Unaudited Condensed Consolidated Interim Financial Statements of

DEFSEC TECHNOLOGIES INC.

Three and nine months ended June 30, 2026 and 2025

(Expressed in Canadian dollars)

DEFSEC Technologies Inc.

Table of contents

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

See accompanying notes to the unaudited condensed consolidated interim financial statements.

See accompanying notes to the unaudited condensed consolidated interim financial statements.

⁽¹⁾ See Note 1(a)
 

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.

2. Basis of preparation

(a) Going concern

These unaudited condensed consolidated interim financial statements have been prepared assuming the Company will continue as a going concern. The going concern basis of presentation assumes the Company will continue in operation for the foreseeable future and can realize its assets and discharge its 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 $6.7 million net loss and negative operating cash flows of $6.4 million in the nine month period ended June 30, 2026 (2025 - $7.2 million net loss and negative operating cash flows of $6.6 million). At June 30, 2026, the Company had $3.7 million in working capital (September 30, 2025 - $6.0 million) and $59.0 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;
• Its ability to successfully execute the Company's business plan;
• Its 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.

These unaudited condensed consolidated interim financial statements were authorized for issue by the Board of Directors on August 12, 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 June 30, 2026, the Company has the following wholly-owned subsidiaries, which is unchanged from September 30, 2025:

(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.

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 June 30, 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.

In May 2024, the IASB issued amendments to IFRS 9 and IFRS 7 Classification and Measurement of Financial Instruments.  These amendments clarify the date of recognition and derecognition of some financial assets and liabilities, with a new exception for some financial liabilities settled through an electronic cash transfer system; add new disclosures for certain instruments with contractual terms that can change cash flows (such as some instruments with features linked to the achievement of environment, social and governance targets); and update the disclosures for equity instruments designated at fair value through other comprehensive income.  These amendments apply to annual reporting periods beginning on or after January 1, 2026.  The Company is currently assessing the impact of these amendments on its consolidated financial statements.

3. Material accounting policies

During the three and nine month periods ended June 30, 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:

For the three and nine month periods ended June 30, 2026, a total of $0.1 million and $0.2 million, respectively (2025 - $0.2 million and $0.3 million, respectively) of inventory was included in profit or loss as an expense as part of cost of sales.

5. Property and equipment

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

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:

At June 30, 2026, management concluded there was no indication of impairment on the intangible assets.

7. Warrant liabilities

The following table shows a breakdown and balance of warrant liabilities at June 30, 2026:

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:

Private Placement (June 2026)

On June 26, 2026, the Company issued 673,006 common shares at an offering price of $3.74 (US$2.63), which included a concurrent issuance of warrants to purchase up to an aggregate of 673,006 common shares. The warrants have a five-year life with an exercise price of $4.39 per common share. Gross proceeds from the transaction was $2.5 million.

The fair value of the June 2026 common share purchase warrants was calculated using the Black Scholes model, with the following assumptions:

Brokers' Compensation

In connection with the June 2026 Offering, the broker was paid a cash fee equal to 7.5% on the equity financing raised, which totaled $188,778.

As compensation for services rendered, the broker or its designees were granted 50,475 warrants ("June 2026 Broker Warrants").  The June 2026 Broker Warrants are immediately exercisable and entitle the holder to acquire common shares on a one-for-one basis.  The June 2026 Broker Warrants have a five-year life with an exercise price of $4.675 per common share.

The fair value of the June 2026 Broker Warrants at the closing of the June 2026 offering was $108,521 calculated using the Black Scholes model.

The fair value of the June 2026 Broker warrants was calculated using the Black Scholes model, with the following assumptions

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:

Brokers' Compensation

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.

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:

Share Issuance Costs:

In Fiscal 2026 the Company incurred the following share issuance costs that have been included in share capital and warrants on the Interim Consolidated Statements of Financial Positions:

(b) Warrants

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

As at June 30, 2026, the 21,007,716 warrants outstanding are exercisable into 2,595,779 (September 30, 2025 - 1,295,113) common shares.

The following table provides additional information on the total outstanding warrants at June 30, 2026:

(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.

Share-based compensation

The Company did not grant any RSUs, PSUs, and SARs, pursuant to the Company's Long Term Incentive Program (" LTIP") during the nine months ended June 30, 2026. As at June 30, 2026, there are 114,284 stock option units available for future grants.

The following table presents the changes in stock options during the period:

The following table presents option outstanding during the period by grant:

The fair value of the stock options granted on May 13, 2026, was calculated using the Black Scholes model, with the following assumptions:

For the three and nine months ended June 30, 2026, the Company recorded share-based compensation of $480,453 (2025 - $21,777 and $99,174, respectively). As at June 30, 2026, unrecognized share-based compensation expense was $366,601 (2025 - $14,518)

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:

At June 30, 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.

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:

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 June 30, 2026, the Company's contracted not yet recognized revenue was $2,700 (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 June 30, 2026, two customers accounted for 51% and 36% (2025 - two customers accounted for 66% and 10%) of revenue. For the nine months ended June 30, 2026, two customers accounted 58% and 32% (2025 - two customers accounted for 65% and 10%) of revenue.

11. Related party transactions

At June 30, 2026, there was $782,715 (September 30, 2025 - $791,946) outstanding in accounts payable and accrued liabilities due to officers and directors for accrued wages, bonuses 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:

13. Financial instruments

For the nine months ended June 30, 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.

At June 30, 2026, we had the following net U.S. dollar exposure:

During the three and nine months ended June 30, 2026, we recorded a foreign exchange gain of $34,889 and a loss of $13,301 respectively (2025 - loss of $258,856 and $67,750).

Liquidity risk

At June 30, 2026, our contractual obligations were as follows:

At June 30, 2026, the Company had $3.5 million in cash and $3.7 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).

14. Supplemental cash flow information

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

The following is a summary of non-cash items that were excluded from the Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 2026:

• The issuance of 42,453 December 2025 Broker warrants (see Note 8(a)); and
• The issuance of 50,475 June 2026 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 nine months ended June 30, 2025:

• $2,571,322 non-cash increases to right-of-use assets and lease obligations for a new lease signed in Kanata, Ontario;
• 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 12, 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 (see Note 4 of the Annual Financial Statements) expired December 15, 2024.

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 $385,000 with a maximum penalty of $77,000.  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.