KWESST Announces Completion of Volume Production Ramp-Up for Arwen Cartridges Through Outsourcing with Ammunition Manufacturer to Meet Growing Demand

Rhea-AI Summary

KWESST Micro Systems has completed its volume production ramp-up for ARWEN cartridges through outsourcing to a Canadian ammunition manufacturer. The company has successfully completed characterization testing of its new 40mm baton round, expanding beyond its historical 37mm cartridge offering. The company is currently shipping evaluation quantities to agencies in the U.S. and Canada.

Additionally, KWESST's subsidiary has secured a receivables facility agreement with a US-based global financing company, providing up to $250,000 CAD in funding. The facility advances 80% upfront with a 2.5% rate for the first thirty days and 1% for each subsequent ten days, to 20% of the funded receivable value.

Positive

• Successful completion of volume production ramp-up for ARWEN cartridges
• Expansion of product line with new 40mm baton round
• Secured non-dilutive financing facility up to $250,000 CAD

Negative

• High financing costs with 2.5% rate for first 30 days and 1% per 10 days thereafter
• financing facility at only 80% of receivables value

Insights

Financial Analyst

The announcement reveals two significant operational developments: production scaling through outsourcing and a new $250,000 CAD financing facility. The outsourcing strategy for ARWEN cartridge production to a Canadian ammunition manufacturer demonstrates operational efficiency and scalability. The financing facility, while providing working capital, comes at a notable cost with a 2.5% initial rate and additional 1% per 10-day fees, capped at 20% of receivable value. The 80% upfront funding with 20% fee deposit structure suggests tight cash management needs. While the non-dilutive nature is positive, the relatively high financing costs indicate potential cash flow pressures. The expansion into 40mm cartridges could open new market opportunities, but the immediate financial impact remains to be proven.

Defense Industry Analyst

The strategic expansion from 37mm to 40mm ARWEN cartridge production marks a significant market positioning move. The 40mm format's compatibility with existing third-party platforms substantially expands the addressable market. Successful characterization testing by an independent ballistics laboratory adds credibility and could accelerate agency adoption. The outsourcing to a Canadian ammunition manufacturer suggests improved production economics and scalability. Early customer engagement through evaluation shipments to U.S. and Canadian agencies indicates promising market interest. However, the need for receivables financing suggests extended sales cycles typical in government contracting, which could impact near-term revenue recognition.

• Company also establishes financing facility for its programmatic military contracts

Ottawa, Ontario--(Newsfile Corp. - October 23, 2024) - KWESST Micro Systems Inc. (NASDAQ: KWE) (NASDAQ: KWESW) (TSXV: KWE) ("KWESST" or the "Company") today announced it has completed its plan to ramp up volume production of ARWEN cartridges, including the new 40mm baton round following successful characterization testing by a recognized ballistics laboratory.

The ARWEN system is long-established in the law enforcement community and was designed as an alternative to lethal force for maintaining public order in the event of riots and civil unrest during protests and demonstrations.

Historically, the Company has offered a 37mm cartridge that fires from its ARWEN launchers. In a move to expand the market for ARWEN branded products and to leverage the large installed base of third-party 40mm firing platforms, KWESST announced and showcased a new 40mm baton cartridge at the annual SHOT Show in January, 2024. Live fire demonstrations at the SHOT Show Range Day and other events since then have demonstrated the notable performance of the new 40mm baton cartridge.

On the heels of these demonstrations KWESST initiated formal characterization testing of the new 40mm cartridge as well as field testing with selected agencies and is currently shipping evaluation quantities to a number of agencies in the U.S. and Canada. "We've taken our time to get this right and we are very encouraged at the formal test results and early customer reaction," said Homuth.

"To ramp up for high rate production we have now transitioned outsourced assembly of the 37mm baton cartridge to a Canadian ammunition manufacturer and will shortly do the same with the new 40mm cartridge now that characterization testing has been completed by an independent ballistic test laboratory," said Sean Homuth, KWESST President and CEO.

KWESST Subsidiary Enters into Agreement for Factoring of Government Program Receivables Providing a Non-Dilutive Source of Funding

KWESST's also announces that its wholly-owned subsidiary, KWESST Inc., has entered into a receivables facility agreement with a US-based global financing company. The facility provides up to $250,000 CAD advanced at a rate of 2.5% for the first thirty days and 1% for each ten days thereafter until receipt of funds from the receivable payee and limited to a total of 20% of the value of the receivable funded. Funds are advanced at 80% up front of the face value of the receivable with a 20% fee deposit retained by the financing company until the amount funded is fully repaid, following which any balance remaining of the 20% fee deposit is returned to KWESST Inc. The agreement grants security against KWESST Inc.'s receivables and other assets for funds advanced by the financing company, supporting KWESST's accelerated program ramp-up and offsetting protracted payment terms on some of its receivables. Payments of KWESST Inc. under the agreement are guaranteed by KWESST and another wholly-owned subsidiary, KWESST Public Safety Systems Canada Inc. The initial term is for 12 months and may be terminated within such term by KWESST Inc., subject to the payment of an early termination fee of 3% of the total limit of the facility.

About KWESST

KWESST (NASDAQ: KWE) (NASDAQ: KWESW) (TSXV: KWE) develops and commercializes breakthrough next-generation tactical systems for military and security forces. The company's current portfolio of offerings includes digitization of tactical forces for real-time shared situational awareness and targeting information from any source (including drones) streamed directly to users' smart devices and weapons. Other KWESST products include countermeasures against threats such as electronic detection, lasers and drones. These systems can operate stand-alone or integrate seamlessly with OEM products and battlefield management systems, and all come integrated with TAK. The company also has a new proprietary non-lethal product line branded PARA OPS^TM with application across all segments of the non-lethal market, including law enforcement. The Company is headquartered in Ottawa, Canada with representative offices in London, UK and Abu Dhabi, UAE.

For more information, please visit https://kwesst.com/

Contact:
David Luxton, Executive Chairman: luxton@kwesst.com
Sean Homuth, President and CEO: homuth@kwesst.com
Jason Frame, Investor Relations: frame@kwesst.com 587.225.2599

Neither the TSX Venture Exchange nor its respective Regulation Services Provider (as that term is defined in the policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this release.

This press release contains "forward-looking statements" and "forward-looking information" within the meaning of Canadian and United States securities laws (collectively, "forward-looking statements"), which may be identified by the use of words such as "anticipates", "potential", "plans", "is expected", "expects", "scheduled", "intends", "contemplates", "believes", "proposes" or variations (including negative and grammatical variations) of such words and phrases, or state that certain actions, events or results "may", "could", "would", "might" or "will" be taken, occur or be achieved. Such statements are based on the current expectations of KWESST's management and are based on assumptions and subject to risks and uncertainties. Although KWESST's management believes that the assumptions underlying such statements are reasonable, they may prove to be incorrect. The forward-looking events and circumstances discussed in this press release may not occur by certain specified dates or at all and could differ materially as a result of known and unknown risk factors and uncertainties affecting KWESST, including KWESST's inability to secure contracts or fulfill staffing requirements, statements of work/taskings on the Canadian government programs, and orders for its products and services in 2024 and onwards for reasons beyond its control (including anticipated increase in demand for Arwen products), the renewal or extension of agreements beyond their original term, the granting of patents applied for by KWESST, inability to finance the scale up to full commercial production levels for its physical products or inability to repay existing credit facilities or loans contracted to finance such activities, inability to secure key partnership agreements to facilitate the outsourcing and logistics for its Arwen and PARA OPS products, ramp-up of the Canadian government defence programs, overall interest in KWESST's products being lower than anticipated or expected; general economic and stock market conditions; adverse industry events; loss of markets; future legislative and regulatory developments in Canada, the United States and elsewhere; the inability of KWESST to implement its business strategies; risks and uncertainties detailed from time to time in KWESST's filings with the Canadian Security Administrators and the United States Securities and Exchange Commission, and many other factors beyond the control of KWESST. Although KWESST has attempted to identify important factors that could cause actual actions, events or results to differ materially from those described in forward-looking statements, there may be other factors that cause actions, events or results to differ from those anticipated, estimated or intended. No forward-looking statement can be guaranteed. Except as required by applicable securities laws, forward-looking statements speak only as of the date on which they are made and KWESST undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

To view the source version of this press release, please visit https://www.newsfilecorp.com/release/227599

FAQ

What is KWESST's new production arrangement for ARWEN cartridges?

KWESST (KWE) has outsourced assembly of 37mm baton cartridges to a Canadian ammunition manufacturer and plans to do the same with the new 40mm cartridge following successful characterization testing.

What are the terms of KWESST's new receivables facility agreement?

The facility provides up to $250,000 CAD with 80% advanced upfront, charging 2.5% for the first 30 days and 1% per 10 days thereafter, to 20% of the funded receivable value.

What new product did KWESST showcase at the 2024 SHOT Show?

KWESST showcased its new 40mm baton cartridge at the SHOT Show in January 2024, expanding beyond its historical 37mm cartridge offering.