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UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C.
20549

FORM 20-F

[   ] REGISTRATION STATEMENT PURSUANT TO
SECTION 12(b) OR (g) OF THE SECURITIESEXCHANGE ACT OF 1934

OR

[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGEACT OF 1934

For the fiscal year endedDecember 31, 2016

OR

[   ] TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934

OR

[   ] SHELL COMPANY PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGEACT OF 1934

Date of event requiring this shell company report N/A

For the transition period fromN/AtoN/A

Commission file number 001-36685

KELSO TECHNOLOGIES INC.(Exact
name of Registrant as specified in its charter)

Not Applicable(Translation of Registrants name into
English)

British Columbia, Canada(Jurisdiction of
incorporation or organization)

13966 18B Avenue, Surrey, British Columbia V4A 8J1, Canada(Address of principal executive offices)

James R. Bond, CEO13966 18B AvenueSurrey, British Columbia V4A 8J1, CanadaTelephone:
250.764.3618Email: bond@kelsotech.com(Name, Telephone,
E-mail and/or Facsimile number and Address of Company Contact Person)

Copy of communications to: Bernard PinskyClark Wilson LLPSuite 800  885 West Georgia StreetVancouver, British Columbia, Canada, V6C 3H1Telephone:
604.687.5700Facsimile: 604.687.6314

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- ii -

Securities registered or to be registered pursuant to Section
12(b) of the Act.

|Title of Class                  | Name of each exchange on which registered
|------------------------------- | -----------------------------------------
|Common Shares Without Par Value | NYSE MKT                                 

Securities registered or to be registered pursuant to Section
12(g) of the Act.

Nil (Title of Class)

Securities for which there is a reporting obligation pursuant
to Section 15(d) of the Act.

Not Applicable(Title of Class)

Indicate the number of outstanding shares of each of the
issuers classes of capital or common stock as of the close of the period
covered by the annual report.

46,411,752 common shares without par value outstanding on
December 31, 2016. There were no Class A non-cumulative preference shares
outstanding on December 31, 2016.

Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities Act. [   ] YES
[X] NO

If this report is an annual or transition report, indicate by
check mark if the registrant is not required to file reports pursuant to Section
13 or 15(d) of the Securities Exchange Act of 1934. [   ] YES [X] NO

Note  Checking the box above will not relieve any registrant
required to file reports pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 from their obligations under those Sections.

Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] YES [   ] NO

Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). NOT APPLICABLE TO
THE REGISRANT AT THIS TIME [   ] YES [   ] NO

Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated filer. See the
definition of an accelerated filer and large accelerated filer in Rule 12b-2
of the Exchange Act. (Check one):

Large accelerated filer [   ]
    Accelerated filer [   ]
    Non-accelerated filer [X]


Indicate by check mark which basis of accounting the registrant
has used to prepare the financial statements included in this filing:

U.S. GAAP [   ]
    International Financial Reporting Standards as
      issued
    Other [   ]by the International Accounting Standards Board
      [X]


If Other has been checked in response to the previous
question, indicate by check mark which financial statement item the registrant
has elected to follow.[   ] ITEM 17 [   ] ITEM 18

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- iii -

If this is an annual report, indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
[   ] YES [X] NO

Under the Jumpstart Our Business Startups Act of 2012 (the
JOBS Act), Kelso Technologies Inc. is classified as an Emerging Growth
Company. Under the JOBS Act, Emerging Growth Companies are exempt from certain
reporting requirements, including the auditor attestation requirements of
Section 404(b) of the Sarbanes-Oxley Act. Under this exemption, the companys
auditor will not be required to attest to and report on managements assessment
of the companys internal controls over financial reporting. The company is also
exempt from certain other requirements, including the requirement to adopt
certain new or revised accounting standards until such time as those standards
would apply to private companies. The company will remain an Emerging Growth
Company for up to the last day of the fiscal year following the fifth
anniversary of the date of the first sale of common equity securities pursuant
to an effective registration statement under the Securities Act of 1933,
although it will lose that status earlier if revenues exceed US$1 billion, or if
the company issues more than US$1 billion in non-convertible debt in a three
year period, or the company will lose that status on the date that it is deemed
to be a large accelerated filer.

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- i -

TABLE OF CONTENTS

|                           |                                                             |                                                            | Page
|-------------------------- | ----------------------------------------------------------- | ---------------------------------------------------------- | ----
|FORWARD-LOOKING STATEMENTS | 3                                                          
|PART I                     |                                                             |                                                            | 3   
|Item 1.                    | Identity of Directors, Senior Management and
      Advisers | 3                                                         
|                           | A.                                                          | Advisers                                                   | 4   
|                           | B.                                                          | Auditors                                                   | 4   
|Item 2.                    | Offer Statistics
      and Expected Timetable               | 4                                                         
|Item 3.                    | Key Information                                             | 4                                                         
|                           | A.                                                          | Selected Financial Data                                    | 4   
|                           | B.                                                          | Capitalization and Indebtedness                            | 5   
|                           | C.                                                          | Reasons for the Offer and Use
      of Proceeds            | 5   
|                           | D.                                                          | Risk Factors                                               | 6   
|Item 4.                    | Information on
      the Company                            | 11                                                        
|                           | A.                                                          | History and
      Development of the Company               | 11  
|                           | B.                                                          | Business Overview                                          | 17  
|                           | C.                                                          | Organizational Structure                                   | 25  
|                           | D.                                                          | Property, Plants and
      Equipment                       | 25  
|Item 5.                    | Operating and Financial Review and Prospects                | 25                                                        
|                           | A.                                                          | Operating Results                                          | 26  
|                           | B.                                                          | Liquidity
      and Capital Resources                      | 29  
|                           | C.                                                          | Research and Development,
      Patents and Licenses, etc. | 31  
|                           | D.                                                          | Trend
      Information                                    | 31  
|                           | E.                                                          | Off-Balance Sheet
      Arrangements                       | 32  
|                           | F.                                                          | Tabular
      Disclosure of Contractual Obligations        | 32  
|Item 6.                    | Directors,
      Senior Management and Employees            | 32                                                        
|                           | A.                                                          | Directors
      and Senior Management                      | 32  
|                           | B.                                                          | Compensation                                               | 34  
|                           | C.                                                          | Board
      Practices                                      | 38  
|                           | D.                                                          | Employees                                                  | 41  
|                           | E.                                                          | Share
      Ownership                                      | 41  
|Item 7.                    | Major
      Shareholders and Related Party Transactions     | 42                                                        
|                           | A.                                                          | Major
      Shareholders                                   | 42  
|                           | B.                                                          | Related Party Transactions                                 | 42  
|Item 8.                    | Financial Information                                       | 43                                                        
|                           | A.                                                          | Financial Statements and
      Other Financial Information | 43  
|                           | B.                                                          | Significant
      Changes                                  | 44  
|Item 9.                    | The Offer and
      Listing                                 | 44                                                        
|                           | A.                                                          | Offer and
      Listing Details                            | 44  
|                           | B.                                                          | Plan of Distribution                                       | 45  
|                           | C.                                                          | Markets                                                    | 45  
|                           | D.                                                          | Selling Shareholders                                       | 45  
|                           | E.                                                          | Dilution                                                   | 46  
|Item 10.                   | Additional
      Information                                | 46                                                        
|                           | A.                                                          | Share
      Capital                                        | 46  
|                           | B.                                                          | Memorandum and Articles of
      Association               | 46  
|                           | C.                                                          | Material
      Contracts                                   | 46  
|                           | D.                                                          | Exchange Controls                                          | 48  
|                           | E.                                                          | Taxation                                                   | 48  
|                           | F.                                                          | Dividends and Paying Agents                                | 50  
|                           | G.                                                          | Statement by
      Experts                                 | 50  
|                           | H.                                                          | Documents on Display                                       | 50  

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|               | I.                                                                                  | Subsidiary
      Information                                                  | 50
|-------------- | ----------------------------------------------------------------------------------- | ----------------------------------------------------------------------------- | --
|Item
      11. | Quantitative
      and Qualitative Disclosures About Market Risk                    | 51                                                                           
|Item
      12. | Description
      of Securities Other than Equity Securities                        | 52                                                                           
|Part
      II  |                                                                                     |                                                                               | 52
|Item
      13. | Defaults,
      Dividend Arrearages and Delinquencies                               | 52                                                                           
|Item
      14. | Material
      Modifications to the Rights of Security Holders and Use of Proceeds. | 52                                                                           
|Item
      15. | Controls
      and Procedures                                                       | 53                                                                           
|Item
      16. | [Reserved]                                                                          | 54                                                                           
|               | A.                                                                                  | Audit
      Committee Financial Expert                                        | 54
|               | B.                                                                                  | Code
      of Ethics                                                          | 54
|               | C.                                                                                  | Principal
      Accountant Fees and Services                                  | 54
|               | D.                                                                                  | Exemptions
      from the Listing Standards for Audit Committees.             | 55
|               | E.                                                                                  | Purchases
      of Equity Securities by the Issuer and Affiliated Purchasers. | 55
|Part
      III |                                                                                     |                                                                               | 55
|Item
      17. | Financial
      Statements                                                          | 57                                                                           
|Item
      18. | Financial
      Statements                                                          | 57                                                                           
|Item
      19. | Exhibits                                                                            | 57                                                                           

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FORWARD-LOOKING STATEMENTS

This annual report contains forward-looking statements. These
statements relate to future events or future financial performance. In some
cases, you can identify forward-looking statements by terminology such as
estimate, project, believe, anticipate, intend, expect, plan,
predict, may, should, potential, or continue, the negative thereof or
other variations thereon or comparable terminology. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause the actual results, performance or achievements of Kelso
Technologies Inc. to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements.

There can be no assurance that the forward-looking statements
will prove to be accurate as actual results and future events could differ
materially from those anticipated in such statements. Accordingly, readers
should not place undue reliance on forward-looking statements. The
forward-looking statements in this annual report speak only as to the date
hereof, or such other date as may be indicated herein. Except as required by
applicable law, including the securities laws of the United States and Canada,
the Company does not intend to update any of the forward-looking statements to
conform these statements to actual results.

In this annual report, unless otherwise stated, all dollar
amounts are expressed in United States dollars ($). The financial
statements and summaries of financial information contained in this annual
report are also reported in United States dollars unless otherwise stated. All
such financial statements have been prepared in accordance with International
Financial Reporting Standards (IFRS), unless expressly stated
otherwise.

As used in this annual report, Company means Kelso Technologies
Inc. and the Companys wholly-owned subsidiaries Kelso Technologies (U.S.A.)
Inc., KIQ Industries Inc. and Kelso Innovative Solutions Inc. (collectively the
Company).

PART I

Item 1.Identity of Directors, Senior
Management and Advisers

The directors and the senior management of the Company are as
follows:

Name and Office Held
    FunctionJames R. Bond Director, President and Chief
      Executive Officer
    As President and Chief Executive Officer, Mr. Bond is
      responsible for strategic planning and operations, as well as managing our
      relations with the Companys legal advisers, regulatory authorities and
      the investment community; as a director, Mr. Bond participates in
      management oversight and helps to ensure compliance with the Companys
      corporate governance policies and standards.William Troy, Director and Audit Committee
      Member(1)
    As an independent director, Mr. Troy supervises the
      Companys management and helps to ensure compliance with our corporate
      governance policies and standards.Neil Gambow Director, Chief Technology Officer(2)
    As a director, Mr. Gambow supervises the Companys
      management and helps to ensure compliance with the Companys corporate
      governance policies and standards. As Managing Director Corporate
      Development, Mr. Gambow is responsible for the daily operations of the
      Companys plant in Bonham, TX as well as the development, sales, marketing
      and engineering of the Companys products.Peter Hughes Director and Audit Committee Member
    As an independent director, Mr. Hughes supervises the
      Companys management and helps to ensure compliance with the Companys
      corporate governance policies and standards.


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Name and Office Held
    FunctionAnthony (Tony) Andrukaitis
      Director and Executive Vice President Business Development
      and Chief Operating Officer
    As a director, Mr. Andrukaitis supervises the
      Companys management and helps to ensure compliance with the Companys
      corporate governance policies and standards. As Vice President Business
      Development and COO, Mr. Andrukaitis is responsible for the daily
      operations of the Companys plant in Bonham, Texas and will continue to
      take an active management role in pursuing growth of business
      opportunities, including mergers and acquisitions.Phil Dyer Director and Audit Committee
      Member
    As an independent director, Mr. Dyer supervises
      the Companys management and helps to ensure compliance with the Companys
      corporate governance policies and standards.John R. ONeill
      Director(3)
    As an independent director, Mr. ONeill
      supervises the Companys management and helps to ensure compliance with
      the Companys corporate governance policies and standards.Edward Paul (Paul) Cass
      Director and Audit Committee Member(4)
    As an independent director, Mr. Cass supervises
      the Companys management and helps to ensure compliance with the Companys
      corporate governance policies and standards.Laura Roach Director(5)
    As an independent director, Ms. Roach
      supervises the Companys management and helps to ensure compliance with
      the Companys corporate governance policies and standards.Richard Lee Chief Financial
      Officer
    As our Chief Financial Officer, Mr. Lee is
      responsible for the management and supervision of all of the financial
      aspects of the Companys business.


|(1) | Mr. Troy did not stand for re-election at the Companys
      Annual General Meeting held on June 2, 2016.                                                                                                  
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | On June 2, 2016 Mr. Gambow resigned as Managing Director
      Corporate Development and was appointed Chief Technology Officer. Mr.
      Gambow resigned as a Director of the Company on February 2,
2017.
|(3) | Mr. ONeill resigned as a Director of the Company on
      August 2, 2016.                                                                                                                                  
|(4) | Mr. Cass was elected a Director of the Company at the
      Companys Annual General Meeting held June 2, 2016.                                                                                             
|(5) | Ms. Roach was appointed a Director of the Company on
      August 10, 2016.                                                                                                                                 

The business address for our directors and officers is 13966
18B Avenue, Surrey, British Columbia, Canada V4A 8J1.

Advisers

The Companys legal advisers are Clark Wilson LLP with a
business address at 900  885 West Georgia Street, Vancouver, British Columbia,
Canada V6C 3H1.

Auditors

The Companys current auditors are Smythe CPA, Chartered
Professional Accountants, with a business address at 700  355 Burrard Street,
Vancouver, British Columbia, Canada V6C 2G8. Smythe CPA, Chartered Professional
Accountants, are members of the Institute of Chartered Professional Accountants
of British Columbia and are registered with both the Canadian Public
Accountability Board and the U.S. Public Company Accounting Oversight Board.
Smythe CPA, Chartered Professional Accountants were first appointed as
the Companys auditors on November 16, 2009.

Item 2.Offer Statistics and Expected
Timetable

Not Applicable.

Item 3.Key Information

A.Selected Financial Data

Prepared In Accordance With IFRS

The following table summarizes selected financial data for the
Company for the years ended December 31, 2016, 2015 and 2014 prepared in
accordance with IFRS as issued by the International Accounting Standards Board
(IASB). Effective December 31, 2012, we changed our
fiscal year end from August 31st to December 31st. The information in the table
was extracted from the detailed financial statements and related notes included
in this annual report and should be read in conjunction with such financial
statements and with the information appearing under the heading, Item 5 
Operating and Financial Review and Prospects beginning at page 25 below.

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Selected Financial Data

Statements of Income (Loss) Data
    Year ended December 31,
      2016 (audited) ($)
    Year ended **December 31,**2015 (audited) ($)
    Year ended **December 31,** 2014
      (audited) ($)
    Year ended December 31,
      2013 (audited) ($)
    Four months ended
      December 31, 2012 (audited)
      ($)
    Year ended August 31,
      2012 (audited) ($)Revenues
    8,077,143
    18,910,122
    23,816,809
    13,131,387
    2,830,778
    2,233,807Gross Profit
    1,978,241
    5,100,129
    10,924,325
    5,305,207
    893,171
    560,373Net (Loss)/Income and Comprehensive (Loss)/Income
    (2,465,592)
    (2,510,826)
    4,025,781
    2,456,636
    10,988
    (1,276,827)Basic and Diluted (Loss)/Earnings per Share
    (0.05)
    (0.05)
    0.09
    0.06
    0.00
    (0.04)


Statement of Financial Position
      Data
    As at December
      31, 2016 (audited) ($)
    As at December
      31, 2015 (audited) ($)
    As at December
      31, 2014 (audited) ($)
    As at December
      31, 2013 (audited) ($)
    As at December
      31, 2012 (audited) ($)
    As at August 31,
      2012 (audited) ($)Assets
    13,050,144
    16,157,689
    20,696,182
    9,283,388
    4,319,482
    2,689,346Current Liabilities
    1,105,767
    2,550,970
    4,097,256
    486,147
    283,042
    763,773Shareholders Equity/(Deficiency)
    11,771,944
    13,606,719
    16,598,926
    8,797,241
    4,036,440
    1,925,573Common Shares
    22,829,820
    22,515,140
    22,141,417
    18,086,144
    16,073,471
    14,495,094(Deficit)/Retained Earnings
    (14,272,161)
    (11,806,569)
    (7,918,089)
    11,507,420
    (13,964,056)
    (13,975,044)Outstanding Common Shares
    46,411,752
    46,071,752
    45,246,752
    43,020,326
    39,990,583
    36,659,583


B.Capitalization and Indebtedness

Not applicable.

C.Reasons for the Offer and Use of
Proceeds

Not applicable.

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D.Risk Factors

Due to the Companys size and the nature of the Companys
activities, the Company will always be exposed to some business risks. This
section discusses the material risks facing the Company.

The Companys operations and financial performance are subject
to the normal risks applicable to railroad equipment supply companies and are
subject to various factors which are beyond the Companys control. Risk areas
include that the Companys products involve detailed proprietary and engineering
knowledge and specific customer adoption criteria, hence factors may exist that
could cause actual results to be materially different than those anticipated by
management. These may include that the Company may be unsuccessful in raising
any additional capital for needs that may arise; the Company may not have
sufficient capital to develop, produce and deliver new orders; customer orders
that are placed may be cancelled; products may not perform as well as expected;
markets may not develop as quickly as anticipated or at all; or that the
productive capacity of the Company may not be large enough to handle market
demand. Should one or more of these risks and uncertainties materialize, or
should underlying assumptions prove incorrect, then actual results may vary
materially from those described in forward-looking statements. These risk
factors are described in more detail below.

Risks Relating to the Business

The Companys products involve detailed proprietary and
engineering knowledge and specific customer adoption criteria. If the Company is
not able to effectively protect the Companys intellectual property or cater to
specific customer adoption criteria, the Companys business may suffer a
material negative impact and may fail.

The success of the Company may depend on the Companys ability
to protect and develop the Companys technologies. The Companys Patent No.
5,855,225 for the Companys external constant force spring pressure relief
valves (each, an EPRV) expired January 29, 2016. Our one-bolt manway
securement system Patent 7,104,722 B2 has also been trademarked as the Kelso
Klincher® (the KKM) a trademark that was issued on January 29, 2013under trademark number 4,282,652. The Company does not have a patent for the
Companys Kelso Tiger Tube - Eduction Tube Technology (the ETS). The
patent for the ETS technology expired several years ago, although the Company
does hold manufacturing, sale and technology rights. The Company holds a patent
for the Companys ceramic BOV Patent 9470320 issued on January 13, 2016. See
Information on the Company  Business Overview  Key Products for additional
details regarding EPRVs, KKMs and ETS.

If the Company is unable to secure trademark and patent
protection for the Companys intellectual property in the future, or that
protection is inadequate for future products, the business may be materially
adversely affected. Further, there is no assurance that the Companys railroad
equipment products, including the Companys EPRVs, KKMs and ETS or other
aspects of the business do not or will not infringe upon patents, copyrights or
other intellectual property rights held by third parties. Although we are not
aware of any such claims, we may become subject to legal proceedings and claims
from time to time relating to the intellectual property of others in the
ordinary course of the Companys business. If we are found to have violated the
intellectual property rights of others, we may be enjoined from using such
intellectual property, and we may incur licensing fees or be forced to develop
alternatives. In addition, we may incur substantial expenses and diversion of
management time in defending against these third-party infringement claims,
regardless of their merit. Successful infringement or licensing claims against
the Company may result in substantial monetary liabilities, which may materially
and adversely disrupt the Companys business

Further, the Association of American Railroads (the
AAR) has specific adoption criteria that must be met before the
Companys products can be utilized by customers in the railroad industry. The
Company has been successful in obtaining AAR approvals for The Companys key
products; however, there is no guarantee that the Companys products will
continue to meet AAR standards and adoption criteria as they evolve or that new
products developed by the Company will receive AAR approval. In addition,
certain customers may have specific adoption criteria beyond what is required by
the AAR, and there is no guarantee that the Company will be able to cater to
these specific adoption criteria. The Companys failure to meet AAR and customer
adoption criteria could have a material negative impact on the Companys ability
to obtain purchase orders and generate revenue.

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The Company may have insufficient capital in the future to
meet production demands and continue the Companys operations.

Although the Company had a positive working capital position in
the amount of $8,511,809 as at December 31, 2016, the Company may, from time to
time, report a working capital deficit. The Company reported a net loss and
comprehensive loss for the year ended December 31, 2016 of $2,465,592, a net
loss and comprehensive loss for the fiscal year ended December 31, 2015 of
$2,510,826 and net income and comprehensive income for the year ended December
31, 2014 of $4,025,781. Due to recent fiscal losses and to maintain the
Companys business activities, the Company may require additional funds which
may be obtained either by the sale of securities or obtaining debt financing.
There is no assurance that the Company will be successful in obtaining such
additional financing; failure to do so could result in the inability of the
Company to develop new products, meet production and delivery demands and
continue the Companys operations.

The Company has a limited operating history and may not
achieve the Companys growth objectives.

The Company has a limited history of earnings. The Company is
subject to all of the business risks and uncertainties associated with any
business enterprise which is transitioning from product development to
profitable operations, including the risk that it will not achieve the Companys
growth objectives. There is no assurance that the Company will be able to
successfully complete the Companys financing and development plans or operate
profitably over the short or long term. The Company is dependent upon the good
faith and expertise of management to identify, develop and operate commercially
viable product lines. No assurance can be given that the Companys efforts will
result in the development of additional commercially viable product lines or
that the Companys current product lines will prove to be commercially viable in
the long-term. If the Companys efforts are unsuccessful over a prolonged period
of time, the Company may have insufficient working capital to continue to meet
the Companys ongoing obligations and the Companys ability to obtain additional
financing necessary to continue operations may also be adversely affected. Even
if the Company is successful in developing one or more additional product lines,
there is no assurance that these product lines or the Companys existing product
lines will be profitable.

Markets for the Companys products may not develop as
quickly as anticipated or at all.

Markets for the Companys products may not develop as quickly
as anticipated, or at all, resulting in the Company being unable to meet the
Companys revenue and production targets. This may have a material negative
impact on the Company, particularly if the Company has incurred significant
expenses to cater to increased market demand and such market demand does not
materialize.

Competition could affect the Company and the Companys
ability to generate revenue at profitable levels.

Although the Company has patents, trademarks and other
protections in place to protect the proprietary technology on which the
Companys business is dependent, competitive products may be developed in the
future. Competition could adversely affect the Companys ability to acquire
additional market share or to maintain revenue at current and projected levels.

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- 8 -

Customer orders that are placed may be cancelled.

Although the Company makes efforts to ensure customers are
satisfied with the Companys products, there is a risk that customers may cancel
purchase orders before they are filled. This may have a material negative impact
on the Company, particularly if the Company has already ordered the component
parts required to assemble the finished products for that order or if the
Company has assembled the required finished products. The negative impact may be
mitigated by the Companys ability to utilize the component parts and finished
products to satisfy other purchase orders, but there is no guarantee that the
Company will able to mitigate the risk of loss to the Company from cancelled
orders in this manner.

The Company is dependent on a limited number of customers.

Although the Company is optimistic about the Companys future
as a railroad equipment supplier, the Company is dependent upon a limited number
of customers for a significant portion of the Companys revenue. In particular,
the Company is dependent on two major corporations as customers in 2016. The
sales to these two customers (Customer A and Customer B) exceeded 10% of the
Companys revenues during the year ended December 31, 2016. During the year
ended December 31, 2016 the Company generated revenues of $8,077,143 of which
$2,511,850 were from Customer A and sales of $2,107,426 were from Customer B.
During the year ended December 31, 2015 the Company had $18,910,122 of revenue
from four customers of which sales of $8,555,088 were from Customer A , sales of
$2,045,215 were from Customer B, sales of $3,196,253 were from Customer C and
sales of $1,959,883 were from Customer D. During the year ended December 31,
2014, the Company had $23,816,809 of revenue of which sales of $14,997,197 were
from Customer A and sales of $3,180,348 were from Customer B. Although Customers
A, B, C, and D have displayed a pattern of consistent timely payment of accounts
owing, there is no guarantee that sales to these customers will continue at
current levels or that these customers will continue to satisfy their payment
obligations to the Company in a timely manner. The Company does not have any
formal agreements for long term, large-scale purchase orders with these
customers and only sells to them based on purchase orders received. The Company
expects that a limited number of customers will continue to represent a
substantial portion of the Companys sales for the foreseeable future. The loss
of any of these customers could have a material negative impact upon the Company
and the Companys results of operations.

Products may not perform as well as expected.

There is a risk that the Companys products may not perform as
well as expected, which may result in customer complaints, returned products,
product recalls and/or loss of repeat customers. Any one of these effects may
have a material negative impact on the Companys ability to generate revenue and
continue operations. The Company maintains product liability insurance and
commercial general liability insurance at levels which the Company believes are
adequate based on the Companys customer base and revenue from product sales.
However, the amount of the Companys insurance coverage may not be sufficient to
cover future products claims. In 2016, the Companys product liability insurance
premiums were $271,305 covering up to $2,000,000 of aggregate product liability
insurance coverage and up to $1,000,000 of coverage per incident. In 2016, the
Companys commercial general liability insurance premiums were $175,823 covering
up to $2,000,000 aggregate coverage and $1,000,000 of coverage per incident.

There may be a shortage of parts and raw materials.

The Company currently has approximately three to five suppliers
in the United States for each of the component parts and raw materials required
to assemble the Companys finished products. There is a risk that the Company
may face a shortage of parts and raw materials in the future if the Companys
suppliers are unable to support current or increased customer demand for the
Companys products. This could have a material negative impact on the Company,
the Companys revenues and continued operations.

The productive capacity of the Company may not be large
enough to handle market demand.

The Companys current production facilities may not be large
enough to handle market demand for the Companys products if market demand is
beyond projected levels. The Company may not have sufficient capital to fund
increased production at the Companys existing facilities or to
add new production facilities, and even if the Company did have sufficient funds
for these purposes, the turnaround time to increase production may not be fast
enough to meet market demand. This may have a material negative impact on the
Companys ability to maintain existing customers and expand the Companys
customer base, and the Companys ability to generate revenue at current and
projected levels.

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The Companys research and development efforts may not
result in commercially viable products.

The Companys efforts to research and develop new products for
the railroad industry and to develop applications for the Companys products in
other industries, such as the trucking industry, may not result in commercially
viable products or applications. This may have a negative impact on the Company
as the Companys current products may cease to be best-available technology and
the Company would not have a replacement or alternative product offering. Also,
this may result in the Companys investment into such research and development
being a loss.

The Company may face uninsurable or underinsured
risks.

In the course of development and production of railroad
equipment products, certain risks, and in particular, destruction of production
facilities by a natural disaster, acts of terrorism, acts of war or patent
infringement may occur. It is not always possible to fully insure against such
risks and the Company may decide not to take out insurance against such risks as
a result of high premiums or other reasons. Should such liabilities arise, they
could reduce or eliminate any future profitability and result in increasing
costs and a decline in the value of the securities of the Company. Of the above
listed risks only an act of war is truly uninsurable. The Company maintains
commercial general liability insurance for claims up to $2,000,000 in aggregate
and $1,000,000 per incident, as well as product liability insurance for claims
up to $2,000,000 in aggregate and $1,000,000 per incident. Although the Company
believes that the insurance policies currently in place adequately insure the
Company given the size of the Companys customer base and revenues from product
sales, there is a risk that the Companys insurance coverage may not be
sufficient to cover future products claims.

The raw materials used by the Company for the Companys
products are subject to price fluctuations.

Many of the materials used in the Companys products are
commodity raw materials such as steel and rubber. These raw materials can be
subject to significant price fluctuations. A steep rise in the price of such raw
materials may have an adverse effect on the pricing of the Companys products
and the Companys operating results. As the Company does not have any purchase
agreements with customers, we are able to mitigate the risks associated with
price fluctuations in our raw materials by adjusting the pricing of the
Companys products accordingly. However, there is no guarantee that customers
will continue to purchase the Companys products if prices are adjusted due to
the fluctuation in the price of raw materials.

Risks Relating to Management

The success of the Companys business depends substantially
on the continuing efforts of the Companys senior executives, and the Companys
business may be severely disrupted if the Company loses their services.

The future success of the Company heavily depends upon the
continued services of the Companys senior executives and other key employees.
In particular, the Company relies on the expertise and experience of the
Companys Chief Executive Officer (CEO), Chief Financial Officer
(CFO), Chief Operating Officer (COO) of Kelso Technologies
(U.S.A.) Inc. (Kelso USA), Kelso Innovative Solutions Inc. (Kelso
Innovative) and KIQ Industries Inc. (KIQ Industries). The Company
relies on the industry expertise and experience of the Companys senior
executives, and their working relationships with the Companys employees,
customers and relevant regulatory authorities. If one or more of the Companys
senior executives were unable or unwilling to continue in their present
positions, the Company might not be able to replace them easily or at all. If
any of the Companys senior executives joins a competitor or forms a competing
company, the Company may lose clients, suppliers, key professionals, technical
know-how and staff members.

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Because executive management is free to devote time to other
ventures, shareholders may not agree with their allocation of time.

The Companys executive officers and directors devote the
majority of their time to the management and operation of the Companys
business. Management is not however, contractually required to manage or direct
the Company as their sole and exclusive function and they may have other
business interests and engage in other activities in addition to those relating
to the Company. This includes rendering advice or services of any kind to and
creating or managing other businesses, including other businesses in the
railroad industry. The Companys executive officers and directors are required
by law to act honestly and in good faith with a view to the best interests of
the Company and to disclose any interests, which they may have in any project or
opportunity of the Company. If a conflict of interest arises, at a meeting of
the board of directors of the Company (the Board), any director with a
conflict is required to disclose their interest in the matter and to abstain
from voting on such matter.

The board of directors may change the Companys operating
policies and strategies without prior notice to shareholders or shareholder
approval and such changes could harm the Companys business and results of
operations, and the value of the Common Shares.

The Board has the authority to modify or waive certain of the
Companys current operating policies and strategies without prior notice and
without shareholder approval. The Company cannot predict the effect any changes
to the Companys current operating policies and strategies would have on the
Companys business, operating results and value of the Common Shares. However,
such changes could have a material adverse effect on the Companys financial
position or otherwise.

The Articles of the Company contain provisions indemnifying
the Companys officers and directors against eligible penalties.

The Articles of the Company contain provisions with respect to
the indemnification of the Companys officers and directors against all eligible
penalties, being a judgment, penalty or fine awarded or imposed in, or an amount
paid in settlement of, an eligible proceeding. An eligible proceeding means a
legal proceeding or investigative action, whether current, pending, threatened
or completed, in which a director, former director or alternate director of the
Company (each, an eligible party) or any of the heirs and legal
personal representatives of the eligible party, by reason of the eligible party
being or having been a director or alternate director of the Company: is or may
be joined as a party; or is or may be liable for or in respect of a judgment,
penalty or fine in, or expenses related to, the proceeding.

Since the majority of the Companys officers and directors
are located in Canada, it may be difficult to enforce any United States judgment
for claims brought against the Companys officers and directors.

The Company has been organized under the laws of the Province
of British Columbia, Canada. Although the Companys assets are located in the
United States, many of the Companys officers and directors are residents of
Canada. While a cross border treaty exists between the United States and Canada
relating to the enforcement of foreign judgments, the process of such is
cumbersome and in some cases has prevented the enforcement of judgments. As a
result, while actions may be brought in Canada, it may be impossible to effect
service of process within the United States on the Companys officers and
directors or to enforce against these persons any judgments in civil and
commercial matters, including judgments under United States federal securities
laws. In addition, a Canadian court may not permit an original action in Canada
or enforce in Canada a judgment of a United States court based on civil
liability provisions of United States federal securities laws.

Risks Relating to the Common Shares

If the Companys business is unsuccessful, the Companys
shareholders may lose their entire investment.

Although shareholders will not be bound by or be personally
liable for the Companys expenses, liabilities or obligations beyond their total
original capital contributions, should the Company suffer a deficiency in funds
with which to meet the Companys obligations, the shareholders as a
whole may lose their entire investment in the Company.

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The Common Shares are subject to the price volatility of
publicly traded securities.

In recent years, the securities markets in the United States
and Canada have experienced a high level of price and volume volatility, and the
market prices of securities of many companies have experienced wide fluctuations
in price, which have not necessarily been related to the operating performance,
underlying asset values or prospects of such companies. There can be no
assurance that continual fluctuations in price will not occur. It may be
anticipated that any quoted market for the Common Shares will be subject to
market trends generally, notwithstanding any potential success of the
Company.

The Common Shares have limited liquidity and shareholders
may be unable to sell their shares.

The Company is publicly traded on both the Toronto Stock
Exchange and NYSE MKT. There is currently a limited market for the Common Shares
and the Company can provide no assurance to investors that a liquid market will
develop. If a market for the Common Shares does not develop, shareholders may
not be able to resell the Common Shares that they have purchased and they may
lose all of their investment. Public announcements regarding the Company,
changes in government regulations, conditions in the Companys market segment
and changes in earnings estimates by analysts may cause the price of the Common
Shares to fluctuate substantially.

Investors interests in the Company will be diluted and
investors may suffer dilution in their net book value per share if the Company
issues additional shares or raise funds through the sale of equity securities.

The Companys Articles currently authorize the issuance of an
unlimited number of Common Shares without par value and an unlimited number of
Preferred Shares, of which 5,000,000 are designated as Series 1 Shares. If we
are required to issue any additional shares or enter into private placements to
raise financing through the sale of equity securities, investors interests in
the Company will be diluted and investors may suffer dilution in their net book
value per share depending on the price at which such securities are sold. If the
Company issues any such additional shares, such issuances also will cause a
reduction in the proportionate ownership and voting power of all other
shareholders. Further, any such issuance may result in a change in control of
the Company.

As a foreign private issuer the Company will not be subject
to U.S. proxy rules.

As a foreign private issuer, the Company will be exempt from
the rules and regulations under the Securities Exchange Act of 1934
(United States) related to the furnishing and content of proxy statements.

Item 4.Information on the Company

A.History and Development of the Company

The Company was incorporated as Kelso Resources Ltd. pursuant
to the Company Act (British Columbia) on March 16, 1987. On July 21,
1994, the Company changed the Companys corporate name to Kelso Technologies
Inc. The Company is currently organized pursuant to the Business
Corporations Act (British Columbia) (BCBCA) which replaced the
Company Act (British Columbia) in 2004.

The Companys registered office is located at Suite 800  885
West Georgia Street, Vancouver, British Columbia V6C 3H1. The Companys
corporate head office is located at 13966 18B Avenue, Surrey, British Columbia
V4A 8J1. The Companys head office telephone number is (250) 764-3618.

In February 2007, the Company replaced the Companys original
Articles with new Articles to reflect the adoption of the BCBCA. On May 13,
2010, the Company consolidated the Companys share capital on the basis of one
new Common Share in the capital of the Company for seven old Common Shares. This
consolidation was approved by a special resolution of the shareholders of the
Company passed February 5, 2010. At the Companys annual general and special
meeting held on June 5, 2013, the Company obtained shareholder approval of
certain amendments to the Articles of the Company to include, among other things, advance
notice provisions. Advance notice provisions provide a framework whereby the
Company can fix a deadline for submission of director nominations by
shareholders prior to any annual or special meeting of shareholders and can set
forth the information regarding director nominees that a shareholder must
include in their notice to the Company for such notice to be in proper written
form.

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The Common Shares have been publicly traded on the Toronto
Stock Exchange (the (TSX) under the symbol KLS since May 22, 2014,
prior to which the Common Shares traded on the TSX Venture Exchange
(TSXV). The Common Shares have traded on the NYSE MKT (NYSE
MKT) under the symbol KIQ since October 14, 2014, prior to which the
Common Shares traded on the U.S. OTCQX over the counter market (OTCQX
International) under the symbol KEOSF.

The Company operates in conjunction with the Companys three
wholly-owned subsidiaries Kelso USA, Kelso Innovative and KIQ Industries. The
Company owns 100% of the voting securities of each of the Companys
subsidiaries. None of the subsidiaries has a class of restricted securities.
Kelso USA was incorporated on August 3, 2005 in the State of Nevada. KIQ
Industries was incorporated on October 7, 2014 in the State of Nevada. Kelso
Innovative was incorporated on June 20, 2012 in the State of Nevada. Kelso
Innovative focuses on industrial designs and distribution plans for the
Companys products for applications for the roadway trucking and trailer market.
KIQ Industries is working on the development of several new specialty
products.

General Development of the Business

General

The Company is a railroad equipment supplier that produces and
sells proprietary tank car service equipment used in the safe loading, unloading
and containment of non-hazardous and hazardous materials during transport.
Products are specifically designed to provide economic and operational
advantages while reducing the potential effects of human error and environmental
harm during the transport of non-hazardous and hazardous materials.

The Company currently offers approximately 60 products. The key
products that the Company offers include a series of 47 types of EPRV for
pressure management; 4 types of KKM; 4 types of BOV and 4 types of VRV that
address the technical requirements of load and unload operations and the
containment of hazardous commodities during transport. See Key Products below
for a description of the Companys key products and Markets for the revenue
generated from each key product. In addition to current product offerings, Kelso
Innovative, the Companys wholly-owned product development enterprise, has been
working on new products to add to the Companys catalogue by incorporating
customer feedback into product development decisions.

The Companys unaudited revenues over the last eight quarters
were as follows: $1,877,128 for the quarter ended December 31, 2016, $1,905,608
for the quarter ended September 30, 2016, $2,360,975 for the quarter ended June
30, 2016, $1,933,432 for the quarter ended March 31, 2016; $3,071,130 for the
quarter ended December 31, 2015, $4,370,567 for the quarter ended September 30,
2015, $4,596,741 for the quarter ended June 30, 2015, $6,871,684 for the quarter
ended March 31, 2015, $6,751,794. The Companys net income/loss over the last
eight quarters were as follows: $(260,862) for the quarter ended December 31,
2016, $(850,494) for the quarter ended September 30, 2016, $(543,839) for the
quarter ended June 30, 2016, $(686,404) for the quarter ended March 31, 2016;
net loss of $2,283,515 for the quarter ended December 31, 2015, net loss of
$661,263 for the quarter ended September 30, 2015, net income of $105,083 for
the quarter ended June 30, 2015 and net income of $328,869 for the quarter ended
March 31, 2015.

The Company believes that it continues to build a quality brand
in the railroad industry based on the Companys reputation to create, develop,
engineer and reliably supply technology and product solutions that address the
demanding technology criteria of the Companys railroad customers. The Company
brings new technology to the railroad industry which has historically been slow
to develop. Specifically, the Company designs products that are aimed at
reducing the risks associated with transport of non-hazardous and HAZMAT
commodities in the railroad industry, and the Company attempts to solve problems
that have been persistent in the market for years. For example, the Companys
BOV design is a response to numerous industry requests to develop a better
bottom outlet valve, and the Company believes the Companys BOV design is an
improvement on the standard bottom outlet valves. Two years ago, the Company asked several key customers
about their needs. Several of these customers, including Trinity Industries,
Inc. and Potash Corporation of Saskatchewan Inc., asked the Company when it was
going to design a bottom outlet valve. Due to the Companys AAR committee work,
the Company also knew that the existing bottom outlet valves had leak problems
and corrosion issues. When the Company announced the Companys BOV design,
several companies volunteered to do the service trial. In the past four years,
the Company believes that it has successfully gained the railroad industrys
confidence, approval and their willingness to adopt the Companys products as
evidenced by increased revenues from sales and by AAR approvals and
certifications for the Companys products. There is no guarantee that the
Companys customers who have inquired about BOV products or that the companies
who have volunteered to do the BOV service trials will purchase the Companys
BOV products in the future.

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The Companys management expanded the Companys business plans
in 2016 to include non-tank car related equipment, engineering and
troubleshooting services and ancillary non-proprietary production services.
Product development activities are focusing on the creation of innovative
engineering solutions for a wide range of applications in all transportation
markets.

The Companys roots and reputation are in rail tank car
technologies and the Company has established a solid foundation for corporate
growth strategies in new markets. New product development initiatives
concentrate on a wider range of technology products that are designed to provide
unique economic benefits and safe operational advantages to customers. New
markets initiated in 2016 include technologies for military applications, fuel
technologies for locomotives, military and heavy equipment, rail yard
technologies, emergency response kits for first responders and extreme terrain
vehicle technologies for commercial and homeland security applications.

Three Year History

2014

In February 2014, the Company reported that it has filed a
patent application for a new externally mounted dual rating pressure relief
valve (DPRV) design for use on new rail tank cars and retrofits of
existing rail tank cars that are in Packaging Groups 1 & 2 (US Bureau of
Explosives designations) which include all tank cars carrying crude oil and
ethanol as well as other flammable chemicals. In general terms, in an accident
involving fire, the DPRV is intended to lower the Companys operating pressure
rating to a level that will keep the valve open in order to evacuate the tank
car in less than 100 minutes as required by AAR recommendations. The Company
believes, based on managements knowledge of current industry standards and
other products on the market that the DPRV is a significant change compared to
currently available technology, and that the DPRV will provide economic
advantages to the impact of the expense of retrofits facing the railroad
industry. The Company holds the patent for the DPRV Patent 9,234,601 B1 expiring
in 2033.

In April 2014, the Company declared an annual cash dividend of
US$0.01 per share on outstanding common shares of the Company as of the record
date of April 15, 2014. The dividend was paid on April 30, 2014.

On May 22, 2014 the common shares of the Company commenced
trading on the TSX under the trading symbol KLS.

On June 4, 2014 the shareholders of the Company re-approved a
shareholder rights plan pursuant to an agreement between the Company and
Computershare Trust Company of Canada dated February 3, 2011.

On June 4, 2014 the shareholders of the Company approved the
Companys 10% rolling stock option plan.

On July 1, 2014 the Company occupied the new 44,000 sq. ft.
manufacturing facility in Bonham, TX. Production was fully consolidated in the
new facility as of September 30, 2015. The 6,000 sq. ft. facility adjacent to
the new manufacturing facility and previously used for manufacturing is now a
product development and customer training center.

On October 8, 2014 the Company filed a patent application for
the VRV. Service trials for the VRV are expected to start in 2015. The VRV valve
design applies the constant force spring technology used in all of the Companys
pressure relief valves. The Company also holds the patent for
the Companys VRV, Patent 9,441,749 expiring in 2033.

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On October 14, 2014 the common shares of the Company commenced
trading on the NYSE MKT under the trading symbol KIQ.

On December 2, 2014 the Company received the Companys first
commercial 100 tank car unit train order featuring both the pressure relief
valve and one bolt manway.

On December 4, 2014 the AAR approved the JS165H high-flow
pressure release valve for commercial applications after completing the
Companys two year field trials.

2015

On January 2, 2015 Mr. Phil Dyer was appointed to the Board of
Directors and Mr. Tony Andrukaitis was appointed Executive Vice President of
Business Development.

In April 2015, the Company declared an annual cash dividend of
US$0.03 per share on outstanding common shares of the Company as of the record
date of April 15, 2015. The dividend was paid on April 30, 2015.

On April 23, 2015 the Company completed the commercial design
and internal testing of the Companys BOV. The Company has submitted the final
required application information to the AAR for service trial testing and the
eventual commercial approval of the BOV.

On June 4, 2015 the shareholders of the Company appoint John R.
ONeill to the Board of Directors at the annual general meeting held in
Vancouver, British Columbia, Canada.

On June 23, 2015 the Company reported that the AAR has approved
the Companys VRV design for commercial field trial testing. The VRV is a low
pressure device specifically designed to protect rail tank cars from the effect
of an excessive vacuum preventing the implosion of the tank car.

On July 7, 2015 the Company announced that it has completed the
Companys production infrastructure to produce the Companys Kelso Klincher®
Manway (KKM) and the Companys proprietary loading rack adaptors at volume
levels that can meet the supply demands of tank car producers (OEM), shippers
and tank car owners.

On August 18, 2015 the Company receives the approval of the AAR
for the Companys BOV design for commercial field trial testing. Bottom outlet
valves are utilized on rail tank cars for the primary purpose of unloading the
contents of the tank. The BOV must be a low-profile design as it is positioned
at the lowest point of the tank so that a full discharge of the tank can be
achieved. They are widely used in the transport of hazardous commodities such as
crude oil, ethanol, chemicals, petrochemicals and minerals such as molten sulfur
as well as many non-hazardous commodity applications.

On September 16, 2015 the Company established a Strategic
Alliance (Alliance) with Carolina Seal Inc. (CSI) to offer the industry an
unprecedented one year seal warranty program for the Companys pressure relief
valves (PRV). CSI is a long time supplier to the Company and an industry leader
in engineered sealing solutions for containment equipment used in railroad
systems. The one year warranty program will apply to all new orders. CSI will
maintain an inventory of pedigree materials to support PRV new tank car
installations, re-qualifications, retrofits, improvement orders and repairs. The
Alliance is a key arrangement that strengthens the Companys safety, reliability
and technology innovation for the Companys line of pressure relief valves.
Carolina Seal is a founding member of the Ride Tight® Program with the Companys
partner VSP Technologies. The concept of the Alliance is to deliver outstanding
value to customers with the first one year seal warranty ever offered in the
rail industry.

On September 17, 2015 Canadas preeminent media brand Canadian
Business and PROFIT has ranked the Company third on its 27th annual PROFIT 500
list  the definitive ranking of 500 of Canadas Fastest-Growing Companies.

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On September 23, 2015 the Company establishes an in-house
inspection and re-certification service for the Companys pressure relief valves
(PRV) due to high customer demand. It is customary in the railway industry that
every 5 years a PRV in service should be inspected, repaired or retrofitted, and
re-certified for commercial service. On September 30, 2015 the Company announces
that all participants in the service trials of the Companys VRV have installed
the VRV and begun testing. The VRV is a device specifically designed to protect
rail tank cars from the effects of excessive vacuum which can cause implosion of
the tank car.

October 28, 2015 the Company received United States Patent
Number 9,163,738 for the unique design of the Companys new high pressure
constant-force spring pressure relief valve (HPRV) for specialized use in the
Pressure Tank Cars category of the rail tank car market. The Companys HPRV is
a derivative of the Companys existing PRV patent and meets the performance
specifications and regulatory requirements for pressure tank cars. It is
designed for demanding applications in the transport of pressurized commodities
such as propane and anhydrous ammonia. The new HPRV will be offered in 225PSI,
247PSI, 280PSI, 300PSI and 330PSI ratings.

On December 2, 2015 the Company launched a solution to address
the challenges associated with sealing material identification. In conjunction
with the Companys previously announced Strategic Alliance with Carolina Seal
Inc., seals used in Companys pressure relief valves (PRV) will incorporate a
Compound Authentication Procedure (CAP). The CAP is believed to be the first
and only such procedure for seals in the rail industry today.

2016

On January 12, 2016 the Company was granted a United States
Patent 9,234,601 B1 for the Companys DPRV which expires in 2033.

The Companys DPRV design is based on specialized mechanical
engineering innovations that provide safety benefits in both accident and
non-accident environments. In general terms in an accident involving fire the
DPRV will significantly lower the Companys operating pressure rating to a level
that will keep the valve open in order to evacuate the tank car in less than 100
minutes as required by the AAR recommendations. This capability in a fire allows
the contents in the tank car to escape before it over pressurizes causing a
breach or failure or before the contents self-combust. Both these dangerous
situations can cause a catastrophic explosion of the tank car.

The Companys DPRV offers new safety advantages that are an
improvement to current technology requirements. The Company is pursuing
regulatory approvals from the AAR for the commercial distribution of the DPRV.

On January 15, 2016 the Company successfully renewed the
Companys M1003 manufacturing status under AAR policies and guidelines which is
valid until 2019. In accordance with the M1003 regulations the AAR conducts a
full manufacturing audit annually in order to maintain the M1003 manufacturing
status which is a requirement for all tank car valve manufacturers. The AAR
conducted the audit of the Companys Bonham, Texas facility from January 5 &
6, 2016. The audit was completed with no adverse findings and continuation of
the Companys M1003 approval has been recommended by the lead auditor. In
addition to the AAR review the Companys M1003 system has been audited by a
number of key customers who have approved our M1003 program as compliant with
their own M1003 requirements. Achieving M1003 approval is indicative of the
Companys commitment to American-made high quality products. This includes
product warranties and service that surpass all industry requirements.

In February, 2016, the Company completed the development of the
Companys new rail tank car bottom outlet valve (BOV) featuring ceramic
components that are designed to increase valve life and reliability. The Company
received the approval from the AAR the field service trials of this unique BOV
design. The ceramic BOV is an evolution of the Companys current stainless steel
BOV design that is currently in service trials. Most general service tank rail
tank cars carrying non-hazardous and hazardous commodities including crude oil
and ethanol are equipped with a bottom outlet valve through which the tank car
is emptied. Current BOV designs utilizing stainless steel components have
well-known shortcomings specifically in transport services where the commodity
is abrasive or has corrosive characteristics that are detrimental to the
materials from which the BOV is made.

On March 1, 2016 Tony Andrukaitis was appointed the Chief
Operating Officer (COO) for the Company and Mr. Neil Gambow became the Managing
Director of Corporate Development.

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On April 4, 2016 the Company entered into a products
distribution agreement with Metal Goods Manufacturing Company, Inc.
(MGM), headquartered in Bartlesville, Oklahoma. MGM, established in
1938, designs and manufactures check valves, fittings, magnetic gauging devices
and control valves used in the rail, pipeline and natural gas industries.

On June 2, 2016 Mr. Paul Cass is elected as a Director of the
Company at the Companys Annual General Meeting held in Vancouver, B.C. Mr.
William Troy did not stand for re-election.

In July, 2016 the Company successfully completed initial
commercial testing of the Companys new emergency response kit known as the
Kelso ERK (ERK). This specialized equipment is used by first responders to cap
and contain chemical leaks in the field that originate in a HAZMAT rail tank
cars valve assembly or the Companys connections located on the top of the tank
car. The ERK is specifically designed to be implemented quickly and safely to
reduce potential dangers to human life and environmental harm to communities
during emergency events involving hazardous materials. The ERK meets the design
requirements of many first responder stakeholders in North America. These
stakeholders include the National Hazardous Materials Response Team and their 13
regional response centers; six Class 1 railroads; 700 Class 2 and 3 railroads;
and training organizations like the Transportation Technology Center, Inc (TTCI)
- a division of the AAR and TRANSCAER® which provides a voluntary
national outreach effort that focuses on assisting communities prepare for and
respond to a possible hazardous material accident event. Both TTCI and
TRANSCAER® have direct influential relationships with the many first
responders in North America.

On August 3 2016 Mr. John ONeill resigned from the Board.

On August 10, 2016 Ms. Laura Roach was appointed to the Board.

On September 13, 2016 the Company was granted a United States
Patent 9,441,749 for the Companys VRV. The patent took approximately two years
to process and will remain in effect for the next seventeen years. The VRV is a
low pressure device specifically designed to protect rail tank cars from the
effect of an excessive vacuum and prevents the implosion of the tank car. The
development of the Companys VRV design has been driven by customers concerns
and demands for a better performing VRV due to high failure rates of current
products in the market today.

On November 10, 2016 theCompanyentered an
exclusive Technology Development Agreement (the GJ Agreement) with G
& J Technologies Inc. (G & J), a private company incorporated
in the Province of British Columbia. The GJ Agreement focuses on the
development, commercialization and production of proprietary products used in
heavy-duty, high-performance extreme terrain vehicles (ETVS). The GJ
Agreement gives the Company the worldwide, perpetual, exclusive rights to
develop with G & J a new generation of patented technologies that enhance
the capabilities of ETVS. The Agreement gives the Company the right to patent,
market, manufacture, distribute and license all specialized technologies covered
under the GJ Agreement. The Company plans to utilize these technologies to
create ETVS components that can generate multi-million dollar revenue streams.

Subsequent to Year Ended December 31, 2016

Mr. Neil Gambow resigned as a Director and Chief Technology
Officer of the Company effective February 2, 2017.

On February 8, 2017the Company filed a United States
provisional patent application and a corresponding Canadian patent application
for an Active Suspension Control System and Method for No-Road Vehicles (ASCS).
The ASCS patent applications owned by Kelso cover numerous new technologies. The
Company anticipates filing further patent applications relating to the ASCS
technology as the Company continues to develop and improve the ASCS technology.
With the ASCS patent applications, the Company seeks proprietary rights
protection to allow for the development of the Companys business of converting
existing commercial vehicles into heavy-duty, high-performance extreme terrain
vehicles (ETVS). The innovations disclosed in the ASCS patent applications are
believed to be unique and to represent a dramatic improvement over existing
technologies presently used in commercial off-road vehicles. Vehicles featuring
the Companys proprietary technologies are expected to provide distinct
advantages to customers in terms of safety, performance and economic
efficiencies.

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- 17 -

In accordance with M1003 manufacturing status policies and
guidelines the AAR conducted the audit of the Companys Bonham, Texas facility
from January 16  18, 2017. This audit is required to maintain M1003
certification which is a requirement for all tank car valve manufacturers. The
audit was completed with no adverse findings and continuation of the Companys
M1003 approval has been recommended by the lead auditor. In addition to the AAR
review the Companys M1003 system has been audited by a number of key customers
who have approved our M1003 program as compliant with their own M1003
requirements. Achieving M1003 approval is indicative of the Companys commitment
to American-made high quality products. This includes product warranties and
service that surpass all industry requirements.

Capital Expenditures

The Company has no material capital expenditures planned at
this time nor does it have any divestitures planned.

Takeover Offers

The Company is not aware of any indication of any public
takeover offers by third parties in respect of the Companys common shares
during the Companys last financial year or current financial year.

B.Business Overview

The Company is a railroad equipment supplier that produces and
sells proprietary tank car service equipment used in the safe loading, unloading
and containment of hazardous materials during transport. Products are
specifically designed to provide economic and operational advantages while
reducing the potential effects of human error and environmental harm during the
transport of hazardous materials.

The Company currently offers approximately 60 products. Key
products include 47 types of EPRVs for pressure management; 4 types of one-bolt
manways, 4 types of bottom outlet valves and 4 types of vacuum relief valves
that address the technical requirements of loading, transport and unloading
operations for the containment of non-hazardous and hazardous commodities during
transport. Products are proprietary and patent protected and designed for use on
applications on railroad tank cars but can be modified for use in other markets
such as trucking. The Company has obtained patents for the Companys EPRV Patent
5,855,225 and KKM Patent 7,104,722 B2, the patent for the Companys ETS
technology has expired. The Company holds a patent for the Companys ceramic BOV
Patent 9470320 issued on January 13, 2016. See Risk Factors  Risks Relating to
the Business for additional information on patents for the Companys product.
See Key Products below for a description of the Companys key products. In
addition to current product offerings, Kelso Innovative, the Companys
wholly-owned product development enterprise, receives feedback from key
customers on new products to add to the Companys catalogue and considers, and
where appropriate incorporates, this customer feedback into product development
decisions. The Company does not have any agreements with the Companys customers
in this regard.

The Companys management has expanded the Companys business
plans in 2016 to include non-tank car related equipment, engineering and
troubleshooting services and ancillary non-proprietary production services.
Product development activities are focusing on the creation of innovative
engineered solutions for a wide range of applications in all transportation
markets.

The Company continues to build a quality brand in the railroad
industry based on the Companys reputation to create, develop, engineer and
reliably supply best technology product solutions that address the demanding
technology criteria of the Companys railroad customers. In less than three
years, the Company has successfully gained the railroad industrys confidence,
approval and their willingness to adopt the Companys products.

The Common Shares are publicly traded on the TSX under the
trading symbol KLS and on the NYSE MKT under the trading symbol KIQ.

The Company operates in conjunction with the Companys three
wholly-owned subsidiaries, Kelso USA, Kelso Innovative and KIQ Industries. Kelso
Innovative focuses on engineering industrial designs and distribution plans for
the Companys products for applications in the roadway trucking and trailer
market. KIQ Industries is working on the development of several new specialty
products.

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Markets

The Companys principal markets are the United States and
Canada. The Company distributes the Companys products directly to the Companys
customers from the Companys production facilities in Bonham, Texas.

The Companys key products are the BOV, VRV, KKM and EPRV. Each
of these key products is at the commercial production stage. The Company
continues to work on the development of new products and on finding new markets
for the Companys existing products such applications for the Companys products
in the trucking industry.

The Companys total revenue for the past three financial years
is attributable by key product and by geographic region as follows:

Year Ended
    Total Revenue
      (audited)
    Key Product
    Geographic JurisdictionETS and Other
      **(unaudited)**
    KKM (unaudited)
    EPRV (unaudited)
    United States (unaudited)
    Canada (unaudited)December 31, 2014
    $23,816,809
    $46,097 (0.2%)
    $151,027 (0.6%)
    $23,569,460 (99.2%)
    $22,875,589 (96%)
    $941,220 (4%)December 31, 2015
    $18,910,122
    $5,480 (0 %)
    $1,678,092 (9%)
    $17,226,550 (91%)
    $16,950,239 (89.6%)
    $1,959,883 (10.4%)December 31, 2016
    $8,077,143
    $299,874 (3.7%)
    $227,103 (2.8%)
    $7,550,166 (93.5%)
    $8,059,293 (99.8%)
    $17,850 (0.002%)


Business Model

The business model of the Company is focused on the industrial
design and engineering development of qualified commercial products based on the
Companys patents, proprietary rights, expertise and specific technology
adoption criteria established by the Companys clientele. The resulting products
are marketed, produced and distributed to the Companys OEM, repair and retrofit
customers in the railroad industry.

The Companys primary goal is to build large profitable revenue
streams from the Companys products. Management plans to reinvest profits into
the expansion of the Companys business to grow earnings to levels that maintain
financial health without further external funding; improve returns on
investment; allow for the payment of dividends; and allow the corporate value to
increase on behalf of the Companys shareholders. However, there is no guarantee
that the Company will be successful in achieving these goals.

New additions to the M-1002 and Federal Regulations (CFR 49) in
the US as well as Transport Canada regulations have been mostly driven by need
to improve safety, protect the environment from accidental spills. The recent
tragic accidents at Lac Mégantic, Quebec and other incidents in
several locations in Canada and the US have further driven regulations to
improve safety all around as evidenced by the new regulations issued by
Transport Canada and PHMSA in May 2015. These new regulations are the final
rules covering construction requirements for tank cars carrying flammable
commodities (DOT 117), timetables for phaseout of tank cars not meeting the new
rules and management of high-hazard trains. The Company believes that these new
rules provide opportunity for the company as new cars are built to replace older
cars and some older cars are retrofitted to meet the new rules. These new rules
were influenced by the AAR Tank Car Committee who convenes task groups to
address tank car safety and use. The AAR Tank Car Committee has approximately 44
active task groups to address safety, environmental/social concerns of which
Kelso is active on four.

The Company believes the key components of the Companys
business model include:

- experienced executive management, including directors and officers with
  several years of business experience as described under Directors and Senior
  Management;
- focused strategic plans that are achievable, flexible and sustainable;
- access to development capital through reputable public company governance;
- corporate branding as a reliable supplier of high-quality railroad
  equipment;

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- exceptional customer service;
- industrial engineering capability for product solutions based on
  customers specific criteria;
- growth of a next generation equipment catalogue through in-house product
  development that moves away from historical products to significantly
  different technology;
- acquisition of new or established products that can grow new markets under
  the Companys management;
- marketing initiatives that promote awareness of the Companys products
  being best available technology as evidenced by increasing revenue from
  sales of the Companys products and adoption rates for the Companys products
  in the marketplace;
- reliable order base from customers to fuel predictable profitable business
  growth; and
- production infrastructure and capacity that can supply demand.

Although still a small enterprise, the Company believes that it
remains at the forefront of technology development for the railroad industry as
it has successfully developed new products which are designed to address current
industry and customer demand and which replace products that are based on
technology which was developed in some cases over 80 years ago. The Companys
business model is focused on becoming a leader in the design and supply of new
technologies aimed at safe operational effectiveness and economic efficiencies
in transportation systems.

Key Products

The Company currently offers approximately 60 products. The key
products that the Company offers, as summarized below, include a series of 47
types of EPRVs for pressure management; 4 models of the KKM manway securement
system, 4 Bottom Outlet Valve (BOV) models, 4 Vacuum Relief Valve (VRV) models;
and 1 ETS product that address the technical requirements of load and unload
operations and the containment of hazardous commodities during transport.
Products are designed for use on applications on railroad tank cars but can be
modified for use in other markets such as trucking. The Company has patent
protection for the Companys EPRV and KKM and has applied for patents on the
Companys BOV and VRV products. See Risk Factors  Risks Relating to the
Business. In addition to current product offerings, Kelso Innovative continues
to work on new products to add to the Companys catalogue by incorporating
customer feedback into product development decisions.

External Constant Force Spring Pressure Relief Valves (EPRV)

Over the past decade Kelso has been involved in the
development, regulatory approval, marketing and manufacture of EPRVs that are
designed for railroad tank cars that carry hazardous and nonhazardous
commodities. The Company currently has approximately 47 versions of EPRVs in the
Companys product line, including a number of high-performance EPRVs. As
required, the Companys series of EPRVs have received AAR approval based on
service trials and physical testing. The Company believes that the Companys
series of EPRVs are best available technology products and proprietary to the
Company. The Company believes they have a number of significant competitive
advantages that include:

- high barrier to entry for competitors due to the Companys patent rights
  and the years of testing required by the AAR to gain regulatory approvals;
- the only proven high flow valve in market that is totally external, which
  limits exposure to chemicals or other corrosive substances transported in the
  tank car. Based on the Companys knowledge, there is only one other totally
  external valve on the market that meets the high-flow requirement (a minimum
  flow of 27,000 scfm@75psi) which is an external helical spring valve sold by
  Fort Vale Manufacturing; there may be other manufacturers of external high
  flow valves that the Company is not aware of);
- technological improvement over older valve systems as it eliminates the
  helical coil spring, the internal valve stems and spring guide tube;
- the introduction of multiple springs, thus preventing the disruptions that
  occur with existing single-spring designs that become completely inoperable
  when the single spring fails;
- increased valve reliability due to little or no contact with non-hazardous
  and HAZMAT commodities;
- uses flat gasket seal which is more tolerant to contamination;
- low profile provides for better roll-over safety; and

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- 20 -

- external design allows complete inspection during loading.

See Information on the Company  Business Overview 
Competitive Conditions below.

One-Bolt Manway (KKM)

The Company holds the patent rights for a unique one-bolt
manway technology currently trademarked as the Kelso Klincher®. The Company
believes the KKM is a technology change opportunity for the railroad industry
where the operational effectiveness and economics are compelling for customers
adoption of the KKM. The Company believes advantages include:

- one-bolt-and-strap design eliminate possible leaks due to crushed gaskets
  (the strap system design applies uniform force on the gaskets when they are
  drawn together to secure the lid compared eye-bolts point load the gasket at
  each eye-bolt location which can crush the gasket during sealing operations.
- eliminates lid deformation and nozzle distortion due to the over-torque of
  current eye-bolts;
- eliminates relaxation of gaskets under eye-bolt location (the strap system
  uniformly loads the gasket which can cause a leak;
- reduces eye-bolt nuts loosening in transit due to vibration and improper
  cross-bolting technique. This can result in a $5,000 fine per rail car imposed
  on shippers by FRA for every loose eye bolt.
- standard AAR-approved gasket retention method with hard and soft gaskets;
- ACME Thread on T-Bolt virtually eliminates loosening due to vibration
  (this type of thread is typically used on ships where vibrations are constant;
  this is a well-known design feature of ACME threads);
- rigid collar at top of nozzle reduces risk of nozzle distortion;
- much faster opening and closing operation with one bolt management system,
  considering the industry recommended practice generally takes approximately 25
  to 35 minutes as documented in AAR Pamphlet 34 whereas the KKM procedure takes
  approximately 5 minutes;
- increases daily terminal loading capacity up to 32%, thus increasing
  revenues of terminal operations that are paid by the volume of oil loaded and
  shipped (confirmed by loading terminal operators and management at the Bakken
  Oil Fields);
- uniform load on the gasket prolongs service life as evidenced by field
  service experience;
- reduces possible release of hazardous commodity in a roll-over accident by
  moving threaded closing mechanism below the plane of the lid; and
- the KKM comes in 3 models which include various levels of stainless steel
  construction for corrosion prevention to meet specific customer needs.

Kelso Bottom Outlet Valve (BOV)

The Kelso quarter-turn ball-style BOV is designed to
substantially improve field performance. Most general service tank cars have a
quarter turn ball-style BOV with a stainless steel ball used for unloading the
tank car. The existing designs are plagued with problems with seal leaks due to
debris contamination, damage due to physical abuse or corrosion, leaks at the
valve stem and excessive torque used to open a valve. When a BOV experiences a
leak, it must be removed from the tank car for repair. This is a costly
operation that takes the tank car out of service for at least 45 days. The new
Kelso ball-style BOV addresses these problems with new technologies:

- The ball is made from a high-strength ceramic material that is 10X harder
  than stainless steel which will virtually eliminate damage due to abuse.
- The ceramic material is very resistant to chemical attack thus virtually
  eliminating corrosion on the ball.
- The valve design includes a ceramic wiper that wipes the ball as it is
  rotated to remove debris contamination thus protecting the valve seals from
  damage.
- The valve stem is designed to use a spring-loaded seal that compensated
  for seal wear thus reducing the likelihood of a stem leak.
- The wiper action substantially reduces the torque to open and close the
  valve making it easier to operate.

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- 21 -

The Kelso BOV is expected to substantially reduce the risk of a
leak and offer tank car owners a more cost-effective product. The Kelso BOV is
currently approved for AAR field service trial. The Company holds a patent for
the BOV Patent 9470320 issued on January 13, 2016.

Kelso Vacuum Relief Valve (VRV)

Most general service tank cars have a vacuum relief valve
installed to prevent tank car implosion due to excessive vacuum in the tank car.
This can be caused by using an evacuation pump to unload the car or temperature
change on an empty tank car. The current designs use a very weak helical spring
for actuation. This weak spring can allow the valve to open even during transit
and suck in debris which contaminates the valve seal causing the leak. This has
been a severe problem especially on crude oil tank cars. Customers have pressed
Kelso to design a VRV to address this problem.

The Kelso design uses the Companys constant force spring
technology to provide a stronger spring to reduce possible leaks. The spring is
housed in a protected environment to protect it from the environment. The Kelso
VRV is currently in AAR field service trials. The Company holds the patent for
the Companys VRV, Patent 9,441,749 expiring in 2033.

Production and Services

The Company operates one 44,000 sq. ft. production facility and
one 6,000 sq. ft. engineering development facility both in Bonham, Texas. The
Company is fully qualified and certified to produce products for the railroad
industry. It has been granted the required certifications for the Companys
production facilities from the AAR.

Location to supply chains and customers is a critical factor in
the Companys production strategy in order to reduce distribution costs of
inbound components and shipping costs associated with outgoing finished
products. Bonham, Texas is within approximately 250 miles of the Companys main
customers. The Company controls assembly, testing, certification and shipping
processes for the Companys products. Production output can be scaled upwards
when required with minimal investment.

The Companys policy is that all parts and workforce must be
sourced in the United States or Canada when possible. The Company utilizes
assembly production techniques to produce finished products. The Company
believes that cast and fabricated components of the Companys products are being
sourced from expert certified suppliers because AAR regulations require the
Company to certify that each major supplier meets the Companys QA requirements
which are driven by M-1002 and M-1003. This is a matter of record as the Company
must have an AAR B1 form on file showing the supplier is approved by the
Company. The Company requires that the suppliers have current equipment and that
the suppliers employees have proper training certifications, including
certifications for welding. Having a current AAR Form B1 for each major supplier
is an audit item for the Companys M-1003 certification. Suppliers of major
metal components must provide mill certificates per AAR M-1003 for the materials
proving they are sourced from US or Canadian suppliers or other locations
approved by the Company. The Company believes that by using certified suppliers,
the Company minimizes expensive capital layouts for manufacturing equipment and
certified human resource expertise, which in turn reduces the Companys
financial risks due to fabrication and casting errors.

Cost control and minimization is paramount to the Companys
production strategy as is the plant location relative to customers to reduce
distribution costs. The Company believes it has engaged individuals with
extensive production expertise with the overall goal of attaining economic,
effective and efficient assembly operations. The Companys internal audit
requirements require that individuals performing critical operations for
component parts must have demonstrated a minimum of five years experience with
similar production procedures.

Marketing

The Companys marketing professionals work directly with users
of the Companys products and the businesses that build, retrofit and repair
railroad and trucking rolling stock. There are two key market segments for the
Companys products. The largest and most demanding is the rail tank car
manufacturers, or OEMs, that produce new tank cars. The other is the railroad
retrofit and repair market. Both market segments continue to be developed by the
Company, but management has been making decisions about the operating
matters of the Company based on the OEM market as OEMs constitute the largest
portion of the Companys customer base. Management has established key strategic
relationships with the Federal Railroad Administration of the United States
(FRA) and Transport Canada, both of which have requested that the Company
participate in and present at FRA and Transport Canada training seminars
throughout North America. The Company is a member of the AAR, Chlorine
Institute, Canadian Rail Supply, the Canadian Association of Railway Suppliers
and Railway Supply Institute (RSI) and management has established key strategic
relationships with other influential members of the railroad community including
the FRA and Pipeline and Hazardous Materials Safety Administration (PHMSA).
These key strategic relationships have resulted in the Company coordinating the
Companys actions with FRA, and working especially with the FRA to ensure the
Companys products meet regulations and provide better technology. The Company
believes that it is well connected to the Safety and HAZMAT sections of the
Class I railroads, such as BNSF Railway, Union Pacific Railroad, Canadian
National Railway, CSX and Canadian Pacific Railway, by virtue of the Company
meeting with the Safety and HAZMAT security representatives for the Class I
railroads. The Company has provided EPRV and KKM to install on most of their
training cars, and the Company joins them on customer and first-responder
training sessions at their request.

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The Company has also implemented educational marketing
initiatives whereby the Company sends representatives and speakers to industry
seminars and trade shows and to customer sponsored training seminars specific to
customer locations.

The Company believes that the Companys marketing initiatives
deliver a steady flow of new orders from customers. Lead times from order point
to delivery date can range from one to 36 months.

Research and Development

A key cornerstone of the Companys ability to sustain business
growth lies in the Companys ability to create new commercial products. The
Companys research, development and engineering initiatives are conducted
through Kelso Innovative. Kelso Innovative is dedicated to the creation of new
patented products that better serve the modern challenges of the domestic and
international markets for the transport of non-hazardous and HAZMAT commodities
via rail and road. Kelso Innovative works closely with non-hazardous and HAZMAT
commodities stakeholders designing products that involve detailed proprietary
and engineering knowledge and specific industry adoption criteria. Many of these
new products have significant industrial market prospects. They are expected to
be successfully developed, introduced and adopted commercially over the upcoming
years. The Company expects some new products to be approved by the AAR in time
for sales in 2016. Testing and development costs are not material. However,
there is no guarantee that such products will have significant market prospects
or that they will be successfully developed, introduced and adopted
commercially. The Companys pressure relief valve for high-pressure tank cars
designed to carry liquefied compressed gas is currently in testing and
applications are expected to be made to AAR for service trials in 2016. The
Companys BOV and VRV are currently in field service trials. See Business
Overview.

Specialized Skill and Knowledge

The Company relies on the specialized skills of management,
employees and consultants in the areas of product development and assembly,
business development and public company management. In particular, the Company
believes that it has engaged individuals with extensive production expertise and
railroad industry experience with the overall goal of attaining economic,
effective and efficient assembly operations. The Company believes it has engaged
individuals with extensive production expertise because the Companys internal
hiring standards require that individuals performing critical operations for
component parts must have demonstrated a minimum of five years experience with
similar production operations. The Company has a management team with extensive
experience managing public companies. See Directors, Senior Management and
Employees. The loss of any of these individuals could have an adverse effect on
the Company. See Risk Factors.

Competitive Conditions

The Company is an innovator in the design and supply of
railroad service equipment and uses patented technology to develop proprietary
commercial products. As at the date of this filing, the Companys main
competitors are Midland Manufacturing of Chicago, Illinois, Fort Vale and Union
Tank Car Company of Chicago, Illinois. The Company believes the Companys EPRV
product line has advantages over the competitors internal and external pressure
valve products offered by competitors as described under Key Products. ESI
Inc., an independent firm based in Aurora, Illinois, which reviewed the
Companys KKM against competitive products determined that the Companys KKM was
the best available manway in the Companys report dated May 6, 2013 titled
Hazard Analysis Kelso Technologies Klincher® Manway. Competitive products may
be forthcoming in the future but could be conditional based on their designs and
may have to undergo lengthy service trials and applications to gain regulatory
approvals from the AAR. This process could take two to three years to achieve,
giving the Company a significant advantage. The Company holds patent rights to
certain of the Companys products and technologies. The Company takes the
Companys patent rights seriously and intends to vigorously defend any
infringements on the Companys patents.

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The ability of the Company to compete for and acquire
production contracts for the Companys products in the future will depend on a
number of factors, including the Companys ability to continue to offer best
available technology, competitive pricing, timely delivery of purchase orders
and strong customer service.

Raw Materials/Components

The Company has three to five suppliers in the United States
for each component part of the Companys products, and sources parts directly
from these suppliers based on the suppliers ability to satisfy the purchase
order within the specified timeframe. The Company assembles the components at
the Companys production facilities in Bonham, Texas to develop the Companys
finished products which are then shipped directly to the Companys customers.
The parts used to assemble the Companys products are generally available from a
variety of suppliers at prices which are within the Companys budget for such
parts. Most materials used to assemble the Companys products are commodity raw
materials such as steel and rubber. These materials are subject to price
fluctuations which the Company believes have historically been modest based on
commodity prices for these materials. As Company does not have any long term
contracts with the Companys suppliers, it is able to mitigate the effects of
such price fluctuations by adjusting product pricing based on the price of
commodity raw materials at the time a purchase order is placed. See Risk
Factors for a discussion of the risk factors associated with price fluctuation
for raw materials.

Intangible Properties

The Companys intangible property, particularly the Companys
intellectual property rights, plays an important role in securing the Companys
competitive advantage. The Company held the patent for the Companys EPRV
technology Patent 5,855,225 which expired January 29, 2016. The Company holds
the patents for the Companys EPRV Patent No. 9,568,146 B1 issued February 14,
2017 and for the Companys KKM Patent 7,104,722 B2 which expires in 2023, and
has a trademark for the Companys Kelso Klincher® Manway (Registration Number
4,282,652) and has filed a trademark application for the Companys Kelso Tiger
Tube products. The Company does not have a patent for the Companys ETS
technology. The Company holds the patent for the Companys ceramic BOV Patent
9470320 issued on January 13, 2016. The Company holds the patent for the
Companys DPRV Patent 9,234,601 B1 expiring in 2033. The Company also holds the
patent for the Companys VRV, Patent 9,441,749 expiring in 2033. On February 8,
2017the Company filed a United States provisional patent application and
a corresponding Canadian patent application for an Active Suspension Control
System and Method for No-Road Vehicles (ASCS).

These patents and trademarks are critical to the Companys
success as they provide a significant advantage to the Company over the
Companys competitors. See Risk Factors for a discussion of risk factors
relating to the Companys intellectual property and competition.

Seasonality/Cycles

The cyclical nature of the Companys business reflects the
cyclical nature of business in the railroad industry. Generally, the first
quarter is the quietest for the Company and others in the railroad industry,
while the third and fourth quarters are the busiest. The quiet first quarter is
attributable, in large part, to this being the time of the year when companies in the railroad sector are planning their
development and purchase needs for the year, while the delivery of products
tends to happen in the third and fourth quarter.

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Economic Dependence

The Companys business is dependent on the Companys ability to
create, produce and distribute the Companys unique proprietary products such as
the Companys patented pressure relief valves, one-bolt manway, vacuum relief
valves and bottom outlet valves. See Material Contracts.

Although the Company is optimistic about the Companys future
as a railroad equipment supplier, the Company is dependent upon a limited number
of customers for a significant portion of the Companys revenue. The Company
does not have any formal agreements for long term, large-scale purchase orders
from the Companys existing customers; however, the Company believes that it
maintains good relationships with the Companys customers to maintain the
Companys status as a preferred supplier of EPRV, KKM and 1 ETS product. The
Company is a preferred supplier for Trinity and ARI as evidenced by the
Companys EPRV becoming recommended standard equipment on a series of their
railroad tank cars used primarily for ethanol and crude oil transport. Trinity
is the number one tank car manufacturer in North America, while ARI is the
number three tank car manufacturer in North America. This designation is
significant because the Company is listed as standard and not optional equipment
for tank cars of Trinity and ARI destined for crude oil and ethanol service by
these customers.

The Company currently services all five of the OEM producers of
rail tank cars and is aware of the new tank car builder OEMs entering the
market. Purchase orders from these and other customers continue to be submitted
to the Company for the Companys products. The Companys purchase orders are
subject to the general terms and conditions imposed by the Company. The general
terms and conditions provide that all payments from customers are due and
payable 30 days from the date of invoice, provided however, that the Company has
the right to require payment before shipment or payment via letter of credit in
the event that the Company determines the buyer is delinquent in payment or will
exceed the Companys credit limit. Orders in process are subject to cancellation
charges as determined by the Company. The extent of work performed at the time
of cancellation will govern the amount of the charge.

Employees

As at December 31, 2016, the Company had 47 employees (December
31, 2015  42 employees), including employees of the Companys subsidiaries. The
largest group of employees works at the Companys production facilities in
Bonham, Texas and the remainder work in British Columbia.

Reorganizations

In April 2010, the Company completed a reorganization of the
Companys management team. In connection with this reorganization, in May 2010,
the Company completed a consolidation of the Companys Common Shares on the
basis of seven old Common Shares for one new Common Share.

Government Regulations

The railroad transportation industry is highly regulated by
governments. In both the United States and Canada, governments regulate, among
other things, transportation of non-hazardous and HAZMAT commodities as well as
rail safety. The primary regulatory body in the United States for the railroad
transportation industry is U.S. Department of Transportation and the Federal
Railroad Administration, PHMSA and in Canada is Transport Canada.The
Company endeavours to develop all of the Companys products and operate the
Companys business in compliance with all applicable government regulations and
testing requirements. The Company certifies the Companys products on an ongoing
basis in accordance with AAR guidelines and government regulations. As the
Company assembles the Companys products rather than manufactures them, the
Company is not subject to any environmental regulations other than the standard
water and sewage regulations.

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C.Organizational Structure

The Company has three wholly-owned subsidiaries, Kelso USA,
Kelso Innovative and KIQ Industries. Kelso Technologies Inc. owns 100% of the
voting securities of each of the Companys subsidiaries. No subsidiary has a
class of restricted securities. See Information on the Company  History and
Development of the Company.

D.Property, Plants and Equipment

The Company operates one production facility totaling
approximately 44,000 square feet and one engineering development facility
totaling 6,000 square feet both in Bonham, Texas. The Company is fully qualified
and certified to produce products for the railroad industry. It has been granted
the required certifications for the Companys production facilities from the
AAR. See Business Overview for additional information regarding the Companys
facilities, including a discussion of the productive capacity and extent of
utilization of the Companys facilities and products produced. To the best of
the Companys knowledge, there are no environmental issues that may affect the
Companys utilization of the Companys assets.

As at December 31, 2016, the total carrying value for the
Companys property, plant and equipment was $3,194,492 (December 31, 2015:
$3,396,893), the breakdown of which is as follows: land - $12,588 (December 31,
2015: $12,558), buildings - $2,651,942 (December, 2015: $2,762,440), leasehold
improvements - $13,487 (December 31, 2015: $19,080), production equipment -
$481,648 (December 31, 2015: $595,306), and vehicles - $34,857 (December 31,
2014: $7,509).

At the time of this filing, the Company has no new plans for
further acquisition or construction of new buildings as management feels that
the Companys current space will handle all capacity issues in the year.

Item 4A. Unresolved Staff Comments

Not applicable

Item 5.Operating and Financial Review and
Prospects

The following discussion and analysis of the Companys
financial condition and results of operations for the years ended December 31,
2016 (Fiscal 2016), December 31, 2015 (Fiscal 2015)and
December 31, 2014 (Fiscal 2014) should be read in conjunction with the
Companys financial statements and related notes included in this annual report
in accordance with Item 8  Financial Information. The Companys financial
statements for Fiscal 2016, Fiscal 2015 and Fiscal 2014 (collectively, the
Reported Periods) were prepared in accordance IFRS.

Revenues have been: Fiscal 2014 $23,816,809, Fiscal 2015
$18,910,122 and Fiscal 2016 $8,077,143. At the same time the gross profit
margins have been: 46% for Fiscal 2014, 27% for Fiscal 2015 and 24.5% for Fiscal
2016. Revenues for 2014 were extremely high due to unusually high demand from
crude oil suppliers for new rail tank cars. This demand caused OEM manufacturers
to increase their production of tank cars. Revenues for Fiscal 2015 and 2016
decreased due to a significant drop in oil prices which in turn lessened demand
for crude oil tank cars. Management expects that this decrease in demand for
more profitable valves for crude oil tank cars will continue for the foreseeable
future. The Companys gross profit margin for Fiscal 2014 was very strong due to
economies of scale and also due to a product mix that saw the industry ordering
stainless steel EPRVs in an attempt to reduce the corrosive effect of the
sulphur content of the crude oil that is being transported. The gross profit for
Fiscal 2015 declined due in part to a pricing conflict brought on by a foreign
competitor as well as the introduction of the Companys KKM manway system which
had higher than expected start up costs. The profit margin continued to decline
in Fiscal 2016 due to the rail market being very slow and the Company was
required to adjust selling prices to attract business. The Companys
administrative costs were $463,888 per month for Fiscal 2015 and have since
declined to $431,336 (excluding share-based expenses) per month for Fiscal 2016.
These costs have declined due to management cutting operating costs in light of
the depressed rail market. Management continues to realign the Companys
business model and believes that costs related to rail equipment production will
continue to decline over the current year as the overall demand in the sector is
anticipated to be flat for the foreseeable future. There have been no unusual or
infrequent events that have affected the Company directly with the exception of
the decreased demand for tank cars attributable to the commodity prices in the
crude oil industry.

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See Item 17  Financial Statements and the notes to the
financial statements enclosed herewith for a discussion of the significant
accounting policies and significant estimates and judgments required to be made
by management.

A.Operating Results

The financial results for the Reported Periods are indicative
of an industrial railroad equipment supply company transitioning from a product
development organization to an industrial business enterprise that has the
capability to distribute commercial products from a production infrastructure
that can reliably supply to a heavily regulated railroad industry. The growth
and declines in revenues, corresponding expenses and resulting earnings and
losses reflect the Companys progress in the execution of the Companys business
plans in an extremely cyclical rail industry. There was a steady growth of sales
of the Companys products to the OEM segment of the rail tank industry that
began in April 2012. Growth results peaked in Fiscal 2014 and the past two
fiscal years experienced a decline in operational results in line with recession
in the rail industry. Financial results reflect the costs and investments
associated with ongoing product development and the expansion of the Companys
production capacity (including equipment, lease costs, training and qualifying
human resources) in advance of higher profitable sales levels. The strategic
plan for commercialization has also required the Company to make ongoing
investments in production infrastructure; industrial engineering and testing;
railroad regulatory filings; liability insurance; and new market initiatives.
The majority of these costs are written off in the period when they occur and
reflect in the reported profitability of the Company in the period in which they
were incurred.

The Company saw rapid growth in Fiscal 2013 and 2014 but
commencing in Fiscal 2015 and Fiscal 2016 decreased revenues and profits were
recorded due to a decrease in demand from the crude oil sector, competitive
pricing issues and bringing the KKM into production with the inefficient costing
issues that are associated with new production systems. Revenues grew steadily
from $13,131,387 in Fiscal 2013 to $23,816,809 in Fiscal 2014. Fiscal 2015 saw
the beginning of a decline in revenues to $18,910,122 and continued into Fiscal
2016 where revenues declined to $8,077,143. The greatest increase in units sold
was realized in Fiscal 2014 as the OEM manufacturers received and unusual growth
in orders from crude oil producers. Fiscal 2015 and Fiscal 2016 saw a steady
decline in orders from crude oil producers for the Companys EPRV and the
Company believes that this decreased demand will continue in 2017. The Company
received more orders for stainless steel EPRVs in Fiscal 2014. This is
evidenced by the gross profit performance at 46% in Fiscal 2014. The margin on
stainless steel valves is better than the margin on the conventional carbon
valve. However Fiscal 2015 saw margins shrink to 27% and Fiscal 2016 saw margins
further declined to 24.5% as the Company encountered issues with competitors
pricing as well as a sector with lower demand than prior years due to a slowdown
in the oil sector. EPRVs for the crude oil sector yield a greater margin than
those valves sold to other sectors. The Companys administrative costs have
declined due to the necessity of conserving capital. In Fiscal 2014, 2015 and
2016 the Companys monthly overhead costs were approximately $389,285, $463,888
and $431,336 respectively. The Companys net income or loss is a result of the
previous factors. During Fiscal 2016 the Company recorded a net tax recovery of
$1,248,551. This recovery pertained to the results of prior years and is the net
amount of the taxes that the Company has already paid to the Canadian
government. The Company showed a profit for Fiscal 2014 of $4,025,781 and a loss
for Fiscal 2015 of $2,510,826. In Fiscal 2016 Kelso reported a loss of
$2,465,592. Prior to these reporting periods the Company had been incurring
losses.

Management cautions that the infrastructure of the railroad
industry poses many challenges to the development and adoption of the Companys
products. Economic and regulatory uncertainty could have a material effect on
the Companys current or future business including financial condition and
results of operations. The Company is still in the early stages of implementing
the Companys commercial business plan hence there are financial risks inherent
in the Companys business plans. This includes a lack of assurance that a
profitable market for the Companys industrial products will continue to
develop. Other risk factors may include the adverse effects of raw material
costs; competition; and environmental and regulatory issues if government
regulations change in the future. See Risk Factors.

Year Ended December 31, 2016 Compared to the Year Ended
December 31, 2015

For Fiscal 2016, the Company reported net loss of $2,465,592
($0.05 per share) against revenue of $8,077,143 compared to a net loss of
$2,510,826 ($0.05 per share) against revenue of $18,910,122 for the year ended
December 31, 2015. The Companys gross profit percentage decreased slightly to
24.5% from 26.9% in 2015. The decline is due to a very soft rail market and corresponding price
adjustments. Net loss and comprehensive loss for Fiscal 2016 was $2,465,592
after deducting non-cash working capital items. In accordance with IFRS,
reported income includes items not involving cash. These include amortization of
$241,363, share-based expense (Black-Scholes) of $285,745 and net income tax
recovery of $989,186.

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- 27 -

Factors in the reported income for Fiscal 2016 include expenses
of $2,076,460 (Fiscal 2015-$1,547,182) related to office and administration
costs mainly in Bonham, Texas; and on-going industrial product design and
development costs of $704,86857 (fiscal 2015- $783,680). The Company currently
has three members of the engineering department. In 2015 there were four members
of this department and this resulted in declining design and development costs.

Other key costs include production infrastructure; human
resource education; and marketing related expenses for products that have not
yet seen sales results. For Fiscal 2016 salaries and benefits increased to
$492,732 (Fiscal 2015 - $368,112). The Company employs ten administrative people
in this area as compared to eight for the comparative period. Executive
management contract fees have decreased to $717,369 Fiscal 2015 ($727,217). In
Fiscal 2016 and 2015 there was no executive bonus paid. The Companys consulting
fees have declined to $246,501 for Fiscal 2016 (Fiscal 2015 - $421,869). During
Fiscal 2016 the Company retained two administrative support persons and one
web-site/communications consultant. In addition this account includes transfer
agent and filing fees which declined due to the Company not listing on any new
exchanges during the year. Investor relations fees of $84,000 remained the same
between Fiscal 2016 and 2015.

Business growth expenses included marketing costs of $587,553
(Fiscal 2015 - $730,389) and related travel costs of $526,451 for Fiscal 2016
(Fiscal 2015 - $445,555). The Companys marketing efforts continue in an attempt
to keep the Companys products at the forefront of the industry. For Fiscal 2016
the Company employed six full time marketing people whereas for most of Fiscal
2015 the Company employed five people in this capacity. Salaries have been
restructured for 2016 and compensation packages are more heavily composed of
incentive targets as opposed to higher base salaries. Travel costs have risen
with the added marketing efforts as the Companys sales people are constantly
travelling around the United States.

Share-based expenses were incurred due to the granting of share
purchase options during Fiscal 2016. Share-based expenses for Fiscal 2016 were
$285,745 as compared to $672,533 during Fiscal 2015.

Accounting, audit and legal fees are a key cost component in
the access to capital resources and administration functions of a publicly
listed industrial company. Costs for these professional services were $357,876
for Fiscal 2016 (Fiscal 2015 - $239,581).

The Companys products are used for the safe management of
hazardous materials and require product liability insurance. Premiums are
established by the number units of the Companys products being used in the
transport industry. As the Companys business grows so will the insurance costs.
Total insurance costs for product liability, general commercial and health
insurance for Fiscal 2016 were $570,102 (Fiscal 2015 - $731,835).

Year Ended December 31, 2015 Compared to the Year Ended
December 31, 2014

For Fiscal 2015, the Company reported net loss of $2,510,826
($0.05 per share) against revenue of $18,910,122 compared to a net income of
$4,025,781 ($0.09 per share) against revenue of $23,816,809 for the year ended
December 31, 2014. The Companys gross profit percentage has decreased to 27% as
a result of lower sales prices and low production rates due to a decrease in
sales of stainless steel EPRVs in Fiscal 2015.

Net loss and comprehensive loss for Fiscal 2015 was $2,510,826
after deducting non-cash working capital items. In accordance with IFRS,
reported income includes items not involving cash. These include amortization of
$237,201, share-based expenses (Black-Scholes) of $672,533 and deferred income
tax recovery of $86,932.

Factors in the reported income for Fiscal 2015 include expenses
of $118,693 (Fiscal 2014-$128,806) related to the lease costs of production and
headquarter facilities in Downers Grove, Illinois and Bonham, Texas; and
on-going industrial product design and development costs of $783,680 (fiscal
2014- $440,600). The Company started the current fiscal year with two engineers in this division but
added two more engineers in Fiscal 2015. This has added to our design and
development costs.

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- 28 -

Other key costs include production infrastructure; human
resource education; and marketing related expenses for products that have not
yet seen sales results. For Fiscal 2015 salaries and benefits increased to
$368,112 (Fiscal 2014 - $245,430). The Company employs eight administrative
people in this area as compared to five for the comparative period. Executive
management contract fees have increased between Fiscal 2014 ($540,000) and
Fiscal 2015 ($727,217). This is due to the addition of one more executive
member. In Fiscal 2015 there was not an executive bonus but Fiscal 2014 saw a
bonus of $694,767. This bonus was pursuant to each officers management contract.
The Companys consulting fees have risen to $548,471 for Fiscal 2015 (Fiscal
2014 - $460,680). During Fiscal 2015 the Company retained one investor relations
party, two administrative support persons and one web-site/communications
consultant. In addition this account includes transfer agent and filing fees
which rose due to our filings with the Securities and Exchange Commission and
due to the listing of the Companys common shares on the TSX in Canada and on
the NYSE MKT.

Business growth expenses included marketing costs of $730,389
(Fiscal 2014 - $571,990) and related travel costs of $445,555 for Fiscal 2015
(Fiscal 2014 - $290,400). The Companys marketing efforts have increased
substantially in an attempt to keep our products at the forefront of the
industry. For Fiscal 2015 the Company employed five full time marketing people
whereas for most of Fiscal 2014 the Company employed four people in this
capacity. Travel costs have risen with the added marketing efforts as the
Companys sales people are constantly travelling around the United States.

Share-based expenses increased due to the granting of share
purchase options during Fiscal 2015. Share-based expenses for Fiscal 2015 were
$672,533 as compared to $417,401 during Fiscal 2014.

Accounting, audit and legal fees are a key cost component in
the access to capital resources and administration functions of a publicly
listed industrial company. Costs for these professional services were $239,581
for Fiscal 2015 (Fiscal 2014 - $225,481).

The Companys products are used for the safe management of
hazardous materials and require product liability insurance. Premiums are
established by the number units of our products being used in the transport
industry. As the Companys business grows so will the insurance costs. Total
insurance costs for product liability, general commercial and health insurance
for Fiscal 2015 were $731,835 (Fiscal 2014 - $626,704).

During Fiscal 2015 the Company wrote-off $298,484 of intangible
asset costs that were deemed not recoverable from future operations. As well the
Company undertook a tax review in order to comply with US tax law. For Fiscal
2015 the Company has recorded a tax liability of $1,191,020 which is net of
taxes paid to the Canadian government. The Company is currently working on
several issues which may result in the recovery of any assessed tax liability.
The timing of these possible recoveries is not known at this time.

Year Ended December 31, 2014 Compared to the Year Ended
December 31, 2013

For Fiscal 2014, the Company reported net income of $4,025,781
($0.09 per share) against revenue of $23,816,809 compared to a net income of
$2,456,636 ($0.06 per share) against revenue of $13,131,387 for the year ended
December 31, 2013. The Companys gross profit percentage has increased to 46% as
a result of greater sales of stainless steel EPRVs in Fiscal 2014. Financial
results are in line with business development budgets established by
management.

Net income and comprehensive income for Fiscal 2014 was
$4,025,781 after deducting non-cash working capital items. In accordance with
IFRS, reported income includes items not involving cash. These include
amortization of $161,408, share-based expenses (Black-Scholes) of $417,401 and
deferred income tax of $832,171.

Factors in the reported income for Fiscal 2014 include expenses
of $128,806 (Fiscal 2013-$157,397) related to the lease costs of production and
headquarter facilities in Downers Grove, Illinois and Bonham, Texas; and
on-going industrial product design and development costs of $440,600 (fiscal
2013-253,308). The Company started the current fiscal year with two engineers in this division but
  added two more engineers in Fiscal 2014. This has added to the Companys design
and development costs.

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- 29 -

Other key costs include production infrastructure; human
  resource education; and marketing related expenses for products that have not
  yet seen sales results. For Fiscal 2014 salaries and benefits stayed constant at
  $245,430 (Fiscal 2013 - $245,409). The Company employs five administrative
  people in this area as compared to four for the comparative period. Executive
  management contract fees have stayed constant between Fiscal 2013 and Fiscal
  2014 at $540,000 per year. In addition, the Company paid a bonus to three senior
  operating officers totaling $694,767 for Fiscal 2014 and $269,434 for Fiscal
  2013. This bonus was pursuant to each officers management contract. The
  Companys consulting fees have risen to $460,680 for Fiscal 2014 (Fiscal 2013 -
  $339,552). During Fiscal 2014 the Company retained one investor relations party,
  one administrative support person and one web-site/communications consultant. In
  addition this account includes transfer agent and filing fees which rose due to
  the Companys filings with the Securities and Exchange Commission and due to the
  listing of the Companys common shares on the TSX in Canada and on the NYSE MKT.

Business growth expenses included marketing costs of $571,990
  (Fiscal 2013 - $371,687) and related travel costs of $290,400 for Fiscal 2014
  (Fiscal 2013 - $223,019). The Companys marketing efforts have increased
  substantially as reflected in the Companys increased sales. For Fiscal 2014 the
  Company employed five full time marketing people whereas for most of Fiscal 2013
  the Company employed three people in this capacity. Travel costs have risen with
  the added marketing efforts as the Companys sales people are constantly
  travelling around the United States.

Share-based expenses declined due to the grant of fewer share
  purchase options during Fiscal 2014. Share-based expenses for Fiscal 2014 were
  $417,401 as compared to $743,756 during Fiscal 2013.

Accounting, audit and legal fees are a key cost component in
  the access to capital resources and administration functions of a publicly
  listed industrial company. Costs for these professional services were $225,481
  for Fiscal 2014 (Fiscal 2013 - $167,929).

The Companys products are used for the safe management of
  hazardous materials and require product liability insurance. Premiums are
  established by the number units of the Companys products being used in the
  transport industry. As the Companys business grows so will the insurance costs.
  Total insurance costs for product liability, general commercial and health
  insurance for Fiscal 2014 were $626,704 (Fiscal 2013 - $372,402).

B.Liquidity and Capital Resources

The Companys primary source of revenue is from new rail tank
  car builders and retrofit/repair customers. The Company is confident that the
  demand for the Companys products will eventually improve in future periods.
  Indicators in the rail industry suggest that the demand for new tank car builds
  will remain low in the first part of 2017 with increased demand in the later
  part of 2017. Management expects that the Companys capital resources will
  diminish over the short term until revenues begin to improve in future
  periods.

As at the end of Fiscal 2016 there were no material commitments
  for capital expenditures. During 2014 the Company completed the construction of
  a new 44,000 square foot building for a cost of $2,700,000. There are no loans
  or encumbrances on the building.

The Company plans to generate the necessary capital resources
  to finance operations by way of the sales of the Companys products and the
  exercise incentive stock options. During 2016 the Company raised $314,680
  (exclusive of share issue costs) from the exercise of 340,000 share purchase
  options. If the Company is unsuccessful in generating adequate capital resources
  from one or more of the anticipated sources and is unable to replace any
  shortfall with capital resources from another source, the Company may not be
  able to meet the Companys future financial obligations and the Companys
  operations may be adversely affected.

Management takes all necessary precautions to minimize risks
  however additional risks could affect the future performance of the Company.
  They include that the Company's products are new entries to the railroad
  industry and involve detailed proprietary and engineering knowledge and specific
  customer adoption criteria, hence factors that could cause actual financial results to be materially different
  include that we may be unsuccessful in raising any additional capital needs that
  may arise; we may not have sufficient capital to develop, produce and deliver
  new orders; product development may face unexpected delays; orders that are
  placed may be cancelled; product may not perform as well as expected; markets
  may not develop as quickly as anticipated or at all; or that the construction or
  other plans for plants run into permit, labor or other problems. See Risk
  Factors.

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- 30 -

In the past, the Company has raised funds through private
  placement equity financings and through the exercise of options and warrants.
  Currently, the Company relies primarily on revenues generated through
  operations. Although the Company has been successful in raising funds and
  funding itself in the past, there is no guarantee that the Company will be able
  to do so in the future.

December 31, 2016 Compared to December 31,
  2015

At December 31, 2016 the Company had cash and cash equivalents
  in the amount of $2,312,279; accounts receivable of $637,845; prepaid expenses
  of $708,100; Income tax receivable of $753,223 and inventory of $5,206,129
  compared to cash and cash equivalents in the amount of $3,175,292; accounts
  receivable of $1,706,488; prepaid expenses of $1,103,498; and inventory of
  $5,981,919 at December 31, 2015.

The working capital position of the Company at December 31,
  2016 was $8,511,809 compared to a working capital position of $10,099,390 at
  December 31, 2015.

Net assets of the Company were 11,711,944 at December 31, 2016
  compared to $16,157,689 at December 31, 2015. At December 31, 2016, the Company
  had no interest bearing long-term liabilities or debt.

December 31, 2015 Compared to December 31,
  2014

At December 31, 2015 the Company had cash and cash equivalents
  in the amount of $3,175,292; accounts receivable of $1,706,488; prepaid expenses
  of $1,103,498; Income tax receivable of $683,163 and inventory of $5,981,919
  compared to cash and cash equivalents in the amount of $9,895,463; accounts
  receivable of $2,850,180; prepaid expenses of $58,432; income tax receivable of
  $Nil and inventory of $4,161,506 at December 31, 2014.

The working capital position of the Company at December 31,
  2015 was $10,099,390 which includes $2,795 due to related parties compared to a
  working capital position of $12,868,325 which includes $709,954 due to related
  parties at December 31, 2014.

Total assets declined to $16,157,689 at December 31, 2015
  compared to $20,696,182 at December 31, 2014. At December 31, 2015, the Company
  had no interest bearing long-term liabilities or debt.

December 31, 2014 Compared to December 31,
  2013

At December 31, 2014 the Company had cash and cash equivalents
  in the amount of $9,895,463; accounts receivable of $2,850,180; prepaid expenses
  of $58,432 and inventory of $4,161,506 compared to cash and cash equivalents in
  the amount of $4,462,531; accounts receivable of $1,259,340; prepaid expenses of
  $71,696 and inventory of $2,139,750 at December 31, 2013.

The working capital position of the Company at December 31,
  2014 was $12,868,325 which includes $709,954 due to related parties compared to
  a working capital position of $7,447,170 which includes $284,847 due to related
  parties at December 31, 2013.

Total assets grew to $20,696,182 at December 31, 2014 up from
  $9,283,388 at December 31, 2013. At December 31, 2014, the Company had no
  interest bearing long-term liabilities or debt.

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December 31, 2013 Compared to December 31,
  2012

At December 31, 2013 the Company had cash and cash equivalents
  in the amount of $4,462,531; accounts receivable of $1,259,340; prepaid expenses
  of $71,696 and inventory of $2,139,750 compared to cash and cash equivalents in
  the amount of $1,421,053; accounts receivable of $1,055,778; prepaid expenses of
  $88,506 and inventory of $1,188,467 at December 31, 2012.

The working capital position of the Company at December 31,
  2013 was $7,447,170 which includes $15,413 due to related parties compared to a
  working capital position of $3,470,762 which includes $12,247 due to related
  parties at December 31, 2012.

Total assets grew to $9,283,388 at December 31, 2013 up from
  $4,319,482 at December 31, 2012. At December 31, 2013 the Company had no
  interest bearing long-term liabilities or debt.

C.Research and Development, Patents and
  Licenses, etc.

A cornerstone of the Companys ability to initiate business
  growth lies in the Companys ability to create new commercial products and
  innovate existing products. The Companys research, development and engineering
  initiatives are conducted through Kelso Innovative. Kelso Innovative is
  dedicated to the creation of new patented products that better serve the modern
  challenges of the domestic and international markets for the transport of
  non-hazardous and HAZMAT commodities via rail and road. The Company works
  closely with stakeholders designing products that involve detailed proprietary
  and engineering knowledge and specific industry adoption criteria. Many of these
  new products have significant industrial market prospects. They are expected to
  be successfully developed, introduced and adopted commercially over the upcoming
  years. See Business Overview, Intangible Properties, Economic Dependence
  and Risk Factors above for a discussion of the Companys patents and licenses.

The Company has spent the following amounts on research in
  recent years: $704,868 during Fiscal 2016, $783,680 during Fiscal 2015 and
  $440,600 during Fiscal 2014.

D.Trend Information

In 2015 the Company managed the Companys business development
  strategies in the worst rail tank car market since 2008. HAZMAT businesses have
  cut back on production which has led to lower demand for rail tank cars. There
  are many reasons for this trend which include political climate, regulatory
  uncertainty, low commodity prices and diminishing capital investment activity.
  This is expected to continue throughout 2017.

Affecting the Companys future business outlook is the impact
  of mandatory new regulations for HAZMAT tank cars. On May 1, 2015 Transport
  Canada (TC) and the Department of Transportation (DOT) of the United States put
  forth their much anticipated design specifications for the new DOT- 117 rail
  tank cars to be used in the transportation of flammable liquids by rail. The
  final rules were developed by the U.S. Pipeline and Hazardous Material Safety
  Administration (PHMSA) and the Federal Railroad Administration (FRA).

The new rules establish a minimum threshold for existing
  DOT-111 and DOT-117 rail cars transporting dangerous goods including petroleum
  crude oil and ethanol and other flammable commodities in North America. The
  primary theme of the new regulations is improving the survivability of a tank
  car in an accident and the adoption and use of the best available safety
  technologies (BAST) for the rail transport of hazardous materials.

Originally scheduled for January 2015 the delayed PHMSA
  regulations have proven problematic to the owners of rail tank cars. After much
  analysis the retrofit option for most owners is cost prohibitive and makes no
  financial sense. It appears that there may be a new build boom forming on the
  horizon as the majority of existing DOT-111 tank cars will most likely be
  re-purposed or scrapped in favor of new tank cars. Compliance with the new
  DOT-117 regulations must be completed in early 2018 for crude tank cars and 2023
  for ethanol tank cars, a situation that should be good for the long-term benefit
  of the Company.

---

- 32 -

E.Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements
  that have, or are reasonably likely to have, a current or future effect on the
  Companys financial condition, changes in financial condition, revenues or
  expenses, results of operations, liquidity, capital expenditures or capital
  resource that is material to investors.

F.Tabular Disclosure of Contractual
  Obligations

The Company does not have any contractual obligations as of
  December 31, 2016 relating to long-term debt obligations, capital (finance)
  lease obligations, operating lease obligations, purchase obligations or other
  long-term liabilities reflected on the Companys latest balance sheet as at
  December 31, 2016.

Item 6.Directors, Senior Management and
  Employees

A.Directors and Senior Management

The following information sets forth the name, office held,
  age, and functions and areas of experience in the Company of each of the
  Companys directors, senior management, and certain significant employees:

Name
      Position(s) Held with Company
      Principal Business
            Activities and Other Principal DirectorshipsJames R. Bond
      Director, President and CEO
      President of Bondwest Enterprises
        Inc. a private company specializing in public company management,
        corporate finance, entrepreneurial management and business development
        since 1988.Richard Lee
      CFO
      CFO of the Company since April 8, 2010 and
        self-employed businessman.William Troy(1)
      Director and Audit Committee Member
      BusinessmanNeil Gambow(2)
      Director, former COO, Chief Technology
        Officer, CEO of Kelso USA and CEO of Kelso Innovative
      President and CEO of Kelso
        Innovative from June 21, 2012 to February 2, 2017; President and CEO,
        Kelso USA from November 2007 to August 3, 2016; President Nexnine LLC a
        consultancy business since November 2006.Peter Hughes
      Director and Audit Committee Member
      Self-employed businessman.
        Director of Broome Capital Inc. (BCP.HNEX), Gourmet Ocean Products Inc.
        (GOP.V) and Naturally Splendid Enterprises Ltd. (NSP  TSXV).Tony Andrukaitis
      Director, Executive Vice President Business
        Development, COO
      Independent Business Consultant;
        Chief Operations Officer of Trinity Rail and President of Trinity Tank
        Car, Inc. (holding company providing products and services to industrial,
        energy, transportation, and construction sectors) from July 2004 to March
        2009. President and CEO, Kelso USA from August 3, 2016 to present;
        President and CEO Kelso Innovative from February 2, 2017 to present.Phil Dyer
      Director and Audit Committee Member
      Businessman. Legacy Texas Bank
        Plano, Texas from November 1996 to February, 2016 including the position
        of President from December 2000 to December of 2014. Former mayor of
        Plano, TX, having served from 2009 to 2013.John R. ONeill(3)
      Director
      John R. O'Neill is the President
        and CEO of the Firefighters Education and Training Foundation (the
        Safety Train) which he founded in 1994. Prior to his involvement
        with the Safety Train, he was a private building contractor.Paul Cass(4)
      Director and Audit Committee Member
      BusinessmanLaura Roach(5)
      Director
      Partner at Albin Roach, a law
        firm located in Collin County, Texas since 2000 and President of an
        internet based attorney referral business named divorceinpeace.


(1) Mr. Troy did not stand for re-election at the
  Companys Annual General Meeting held on June 2, 2016.

---

- 33 -

|(2) | On June 2, 2016 Mr. Gambow resigned as Managing Director
      Corporate Development and was appointed Chief Technology Officer. Mr.
      Gambow resigned as a Director of the Company on February 2,
      2017.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(3) | Mr. ONeill resigned as a Director of the Company on
      August 2, 2016.                                                                                                                                        
|(4) | Mr. Cass was elected a Director of the Company at the
      Companys Annual General Meeting held June 2, 2016.                                                                                                   
|(5) | Ms. Roach was appointed a Director of the Company on
      August 10, 2016.                                                                                                                                       

James R. Bond (63 years)  President, CEO and
  Director

Mr. Bond has been director President and CEO of the Company
  since April 7, 2010.Mr. Bond is the President of Bondwest Enterprises
  Inc., a Canadian company established in 1988 that specializes in corporate
  architecture, financial networking, entrepreneurial management, strategic
  business development and distress turnarounds. Over the past 36 years he has
  served in advisory, consulting, executive management, director and corporate
  officer roles in numerous private and public companies conducting business in
  the technology, manufacturing and processing industries.

Richard Lee (61 years)  CFO

Mr. Lee has been the Companys CFO since April 8, 2010. Mr. Lee
  is a graduate of the University of British Columbia with a Bachelors degree in
  Commerce. In addition he is a Chartered Professional Accountant, Certified
  Management Accountant having obtained his designation in 1991. Mr. Lee spent
  more than 27 years working for public accounting firms or for companies that
  trade on recognized stock exchanges. He has gained a wealth of experience in
  corporate finance, acquisitions and accounting while working with and for listed
  public companies trading in Canada as well as registered with the SEC in the
  United States.

Neil Gambow (71 years)  Chief Technology
  Officer(1)

Mr. Gambow was appointed Chief Technology Officer on June 2,
  2016. Mr. Gambow held the position of COO of the Company until March 1, 2016.
  Mr. Gambow had been a director of the Company since December 28, 2009. Mr.
  Gambow had served as CEO of Kelso Innovative since June 21, 2012 until his
  resignation on February 2, 2017 and as President and CEO of Kelso USA since
  November 2007 until August 3, 2016. Mr. Gambow is the former President of
  Midland Manufacturing, a subsidiary of the Dover Corporation, a US Fortune 500
  company. Midland produces valves and valve-related products for the North
  American rail tank car market.

(1) On June 2, 2016 Mr. Gambow resigned as Managing
  Director Corporate Development and was appointed Chief Technology Officer. Mr.
  Gambow resigned as a Director of the Company on February 2, 2017.

Peter Hughes (55 years) - Director

Mr. Hughes has been a director of the Company since October 4,
  2010 and is a member of the Companys Audit Committee. Mr. Hughes has 30 years
  business experience including senior-level executive and director positions in
  both private and public companies specializing in pharmaceuticals, alternative
  energy and mining. Mr. Hughes has built industrial and resource companies from
  the ground up and has obtained regulatory and exchange approval for numerous
  reporting issuers. His experience includes corporate structuring, technology
  assessments, proprietary protection, public and private financings, negotiating
  property agreements, and public company management. He has also worked with
  National Research Council of Canada providing alternative energy companies with
  market intelligence and strategic planning. Mr. Hughes has a Bachelor of Science
  from UBC and completed the Canadian Securities Course and Directors &
  Officers Program. Mr. Hughes currently serves as President, CEO and a director
  of Broome Capital Inc., a capital pool company listed on the NEX CEO and a
  director of Gourmet Ocean Products Inc. a company listed on the TSXV and as a
  director of Naturally Splendid Enterprises Ltd., a company listed on the TSXV.

Tony Andrukaitis (62 years)  Director, Executive
  Vice-President Business Development and COO

Mr. Andrukaitis has been a director of the Company since August
  24, 2011 and was appointed COO on March 1, 2016. Mr. Andrukaitis was a member of
  the Audit Committee until January 2, 2015 when he was appointed Executive Vice
  President Business Development. Mr. Andrukaitis holds the position of President
  and CEO of Kelso USA since August 3, 2016 and President and CEO of Kelso
  Innovative (engineering industrial designs and distribution plans for patented Kelso Klincher) since February
  2, 2017. Mr. Andrukaitis has over 26 years of senior corporate management
  experience in finance, accounting, strategic planning, business development and
  turnaround activities. He was the Chief Operations Officer of Trinity Rail and
  former President of Trinity Tank Car, Inc., both subsidiaries of Trinity
  Industries of Dallas, Texas. Prior to that, he was the President and CEO of GATX
  Terminals Corporation of Chicago, IL. Mr. Andrukaitis is a CPA and holds a
  Bachelor of Science degree in Accounting from the University of Illinois and
  Master of Business Administration degree from DePaul University.

---

- 34 -

Phil Dyer (65 years)  Director

Mr. Dyer has been a director of the Company since January 2,
  2015 and is a member of the Audit Committee. Mr. Dyer was employed by Legacy
  Texas Bank, Plano, Texas from November 1996 to February 2016, including the
  holding position of President from December 2000 to December 2014. Mr. Dyer is
  also the former mayor of Plano, Texas having served from 2009 to 2013. Mr. Dyer
  holds a Bachelors degree from the University of Texas and an MBA from East
  Texas State University.

Paul Cass (60 years) - Director

Mr. Cass is the COO at Whitewater West Industries Ltd. He has
  held several positions at Ballard Power Systems Inc. including Vice President
  and Chief Operations Officer (2014 to March 31, 2016); Vice President,
  Operations (2009-2014); Director, Material Handling and Bus Markets, Customer
  Service & Apps Eng (2008-2009); Director Bus Markets, Customer Service &
  Applications Engineering (2005-2008); Director, Customer Service, Applications
  Engineering and Program Management (2003-2005); Director Programs and Product
  Development (2001-2003). Mr. Cass holds an MBA and BASc and is a member of the
  Association of Professional Engineers and Geoscientists of British Columbia
  (P.Eng).

Laura Roach (45 years) - Director

Ms. Roach is a partner at Albin Roach, a law firm located in
  Collin County, Texas. Ms. Roachs practice consists of both litigation matters
  and mediation. Her clients range from large business to individuals. She has the
  role of operational leader at the law firm. Ms. Roach is also an entrepreneur,
  founding and running a referral and marketing business. Ms. Roach has been
  recognized many times for the quality of her legal practice, including being
  named one of Texas Monthly magazines super lawyers every year since 2013, being
  named as a top attorney in D Magazine every year since 2013, and one of the top
  21 to lead Collin County into the 21st Century by Inside Collin County Business,
  among other recognitions.

Family Relationships

There are no family relationships between any of the Companys
  directors and senior management listed above.

B.Compensation

During Fiscal 2016, the Companys directors and members of the
  Companys administrative, supervisory or management bodies received compensation
  for services, as follows:

Name and Principal Position
      Year Ended
      Salary ($)
      Option based Awards ($)
      All other compensation ($)
      Total compensation
          ($)James R. Bond Director, President and CEO
      December 31, 2016
      $180,000
      N/A
      N/A
      180,000Richard Lee CFO
      December 31, 2016
      $180,000
      N/A
      N/A
      180,000William Troy(1)Director
      December 31, 2016
      N/A
      N/A
      7,000
      7,000


---

- 35 -

Name and Principal Position
      Year Ended
      Salary ($)
      Option based Awards ($)
      All other compensation ($)
      Total compensation
          ($)Neil Gambow(2)Director, Chief
            Technology Officer), CEO Kelso USA
          and CEO Kelso Innovative
      December 31, 2016
      $180,000
      N/A
      N/A
      180,000Peter Hughes Director
      December 31, 2016
      N/A
      N/A
      30,000
      30,000Tony Andrukaitis Director, Executive Vice President Business Development and COO
      December 31, 2016
      $180,000
      N/A
      N/A
      180,000Phil Dyer Director
      December 31, 2016
      N/A
      N/A
      12,000
      12,000John R. ONeill(3)Director
      December 31, 2016
      N/A
      N/A
      5,000
      5,000Paul Cass(4)Director
      December 31, 2016
      N/A
      N/A
      7,000
      7,000Laura Roach(5)Director
      December 31, 2016
      N/A
      N/A
      5,000
      5,000


|(1) | Mr. Troy did not stand for re-election at the Companys
      Annual General Meeting held on June 2, 2016.                                                                                                        
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | On June 2, 2016 Mr. Gambow resigned as Managing Director
      Corporate Development and was appointed Chief Technology Officer. Mr.
      Gambow resigned as a Director of the Company on February 2,
      2017.
|(3) | Mr. ONeill resigned as a Director of the Company on
      August 2, 2016.                                                                                                                                        
|(4) | Mr. Cass was elected a Director of the Company at the
      Companys Annual General Meeting held June 2, 2016.                                                                                                   
|(5) | Ms. Roach was appointed a Director of the Company on
      August 10, 2016.                                                                                                                                       

Management Agreements

The Company entered into Professional Services Agreement with
  Bondwest Enterprises Inc. (Bondwest), a private company 100% owned by
  James R. Bond effective January 1, 2014 with regards to his engagement as the
  President and Chief Executive Officer of the Company (the CEO Agreement). The
  CEO Agreement expired on December 31, 2016. The CEO Agreement provided for a
  severance clause of twelve months notice for termination. Pursuant to the CEO
  Agreement, the Company agreed to pay Bondwest a base fee of $15,000 per month
  for the term of the Agreement. Mr. Bond was eligible to receive a bonus based on
  the performance of the Company. On January 1, 2017 the Company and Bondwest
  entered into a Professional Services Agreement which expires on December 31,
  2021 (the CEO PSA). Under the terms of the CEO PSA Bondwest will
  receive a base fee of US$15,000 per month for the fiscal year 2017. The base fee
  for fiscal 2018 will increase to US$18,000 per month upon achieving sales in
  2017 of US$18,000,000. The base fee for fiscal 2019 will increase to US$21,000
  per month upon achieving sales in 2018 of US$24,000,000. The base fee for fiscal
  2020 will increase to US$24,000 per month upon achieving sales of US$30,000,000.
  If at any time during the term of the CEO PSA sales reach US$50,000,000 the base
  fee will increase to US$24,000 per month. Bondwest is also eligible to receive
  an annual bonus, capped at 1.5 times the base fee. The cap would increase to 3x
  the base fee upon achieving top line sales of US$50,000,000. The performance
  bonus will be calculated at one-third of 10% of the adjusted income which will
  be based on the audited annual income adjusted for non-cash items (eg.
  stock-based compensation, deferred taxes, unrealized foreign exchange and
  amortization) and income taxes. The CEO PSA also includes a severance clause of
  24 months base fee for termination or change of control.

The Company entered into an employment agreement with Richard
  Lee effective January 1, 2014 with regards to his employment as the Chief
  Financial Officer of the Company (the CFO Agreement). The CFO Agreement
  expired on December 31, 2016. The CFO Agreement provided for a severance clause
  of twelve months notice for termination. Pursuant to the CFO Agreement, the
  Company agreed to pay Mr. Lee a base salary of $15,000 per month for the term of
  the CFO Agreement. Mr. Lee was eligible to receive a bonus based on the
  performance of the Company. On January 1, 2017 the Company and Kitchener
  Holdings Corp. (Kitchener) a private company 100% owned by Mr. Lee
  entered into a Professional Services Agreement which expires on December 31,
  2021 (the CFOPSA). Under the terms of the CFO PSA Kitchener will
  receive a base fee of US$15,000 per month for the fiscal year 2017. The base fee
  for fiscal 2018 will increase to US$18,000 per month upon achieving sales in
  2017 of US$18,000,000. The base fee for fiscal 2019 will increase to US$21,000
  per month upon achieving sales in 2018 of US$24,000,000. The base fee for fiscal
  2020 will increase to US$24,000 per month upon achieving sales of US$30,000,000.
  If at any time during the term of the CFO PSA sales reach US$50,000,000 the base
  fee will increase to US$24,000 per month. Kitchener is also eligible to receive
  an annual bonus, capped at 1.5 times the base fee. The cap would increase to 3x
  the base fee upon achieving top line sales of US$50,000,000. The performance
  bonus will be calculated at one-third of 10% of the adjusted income which will
  be based on the audited annual income adjusted for non-cash items (eg.
  stock-based compensation, deferred taxes, unrealized foreign exchange and
  amortization) and income taxes. The CFO PSA also includes a severance clause of
  24 months base salary for termination or change of control.

---

- 36 -

The Company entered into an employment agreement with Neil
  Gambow effective January 1, 2014 with regards to his employment as the President
  and Chief Executive Officer of Kelso USA (the Gambow Agreement) . The
  Gambow Agreement expired on December 31, 2016. The Gambow Agreement provided for
  a severance clause of twelve months notice for termination. Pursuant to the
  Gambow Agreement, the Company agreed to pay Mr. Gambow a base salary of
  US$15,000 per month for the term of the Gambow Agreement. Mr. Gambow was
  eligible to receive a bonus based upon the performance of the Company.

On January 1, 2017 the Company and Mr. Andrukaitis entered into
  a Professional Services Agreement which expires on December 31, 2021 (the
  COO PSA). Under the terms of the COO PSA Mr. Andrukaitis will receive a
  base salary of US$15,000 per month for the fiscal year 2017. The base salary for
  fiscal 2018 will increase to US$18,000 per month upon achieving sales in 2017 of
  US$18,000,000. The base salary for fiscal 2019 will increase to US$21,000 per
  month upon achieving sales in 2018 of US$24,000,000. The base salary for fiscal
  2020 will increase to US$24,000 per month upon achieving sales of US$30,000,000.
  If at any time during the term of the COO PSA sales reach US$50,000,000 the base
  salary will increase to US$24,000 per month. Mr. Andrukaitis is also eligible to
  receive an annual bonus, capped at 1.5 times the base salary. The cap would
  increase to 3x the base salary upon achieving top line sales of US$50,000,000.
  The performance bonus will be calculated at one-third of 10% of the adjusted
  income which will be based on the audited annual income adjusted for non-cash
  items (eg. stock-based compensation, deferred taxes, unrealized foreign exchange
  and amortization) and income taxes. The COO PSA also includes a severance clause
  of 24 months base salary for termination or change of control.

Stock Option Plan

Pursuant to the policies of the TSX, the Company is required to
  adopt stock option plan prior to granting incentive stock options and,
  accordingly, the Company has adopted a stock option plan (the Option Plan).
  The purpose of the Option Plan is to ensure that the Company is able to provide
  an incentive program for directors, officers, employees and persons providing
  services to the Company (the Optionee) that provides enough flexibility in the
  structuring of incentive benefits to allow the Company to remain competitive in
  the recruitment and maintenance of key personnel.

The maximum aggregate number of common shares that may be
  reserved for issuance pursuant to the Option Plan shall be a rolling number of
  common shares equal to 10% of the total issued and outstanding common shares of
  the Company from time to time. Any common shares in respect of which previously
  granted options have been exercised shall not be deducted from the number of
  common shares reserved for issuance under the Option Plan and shall again be
  available for grant under the Option Plan. In addition, the aggregate number of
  common shares which may be reserved for issuance pursuant to the Option Plan or
  any other share compensation arrangement (pre-existing or otherwise) to any one
  participant under the Option Plan within a one-year period shall not exceed 5%
  of the common shares (on a non-diluted basis) outstanding at the time of the
  grant. The maximum number of common shares which may be issued to insiders
  within any one year period under the Option Plan or under any other share
  compensation arrangement taken together shall not exceed 10% of the common
  shares outstanding from time to time.

The exercise price of any option granted under the Option Plan
  is to be determined from time to time by the Board but in any event shall be no
  lower than the last closing price of the Companys shares before the grant of
  options. The Board, or a committee appointed for such purposes, also has the
  authority under the Option Plan to determine other terms and conditions relating to the grant of options,
  including any applicable vesting provisions. Options issued to any Optionee
  providing investor relations services to the Company must vest (and not
  otherwise be exercisable) in stages over a minimum of twelve months with no more
  than one quarter of the options vesting in any three month period, and will
  expire within a maximum of thirty days after the Optionee ceases to be employed
  by the Company.

---

- 37 -

The term of options granted under the Option Plan shall not
  exceed ten years from the date of grant, and all options granted under the
  Option Plan are not transferable other than by will or the laws of dissent and
  distribution. If an Optionee ceases to be an Optionee for any reason whatsoever
  other than death or termination for cause, each option held by such Optionee
  will cease to be exercisable the earlier of 90 days following the termination
  date (being the date on which such Optionee ceases to be an Optionee) and the
  original expiry date of such option. If an Optionee dies, the legal
  representative of the Optionee may exercise the Optionee's options within one
  year after the date of the Optionee's death but only up to and including the
  original option expiry date.

If at any time the expiry of the term of an option should be
  determined to occur either during a period in which the trading of common shares
  by the Optionee is restricted under the insider trading policy or other policy
  of the Company or within ten business days following such a period, then the
  expiry date (and the option term) of such option shall be automatically extended
  to the tenth trading day following the date the relevant black-out period or
  other trading restriction imposed by the Company is lifted, terminated or
  removed.

The Directors and Senior Management are eligible to participate
  in the Option Plan. The Company does not provide any financial assistance to
  participants in order to facilitate the purchase of common shares under the
  Option Plan. The Board can amend the terms of the Option Plan, provided that,
  among other things, no such amendment may be made that would increase the
  maximum aggregate number of common shares available for issuance as options or
  that would affect the terms of any previously granted stock option unless the
  Company receives shareholder approval for such amendment in accordance with the
  policies of the TSX.

Option-Based Awards

The following table sets forth the share-based awards or
  option-based awards for each of directors and officers of the Company
  outstanding as at December 31, 2016:

Name
      Option Based AwardsNumber of securities underlying unexercised options (#)
      Option exercise price (US$)
      Option expiration date
      Value of unexercised in-the-money options (US$)(1)James R. Bond(1)
      100,000 
        100,000
      1.45 
        1.30
      March 31, 2017 
        August 18, 2021
      0 
        34,270Richard Lee(1)
      100,000 
        100,000
      1.45 
        1.30
      March 31, 2017 
        August 18, 2021
      0 
        34,270Neil Gambow(1)(2)
      200,000 
        100,000
      1.45 
        1.30
      March 31, 2017 
        February 2, 2018
      0 
        34,270William Troy(1)(3)
      Nil
      -
      -
      -Peter Hughes(1)
      150,000 
        50,000
      1.45 
        1.30
      March 31, 2017 
        August 18, 2021
      0 
        17,135Tony Andrukaitis(1)
      50,000 
        100,000
      1.45 
        1.30
      March 31, 2017 
        August 18, 2021
      0 
        34,270Phil Dyer(1)
      200,000
      1.30
      August 18, 2021
      68,540John R. ONeill(1)(4)
      Nil
      -
      -
      -


---

- 38 -

Name
      Option Based AwardsNumber of securities underlying unexercised options (#)
      Option exercise price (US$)
      Option expiration date
      Value of unexercised in-the-money options (US$)(1)Paul Cass(5)
      200,000
      1.30
      August 18, 2021
      68,540Laura Roach(6)
      200,000
      1.30
      August 18, 2021
      68,540


|(1) | Value is calculated based on the difference between the
      market value of the securities underlying the options as at December 31,
      2016 (being CAD$1.25) and the exercise price of the option. The quoted
      share price is in CAD dollars and has been converted to US dollars using
      the Bank of Canada rate on December 31, 2016 of USD 1.3427.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Mr. Gambow resigned as a Director of the Company on
      February 2, 2017.                                                                                                                                                                                                                                                                                         
|(3) | Mr. Troy did not stand for re-election as a Director of
      the Company at the Annual General Meeting held on June 2, 2016.                                                                                                                                                                                                                                       
|(4) | Mr. ONeill resigned as a Director of the Company on
      August 2, 2016.                                                                                                                                                                                                                                                                                          
|(5) | Mr. Cass was elected a Director of the Company at the
      Companys Annual General Meeting held June 2, 2016.                                                                                                                                                                                                                                                     
|(6) | Ms. Roach was appointed a Director of the Company on
      August 10, 2016.                                                                                                                                                                                                                                                                                         

Termination and Change of Control Benefits

Except as disclosed above with respect to James R. Bond,
  Richard Lee, Neil Gambow and Tony Andrukaitis, we have no plans or arrangements
  in respect of remuneration received or that may be received by the Companys
  directors and senior management in respect of compensating such person in the
  event of termination of employment (as a result of resignation, retirement,
  change of control, etc.) or a change in responsibilities.

Pension, Retirement or Similar Benefits

The Company has not set aside or accrued any amounts to provide
  pension, retirement or similar benefit for the Companys directors or senior
  management during Fiscal 2016.

C.Board Practices

Term of Office

Each director of the Company holds office until the next annual
  general meeting of the Company or until his successor is elected or appointed,
  unless his office is earlier vacated in accordance with the articles of the
  Company or the provisions of the BCBCA. Each member of the Companys senior
  management is appointed to serve at the discretion of the Companys Board,
  subject to the terms of the personal service agreements described above.

Service Contracts

See Employment Agreements and Termination and Change of
  Control Benefits above for particulars of certain directors service contracts
  with the Company and the Companys subsidiaries, as applicable. Other than as
  disclosed herein, the Company does not have any service contracts with directors
  which provide for benefits upon termination of employment.

Committees

The Company currently has three standing committees, the audit
  committee, the corporate governance and nominating committee and the
  compensation committee.

Audit Committee

The current members of the audit committee are Phil Dyer
  (Chairman), Peter Hughes and Paul Cass. As defined in National Instrument 52-110
   Audit Committees of the Canadian Securities Administrator, Phil Dyer,
  Peter Hughes and Paul Cass are independent meaning that they have no direct or
  indirect material relationship with the Company that could, in the view of the
  Board, reasonably interfere with the exercise of their independent judgment.
  They are also financially literate, meaning that they have the ability
  to read and understand a set of financial statements that present a breadth of
  complexity of accounting issues that are generally comparable to the breadth and
  complexity of the issues that can reasonably be expected to be raised by the
  Companys financial statements.

---

- 39 -

The Company has adopted a charter for the Companys audit
  committee. The audit committee is responsible for review of both interim and
  annual financial statements for the Company. For the purposes of performing
  their duties, the members of the audit committee have the right at all times, to
  inspect all the books and financial records of the Company and any subsidiaries
  and to discuss with management and the external auditors of the Company any
  accounts, records and matters relating to the financial statements of the
  Company. The audit committee members meet periodically with management and
  annually with the external auditors. The Companys audit committee has the
  overall duties and responsibilities to:

- review the financial reporting process to ensure the accuracy of the
    financial statements of the Company;
- assist the Board to properly and fully discharge its responsibilities;
- strengthen the role of the Board by facilitating in depth discussions
    between directors, management and external auditors;
- evaluate the independent auditor's qualifications, performance and
    independence;
- facilitate the independence of the independent auditor;
- assess the processes relating to the determination and mitigation of risks
    and the maintenance of an effective control environment; and
- review the processes to monitor compliance with laws and regulations.

Compensation Committee

The principal purpose of the Compensation Committee is to
  implement and oversee compensation policies approved by the Board. The duties
  and responsibilities of the Compensation Committee include, without limitation,
  the following:

- to recommend to the Board compensation policies and guidelines for the
    Company; and
- to review and approve corporate goals and objectives relevant to the
    compensation of the Chief Executive Officer and, in light of those goals and
    objectives, to recommend to the Board the annual salary, bonus and other
    benefits, direct and indirect, of the Chief Executive Officer and to approve
    compensation for all other designated officers of the Company, after
    considering the recommendations of the Chief Executive Officer, all within the
    human resources and compensation policies and guidelines approved by the
    Board.

The Company has adopted a formal written mandate for the
  Compensation Committee. The mandate provides that the committee shall consist of
  at least three members of the Board, all of whom shall be independent in
  accordance with applicable legal requirements, including currently the
  requirements published by the Canadian Securities Administrators under NP 58-201
  Corporate Governance Guidelines and the applicable NYSE MKT rules. The current
  members of the Compensation Committee are Messrs. Hughes, Cass and Ms.
  Roach.

All members of the Compensation Committee have direct
  experience which is relevant to their responsibilities as Compensation Committee
  members. All of the members of the Compensation Committee have or have had
  senior level executive and director positions in both private and public
  companies, and therefore have a good understanding of how compensation works and
  how to motivate staff. All of the members have good financial understanding
  which allows them to assess the costs versus benefits of compensation plans. The
  members combined experience in the resource sector provides them with the
  understandings of the Companys success factors and risks which is very
  important when determining the metrics for measuring success.

The Board appoints the members of the Compensation Committee
  for the ensuing year at the Companys organizational meeting held in conjunction
  with each annual general meeting of the Companys Shareholders. The Board may at
  any time remove or replace any member of the Compensation Committee and may fill
  any vacancy in the committee.

The Compensation Committee meets regularly each year on such
  dates and at such locations as the Chair of the Compensation Committee
  determines. The Compensation Committee has access to such officers and employees
  of the Company and to such information respecting the Company and
  may engage independent counsel or advisors at the expense of the Company, all as
  it considers to be necessary or advisable in order to perform its duties and
  responsibilities.

---

- 40 -

Corporate Governance and Nominating Committee

The purpose of the Corporate Governance and Nominating
  Committee is to provide a focus on corporate governance that will enhance
  corporate performance, and to ensure on behalf of the Board and Shareholders
  that the Companys corporate governance system is effective in the discharge of
  the Companys obligations to the Companys shareholders.

The Corporate Governance and Nominating Committee also has the
  responsibility of proposing nominees for director. The Committee considers the
  competencies and skills that the Board as a whole should possess, the
  competencies and skills of existing Board members and the competencies and
  skills of proposed new Board members. The Committee members utilize their
  extensive knowledge of the industry and personal contacts to identify potential
  nominees that possess the desired skills and competencies.

The duties and responsibilities of the Corporate Governance and
  Nominating Committee include, without limitation, the following:

|a) | Develop and monitor the Companys overall approach to
      corporate governance issues and, subject to approval by the Board,
      implement and administer this process.                        
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                    
|b) | Advise the Board or any of the committees of the Board of
      any corporate governance issues which the Committee determines ought to be
      considered by the Board or any such committees.   
|   |                                                                                                                                                                                                    
|c) | Review with the Board, on a regular basis, but not less
      than annually, the terms of reference for the Board, each committee of the
      Board, the Chairman and the Chief Executive Officer.
|   |                                                                                                                                                                                                    
|d) | Review with the Board, on a regular basis, the methods
      and processes by which the Board fulfils its duties and responsibilities,
      including without limitation:                         

| | i.   |  | the size of the Board;                                                                                                                  
| | ---- |  | ----------------------------------------------------------------------------------------------------------------------------------------
| |      |  |                                                                                                                                         
| | ii.  |  | the number and content of meetings;                                                                                                     
| |      |  |                                                                                                                                         
| | iii. |  | the annual schedule of issues to be presented to the
      Board at its meetings or those of its committees;                            
| |      |  |                                                                                                                                         
| | iv.  |  | material which is to be provided to the directors
      generally and with respect to the meetings of the Board or its
      committees;
| |      |  |                                                                                                                                         
| | v.   |  | resources available to the directors; and                                                                                               
| |      |  |                                                                                                                                         
| | vi.  |  | the communication process between the Board and
      management.                                                                       

|e) | Review and, as necessary, authorize a committee or an
      individual director to engage separate independent counsel and/or advisors
      at the expense of the Company in appropriate circumstances.                                                                                   
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                            
|f) | Make recommendation to the Board regarding changes or
      revisions to the Boards Corporate Governance Guidelines;                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                            
|g) | Evaluate and make recommendations to the Board concerning
      the appointment of directors to the committees and the selection of Board
      committee chairs;                                                                                                                          
|   |                                                                                                                                                                                                                                                                                            
|h) | Annually evaluate and report to the Board on the
      performance and effectiveness of the Board and its committees;                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                            
|i) | Annually, in conjunction with the Chief Executive
      Officer, evaluate the performance of the Companys management (other than
      the Chief Executive Officer). Conduct an annual review of succession
      planning and report its findings and recommendations to the
      Board;
|   |                                                                                                                                                                                                                                                                                            
|j) | Evaluate and lead the Boards annual review of the Chief
      Executive Officers performance; and                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                            
|k) | Annually review and evaluate its
      performance.                                                                                                                                                                                                                                        

The Company has adopted a formal written mandate for the
  Corporate Governance and Nominating Committee. The mandate provides that the
  Corporate Governance and Nominating Committee shall consist of at least three
  directors, all of whom will be independent directors in accordance with
  applicable legal requirements, including currently the requirements published by
  the Canadian Securities Administrators under NP 58-201 Corporate Governance
  Guidelines and the applicable NYSE MKT rules. Each member will have skills
  and/or experience which are relevant to the mandate of the Committee. The
  current members of the Corporate Governance and Nominating Committee are Messrs.
  Hughes, Dyer and Ms. Roach.

---

- 41 -

The Board appoints the members of the Corporate Governance and
  Nominating Committee for the ensuing year at the Companys organizational
  meeting held in conjunction with each annual general meeting of the Shareholders
  of the Company. The Board may at any time remove or replace any member of the
  Corporate Governance and Nominating Committee and may fill any vacancy in the
  committee.

The Corporate Governance and Nominating Committee meets
  regularly each year on such dates and at such locations as the Chair of the
  committee determines. The Corporate Governance and Nominating Committee has
  access to such officers and employees of the Company and to such information
  respecting the Company and may engage independent counsel and advisors at the
  expense of the Company, all as it considers to be necessary or advisable in
  order to perform its duties and responsibilities.

D.Employees

As at December 31, 2016, the Company had 47 employees,
  including employees of the Companys subsidiaries. The largest number of
  employees work at the Companys production facilities in Bonham, Texas. The
  remainder work in British Columbia.There has been no significant change
  in the number of employees since December 31, 2016. At the date of this filing,
  the Companys employees are not unionized and all employees are full-time. At
  December 31, 2015, the Company had 42 employees, including employees of the
  Companys subsidiaries.

E.Share Ownership

As of December 31, 2016, the Companys directors and senior
  management beneficially owned the following common shares and stock options of
  the Company:

Name and Office Held
      Number of Common Shares Owned
        andPercent of Total Outstanding Common
      Options Owned# of Shares
      Shares% of
            Class(1)James R. Bond Director, President and CEO
      1,287,500 (2)
      2.77
      200,000William Troy(11)Director
      1,041,021(3)
      2.24
      100,000Neil Gambow Director, Managing Director CorporateDevelopment(12)CEO Kelso USA and
          CEO Kelso Innovative
      447,169(4)
      0.96
      300,000Peter Hughes Director
      1,000(5)
      .002
      200,000Tony Andrukaitis Director, Executive Vice President
            BusinessDevelopment and COO
      222,480(6)
      .479
      150,000Phil Dyer Director
      10,000(7)
      .021
      200,000John R. ONeill(13)Director
      0
      0
      0Paul Cass(14)Director
      69,000(8)
      .148
      200,000Laura Roach(15)Director
      6,390(9)
      .013
      200,000Richard Lee CFO
      114,500(10)
      .246
      200,000


|(1) | Based on 46,411,752 common shares issued and outstanding
      as at December 31, 2016.                                                                                                                                                                                                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Mr. Bond holds 507,500 common shares directly; 625,000
      common shares indirectly through Bondwest Enterprises Inc., a company
      owned and controlled by Mr. Bond; and 155,000 common shares jointly with
      Serena Sardar, Mr. Bonds spouse; and he also holds 200,000 stock options
      exercisable into Common Shares that are not included in the
      total.

---

- 42 -

|(3)  | Mr. Troy also held 100,000 stock options exercisable into
      Common Shares that are not included in the total.                                                                                                 
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(4)  | Mr. Gambow also holds 300,000 stock options exercisable
      into Common Shares that are not included in the total.                                                                                              
|(5)  | Mr. Hughes holds 200,000 stock options exercisable into
      Common Shares that are not included in the total.                                                                                                   
|(6)  | Mr. Andrukaitis holds 150,000 stock options exercisable
      into Common Shares that are not included in the total.                                                                                              
|(7)  | Mr. Dyer holds holds 200,000 stock options exercisable
      into Common Shares that are not included in the total.                                                                                               
|(8)  | Mr. Cass also holds 200,000 stock options exercisable
      into Common Shares that are not included in the total.                                                                                                
|(9)  | Ms. Roach also holds 200,000 stock options exercisable
      into Common Shares that are not included in the total.                                                                                               
|(10) | Mr. Lee holds 200,000 stock options exercisable into
      Common Shares that are not included in the total.                                                                                                      
|(11) | Mr. Troy did not stand for re-election as a Director of
      the Company at the Companys Annual General Meeting held June 2,
      2016.                                                                        
|(12) | On June 2, 2016 Mr. Gambow resigned as Managing Director
      Corporate Development and was appointed Chief Technology Officer. Mr.
      Gambow resigned as a Director of the Company on February 2,
      2017.
|(13) | Mr. ONeill resigned as a Director of the Company on
      August 2, 2016.                                                                                                                                        
|(14) | Mr. Cass was elected a Director of the Company at the
      Companys Annual General Meeting held June 2, 2016.                                                                                                   
|(15) | Ms. Roach was appointed a Director of the Company on
      August 10, 2016.                                                                                                                                       

The voting rights attached to the common shares owned by the
  Companys directors and senior management do not differ from those voting rights
  attached to shares owned by people who are not directors or senior management of
  the Company.

Item 7.Major Shareholders and Related Party
  Transactions

A.Major Shareholders

To the best of the Companys knowledge, there are no persons or
  company who beneficially own, directly or indirectly, or exercise control or
  direction over, securities carrying more than 5% of the voting rights attached
  to any class of voting securities of the Company.

The voting rights of the Companys major shareholders do not
  differ from the voting rights of holders of the Companys common shares who are
  not the Companys major shareholders.

As at December 31, 2016, the registrar and transfer agent for
  the Company reported that there were 46,411,752 common shares of the Company
  issued and outstanding. Of these, 42,314,461 were registered to Canadian
  residents (45 recorded shareholders), 4,075,548 were registered to residents of
  the United States (789recorded shareholders) and 21,743 were registered
  to residents of other foreign countries (4 recorded shareholders).

To the best of the Companys knowledge, the Company is not
  directly or indirectly owned or controlled by another corporation, by any
  foreign government or by any other natural or legal person severally or jointly,
  except as disclosed in the above table regarding the Companys major
  shareholders.

There are no arrangements known to the Company, the operation
  of which may at a subsequent date result in a change in control of the Company.

B.Related Party Transactions

For Fiscal 2016, management fees for the Company were $717,369
  (Fiscal 2015 - $727,217; Fiscal 2014 -$1,243,763). At December 31, 2016, the
  amount due to related parties (unsecured and have no interest) was $36,000 (2015
  2,795: 2014 $709,954). There were no management bonuses earned in Fiscal 2016 or
  Fiscal 2015 (2014 - $694,767) The $36,000 (2015 Nil) related to Directors fees
  and there were no amounts due (2015 $2,795; 2014 $15,187) for reimbursement of
  expenses to a director of the Company. Expense reimbursements are due on demand.
  Related party transactions during Fiscal 2016, Fiscal 2015 and Fiscal 2014 were
  in the normal course of operations and were measured at their fair value.

Share-based expenses (calculated using the Black-Scholes option
  pricing model) were $285,745 for Fiscal 2016 ($553,011 for Fiscal 2015; $208,023
  for Fiscal 2014).

Other than as disclosed in this annual report and the financial
  statements attached hereto and other than in the ordinary course of business,
  since the beginning of the Companys preceding three financial years, there have
  been no transactions or loans between the Company and:

---

- 43 -

| | (a) | enterprises that directly or indirectly through one or
      more intermediaries, control or are controlled by, or are under common
      control with, the Company;                                                                                                                                                                                                                                       
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                            
| | (b) | associates, meaning unconsolidated enterprises in which
      we have a significant influence or which have significant influence over
      the Company;                                                                                                                                                                                                                                                  
| |     |                                                                                                                                                                                                                                                                                                                                                                                                            
| | (c) | individuals owning, directly or indirectly, an interest
      in the voting power of the Company that gives them significant influence
      over the Company, and close members of any such individuals
      family;                                                                                                                                                                                    
| |     |                                                                                                                                                                                                                                                                                                                                                                                                            
| | (d) | key management personnel, that is, those persons having
      authority and responsibility for planning, directing and controlling the
      activities of the Company, including directors and senior management of
      the Company and close members of such individuals families; and                                                                                                                
| |     |                                                                                                                                                                                                                                                                                                                                                                                                            
| | (e) | enterprises in which a substantial interest in the voting
      power is owned, directly or indirectly, by any person described in (c) or
      (d) or over which such a person is able to exercise significant influence,
      including enterprises owned by directors or major shareholders of the
      Company and enterprises that have a member of key management in common
      with the Company.

Compensation

For information regarding compensation for the Companys
  directors and senior management, see Item 6.B. Compensation.

Interests of Experts and Counsel

Not applicable.

Item 8.Financial Information

A.Financial Statements and Other Financial
  Information

The Companys financial statements are stated in United States
  dollars and are prepared in accordance with IFRS, as issued by the IASB, the
  application of which, in the Companys case, conforms in all material respects
  for the periods presented with the United States generally accepted accounting
  principles.

The following financial statements and notes thereto are filed
  with and incorporated herein as part of this annual report:

| | (a) | audited consolidated financial statements for the year
      ended December 31, 2016 including: independent auditors report by Smythe
      CPA, Chartered Professional Accountants, consolidated statements of
      financial position as at December 31, 2016 and 2015, consolidated
      statements of operations and comprehensive income (loss), changes in
      equity and cash flows for the years December 31, 2016 and 2015 and
      2014.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

These financial statements can be found under Item 17.
  Financial Statements below.

Export Sales

All sales are domestic to the US.

Legal Proceedings

There have not been any legal or arbitration proceedings,
  including those relating to bankruptcy, receivership or similar proceedings,
  those involving any third party, and governmental proceedings pending or known
  to be contemplated, which may have, or have had in the recent past, significant
  effect the Companys financial position or profitability.

---

- 44 -

Also, there have been no material proceedings in which any
  director, any member of senior management, or any of the Companys affiliates is
  either a party adverse to the Company or the Companys subsidiaries or has a
  material interest adverse to the Company or the Companys subsidiaries.

Policy on Dividend Distributions

The Companys Board of Directors may give consideration on an
  annual basis to the payment of future dividends. The amount of any future annual
  dividends will be determined based on a number of factors that may include the
  results of operations, financial condition, cash requirements and future
  prospects of the Company. The Board is, however, under no obligation to declare
  dividends and the declaration of dividends is wholly within their discretion.
  Further, the Companys Board of Directors may cease declaring dividends or may
  declare dividends in amounts that are different from those previously declared.

Significant Changes

The Company is not aware of any significant change that has
  occurred since December 31, 2016 that have not been disclosed in this annual
  report.

Item 9.The Offer and Listing

A.Offer and Listing Details

Price History

Full Financial Years (five most recent full financial years)

The annual high and low market prices of the Companys common
  shares for the five most recent full financial years on the TSX and NYSE MKT
  were as follows:

Year Ended
      TSX(1) (Canadian dollars, $)
      NYSE
        MKT(2) (U.S. dollars, $)High
      Low
      **High**
      **Low**December 31, 2016
      1.90
      0.96
      1.44
      0.70December 31, 2015
      5.70
      1.30
      5.11
      0.79December 31, 2014
      7.32
      3.11
      6.73
      2.77December 31, 2013
      3.46
      0.58
      3.33
      0.5875December 31, 2012(3)
      0.68
      0.51
      0.66
      0.528


|(1) | The common shares of the Company were listed for trading
      on the TSX on May 22, 2014 prior to which they traded on the
      TSXV.                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | The common shares of the Company were listed for trading
      on the NYSE MKT on October 14, 2014 prior to which they traded on the
      OTCQX International under the symbol KEOSF.                               
|(3) | Effective December 31, 2012, the Company changed the
      fiscal year end from August 31 to December 31. Information in this row is
      for the four month period from September 1, 2012 to December 31,
      2012.

Full Financial Quarters (two most recent full financial
  years)

The high and low market prices of the Companys common shares
  for each full financial quarter for the two most recent full financial years on
  the TSX and NYSE MKT were as follows:

Quarter Ended
      TSX (Canadian
            dollars, $)
      NYSE MKT (U.S.
            dollars, $)High
      Low
      High
      LowDecember 31, 2016
      1.34
      0.96
      0.998
      0.70September 30, 2016
      1.90
      1.04
      1.44
      0.81June 30, 2016
      1.36
      1.02
      1.06
      0.78


---

- 45 -

Quarter Ended
      TSX (Canadian
            dollars, $)
      NYSE MKT (U.S.
            dollars, $)High
      Low
      High
      LowMarch 31, 2016
      1.52
      1.05
      1.09
      0.80December 31, 2015
      1.56
      1.30
      1.62
      0.79September 30, 2015
      2.66
      2.55
      2.63
      1.83June 30, 2015
      4.38
      4.26
      4.16
      3.08March 31, 2015
      5.70
      5.51
      5.11
      3.99


Most Recent 6 Months

The high and low market prices of the Companys common shares
  for each month for the most recent six months on the TSX and NYSE MKT were as
  follows:

Month Ended
      TSX (Canadian
            dollars, $)
      NYSE MKT (U.S.
            dollars, $)High
      Low
      High
      LowFebruary 28, 2017
      1.40
      1.17
      1.08
      0.92January 31, 2017
      1.40
      1.19
      1.05
      0.91December 31, 2016
      1.25
      1.08
      0.96
      0.80November 30, 2016
      1.33
      0.96
      0.9899
      0.70October 31, 2016
      1.34
      1.08
      0.98
      0.7877September 30, 2016
      1.52
      1.19
      1.17
      0.8962


Transfers of Common Shares

The Companys common shares are in registered form and the
  transfer of the Companys common shares is managed by the Companys transfer
  agent, Computershare Investor Services Inc. with transfer facilities in
  Vancouver and Toronto.

Computershare Trust Company, Denver, Colorado, serves as
  co-transfer agent and co-registrar for the Companys shares in the US.

Requests for information should be directed to Computershare
  Investor Services Inc., 100 University Avenue, 8th Floor, Toronto,
  Ontario Canada M5J 2Y1. Telephone 1 800 564 6253 (toll free in Canada and the
  United States) between the hours of 8:30 a.m. and 8:00 p.m. Eastern Time or 514
  982 7555 (international direct dial).

B.Plan of Distribution

Not applicable.

C.Markets

The Common Shares are publicly traded on the TSX under the
  symbol KLS, and on the NYSE MKT under the symbol KIQ.

D.Selling Shareholders

Not applicable.

---

- 46 -

E.Dilution

Not applicable.

F. Expenses of the Issue

Not applicable.

Item 10.Additional Information

A.Share Capital

Not applicable.

B.Memorandum and Articles of Association

The information required by this item is incorporated herein by
  reference from the Companys Registration Statement on Form 20-F filed on filed
  on August 29, 2013, as amended on October 23, 2013, November 21, 2013 and
  December 3, 2013.

C.Material Contracts

There are no other contracts, other than those disclosed in
  this annual report and those entered into in the ordinary course of the
  Companys business, that are material to the Company and which were entered into
  in the most recently completed fiscal year or which were entered into before the
  most recently completed fiscal year but are still in effect as of the date of
  this annual report:

|1. | The Companys patent for the EPRV was in good standing
      until January 29, 2016. The patent abstract describes the EPRV as a
      pressure relief valve for releasing fluid through a vent in a railway tank
      car, tank trucks and similar vessels. A valve disc is normally biased in a
      closed position by a plurality of constant- force springs of laminated
      steel tapes on drums supported on upright angle brackets symmetrically
      arranged around a valve seat. The pressure at which the valve opens is
      determined by a pre-selection of the number of springs, laminated tapes
      per spring and the restoring force of each tape. See Business
      Overview.                                                                                                                                                                                                                         
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|2. | On May 26, 2010, the Company entered into an agreement
      with Barry LaCroix whereby the Company acquired Manhole Cover Patent No.
      US 7,104,722 B2 from Mr. LaCroix and related technology and intellectual
      property in consideration for CDN$40,000 and the grant of a 5% royalty on
      gross sales of the manhole covers sold under the auspices of the patent in
      favour of Mr. LaCroix on the terms and conditions set out in the
      agreement. This patent expires 2023.                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|3. | The Company has a shareholder rights plan pursuant to an
      agreement between the Company and Computershare Trust Company of Canada
      dated February 3, 2011. This plan was re-approved by the shareholders of
      the Company on June 4, 2014 and by the TSX as part of the Companys
      approval for the listing of the Companys common shares. This plan expires
      at the close of business on the day immediately following the date of the
      Companys annual meeting of shareholders to be held in 2017. A copy of the
      shareholder rights plan is available under the Companys profile on SEDAR
      at www.sedar.comin Canada on EDGAR at www.sec.govin
      the United States.                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|4. | The Company has a 10% rolling stock option plan which was
      last approved by the shareholders of the Company on June 4, 2014. A copy
      of the Option Plan is available under the Companys profile on SEDAR at www.sedar.comin Canada on EDGAR at www.sec.govin
      the United States.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|5. | On November 10, 2016 the Company entered an exclusive
      Technology Development Agreement (the GJ Agreement) with G &
      J Technologies Inc. (G & J), a private company incorporated
      in the Province of British Columbia. The GJ Agreement focuses on the
      development, commercialization and production
      of proprietary products used in heavy-duty, high-performance
      ETVS. The GJ Agreement gives the Company the worldwide, perpetual,
      exclusive rights to develop with G & J a new generation of patented
      technologies that enhance the capabilities of ETVS. The GJ Agreement gives
      the Company the right to patent, market, manufacture, distribute and
      license all specialized technologies covered under the GJ Agreement. The
      Company plans to utilize these technologies to create ETVS components that
      can generate multi-million dollar revenue streams.

---

- 47 -

|6. | On January 1, 2017 the Company entered into Professional
      Services Agreement with Bondwest Enterprises Inc. (Bondwest), a
      private company 100% owned by James R. Bond which expires on December 31,
      2021 (the CEO PSA) with regards to Mr. Bonds engagement as the
      President and Chief Executive Officer of the Company. Under the terms of
      the CEO PSA Bondwest will receive a base fee of US$15,000 per month for
      the fiscal year 2017. The base fee for fiscal 2018 will increase to
      US$18,000 per month upon achieving sales in 2017 of US$18,000,000. The
      base fee for fiscal 2019 will increase to US$21,000 per month upon
      achieving sales in 2018 of US$24,000,000. The base fee for fiscal 2020
      will increase to US$24,000 per month upon achieving sales of
      US$30,000,000. If at any time during the term of the CEO PSA sales reach
      US$50,000,000 the base fee will increase to US$24,000 per month. Bondwest
      is also eligible to receive an annual bonus, capped at 1.5 times the base
      fee. The cap would increase to 3x the base fee upon achieving top line
      sales of US$50,000,000. The performance bonus will be calculated at one-
      third of 10% of the adjusted income which will be based on the audited
      annual income adjusted for non- cash items (eg. stock-based compensation,
      deferred taxes, unrealized foreign exchange and amortization) and income
      taxes. The CEO PSA also includes a severance clause of 24 months base fee
      for termination or change of control.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|7. | On January 1, 2017 the Company entered into a
      Professional Services Agreement with Kitchener Holdings Corp.
      (Kitchener) a private company 100% owned by Richard Lee which
      expires on December 31, 2021 (the CFO PSA) with regards to Mr.
      Lees employment as the Chief Financial Officer of the Company. Under the
      terms of the CFO PSA Kitchener will receive a base fee of US$15,000 per
      month for the fiscal year 2017. The base fee for fiscal 2018 will increase
      to US$18,000 per month upon achieving sales in 2017 of US$18,000,000. The
      base fee for fiscal 2019 will increase to US$21,000 per month upon
      achieving sales in 2018 of US$24,000,000. The base fee for fiscal 2020
      will increase to US$24,000 per month upon achieving sales of
      US$30,000,000. If at any time during the term of the CFO PSA sales reach
      US$50,000,000 the base fee will increase to US$24,000 per month. Kitchener
      is also eligible to receive an annual bonus, capped at 1.5 times the base
      fee. The cap would increase to 3x the base fee upon achieving top line
      sales of US$50,000,000. The performance bonus will be calculated at
      one-third of 10% of the adjusted income which will be based on the audited
      annual income adjusted for non-cash items (eg. stock- based compensation,
      deferred taxes, unrealized foreign exchange and amortization) and income
      taxes. The CFO PSA also includes a severance clause of 24 months base
      salary for termination or change of control.            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|8. | On January 1, 2017 the Company and Mr. Andrukaitis
      entered into a Professional Services Agreement which expires on December
      31, 2021 (the COO PSA) with regards to Mr. Andrukaitiss
      employment as the Chief Operating Officer of the Company. Under the terms
      of the COO PSA Mr. Andrukaitis will receive a base salary of US$15,000 per
      month for the fiscal year 2017. The base salary for fiscal 2018 will
      increase to US$18,000 per month upon achieving sales in 2017 of
      US$18,000,000. The base salary for fiscal 2019 will increase to US$21,000
      per month upon achieving sales in 2018 of US$24,000,000. The base salary
      for fiscal 2020 will increase to US$24,000 per month upon achieving sales
      of US$30,000,000. If at any time during the term of the COO PSA sales
      reach US$50,000,000 the base salary will increase to US$24,000 per month.
      Mr. Andrukaitis is also eligible to receive an annual bonus, capped at 1.5
      times the base salary. The cap would increase to 3x the base salary upon
      achieving top line sales of US$50,000,000. The performance bonus will be
      calculated at one-third of 10% of the adjusted income which will be based
      on the audited annual income adjusted for non-cash items (eg. stock-based
      compensation, deferred taxes, unrealized foreign exchange and
      amortization) and income taxes. The COO PSA also includes a severance
      clause of 24 months base salary for termination or change of
      control.                                        

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- 48 -

D.Exchange Controls

There are no government laws, decrees or regulations in Canada
  which restrict the export or import of capital or which affect the remittance of
  dividends, interest or other payments to non-resident holders of the Companys
  common shares. Any remittances of dividends to United States residents and to
  other non-residents are, however, subject to withholding tax. See Taxation
  below.

E.Taxation

Certain Canadian Federal Income Taxation

The Company considers that the following general summary fairly
  describes the principal Canadian federal income tax consequences applicable to a
  holder of the Companys common shares who is a resident of the United States,
  who is not, will not be and will not be deemed to be a resident of Canada for
  purposes of the Income Tax Act (Canada) and any applicable tax treaty and
  who does not use or hold, and is not deemed to use or hold, his, her or its
  common shares in the capital of the Company in connection with carrying on a
  business in Canada (a non-resident holder).

This summary is based upon the current provisions of the Income Tax Act (Canada), the regulations thereunder (the
  Regulations), the current publicly announced administrative and
  assessing policies of the Canada Revenue Agency and the Canada-United States Tax
  Convention as amended by the Protocols thereto (the Treaty). This
  summary also takes into account the amendments to the Income Tax Act (Canada) and the Regulations publicly announced by the Minister of Finance
  (Canada) prior to the date hereof (the Tax Proposals) and assumes that
  all such Tax Proposals will be enacted in their present form. However, no
  assurances can be given that the Tax Proposals will be enacted in the form
  proposed, or at all. This summary is not exhaustive of all possible Canadian
  federal income tax consequences applicable to a holder of the Companys common
  shares and, except for the foregoing, this summary does not take into account or
  anticipate any changes in law, whether by legislative, administrative or
  judicial decision or action, nor does it take into account provincial,
  territorial or foreign income tax legislation or considerations, which may
  differ from the Canadian federal income tax consequences described herein.

This summary is of a general nature only and is not intended
  to be, and should not be construed to be, legal, business or tax advice to any
  particular holder or prospective holder of the Companys common shares, and no
  opinion or representation with respect to the tax consequences to any holder or
  prospective holder of the Companys common shares is made, accordingly, holders
  and prospective holders of the Companys common shares should consult their own
  tax advisors with respect to the income tax consequences of purchasing, owning
  and disposing of the Companys common shares in their particular
  circumstances.

Dividends

Dividends paid on the Companys common shares to a non-resident
  holder will be subject under theIncome Tax Act (Canada) to withholding
  tax at a rate of 25% subject to a reduction under the provisions of an
  applicable tax treaty, which tax is deducted at source by the Company. The
  Treaty provides that the Income Tax Act (Canada) standard 25% withholding
  tax rate is reduced to 15% on dividends paid on shares of a corporation resident
  in Canada (such as the Company) to residents of the United States, and also
  provides for a further reduction of this rate to 5% where the beneficial owner
  of the dividends is a corporation resident in the United States that owns at
  least 10% of the voting shares of the corporation paying the dividend.

Capital Gains

A non-resident holder is not subject to tax under the Income
  Tax Act (Canada) in respect of a capital gain realized upon the disposition
  of a common share of the Company unless such share represents taxable Canadian
  property, as defined in the Income Tax Act (Canada), to the holder
  thereof. The Companys common shares generally will be considered taxable
  Canadian property to a non-resident holder if:

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- 49 -

- the non-resident holder;
- persons with whom the non-resident holder did not deal at arms length; or
- the non-resident holder and persons with whom such non-resident holder did
    not deal at arms length,

owned, or had an interest in an option in respect of, not less
  than 25% of the issued shares of any class of the Companys capital stock at any
  time during the 60 month period immediately preceding the disposition of such
  shares. In the case of a non-resident holder to whom shares of the Company
  represent taxable Canadian property and who is resident in the United States, no
  Canadian taxes will generally be payable on a capital gain realized on such
  shares by reason of the Treaty unless the value of such shares is derived
  principally from real property situated in Canada.

United States Federal Income Taxation

The following is a general discussion of United States federal
  foreign income tax matters under current law, generally applicable to a U.S.
  Holder (as defined below) of the Companys common shares who holds such shares
  as capital assets. This discussion addresses the material United States federal
  income tax consequences but does not address consequences peculiar to persons
  subject to special provisions of federal income tax law, such as those described
  below as excluded from the definition of a U.S. Holder. In addition, this
  discussion does not cover any state, local or foreign tax consequences. See
  Certain Canadian Federal Income Tax Consequences above.

The following discussion is based upon the Internal Revenue
  Code of 1986, as amended (the Code), Treasury Regulations, published
  Internal Revenue Service (IRS) rulings, published administrative
  positions of the IRS and court decisions that are currently applicable, any or
  all of which could be materially and adversely changed, possibly on a
  retroactive basis, at any time. In addition, this discussion does not consider
  the potential effects, both adverse and beneficial, of any recently proposed
  legislation which, if enacted, could be applied, possibly on a retroactive
  basis, at any time. No assurance can be given that the IRS will agree with such
  statements and conclusions, or will not take, or a court will not adopt, a
  position contrary to any position taken herein.

Holders and prospective holders of common shares should
  consult their own tax advisors with respect to federal, state, local, and
  foreign tax consequences of purchasing, owning and disposing of the Companys
  common shares.

U.S. Holders

As used herein, a U.S. Holder includes a holder of
  less than 10% of the Companys common shares who is a citizen or resident of the
  United States, a corporation created or organized in or under the laws of the
  United States or of any political subdivision thereof, any entity which is
  taxable as a corporation for U.S. tax purposes and any other person or entity
  whose ownership of the Companys common shares is effectively connected with the
  conduct of a trade or business in the United States. A U.S. Holder does not
  include persons subject to special provisions of federal income tax law, such as
  tax-exempt organizations, qualified retirement plans, financial institutions,
  insurance companies, real estate investment trusts, regulated investment
  companies, broker-dealers, non-resident alien individuals or foreign
  corporations whose ownership of the Companys common shares is not effectively
  connected with the conduct of a trade or business in the United States and
  shareholders who acquired their shares through the exercise of employee stock
  options or otherwise as compensation.

Distributions

The gross amount of a distribution paid to a U.S. Holder will
  generally be taxable as dividend income to the U.S. Holder for U.S. federal
  income tax purposes to the extent paid out of the Companys current or
  accumulated earnings and profits, as determined under U.S. federal income tax
  principles. Distributions which are taxable dividends and which meet certain
  requirements will be unqualified dividend income and taxed to U.S. Holders at
  a maximum U.S. federal rate of 15%. Distributions in excess of the Companys
  current and accumulated earnings and profits will be treated first as a tax-free
  return of capital to the extent of the U.S. Holders tax basis in the common
  shares and, to the extent in excess of such tax basis, will be treated as a gain
  from a sale or exchange of such shares.

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- 50 -

Capital Gains

In general, upon a sale, exchange or other disposition of
  common shares, a U.S. Holder will generally recognize a capital gain or loss for
  U.S. federal income tax purposes in an amount equal to the difference between
  the amount realized on the sale or other distribution and the U.S. Holders
  adjusted tax basis in such shares. Such gain or loss will be U.S. source gain or
  loss and will be treated as a long-term capital gain or loss if the U.S.
  Holders holding period of the shares exceeds one year. If the U.S. Holder is an
  individual, any capital gain will generally be subject to U.S. federal income
  tax at preferential rates if specified minimum holding periods are met. The
  deductibility of capital losses is subject to significant limitations.

Foreign Tax Credit

A U.S. Holder who pays (or has had withheld from distributions)
  Canadian income tax with respect to the ownership of the Companys common shares
  may be entitled, at the option of the U.S. Holder, to either a deduction or a
  tax credit for such foreign tax paid or withheld. Generally, it will be more
  advantageous to claim a credit because a credit reduces United States federal
  income taxes on a dollar-for-dollar basis, while a deduction merely reduces the
  taxpayers income subject to tax. This election is made on a year-by-year basis
  and generally applies to all foreign income taxes paid by (or withheld from) the
  U.S. Holder during that year. There are significant and complex limitations
  which apply to the tax credit, among which are an ownership period requirement
  and the general limitation that the credit cannot exceed the proportionate share
  of the U.S. Holders United States income tax liability that the U.S. Holders
  foreign source income bears to his or its worldwide taxable income. In
  determining the application of this limitation, the various items of income and
  deduction must be classified into foreign and domestic sources. Complex rules
  govern this classification process. There are further limitations on the foreign
  tax credit for certain types of income such as passive income, high
  withholding tax interest, financial services income, shipping income, and
  certain other classifications of income. The availability of the foreign tax
    credit and the application of these complex limitations on the tax credit are
    fact specific and holders and prospective holders of the Companys common shares
    should consult their own tax advisors regarding their individual
    circumstances.

F.Dividends and Paying Agents

Not applicable.

G.Statement by Experts

Not applicable.

H.Documents on Display

Additional information, including the Companys Consolidated
  Financial Statements, press releases and other required filing documents are
  available under the Companys profile on SEDAR at www.sedar.com in
  Canada, on EDGAR at www.sec.gov in the United States and on the Companys
  website at www.kelsotech.com. Copies of such documents may also be viewed
  by appointment during normal business hours at the Companys registered and
  records office being the offices of Clark Wilson LLP, 800  885 West Georgia
  Street, Vancouver, British Columbia, Canada V6C 3H1 during normal business
  hours.

I.Subsidiary
  Information

The Company operates in conjunction with the Companys three
  wholly-owned subsidiaries Kelso USA, Kelso Innovative and KIQ Industries. Kelso
  Technologies Inc. owns 100% of the voting securities of each of the Companys
  subsidiaries and none of the subsidiaries has a class of restricted securities.
  Kelso USA was incorporated on August 3, 2005in the State of Nevada.
  Kelso Innovative was incorporated on June 20, 2012 in the State of Nevada. KIQ
  Industries was incorporated on October 7, 2014 in the State of Nevada.

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- 51 -

Item 11.Quantitative and Qualitative
  Disclosures About Market Risk

Financial instruments are agreements between two parties that
  result in promises to pay or receive cash or equity instruments. The Company
  classifies the Companys financial instruments as follows: cash is classified as
  a financial asset at FVTPL, accounts receivable is classified as loans and
  receivables, and due to related parties and accounts payable are classified as
  other financial liabilities, which are measured at amortized cost. The carrying
  value of these instruments approximates their fair values due to their short
  term to maturity.

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

- Credit risk;
- Liquidity risk; and
- Market risk.

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 is placed with a major Canadian financial
  institution and the Companys concentration of credit risk for cash and maximum
  exposure thereto as at December 31, 2016 was $2,312,279 (December 31, 2015 -
  $3,175,292).

With respect to the Companys 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 as at December 31, 2016 was $637,845
  (December 31, 2015 - $1,706,488). The Companys concentration of credit risk for
  accounts receivable with respect to Customer A (see note 15 to audited annual
  financial statements for the year ended December 31, 2016) as at December 31,
  2016 was $73,500 (December 31, 2015 - $894,224), while Customer B was $140,796
  (December 31, 2015  $236,037). Customers C and D do not have any accounts
  receivable as at December 31, 2016

Liquidity Risk

Liquidity risk is the risk that the Company will be unable to
  meet the Companys 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 the Companys liabilities when due,
  under both normal and stressed conditions, without incurring unacceptable losses
  or risking damage to the Companys reputation. At December 31, 2016, the Company
  had $2,312,279 (December 31, 2015 - $3,175,292) of cash to settle current
  liabilities with the following due dates: accounts payable of $235,600 (December
  31, 2015 - $543,903); management bonus payable of $Nil (Fiscal 2015-$Nil); taxes
  payable of $834,167 (Fiscal 2015 - $2,004,272) and; due to related party balance
  of $36,000 (Fiscal 2015 - $2,795). All payables are due within a year.

Market Risk

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

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s cash consists of cash held in bank accounts that earn interest at
  variable rates. Due to the short-term nature of this financial instrument,
  fluctuations in market rates of interest do not have a significant impact on the
  estimated fair value or future cash flows.

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- 52 -

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.

As at December 31, 2016 and December 31, 2015, the Companys
  net exposure to foreign currency risk is as follows (in USD):

As at December 31, 2016
      As at December 31, 2015Net Assets
      $2,686,073
      $2,889,908


Based on the above, assuming all other variables remain
  constant, a 14% weakening or strengthening of the USD against the CAD would
  result in approximately $377,000 (December 31, 2015 - $462,000) foreign exchange
  loss or gain in the consolidated statements of operations.

Other Price Risk

Other price risk is the risk that the future cash flows of a
  financial instrument will fluctuate due to changes in market prices, other than
  those arising from interest rate risk or currency risk. The Company is not
  exposed to other price risk.

See Item 17. Financial Statements.

Item 12.Description of Securities Other than
  Equity Securities

Not applicable.

PART II

Item 13.Defaults, Dividend Arrearages and
  Delinquencies.

None.

Item 14.Material Modifications to the Rights
  of Security Holders and Use of Proceeds.

The Company has a shareholder rights plan pursuant to an
  agreement between the Company and Computershare Trust Company of Canada dated
  February 3, 2011. This plan was re- approved by the shareholders of the Company
  on June 4, 2014 and by the TSX as part of the Companys approval of the listing
  of the common shares of the Company. This plan expires at the close of business
  on the day immediately following the date of the Companys annual meeting of
  shareholders to be held in 2017. The purpose of the shareholder rights plan is
  to: (a) ensure, to the extent possible, that all holders of the Common Shares of
  the Company and the Board have adequate time to consider and evaluate any
  unsolicited bid for the Common Shares; (b) provide the Board with adequate time
  to identify, develop and negotiate value-enhancing alternatives, if considered
  appropriate, to any such unsolicited bid: (c) encourage the fair treatment of
  the Companys securityholders in connection with any takeover bid made for the
  Common Shares; and (d) generally to assist the Board in enhancing shareholder
  value. One right as been issued in respect of each issued Common Share of the
  Company.

At the Companys annual general and special meeting held on
  June 5, 2013, the Company obtained shareholder approval of certain amendments to
  the Articles of the Company to include provisions for: (i) uncertificated
  shares; (ii) conversion of fractional shares into whole shares in accordance
  with the Business Corporations Act (British Columbia); (iii)
  participation in shareholders meetings by telephone and other communication
  mediums; (iv) flexibility to the board of directors to make certain alterations
  to the Companys authorized share structure by way of directors resolution as
  opposed to the Company having to incur the additional costs of obtaining
  shareholder approval; and (v) allowing for change of the Companys name by
  directors resolution instead of by an ordinary resolution of the shareholders of
  the Company. In addition shareholders approved the adoption of advance notice
  provisions. Advance notice provisions provide a framework whereby the Company
  can fix a deadline for submission of director nominations by shareholders prior
  to any annual or special meeting of shareholders and can set forth the
  information regarding director nominees that a shareholder must include in their
  notice to the Company for such notice to be in proper written form.

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- 53 -

Item 15.Controls and Procedures

A. Disclosure Controls and Procedures

As required by paragraph (b) of Rules 13a-15 or 15d-15 under
  the Securities Exchange Act of 1934 (the Exchange Act), the Companys
  principal executive officer and principal financial officer evaluated the
  Companys disclosure controls and procedures (as defined in Rules 13a-15(e) and
  15d-15(e) of the Exchange Act) as of the end of the period covered by this
  annual report on Form 20-F. Based on this evaluation, these officers concluded
  that as of the end of the period covered by this Annual Report on Form 20-F, the
  Companys disclosure controls and procedures were effective to ensure that the
  information required to be disclosed by the Company in reports it files or
  submits under the Exchange Act is recorded, processed, summarized and reported
  within the time periods specified in the rules and forms of the Securities and
  Exchange Commission. These disclosure controls and procedures include controls
  and procedures designed to ensure that such information is accumulated and
  communicated to the Companys management, including the Companys principal
  executive officer and principal financial officer, to allow timely decisions
  regarding required disclosure.

The Companys management is responsible for establishing and
  maintaining adequate internal control over financial reporting to provide
  reasonable assurance regarding the reliability of the Companys financial
  reporting and the preparation of financial statements for external purposes in
  accordance with generally accepted accounting principles. Internal control over
  financial reporting includes those policies and procedures that (i) pertain to
  the maintenance of records that in reasonable detail accurately and fairly
  reflect the transactions and dispositions of the assets of our company; (ii)
  provide reasonable assurance that transactions are recorded as necessary to
  permit preparation of financial statements in accordance with generally accepted
  accounting principles, and that receipts and expenditures of the company are
  being made only in accordance with authorizations of the Companys management
  and directors; and (iii) provide reasonable assurance regarding prevention or
  timely detection of unauthorized acquisition, use or disposition of the
  Companys assets that could have a material effect on the financial
  statements.

Because of the Companys inherent limitations, internal control
  over financial reporting may not prevent or detect misstatements. Also,
  projections of any evaluation of effectiveness to future periods are subject to
  the risk that controls may become inadequate because of changes in conditions,
  or that the degree of compliance with the policies or procedures may
  deteriorate.

Management assessed the Companys internal control over
  financial reporting as of December 31, 2016, the end of the Companys fiscal
  year. Management based its assessment on criteria established in Internal
    ControlIntegrated Framework (COSO Framework) published by The Committee of
    Sponsoring Organizations (COSO 2013). Managements assessment included
  evaluation of such elements as the design and operating effectiveness of key
  financial reporting controls, process documentation, accounting policies, and
  the Companys overall control environment.

Based on the Companys assessment, management has concluded
  that the Companys internal control over financial reporting was effective, as
  of the end of the fiscal year, to provide reasonable assurance regarding the
  reliability of financial reporting and the preparation of financial statements
  for external reporting purposes in accordance with IFRS as issued by the
  IASB.

Attestation Report of the Registered Public Accounting Firm

Because the Company is an emerging growth company as defined
  in the United States Jumpstart Our Business Startups Act of 2012, the Company
  will not be required to comply with the auditor attestation requirements of the
  United States Sarbanes-Oxley Act of 2002 for as long as the
  Company remains an emerging growth company, which may be for as long as five
  years following its initial registration in the United States.

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- 54 -

Changes in Internal Control over Financial Reporting

The Companys management has evaluated, with the participation
  of the Companys chief executive officer and chief financial officer, whether
  any changes in the Companys internal control over financial reporting that
  occurred during the Companys last fiscal year have materially affected, or are
  reasonably likely to materially affect, the Companys internal control over
  financial reporting. Based on the evaluation we conducted, the Companys
  management has concluded that no such changes occurred during the period covered
  by this annual report on Form 20-F.

Item 16.[Reserved]

A.Audit Committee Financial Expert

The Companys board of directors has determined that Phil Dyer
  qualifies as an audit committee financial expert as defined in Item 16A(b) of
  Form 20-F, and is an independent director as the term is defined by Section
  803 of the NYSE MKT Company Guide.

B.Code of Ethical Conduct

The Company adopted a Code of Business Conduct and Ethics on
  August 1, 2014, which was amended and adopted by the Board of Directors on March
  23, 2015 that applies to all of the Companys directors and employees, including
  the Companys principal executive officer and principal financial officer. The
  full text of the Companys Code of Business Conduct and Ethics is available
  under the Companys profile on SEDAR at www.sedar.com in Canada, on EDGAR
  at www.sec.gov in the United States and on the Companys website at www.kelsotech.com.

C.Principal Accountant Fees and Services

Audit Fees. This category includes the fees for the
  audit of the Companys financial statements and the quarterly reviews of interim
  financial statements. This category also includes advice on audit and accounting
  matters that arose during or as a result of the audit or the review of interim
  financial statements and services in connection with Securities and Exchange
  Commission filings.

Audit-Related Fees. This category includes assurance and
  related services that are reasonably related to the performance of the audit or
  review of the financial statements that are not reported under Audit Fees, and
  describes the nature of the services comprising the fees disclosed under this
  category.

Tax Fees. This category includes the fees for
  professional services rendered for tax compliance, tax advice and tax planning,
  and describes the nature of the services comprising the fees disclosed under
  this category.

All Other Fees. This category includes products and
  services provided by the principal accountant, other than the services reported
  under Audit Fees, Audit-Related Fees or Tax Fees.

The Companys current independent public accountants provided
  audit and other services during the fiscal year ended December 31, 2016 and the
  fiscal year ended December 31, 2015:

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- 55 -

|                   |  | December |  |  | December | 
|------------------ |  | -------- |  |  | -------- | 
|                   |  | 31, 2016 |  |  | 31, 2015 | 
|                   |  | ($)      |  |  | ($)      | 
|Audit Fees         |  | 90,000   |  |  | 95,000   | 
|Audit-Related Fees |  | N/A      |  |  | 2,500    | 
|Tax Fees           |  | 55,000   |  |  | 30,000   | 
|All Other Fees     |  | N/A      |  |  | N/A      | 
|Total Fees         |  | 145,000  |  |  | 125,000  | 

Pre-Approval Policies and Procedures

The Companys audit committee pre-approves all services
  provided by the Companys independent auditors. All of the services and fees
  described under the categories of Audit Fees, Audit Related Fees, Tax Fees
  and All Other Fees were reviewed and approved by the audit committee before
  the respective services were rendered, and none of such services were approved
  by the audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of
  Regulation S-X.

The audit committee has considered the nature and amount of the
  fees billed by Smythe CPA, Chartered Professional Accountants, and believes that
  the provision of the services for activities unrelated to the audit is
  compatible with maintaining the independence of Smythe CPA, Chartered
  Professional Accountants.

D.Exemptions from the Listing Standards for
  Audit Committees.

Not Applicable.

E.Purchases of Equity Securities by the
  Issuer and Affiliated Purchasers.

Not Applicable.

F. Change in Registrants Certifying Account

Not applicable.

G.Corporate Governance

The Companys common shares are listed on NYSE MKT. Section 110
  of the NYSE MKT Company Guide permits the NYSE MKT to consider the laws, customs
  and practices of foreign issuers, and to grant exemptions from NYSE MKT listing
  criteria based on these considerations. A company seeking relief under these
  provisions is required to provide written certification from independent local
  counsel that the non-complying practice is not prohibited by home country law. A
  description of the significant ways in which the Companys governance practices
  differ from those followed by domestic companies pursuant to NYSE MKT standards
  is as follows: Shareholder Meeting Quorum Requirement: NYSE MKT
  recommends a quorum of at least 33 1/3%. The Companys quorum requirement is set
  forth in the Companys articles, which provides that a quorum for the
  transaction of business at a meeting of shareholders is one or more persons,
  present in person or by proxy.

Proxy Delivery Requirement: NYSE MKT requires the
  solicitation of proxies and delivery of proxy statements for all shareholder
  meetings, and requires that these proxies be solicited pursuant to a proxy
  statement that conforms to SEC proxy rules. The Company is a foreign private
  issuer as defined in Rule 3b-4 under the Exchange Act, and the equity
  securities of the Company are accordingly exempt from the proxy rules set forth
  in Sections 14(a), 14(b), 14(c) and 14(f) of the Exchange Act. The Company
  solicits proxies in accordance with applicable rules and regulations in
  Canada.

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- 56 -

H. Mine Safety Disclosure

Not applicable.

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- 57 -

PART III

Item 17.Financial Statements

Financial Statements filed as part of the annual
  report:

The following financial statements and notes thereto are filed
  with and incorporated herein as part of this annual report:

Audited consolidated financial statements for the year ended
  December 31, 2016 including: independent auditors report by Smythe CPA,
  Chartered Professional Accountants, consolidated statements of financial
  position as at December 31, 2016 and 2015.

Item 18.Financial Statements

See Item 17. Financial Statements.

Item 19.Exhibits

Exhibit No.
      Description(3)
      Articles of Incorporation and Bylaws3.01
      Certificate of Incorporation(1)3.01a
      Certificate of Name Change(1)3.01b
      Notice of Articles(1)3.01c
      Articles(1)(4)
      Securityholder Rights4.01
      Shareholders Rights Plan dated February 3,
        2011(1)(10)
      Material Contracts10.01*
      Professional Services Agreement with Bondwest
        Enterprises Inc. dated January 1, 201710.02*
      Professional Services Agreement with Kitchener
        Holdings Corp. dated January 1, 201710.03*
      Professional Services Agreement with Anthony
        Andrukaitis dated January 1, 201710.04
      Stock Option Plan(1)10.05
      Agreement with Barry LaCroix for Patent No. US
        7,104,722 B2 dated May 26, 2010(1)10.06
      Notice of Recordation of Assignment Document
        for US Patent No. 7104722(1)10.07
      Notice of Recordation of Assignment Document
        for US Patent No. 5855225(1)10.08
      Technology Development Agreement with G & J
        Technologies Inc.(6)11
      Code of Business Conduct and Ethics dated March
        23, 2015(3)12.1*
      Certification of Chief Executive Officer
        pursuant to Section 302 of the Sarbanes-Oxley Act of 200212.2*
      Certification of Chief Financial Officer
        pursuant to Section 302 of the Sarbanes-Oxley Act of 200213.1*
      Certification of Chief Executive Officer
        pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
        the Sarbanes-Oxley Act of 200213.2*
      Certification of Chief Financial Officer
        pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
        the Sarbanes-Oxley Act of 2002(21)
      Subsidiaries


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- 58 -

Exhibit No.
      Description21.01*
      List of Subsidiaries(99)
      Additional Exhibits99.1
      Audited annual financial statements for the
        year ended December 31, 2013(2)99.2
      Audited annual financial statements for the
        year ended December 31, 2014(4)99.3
      Audited annual financial statements for the
        year ended December 31, 2015(5)99.4
      Audited annual financial statements for the
        year ended December 31, 2016(7)


|*Filed herewith
|---------------
|(1)            
|(2)            
|(3)            
|(4)            
|(5)            
|(6)            
|(7)            

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- 59 -

SIGNATURES

The registrant hereby certifies that it meets all of the
  requirements for filing on Form 20-F and that it has duly caused and authorized
  the undersigned to sign this annual report on its behalf.

KELSO TECHNOLOGIES INC.

By: /s/ James R. BondJames R.
  Bond
  President and Chief Executive Officer 
  (Principal Executive
  Officer)

Date: March 31, 2016

By: /s/ Richard LeeRichard Lee 
  Chief
  Financial Officer 
  (Principal Financial Officer 
  and Principal Accounting
  Officer)

Date: March 31, 2016

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