © 20 21 Fundamental Research Corp. “1 8 + Years of Bringing Undiscovered Investment Opportunities to the Forefront ” www.researchfrc.com Partnering with influencers Launching in January 2022 Business Model and Action Plan As mentioned , KWE will use e - commerce platforms and social media campaigns to market LEC. The company has already partnered with a former police officer and now an influencer, Brandon Tatum, who runs the YouTube channel "The Officer Tatum" with over 1.6M subscribers. He also has more than 3M followers across multiple social media platforms. Mr. Tatum has agreed to act as an advisor , and be an advocate for LEC for law enforcement and personal defense in the U.S. Source: ‘ The Officer Tatum ’ in Y outube KWE recently hired an engineer with a 17 - year track record with Colt (a leading firearms manufacturer) , where he held positions such as R&D Manager and Product Support Engineering Manager T o keep upfront costs low, the company plans to outsourc e production to firearms manufacturers within No rth America. KWESST will also be negotiating with distributors in favorable locations Source: KWESST July Presentation Equity Research Page 7 of 15 © 20 21 Fundamental Research Corp. “1 8 + Years of Bringing Undiscovered Investment Opportunities to the Forefront ” www.researchfrc.com The CEO and the Chairman hold 31% While KWE views the LEC system as its primary driver of revenue in the short - term, the company will continue to pursue contracts with the U.S. and Canadian militaries for its other products. Management and Board Source: Company Filings Brief biographies of the senior management and board members , as provided by the company, follow: Jeff rey MacLeod, Founder, President, CEO & Director Jeff is a former Canadian RCEME officer and served as System Engineer for three major Army Crown Projects before moving to the private sector. For almost twenty years he was General Manager of Diemaco/Colt Canada. He is an expert in the Small Arms and Sold ier Systems field as well as all aspects of manufacturing. He formed KWESST in 2017 to pursue opportunities in the networking and digitization of legacy and future weapons systems. David E. Luxton, Executive Chairman David is a recognized entrepreneur in the defence and security industry. He was formerly an infantry officer and senior official with the Canadian and British governments before leading the global build - out of successive defence and security companies, including Simunition, the world leader in simulated munitions for close - quarters combat training. He led the build - out of Allen - Vanguard, which became a world leader in Counter - IED solutions, where he remains Chairman. He is also former Chairman of United Tactical Systems, a worl d leader in non - lethal munitions systems. Steven Archambault, CFO Mr. Archambault began his career as a CPA, CA, with Ernst & Young LLP, followed by senior finance positions at AXIS Capital, a global insurer and reinsurer, and more recently had CFO roles with small - cap public Canadian companies listed on the TSX Venture Exchange and Canadian Securities Exchange in media broadcasting technology and health and wellness industries. Name Position/(s) # Shares Outstanding % of Total Jeffrey Macleod President & CEO 9,895,244 20.66% David Luxton Executive Chairman 4,640,021 9.69% Paul Mangano Independent Director 321,720 0.67% John McCoach Independent Director 107,413 0.22% Elisabeth Preston Corporate Secretary 20,000 0.04% and Director Paul Fortin Independent Director 5,000 0.01% Total Shares Owned by Directors 14,989,398 31.30% Total Shares Outstanding 47,885,013 Equity Research Page 8 of 15 © 20 21 Fundamental Research Corp. “1 8 + Years of Bringing Undiscovered Investment Opportunities to the Forefront ” www.researchfrc.com Rick Bowes, VP of Operations Prior to his various senior roles with defence contractors such as General Dynamics Canada, DRS Technologies Canada (now Leonardo DRS), ATCO Frontec and ADGA Group Inc., Rick had a distinguished career as a senior officer in the Canadian Army, retiring in 2003 as a Lieutenant Colonel. He is a graduate of Royal Military College of Canada and served in various operational and staff roles in the Canadian military and on secondment to the British Army. As an armour officer, Rick served with various units such as Lord Strathcona’s Horse (Royal Canadians) and the Canadian Airborne Regiment Battle Group across Canada and in deployed operations in Bosnia - Herzegovina with the UN Protection Force and the NATO Stabilization Force (SFOR). Rick was also part of the planning team for Canada’s participation in the NATO Kosovo Force (KFOR) mission in 1999. Jeff Dunn, U.S. Market Development Jeff is former COO of ARTEMIS, Inc., the Naval Service Lead for Rapid Prototyping at Booz Allen Hamilton, and Director Strategic Development at General Atomics Aeronautical Systems. Military service awards include a Bronze Star, a Meritorious Service Medal, a Navy & Marine Corps Commendation Medal and several Navy & Marine Corps Achievement Medals. Jeff spent 20 years as a U.S. Marine AV - 8B Harrier pilot & missio n commander. John McCoach, Independent Director John McCoach retired from full time employment in 2016. At that time he was President, TSX Venture Exchange; a role he held for seven years. John is a director of the Capital Markets Authority Implementation Organization. CMAIO is tasked by The Government of Canada, six provinces and one territory to create a pan Canadian securities commission. He is also the Lead Director, Liberty Defense Holding Ltd. John was a director, and Interim CEO, of Nautilus Mineral s Inc. John is also a director of the Royal Canadian Marine Search and Rescue. Paul Mangano, Independent Director Paul is a thirty - four - year veteran of the high - tech sector. He has an MBA in High Technology from Northeastern University and a BA in Economi cs from Harvard. In 2015, he established Surculus Advisors, a management advisory firm providing strategic advice and leadership to SME companies in the high - tech sector including aerospace and defense. Prior to forming Surculus Advisors, Paul was a Divisi on President at L - 3 Communications (NYSE: LLL). He is former President and Chief Operating Officer of Proterion Corporation. Paul Fortin, Independent Director Paul has held senior business development positions within two of Canada’s largest law firms - Gowlings WLG and more recently Borden Ladner Gervais LLP where he was responsible for the firm’s defense and security as well as international expansion strategi es which encompassed Asia Pacific, United Kingdom, and the United States. His network includes exceptionally strong ties to the defense community and diplomatic defense attach é network, notably with the Equity Research Page 9 of 15 © 20 21 Fundamental Research Corp. “1 8 + Years of Bringing Undiscovered Investment Opportunities to the Forefront ” www.researchfrc.com $1.12M in revenue and $6.43M in net loss es (EPS: - $0.15) in FY2021 (9M); historical revenue came from t actical and digitization products Spent $1.43M on ads and promotion in FY2021 (9M) Healthy balance sheet USA (Air Force, Army, Navy, USMC) , 5 Eyes, Korean, Ukrainian, Israeli and NATO and Middle Eastern (Gulf States). Elisabeth Preston, Director & Corporate Secretary Elisabeth Preston is Chief Legal Counsel for a top tier international defence company with widespread global operations. She is an international business and trade lawyer, with significant transactional experience in many jurisdictions. Her experience sp ans more than thirty years advising companies as an executive in areas relating to governance, cross - border marketing, strategic relationships, major commercial transactions and financings to fund growth. Financials Source: Company Filings, FRC Stoc k O ptions and W arrants 3. 6 7M optio ns (weighted average price $1.0 9 ) , and 15.7 3 M warrants ($0. 90 ) outstanding. 3.42 M options and all of the warrants are in - the - money, implying potential to raise up to $ 16 M if exercised. Equity Research Page 10 of 15 © 20 21 Fundamental Research Corp. “1 8 + Years of Bringing Undiscovered Investment Opportunities to the Forefront ” www.researchfrc.com Assuming sales of 7,500 units in 2022, increasing to 346k units by 2030 (2.25% of the global non - lethal weapons market) DCF valuation of $ 3.84 per share FRC Projections and Valuation Source: FRC Equity Research Page 11 of 15 © 20 21 Fundamental Research Corp. “1 8 + Years of Bringing Undiscovered Investment Opportunities to the Forefront ” www.researchfrc.com KWE is trading at a 55% discount Weighted average fair value of $ 4. 28 per share Assigning a risk rating of 4 (Speculative) Source : S&P Capital IQ and FRC Source : FRC We are initiating coverage with a BUY rating, and a fair value estimate of $ 4 28 per share. The success of KWE relies on its ability to gain traction for LEC units. On paper, we believe KWE’s products have advantages over its competitors The upcoming tradeshows will give us an indication on whether LEC can generate interest from potential customers. Byrna’s track record indicates that KWE will be able to quickly grow revenue if LEC is able to attract customers. We believe KWE will likely h ave to pursue an equity financing next year to pursue an aggressive marketing campaign. Risks We believe the company is exposed to the following risks (list is non - exhaustive): ➢ Currently generates minimal revenues. ➢ Potential for share dilution through equity financings. ➢ Technology must be kept up - to - date constantly to remain ahead of the curve. ➢ There is no guarantee that LEC will gain traction. ➢ The company will have to allocate large marketing budgets to capture ma rket share. Equity Research Page 12 of 15 © 20 21 Fundamental Research Corp. “1 8 + Years of Bringing Undiscovered Investment Opportunities to the Forefront ” www.researchfrc.com Appendix Equity Research Page 13 of 15 © 20 21 Fundamental Research Corp. “1 8 + Years of Bringing Undiscovered Investment Opportunities to the Forefront ” www.researchfrc.com Equity Research Page 14 of 15 © 20 21 Fundamental Research Corp. “1 8 + Years of Bringing Undiscovered Investment Opportunities to the Forefront ” www.researchfrc.com Equity Research Page 15 of 15 © 20 21 Fundamental Research Corp. “1 8 + Years of Bringing Undiscovered Investment Opportunities to the Forefront ” www.researchfrc.com Fundamental Research Corp. Equity Rating Scale: Buy – Annual expected rate of return exceeds 12% or the expected return is commensurate with risk Hold – Annual expected rate of return is between 5% and 12% Sell – Annual expected rate of return is below 5% or the expected return is not commensurate with ris k Suspended or Rating N/A — Coverage and ratings suspended until more information can be obtained from the company regarding recent events. Fundamental Research Corp. Risk Rating Scale: 1 (Low Risk) - The company operates in an industry where it has a str ong position (for example a monopoly, high market share etc.) or operates in a regulated industry. The future outlook is stable or positive for the industry. The company generates positive free cash flow and has a history of pr ofitability. The capital s tructure is conservative with little or no debt. 2 (Below Average Risk) - The company operates in an industry where the fundamentals and outlook are positive. The industry and company are relatively less sensitive to systematic risk than companies with a Risk Rating of 3. The company has a history of profitability and has demonstrated its ability to generate positive free cash flows (though current free cash flow may be negative due to capital investment). The company’s capital structure is conservative with little to modest use of debt. 3 (Average Risk) - The company operates in an industry that has average sensitivity to systematic risk. The industry may be cyclical. Profits and cash flow are sensitive to economic factors although the company has d emonstrated its ability to generate positive earnings and cash flow. Debt use is in line with industry averages, and coverag e ratios are sufficient. 4 (Speculative) - The company has little or no history of generating earnings or cash flow. Debt use is higher. These companies may be in start - up mode or in a turnaround situation. These companies should be considered speculative. 5 (Highly Speculative) - The company has no history of generating earnings or cash flow. They may operate in a new industry with new, and unproven products. Products may be at the development stage, testing, or seeking regulatory approval. These companies may run into liquidity issues and may rely on external funding. These stocks are considered highly speculative. Disclaimers and Disclosure The opinions expressed in this report are the true opinions of the analyst about this company and industry. Any “forward lo oking statements” are our best estimates and opinions based upon information that is publicly available and that we believe to be c orrect, but we have not independently verified with respect to truth or correctness. There is no guarantee that our forecasts will materialize. Actual results will likely vary. A company with related management to FRC owns shares of the subject compa ny, but does not make a market or offer shares for sale of the subject company, and does not have any investment banking business with the sub ject company. The Analyst does not own shares of KWESST . Fees were paid by KWESST to FRC. The purpose of the fee is to subsidize the high costs of research and monitoring. FRC takes steps to ensure independence including setting fees in advance and utilizing analysts who must abide by CFA Institute Code of Ethics and Standards of Prof essional Conduct. Additional ly, analysts may not trade in any security under coverage. Our full editorial control of all research, timing of release of the reports, and rele ase of liability for negative reports are protected contractually. To further ensure independence, KWESST has agreed to a minimum coverage term including an initial report and three updates. Coverage cannot be unilaterally terminated Distribution procedure: our reports are distributed first to our web - based subscribers on the date shown on this report then made available to delayed access users through various other channels for a limited time. The distribution of FRC’s ratings are as follows: BUY (68%), HOLD ( 7 %), SELL / SUSPEND (2 5 %). To subscribe for real - time access to research, visit https://www.researchfrc.com/website/subscribe/ for subscription options. This report contains "forward looking" statements. Forward - looking statements regarding the Company and/or stock’s performance inher ently involve risks and uncertainties that could cause actual results to differ from such forward - looking statements. Factors that would cause or contribute to such differences include, but are not limited to, continued acceptance of the Company's product s/services in the marketplace; acceptance in the marketplace of the Company's new product lines/services; competitive factors ; new product/service introductions by others; technological changes; dependence on suppliers; systematic market risks and other ri sks discussed in the Company's periodic report filings, including interim reports, annual reports, and annual information forms filed with the various securities regulators. By making these forward - looking statements, Fundamental Research Corp. and the a nalyst/author of this report undertakes no obligation to update these statements for revisions or changes after the date of t his report. 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