DEFSEC (NASDAQ: DFSC) grows Q2 revenue but warns on going concern

Q: How did DEFSEC (DFSC) perform financially in Q2 Fiscal 2026?

DEFSEC grew Q2 2026 revenue to $2.12 million , up 68% year over year, mainly from digitization services. However, it reported a Q2 net loss of $2.02 million and a six‑month net loss of $4.11 million , reflecting ongoing investment and operating costs.

Q: What is DEFSEC (DFSC) reporting about its going concern status?

DEFSEC states its financial statements are prepared on a going concern basis but highlights material risks and uncertainties. Continued operations depend on winning new sales orders, launching new products on time, and raising additional debt or equity financing when required.

Q: How much cash and working capital does DEFSEC (DFSC) have?

As of March 31, 2026 , DEFSEC held $2.95 million in cash and cash equivalents and had working capital of $3.59 million . These balances declined from September 30, 2025 as the company funded operating losses and product development.

Q: Where is DEFSEC’s (DFSC) revenue growth coming from?

Growth is mainly from digitization services on Canadian government defence programs. Q2 2026 digitization revenue increased significantly, while less‑lethal product sales were relatively flat. Digitization also supported higher gross margins compared with the prior year quarter.

Q: What were DEFSEC’s (DFSC) EBITDA and Adjusted EBITDA in Q2 2026?

For Q2 2026, DEFSEC reported an EBITDA loss of $1.81 million and an Adjusted EBITDA loss of $1.74 million . Adjusted EBITDA excludes items such as foreign exchange impacts, changes in fair value of warrant liabilities, and certain non‑recurring or non‑cash charges.

Q: How leveraged is DEFSEC (DFSC) and what liabilities are notable?

Total liabilities were $4.68 million at March 31, 2026, including $1.26 million of lease obligations and $0.15 million of warrant liabilities. The remainder is mainly accounts payable, accrued liabilities, and royalty obligations owed under licensing agreements.

Filing Impact

(Neutral)

Filing Sentiment

(Neutral)

Form Type

6-K

Rhea-AI Filing Summary

DEFSEC Technologies reported much stronger Q2 Fiscal 2026 revenue but remains loss-making with material going concern risks. Revenue for the quarter rose 68% year over year to $2.12 million, driven mainly by digitization services for Canadian defence programs. Six‑month revenue reached $3.43 million, while the net loss for the same period was $4.11 million and Adjusted EBITDA loss was $3.62 million. Cash and cash equivalents fell to $2.95 million and working capital to $3.59 million, reflecting ongoing negative operating cash flows. Management explicitly highlights that continued operations depend on securing additional orders, successfully launching new products such as DEFSEC Lightning 2.0 and PARA SHOT, and raising further debt or equity financing, noting conditions that cast substantial doubt on the company’s ability to continue as a going concern.

Positive

Strong top-line growth and margin improvement: Q2 2026 revenue rose 68% year over year to $2.12 million, driven by digitization services, and gross margin improved to 29.5%, reflecting a more profitable sales mix and better utilization on Canadian defence programs.

Negative

Going concern uncertainty and sustained cash burn: Six‑month net loss of $4.11 million, negative operating cash flow of $4.93 million, shrinking cash to $2.95 million, and explicit disclosure of material risks that cast substantial doubt on the company’s ability to continue as a going concern.

Insights

Revenue is growing, but cash burn and going concern risk remain significant.

DEFSEC Technologies increased Q2 revenue to $2.12 million, up 68% year over year, mostly from digitization contracts. Gross margin improved to 29.5%, showing better project mix and scale on Canadian defence programs.

Despite this, the company posted a six‑month net loss of $4.11 million and negative operating cash flow of $4.93 million. Cash declined to $2.95 million with working capital of $3.59 million, while accumulated deficit reached $56.39 million, underscoring ongoing dependence on external financing.

Management explicitly states that continued operations depend on timely new orders, successful commercialization of products like PARA SHOT and DEFSEC Lightning 2.0, and access to additional debt or equity. This disclosure, along with formal going concern language in the Q2 Fiscal 2026 financial statements authorized on May 13, 2026, makes financing execution and order conversion key issues in future filings.

Key Figures

Q2 2026 Revenue: $2,119,699 Six-month Revenue: $3,427,435 Six-month Net Loss: $4,105,995 +5 more

8 metrics

Q2 2026 Revenue $2,119,699 Three months ended March 31, 2026; up 68% year over year

Six-month Revenue $3,427,435 Six months ended March 31, 2026 vs $2,151,820 in 2025

Six-month Net Loss $4,105,995 Six months ended March 31, 2026

Operating Cash Flow ($4,926,868) Cash used in operating activities, six months ended March 31, 2026

Cash and Cash Equivalents $2,951,005 As of March 31, 2026

Working Capital $3,593,334 Current assets minus current liabilities as of March 31, 2026

Accumulated Deficit $56,386,047 As of March 31, 2026

Adjusted EBITDA Loss $3,624,993 Six months ended March 31, 2026

Key Terms

going concern, Adjusted EBITDA, warrant liabilities, Industrial and Technological Benefits, +1 more

5 terms

going concern financial

"there are material risks and uncertainties that may cast substantial doubt about the Company's ability to continue as a going concern"

A going concern is a business that is expected to continue its operations and meet its obligations for the foreseeable future, rather than shutting down or selling off assets. This assumption matters to investors because it indicates stability and ongoing profitability, making the business a more reliable investment. Think of it as believing a restaurant will stay open and serve customers, rather than closing down suddenly.

Adjusted EBITDA financial

"EBITDA that has been adjusted for the removal of share-based compensation, foreign exchange loss (gain)... ("Adjusted EBITDA")"

Adjusted EBITDA is a way companies measure how much money they make from their core operations, like running a business, by removing certain costs or income that aren’t part of regular business activities. It helps investors see how well a company is doing without distractions from unusual expenses or gains, making it easier to compare companies or track performance over time.

warrant liabilities financial

"Change in fair value of warrant liabilities | 7 | | (34,774 | )"

Warrant liabilities are the financial obligations a company records when it grants warrants—special rights allowing someone to buy shares at a set price in the future. If the warrants are expected to be exercised, they are treated as a liability because the company might need to deliver shares or cash later. This matters to investors because it affects the company’s reported financial health and the potential dilution of existing shares.

Industrial and Technological Benefits financial

"shall meet certain Industrial and Technological Benefits ("ITBs") targets as a condition for fulfilling the obligations in the contract"

Advantages that come from improvements in how things are made or the technologies used — for example, faster production, lower costs, better product features, or new capabilities. Investors care because these gains can boost a company’s profits, make its products more competitive, and reduce risks from disruption; think of it like swapping an old, slow saw for a modern power tool that lets a workshop produce more, cheaper, and with fewer mistakes.

Team Awareness Kit technical

"TAK-enabled real-time situational awareness software as a service (“SaaS”). “TAK-enabled” refers to integration with the Team Awareness Kit (“TAK”)"

Form 6-K: How Foreign Companies Report to the SEC →

05/13/2026 - 08:35 PM

UNITED STATES
SECURITIES AND EXCHANGE COMMIS SION
Washington, D. C. 20549

Form 6-K

REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16 UNDER THE SECURITIES EXCHANGE ACT OF 1934

For the month of May, 2026.

Commission File Number: 001-41566

DEFSEC Technologies Inc.

(Exact Name of Registrant as Specified in Charter)

80 Hines Rd, Suite 300, Ottawa, Ontario, K2K 2T8
(Address of principal executive offices)

Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F. Form 20-F ☒ Form 40-F □

INCORPORATION BY REFERENCE

Exhibits 99. 1 and 99. 2 of this Form 6-K are incorporated by reference into the Registrant's Registration Statement on Form F-3 File No. 333-277196, Form F-3 File No. 333-281960, Form F-3 File No. 333-283343, Form F-3 File No. 333-285263 and Form F-3 File No. 333-293140.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		DEFSEC TECHNOLOGIES INC.
		(Registrant)

Date: May 14, 2026	By:	/s/ Jennifer Welsh
	Name:	Jennifer Welsh
	Title:	Chief Financial Officer

EXHIBIT INDEX

99.1	Unaudited Condensed Consolidated Interim Financial Statements for the three and six months ended March 31, 2026 and 2025
99.2	Management's Discussion and Analysis for the three and six months ended March 31, 2026
99.3	Certification of Interim Filings by CEO dated May 13, 2026
99.4	Certification of Interim Filings by CFO dated May 13, 2026

Unaudited Condensed Consolidated Interim Financial Statements of

DEFSEC TECHNOLOGIES INC.

Three and six months ended March 31, 2026 and 2025

(Expressed in Canadian dollars)

DEFSEC Technologies Inc.

Table of contents

	Page

FINANCIAL STATEMENTS

Unaudited Condensed Consolidated Interim Statements of Financial Position	3

Unaudited Condensed Consolidated Interim Statements of Net Loss and Comprehensive Loss	4

Unaudited Condensed Consolidated Interim Statements of Changes in Shareholders' Equity	5

Unaudited Condensed Consolidated Interim Statements of Cash Flows	6

Notes to the Unaudited Condensed Consolidated Interim Financial Statements	7-21

DEFSEC TECHNOLOGIES INC.
Unaudited Condensed Consolidated Interim Statements of Financial Position
As at March 31, 2026 and September 30, 2025
(Expressed in Canadian dollars)

	Notes		March 31, 2026			September 30, 2025
ASSETS
Cash and cash equivalents		$	2,951,005		$	6,686,429
Restricted short-term investment			47,500			47,500
Trade and other receivables			2,014,019			1,494,152
Inventories	4		514,412			519,609
Prepaid expenses and other			518,586			163,562
Deferred costs			71,221			34,773
Current assets			6,116,743			8,946,025
Property and equipment	5		279,207			279,132
Right-of-use assets			1,078,269			1,165,181
Deposits			15,093			46,132
Intangible assets	6		2,202,017			2,390,030
Deferred costs			117,959			94,976
Non-current assets			3,692,545			3,975,451
Total Assets		$	9,809,288		$	12,921,476

LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Accounts payable and accrued liabilities		$	2,065,953		$	2,310,662
Accrued royalties liability			250,000			200,000
Lease obligations			17,120			188,907
Contract liabilities			37,347			7,671
Warrant liabilities	7,8(b)		152,989			210,965
Current liabilities			2,523,409			2,918,205
Accrued royalties liability			921,665			1,087,009
Lease obligations			1,239,283			1,114,543
Non-current liabilities			2,160,948			2,201,552
Total liabilities			4,684,357			5,119,757

Shareholders' equity
Share capital	8(a)		47,854,235			47,003,991
Warrants	8(b)		8,345,194			7,764,412
Contributed surplus	8(c)		5,398,445			5,398,445
Accumulated other comprehensive loss			(86,896	)		(85,077	)
Accumulated deficit			(56,386,047	)		(52,280,052	)
Total shareholders' equity			5,124,931			7,801,719

Total Liabilities and Shareholders' Equity		$	9,809,288		$	12,921,476

See Note 2(a) Going concern and Note 15 Commitments and contingencies.
See accompanying notes to the unaudited condensed consolidated interim financial statements.

DEFSEC TECHNOLOGIES INC.
Unaudited Condensed Consolidated Interim Statements of Net Loss and Comprehensive Loss
Three and six months ended March 31, 2026 and 2025
(Expressed in Canadian dollars)

			Three Months Ended						Six Months Ended
	Notes		March 31, 2026			March 31, 2025			March 31, 2026			March 31, 2025

Revenue	10	$	2,119,699		$	1,264,162		$	3,427,435		$	2,151,820
Cost of sales	4		(1,493,731	)		(950,141	)		(2,396,775	)		(1,433,277	)
Gross profit			625,968			314,021			1,030,660			718,543

Operating expenses
General and administrative			1,471,869			1,102,261			2,810,219			2,613,705
Selling and marketing			335,569			334,114			638,939			1,016,661
Research and development			556,866			299,916			1,206,495			972,491
Share-based compensation	8(c)		-			26,342			-			77,397
Depreciation and amortization	5,6		170,354			285,929			347,623			600,420
Total operating expenses			2,534,658			2,048,562			5,003,276			5,280,674

Operating loss			(1,908,690	)		(1,734,541	)		(3,972,616	)		(4,562,131	)

Other income (expenses)
Share issuance costs	8(a)		-			-			-			(1,807,686	)
Net finance costs	12		(45,811	)		(31,361	)		(83,105	)		(93,420	)
Foreign exchange gain (loss)			25,062			77,823			(48,190	)		191,106
Impairment of right-of-use assets			-			-			-			(88,596	)
Gain (loss) on disposal of property and equipment	5		(58,778	)		6,809			(58,778	)		6,809
Change in fair value of warrant liabilities	7		(34,774	)		221,763			56,694			1,437,396
Total other expenses, net			(114,301	)		275,034			(133,379	)		(354,391	)
Net loss		$	(2,022,991	)	$	(1,459,507	)	$	(4,105,995	)	$	(4,916,522	)

Other comprehensive income (loss):
Items that are or may be reclassified subsequently to profit or loss
Foreign currency translation differences			(24,664	)		1,381			(1,819	)		(94,895	)
Total comprehensive loss		$	(2,047,655	)	$	(1,458,126	)	$	(4,107,814	)	$	(5,011,417	)

Net loss per share
Basic and diluted	9	$	(1.01	)	$	(6.16	)	$	(2.36	)	$	(16.11	)

Weighted average number of shares outstanding
Basic and diluted	9		1,993,626			237,039			1,742,602			305,190
See accompanying notes to the unaudited condensed consolidated interim financial statements.

DEFSEC TECHNOLOGIES INC.
Unaudited Condensed Consolidated Interim Statements of Changes in Shareholders’ Equity
Six months ended March 31, 2026 and 2025
(Expressed in Canadian dollars)

	Notes	Number of Common Shares⁽¹⁾		Share capital			Warrants			Contributed surplus		Translation reserve			Deficit			Total Shareholders' Equity
Balance, September 30, 2024		75,200	$	37,822,725		$	1,084,687		$	5,152,753	$	(38,520	)	$	(42,653,358	)	$	1,368,287
Shares issued for public offering		3,809		100,310			-			-		-			-			100,310
Shares issued for private offering		50,248		371,154			-			-		-			-			371,154
Warrants issued for private placement		-		-			2,394,955			-		-			-			2,394,955
Pre-funded warrants issued for public offering		-		-			3,489,393			-		-			-			3,489,393
Pre-funded warrants issued for private placement		-		-			4,579,154			-		-			-			4,579,154
Share issuance costs		-		(164,199	)		(1,671,762	)		-		-			-			(1,835,961	)
Shares issued for debt		5,669		100,000			-			-		-			-			100,000
Pre-funded warrants exercised		378,771		4,339,668			(3,550,495	)		-		-			-			789,173
Warrants exercised		16,667		628,250			(267,750	)		-		-			-			360,500
Warrants expired		-		-			(132,000	)		132,000		-			-			-
Share-based compensation		-		-			-			77,397		-			-			77,397
Other comprehensive loss		-		-			-					(94,895	)		-			(94,895	)
Net loss		-		-			-			-		-			(4,916,522	)		(4,916,522	)
Balance, March 31, 2025		530,364	$	43,197,908		$	5,926,182		$	5,362,150	$	(133,415	)	$	(47,569,880	)	$	6,782,945

Balance, September 30, 2025		1,396,321	$	47,003,991		$	7,764,412		$	5,398,445	$	(85,077	)	$	(52,280,052	)	$	7,801,719
Shares issued for private placement	8(a)	566,040		1,013,212			-			-		-			-			1,013,212
Warrants issued for private placement		-		-			1,124,863			-		-			-			1,124,863
Share issuance costs	8(a)	-		(309,315	)		(396,823	)		-		-			-			(706,138	)
Pre-funded warrants exercised	8(b)	31,265		146,347			(147,258	)		-		-			-			(911	)
Other comprehensive loss		-		-			-			-		(1,819	)		-			(1,819	)
Net loss		-		-			-			-		-			(4,105,995	)		(4,105,995	)
Balance, March 31, 2026		1,993,626	$	47,854,235		$	8,345,194		$	5,398,445	$	(86,896	)	$	(56,386,047	)	$	5,124,931
See accompanying notes to the unaudited condensed consolidated interim financial statements.
⁽¹⁾ See Note 1(a)

DEFSEC TECHNOLOGIES INC.
Unaudited Condensed Consolidated Interim Statements of Cash Flows
Six months ended March 31, 2026 and 2025
(Expressed in Canadian dollars)

			Six Months Ended
	Notes		March 31, 2026			March 31, 2025

OPERATING ACTIVITIES
Net loss		$	(4,105,995	)	$	(4,916,522	)
Items not affecting cash:
Depreciation and amortization	5,6		347,623			600,420
Share-based compensation	8(c)		-			77,397
Change in fair value of warrant liabilities (including related foreign exchange gain)	7		(57,976	)		(1,359,187	)
Net finance costs	12		83,105			93,420
Loss on disposal of property and equipment	5		58,778			-
Impairment of ROU asset			-			82,954
Gain on debt settlement			-			(500	)
Unrealized foreign exchange loss (gain)			(5,447	)		-
Changes in non-cash working capital items	14		(1,320,893	)		(1,188,324	)
Changes in non-current deferred costs			-			(39,711	)
Share offering costs			-			1,807,686
Interest received (paid)			73,937			(9,564	)
Cash used in operating activities			(4,926,868	)		(4,851,931	)

INVESTING ACTIVITIES
Additions of property and equipment	5		(121,362	)		(32,035	)
Investments in intangible assets	6		-			(26,675	)
Cash flows used in investing activities			(121,362	)		(58,710	)

FINANCING ACTIVITIES
Proceeds from the issuance of common shares and warrants	7,8(a)		2,060,386			11,948,426
Payments of share offering costs	8(a)		(629,391	)		(3,188,310	)
Payments of lease obligations			(119,434	)		(67,554	)
Proceeds from exercise of warrants	8(b)		31			370,095
Cash flows provided by financing activities			1,311,592			9,062,657

Net change in cash during the period			(3,736,638	)		4,152,016
Cash and cash equivalents, beginning of period			6,686,429			256,828
Effect of exchange rates on cash			1,214			-
Cash and cash equivalents, end of period		$	2,951,005		$	4,408,844

Cash and investments consist of the following:
Cash held in banks		$	2,951,005		$	4,408,844
Short-term guaranteed investment certificates			47,500			30,000
Cash and investments, end of period		$	2,998,505		$	4,438,844
See accompanying notes to the unaudited condensed consolidated interim financial statements.

DEFSEC TECHNOLOGIES INC.
Notes to the Unaudited Condensed Consolidated Interim Financial Statements
Three and six months ended March 31, 2026 and 2025
(Expressed in Canadian dollars)

1. Corporate information

DEFSEC Technologies Inc. (the "Company", "DEFSEC") was incorporated on November 28, 2017, under the laws of the Province of British Columbia. The registered office is located at 550 Burrard Street, Suite 2900, Vancouver, British Columbia, Canada, and the corporate office is located at Suite 300, 80 Hines Rd., Ottawa, Ontario, Canada.

The Company develops and commercializes next-generation technology solutions that deliver a tactical advantage for military, public safety agencies and personal defense markets. The Company's core mission is to protect and save lives.

DEFSEC's common stock is listed on the TSX-Venture Exchange ("TSX-V'') under the stock symbol of DFSC, on the Nasdaq Capital Market ("Nasdaq") under the stock symbol of DFSC and on the Frankfurt Stock Exchange under the stock symbol of 62U2. Additionally, warrants issued in the United States are also listed on the Nasdaq under the stock symbol of DFSCW. Effective May 1, 2023, the warrants issued in Canada are listed on the TSX-V under the stock symbol of DFSC.WT.U.

(a) 2025 Reverse Stock Split (applied retrospectively)

On April 23, 2025, on Nasdaq, and on April 24, 2025, on the TSX-V, DEFSEC effected 21-for-1 reverse stock split of its common stock (the "2025 Reverse Split"). Accordingly, all shareholders of record at the opening of business on April 23, 2025, received one issued and outstanding common share of DEFSEC in exchange for twenty-one outstanding common shares of DEFSEC. No fractional shares were issued in connection with the 2025 Reverse Split. All fractional shares created by the 2025 Reverse Split were rounded to the nearest whole number of common shares, with any fractional interest representing 0.5 or more common shares entitling holders thereof to receive one whole common share.

Effective on the date of the 2025 Reverse Split, the exercise price and number of common shares issuable upon the exercise of outstanding stock options and warrants were proportionately adjusted to reflect the 2025 Reverse Split. All information respecting outstanding common shares, including net loss per share, in the current and comparative periods presented herein give effect to the 2025 Reverse Split.

DEFSEC TECHNOLOGIES INC.
Notes to the Unaudited Condensed Consolidated Interim Financial Statements
Three and six months ended March 31, 2026 and 2025
(Expressed in Canadian dollars)

2. Basis of preparation

(a) Going concern

These unaudited condensed consolidated interim financial statements have been prepared assuming we will continue as a going concern. The going concern basis of presentation assumes we will continue in operation for the foreseeable future and can realize our assets and discharge our liabilities and commitments in the normal course of business.

As an early-stage company, it has not yet reached significant revenue levels for most of its products and has incurred significant losses and negative operating cash flows from inception that have primarily been funded from financing activities. The Company has incurred a $4.1 million net loss and negative operating cash flows of $4.9 million in the six month period ended March 31, 2026 (2025 - $4.9 million net loss and negative operating cash flows of $4.8 million). At March 31, 2026, the Company had $3.6 million in working capital (September 30, 2025 - $6.0 million) and $56.4 million in accumulated deficit (September 30, 2025 - $52.3 million).

The Company's ability to continue as a going concern and realize its assets and discharge its liabilities in the normal course of business is dependent upon closing timely additional sales orders, timely commercial launch of new products, and the ability to raise additional debt or equity financing, when required. There are various risks and uncertainties affecting our future financial position and our performance including, but not limited to:

The market acceptance and rate of sales of the Company's product offerings;
The Company's ability to grow its digitization services business;
Ability to successfully execute the Company's business plan;
Ability to raise additional capital at acceptable terms;
General local and global economic conditions, including the ongoing conflict in Gaza and the global disruptions from Russia's invasion of Ukraine and the United States Conflict with Iran; and
Risks related to United States tariffs, including potential supply chain disruptions, required operational adjustments, increased costs and potential logistical disruptions.

The Company's strategy to mitigate these material risks and uncertainties is to execute a business plan, in a timely manner, aimed at continued focus on revenue growth, product development and innovation, improving overall gross profit, managing operating expenses and working capital requirements, and securing additional capital, as needed.

Failure to implement its business plan could have a material adverse effect on the Company's financial condition and/or financial performance. There is no assurance that the Company will be able to raise additional capital as required in the future. Accordingly, there are material risks and uncertainties that may cast substantial doubt about the Company's ability to continue as a going concern.

These unaudited condensed consolidated interim financial statements do not include any adjustments to the carrying amounts and classification of assets, liabilities and reported expenses that may otherwise be required if the going concern basis was not appropriate.

(b) Statement of compliance

These unaudited condensed consolidated interim financial statements have been prepared in accordance with IAS 34, Interim Financial Reporting, (“IAS 34”) as issued by the International Accounting Standards Board (“IASB”) and the interpretations of the IFRS Interpretations Committee. They do not include all the information required for a complete set of financial statements prepared in accordance with IFRS^® Accounting Standards (“IFRS”) and should be read in conjunction with our Annual Audited Consolidated Financial Statements for the years ended September 30, 2025, 2024 and 2023 (the “Annual Financial Statements”). However, selected explanatory notes are included to explain events and transactions that are material to an understanding of the changes in our financial position and performance since the last Annual Financial Statements.

DEFSEC TECHNOLOGIES INC.
Notes to the Unaudited Condensed Consolidated Interim Financial Statements
Three and six months ended March 31, 2026 and 2025
(Expressed in Canadian dollars)

These unaudited condensed consolidated interim financial statements were authorized for issue by the Board of Directors on May 13, 2026.

(c) Basis of consolidation

These unaudited condensed consolidated interim financial statements incorporate the financial statements of DEFSEC and the entities it controls.

Control is achieved where we have the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities, are exposed to, or have rights to, variable returns from our involvement with the entity and have the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to us until the date on which control ceases. Profit or loss of subsidiaries acquired during the period are recognized from the date of acquisition or effective date of disposal as applicable. All intercompany transactions and balances have been eliminated.

At March 31, 2026, the Company has the following wholly-owned subsidiaries, which is unchanged from September 30, 2025:

Entity	Location	Functional Currency	Equity %
KWESST Inc.	Ottawa, Canada	CAD	100%
2720178 Ontario Inc.	Ottawa, Canada	CAD	100%
Police Ordnance Company Inc.	Ottawa, Canada	CAD	100%
KWESST U.S. Holdings Inc.	Delaware, United States	USD	100%
KWESST Defense Systems U.S. Inc	North Carolina, United States	USD	100%
KWESST Public Safety Systems U.S. Inc.	North Carolina, United States	USD	100%
KWESST Public Safety Systems Canada Inc.	Ottawa, Canada	CAD	100%

(d) Functional and presentation currency

The unaudited condensed consolidated interim financial statements are presented in Canadian dollars ("CAD"), which is the functional and presentation currency.

While each of the Company's subsidiaries has its own functional currency, the functional currency of the parent company, DEFSEC, is CAD as this is the currency of the primary economic environment in which the Company operates. Most of the revenues, cost of sales and operating expenses from significant subsidiaries are denominated in CAD. The Company's Canadian wholly owned subsidiaries are measured using CAD as the functional currency and its U.S. wholly owned subsidiaries are measured using the United States dollar ("USD") as their functional currency.

(e) Basis of measurement

The unaudited condensed consolidated interim financial statements have been prepared on a historical cost basis except for certain financial instruments measured at fair value. Historical cost is generally based on the fair value of the consideration given in exchange for assets.

(f) Use of estimates and judgments

The preparation of the unaudited condensed consolidated interim financial statements in accordance with IFRS requires management to make judgments, estimates, and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income, expenses, and disclosure of contingent liabilities. Actual results may differ from these estimates.

DEFSEC TECHNOLOGIES INC.
Notes to the Unaudited Condensed Consolidated Interim Financial Statements
Three and six months ended March 31, 2026 and 2025
(Expressed in Canadian dollars)

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to estimates are recognized prospectively.

Judgments

Information about judgments made in applying accounting policies that have the most material effects on the amounts recognized in these unaudited condensed consolidated interim financial statements are the same as disclosed in Note 2(f) of the Annual Financial Statements.

Estimates

Information about assumptions and estimation uncertainties at March 31, 2026 that have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities in the next financial year are the same as disclosed in Note 2(f) of the Annual Financial Statements.

(g) Changes to standards and interpretations

IFRS 18 Presentation and Disclosure in Financial Statements

The IASB issued IFRS 18 Presentation and Disclosure in Financial Statements on April 9, 2024, to replace IAS 1 Presentation of Financial Statements and is effective for annual periods beginning on or after January 1, 2027. IFRS 18 introduces a defined structure for the presentation of the statement of income, including required totals and subtotals, as well as aggregating and disaggregating principles to categorize financial information. The standard also requires all Management-defined performance measures to be disclosed in the notes to the financial statements. The Company is currently assessing the impact of this new standard.

3. Material accounting policies

During the three and six month periods ended March 31, 2026, the accounting policies in these unaudited condensed consolidated interim financial statements are the same as those applied in the Annual Financial Statements.

4. Inventories

The following table presents a breakdown of inventories:

		March 31, 2026		September 30, 2025
Finished goods	$	29,277	$	34,463
Work-in-progress		28,685		29,414
Raw materials		456,450		455,732
Total	$	514,412	$	519,609

At March 31, 2026, a total of $0.2 million (2025 - $0.1 million) of inventory was included in profit or loss as an expense as part of cost of sales.

DEFSEC TECHNOLOGIES INC.
Notes to the Unaudited Condensed Consolidated Interim Financial Statements
Three and six months ended March 31, 2026 and 2025
(Expressed in Canadian dollars)

5. Property and equipment

The following is a summary of changes in property and equipment:

Cost		Computer equipment		Computer software		Office furniture and equipment			LRIP equipment ⁽¹⁾			R&D equipment			Leasehold improvements			Sales demo equipment		Total
Balance, September 30, 2025	$	231,320	$	5,129	$	207,530		$	138,734		$	218,428		$	131,792		$	109,234	$	1,042,167
Additions		46,928		-		20,488			41,003			12,943			-			-		121,362
Disposals		-		-		(9,782	)		(138,733	)		(137,217	)		(131,792	)		-		(417,524	)
Balance, March 31, 2026	$	278,248	$	5,129	$	218,236		$	41,004		$	94,154		$	-		$	109,234	$	746,005

Accumulated depreciation		Computer equipment		Computer software		Office furniture and equipment			LRIP equipment ⁽¹⁾			R&D equipment			Leasehold improvements			Sales demo equipment		Total
Balance, September 30, 2025	$	157,478	$	5,129	$	105,335		$	102,580		$	182,872		$	100,407		$	109,234	$	763,035
Depreciation		21,067		-		12,593			15,887			2,276			10,686			-		62,509
Disposals		-		-		(5,577	)		(115,655	)		(126,421	)		(111,093	)		-		(358,746	)
Balance, March 31, 2026	$	178,545	$	5,129	$	112,351		$	2,812		$	58,727		$	-		$	109,234	$	466,798

Carrying value, September 30, 2025	$	73,842	$	-	$	102,195		$	36,154		$	35,556		$	31,385		$	-	$	279,132
Carrying value, March 31, 2026	$	99,703	$	-	$	105,885		$	38,192		$	35,427		$	-		$	-	$	279,207
⁽¹⁾Low-rate initial production equipment (“LRIP”) includes moulds for the PARA SHOT™ products.

During the second quarter of Fiscal 2026, the Company reviewed its property and equipment and identified certain assets that were no longer in use. As a result, a loss of $58,778 was recognized and recorded as gain (loss) on disposal of property and equipment in the Unaudited Condensed Consolidated Statements of Net Loss and Comprehensive Loss.

6. Intangible assets

The following table shows a breakdown of our intangible assets:

		PARA SHOT™ System			PARA SHOT™ Patent			ARWEN^®Tradename			Customer Relationships			ARWEN^®40mm Patent			Total
Balance at September 30, 2025	$	2,286,277		$	40,295		$	10,632		$	31,041		$	21,785		$	2,390,030
Amortization		(159,535	)		(18,910	)		(4,400	)		(2,500	)		(2,668	)		(188,013	)
Balance at March 31, 2026	$	2,126,742		$	21,385		$	6,232		$	28,541		$	19,117		$	2,202,017

At March 31, 2026, management concluded there was no indication of impairment on the intangible assets.

DEFSEC TECHNOLOGIES INC.
Notes to the Unaudited Condensed Consolidated Interim Financial Statements
Three and six months ended March 31, 2026 and 2025
(Expressed in Canadian dollars)

7. Warrant liabilities

The following table shows a breakdown and balance of warrant liabilities at March 31, 2026:

		U.S. IPO and Canadian Offerings						Private Placement						Debt Settlement			Direct Offering			Public Offering
		2022 Warrants			Over- Allotment Warrants			2023 Warrants			Pre-Funded Warrants			Warrants			Warrants			Pre-Funded Warrants			Total
Balance, at September 30, 2024	$	65,765		$	7,644		$	60,373		$	31,338		$	1,145		$	681,030		$	-		$	847,295
Initial recognition		-			-			-			-			-			-			4,770,722			4,770,722
Exercised		-			-			-			-			-			-			(779,578	)		(779,578	)
Gain on revaluation of financial instruments		112,054			(7,644	)		(64,314	)		(29,959	)		1,990			(699,473	)		(714,912	)		(1,402,258	)
Exchange loss on revaluation		2,289			-			3,941			90			-			44,696			25,693			76,709
Extinguish warrant liability/transfer to equity		-			-			-			-			-			-			(3,301,925	)		(3,301,925	)
Balance, at September 30, 2025	$	180,108		$	-		$	-		$	1,469		$	3,135		$	26,253		$	-		$	210,965
Gain on revaluation of financial instruments		(35,248	)		-			-			(1,446	)		(613	)		(19,387	)		-			(56,694	)
Exchange gain on revaluation		(947	)		-			-			(23	)		(16	)		(296	)		-			(1,282	)
Balance, at March 31, 2026	$	143,913		$	-		$	-		$	-		$	2,506		$	6,570		$	-		$	152,989

Number of outstanding securities at September 30, 2025⁽¹⁾		3,226,392			-			1,542,194			151,734			56,141			4,715,000			-			9,691,461
Number of outstanding securities at March 31, 2026		3,226,392			-			1,542,194			151,734			56,141			4,715,000			-			9,691,461
⁽¹⁾Number of outstanding securities have not been adjusted for the share consolidations discussed in Note 1 (a)

DEFSEC TECHNOLOGIES INC.
Notes to the Unaudited Condensed Consolidated Interim Financial Statements
Three and six months ended March 31, 2026 and 2025
(Expressed in Canadian dollars)

8. Share Capital and Contributed Surplus

As disclosed in Note 1(a), the 2025 Reverse Split has been applied retrospectively herein.

(a) Share capital

Authorized

DEFSEC is authorized to issue an unlimited number of common shares.

Issued Common Shares

The following is a summary of changes in outstanding common shares since September 30, 2025:

	Number		Amount
Balance, beginning of period	1,396,321	$	47,003,991
Issued in private placement	566,040		1,013,212
Issued for exercise of warrants	31,265		146,347
Less: share offering costs for the period	-		(309,315	)
Balance as at March 31, 2026	1,993,626	$	47,854,235

Private Placement (December 2025)

On December 18, 2025, the Company issued 566,040 common shares at an offering price of $3.64 (US$2.65), which included a concurrent issuance of warrants to purchase up to an aggregate of 566,040 common shares. The warrants have a five-year life with an exercise price of $4.27 per common share. Gross proceeds from this transaction was $2.1 million.

The fair value of the December 2025 common share purchase warrants was calculated using the Black Scholes model, with the following assumptions:

		Initial Recognition
Number of warrants		566,040
Stock price	$	2.59
Exercise price	$	4.27
Volatility		105%
Dividend yield		nil
Risk free interest rate		2.9%
Expected life (in years)		5
Fair value per warrant	$	1.85
Total Value of Warrants	$	1,047,174

As part of the issuance of the warrants, the Company incurred $93,000 of share issuance costs in the second quarter of Fiscal 2026 in order to register the warrants with the Securities Exchange Commission.

Brokers' Compensation and Share Issuance Costs

In connection with the December 2025 Offering, the broker was paid a cash fee equal to 7.5% on the equity financing raised, which totaled $154,529. In addition, broker management fees and other expenses totaled $75,547.

DEFSEC TECHNOLOGIES INC.
Notes to the Unaudited Condensed Consolidated Interim Financial Statements
Three and six months ended March 31, 2026 and 2025
(Expressed in Canadian dollars)

As compensation for services rendered, the broker or its designees were granted 42,453 warrants ("December 2025 Broker Warrants"). The December 2025 Broker Warrants are immediately exercisable and entitle the holder to acquire common shares on a one-for-one basis. The December 2025 Broker Warrants have a five-year life with an exercise price of $4.55 per common share.

The fair value of the December 2025 Broker Warrants at the closing of the December 2025 offering was $77,689 calculated using the Black Scholes model.

The fair value of the December 2025 Broker warrants was calculated using the Black Scholes model, with the following assumptions:

		Initial Recognition
Number of warrants		42,453
Stock price	$	2.59
Exercise price	$	4.55
Volatility		105%
Dividend yield		nil
Risk free rate		2.90%
Expected life (in years)		5
Fair value per warrant	$	1.83
Total Value of Warrants	$	77,689

(b) Warrants

The following is a summary of changes in outstanding warrants since September 30, 2025:

	Number of warrants			Weighted average exercise price
Balance, as at September 30, 2025	20,207,007		$	2.45
Issued (Note 8(a))	608,493			4.29
Exercised	(31,265	)		0.001
Expired	-			-
Balance, as at March 31, 2026	20,784,235		$	2.49
Exercisable, as at March 31, 2026	20,784,235		$	2.49

As at March 31, 2026, the 20,784,235 warrants outstanding are exercisable into 1,872,332 (September 30, 2025 – 1,295,113) common shares.

DEFSEC TECHNOLOGIES INC.
Notes to the Unaudited Condensed Consolidated Interim Financial Statements
Three and six months ended March 31, 2026 and 2025
(Expressed in Canadian dollars)

The following table provides additional information on the total outstanding warrants at March 31, 2026:

	Exercise Price	Number outstanding	Conversion ratio to Common Shares	Underlying Securities		Book value		Expiry Date
Classified as Equity:
LEC's Warrants	CAD$0.70	500,000	14,700 for 1	34	$	425,000		April 29, 2026
December 2022 U.S. Underwriter Warrants	US$5.1625	134,950	210 for 1	642		189,592		December 9, 2027
July 2023 U.S. Underwriter Warrants	US$2.66	123,637	210 for 1	588		204,187		July 21, 2028
April 2024 U.S. Underwriter Warrants	US$0.8125	76,925	210 for 1	366		43,869		April 9, 2029
June 2024 U.S. Underwriter Warrants	US$0.725	145,000	210 for 1	690		61,213		June 14, 2029
August 2024 U.S. Underwriter Warrants	US$0.25	353,625	210 for 1	1,683		28,826		August 9, 2029
November 2024 U.S. Underwriter Warrants	US$1.125	194,450	21 for 1	9,259		187,468		November 1, 2029
November 2024 Private Placement Warrants	US$1.03	3,795,200	21 for 1	180,723		2,903,328		November 11, 2029
November 2024 PP Underwriter Warrants	US$1.03	207,260	21 for 1	9,869		158,554		November 11, 2029
February 21, 2025 PP Warrants	CAD$1.16	3,787,879	21 for 1	180,375		2,196,970		February 21, 2030
February 21, 2025 PP Underwriter Warrants	CAD$1.16	189,394	21 for 1	9,018		109,991		February 21, 2030
February 25, 2025 PP Warrants	CAD$1.16	151,515	21 for 1	7,215		83,939		February 25, 2030
February 25, 2025 PP Underwriter Warrants	CAD$1.16	7,576	21 for 1	360		4,197		February 25, 2030
July 2025 Public Offering Warrants	CAD$10.52	759,879	1 for 1	759,879		3,011,466		July 25, 2030
July 2025 Broker Warrants	CAD$10.52	56,991	1 for 1	56,991		451,255		July 25, 2030
December 2025 Private Placement Warrants	CAD$4.27	566,040	1 for 1	566,040		1,047,174		December 18, 2030
December 2025 Broker Warrants	CAD$4.55	42,453	1 for 1	42,453		77,689		December 18, 2030
November 2024 Issuance Costs						(868,653	)
February 2025 Issuance Costs						(803,109	)
July 2025 Issuance Costs						(770,939	)
December 2025 Issuance Costs						(396,823	)
		11,092,774		1,826,185	$	8,345,194
Classified as liability:
December 2022 Public Offerings	US$5.00	3,226,392	210 for 1	15,363	$	143,913		December 9, 2027
December 2022 Debt Settlement	US$5.00	56,141	210 for 1	267		2,506		December 9, 2027
July 2023 Public Offerings	US$2.66	1,542,194	210 for 1	7,343		-		July 21, 2028
July 2023 Pre-Funded Warrants	US$0.001	151,734	210 for 1	722		-		No expiry
August 2024 Public Offering	US$0.25	4,715,000	210 for 1	22,452		6,570		August 9, 2029
		9,691,461		46,147		152,989
Total outstanding warrants		20,784,235		1,872,332	$	8,498,183

(c) Contributed surplus

Contributed surplus consists of options issued to employees and directors at fair value, the cumulative amortized fair value of share-based compensation grants since inception, less amounts transferred to share capital for exercises. If outstanding options expire or are forfeited, there is no reversal of contributed surplus.

DEFSEC TECHNOLOGIES INC.
Notes to the Unaudited Condensed Consolidated Interim Financial Statements
Three and six months ended March 31, 2026 and 2025
(Expressed in Canadian dollars)

Share-based compensation

The Company did not grant any stock options, RSUs, PSUs, and SARs, pursuant to our LTIP during the six months ended March 31, 2026. As at March 31, 2026, there are 198,476 stock option units available for future grants.

	Number of options			Weighted average exercise price
Outstanding, at September 30, 2025	995		$	555.42
Forfeited	(109	)		648.78
Outstanding, at March 31, 2026	886		$	543.96
Options Exercisable, at March 31, 2026	886		$	543.96

For the three and six months ended March 31, 2026, the Company recorded share-based compensation of $nil (2025 - $26,342 and $77,397, respectively).

9. Loss per share

As disclosed in Note 1(a), the 2025 Reverse Split has been applied retrospectively.

The following table summarizes the calculation of the weighted average number of basic and diluted common shares to calculate the loss per share as reported in the unaudited condensed consolidated interim statements of net loss and comprehensive loss:

	Three months ended		Six months ended
	March 31, 2026	March 31, 2025	March 31, 2026	March 31, 2025
Issued common shares, beginning of period	1,993,626	144,391	1,396,321	75,199

Effect of shares issued from:
Debt settlements	-	-	-	4,361
Private Placements	-	20,441	320,341	10,333
Public Offerings	-	-	-	3,140
Exercise of warrants	-	72,207	25,940	212,157
Weighted average number of basic common shares	1,993,626	237,039	1,742,602	305,190

Dilutive securities
Stock options	-	-	-	-
Warrants	-	-	-	-
Weighted average number of dilutive common shares	1,993,626	237,039	1,742,602	305,190

At March 31, 2026 and 2025, all dilutive securities, being warrants, pre-funded warrants, broker warrants and stock options, were anti-dilutive because the Company incurred a net loss for the above periods.

DEFSEC TECHNOLOGIES INC.
Notes to the Unaudited Condensed Consolidated Interim Financial Statements
Three and six months ended March 31, 2026 and 2025
(Expressed in Canadian dollars)

10. Revenue

a) Revenue streams

DEFSEC generates revenue from the sale of products and services to its customers.

b) Disaggregation of revenue from contracts with customers

In the following table, revenue from contracts with customers is disaggregated by primary geographical market, major products and service lines, and timing of revenue recognition:

		Three months ended				Six months ended
		March 31, 2026		March 31, 2025		March 31, 2026		March 31, 2025
Major products/service lines
Digitization	$	1,927,119	$	1,066,786	$	3,174,595	$	1,785,769
Less-Lethal		192,580		197,376		252,840		365,124
Other		-		-		-		927
	$	2,119,699	$	1,264,162	$	3,427,435	$	2,151,820

Primary geographic market
Canada	$	2,028,233	$	1,207,168	$	3,335,969	$	2,056,456
United States		91,466		56,994		91,466		95,364
	$	2,119,699	$	1,264,162	$	3,427,435	$	2,151,820

Timing of revenue recognition
Products and services transferred over time	$	1,954,587	$	1,066,786	$	3,220,563	$	1,785,769
Products transferred at a point in time		165,112		197,376		206,872		366,051
	$	2,119,699	$	1,264,162	$	3,427,435	$	2,151,820

Revenue allocated to remaining performance obligations represents contracted revenue that has not yet been recognized ("contracted not yet recognized") and includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods. At March 31, 2026, the Company's contracted not yet recognized revenue was $37,347 (September 30, 2025 - $7,671), of which 100% of this amount is expected to be recognized over the next 12 months.

For the three months ended March 31, 2026, two customers accounted for 57% and 34% (2025 - three customers accounted for 69%, 9% and 7%) of revenue. For the six months ended March 31, 2026, two customers accounted 63% and 29% (2025 - three customers accounted for 65%, 10% and 8%) of revenue.

DEFSEC TECHNOLOGIES INC.
Notes to the Unaudited Condensed Consolidated Interim Financial Statements
Three and six months ended March 31, 2026 and 2025
(Expressed in Canadian dollars)

11. Related party transactions

At March 31, 2026, there was $18,252 (September 30, 2025 - $791,946) outstanding in accounts payable and accrued liabilities due to officers and directors for accrued wages and vacation, consulting fees, directors' fees and expense reimbursements.

12. Net finance costs

The following table presents a breakdown of net finance costs for the following periods:

		Three months ended						Six months ended
		March 31, 2026			March 31, 2025			March 31, 2026			March 31, 2025
Interest expense from:
Accretion cost - accrued royalties liability	$	40,214		$	39,309		$	84,656		$	84,826
Lease obligations		35,164			9,052			72,386			23,093
Other		101			2,148			294			6,453
Total interest expense		75,479			50,509			157,336			114,372
Interest income		(29,668	)		(19,148	)		(74,231	)		(21,452	)
Gain on debt settlement		-			-			-			500
Net finance costs	$	45,811		$	31,361		$	83,105		$	93,420

13. Financial instruments

For the six months ended March 31, 2026, there were no material changes to our financial risks as disclosed in Note 22 of the Annual Financial Statements, except for the following:

Foreign currency risk

A portion of the Company's revenue and operating costs are realized in currencies other than its functional currency, primarily USD. The Company has entered into financing transactions in the past that were denominated in USD or allowed for the settlement in USD. As a result, the Company is exposed to currency risk on these transactions. Further, additional earnings volatility arises from the translation of monetary assets and liabilities denominated in foreign currencies at the rate of exchange on each date of the Unaudited Condensed Consolidated Interim Statements of Financial Position; the impact of which is reported as a foreign exchange gain or loss on the Unaudited Condensed Consolidated Interim Statements of Net Loss and Comprehensive Loss. The Company's objective in managing currency risk is to minimize the exposure to currencies other than our functional currency. The Company does so by matching foreign denominated assets with foreign denominated liabilities where possible. Currently, we do not use derivative instruments to hedge the U.S. dollar exposure.

DEFSEC TECHNOLOGIES INC.
Notes to the Unaudited Condensed Consolidated Interim Financial Statements
Three and six months ended March 31, 2026 and 2025
(Expressed in Canadian dollars)

At March 31, 2026, we had the following net U.S. dollar exposure:

		March 31, 2026			September 30, 2025
US denominated
Assets	$	910,619		$	4,627,168
Liabilities		(33,522	)		(218,577	)
Net USD exposure	$	877,097		$	4,408,591

Impact to loss if 5% movement in USD	$	43,855		$	220,430

During the three and six months ended March 31, 2026, we recorded a foreign exchange gain of $25,026 and a loss of $48,190 respectively (2025 - gains of $77,823 and $191,106).

Liquidity risk

At March 31, 2026, our contractual obligations were as follows:

Payment due:		Total		Within 1 year		1 to 3 years		3 to 5 years		5 years and beyond

Minimum royalty commitments	$	1,800,000	$	250,000	$	550,000	$	650,000	$	350,000
Accounts payable and accrued liabilities		2,065,953		2,065,953		-		-		-
Lease obligations		2,126,135		152,782		407,420		407,420		1,158,513
Total contractual obligations	$	5,992,088	$	2,468,735	$	957,420	$	1,057,420	$	1,508,513

At March 31, 2026, we had $3.0 million in cash and $3.6 million in working capital (current assets less current liabilities).

In the second quarter of Fiscal 2026 the Company confirmed with the counter party that the minimum royalty under the LEC agreement are owed on the anniversary of the effective date of that agreement, being January 15^th of each year, and shall be paid no later than 45 days after that date.

Credit risk

Credit risk is the risk of financial loss to DEFSEC if a counterparty to a financial instrument fails to meet its contractual obligations. The Company's credit risk exposure is limited to cash, and trade and other receivables. The Company enters into contracts with either large, financially sound global general contractors or law enforcement agencies, which mitigates the credit risk.

As described in Note 2(h) of the Annual Financial Statements, the Company has applied the simplified approach to recognize the lifetime expected credit losses. After assessing the quality of the receivables, management has concluded that the expected credit loss on all outstanding receivables is $nil. Accordingly, no loss allowance has been recognized at the reporting date (2025: $nil).

DEFSEC TECHNOLOGIES INC.
Notes to the Unaudited Condensed Consolidated Interim Financial Statements
Three and six months ended March 31, 2026 and 2025
(Expressed in Canadian dollars)

14. Supplemental cash flow information

The following table presents changes in non-cash working capital:

		Six months ended
		March 31, 2026			March 31, 2025

Trade and other receivables	$	(520,540	)	$	(513,989	)
Inventories		5,197			(48,034	)
Prepaid expenses and other		(323,985	)		(154,074	)
Deferred costs		(59,431	)		(10,077	)
Accounts payable and accrued liabilities		(251,810	)		(464,191	)
Contract liabilities		29,676			2,041
Accrued royalties liability		(200,000	)		-
	$	(1,320,893	)	$	(1,188,324	)

The following is a summary of non-cash items that were excluded from the Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2026:

The issuance of 42,453 December 2025 Broker warrants (see Note 8(a))

The following is a summary of non-cash items that were excluded from the Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2025:

119,047 shares issued for debt settlement of business expenses incurred while representing the Company in an aggregate amount of $100,000 owed to a company controlled by Mr. David Luxton, Chairman of the Company;
$187,468 non-cash share issuance costs as part of the net proceeds settlement at the closing of the November 1, 2024 U.S. Public Offering;
$221,088 non-cash share issuance costs as part of the net proceeds settlement at the closing of the November 1, 2024 Private Placement;
$114,046 non-cash share issuance costs as part of the net proceeds settlement at the closing of the February 2025 Private Placement; and
Expiry of 200,000 warrants in connection with the acquisition of Police Ordnance Company expired December 15, 2024.

DEFSEC TECHNOLOGIES INC.
Notes to the Unaudited Condensed Consolidated Interim Financial Statements
Three and six months ended March 31, 2026 and 2025
(Expressed in Canadian dollars)

15. Commitments and contingencies

The Company, under its LC4ISR Sub-Tier Subcontract, shall meet certain Industrial and Technological Benefits ("ITBs") targets as a condition for fulfilling the obligations in the contract. Such requirements are part of Canada's effort to promote economic development and increased competitiveness of the defence sector and develop, grow and sustain a diverse, talented, and innovative Canadian workforce. Under the obligations, DEFSEC will spend 100% of the contract-value as Supplier Development in Canada, specifically involving Small and Medium Business (employing fewer than 250 full-time personnel), and spend 20% of the contract value as transactions involving Skills Development and Training in the areas of Defence Systems Integration, Artificial Intelligence, Cyber Resilience, or In-Service Support. As all work under the contract is being executed in Canada by the Company, 100% of the Small and Medium Business requirement is expected to be met. Achievement of the Company's Skills Development and Training requirement is expected to be met by transactions related to Senior Integrated Logistics Support Specialist ("ILS") related roles filled under its taskings, as these have been deemed by Canada to be eligible, and DEFSEC currently has seven (7) such roles of its total 25 under current taskings. While these roles are expected to fulfill the Company's obligations over the achievement period, any penalty by way of liquidated damages, is limited in its financial impact to a maximum of 20% of the shortfall (up to 4% of total contract value). Further mitigating any potential shortfall is the ability to achieve a five (5) times multiplier for any contribution to Skills Development and Training for Indigenous Peoples or majority Indigenous-controlled educational or training facilities. Based on the billings to date, the Company may have an ITB obligation of $558,000 with a maximum penalty of $112,000. Management believes it will meet the required targets within the specified timeframes. Accordingly, no liability has been recorded in these unaudited condensed consolidated interim financial statements related to this commitment.

DEFSEC TECHNOLOGIES INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS

Three and six months ended March 31, 2026

(Expressed in Canadian Dollars)

DEFSEC TECHNOLOGIES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
THREE AND SIX MONTHS ENDED MARCH 31, 2026

All references in this management's discussion and analysis (the "MD&A") to "DEFSEC", "we", "us", "our", and the "Company" refer to DEFSEC Technologies Inc. and its subsidiaries as at March 31, 2026. This MD&A has been prepared with an effective date of May 13, 2026.

This MD&A should be read in conjunction with our unaudited condensed consolidated interim financial statements for the three and six months ended March 31, 2026 and 2025 ("Q2 Fiscal 2026 FS") and the annual audited consolidated financial statements and related notes for the years ended September 30, 2025, 2024 and 2023 ("Fiscal 2025 FS"). The financial information presented in this MD&A is derived from these unaudited condensed consolidated interim financial statements prepared in accordance with IFRS^® Accounting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB"). This MD&A contains forward-looking statements that 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 DEFSEC is available to view on SEDAR+ at http://www.sedarplus.ca/ and EDGAR (https://www.sec.gov).

NON-IFRS MEASURES

In this MD&A, we have presented earnings before interest, taxes, depreciation and amortization ("EBITDA") and EBITDA that has been adjusted for the removal of share-based compensation, foreign exchange loss (gain), change in fair value of derivative liabilities, and any one-time, irregular and nonrecurring items ("Adjusted EBITDA") 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 measures.

Management also references "program billings on an annualized go-forward basis" and "annualized gross margin contribution" which refers to programmatic revenue and gross margin based on the roles staffed for a full year at the program billing rate. Management believes these are useful measures because it reflects management's estimate of annualized revenues and gross margin contributions based on current contractual taskings as of the date referenced. The most directly comparable financial measure that is disclosed in the financial statements of the Company to which the non-IFRS measure relates is revenue and gross margin respectively.

Management uses non-IFRS measures, in addition to IFRS financial measures, to understand and compare operating results across accounting periods, for financial and operational decision making, for planning and forecasting purposes, and to evaluate our financial performance. We believe that these non-IFRS financial measures enable us to identify underlying trends in our business that could otherwise be hidden by the effect of certain expenses that we exclude in the calculations of the non-IFRS financial measures.

Accordingly, we believe that these non-IFRS financial measures reflect our ongoing business in a manner that allows for meaningful comparisons and analysis in the business and provides useful information to investors and securities analysts, and other interested parties in understanding and evaluating our operating results, enhancing their overall understanding of our past performance and future prospects.

We caution readers that these non-IFRS financial measures do not replace the presentation of our IFRS financial results and should only be used as a supplement to, not as a substitute for, our financial results presented in accordance with IFRS. There are limitations in the use of non-IFRS measures because they do not include all the expenses that must be included under IFRS as well as they involve the exercise of judgment concerning exclusions of items from the comparable non-IFRS financial measure. Furthermore, other peers may use other non-IFRS measures to evaluate their performance, or may calculate non-IFRS measures differently, all of which could reduce the usefulness of our non-IFRS financial measures as tools for comparison.

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DEFSEC TECHNOLOGIES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
THREE AND SIX MONTHS ENDED MARCH 31, 2026

GOING CONCERN

As an early-stage company, we have not yet reached significant revenue levels for most of our products and services and have incurred significant losses and negative operating cash flows from inception that have primarily been funded from financing activities. DEFSEC's unaudited condensed consolidated interim financial statements for Q2 Fiscal 2026 have been prepared on the "going concern" basis which presumes that DEFSEC will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future. Our ability to continue as a going concern and realize our assets and discharge our liabilities in the normal course of business is dependent upon closing timely additional sales orders, timely commercial launch of new products, and the ability to raise additional debt or equity financing, when required. There are various risks and uncertainties affecting our future financial position and our performance. Accordingly, there are material risks and uncertainties that may cast substantial doubt about our ability to continue as a going concern. Refer to Note 2(a) of the Q2 Fiscal 2026 FS for further information.

TRADEMARKS

We own or have rights to various trademarks, service marks and trade names that we use in connection with the operation of our business. This MD&A also contains additional trademarks, trade names and service marks belonging to other companies. Solely for convenience, trademarks, trade names and service marks referred to in this MD&A may appear without the ®, ™ or SM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the right of the applicable licensor to these trademarks, trade names and service marks. We do not intend our use or display of other parties' trademarks, trade names or service marks to imply, and such use or display should not be construed to imply, a relationship with, or endorsement or sponsorship of us by, these other parties.

FORWARD-LOOKING STATEMENTS

Certain statements in this document constitute "forward-looking statements" and "forward-looking information" within the meaning of applicable Canadian and United States securities laws (together, "forward-looking statements"). Such forward-looking statements include, but are not limited to, information with respect to our objectives and our strategies to achieve these objectives, as well as statements with respect to our beliefs, plans, expectations, anticipations, estimates and intentions. These forward-looking statements may be identified by the use of terms and phrases such as "may", "would", "should", "could", "expect", "intend", "estimate", "anticipate", "plan", "foresee", "believe", or "continue", the negative of these terms and similar terminology, including references to assumptions, although not all forward-looking statements contain these terms and phrases. Forward-looking statements are provided for the purposes of assisting the reader in understanding us, our business, operations, prospects and risks at a point in time in the context of historical and possible future developments and therefore the reader is cautioned that such information may not be appropriate for other purposes.

Forward-looking statements relating to us include, among other things, statements relating to:

• our expectations regarding our business, financial condition and results of operations;

• the future state of the legislative and regulatory regimes, both domestic and foreign, in which we conduct business and/or may conduct business in the future;

• our expansion into domestic and international markets;

• our ability to attract customers and clients;

• our relationships with suppliers and the terms of our arrangements with them;

• our marketing and business plans and short-term objectives;

• our ability to obtain and retain the licenses and personnel we require to undertake our business;

• our ability to deliver under contracts with customers;

• anticipated revenue and related margin from professional service contracts with customers and related growth rates;

• our strategic or other important relationships with third parties;

• our anticipated trends and challenges in the markets in which we operate;

• governance of us as a public company;

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DEFSEC TECHNOLOGIES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
THREE AND SIX MONTHS ENDED MARCH 31, 2026

• expectations regarding future developments of products and our ability to bring these products to market; and

• achievement of milestones for various product development initiatives.

Forward-looking statements are based upon a number of assumptions and are subject to a number of risks and uncertainties, many of which are beyond our control, which could cause actual results to differ materially from those that are disclosed in or implied by such forward-looking statements. These risks and uncertainties include, but are not limited to, the following risk factors, some of which are discussed in greater detail under the section "Risk Factors" in our 20-F dated December 29, 2025:

• limited operating history;

• failure to realize our growth strategy;

• failure to complete transactions or realize anticipated benefits;

• reliance on key personnel;

• regulatory compliance;

• competition;

• changes in policy, laws, regulations, practices and guidelines;

• demand for our products and services;

• fluctuating prices of raw materials, and third party-labour rates;

• pricing for products and services;

• ability to supply sufficient product and services;

• potential cancellation or loss of customer contracts if we are unable to meet contract performance requirements;

• potential cancellation or loss of customer contracts due to changes in customer requirements or other reasons;

• expansion to other jurisdictions;

• cost and complexity of sales or operations due to expansion to international markets;

• cost of redesign and retooling as a result of regulatory requirements or change;

• damage to our reputation;

• operating risk and insurance coverage;

• negative operating cash flows;

• management of growth and change;

• product liability or contractual liability to third parties including contingent liability;

• product recalls and warranty claims;

• environmental policy, regulations, compliance and related risks;

• ownership, use, protection and enforcement of intellectual property rights;

• shutdown or impairment of access to United States' government deployed geospatial software suite for real-time situational awareness (TAK) impairing deployment and operation of certain of our products and services;

• constraints on marketing products and services;

• reliance on management and key personnel;

• fraudulent or illegal activity by our employees, suppliers, contractors and/or consultants;

• breaches of security at our facilities or in respect of electronic documents and data storage and risks related to breaches of applicable security and privacy laws;

• government regulations regarding public or employee health and safety regulations, including public health measures in the event of pandemics or epidemics;

• safety and security of personnel working within our facilities or at third party sites;

• regulatory or agency proceedings, investigations and/or audits;

• additional capital requirements to support our operations and growth plans, leading to further dilution to shareholders;

• the terms and timing of additional capital raises;

• conflicts of interest;

• litigation and disputes;

• risks relating to Canadian policy impacting our operations, business or prospects;

• risks related to United States' policy and other international activities, including regional conflicts that may impact our operations;

• risks related to security clearances and controlled goods registrations and compliance;

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DEFSEC TECHNOLOGIES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
THREE AND SIX MONTHS ENDED MARCH 31, 2026

• risks relating to the ownership, trading or transfer of our securities, such as potential extreme volatility in the price of, or market for, our securities;

• risks related to our U.S. foreign private issuer status;

• risks related to our emerging growth company status;

• risks related to meeting the continued listing requirements of the Nasdaq Capital Market ("Nasdaq") and the TSX Venture Exchange ("TSXV");

• risks related to the liquidity of the Common Shares of the Company (the "Common Shares");

• significant changes or developments in Canadian or United States trade policies and tariffs that may have a material adverse effect on our business and financial statements;

• risks related to Canadian and United States tariffs and trade agreements, including potential supply chain disruptions, required operational adjustments, increased complexity and costs and potential logistical disruptions;

• risks related specifically to United States tariffs on aluminum and steel;

• risks relating to prolonged United States' government shutdowns; and

• risks related to retaliatory tariffs imposed by Canada's government affecting potential foreign sales.

Although the forward-looking statements contained herein are based upon what we believe are reasonable assumptions, investors are cautioned against placing undue reliance on this information since actual results may vary from the forward-looking statements. Certain assumptions were made in preparing the forward-looking statements concerning availability of capital resources, business performance, market and regulatory conditions, supplies' availability and customer demand.

Consequently, all of the forward-looking statements contained herein are qualified by the foregoing cautionary statements, and there can be no guarantee that the results or developments that we anticipate will be realized or, even if substantially realized, that they will have the expected consequences or effects on our business, financial condition or results of operation. Unless otherwise noted or the context otherwise indicates, the forward-looking statements contained herein are provided as of the date hereof, and we do not undertake to update or amend such forward-looking statements whether as a result of new information, future events or otherwise, except as may be required by applicable law.

BUSINESS OVERVIEW

DEFSEC is an early-stage technology company that develops and commercializes next-generation tactical systems and services for military and security forces and public safety markets.

Our product development has focused on three niche market segments as follows:

Our core mission is to protect and save lives. We group our offerings into Military and Public Safety missions.

DEFSEC's Public Safety offerings are comprised of:

DEFSEC Lightning^TM: A cloud-hosted software that enables rapid incident responses with quick onboarding for inter-agency collaboration and real-time encrypted communication (text, voice, photo/video). It leverages the Company's military digitization technology experience to provide responders to any type of incident with instant onboarding to the mission and TAK-enabled real-time situational awareness software as a service (“SaaS”). “TAK-enabled” refers to integration with the Team Awareness Kit (“TAK”) which is a United States government developed geospatial software suite providing real-time situational awareness for military, security and public safety teams. The DEFSEC Lightning^TM 2.0, which was commercially released on May 6, 2026, is the next iteration of the Company’s cloud-based platform using patent-pending technology to further develop the user experience including TAK and standard Lightning^TM features such as:

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DEFSEC TECHNOLOGIES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
THREE AND SIX MONTHS ENDED MARCH 31, 2026

Proprietary plug-in tools relevant to law enforcement, including ground search and rescue tools ("GSAR"), TAK enabled sniper and surveillance tools ("TSAS");
Native Cloud-based Microsoft environment (MS Azure);
Seamless INTEGRATION and FUSION of crucial real-time position location, imagery, and targeted time-sensitive emergency services data and information for effective and coordinated delivery of emergency services;
Opt-in geo-fencing with unique call-out feature that enables rapid response to a critical incident, which ensures privacy for all users; and
Supports stakeholders from Emergency Operations Centers ("EOC"), Incident Command Post ("ICP"), Incident Commanders, and all first responders whether mobile or dismounted.

The Company is presently pursuing trials and pilots of the product as it continues to evolve the product throughout Fiscal 2026. One Canadian police agency has subscribed ahead of full release, and the Company continues to demonstrate the system to other agencies it has relationships with.

Less-Lethal Munitions Systems: DEFSEC proprietary less-lethal munitions systems including launchers and various payloads to bring dangerous incidents to a safe conclusion.

PARA SHOT^TM, a next-generation system designed to be less-lethal.
ARWEN^® 37mm system, plus a new 40mm munition and new live action training adapters and marking cartridges in 37mm and 40mm for realistic scenario training leveraging the PARA SHOT^TM Low Energy Cartridge ("LEC") technology.

DEFSEC's Dual Use and Military offerings are comprised of:

Digitization services to enhance mission readiness and situational awareness for military forces including through task-order based software solutions;
Tactical Advanced System For Command And Control ("TASCS"), Indirect Fire Modules System ("TASCS IFM") and TASCS Networked Observation and Reconnaissance System ("TASCS NORS"). These are specialized, digitized and modular technology designed to enhance the effectiveness of indirect fire weapons such as mortars and rocket launchers. These systems allow for enhanced precision, situational awareness and digitization of less intelligent legacy systems;
TAK-enabled Sniper and Surveillance ("T-SAS^TM") solution enabling real-time situational awareness for tactical operators engaged in fast-paced front-line operations;
DEFSEC Lightning^TM 2.0 SaaS, as described above, has a dual use for not only the public safety market but for military customers that use TAK, particularly the Canadian and United States militaries;

The dual-use Battlespace Laser Identification Sensor System (“BLISS^TM”) (an earlier version being named BLDS) providing real-time alerts on presence, location and type of laser threats, and enabling future capabilities such as automated threat classification and coordinated response will support both vehicle-mounted and personnel-worn applications; and
Phantom^TM Tactical Multi-Function Electro-Magnetic Spectrum Operations (EMSO) system and Electronic Warfare device. Development and patent applications have been paused as we determine the best method to bring this product to market.

Strategy

Our strategy is to pursue and win large task-order based software development and digitization defence contracts for multi-year revenue visibility with prime, or large second tier, defence contractors, with a particular focus on command and control situational awareness (including TAK) applications that can also be leveraged to address similar requirements in the Public Safety Market. In the Public Safety market, these efforts are complemented by activities relating to our proprietary ARWEN^® and PARA SHOT^TM less-lethal products, where it is possible to drive related sales with combined selling efforts and where the sales cycle is typically shorter than the more programmatic defence market.

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DEFSEC TECHNOLOGIES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
THREE AND SIX MONTHS ENDED MARCH 31, 2026

Principal Products and Services

The following is a summary of our main product and service categories for each business line:

Less-Lethal

Digitization

Counter-Threat

PARA SHOT^TM products:
Non-reciprocating devices:

A single-shot device
A five-shot device
12-gauge shotgun (planning stage; not yet industrialized)

Reciprocating devices
(Planning stage, not yet commercially available)

Replica pistol

AR style rifle

Cartridge

Blunt / training

Inert marking powder
Irritant powder

ARWEN^® products:

Single shot 37mm launcher
Multi-round 37mm launcher
Baton blunt impact 37mm, and 40mm
37mm chemical, irritant, and barricade-penetrating rounds
PARA SHOT^TM training adapter for ARWEN^® Platform

Products:

TASCS Indirect Fire

Modules System
("TASCS IFM")

TASCS Networked

Observation and
Reconnaissance System
("TASCS NORS")

New T-SAS Tactical

Surveillance and Sniper
system ("T-SAS™")
Services:

ATAK Centre of Excellence
DEFSEC Lightning^TM 2.0 SaaS for Critical Incident Management System ("CIMS") (not yet commercially available)
Task-order based software services on long-term government defence contracts

Products:

Battlespace Laser Identification Sensor System (BLISS^TM)
Phantom^TMElectronic Warfare device

Less-Lethal Products

Non-reciprocating PARA SHOT^TM devices

We are in the low-rate initial production ("LRIP") phase for the .67 caliber single shot devices and cartridges. We expect to complete our sales, marketing and distribution plan and will begin the higher volume production phase for these products during Fiscal 2026. Both will be offered first to the professional user market (public safety and security) where demonstrations and evaluations are underway. We also intend to offer these devices and cartridges to the personal safety market in accordance with applicable rules and regulations. In the United States, this entails classification with the Bureau of Alcohol, Tobacco and Firearms ("ATF"). If the launchers are classified as a firearm, it is possible that a reduction in the caliber may be required in order to obtain the appropriate classification (as not a "destructive device" i.e. under .50 caliber) to reduce the barriers to sell to the personal safety market. This would also require testing and evaluation to determine whether a reduced caliber version would operate effectively as intended. The Company has not yet done such testing. This would entail moderate investment in tooling to resize the launchers and cartridges accordingly. The Company has already completed prototypes in .49 caliber should they be required. In June 2025 we submitted for a ruling, with the initial ruling being returned to us in November 2025. The ATF did not rule on destructive device classification. The Company will continue to seek clarity on this. In the meantime, we continue to self-classify it as a destructive device until otherwise advised on the classification with the ATF.

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DEFSEC TECHNOLOGIES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
THREE AND SIX MONTHS ENDED MARCH 31, 2026

(PARA SHOT^TM Micro) (PARA SHOT^TM Mini)

We plan to offer three types of payloads for projectiles based on customer needs:

solid slug for training practice;
inert colored powder for practice or realistic close quarters combat simulation; and
incapacitating irritant pepper powder for operational use.

Reciprocating PARA SHOT^TM devices

We have a plan to prototype PARA SHOT^TM as a high-capacity automatic pistol and carbine (referred to as reciprocating devices) for less-lethal operations and force-on-force training, along with a reciprocating PARA SHOT^TM cartridge. The start of this project has yet to be determined as we have prioritized the roll-out of PARA SHOT^TM for the personal safety market.

See below for further details of our projected product development cycle and estimated additional investment to reach full commercialization for our PARA SHOT^TM devices.

ARWEN^® launchers

We are currently selling the following ARWEN^® products and related ammunition to law enforcement agencies throughout North America:

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DEFSEC TECHNOLOGIES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
THREE AND SIX MONTHS ENDED MARCH 31, 2026

Digitization

For the Digitization business line, our products and services share the same core technology platforms and leverage our domain knowledge, proprietary sensor-software integration, proprietary algorithms and electronic circuitry expertise in order to develop and deliver integrated shared situational awareness solutions to our clients who operate in the primarily dismounted domain (i.e., away from supporting platforms such as aircraft and vehicles, including armored vehicles):

TAK is a United States Government-owned situational awareness software ecosystem that operates on Android end-user devices and is distributed in multiple variants, including Military TAK ("MilTAK") and Civilian TAK ("CivTAK"). MilTAK is designed for U.S. and allied defence partners and is subject to controlled distribution, while CivTAK is more broadly accessible to public safety and civilian organizations. Based on our observation, TAK-across its variants-is becoming the de facto standard for software-based situational awareness in the United States, Canada, and several other North Atlantic Treaty Organization ("NATO") countries. Although the core TAK software is United States government-owned and generally available at no cost within its respective distribution channels, developing mission-specific plug-ins, enabling interoperability between MilTAK and CivTAK environments, and implementing secure tactical networking solutions remain beyond the capacity of most user organizations. We offer the experience and expertise required to support TAK deployment, integration, cross-domain interoperability, and secure network implementation for prospective clients.
After successfully developing digital technologies for tactical military applications which provide real-time exchange of situational awareness, navigation, imagery, and operational information for soldiers on the ground, we saw opportunities to apply these digitization solutions to the public safety market. These solutions solve critical challenges for law enforcement, fire, emergency response, search and rescue, and natural disaster management, all of whom require networked situational awareness in real time to understand, decide, and act faster and more effectively in response to a critical incident. When responders are facing a public emergency, they need information quickly. In situations ranging from active shooter incidents to natural disasters, responders must have clear, real-time awareness of the environment they are entering and the location of available resources. They also need to communicate and collaborate in real-time - across teams and information sources and often across departments.
Leveraging our experience gained through our work in the civilian public safety market with our ARWEN^® line of public order products, DEFSEC has, as of May 6, 2026, commercially released DEFSEC Lightning™ 2.0 SaaS platform. Development of this platform was originally announced in October 2023.
The DSEF (Directorate Land Command Systems Program Management Software Engineering Facility) program is a 5-year contract awarded to a joint venture to which DEFSEC is a party. The Land C4ISR (Land Command, Control, Communications, Computers, Intelligence, Surveillance and Reconnaissance) programs are a series of task-order based long-term contracts to modernize the Canadian Army's capabilities. Under the Land C4ISR program, DEFSEC is a subcontractor to Thales Canada, who is the major sub-prime contractor. The Company will increase staffing, and related revenue, if future taskings are received.

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DEFSEC TECHNOLOGIES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
THREE AND SIX MONTHS ENDED MARCH 31, 2026

The following table provides an update of our current product development cycle by product line and estimated timeline by quarter to reach production:

	Concept & Design	Prototype⁽¹⁾	Market Testing⁽²⁾	LRIP Production⁽³⁾	Higher Volume Production⁽⁴⁾
PARA SHOT^TM – Micro (single-shot device) ⁽⁵⁾	Completed	Completed	Ongoing	Ongoing	Q3-Q4 FY26
PARA SHOT^TM – Micro (single-shot device) ⁽⁵⁾
PARA SHOT^TM – Mini (5-shot device)⁽⁵⁾	Completed	Completed	Ongoing	Q2-Q3 FY 2026	FY26
PARA SHOT^TM – Mini (5-shot device)⁽⁵⁾
PARA SHOT^TM – reciprocating devices	Q4 FY26	Q4 FY26	Q4 FY26	Q1 FY 2027	Q4 FY27
PARA SHOT^TM – reciprocating devices
BLISS	Completed	Ongoing	Ongoing	Ongoing	TBD per market demand
ARWEN® 37mm Ammunition	Completed	Completed	Completed	Completed	Completed
ARWEN® 40mm Ammunition	Completed	Completed	Completed	Completed	Ongoing
ARWEN® 40mm, 37mm training cartridge	Completed	Completed	Ongoing	Q3 FY26	FY26

Notes:

(1) Prototype Version 1 (V1) and Version 2 (V2), integration, and testing have been completed. Next Generation BLISS prototyping is ongoing with units available for qualification and customer trials.

(2) Includes field testing, prototype V2, Next Generation (SPOC8) and BLISS Prototype.

(3) "Low-Rate Initial Production". Includes final product development, LRIP, and sales demonstration units. A product is not ready for pre-production until it reaches Technology Readiness Level (TRL) of 5 to 6. Version 2 has been delivered to the customer for integration under this phase, SPOC 4 prototypes have been delivered to a North American customer for range-trials, Next Generation (SPOC 8) prototypes have been integrated and are undergoing testing and demonstration at DEFSEC, BLISS prototypes have been delivered for customer testing at U.S. Army Test Center.

(4) Awaiting customer validation and follow-on orders.

(5) Includes the cartridges for the devices. Low-rate initial production timeline extended by one to two quarters in order to include product refinements. Higher volume production anticipated timelines could be longer if modifications are required as a result of the ATF confirmation of classification to reduce barriers to sales to the civilian personal safety market.

We consider a product to have reached the commercialization phase when we have begun LRIP and we have a sales, marketing, and distribution plan for the product. Commercialization may precede a first sale of the product.

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DEFSEC TECHNOLOGIES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
THREE AND SIX MONTHS ENDED MARCH 31, 2026

Major Highlights - Quarter ended March 31, 2026 ("Q2 Fiscal 2026")

The following is a summary of the major highlights that occurred during Q2 Fiscal 2026:

On January 23, 2026, the Company announced that it appointed Niel Marotta as a member of the Board, effective immediately, and that it filed an amended and restated notice of the annual and special meeting of shareholders, to be held on February 19, 2026, and a related amended and restated management information circular and form of proxy.

On January 30, 2026, the Company announced that it voluntarily filed restated unaudited condensed consolidated interim financial statements for the three and nine months ended June 30, 2025 and 2024 (the "Restated Interim Financial Statements") and the related management's discussion and analysis of financial condition and results of operations for the three and nine months ended June 30, 2025 (the "Restated MD&A"). The Restated Interim Financial Statements were amended as a result of errors identified related to the initial measurement of right-of-use assets and lease liabilities associated with the Company's lease entered into in June 2025, as well as the recording of lease-related prepayments associated with the same lease. Changes were limited to the interim statements of financial position and related notes, with no change being made to the interim statements of net loss and comprehensive loss, the interim statements of changes in shareholders' equity or the interim statements of cash flows reported in the Restated Interim Financial Statements.

On February 2, 2026, the Company announced that it appointed Elisabeth Preston as Senior Vice-President and Chief Legal Officer.

On February 23, 2026, the Company announced that shareholders approved all the resolutions detailed in the amended and restated management information circular of the Company dated January 14, 2026, namely:

To set the number of Directors at seven;
Electing all the nominees to the Board of Directors of the Company;
Appointing MNP LLP as auditor of the Company for the ensuing year and authorizing the directors to determine the auditor's compensation; and
Approving the Company's amended long term incentive plan.

On February 23, 2026, Mr. Marotta replaced Mr. Fortin as a member of the audit committee.
On March 31, 2026, the Company announced the launch of its Battlespace Laser Identification Sensor System (BLISS™), the next-generation capability in the company's battlefield laser detection innovation path. BLISS is designed to alert operators to laser activity across the battlespace, providing critical early warning, characterization of the nature of the threat, and valuable time to assess, evade, defend, and deploy countermeasures. Low cost and scalable across dismounted soldiers, vehicles, and fixed infrastructure, it greatly enhances survivability, situational awareness and provides a much more complete picture of threats in the battlespace in real time.

The following is a summary of major highlights that occurred after March 31, 2026:

On April 20, 2026, the Company announced that David Ibbetson, former General Manager of General Dynamics Mission Systems International ("GDMS") has joined DEFSEC's board of directors. The Company also announced the departure of Paul Mangano from the board of directors. Mr. Ibbetson was also appointed as a member of the audit committee.

On April 29, 2026, the Company confirmed that it had shipped two new networked BLISS^TM systems to the United States Army Yuma Test Center (US Army YTC) for test and evaluation.

On May 6, 2026, the Company announced the commercial release of its Lightning^TM real-time situational awareness system for faster, coordinated response within and across responder agencies during critical incidents.

11 | Page

DEFSEC TECHNOLOGIES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
THREE AND SIX MONTHS ENDED MARCH 31, 2026

RESULTS OF OPERATIONS

The following selected financial data has been extracted from Q2 Fiscal 2026 FS.

		Three months ended March 31,							Six months ended March 31,
		2026			2025		Change 2026 vs 2025		2026			2025		Change 2026 vs 2025

Revenue	$	2,119,699		$	1,264,162		68%	$	3,427,435		$	2,151,820		59%
Cost of sales		(1,493,731	)		(950,141	)	(57)%		(2,396,775	)		(1,433,277	)	(67)%
Gross profit		625,968			314,021		99%		1,030,660			718,543		43%
Gross Margin %		29.5%			24.8%				30.1%			33.4%

Operating expenses
General and administrative ("G&A")		1,471,869			1,102,261		(34)%		2,810,219			2,613,705		(8%)
Selling and marketing ("S&M")		335,569			334,114		-%		638,939			1,016,661		37%
Research and development ("R&D")		556,866			299,916		(86)%		1,206,495			972,491		(24)%
Share-based compensation		-			26,342		100%		-			77,397		100%
Depreciation and amortization		170,354			285,929		40%		347,623			600,420		42%
Total operating expenses		2,534,658			2,048,562		(24)%		5,003,276			5,280,674		(5)%

Operating loss		(1,908,690	)		(1,734,541	)	(10)%		(3,972,616	)		(4,562,131	)	13%

Other income (expenses)
Share issuance costs		-			-		-%		-			(1,807,686	)	100%
Net finance costs		(45,811	)		(31,361	)	(46)%		(83,105	)		(93,420	)	11%
Foreign exchange gain (loss)		25,062			77,823		(68)%		(48,190	)		191,106		(125)%
Impairment of right-of-use assets		-			-		-%		-			(88,596	)	100%
Gain (loss) on disposal of property and equipment		(58,778	)		6,809		(963)%		(58,778	)		6,809		(963)%
Change in fair value of warrant liabilities		(34,774	)		221,763		(116)%		56,694			1,437,396		(96)%
Total other expenses, net		(114,301	)		275,034		(142)%		(133,379	)		(354,391	)	62%
Net loss	$	(2,022,991	)	$	(1,459,507	)	(39)%	$	(4,105,995	)	$	(4,916,522	)	16%

EBITDA loss⁽¹⁾	$	(1,806,826	)	$	(1,142,217	)	(58)%	$	(3,675,267	)	$	(4,222,682	)	13%
Adjusted EBITDA loss⁽¹⁾	$	(1,738,336	)	$	(1,422,270	)	(22)%	$	(3,624,993	)	$	(3,884,314	)	7%
Loss per share - basic and diluted	$	(1.01	)	$	(6.16	)	84%	$	(2.36	)	$	(16.11	)	85%
Weighted average Common Shares - basic and diluted		1,993,626			237,039				1,742,602			305,190
⁽¹⁾ ^{EBITDA and Adjusted EBITDA are non-IFRS measures. See "Non-IFRS Measures". See below for "Reconciliation of Non-IFRS Measure".}

12 | Page

DEFSEC TECHNOLOGIES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
THREE AND SIX MONTHS ENDED MARCH 31, 2026

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

		Three Months ended March 31,						Six Months ended March 31,
		2026			2025			2026			2025

Net loss as reported under IFRS	$	(2,022,991	)	$	(1,459,507	)	$	(4,105,995	)	$	(4,916,522	)
Net financing costs		45,811			31,361			83,105			93,420
Depreciation and amortization		170,354			285,929			347,623			600,420
EBITDA loss		(1,806,826	)		(1,142,217	)		(3,675,267	)		(4,222,682	)
Other adjustments:
Stock-based compensation		-			26,342			-			77,397
Share issuance costs		-			-			-			1,807,686
Impairment of right-of-use-asset		-			-			-			88,596
Gain (loss) on disposal of property and equipment		58,778			(6,809	)		58,778			(6,809	)
Change in fair value of warrant liabilities		34,774			(221,763	)		(56,694	)		(1,437,396	)
Foreign exchange loss (gain)		(25,062	)		(77,823	)		48,190			(191,106	)
Adjusted EBITDA loss		(1,738,336	)		(1,422,270	)		(3,624,993	)		(3,884,314	)

Revenue

Total revenue increased by $0.9 million or 68% in Q2 Fiscal 2026 compared to Q2 Fiscal 2025, due to an increase of $0.9 million generated by our digitization services. The increase was driven by additional resources added over the last twelve months hired to fulfill our Canadian Government Defence program subcontracts. Sales of our less-lethal products and services were flat when comparing the second quarter of fiscal 2026 to the same period last year.

The Company’s government services program billings on an annualized go-forward basis were approximately $9.1 million¹ based on the 43 resources assigned to these projects at March 31, 2026. Subsequent to the end of the quarter, two additional resources were added to the programs resulting in program billings on an annualized go-forward basis of approximately $9.4 million¹. Management continues to work closely with industry partners and prime contractors in order to monitor the outlook for growth. The Company also expects revenue to increase with continued growth in the ARWEN^® business due to the expected demand for the new 40mm ammunition, training adapters and PARA SHOT^TM products. The commercial launch of the DEFSEC Lightning™ 2.0 SaaS platform is expected to support the development of a recurring revenue stream and client base, enhancing the predictability of revenue within our product portfolio. Management also expects the initial order of BLISS^TM received in the prior year to result in requests for additional prototypes ultimately resulting in future revenue.

Gross Profit

In Q2 Fiscal 2026, the gross profit was $0.6 million or 29.5% as compared to a gross profit of $0.3 million or 24.8% in Q2 Fiscal 2025. The improvement in gross margin as a percentage of revenue is due to the change in sales mix.

Gross margin from our digitization programs has improved from 22% in the second quarter of Fiscal 2025 to 30% in the second quarter of Fiscal 2026. In Q2 Fiscal 2025 we had unplanned extra effort expended in the quarter to close out a long-term project which negatively impacted our margin. The expansion of service delivery under our Canadian government defence programs over the past twelve months has also aided in stabilizing our gross margin as we now have a critical mass of resources on task, which makes revenue and margins less prone to fluctuations.

Gross profit of our less-lethal products was lower when comparing Q2 Fiscal 2026 to Q2 Fiscal 2025 mainly due to a product mix shift from higher margin physical products to lower margin training.

Operating Expenses ("OPEX")

_____________________________________
¹ Unaudited, non-IFRS measure.

13 | Page

DEFSEC TECHNOLOGIES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
THREE AND SIX MONTHS ENDED MARCH 31, 2026

Total OPEX increased by $0.5 million when comparing Q2 Fiscal 2026 to Q2 Fiscal 2025 due to the following factors:

G&A increased by $0.4 million in the second quarter of Fiscal 2026 as compared to the same quarter last year. The increase is driven by a $0.2 million increase in salary and benefits and an additional $0.2 million in professional fees for legal and accounting services.

S&M was flat when comparing the second quarter of Fiscal 2026 to the second quarter of Fiscal 2025. A small decrease in personnel cost and travel was offset by higher consulting fees and investor relations costs; and

R&D increased by $0.3 million when comparing the second quarter of Fiscal 2026 to the second quarter of Fiscal 2025. We continue to invest in the development and commercialization of our DEFSEC Lightning^TM 2.0, BLISS and PARA SHOT^TM products.

Other income (expenses), net

For the second quarter of Fiscal 2026, other income (expense) totaled a loss of $0.1 million, compared to income of $0.3 million in the second quarter of Fiscal 2025. The change was primarily attributable to $0.1 million of net financing costs, partially offset by foreign exchange impacts. In addition, during the second quarter of Fiscal 2026, the Company conducted a review of its fixed assets in use and determined that certain assets should be written off and disposed of, resulting in a loss on disposal of $0.1 million recorded during the quarter. The majority of these assets were held at the Company’s previous head office which was vacated at the end of the quarter and it was determined that these assets were not sufficiently beneficial to relocate.

In the second quarter of Fiscal 2026, the Company also recorded a loss less than $0.1 million arising from the remeasurement of warrant liabilities at March 31, 2026. In accordance with IFRS, warrant liabilities are required to be remeasured at fair value at each reporting date until exercise or expiry. In the comparable period of the prior year, we recognized a $0.2 million gain related to the remeasurement of warrant liabilities. The resulting $0.3 million year‑over‑year variance from a gain to a loss represents the principal driver of the change in Other income (expense) compared with the second quarter of fiscal 2025.

SUMMARY OF QUARTERLY RESULTS

The following table summarizes selected results for the eight most recently completed quarters to March 31, 2026 (unaudited):

		2026						2025												2024
		Q2			Q1			Q4			Q3			Q2			Q1			Q4			Q3

Revenue	$	2,120		$	1,308		$	1,373		$	1,417		$	1,264		$	888		$	560		$	329
Net Loss		(2,023	)		(2,083	)		(2,409	)		(2,301	)		(1,460	)		(3,457	)		(2,337	)		(1,162	)
Net Loss per Common Share (Basic and diluted)	$	(1.01	)	$	(1.39	)	$	(2.70	)	$	(3.69	)	$	(6.16	)	$	(23.94	)	$	(59.33	)	$	(27.30	)

Quarterly Results Trend Analysis

We experience some fluctuations within our quarterly revenue primarily related to the timing and fulfilment of orders for our less-lethal products. Our digitization revenue has grown quarter over quarter as we ramp up service delivery on our Canadian government defence programs. During the quarter we added 14 additional resources to one digitization project, which contributed positively to revenue in the period, with the full impact expected to be realized in future quarters. Our digitization revenue is subject to seasonal fluctuations, particularly in the first quarter of the year as there are fewer service delivery days in the month of December than during other months of the year.

Quarterly fluctuations in net loss were due to the timing of spending for certain research and development projects and the timing of trade shows and other sales and marketing program spend.

14 | Page

DEFSEC TECHNOLOGIES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
THREE AND SIX MONTHS ENDED MARCH 31, 2026

FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES

FINANCIAL CONDITION

The following table summarizes our financial position:

		March 31, 2026		September 30, 2025
ASSETS
Current	$	6,116,743	$	8,946,025
Non-currents		3,692,545		3,975,451
Total Assets	$	9,809,288	$	12,921,476
Liabilities
Current	$	2,523,409	$	2,918,205
Non-current		2,160,948		2,201,552
Total Liabilities		4,684,357		5,119,757
Net assets	$	5,124,931	$	7,801,719

Working capital⁽¹⁾	$	3,593,334	$	6,027,820

Indebtedness:
Lease liabilities	$	1,256,403	$	1,303,450
Warrant liabilities		152,989		210,965
Total debt	$	1,409,392	$	1,514,415
⁽¹⁾ ^{Working capital is calculated as current assets less current liabilities.}

Our working capital was $3.6 million at March 31, 2026, a $2.4 million decrease from September 30, 2025. The decrease was primarily due to our use of cash to fund our operations offset by the December private placement financing which provided $2.1 million in gross proceeds. Current liabilities include warrant liabilities, a non-cash liability item (see Note 8(a) of the Q2 Fiscal 2026 FS). Excluding warrant liabilities, working capital would be $3.8 million. These warrant liabilities will be extinguished when the warrants are exercised or expired. These warrants are set to expire between December 9, 2027, and August 9, 2029. If exercised, the proceeds would provide the Company with additional capital to fund future working capital requirements. There is no assurance that any warrants will be exercised.

Total assets decreased by $3.1 million from September 30, 2025, mainly due to a decrease in cash of $3.8 million to fund our development efforts for our various product lines that have yet to generate sales and the payment of accounts payable and accrued liabilities that were owing at September 30, 2025.

Total liabilities decreased by $0.4 million from September 30, 2025, mainly due to a decrease in accounts payable and accrued liabilities of $0.2 million due to the timing of payments to employees and suppliers and $0.2 million decrease in accrued royalties as a result of the annual payment being made in the quarter.

LIQUIDITY AND CAPITAL RESOURCES

Available Liquidity

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 regularly perform cash flow forecasts to ensure that we have sufficient cash to meet our operational needs while maintaining sufficient liquidity. At this time, we do not use any derivative financial instruments to hedge our currency risk.

On December 17, 2025, we entered into definitive agreements for the purchase and sale of 566,040 Common Shares at a purchase price of $3.64 (US$2.65) per Common Share in a registered direct offering. In a concurrent private placement, we issued unregistered warrants to purchase up to 566,040 Common Shares at an exercise price of $4.27 per Common Share that are immediately exercisable upon issuance and expire five years following the date of issuance. The closing of the offering occurred on December 18, 2025. The net proceeds from this Offering are intended for working capital and general corporate purposes. On February 10, 2026, these warrants were registered with the SEC.

15 | Page

DEFSEC TECHNOLOGIES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
THREE AND SIX MONTHS ENDED MARCH 31, 2026

At March 31, 2026, we held $3.0 million in cash, a decrease of $3.7 million since September 30, 2025, primarily due to funding our operations and partially offset by the December financing which provided gross proceeds of $2.1 million before underwriting and offering costs. The Company also generated cash from the delivery of products and services as revenue grew $1.3 million when comparing the six-month period ended March 31, 2026, with the same period last year.

As an early-stage company, we have not yet reached significant revenue levels for most of our products and have incurred significant losses and negative operating cash flows from inception that have primarily been funded from financing activities. Our ability to continue as a going concern and realize our assets and discharge our liabilities in the normal course of business is dependent upon closing timely additional sales orders, timely commercial launch of new products, and the ability to raise additional debt or equity financing, when required. There are various risks and uncertainties affecting our future financial position and our performance. Accordingly, there are material risks and uncertainties that may cast substantial doubt about our ability to continue as a going concern. Further, we may require additional capital in the event we fail to implement our business plan, which could have a material adverse effect on our financial condition and/or financial performance. There is no assurance that we will be able to raise additional capital as it is required in the future. Potential sources of capital may include additional equity and/or debt financings.

In our view, the availability of capital will be affected by, among other things, capital market conditions, the success of our PARA SHOT^TM system, BLISS and DEFSEC Lightning^TM 2.0 market development efforts, timing of winning new customer contracts, potential acquisitions, and other relevant considerations. In the event we raise additional funds by issuing equity securities, our existing shareholders will likely experience dilution, and any additional incurrence of indebtedness would result in increased debt service obligations and could require us to agree to operational and financial covenants that could further restrict our operations. Any failure to raise additional funds on terms favorable to us or at all may require us to significantly change or curtail our current or planned operations in order to conserve cash until such time, if ever, that sufficient proceeds from operations are generated, and could result in us not being in a position to advance our commercialization strategy or take advantage of business opportunities.

Consolidated Statements of Cash Flows

The following table summarizes our consolidated statements of cash flows for the respective periods:

		Six months ended March 31,
		2026			2025

Total cash provided by (used in):
Operating activities	$	(4,926,868	)	$	(4,851,931	)
Investing activities		(121,362	)		(58,710	)
Financing activities		1,311,592			9,062,657
Net cash outflows		(3,736,638	)		4,152,016
Cash, beginning of period		6,686,429			256,828
Effect of exchange rates on cash		1,214			-
Cash, end of period		2,951,005			4,408,844

Cash used in operating activities

Cash flow used in operating activities increased by $0.1 million to $4.9 million for the six months ended March 31, 2026, primarily reflecting higher payments on accounts payable and accrued liabilities, as well as an additional $0.3 million utilized for prepaid expenses.

Cash used in investing activities

16 | Page

DEFSEC TECHNOLOGIES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
THREE AND SIX MONTHS ENDED MARCH 31, 2026

Cash flows used in investing activities for the six months ended March 31, 2026, increased by $0.1 million compared to the same period in Fiscal 2025. Investing activities in both periods consisted of purchases of property and equipment.

Cash provided by financing activities

Cash flow provided by financing activities was $1.3 million in the first six months of Fiscal 2026 compared to the $9.1 million provided from financing activities in the first six months of Fiscal 2025. The cash provided in both periods was related to proceeds generated from the issuance of common shares and warrants, offset by the related share offering costs for each transaction.

Capital Resources

Our objective in managing our capital is to safeguard our ability to continue as a going concern and to sustain future development of the business. Senior management is responsible for managing capital through regular review of financial information to ensure sufficient resources are available to meet operating requirements and investments to support the growth strategy. Our Board of Directors is responsible for overseeing this process. From time to time, we could issue new Common Shares or debt to maintain or adjust our capital structure. We are not subject to any externally imposed capital requirements.

Our primary sources of capital to date have been borrowings, security offerings, and warrants and, to a lesser extent, revenue. The following is a breakdown of our capital:

		March 31, 2026			September 30, 2025
Debt:
Lease liabilities	$	1,256,403		$	1,303,450
Warrant liabilities		152,989			210,965

Equity:
Share capital	$	47,854,235		$	47,003,991
Warrants		8,345,194			7,764,412
Contributed surplus		5,398,445			5,398,445
Accumulated other comprehensive loss		(86,896	)		(85,077	)
Accumulated deficit		(56,386,047	)		(52,280,052	)
Total capital	$	6,534,323		$	9,316,134

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DEFSEC TECHNOLOGIES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
THREE AND SIX MONTHS ENDED MARCH 31, 2026

Contractual Obligations and Commitments

At March 31, 2026, our contractual obligations and commitments were as follows:

Payment due:		Total		Within 1 year		1 to 3 years		3 to 5 years		5 years and beyond

Minimum royalty commitments	$	1,800,000	$	250,000	$	550,000	$	650,000	$	350,000
Accounts payable and accrued liabilities		2,065,953		2,065,953		-		-		-
Lease obligations		2,126,135		152,782		407,420		407,420		1,158,513
Total contractual obligations	$	5,992,088	$	2,468,735	$	957,420	$	1,057,420	$	1,508,513

Shares Outstanding

At March 31, 2026, authorized capital consists of an unlimited number of Common Shares with no stated par value.

The following table shows the outstanding Common Shares and dilutive securities as at March 31, 2026:

Securities
outstanding

Underlying
Common
Shares⁽¹⁾

Average
price
( CAD $)

Proceeds if
exercised

Common shares

1,993,626

Warrants

9,560,513

1,694,266

2.01

19,216,631

Pre-funded warrants

151,734

722

0.014

2,124

Warrant liabilities

9,539,727

45,425

3.17

30,240,935

U.S. underwriter warrants

1,532,261

131,919

2.20

3,370,974

Stock options

886

543.96

481,950

Total Common Shares and dilutive securities

3,866,844

53,312,614

⁽¹⁾Represents the number of shares to be issued upon exercise

The following table shows the outstanding Common Shares and dilutive securities as at May 13, 2026:

Securities
outstanding

Underlying
Common
Shares⁽¹⁾

Average
price
( CAD $)

Proceeds if
exercised

Common shares

1,993,626

Warrants

9,060,513

1,694,232

2.08

18,845,867

Pre-funded warrants

151,734

722

0.014

2,124

Warrant liabilities

9,539,727

45,425

3.10

29,573,154

U.S. underwriter warrants

1,532,261

131,926

2.17

3,325,006

Stock options

882

541.05

477,206

Total Common Shares and dilutive securities

3,866,806

52,223,357

⁽¹⁾Represents the number of shares to be issued upon exercise

18 | Page

DEFSEC TECHNOLOGIES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
THREE AND SIX MONTHS ENDED MARCH 31, 2026

OFF-BALANCE SHEET ARRANGEMENTS

We have no off-balance sheet arrangements.

RELATED PARTY TRANSACTIONS

Refer to Note 11 of the Q2 Fiscal 2026 FS for disclosure about DEFSEC's related party transactions conducted 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 13 of the Q2 Fiscal 2026 Unaudited Condensed Consolidated Interim Financial Statements for further disclosure of our financial instruments.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Refer to Note 2 of the Fiscal 2025 audited 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 March 31, 2026, DEFSEC's authorized capital consists of an unlimited number of Common Shares with no stated par value. There were 1,993,626 outstanding and issued Common Shares as at March 31, 2026.

SUBSEQUENT EVENTS

Refer to major highlights section earlier in this MD&A.

DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROLS OVER FINANCIAL REPORTING

As required by National Instrument 52-109 Certification of Disclosure in Issuers Annual and Interim Filings and Rule 13a-15(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), as amended, we have evaluated, under the supervision and with the participation of management, including our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), the effectiveness of the design and operation of our disclosure controls and procedures ("DC&P") (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) as of the end of the quarter. These DC&P are designed to provide reasonable assurance that information required to be publicly disclosed is recorded, processed, summarized and reported on a timely basis.

Based upon the evaluation, our CEO and CFO have concluded that the operation of our DC&P were effective as of September 30, 2025. Since the September 30, 2025 evaluation, there have been no changes in our DC&P that materially affected or are reasonably likely to materially affect our DC&P, accordingly their design remains effective.

19 | Page

DEFSEC TECHNOLOGIES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
THREE AND SIX MONTHS ENDED MARCH 31, 2026

Management's Assessment on Internal Controls over Financial Reporting

In accordance with National Instrument 52-109 Certification of Disclosure in Issuer's Annual and Interim Filings and as required by Rule 13a-15(f) of the Securities Exchange Act of 1934 (the "Exchange Act"), as amended, the CEO and CFO are responsible for establishing and maintaining adequate internal controls over financial reporting ("ICFR"), The Company's management, including the CEO and CFO, designed ICFR based on the 2013 Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the "COSO Framework") to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with IFRS.

ICFR is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. ICFR has inherent limitations. ICFR is a process that involves human diligence and compliance and is subject to lapses in judgement and breakdowns resulting from human failures. ICFR also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements will not be prevented or detected on a timely basis by ICFR. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

Management, under the supervision, and with the participation, of our CEO and CFO and oversight of the Board of Directors, evaluated the effectiveness of our ICFR as at September 30, 2025, against the COSO Framework. Based on these evaluations, our management, including our CEO and CFO, concluded that no material weaknesses existed and our ICFR were effective as of September 30, 2025. For the six month period ending on March 31, 2026, there have been no changes that have materially affected or is reasonably likely to materially affect our ICFR, accordingly their design remains effective.

Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements on a timely basis. Additionally, projections of any evaluation of the effectiveness of internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

20 | Page

FORM 52-109F2
CERTIFICATION OF INTERIM FILINGS
FULL CERTIFICATE

I, Sean Homuth, Chief Executive Officer of DEFSEC Technologies Inc., certify the following:

1. Review: I have reviewed the interim financial report and interim MD&A (together, the "interim filings") of DEFSEC Technologies Inc. (the "issuer") for the financial quarter ended March 31, 2026.

2. No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings.

3. Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings.

4. Responsibility: The issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as those terms are defined in National Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings, for the issuer.

5. Design: Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer's other certifying officer(s) and I have, as at the end of the period covered by the interim filings

(a) designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that

(i) material information relating to the issuer is made known to us by others, particularly during the period in which the interim filings are being prepared; and

(ii) information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and

(b) designed ICFR, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer's GAAP.

5.1 Control framework: The control framework the issuer's other certifying officer(s) and I used to design the issuer's ICFR is the Internal Control - Integrated Framework (COSO Framework) published by The Committee of Sponsoring Organizations of the Treadway Commission (COSO).

5.2 ICFR - material weakness relating to design: N/A

-2-

5.3 Limitation on scope of design: N/A

6. Reporting changes in ICFR: The issuer has disclosed in its interim MD&A any change in the issuer's ICFR that occurred during the period ended March 31, 2026 that has materially affected, or is reasonably likely to materially affect, the issuer's ICFR.

Date: May 13, 2026

/s/ Sean Homuth
Sean Homuth
Chief Executive Officer

FORM 52-109F2
CERTIFICATION OF INTERIM FILINGS
FULL CERTIFICATE

I, Jennifer Welsh, Chief Financial Officer of DEFSEC Technologies Inc., certify the following:

5. Design: Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer's other certifying officer(s) and I have, as at the end of the period covered by the interim filings

(a) designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that

(i) material information relating to the issuer is made known to us by others, particularly during the period in which the interim filings are being prepared; and

5.2 ICFR - material weakness relating to design: N/A

-2-

5.3 Limitation on scope of design: N/A

Date: May 13, 2026

/s/ Jennifer Welsh
Jennifer Welsh
Chief Financial Officer

Source: View Original Filing on SEC EDGAR

FAQ

How did DEFSEC (DFSC) perform financially in Q2 Fiscal 2026?

DEFSEC grew Q2 2026 revenue to $2.12 million, up 68% year over year, mainly from digitization services. However, it reported a Q2 net loss of $2.02 million and a six‑month net loss of $4.11 million, reflecting ongoing investment and operating costs.

What is DEFSEC (DFSC) reporting about its going concern status?

DEFSEC states its financial statements are prepared on a going concern basis but highlights material risks and uncertainties. Continued operations depend on winning new sales orders, launching new products on time, and raising additional debt or equity financing when required.

How much cash and working capital does DEFSEC (DFSC) have?

As of March 31, 2026, DEFSEC held $2.95 million in cash and cash equivalents and had working capital of $3.59 million. These balances declined from September 30, 2025 as the company funded operating losses and product development.

Where is DEFSEC’s (DFSC) revenue growth coming from?

Growth is mainly from digitization services on Canadian government defence programs. Q2 2026 digitization revenue increased significantly, while less‑lethal product sales were relatively flat. Digitization also supported higher gross margins compared with the prior year quarter.

What were DEFSEC’s (DFSC) EBITDA and Adjusted EBITDA in Q2 2026?

For Q2 2026, DEFSEC reported an EBITDA loss of $1.81 million and an Adjusted EBITDA loss of $1.74 million. Adjusted EBITDA excludes items such as foreign exchange impacts, changes in fair value of warrant liabilities, and certain non‑recurring or non‑cash charges.

How leveraged is DEFSEC (DFSC) and what liabilities are notable?

Total liabilities were $4.68 million at March 31, 2026, including $1.26 million of lease obligations and $0.15 million of warrant liabilities. The remainder is mainly accounts payable, accrued liabilities, and royalty obligations owed under licensing agreements.

Filing Exhibits & Attachments

4 documents

DEFSEC (NASDAQ: DFSC) grows Q2 revenue but warns on going concern

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FAQ

How did DEFSEC (DFSC) perform financially in Q2 Fiscal 2026?

What is DEFSEC (DFSC) reporting about its going concern status?

How much cash and working capital does DEFSEC (DFSC) have?

Where is DEFSEC’s (DFSC) revenue growth coming from?

What were DEFSEC’s (DFSC) EBITDA and Adjusted EBITDA in Q2 2026?

How leveraged is DEFSEC (DFSC) and what liabilities are notable?

Filing Exhibits & Attachments

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