20-F: DEFSEC Technologies Reports Strong FY25 Revenue Growth Amidst Losses

DEFSEC Technologies Inc. reported a significant 229% increase in revenue for fiscal year 2025, driven by digitization contracts and ARWEN sales, despite continued net losses and negative operating cash flows.

Summary

• Net loss for Fiscal 2025 was $9.6 million, an increase from $7.4 million in Fiscal 2024.
• EBITDA loss for Fiscal 2025 was $8.4 million, up from $6.0 million in Fiscal 2024.
• Total revenue increased by $3.4 million to $4.94 million in Fiscal 2025, a 229% increase from Fiscal 2024.
• Digitization business line revenue increased by $3.0 million, and ARWEN sales increased by $0.4 million.
• Gross margin percentage improved to 35.2% in Fiscal 2025 from 32.3% in Fiscal 2024.
• Total operating expenses increased by $0.6 million (5%) in Fiscal 2025, primarily due to additional headcount and increased business development efforts.
• Working capital improved to $6.0 million at September 30, 2025, from a negative $1.1 million at September 30, 2024, largely due to proceeds from financings.
• Cash position increased to $6.7 million at September 30, 2025, from $0.26 million at September 30, 2024.
• The company completed multiple financings in Fiscal 2025, raising aggregate gross proceeds of $18.8 million.
• Two reverse stock splits were effected: 1-for-10 on October 23, 2024, and 1-for-21 on April 23, 2025.
• The company regained compliance with Nasdaq's minimum bid price requirement on May 8, 2025.
• The estimated useful life of PARA SHOTTM assets was extended from January 2028 to April 2032, reducing annual amortization expense from $934,000 to $350,000.

Sentiment

Score: 4

Explanation: While revenue growth is strong and working capital improved due to recent financings, the company continues to incur significant net losses and negative operating cash flows, indicating ongoing financial challenges and reliance on external funding. The long-term outlook for government contracts and new product commercialization offers potential, but current profitability remains elusive.

Positives

• Total revenue increased significantly by 229% to $4.94 million in Fiscal 2025 from $1.50 million in Fiscal 2024.
• Gross margin percentage improved to 35.2% in Fiscal 2025 from 32.3% in Fiscal 2024, driven by higher-margin digitization contracts.
• Working capital improved substantially to $6.0 million at September 30, 2025, from a negative $1.1 million in the prior year.
• Cash position increased to $6.7 million at September 30, 2025, from $0.26 million at September 30, 2024.
• Successfully raised $18.8 million in gross proceeds from four financings in Fiscal 2025.
• Regained compliance with Nasdaq's minimum bid price requirement on May 8, 2025.
• Secured a first order for prototypes of the newest generation of BLDS for a major North American armored vehicle program on June 18, 2025.
• Government services business is expected to grow to approximately CAD$8.85 million in annualized program billings starting February 2026, with annualized gross margins of approximately CAD$2.3 million.
• Extended the estimated useful life of PARA SHOTTM assets from January 2028 to April 2032, reducing annual amortization expense.

Negatives

• Net loss increased to $9.6 million in Fiscal 2025 from $7.4 million in Fiscal 2024.
• EBITDA loss increased to $8.4 million in Fiscal 2025 from $6.0 million in Fiscal 2024.
• Continued negative operating cash flows of $8.0 million in Fiscal 2025.
• Accumulated deficit increased to $52.3 million at September 30, 2025, from $42.7 million in the prior year.
• The company is an early-stage company with limited operating history and has not yet achieved sustained profitability or positive cash flow from operations.
• A significant portion of Fiscal 2025 revenue is considered non-recurring, although reliance on it has been reduced.
• Dependence on key suppliers for the ARWEN product line with no long-term contracts, potentially leading to lost sales or uncompetitive pricing.
• Global inflationary pressure may adversely impact gross margins and business, particularly for raw materials and labor costs.
• The Phantom project has been put on hold due to a lack of strong customer demand.
• PARA SHOTTM revenue target of over $250,000 in Fiscal 2025 was not achieved.
• The company's ability to continue as a going concern is dependent on additional sales, new product launches, and further capital raises.

Risks

• Limited operating history, under-capitalization, cash shortages, and limitations with personnel, financial, and other resources.
• Failure to realize growth strategy or complete transactions/realize anticipated benefits.
• Reliance on key personnel and ability to attract and retain top talent.
• Regulatory compliance challenges and changes in laws, regulations, and guidelines.
• Competition from numerous domestic and foreign companies, some with greater financial resources.
• Fluctuating prices of raw materials and ability to supply sufficient product.
• Potential cancellation or loss of customer contracts if performance requirements are not met.
• Damage to reputation, especially given products used by military and law enforcement.
• Negative operating cash flows and uncertainty of achieving or sustaining profitability.
• Management of growth, including implementing and improving operational, financial, manufacturing, and management information systems.
• Product liability proceedings or claims, particularly for military and law enforcement products.
• Product recalls.
• Environmental regulations and risks.
• Ownership and protection of intellectual property, including reliance on trade secrets and potential infringement claims.
• Constraints on marketing products and delays in product sales due to marketing and distribution capabilities.
• Reliance on a limited number of third parties for manufacturing, shipping, transportation, logistics, marketing, and sales.
• Inability to accurately forecast demand for products or results of operations.
• Undetected flaws in products.
• Reliance on information technology systems and vulnerability to cyber-attacks.
• Difficulty in predicting results of operations due to evolving markets.
• Risks from doing business internationally, including laws, policies, trade barriers, financial instability, foreign exchange rates, and regional conflicts.
• Protection of electronically stored data and costs associated with breaches.
• Conflicts of interest among directors, officers, or management.
• Difficulty for foreign investors to enforce actions against the company, directors, and officers.
• Substantial capital requirements and financial risk.
• Potential dilution to existing shareholders from additional capital raises.
• Broad discretion over the use of net proceeds from future capital raises.
• Currency fluctuations.
• Unavailability of adequate director and officer insurance.
• Inadequate insurance policies to fully protect from material judgments and expenses.
• Extreme stock price volatility unrelated to operating performance.
• No assurance of an active market for Common Shares, and risks of delisting from Nasdaq.
• Liquidity of Common Shares may be decreased as a result of reverse splits.
• Risk of being classified as a Passive Foreign Investment Company (PFIC) for U.S. federal income tax purposes.
• Proposed legislation in the U.S. Congress, including changes in U.S. tax law, may adversely impact the company.
• Status as a Foreign Private Issuer under U.S. Securities Laws, leading to different disclosure requirements.
• Status as an Emerging Growth Company and reliance on exemptions from certain disclosure requirements.
• Failure to comply with changes in government policies and legislation, especially for military and less-lethal products.
• Subject to extensive government regulation in the United States for military products.
• Decline in U.S. and other government budgets, changes in spending priorities, or delays in contract awards.
• U.S. government contracts are generally not fully funded at inception and contain unfavorable termination provisions.
• PARA SHOTTM devices are classified as firearms (destructive devices) under ATF rules, creating barriers to civilian sales.
• Rapid technological development could result in obsolescence or short product life cycles.
• Uncertainty related to exportation could limit operations in the future.
• Global economic turmoil and regional economic conditions could adversely affect business.
• Industrial and Technological Benefits (ITBs) targets under the LC4ISR Sub-Tier Subcontract, with potential penalties for shortfalls.

Future Outlook

Management expects revenue to continue increasing due to additional resources for Canadian Government Defence programs, with government services business projected to reach approximately CAD$8.85 million in annualized program billings and CAD$2.3 million in annualized gross margins starting February 2026. Further revenue growth is anticipated from the ARWEN business, including new 40mm ammunition and PARA SHOTTM products, and the commercial launch of DEFSEC LightningTM. Initial BLDS orders are also expected to lead to additional networked prototypes and future revenue.

Management Comments

• Management expects revenue to continue to increase as it adds additional resources to fulfill its Canadian Government Defence programs.
• Beginning in February 2026 the Company is expecting its government services business to grow to approximately CAD$8.85 million of program billings on an annualized go-forward basis.
• Management continues to work closely with industry partners and prime contractors on the outlook for growth.
• The Company also expects revenue to increase with continued growth in the ARWEN business including the expected demand/future orders for the new 40mm ammunition and PARA SHOTTM products as well as the commercial launch of DEFSEC LightningTM.
• The initial order of BLDS in the year is expected to result in requests for additional networked prototypes ultimately resulting in future revenue.

Industry Context

The company operates in the highly competitive military, security forces, and personal defense markets, which are characterized by rapidly changing technology and evolving industry standards. There's a notable trend of increased military spending in NATO countries and a growing demand for digital solutions in public safety, driven by rising instances of mass shootings, natural disasters, and terrorist activities. The global less-lethal weapons market is projected to grow from USD$4.95 billion in 2023 to USD$7.6 billion in 2028, indicating a significant market opportunity for DEFSEC's less-lethal products. The company aims to leverage its military digitization experience for public safety applications, aligning with the broader digital transformation challenges faced by public safety agencies.

Comparison to Industry Standards

• The global less-lethal weapons market is projected to reach USD$7.6 billion in 2028, growing at a 4.3% compound annual growth rate, which DEFSEC's PARA SHOTTM and ARWEN products aim to capture.
• DEFSEC's PARA SHOTTM system is positioned against competitors like Byrna Technologies Inc. (Byrna HD), United Tactical Systems, LLC (PepperBall), FN Herstal (handheld CO2/air-powered launchers), Axon Enterprises, Inc. (TASER device), and Wrap Technologies Inc. (remote restraint devices), highlighting its proprietary LEC system with cartridge casing for spin generation as a competitive advantage over air-based launchers.
• For ARWEN, primary competitors include DEFTEC/Safariland's 40mm LTM launchers and ALS (a Pacem Defense Company)'s 37mm and 40mm launchers.
• In digitization and counter-threat, competitors include R&D labs funded by the U.S. Department of Defense, Fabrique Nationale Herstal S.A. (remote weapon stations), Motorola (Tactical TV Decoys), Synchopated Engineering (Mockingbird RF Signal Emulator), and CACI Systemware (MAGPIE). DEFSEC claims a competitive advantage in soldier systems and networked weapons expertise.
• The company's CIMS (DEFSEC LightningTM) as a SaaS model is unique in Canada, though many organizations provide TAK development services to law enforcement.

Management Changes

Corporate Governance

Legal Proceedings

• The company is not a party to any legal proceedings which may have, or have had in the recent past, significant effects on its financial position or profitability.

Related Party Transactions

• Professional services agreement with DEFSEC Corporation (owned by David Luxton, Chairman) for Chairman services.
• Employment agreements with Sean Homuth (President & CEO), Harry Webster (COO), and Jennifer Welsh (CFO).
• Issued 5,669 common shares on November 11, 2024, in settlement of $100,000 of business expenses owed to a company controlled by Mr. David Luxton.
• Accrued bonuses for Named Executive Officers totaling $616,750 for Fiscal 2024, paid in Fiscal 2025.
• Accrued bonuses for Named Executive Officers totaling $722,500 for Fiscal 2025, paid in December 2025.
• Outstanding accounts payable and accrued liabilities of $791,946 (2024 $471,465) due to company officers and directors for unpaid wages, accrued bonuses, accrued vacation, and expense reimbursements.

Stakeholder Impact

• Shareholders: Experienced dilution from multiple equity financings and potential future capital raises. Face stock price volatility and delisting risk from Nasdaq. Reverse stock splits impacted share count and potentially liquidity.
• Employees: Increased headcount to support growth in digitization contracts. Experienced payroll cost increases to retain and hire engineers. NEOs became entitled to RRSP matching up to 3% of annual gross salary starting October 2025.
• Customers (Military/Law Enforcement): Benefit from continued development and commercialization of tactical systems (less-lethal, digitization, counter-threat) aimed at improving situational awareness and operational effectiveness.
• Suppliers: Dependence on key suppliers for ARWEN product line components poses risks of supply interruption or uncompetitive pricing due to lack of long-term agreements. Strategic partnership with a contract manufacturer in the US for ARWEN and PARA SHOTTM production aims to mitigate this.
• Creditors: All outstanding loans were repaid in Fiscal 2023. A new RBC credit facility provides corporate credit cards with cash collateral and a first lien on all assets.

Next Steps

• Continue to increase staffing and related revenue for Canadian Government Defence programs.
• Commercial launch of DEFSEC LightningTM.
• Volume production and roll-out of 40mm ARWEN baton cartridge in Fiscal 2026.
• Higher volume production phase for PARA SHOTTM single shot devices and cartridges during Fiscal 2026.
• Optimizing design of PARA SHOTTM multi-shot device for commercial launch soon after market testing.
• Initial sales focus for PARA SHOTTM on law enforcement agencies.
• Submissions for ATF ruling on PARA SHOTTM classification are ongoing.
• Prototyping PARA SHOTTM as a high-capacity automatic pistol and carbine (reciprocating devices) in Fiscal 2026, though timing may extend.
• Execute a manufacturing agreement with a contract manufacturer in early calendar year 2026 for 40mm ARWEN and PARA SHOTTM cartridges.
• Management and the Board of Directors are in the process of establishing corporate goals for Fiscal 2026.
• Add 15 roles to the team for government services business, subcontracting 13 from ADGA Group Consultants Inc.

Key Dates

Recommendation

While DEFSEC Technologies Inc. demonstrates strong revenue growth and an improving gross margin, driven by strategic government contracts and product diversification, the company continues to operate at a net loss and negative operating cash flow. The recent capital raises have bolstered liquidity and working capital, but the long-term path to sustained profitability remains uncertain given its early-stage nature and competitive markets. The company has successfully addressed Nasdaq listing compliance, which is a positive, but the stock has experienced significant volatility and reverse splits. Investors should hold to monitor the successful commercialization of new products like PARA SHOTTM and DEFSEC LightningTM, the sustained growth of government service contracts, and the company's ability to achieve consistent profitability and positive cash flow. The risks associated with an early-stage company, including capital requirements and market acceptance, warrant a cautious approach.

Keywords

Defense Technology, Tactical Systems, Less-Lethal Weapons, Digitization Solutions, Counter-Threat Systems, Military Contracts, Public Safety, ARWEN, PARA SHOTTM, BLDS, DEFSEC LightningTM, SEC Filing, Form 20-F, Nasdaq, TSXV, Financial Performance, Capital Raise, Risk Management, Corporate Governance