Kelso Technologies Inc.: Exhibit 99.1 - Filed by newsfilecorp.com

EX-99.1 2 exhibit99-1.htm EXHIBIT 99.1 Kelso Technologies Inc.: Exhibit 99.1 - Filed by newsfilecorp.com

KELSO TECHNOLOGIES INC.

Consolidated Financial Statements

For the years ended December 31, 2019, 2018 and 2017
(Expressed in US Dollars)

Index	Page

Report of Registered Public Accounting Firm	2

Consolidated Financial Statements

Consolidated Statements of Financial Position	4

Consolidated Statements of Changes in Equity	5

Consolidated Statements of Operations and Comprehensive Income (Loss)	6

Consolidated Statements of Cash Flows	7

Notes to Consolidated Financial Statements	8 – 28

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

TO THE SHAREHOLDERS AND DIRECTORS OF KELSO TECHNOLOGIES INC.

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated statements of financial position of Kelso Technologies Inc. as of December 31, 2019 and 2018, and the related consolidated statements of operations and comprehensive income (loss), changes in equity and cash flows for the years ended December 31, 2019, 2018 and 2017, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for the years ended December 31, 2019, 2018 and 2017, in conformity with International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board.

Change in Accounting Principle

As discussed in Note 3 to the consolidated financial statements, the Company has changed its accounting policy for leases as of January 1, 2019 due to the adoption of IFRS 16 Leases.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Chartered Professional Accountants

We have served as the Company's auditor since 2006.

Vancouver, Canada

March 16, 2020

Kelso Technologies Inc.

Consolidated Statements of Financial Position

December 31

(Expressed in US Dollars)

		2019			2018

Assets
Current
Cash and cash equivalents	$	4,418,236		$	1,246,244
Accounts receivable (Note 5)		1,824,563			1,224,235
Prepaid expenses		96,627			110,258
Inventory (Notes 6 and 7)		3,394,192			3,668,401

		9,733,618			6,249,138
Property, plant and equipment (Note 7)		3,389,994			3,087,893
Intangible assets (Note 8)		607,959			607,959

	$	13,731,571		$	9,944,990
Liabilities
Current
Accounts payable and accrued liabilities (Note 11)	$	1,638,020		$	1,312,517
Income tax payable (Note 12)		71,341			466,739
Current portion of lease liability (Note 9)		86,384			-

		1,795,745			1,779,256
Long term portion of lease liability (Note 9)		90,551			-

		1,886,296			1,779,256
Shareholders’ Equity
Capital Stock (Note 10)		23,366,542			23,366,542
Reserves (Note 10 (b))		4,238,309			3,892,811
Deficit		(15,759,576	)		(19,093,619	)

		11,845,275			8,165,734

	$	13,731,571		$	9,944,990

Approved on behalf of the Board:

“Peter Hughes” (signed)

Peter Hughes, Director

“Paul Cass” (signed”)

Paul Cass, Director

See notes to consolidated financial statements

Kelso Technologies Inc.

Consolidated Statements of Changes in Equity

For the years ended December 31, 2019, 2018 and 2017
(Expressed in US Dollars)

	Capital Stock
	Number
	of common				Obligation to
	shares		Amount		issue shares			Reserves			Deficit			Total

Balance, December 31, 2016	46,411,752	$	22,829,820	$	192,946		$	3,021,339		$	(14,272,161	)	$	11,771,944
Shares issued	500,000		401,432		(192,946	)		-			-			208,486
Share-based expense	-		-		-			469,187			-			469,187
Shares to be issued	-		-		131,527			-			-			131,527
Net loss for the year	-		-		-			-			(5,015,911	)		(5,015,911	)
Balance, December 31, 2017	46,911,752	$	23,231,252	$	131,527		$	3,490,526		$	(19,288,072	)	$	7,565,233
Exercise of options	8,334		3,763		-			(1,263	)		-			2,500
Shares issued	250,000		131,527		(131,527	)		-			-			-
Share-based expense	-		-		-			403,548			-			403,548
Net income for the year	-		-		-			-			194,453			194,453
Balance, December 31 2018	47,170,086	$	23,366,542	$	-		$	3,892,811		$	(19,093,619	)	$	8,165,734
Share-based expense	-		-		-			345,498			-			345,498
Net income for the year	-		-		-			-			3,334,043			3,334,043
Balance, December 31, 2019	47,170,086	$	23,366,542	$	-		$	4,238,309		$	(15,759,576	)	$	11,845,275

See notes to consolidated financial statements

Kelso Technologies Inc.

Consolidated Statements of Operations and Comprehensive Income (Loss)
For the years ended December 31

(Expressed in US Dollars)

		2019			2018			2017

Revenues (Note 15)	$	20,550,682		$	12,716,596		$	6,062,778
Cost of Goods Sold (Notes 6 and 7)		10,967,803			7,429,380			5,044,093

Gross Profit		9,582,879			5,287,216			1,018,685

Expenses
Office and administration (Note 6)		2,219,711			1,667,646			1,701,723
Management compensation (Note 11)		1,037,586			610,570			544,014
Research (Note 7)		1,129,007			1,352,817			1,572,714
Marketing		288,893			266,152			554,458
Travel		197,293			159,800			430,304
Accounting and legal		321,945			194,282			370,495
Share-based expense (Notes 10 (b) and 11)		345,498			403,548			469,187
Consulting		386,661			196,823			251,055
Investor relations		84,000			84,000			84,000
Foreign exchange (gain) loss		27,698			4,257			(115,643	)
Amortization (Notes 7 and 8)		69,271			30,242			17,088
Bad debts		(20,206	)		(14,689	)		82,042

		6,087,357			4,955,448			5,961,437

Income (Loss) Before the Following:		3,495,522			331,768			(4,942,752	)
Interest income		-			-			3,875
Write-off of inventory (Note 6)		(62,402	)		(26,031	)		(197,729	)
Write-off of property, plant and equipment (Note 7)		-			(34,438	)		(29,601	)
Write-off of intangible assets (Note 8)		-			(328,010	)		-

Income (Loss) Before Taxes:		3,433,120			(56,711	)		(5,166,207	)

Income Tax Expense (Recovery) (Note 12)
Current		99,077			(251,164	)		22,137
Deferred		-			-			(172,433	)

		99,077			(251,164	)		(150,296	)

Net Income (Loss) and Comprehensive Income (Loss) for the year	$	3,334,043		$	194,453		$	(5,015,911	)

Basic Gain (Loss) Per Share (Note 14)	$	0.07		$	0.00		$	(0.11	)

Diluted Gain (Loss) Per Share (Note 14)	$	0.07		$	0.00		$	(0.11	)

Weighted Average Number of Common Shares Outstanding
Basic (Note 14)		47,170,086			47,117,369			46,848,053
Diluted (Note 14)		48,186,522			47,451,644			46,848,053

See notes to consolidated financial statements

Kelso Technologies Inc.
Consolidated Statements of Cash Flows
For the years ended December 31
(Expressed in US Dollars)

		2019			2018			2017

Operating Activities
Net income (loss)	$	3,334,043		$	194,453		$	(5,015,911	)
Items not involving cash:
Deferred income tax recovery		-			-			(172,433	)
Amortization (Notes 7 and 8)		384,827			277,580			203,980
Write-off of inventory (Note 6)		62,402			26,031			668,383
Write-off of property, plant and equipment (Note 7)		-			34,438			29,601
Write-off of intangible assets (Note 8)		-			328,010			-
Share-based expense		345,498			403,548			469,187
Bad debts (recovery)		(20,206	)		(14,689	)		82,042
Unrealized foreign exchange loss (gain)		(1,669	)		4,257			(115,643	)

		4,104,895			1,253,628			(3,850,794	)
Changes in non-cash working capital
Accounts receivable		(580,122	)		(556,101	)		(97,642	)
Income tax receivable		-			-			753,223
Prepaid expenses		13,631			73,708			527,897
Inventory		213,283			291,713			567,764
Accounts payable and accrued liabilities		262,725			399,416			582,099
Income tax payable		(395,398	)		(254,528	)		(112,900	)

		(485,881	)		(45,792	)		2,220,441

Cash Provided by (Used in) Operating Activities		3,619,014			1,207,836			(1,630,353	)

Investing Activities
Intangible assets		-			-			(353,010	)
Proceeds from disposition of property, plant and equipment		-			700			(33,336	)
Acquisition of property, plant and equipment		(428,954	)		(371,758	)		-

Cash Used in Investing Activities		(428,954	)		(371,058	)		(386,346	)

Financing Activities
Issue of common shares, net of share issue costs		-			2,500			-
Lease liability payments		(19,737	)		-			-

Cash Provided by (Used in) Financing Activities		(19,737	)		2,500			-

Foreign Exchange Effect on Cash		1,669			(4,257	)		115,643

Inflow (Outflow) of Cash and Cash Equivalents		3,171,992			835,021			(1,901,056	)
Cash and Cash Equivalents, Beginning of Year		1,246,244			411,223			2,312,279

Cash and Cash Equivalents, End of Year	$	4,418,236		$	1,246,244		$	411,223

Supplemental Cash Flow Information (Note 13)
See notes to consolidated financial statements

KELSO TECHNOLOGIES INC.

Notes to Consolidated Financial Statements

For the years ended December 31, 2019, 2018 and 2017
(Expressed in US Dollars)

1. NATURE OF OPERATIONS

Kelso Technologies Inc. (the “Company”) was incorporated under the laws of British Columbia on March 16, 1987. The Company designs, engineers, markets, produces and distributes various proprietary pressure relief valves and manway securement systems designed to reduce the risk of environmental harm due to non-accidental events in the transportation of hazardous commodities via railroad tank cars. In addition, the Company is an engineering development company specializing in proprietary service equipment used in transportation applications. The Company trades on the Toronto Stock Exchange (“TSX”) under the symbol “KLS”, and the New York Stock Exchange (“NYSE”) under the trading symbol “KIQ”. The Company listed on the TSX on May 22, 2014 and on the NYSE on October 14, 2014. The Company’s head office is located at 13966 18B Avenue, South Surrey, British Columbia, V4A 8J1.

2. BASIS OF PREPARATION

(a) Statement of compliance

These consolidated financial statements of the Company have been prepared in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”).

These consolidated financial statements have been prepared under the historical cost basis, except for financial instruments, which are stated at their fair values. These consolidated financial statements have been prepared using the accrual basis of accounting, except for cash flow information.

Effective January 1, 2019, the Company adopted IFRS 16 Leases (“IFRS 16”). IFRS 16 was adopted retrospectively with no restatement of comparative periods, as permitted by the transition provisions of the standard.

(b) Basis of presentation and consolidation

The consolidated financial statements include the accounts of the Company and its integrated wholly owned subsidiaries, Kelso Technologies (USA) Inc., Kel-Flo Industries Inc. (formerly Kelso Innovative Solutions Inc.) and KIQ Industries Inc., which are all Nevada, USA, corporations and KIQ X Industries Inc., which is a British Columbia company incorporated on December 12, 2017. Intercompany transactions and balances have been eliminated on consolidation. A subsidiary is consolidated from the date upon which control is acquired by the Company and all material intercompany transactions and balances have been eliminated on consolidation.

Control is achieved when the Company is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee.

The functional and presentation currency of the Company and its subsidiaries is the US dollar (“USD”).

KELSO TECHNOLOGIES INC.

Notes to Consolidated Financial Statements

For the years ended December 31, 2019, 2018 and 2017
(Expressed in US Dollars)

2. BASIS OF PREPARATION (Continued)

(d) Significant management judgments and estimation uncertainty

The preparation of consolidated financial statements in conformity with IFRS requires the Company’s management to undertake a number of judgments, estimates and assumptions that affect amounts reported in the consolidated financial statements and notes thereto. Actual amounts may ultimately differ from these estimates and assumptions. The Company reviews its estimates and underlying assumptions on an ongoing basis. Revisions are recognized in the period in which the estimates are revised and may impact future periods.

Significant management judgments

The following are significant management judgments in applying the accounting policies of the Company that have the most significant effect on recognition and measurement of assets, liabilities, income and expenses:

(i) Income taxes

The extent to which deferred tax assets can be recognized is based on an assessment of the probability of the Company generating future taxable income against which the deferred tax assets can be utilized. In addition, significant judgment is required in classifying transactions and assessing probable outcomes of tax positions taken, and in assessing the impact of any legal or economic limits or uncertainties in various tax jurisdictions.

(ii) Functional currency

The functional currency for the Company and its subsidiaries is the currency of the primary economic environment in which the entity operates. The Company has determined its functional currency and that of its subsidiaries is the USD. Determination of functional currency may involve certain judgments to determine the primary economic environment and the Company reconsiders the functional currency of its entities if there is a change in events and conditions that determined the primary economic environment.

(iii) Research and development expenditures

The application of the Company’s accounting policy for research and development expenditures requires judgment in determining whether an activity is determined to be research or development, and if deemed to be development, whether it is probable that future economic benefits will flow to the Company, which may be based on assumptions about future events or circumstances. Estimates and assumptions may change if new information becomes available. If new information becomes available indicating that it is unlikely that future economic benefits will flow to the Company, the amount capitalized is written off to profit or loss in the period the new information becomes available.

(iv) Going concern assumption

The assessment of whether the going concern assumption is appropriate requires management to take into account all available information about the future, which is at least, but not limited to, twelve months from the end of the reporting period.

KELSO TECHNOLOGIES INC.

Notes to Consolidated Financial Statements

For the years ended December 31, 2019, 2018 and 2017
(Expressed in US Dollars)

2. BASIS OF PREPARATION (Continued)

(d) Significant management judgment and estimation uncertainty (Continued)

Estimation uncertainty

Information about estimates and assumptions that have the most significant effect on the recognition and measurement of assets, liabilities, income and expenses is provided below. Actual results may be substantially different.

(i) Impairment of long-lived assets

Long-lived assets consist of intangible assets and property, plant and equipment.

At the end of each reporting period, the Company reviews the carrying amounts of its long-lived assets to determine whether there is any indication that the carrying amount is not recoverable. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). When an individual asset does not generate independent cash flows, the Company estimates the recoverable amount of the cash-generating unit to which the asset belongs. Assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets. When a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual cash-generating units, or otherwise they are allocated to the smallest group of cash-generating units for which a reasonable and consistent allocation basis can be identified.

Recoverable amount is the higher of fair value less costs of disposal and value in use. Fair value is determined as the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.

(ii) Useful lives of depreciable assets

The Company reviews its estimate of the useful lives of depreciable assets at each reporting date, based on the expected utilization of the assets. Uncertainties in these estimates relate to technical obsolescence that may change the utilization of certain intangible assets and equipment.

(iii) Inventories

The Company estimates the net realizable value of inventories, taking into account the most reliable evidence available at each reporting date. The future realization of these inventories may be affected by future technology or other market-driven changes that may reduce future selling prices. A change to these assumptions could impact the Company’s inventory valuation and impact gross margins.

KELSO TECHNOLOGIES INC.

Notes to Consolidated Financial Statements

For the years ended December 31, 2019, 2018 and 2017
(Expressed in US Dollars)

2. BASIS OF PREPARATION (Continued)

(d) Significant management judgment and estimation uncertainty (Continued)

Estimation uncertainty (Continued)

(iv) Share-based expense

The Company grants share-based awards to certain officers, employees, directors and other eligible persons. For equity settled awards, the fair value is charged to the consolidated statements of operations and comprehensive income (loss) and credited to the reserves, over the vesting period using the graded vesting method, after adjusting for the estimated number of awards that are expected to vest.

The fair value of the equity-settled awards is determined at the date of the grant using the Black-Scholes option pricing model. Option pricing models require the input of highly subjective assumptions, including the expected volatility and expected life of the options. Changes in these assumptions can materially affect the fair value estimate, and therefore, the existing models do not necessarily provide a reliable measure of the fair value of the Company’s stock options.

(v) Allowance for credit losses

The Company provides for doubtful debts by analyzing the historical default experience and current information available about a customer’s credit worthiness on an account by account basis. Uncertainty relates to the actual collectability of customer balances that can vary from the Company’s estimation. At December 31, 2019, the Company has an allowance for doubtful accounts of $Nil (2018 - $27,653).

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.

(e) Approval of the consolidated financial statements

The consolidated financial statements of the Company for year ended December 31, 2019 were approved and authorized for issue by the Board of Directors on March 16, 2020.

(f) New accounting standards issued but not yet effective

The Company has performed an assessment of new standards issued by the IASB that are not yet effective. The Company has assessed that the impact of adopting these accounting standards on its consolidated financial statements would not be significant.

3. SIGNIFICANT ACCOUNTING POLICIES

The following is a summary of significant accounting policies:

(a) Cash equivalents

Cash equivalents include short-term liquid investments with maturities of 90 days or less, are readily convertible into known amounts of cash and which are subject to insignificant changes in value.

KELSO TECHNOLOGIES INC.

Notes to Consolidated Financial Statements

For the years ended December 31, 2019, 2018 and 2017
(Expressed in US Dollars)

3. SIGNIFICANT ACCOUNTING POLICIES (Continued)

(b) Inventory

Inventory components include raw materials and supplies used to assemble valves and manway covers, as well as finished valves and manway covers. All inventories are recorded at the lower of cost on a weighted average basis and net realizable value. The stated value of all inventories includes purchase and assembly costs of all raw materials and supplies, and attributable overhead and amortization. A regular review is undertaken to determine the extent of any provision for obsolescence.

Intangible assets acquired separately are measured on initial recognition at cost. Following initial recognition, intangible assets are carried at cost less any accumulated amortization and accumulated impairment losses, if any. The useful lives of intangible assets are assessed as either finite or indefinite.

Intangible assets with finite lives are amortized over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortization period and the amortization method for an intangible asset with a finite useful life are reviewed at least at the end of each reporting period. A change in the expected useful life of the expected pattern of consumption of future economic benefits embodied in the asset is accounted for by changing the amortization period or method, as appropriate, and treated as changes in accounting estimates. Intangible assets with indefinite useful lives are not amortized, but are tested for impairment annually, either individually or at the cash-generating unit level. The assessment of indefinite life is reviewed annually to determine whether the indefinite life continues to be supportable. If not, the change in useful life from indefinite to finite is made on a prospective basis.

The Company amortizes intangible assets with finite lives on a straight-line basis over their estimated useful lives as follows:

Patents - 5 years

Rights - 2 years

Amortization begins when the intangible asset is ready for use. Product and technology development costs, which meet the criteria for deferral and are expected to provide future economic benefits with reasonable certainty are deferred and amortized over the estimated life of the products or technology once commercialization commences.

(d) Property, plant and equipment

Property, plant and equipment are stated at cost less accumulated amortization. Leasehold improvements and prototypes are amortized on a straight-line basis over the lease term and estimated useful life respectively. Amortization is calculated over the estimated useful life of the property, plant and equipment at the following annual rates:

Building	– 4% declining-balance
Production equipment	– 20% declining-balance
Vehicles	– 30% declining-balance
Leasehold improvements	– 5 year straight-line
Prototypes	– 2 year straight-line

KELSO TECHNOLOGIES INC.

Notes to Consolidated Financial Statements

For the years ended December 31, 2019, 2018 and 2017
(Expressed in US Dollars)

3. SIGNIFICANT ACCOUNTING POLICIES (Continued)

(e) Revenue recognition

Revenues from the sale of pressure relief valves, manway securement systems and related products is recognised when all the performance obligations identified in the customer contract, typically consisting of a purchase order, are satisfied. The performance obligations in a typical purchase order are the manufacture of the pressure relief valve, manway securement system and related accessories and delivery of those items. The Company recognizes revenue when collection is reasonably assured.

(f) Impairment of long-lived assets

The Company’s tangible and intangible assets are reviewed for any indication of impairment at each statement of financial position date. If indication of impairment exists, the asset’s recoverable amount is estimated. An impairment loss is recognized when the carrying amount of an asset, or its cash-generating unit, exceeds its recoverable amount. A cash-generating unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of cash inflow from other assets or groups of assets.

The recoverable amount is the greater of the asset’s fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the assets. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs.

(g) Income taxes

(i) Current and deferred income taxes

Income tax expense, consisting of current and deferred tax expense, is recognized in the consolidated statements of operations and comprehensive income (loss). Current tax expense is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at period-end, adjusted for amendments to tax payable with regard to previous years.

Deferred tax assets and liabilities and the related deferred income tax expense or recovery are recognized for deferred tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using the enacted or substantively enacted tax rates expected to apply when the asset is realized or the liability settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income (loss) in the period that substantive enactment occurs.

A deferred tax asset is recognized to the extent that it is probable that future taxable profits will be available against which the asset can be utilized. To the extent that the Company does not consider it probable that a deferred tax asset will be recovered, the deferred tax asset is reduced. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Company intends to settle its current tax assets and liabilities on a net basis.

KELSO TECHNOLOGIES INC.

Notes to Consolidated Financial Statements

For the years ended December 31, 2019, 2018 and 2017
(Expressed in US Dollars)

3. SIGNIFICANT ACCOUNTING POLICIES (Continued)

(ii) Texas margin tax

Effective January 1, 2007, the state of Texas enacted an annual franchise tax known as the Texas margin tax, which is equal to 1% of the lesser of: (a) 70% of a taxable entity’s revenue; and (b) 100% of total revenue less, at the election of the taxpayer: (i) cost of goods sold; or (ii) compensation. A provision for the margin tax owing has been recorded in the consolidated statements of operations and comprehensive income (loss).

(h) Foreign currency translation

The accounts of foreign balances and transactions are translated into USD as follows:

(i) Monetary assets and liabilities, at the rate of exchange in effect at the consolidated statement of financial position date;

(ii) Non-monetary assets and liabilities, at the exchange rates prevailing at the time of the acquisition of the assets or assumption of the liabilities; and

(iii) Revenue and expense items (excluding amortization, which is translated at the same rate as the related asset), at the rate of exchange prevailing at the transaction date.

Gains and losses arising from translation of foreign currency are included in the determination of net income (loss).

(i) Earnings per share

The Company presents basic earnings per share data for its common shares, calculated by dividing the earnings attributable to common shareholders of the Company by the weighted average number of shares outstanding during the period. The Company uses the treasury stock method for calculating diluted earnings per share. Under this method the dilutive effect on earnings per share is calculated on the use of the proceeds that could be obtained upon exercise of options, warrants and similar instruments. It assumes that the proceeds of such exercise would be used to purchase common shares at the average market price during the period. However, the calculation of diluted loss per share excludes the effects of various conversions and exercise of options and warrants that would be anti- dilutive.

(j) Share-based expense

The Company grants share options to acquire common shares of the Company to directors, officers, employees and consultants. The fair value of share-based expense to employees is measured at grant date, using the Black-Scholes option pricing model, and is recognized over the vesting period for employees using the graded vesting method. Fair value of share-based expenses for non-employees is recognized and measured at the date the goods or services are received based on the fair value of the goods or services received. If it is determined that the fair value of goods and services received cannot be reliably measured, the share-based expense is measured at the fair value of the equity instruments issued using the Black-Scholes option pricing model.

KELSO TECHNOLOGIES INC.

Notes to Consolidated Financial Statements

For the years ended December 31, 2019, 2018 and 2017
(Expressed in US Dollars)

3. SIGNIFICANT ACCOUNTING POLICIES (Continued)

(j) Share-based expense (Continued)

For both employees and non-employees, the fair value of share-based expense is recognized on the consolidated statements of operations and comprehensive income (loss), with a corresponding increase in reserves. The amount recognized as expense is adjusted to reflect the number of share options expected to vest. Consideration received on the exercise of stock options is recorded in capital stock and the related share-based expense in reserves is transferred to capital stock.

(k) Capital stock

Proceeds from the exercise of stock options and warrants are recorded as capital stock in the amount for which the option or warrant enabled the holder to purchase a share in the Company. Any previously recorded share-based expense included in the share-based expenses reserve is transferred to capital stock on exercise of options. Capital stock issued for non-monetary consideration is valued at the closing market price at the date of issuance. The proceeds from the issuance of units are allocated between common shares and warrants based on the residual value method. Under this method, the proceeds are allocated first to capital stock based on the fair value of the common shares at the time the units are priced and any residual value is allocated to the warrants reserve. Consideration received for the exercise of warrants is recorded in capital stock, and any related amount recorded in warrants reserve is transferred to capital stock.

(l) Financial instruments

(i) Financial assets

Initial recognition and measurement

A financial asset is measured initially at fair value plus, for an item not at fair value through profit or loss, transaction costs that are directly attributable to its acquisition or issue. On initial recognition, a financial asset is classified as measured at amortized cost or fair value through profit or loss. A financial asset is measured at amortized cost if it meets the conditions that i) the asset is held within a business model whose objective is to hold assets to collect contractual cash flows, ii) the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding, and iii) is not designated as fair value through profit or loss.

Subsequent measurement

The subsequent measurement of financial assets depends on their classification as follows:

Financial assets at fair value through profit or loss

Financial assets measured at fair value through profit and loss are carried in the consolidated statements of financial position at fair value with changes in fair value therein, recognized in the consolidated statements of operations and comprehensive income (loss).

KELSO TECHNOLOGIES INC.

Notes to Consolidated Financial Statements

For the years ended December 31, 2019, 2018 and 2017
(Expressed in US Dollars)

3. SIGNIFICANT ACCOUNTING POLICIES (Continued)

(l) Financial instruments (Continued)

(i) Financial assets (Continued) Subsequent measurement (Continued)

Financial assets measured at amortized cost

A financial asset is subsequently measured at amortized cost, using the effective interest method and net of any impairment allowance.

Derecognition

A financial asset or, where applicable a part of a financial asset or part of a group of similar financial assets is derecognized when:

• the contractual rights to receive cash flows from the asset have expired; or

• the Company has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a ‘pass-through’ arrangement; and either (a) the Company has transferred substantially all the risks and rewards of the asset, or (b) the Company has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

(ii) Financial liabilities

Financial liabilities are recognized when the Company becomes a party to the contractual provisions of the financial instrument. A financial liability is derecognized when it is extinguished, discharged, cancelled or when it expires. Financial liabilities are classified as either financial liabilities at fair value through profit or loss or financial liabilities subsequently measured at amortized cost. All interest-related charges are reported in profit or loss within interest expense, if applicable.

(iii) Fair value hierarchy

The Company categorizes financial instruments measured at fair value at one of three levels according to the reliability of the inputs used to estimate fair values. The fair value of financial assets and financial liabilities included in Level 1 are determined by reference to quoted prices in active markets for identical assets and liabilities. Financial assets and liabilities in Level 2 are valued using inputs other than quoted prices for which all significant inputs are based on observable market data. Level 3 valuations are based on inputs that are not based on observable market data.

(m) Leases

Effective January 1, 2019, the Company adopted IFRS 16 using the modified retrospective approach. The comparative figures for the 2018 and 2017 reporting periods have not been restated and are accounted for under IAS 17 Leases, and IFRIC 4 Determining Whether an Arrangement Contains a Lease, as permitted under the specific transitional provisions in the standard.

KELSO TECHNOLOGIES INC.

Notes to Consolidated Financial Statements

For the years ended December 31, 2019, 2018 and 2017
(Expressed in US Dollars)

3. SIGNIFICANT ACCOUNTING POLICIES (Continued)

(m) Leases (Continued)

The Company applied the exemption not to recognize a right-of-use asset (“ROU asset”) and lease liability for leases with less than 12 months of lease term and leases for low- value assets when applying IFRS 16 to leases previously classified as operating leases under IAS 17.

As at January 1, 2019, the Company did not have any leases that were classified as operating leases under IAS 17. As a result, there was no impact on the consolidated statement of financial position at the date of initial application.

The following is the new accounting policy for leases under IFRS 16:

At inception, the Company assesses whether a contract contains an embedded lease. A contract contains a lease when the contract conveys a right to control the use of an identified asset for a period of time in exchange for consideration.

The Company, as lessee, is required to recognize a ROU asset, representing its right to use the underlying asset, and a lease liability, representing its obligation to make lease payments.

The Company recognizes a ROU asset and a lease liability at the commencement of the lease. The ROU asset is initially measured based on the present value of lease payments, plus initial direct cost, less any incentives received. It is subsequently measured at cost less accumulated amortization, impairment losses and adjusted for certain remeasurements of the lease liability. The ROU asset is amortized from the commencement date over the shorter of the lease term or the useful life of the underlying asset. The ROU asset is subject to testing for impairment if there is an indicator of impairment.

The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted by the interest rate implicit in the lease, or if that rate cannot be readily determined, the incremental borrowing rate. The incremental borrowing rate is the rate which the operation would have to pay to borrow over a similar term and with similar security, the funds necessary to obtain an asset of similar value to the ROU asset in a similar economic environment.

Lease payments included in the measurement of the lease liability are comprised of:

• fixed payments, including in-substance fixed payments;

• variable lease payments that depend on an index or a rate, initially measured using the index or rate as at the commencement date;

• amounts expected to be payable under a residual value guarantee;

• the exercise price under a purchase option that the Company is reasonably certain to exercise;

• lease payments in an optional renewal period if the Company is reasonably certain to exercise an extension option; and

• penalties for early termination of a lease unless the Company is reasonably certain not to terminate early.

KELSO TECHNOLOGIES INC.

Notes to Consolidated Financial Statements

For the years ended December 31, 2019, 2018 and 2017
(Expressed in US Dollars)

3. SIGNIFICANT ACCOUNTING POLICIES (Continued)

(m) Leases (Continued)

The lease liability is subsequently increased by the interest cost on the lease liability and decreased by lease payments made. It is remeasured when there is a change in future lease payments arising from a change in an index or a rate, a change in the estimate of the amount expected to be payable under a residual value guarantee, or as appropriate, changes in the assessment of whether a purchase or extension option is reasonably certain to be exercised or a termination option is reasonably certain not to be exercised.

Variable lease payments that do not depend on an index or a rate not included in the initial measurement of the ROU asset and lease liability are recognized as an expense in profit or loss in the period in which they are incurred.

The ROU assets are presented within “Property, plant and equipment” and the lease liabilities are presented in “Lease liability” on the consolidated statements of financial position.

4. CAPITAL MANAGEMENT

The Company considers its capital to be comprised of shareholders’ equity.

The Company’s objectives in managing its capital are to maintain its ability to continue as a going concern and to further develop its business. To effectively manage the Company’s capital requirements, the Company has a planning and budgeting process in place to meet its strategic goals.

In order to facilitate the management of its capital requirements, the Company prepares expenditure budgets that are updated as necessary depending on various factors, including successful capital deployment and general industry conditions. Management reviews the capital structure on a regular basis to ensure the above objectives are met. There have been no changes to the Company’s approach to capital management during the year ended December 31, 2019. There are no externally imposed restrictions on the Company’s capital.

5. FINANCIAL INSTRUMENTS

Financial instruments are agreements between two parties that result in promises to pay or receive cash or equity instruments. The carrying values of accounts receivable and accounts payable and accrued liabilities approximate their fair values due to their short term to maturity.

The Company has exposure to the following risks from its use of financial instruments:

• Credit risk;

• Liquidity risk; and

• Market risk.

(a) Credit risk

Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. Cash and cash equivalents are placed with major Canadian and US financial institutions and the Company’s concentration of credit risk for cash and maximum exposure thereto is $4,418,236 (2018 - $1,246,244).

KELSO TECHNOLOGIES INC.

Notes to Consolidated Financial Statements

For the years ended December 31, 2019, 2018 and 2017
(Expressed in US Dollars)

5. FINANCIAL INSTRUMENTS (Continued)

(a) Credit risk (Continued)

With respect to its accounts receivable, the Company assesses the credit rating of all customers and maintains provisions for potential credit losses, and any such losses to date have been within management’s expectations. The Company’s credit risk with respect to accounts receivable and maximum exposure thereto is $1,824,563 (2018 - $1,224,235). The Company’s concentration of credit risk for accounts receivable with respect to its significant customers is as follows: Customer A is $476,341 (2018 - $271,564), Customer B is $172,841 (2018 - $161,556) (Note 15). The Company has provided for an allowance for doubtful accounts amounting to $Nil at December 31, 2019 (2018 - $27,653).

To reduce the credit risk of accounts receivable, the Company regularly reviews the collectability of the accounts receivable to ensure there is no indication that these amounts will not be fully recoverable.

(b) Liquidity risk

Liquidity risk is the risk that the Company will be unable to meet its financial obligations as they fall due. The Company’s approach to managing liquidity risk is to ensure, as far as possible, that it will have sufficient liquid funds to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Company’s reputation.

At December 31, 2019, the Company has $4,418,236 (2018 - $1,246,244) of cash and cash equivalents to settle current liabilities of $1,795,745 (2018 - $1,779,256) consisting of the following: accounts payable and accrued liabilities of $1,100,376 (2018 - $1,222,982), due to related party balance of $537,644 (2018 - $89,535), income tax payable of $71,341 (2018 - $466,739) and current portion of lease liability of $86,384 (2018 - $Nil). All payables are due within a year.

The significant market risks to which the Company could be exposed are interest rate risk and currency risk.

(i) Interest rate risk

Interest rate risk is the risk that the fair value or future cash flows will fluctuate as a result of changes in market interest rates. The Company is not exposed to significant interest rate risk.

(ii) Currency risk

The Company is exposed to currency risk to the extent expenditures incurred or funds received and balances maintained by the Company are denominated in Canadian dollars (“CAD”). The Company does not manage currency risk through hedging or other currency management tools.

KELSO TECHNOLOGIES INC.

Notes to Consolidated Financial Statements

For the years ended December 31, 2019, 2018 and 2017
(Expressed in US Dollars)

5. FINANCIAL INSTRUMENTS (Continued)

(ii) Currency risk (Continued)

As at December 31, 2019 and 2018, the Company had the following assets denominated in CAD (amounts presented in USD):

		December 31, 2019			December 31, 2018

Cash and cash equivalents	$	76,389		$	15,666
Accounts receivable		66,035			46,979
Accounts payable		(197,967	)		(210,555	)

	$	(55,544	)	$	(147,910	)

Based on the above, assuming all other variables remain constant, a 14% (2018 - 14%) weakening or strengthening of the USD against the CAD would result in approximately $7,776 (2018 - $20,700) foreign exchange loss or gain in the consolidated statements of operations and comprehensive income (loss).

6. INVENTORY

		December 31, 2019		December 31, 2018

Finished goods	$	100,675	$	230,315
Raw materials and supplies		3,293,517		3,438,086

	$	3,394,192	$	3,668,401

Included in cost of goods sold is $9,443,243 (2018 - $5,974,854; 2017 - $3,376,123) of direct material costs recognized as expense.

Inventory write-off during the year was $62,402 (2018 - $26,031; 2017 - $668,383) of which $Nil (2018 - $Nil; 2017 - $470,654) is included in cost of goods sold and $62,402 (2018 - $26,031; 2017 - $197,729) is included in general and administrative expenses.

KELSO TECHNOLOGIES INC.

Notes to Consolidated Financial Statements

For the years ended December 31, 2019, 2018 and 2017
(Expressed in US Dollars)

7. PROPERTY, PLANT AND EQUIPMENT

						Leasehold		Production							ROU
Cost		Land		Building		Improvements		Equipment		Vehicles			Prototypes		Asset		Total
Balance, December 31, 2017	$	12,558	$	2,955,901	$	43,715	$	809,982	$	61,517		$	-	$	-	$	3,883,673
Additions		-		-		-		-		-			406,160		-		406,160
Disposition		-		-		-		-		(61,517	)		-		-		(61,517	)
Balance, December 31, 2018	$	12,558	$	2,955,901	$	43,715	$	809,982	$	-		$	406,160	$	-	$	4,228,316
Additions		-		-		-		7,166		-			564,234		117,004		688,404
Balance, December 31, 2019	$	12,558	$	2,955,901	$	43,715	$	817,148	$	-		$	970,394	$	117,004	$	4,916,720
Accumulated Amortization
Balance, December 31, 2017	$	-	$	410,037	$	32,924	$	424,664	$	24,502		$	-	$	-	$	892,127
Amortization		-		106,080		2,698		96,327		1,877			67,693		-		274,675
Disposition		-		-		-		-		(26,379	)		-		-		(26,379	)
Balance, December 31, 2018	$	-	$	516,117	$	35,622	$	520,991	$	-		$	67,693	$	-	$	1,140,423
Amortization		-		97,592		1,619		58,515		-			216,365		12,212		386,303
Balance, December 31, 2019	$	-	$	613,709	$	37,241	$	579,506	$	-		$	284,058	$	12,212	$	1,526,726
Carrying Value
December 31, 2019	$	12,558	$	2,342,192	$	6,474	$	237,642	$	-		$	686,336	$	104,792	$	3,389,994
December 31, 2018	$	12,558	$	2,439,784	$	8,093	$	288,991	$	-		$	338,467	$	-	$	3,087,893

Included in cost of goods sold is $131,617 (2018 - $179,645; 2017 - $186,892) of amortization related to property, plant and equipment. Included in expenses is $69,271 (2018 - $21,435; 2017 - $9,528) of amortization related to property, plant and equipment.

Included in inventory is $1,476 (2018 - $5,902; 2017 - $10,261) of amortization related to property, plant and equipment.

Included in research is $183,939 (2018 - $67,693; 2017 - $Nil ) of amortization related to property, plant and equipment, of which $11,433 (2018 - $Nil; 2017 - $Nil) relates to vehicles under lease.

Included in prototype additions are vehicles under lease of $79,668 (2018 - $Nil; 2017 - $Nil) (Note 9).

KELSO TECHNOLOGIES INC.

Notes to Consolidated Financial Statements

For the years ended December 31, 2019, 2018 and 2017
(Expressed in US Dollars)

8. INTANGIBLE ASSETS

						Product
						Development
Cost		Patent		Rights		Costs			Total
Balance, December 31, 2017	$	40,840	$	672,959	$	328,010		$	1,041,809
Impairment		-		-		(328,010	)		(328,010	)
Balance, December 31, 2018 and 2019	$	40,840	$	672,959	$	-		$	713,799
Accumulated Amortization
Balance, December 31, 2017	$	32,033	$	65,000	$	-		$	97,033
Amortization		8,807		-		-			8,807
Balance, December 31, 2018 and 2019	$	40,840	$	65,000	$	-		$	105,840
Carrying Value
December 31, 2018 and 2019	$	-	$	607,959	$	-		$	607,959

During the year ended December 31, 2010, the Company entered into an agreement to acquire a patent related to their manway securement systems. The Company is obligated to pay a 5% royalty in accordance with the agreement (Note 15).

On November 10, 2016, the Company entered into a technology development agreement to acquire all intellectual property rights (the “Products”) of G & J Technologies, Inc. (the “Vendor”) for consideration of $217,946, consisting of $25,000 in cash and 250,000 common shares with a fair value of $192,946. The shares were issued during the year ended December 31, 2017. On November 10, 2016, the Vendor also entered into a consulting agreement with the Company for a fee of $10,000 per month.

In addition, the Company will pay an additional $75,000 in cash and issue 750,000 common shares of the Company to the Vendor based on the following milestones:

• $25,000 cash and 250,000 common shares issuable on the filing of the first new patent application related to the Products (the Company paid the cash and issued the shares with a fair value of $208,486 during the year ended December 31, 2017);

• $25,000 cash and 250,000 common shares issuable on the successful completion of a commercially viable production prototype for the first Product (the Company accrued for the cash payment and shares to be issued with a fair value of $131,527 at December 31, 2017); the cash and shares were issued during the year ended December 31, 2018; and

• $25,000 cash and 250,000 common shares issuable on the completion of the sale of the first ten commercial vehicles incorporating the Products.

The Company is also required to pay a royalty to the Vendor of 2.5% of the net sales earned by the Company, to be paid within 30 days of the end of each calendar quarter. As at December 31, 2019 the Company has not earned any revenue from the sale of the Products.

KELSO TECHNOLOGIES INC.

Notes to Consolidated Financial Statements

For the years ended December 31, 2019, 2018 and 2017
(Expressed in US Dollars)

8. INTANGIBLE ASSETS (Continued)

At December 31, 2017, the Company had capitalized $328,010 of internal product development costs related to the construction of equipment. During the year ended December 31, 2018, as part of the testing phase, the equipment was destroyed and accordingly, management impaired the product development costs and recognized an impairment loss of $328,010.

9. LEASE LIABILITY

The Company has lease agreements for its warehouse space in Kelowna, British Columbia and for vehicles used in the development of prototypes (Note 7).

The continuity of the lease liability for the years ended December 31, 2019 and 2018 is as follows:

Lease liability		Warehouse			Vehicles			Total
Lease liability recognized as of December 31, 2017 and 2018	$	-		$	-		$	-
Lease liability recognized		117,004			79,668			196,672
Lease payments		(12,728	)		(7,746	)		(20,474	)
Lease interest		509			228			737
Lease liability recognized as of December 31, 2019	$	104,785		$	72,150		$	176,935

Current portion	$	73,106		$	13,278		$	86,384
Long-term portion		31,679			58,872			90,551
	$	104,785		$	72,150		$	176,935

10. CAPITAL STOCK

Authorized:

Unlimited Class A non-cumulative, preferred shares without par value, of which 5,000,000 are designated Class A, convertible, voting, preferred shares. No preferred shares have been issued.

Unlimited common shares without par value. Issued:

(a) Common shares

During the year ended December 31, 2018, the Company issued 250,000 shares with a fair value of $131,527 pursuant to achieving the third milestone of the technology development agreement (Note 8). These common shares were recorded as shares to be issued at December 31, 2017.

During the year ended December 31, 2018, the Company issued 8,334 common shares pursuant to the exercise of stock options for gross proceeds of $2,500. Fair value previously recognized on options exercised of $1,263 was reclassified from reserves to capital stock.

KELSO TECHNOLOGIES INC.

Notes to Consolidated Financial Statements

For the years ended December 31, 2019, 2018 and 2017
(Expressed in US Dollars)

10. CAPITAL STOCK (Continued)

(a) Common shares (Continued)

During the year ended December 31, 2017, the Company issued 250,000 common shares with a fair value of $192,946 pursuant to the technology development agreement (Note 8) and 250,000 shares with a fair value of $208,486 pursuant to achieving the second milestone of the technology development agreement (Note 8).

(b) Stock options

The Company has a stock option plan (the “Plan”) available to employees, directors, officers and consultants with grants under the Plan approved from time to time by the Board of Directors. Under the Plan, the Company is authorized to issue options to purchase an aggregate of up to 10% of the Company's issued and outstanding common shares. Each option can be exercised to acquire one common share of the Company. The exercise price for an option granted under the Plan may not be less than the market price at the date of grant less a specified discount dependent on the market price.

Options to purchase common shares have been granted to directors, employees and consultants as follows:

Exercise	Expiry	December 31,				December 31,
Price	Date	2018	Granted	Exercised	Expired	2019
$0.70(CAD)	October 7, 2019	28,571	-	-	(28,571)	-
$6.85(CAD)	November 14, 2019	100,000	-	-	(100,000)	-
$1.30(USD)	August 18, 2021	1,175,000	-	-	-	1,175,000
$0.90(USD)	July 6, 2022	50,000	-	-	-	50,000
$0.30(USD)	November 28, 2022	750,000	-	-	-	750,000
$0.50(USD)	August 20, 2023	750,000	-	-	-	750,000
$0.57(USD)	April 17, 2023	200,000	-	-	-	200,000
$1.45(USD)	May 17, 2024	-	10,000	-	-	10,000
$0.78(USD)	August 19, 2024	-	700,000	-	-	700,000
$0.82(USD)	November 8, 2024	-	10,000	-	-	10,000
Total outstanding		3,053,571	720,000	-	(128,571)	3,645,000
Total exercisable		1,353,571				2,831,667

Exercise	Expiry	December 31,				December 31,
Price	Date	2017	Granted	Exercised	Expired	2018
$0.30(USD)	November 28, 2022	825,000	-	(8,334)	(66,666)	750,000
$0.90(USD)	July 6, 2022	50,000	-	-	-	50,000
$0.70(CAD)	October 7, 2019	28,571	-	-	-	28,571
$6.85(CAD)	November 14, 2019	100,000	-	-	-	100,000
$1.30(USD)	August 18, 2021	1,325,000	-	-	(150,000)	1,175,000
$0.50(USD)	August 20, 2023	-	750,000	-	-	750,000
$0.57(USD)	April 17, 2023	-	200,000	-	-	200,000
Total outstanding		2,328,571	950,000	(8,334)	(216,666)	3,053,571
Total exercisable		845,238				1,353,571

KELSO TECHNOLOGIES INC.

Notes to Consolidated Financial Statements

For the years ended December 31, 2019, 2018 and 2017
(Expressed in US Dollars)

10. CAPITAL STOCK (Continued)

(b) Stock options (Continued)

A summary of the Company’s stock options as at December 31, 2019 and 2018, and changes for the years then ended are as follows:

				Weighted
				Average Exercise
	Number			Price
Outstanding, December 31, 2017	2,328,571		$	1.11
Granted	950,000		$	0.51
Exercised	(8,334	)	$	0.30
Expired	(216,666	)	$	0.99
Outstanding, December 31, 2018	3,053,571		$	0.92
Granted	720,000		$	0.79
Expired	(128,571	)	$	4.22
Outstanding, December 31, 2019	3,645,000		$	0.78

The weighted average contractual life for the remaining options at December 31, 2019 is 3.0 years (2018 - 3.49).

Share-based expense

Share-based expense of $345,498 (2018 - $403,548; 2017 - $469,187) was recognized in the year ended December 31, 2019 for stock options. The share-based expense relates to options granted during December 31, 2019, 2018, 2017 and 2016, which vest over time.

The fair value of stock options is estimated using the Black-Scholes option pricing model with the following weighted average assumptions:

	Year ended	Year ended	Year ended
	December 31,	December 31,	December 31,
	2019	2018	2017
Risk-free interest rate (average)	1.32%	2.15%	1.56%
Estimated volatility (average)	69.93%	66.56%	61.95%
Expected life in years	5.00	5.00	5.00
Expected dividend yield	0.00%	0.00%	0.00%
Estimated forfeitures	0.00%	0.00%	0.00%
Grant date fair value per option	$0.45	$0.29	$0.17

Option pricing models require the use of highly subjective estimates and assumptions. The expected volatility assumption is based on the historical and implied volatility of the Company’s common share price on the TSX. The risk-free interest rate assumption is based on yield curves on Canadian government zero-coupon bonds with a remaining term equal to the stock options’ expected life. The Company uses historical data to estimate option exercise, forfeiture and employee termination within the valuation model.

KELSO TECHNOLOGIES INC.

Notes to Consolidated Financial Statements

For the years ended December 31, 2019, 2018 and 2017
(Expressed in US Dollars)

11. RELATED PARTY TRANSACTIONS

Related party transactions not otherwise described in these consolidated financial statements are shown below. The remuneration of the Company’s directors and other members of key management, being the Chief Executive Officer, Chief Financial Officer, and Chief Operating Officer who have the authority and responsibility for planning, directing and controlling the activities of the Company, consist of the following amounts:

		December 31,		December 31,		December 31,
		2019		2018		2017
Management compensation	$	540,692	$	540,535	$	544,014
Management bonus^*		496,894		70,035		-
Share-based expense^**		255,902		262,261		264,172
Directors’ fees		120,500		73,000		67,000
	$	1,413,988	$	945,831	$	875,186

* The Company has management bonus agreements whereby 10% of the annual income before taxes, amortization and share-based expense is equally distributed to management.

** Share-based expense consists of the key management portion of the fair value of options granted calculated using the Black-Scholes option pricing model and does not include any cash compensation.

As at December 31, 2019, amounts due to related parties included accounts payable and accrued liabilities, which are unsecured and have no interest or specific terms of payments, of $537,644 (2018 - $19,500) consisting of $40,750 (2018 - $19,500) for directors’ fees and $496,894 (2018 - $70,035) for management bonus.

12. INCOME TAXES

The Company has approximately $1,200,000 in non-capital losses in the US that may be applied against future taxable income (expiring in 2032 or later).

The tax effect items that give rise to significant portions of the deferred income tax assets and deferred income tax liabilities at December 31, 2019 and 2018 are as follows:

		December 31,			December 31,
		2019			2018

Deferred income tax assets
Non-capital loss carry-forwards	$	221,178		$	137,251

Deferred income tax assets	$	221,178		$	137,251

Deficiency (excess) of carrying value over tax value of property, plant and equipment	$	(195,048	)	$	(112,422	)
Excess of carrying value over tax value of intangible assets		(26,130	)		(24,829	)

Deferred income tax liability	$	(221,178	)	$	(137,251	)

Net deferred tax asset (liability)	$	-		$	-

KELSO TECHNOLOGIES INC.

Notes to Consolidated Financial Statements

For the years ended December 31, 2019, 2018 and 2017
(Expressed in US Dollars)

12. INCOME TAXES (Continued)

Significant unrecognized tax benefits and unused tax losses for which no deferred tax assets is recognized as of December 31, 2019 and 2018 are as follows:

		December 31,		December 31,
		2019		2018
Excess of tax value over carrying value of mineral properties	$	9,333	$	12,708
Non-capital losses carried forward		264,989		4,660,241
Lease liability		79,896		-

Unrecognized deductible temporary differences	$	354,218	$	4,672,949

Income tax expense differs from the amount that would be computed by applying the Canadian statutory income tax rate of 27.00% (2018 - $27.00%; 2017 - 26.00%) to income (loss) before income taxes as follows:

		December 31,			December 31,			December 31,
		2019			2018			2017
Income (loss) before income taxes	$	3,334,043		$	(56,711	)	$	(5,166,207	)
Statutory income tax rate		27.00%			27.00%			26.00%
Income tax (benefit) liability computed at statutory tax rate		900,192			(15,312	)		(1,343,214	)
Items not deductible for income tax purposes		(12,564	)		77,417			(100,626	)
Under provision of taxes in prior years		36,225			-			-
Change in timing differences		135,130			(80,965	)		187,473
Impact of foreign exchange on tax assets and liabilities		(39,116	)		(90,212	)		117,313
Difference between Canadian and foreign taxes		-			3,403			(464,959	)
Effect of change in tax rates		-			(42,564	)		-
Unused tax losses and tax offsets not recognized		(983,204	)		148,233			1,431,580
Income tax expense (recovery)		36,663			-			(172,433	)
Penalties and interest included in income tax expense (recovery)		27,989			(290,818	)		-
Texas margin tax and branch tax		34,425			39,654			22,137
Income tax expense (recovery)	$	99,077		$	(251,164	)	$	(150,296	)

KELSO TECHNOLOGIES INC.

Notes to Consolidated Financial Statements

For the years ended December 31, 2019, 2018 and 2017
(Expressed in US Dollars)

13. SUPPLEMENTAL CASH FLOW INFORMATION

		December 31,		December 31,			December 31,
		2019		2018			2017
Obligation to issue shares for acquisition of intangible asset	$	-	$	-		$	131,527
Shares issued for intangible assets	$	-	$	131,527		$	401,432
Intangible assets in accounts payable and accrued liabilities	$	-	$	-		$	25,000
Property, plant and equipment in accounts payable and accrued liabilities	$	97,180	$	34,402		$	-
Interest paid	$	737	$	-		$	-
Income taxes paid (recovered)	$	487,206	$	(3,907	)	$	-

14. EARNINGS PER SHARE

The calculation of basic and diluted earnings (loss) per share for the relevant years is based on the following:

		December 31,		December 31,		December 31,
		2019		2018		2017
Net income (loss) for the year	$	3,334,043	$	194,453	$	5,015,911	)
Basic weighted average number of common shares outstanding		47,170,086		47,117,369		46,848,053
Effect on dilutive securities:
Options		1,016,436		334,275		-
Diluted weighted average number of common shares outstanding		48,186,522		47,451,644		46,848,053

Basic income (loss) per share	$	0.07	$	0.00	$	(0.11	)
Diluted income (loss) per share	$	0.07	$	0.00	$	(0.11	)

15. SIGNIFICANT CUSTOMERS

The following table represents sales to individual customers exceeding 10% of the Company’s annual revenues:

		December 31,		December 31,		December 31,
		2019		2018		2017

Customer A	$	11,043,962	$	6,158,718	$	2,934,404
Customer B	$	2,660,840	$	1,524,550	$	896,965

The customers are major US and Canadian corporations who have displayed a pattern of consistent timely payment of amounts owing from sales.

The Company is obligated to pay a 5% royalty from sales of their manway securement systems until 2023 in accordance with the original acquisition agreement. During the year ended December 31, 2019, there were revenues from sales of the manway securement systems totalling $133,486 (2018 - $13,301; 2017 - $183,337).

KELSO TECHNOLOGIES INC.

Notes to Consolidated Financial Statements

For the years ended December 31, 2019, 2018 and 2017
(Expressed in US Dollars)

16. EMPLOYEE BENEFITS

Total employee benefit expenses, including salary and wages, management compensation, share-based expense and benefits for the year ended December 31, 2019 amounted to $4,451,529 (2018 - $3,275,011; 2017 - $3,448,877).

17. SEGMENTED INFORMATION

The Company operates in two business segments with operations and long-term assets in United States and Canada. The two business segments include the design, production and distribution of various proprietary products for the rail sector and active suspension control system for no road vehicles. At December 31, 2019, long term assets of $1,399,087 (2018 - $946,426) relates to the active suspension control system located in Canada and $2,347,234 (2018 - $2,749,426) relates to the rail sector located in the United States. During the year ended December 31, 2019, 2018 and 2017 there was no revenue related to the active suspension control system.

18. SUBSEQUENT EVENT

Subsequent to the year ended December 31, 2019, the Company granted incentive stock options to a director for the purchase of up to 200,000 common shares in the capital stock of the Company. The options are exercisable on or before February 25, 2025 at a price of $0.76. The options vest 1/3 on grant date, 1/3 on the first anniversary of the grant date, and 1/3 on the second anniversary of the grant date.