---

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C.
20549

FORM 20-F

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

OR

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

For the fiscal year endedDecember 31,
2017

OR

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

OR

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

---

-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.

46,911,752 common shares without par value outstanding on
December 31, 2017.There were no Class A non-cumulative
preference shares outstanding on December 31, 2017.

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 [X] 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

---

-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.

---

-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                                         | 5   
|                                   |                                                               |                                                            |     
|Item
      4.                      | **Information
    on the Company**                            | 10                                                        
|                                   | A.                                                            | History
      and Development of the Company               | 10  
|                                   | B.                                                            | Business
      Overview                                    | 17  
|                                   | C.                                                            | Organizational
      Structure                             | 28  
|                                   | D.                                                            | Property,
      Plants and Equipment                       | 28  
|                                   |                                                               |                                                            |     
|Item
      5.                      | **Operating
    and Financial Review and Prospects**          | 28                                                        
|                                   | A.                                                            | Operating
      Results                                    | 29  
|                                   | B.                                                            | Liquidity
      and Capital Resources                      | 32  
|                                   | C.                                                            | Research
      and Development, Patents and Licenses, etc. | 34  
|                                   | D.                                                            | Trend
      Information                                    | 34  
|                                   | E.                                                            | Off-Balance
      Sheet Arrangements                       | 34  
|                                   | F.                                                            | Tabular
      Disclosure of Contractual Obligations        | 35  
|                                   |                                                               |                                                            |     
|Item
      6.                      | **Directors,
    Senior Management and Employees**            | 35                                                        
|                                   | A.                                                            | Directors
      and Senior Management                      | 35  
|                                   | B.                                                            | Compensation                                               | 37  
|                                   | C.                                                            | Board
      Practices                                      | 40  
|                                   | D.                                                            | Employees                                                  | 43  
|                                   | E.                                                            | Share
      Ownership                                      | 43  
|                                   |                                                               |                                                            |     
|Item
      7.                      | **Major
    Shareholders and Related Party Transactions**     | 44                                                        
|                                   | A.                                                            | Major
      Shareholders                                   | 44  
|                                   | B.                                                            | Related
      Party Transactions                           | 44  
|                                   |                                                               |                                                            |     
|Item
      8.                      | **Financial
    Information**                                 | 45                                                        
|                                   | A.                                                            | Financial
      Statements and Other Financial Information | 45  
|                                   | B.                                                            | Significant
      Changes                                  | 46  
|                                   |                                                               |                                                            |     
|Item
      9.                      | **The
    Offer and Listing**                                 | 46                                                        
|                                   | A.                                                            | Offer
      and Listing Details                            | 46  
|                                   | B.                                                            | Plan
      of Distribution                                 | 48  
|                                   | C.                                                            | Markets                                                    | 48  
|                                   | D.                                                            | Selling
      Shareholders                                 | 48  
|                                   | E.                                                            | Dilution                                                   | 48  
|                                   |                                                               |                                                            |     
|Item
      10.                     | **Additional
    Information**                                | 48                                                        
|                                   | A.                                                            | Share
      Capital                                        | 48  
|                                   | B.                                                            | Memorandum
      and Articles of Association               | 48  
|                                   | C.                                                            | Material
      Contracts                                   | 48  
|                                   | D.                                                            | Exchange
      Controls                                    | 50  
|                                   | E.                                                            | Taxation                                                   | 50  
|                                   | F.                                                            | Dividends
      and Paying Agents                          | 52  
|                                   | G.                                                            | Statement
      by Experts                                 | 52  
|                                   | H.                                                            | Documents
      on Display                                 | 53  

---

-ii-

|         | I.                                                                                    | Subsidiary
      Information                                                  | 53
|-------- | ------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------- | --
|         |                                                                                       |                                                                               |   
|Item 11. | **Quantitative and Qualitative Disclosures About
    Market Risk**                    | 53                                                                           
|         |                                                                                       |                                                                               |   
|Item 12. | **Description of Securities Other than Equity
    Securities**                        | 54                                                                           
|         |                                                                                       |                                                                               |   
|Part II  |                                                                                       |                                                                               | 54
|         |                                                                                       |                                                                               |   
|Item 13. | **Defaults, Dividend Arrearages and
    Delinquencies**                               | 54                                                                           
|         |                                                                                       |                                                                               |   
|Item 14. | **Material Modifications to the Rights of Security
    Holders and Use of Proceeds.** | 54                                                                           
|         |                                                                                       |                                                                               |   
|Item 15. | **Controls and Procedures**                                                           | 55                                                                           
|         |                                                                                       |                                                                               |   
|Item 16. | **[Reserved]**                                                                        | 56                                                                           
|         | A.                                                                                    | Audit Committee Financial
      Expert                                        | 56
|         | B.                                                                                    | Code of
      Ethics                                                          | 56
|         | C.                                                                                    | Principal Accountant Fees
      and Services                                  | 56
|         | D.                                                                                    | Exemptions
      from the Listing Standards for Audit Committees.             | 57
|         | E.                                                                                    | Purchases of Equity
      Securities by the Issuer and Affiliated Purchasers. | 57
|         |                                                                                       |                                                                               |   
|Part III |                                                                                       |                                                                               | 55
|         |                                                                                       |                                                                               |   
|Item 17. | **Financial Statements**                                                              | 58                                                                           
|         |                                                                                       |                                                                               |   
|Item 18. | **Financial Statements**                                                              | 57                                                                           
|         |                                                                                       |                                                                               |   
|Item 19. | **Exhibits**                                                                          | 58                                                                           

---

- 3 -

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., Kel-Flo Industries Inc. (formerly: Kelso Innovative
Solutions Inc.) and KIQ X Industries 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 the Companys 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.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.Anthony (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.


---

- 4 -

Name and Office Held
    FunctionEdward Paul (Paul) Cass Director and Audit
      Committee Member
    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
    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 the Companys Chief Financial Officer, Mr. Lee is
      responsible for the management and supervision of all of the financial
      aspects of the Companys business.


The business address for the Company 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, 2017, 2016 and 2015 prepared in
accordance with IFRS as issued by the International Accounting Standards Board
(IASB). 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 28 below.

---

- 5 -

Selected Financial Data

Statements of Income
      (Loss) Data
    Year ended December 31,
      2017 (audited) ($)
    Year ended December 31,
      2016 (audited) ($)
    Year ended December 31,
      2015 (audited) ($)
    Year ended December 31,
      2014 (audited) ($)
    Year ended December 31,
      2013 (audited) ($)Revenues
    6,062,778
    8,077,143
    18,910,122
    23,816,809
    13,131,387Gross Profit
    1,018,685
    1,978,241
    5,100,129
    10,924,325
    5,305,207Net (Loss)/Income and Comprehensive
      (Loss)/Income
    (5,015,911)
    (2,465,592)
    (2,510,826)
    4,025,781
    2,456,636Basic and Diluted (Loss)/Earnings per Share
    (0.11)
    (0.05)
    (0.05)
    0.09
    0.06


Statement of Financial
      Position Data
    As at December 31,
      2017 (audited) ($)
    As at December 31,
      2016 (audited) ($)
    As at December 31,
      2015 (audited) ($)
    As at December 31,
      2014 (audited) ($)
    As at December 31,
      2013 (audited) ($)Assets
    9,165,199
    13,050,144
    16,157,689
    20,696,182
    9,283,388Current Liabilities
    1,599,966
    1,105,767
    2,550,970
    4,097,256
    486,147Shareholders Equity/(Deficiency)
    7,565,233
    11,771,944
    13,606,719
    16,598,926
    8,797,241Common Shares
    23,231,252
    22,829,820
    22,515,140
    22,141,417
    18,086,144(Deficit)/Retained Earnings
    (19,288,072)
    (14,272,161)
    (11,806,569)
    (7,918,089)
    (11,507,420)Outstanding Common Shares
    46,911,752
    46,411,752
    46,071,752
    45,246,752
    43,020,326


B.Capitalization and
Indebtedness

Not applicable.

C.Reasons for the Offer
and Use of Proceeds

Not applicable.

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.

---

- 6 -

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 will be dependent on the Companys
ability to successfully develop, qualify under current regulations, and protect
the Companys technologies by way of patents and trademarks.

The Company has obtained patents for its external constant
force spring pressure relief valves and a one-bolt manway system, vacuum relief
valve and bottom outlet valve. 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 and other aspects of the Companys business do not or will
not infringe upon patents, copyrights or other intellectual property rights held
by third parties. Although the Company is not aware of any such claims, the
Company 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 the Company is found to have violated the intellectual
property rights of others, the Company may be enjoined from using such
intellectual property, and the Company may incur licensing fees or be forced to
develop alternatives. In addition, the Company 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.

The Company may be unable to secure or maintain regulatory
qualifications for its product.

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.

The Company may not have sufficient capital in the future to
meet rapid increases in production demands and may be unable to sustain its
ability to grow its operations as quickly as anticipated.

Although the Company had a positive working capital position in
the amount of $3,628,911 as at December 31, 2017, the Company may, from time to
time, report a working capital deficit. To maintain its activities, the Company
may require access to additional capital through the sale of securities or
obtaining debt financing. There can be no assurance that the Company will be
successful in obtaining such additional financing and failure to do so could
result in the inability of the Company to develop new products, meet production
schedules; execute delivery orders and continue its operations.

---

- 7 -

The Company has a limited operating history and may not be
able to achieve the its 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.

New commercial 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 its
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s ability to grow its
revenues as projected.

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.

Customer orders that are placed may be cancelled or
rescheduled.

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 small number of tank car
producers.

Although management is optimistic about the Companys future as
a railway equipment supplier, the Company is dependent upon the five major
customers that comprise the railroad tank car manufacturers for a significant
portion of its revenue. In particular, the Company is dependent on three major
US corporations and one Canadian corporation as customers. Although customers
have displayed a pattern of consistent product orders over the past 24 months
and 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 when purchase orders are
received. The Company expects that this limited number of customers will
continue to represent a substantial portion of its sales for the foreseeable
future. The loss of any of these customers could have a material negative impact
upon the Company and its results of operations.

Current 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 customer orders. Any one of these effects
may have a material negative impact on the Companys ability to generate revenue
and continue operations.

---

- 8 -

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,
its revenues and continued operations.

Production capacity may not be large enough to handle growth
in market demand.

The Companys production facilities may not be large enough to
handle growing 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 its 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 its customer base, and its
ability to generate revenue at current and projected levels.

The Companys product development efforts may not result in
new qualified commercial 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 its 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 $4,000,000 in aggregate
and $1,000,000 per incident, as well as product liability insurance for claims
up to $4,000,000 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 its 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.

Raw materials used by the Company for the production of its
products are subject to price fluctuations which could change profitability
expectations.

Many of the materials used in the Companys products are common
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, the Company is able to mitigate the risks associated
with price fluctuations in the Companys 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.

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

The future success of the Company heavily depends upon the
continued services of its senior executives and other key employees. In
particular, the Company relies on the expertise and experience of its Chief
Executive Officer and Chief Financial Officer and the Chief Operating Officer of
Kelso Technologies Inc. and its subsidiaries Kelso Technologies (USA) Inc., KIQ
Industries Inc., KIQ X Industries Inc. and Kel-Flo Industries Inc. (formerly:
Kelso Innovative Solutions Inc.). These individuals are under
contractual obligations to the Company expiring on December 31, 2020, however 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.

---

- 9 -

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.

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.

---

- 10 -

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 the
Company is 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.

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.

---

- 11 -

The Company operates in conjunction with the Companys four
wholly-owned subsidiaries Kelso Technologies (USA) Inc., Kel-Flo Industries Inc.
(formerly: Kelso Innovative Solutions Inc.), KIQ Industries Inc. and KIQ X
Industries Inc. 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 Technologies (USA) Inc. was incorporated on August 3, 2005 in
the State of Nevada for potential use for operations in the United States. KIQ
Industries Inc. was incorporated on October 7, 2014 in the State of Nevada for
the purpose of working on the general development of new equipment concepts
should they develop market interest. Kel-Flo Industries Inc. (formerly: Kelso
Innovative Solutions Inc.) was incorporated on June 20, 2012 in the State of
Nevada and is used as a structure to pursue the development of high-speed
no-leak fuel loading technologies for locomotives. KIQ X Industries Inc. was
incorporated on December 12, 2017 in the Province of British Columbia, Canada as
an operating subsidiary for the development, production and sales of the
Companys automated safety suspension for outback terrain vehicles.

General Development of the Business

General

The origins of the Company are as 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.

In 2017 Kelso began to transition its business into an
engineering product development company that specializes in the design,
production and distribution of proprietary service equipment used in various
transportation applications. Under the new strategic plan the Company now offers
specialized truck tanker equipment, rail wheel cleaning systems, fuel loading
systems, military applications, first responder emergency response kits and high
performance suspension systems for motor vehicles being used in rugged outback
terrains.

The Company currently offers approximately 60 products. The key
products that the Company offers include a series of 47 types of External
Pressure Relief Values (PRV) for pressure management; 4 types of
One-Bolt Manways (OBM); 4 types of Bottom Outlet Valves (BOV)
and 4 types of Vacuum Relief Valves (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, Kel-Flo Industries, 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:$1,912,457 for the quarter ended December 31, 2017, $1,153,341
for the quarter ended September 30, 2017, $1,433,663 for the quarter ended June
30, 2017, $1,563,317 for the quarter ended March 31, 2017; $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 and$1,933,432 for the
quarter ended March 31, 2016;.The Companys net income/loss over the last eight
quarters were as follows: $(2,212,407) for the quarter ended December 31, 2017,
($1,380,495) for the quarter ended September 30, 2017, $(897,513) for the
quarter ended June 30, 2017, $(525,496) for the quarter ended March 31, 2017;
$(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 and
$(686,404) for the quarter ended March 31, 2016.

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. Three 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.

---

- 12 -

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 2017 include technologies for truck tankers, fueling
technologies for locomotives, military and heavy equipment, rail yard
technologies, emergency response kits for first responders and rugged outback
terrain suspension technologies for vehicles in commercial industry, homeland
security and leisure applications.

The key to future profitability will be the introduction and
development of new products and marketplaces. Throughout 2017 the Company has
actively developed new product offerings. The Companys new products initiatives
do not require lengthy demanding regulatory approvals and the design and
production process to sales and distribution is much quicker. Target markets
include specialized truck tanker equipment, military products, fuel loading
systems, rail wheel cleaning systems, emergency response kits for first
responders and high performance suspension systems for motor vehicles being used
in rugged sloped terrain applications in recreational and commercial operations.
Most products are near completion and ready for market distribution commencing
in 2018.

The following chart shows anticipated new revenue streams.

STRATEGIC PLAN

2017 NEW REVENUE MARKETS
    REGULATORY APPROVAL
    2018 DIVERSIFICATIONRAIL TANK CARS
    
    RAIL TANK CARSExternal Pressure Relief Valves
    x
    External Pressure Relief ValvesOne-Bolt Manway
    x
    One-Bolt ManwayVacuum Relief Valve
    Pending
    Vacuum Relief ValveBottom Outlet Valve
    Pending
    Bottom Outlet ValveAngle Valve
    Pending
    Angle ValveMiscellaneous
    x
    MiscellaneousTRUCK TANKERSN/A
    N/A
    PRV/VRV ValveN/A
    N/A
    One-Bolt Manway


---

- 13 -

2017 NEW REVENUE MARKETS
    REGULATORY APPROVAL
    2018 DIVERSIFICATIONRAIL OPERATIONS TECHNOLOGYN/A
    N/A
    Rail Wheel CleanerN/A
    N/A
    Fuel Loading SystemEmergency Response Kit
    
    Emergency Response KitTRUCK TECHNOLOGIESN/A
    N/A
    ASCS Suspension SystemsN/A
    N/A
    MILITARY TECHNOLOGIES


Three Year History

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 OBM 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 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. CSI 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.

---

- 14 -

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.

On September 23, 2015 the Company establishes an in-house
inspection and re-certification service for the Companys 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 the Companys 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.

---

- 15 -

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.

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 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 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.

2017

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.

---

- 16 -

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 the Companys 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 April 2017, the Company completed the development of a
package of specialized equipment (KIT) for rail pressure cars that
transport Liquefied Petroleum Gases such as propane and butane and Natural Gas
Liquid Chemicals such as hydrogen fluoride.

The KIT included the Companys new patented (Patent No.
9,568,146 B1 expiring 2034) pressure car pressure relief valve (PPRV), unique
2-inch angle valve (AV) combined with the Companys high quality check valve,
needle valve, thermo-well and magnetic gauging device. This high value product
package increased the Companys technology footprint in rail tank technology.
The Companys pressure car kit allows Kelso to participate in all of the
Companys market targets in the rail tank car industry with the exception of
inhalation risk commodities such as chlorine which remain beyond the Companys
risk/reward interests. The PPRV features the Companys proprietary constant
force spring technology with a low profile design that is mounted externally to
the tank where it is protected from the commodity. The Companys innovative AV
is an-easy-to use valve milled from a single piece of high quality fabricated
steel (not cast) that eliminates porosity weakness. The Association of American
Railroads approved both the PPRV and AV for service field trials which can take
up to two years for final approval.

In May 2017, the Company successfully completed a full-scale
proof-of-patents extreme terrain vehicle prototype known as Big Red. The Big Red
prototype featured a Ford F150 truck that was converted with the seven new
patents (pending) that have been articulated into one functional vehicle.

On June 6, 2017, the Company has entered an Agreement with a
Class I railroad to establish a beta test site for the Companys new rail Wheel
Cleaning System (WCS). The WCS is designed for rail wheel cleaning
operations in railroad hump yards and industrial shipping facilities. The
Agreement allows Kelso to test and evaluate the performance of the WCS in actual
rail yard operations. This was a key prerequisite event that is expected to lead
to full commercial sales of the WCS.

On September 12, 2017, the Company obtained the non-exclusive
distribution rights to a proven line of proprietary fueling technologies known
as Hydrau-Flo®. The agreement covers the North American markets for a two-year
period with an option for one additional year. Kelso will concentrate on
railroad, military and marine applications.

Hydrau-Flo® products are a suite of mechanical and
non-pressurized fuel filling valves that provide safe handling and overfill
protection for heavy equipment applications such as locomotives. They offer a
low-cost solution that can improve fueling times up to 83% adding thousands of
additional production hours to equipment fleets. They are designed to prevent
overfilling, fuel spillage, waste, fuel theft and remove the risk of tank
ruptures from pressure build up during and after filling. Hydrau-Flo® offers
excellent wear resistance with proven increases in productivity. It improves the
economics of ownership by effectively addressing the key issues of longevity,
capacity and efficiency of operations.

In December 2017, the Company completed the design and
implementation of its proprietary Active Suspension Control System
(ASCS). The Company also successfully outfitted a 2017 Ford F150
production prototype (Prototype) with the ASCS. The Prototype featured the
Companys suspension-related patents (pending) that have been designed to provide heavy duty performance capability in
rugged outback terrains as well as standard road conditions.

---

- 17 -

Implementation of Kelsos business infrastructure and plans for
the ASCS project has commenced. The ASCS division of Kelso operates under the
Companys wholly owned British Columbia subsidiary KIQ X Industries Inc
(KIQX) located in Kelowna, BC, Canada. ASCS equipment will be marketed
under the trade name Kelso KIQ X Gear. All requirements of commercial
production including sub-contracted facilities & equipment, supply chain and
engineering are expected to be completed on or before the end of February 2018.

Commercial market planning commenced in March 2018. Initial
marketing and sales initiatives for KIQ X Gear will focus on customers
requiring reliable suspension performance in operations involving search &
rescue, military, railroad, police & border patrol, emergency first
response, railroads, mining, forestry, agriculture, ranching, pipelines,
telecommunications, oil, gas, electric transmission and recreation.

Subsequent to Year Ended December 31, 2017

On February 15, 2018 the Companys commercial testing of the
Companys rail WCS was been completed. The WCS is designed for rail wheel
cleaning operations to facilitate speed retardation in railroad hump yards and
industrial shipping facilities. The WCS is now commercially proven which is the
key prerequisite event to commence full commercial sales of the WCS.

The tested WCS has been acquired by the customer and is being
utilized in full scale railroad operations. The WCS is Kelsos first product to
feature a recurring revenue stream. The cleaning shoes must be replaced as they
wear out during operations. It is recommended that WCS systems be sold with OEM
cleaning shoes and an additional set of replacement shoes.

The Companys WCS is a unique proprietary (patent pending) rail
wheel cleaning system that has been designed in co-operation with Class I
railroads. It addresses the problematic issue of railcar wheels caking with
various commodities during operations. Another key feature of the WCS is that it
improves the effectiveness of speed retarders to reduce the number of over speed
incidents in train assembly operations. The industrial heavy-duty cleaning
capabilities provided by the WCS for railcar operations can reliably maintain
and improve the performance of rolling stock. Some of the more challenging
commodities addressed by the WCS include crude oil/tar, salt water slurry, flour
water slurry, Portland cement, lime powder slurry, sugar water slurry, potash
and sulfur.

The Companys standard 46-foot WCS is a unique modular design
that can be transported to site and installed. The Companys basic system is
mechanical and does not require any external power supply. It can be customized
to accommodate various contaminates as specified and can be automated if
required to allow signal operators to turn the system on or off.

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.

---

- 18 -

The Company currently offers approximately 60 products. Key
products include 47 types of PRVs for pressure management; 4 types of OBMs, 4
types of BOVs and 4 types of VRVs 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 PRV Patent 5,855,225 and OBM 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, Kel-Flo
Industries Inc., 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 four
wholly-owned subsidiaries, Kelso Technologies (USA) Inc., Kel-Flo Industries
Inc. (formerly Kelso Innovative), KIQ X Industries Inc. and KIQ Industries Inc.
Kel-Flo focuses on engineering industrial designs and distribution plans for the
Companys products for applications in the roadway trucking and trailer market.
KIQ Industries Inc. is working on the development of several new specialty
products. KIQ X is working on developing the Active Suspension Control System.

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, OBM and PRV. 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)
    OBM (unaudited)
    PRV (unaudited)
    United States (unaudited)
    Canada (unaudited)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%)December 31, 2017
    $6,062,778
    $452,709 (7.5%)
    $182,667 (3.0%)
    $5,427,402 (89.5%0
    $6,062,778 (100.0%)
    Nil


---

- 19 -

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;
- 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 PRVs for pressure management; 4 models of the OBM manway securement
system, 4 Bottom Outlet Valve (BOV) models, 4 Vacuum Relief Valve (VRV) models;
and1 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 PRV and OBM and has applied for patents on the
Companys BOV and VRV products. See Risk Factors  Risks Relating to the
Business.

---

- 20 -

Rail Tank Car External Constant Force Spring Pressure
Relief Valves (PRV) (Patented)

Over the past decade Kelso has been involved in the
development, regulatory approvals, marketing and manufacture of PRV that are
designed for railroad tank cars that carry hazardous and non-hazardous
commodities. The Company currently offers 36 versions of the PRV in its product
line, including a number of high-performance PRV products. As required all PRV
products have received AAR approval based on service trials and physical
testing. The Company believes that its series of PRV products are best
available technology products; proprietary to Kelso; and 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 leader in bringing an external high flow valve to market which limits
  exposure to chemicals or other corrosive commodities transported in the tank
  car.
- The only high flow valve in market that is totally external which limits
  exposure to chemicals or other corrosive commodities transported in the tank
  car.
- Technological improvement over older valve systems as it eliminates the
  helical coil spring, the internal valve stems and spring guide tube.
- Multiple springs that prevent disruptions that occur when single spring
  designs become inoperable due to spring failure.
- Increased valve reliability due to little or no contact with HAZMAT.
- Uses flat gasket seal; more tolerant to contamination.
- Low profile provides for better roll over safety.
- External design allows complete inspection during loading.

Rail Tank Car One-Bolt Manway (Patented)

The Company holds the patent rights for a unique OBM technology
for use on rail tank cars and truck tank trailers. The Company believes that the
OBM is an important technology change for the railroad industry where the return
on investment and arguments for customers adoption of the OBM are compelling.
They include:

- One bolt-and-strap design eliminates eye-bolt problems and possible leaks
  due to crushed gaskets.
- Eliminates lid deformation and nozzle distortion due to the over-torque of
  eye-bolts.
- Eliminates relaxation of gaskets under eye-bolt location.
- Eliminates eye-bolt nuts loosening in transit due to vibration and improper
  cross-bolting technique  a violation subject to regulatory fines in excess of
  $5,000 per tank car.
- Standard AAR-approved gasket retention method with currently used hard and
  soft gaskets.
- ACME Thread on T-Bolt virtually eliminates loosening due to vibration.
- Rigid collar at top of nozzle reduces risk of nozzle or lid distortion.
- Much faster opening and closing operation with one bolt management system
  which will take the current industry open/close standard cycle time of 25-35
  minutes to 5 minutes with the OBM.
- Uniform load on the gasket prolongs service life as evidenced in field
  service trial.
- Reduces possible release of hazardous commodity in a roll-over accident by
  moving threaded closing mechanism below the plane of the lid.
- Ease of operation with lightweight hinged lid.

---

- 21 -

- No eye-bolts to kick at tank car inspection.

OBM Adapter Plate

Kelso has successfully developed and tested a fully functional
loading arm adaptor that fits both the OBM and older hinged 6 and 8 eye-bolt
manways currently in service on bank cars in North America. The adaptor attaches
permanently to the existing loading arm apparatus and connects the loading arm
to any existing manway in service today. The adaptors are a minimal expense when
measured against the substantial capacity gains they will produce hence
addressing the concerns of additional capital expenditures required to convert
loading terminals that top-load HAZMAT.

Vacuum Relief Valve (VRV) (patented)

The VRV is a patented 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 patented VRV has
been driven by customers demand for a better performing VRV due to high failure
rates of current products in use in the market today.

The Companys new innovative VRV design features the Companys
patented constant force pressure springs and meets the new DOT-117 tank car
specifications implemented on October 1, 2015. The AAR has approved Kelsos VRV
design for commercial service trials which are now complete. The Company awaits
final AAR review and approval which is expected within 60 days.

Bottom Outlet Valve (BOV) (patented)

The Companys patented 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.

The development of the Companys patented BOV has been driven
by customers demand for a better performing BOV due to chronic performance
problems with current products in use in the market today. The Companys new
innovative BOV design prevents valve operating stem leaks and features the use
of non-corrosive ceramic materials and a seal protecting wiper. The Companys
BOV meets the new DOT-117 tank car specifications implemented on October 1, 2015
and the new M1002 Tank Car Standards requiring a removable handle. The AAR has
approved Kelsos BOV design for commercial field trial testing that will take up
to two years to complete.

Emergency Response Kit (ERK)  First Responder
Equipment

Kelso ERK (ERK) is specialized equipment that 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 its 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 was developed in partnership with hazardous materials
specialists from a Class 1 Railroad company. It has numerous advantages for its
users over current competitive designs:

- Compact  the Kelso ERK fits in one container which is a reduction from the
  three containers currently used. The ERK takes up less space on emergency
  response vehicles and allows handling by one person.
- Built with lightweight materials the ERK is half the weight of existing
  products providing easier deployment and operation of the ERK by emergency
  responders.
- No additional application tools are required which reduces kit weight and
  complexity of operation.
- Color-coded valve caps aid first responder in selecting proper valve cap
  under emergency conditions.

---

- 22 -

- Friction reduction system lowers torque needed to apply the valve cap. This
  reduces the number of tools needed to effectively apply the ERK reducing the
  potential effects of human error and potential injury to first responders.
- The ERK is designed for both pressure tank cars which include commodities
  such as chlorine, liquefied petroleum gas and anhydrous ammonia and
  non-pressurized tank cars.
- The Kelso ERK is the only emergency kit in the market that is designed to
  handle general service tank cars.

Truck Tanker Equipment (patents pending)

The Company has completed the design and engineering of two key
pieces of truck tanker equipment for the containment and pressure management of
hazardous and non-hazardous commodities that are transported via roads. The
specialized products include a pressure/vacuum relief valve (TPVR) and a
one-bolt manway (TOBM). These new products are based on the Companys patents
that are utilized in rail tank car applications and meet DOT 407 49 CFR 178.345
regulations. Over the past several years the Companys strategic development
partners have been instrumental in finalizing all design aspects for roadway
applications. The Company believes it has reached this key milestone of
consensus of design with the trucking industry.

On July 10, 2017 the TPVR and TOBM were installed on a truck
tanker for assessment testing by the Companys industrial technology partner.
This testing is not a required regulatory field trial as in rail regulations,
but rather a customer review for suitability. The Company has commenced
marketing and sales initiatives and management expects to generate a
multi-million dollar revenue stream from these products in 2018.

Active Suspension Control System For Combined
Road-No-Road Vehicles (Patents Pending)

The Company has 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 application is owned by Kelso and covers numerous new technologies. Kelso
anticipates filing further patent applications relating to the ASCS technology
as Kelso continues to develop and improve the ASCS technology. Kelso seeks
proprietary rights protection to allow for the development of the Companys
business of outfitting commercial industry and leisure based motor vehicles with
the ASCS system. This allows Kelso to market specialized, high-performance
rugged sloped outback terrain vehicles for recreational and commercial
operations in difficult road and no-road operations.

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. Converted vehicles
feature a spider like independent suspension that keeps the vehicle stable and
level through its proprietary gyroscopic technology. In road-mode it looks like
a standard vehicle with very large wheels and when in no-road mode it can
provide a 20 inch lift capability creating approximately 30 plus inch ground
clearance. The technology allows the vehicle to stay level and stable in any
operational environment.

Design dynamics include:

- The ASCS is a unique reliable suspension methodology based on thirty years
  of research and experience.
- The ASCS is believed to represent a dramatic improvement over existing
  technologies presently used in commercial combined road-no-road vehicles.
- Vehicles featuring the ASCS are expected to provide distinct advantages to
  customers in terms of safety, effective performance and operational
  capabilities.
- The basic design premise of the ASCS is to manage the center-of-gravity of
  the vehicle with automated gyroscopic controlled air suspension.
- This ensures that the driver, passengers and payload remain in as stable
  and level a position as possible when driving in difficult rugged outback
  terrains including flooded areas.

---

- 23 -

- The ASCS technology package is well suited for use in desert, mountain,
  snow and low lying water regions around the world.

Operational advantages include:

- Ideal for commercial customers who need to traverse rough outback terrain
  in a wheeled vehicle for the purpose of reaching remote destinations safely
  with multiple passengers and maximum payload.
- Ideal for both commercial industry and leisure markets.
- Eliminates need for expensive track-based vehicles.
- Ideal for outback operations around the world.
- Combined road-no-road capability eliminates additional transportation costs
  of equipment into service areas.
- Reduces need for more expensive service equipment such as helicopters.
- Excels in all weather environments year round.
- Cost effective operations.
- Lighter weight than competitive vehicles.
- Balanced distribution of weight reduces environmental impact.

The ASCS business operates under the Companys wholly owned
subsidiary KIQ X Industries Inc that is incorporated under the laws of the
Province of British, Columbia, Canada. Research and development, marketing and
subcontracted production operations are located in Kelowna, British
Columbia.

Under this business model Kelso believes production capability
can be scaled to 360 vehicles per year once supply chains and markets can be
established. Production prototype 001X utilizing the ASCS technology on a 2017
Ford F150 is complete and road and off-road testing and marketing has commenced.
New commercial revenues are expected to be derived from customers requiring
heavy duty ASCS performance in agriculture, ranching, search & rescue, snow
management, railroad, homeland security, police & border patrol, first
responders, mining, forestry, and oil, gas and electric transmission
applications.

Wheel Cleaning System (WCS) for Rail Cars (patents
pending)

The WCS is designed for rail wheel cleaning operations in
railroad hump yards and industrial shipping facilities. The Companys WCS is a
unique proprietary (patent pending) rail wheel cleaning system that has been
designed in co-operation with Class I railroads. It addresses the problematic
issue of railcar wheels caking with various commodities during operations. The
industrial heavy-duty cleaning capabilities provided by the WCS for railcar
operations can reliably maintain and improve the performance of rolling stock.
Some of the more challenging commodities addressed by the WCS include crude
oil/tar, salt water slurry, flour water slurry, Portland cement, lime powder
slurry, sugar water slurry, potash and sulfur.

The Companys standard 46-foot WCS is a unique modular design
that can be transported to site and installed. The Companys basic system is
mechanical and does not require any external power supply. It can be customized
to accommodate various contaminates as specified and can be automated if
required to allow signal operators to turn the system on or off. Over time
management expects to generate multi-million dollar revenue streams from the
full market development of the WCS.

The Companys WCS has been vetted for commercial operations by
a Class One railroad and is fully available to railroad operations in North
America. The Company is actively marketing the WCS and customer response to it
has been encouraging. The WCS is a high value product and includes additional
revenue streams that will be generated from the sale of cleaning shoes as they
wear out during operations.

---

- 24 -

Fuel Loading Systems (Hydrau-Flo®) for Locomotives,
Marine and Military Applications

Hydrau-Flo® represents a unique opportunity for Kelso to
participate in fueling technology markets with proven innovative products for
the Companys railroad customers. Company holds the non-exclusive distribution
rights to a proven line of proprietary fueling technologies known as
Hydrau-Flo®. The agreement covers the North American markets for a two year
period with an option for one additional year. Kelso will concentrate on
railroad, military and marine applications.

Hydrau-Flo® products are a suite of mechanical and
non-pressurized fuel filling valves that provide safe handling and overfill
protection for heavy equipment applications such as locomotives. They offer a
low cost solution that can improve fueling times up to 83% adding thousands of
additional production hours to equipment fleets. They are designed to prevent
overfilling, fuel spillage, waste, fuel theft and remove the risk of tank
ruptures from pressure build up during and after filling. Hydrau-Flo® offers
excellent wear resistance with proven increases in productivity. It improves the
economics of ownership by effectively addressing the key issues of longevity,
capacity and efficiency of operations.

In the Companys North American railroad market there are over
23,000 locomotives in service today representing a market size in excess of $200
million. As part of the Companys market feasibility analysis over the past
eight months the Company has successfully retrofitted a locomotive at a fueling
center in approximately one hour and then fueled at high speed with no fuel
leaks demonstrating a significant value proposition for railroad customers.

Management is very encouraged by the Hydrau-Flo® opportunity
and expects new revenue streams to be generated from these products in 2018.

Production and Services

The Company currently operates two facilities totaling 50,000
square feet in Bonham, Texas. The Company is fully qualified and certified to
produce products for the railroad and other industries. It has been granted the
required certifications including holding an AAR M1002 Class D Registration and
AAR M1003 Quality Assurance System Certification for its production facilities
from the Association of American Railroads.

ASCS subcontracted production operations are located in
Kelowna, British Columbia, Canada. The Company believes production capability to
be 360 to 500 vehicles per year once supply chains can be established.

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.

---

- 25 -

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 PRV and OBM to install on most of their
training cars, and the Company joins them on customer and first-responder
training sessions at their request.

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 Kel-Flo Industries Inc. (formerly: Kelso Innovative Solutions Inc.).
Kel-Flo Industries Inc. 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. Kel-Flo Industries Inc. 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 2018. 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 in the filing process of mandated
AAR regulatory service trials. 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.

---

- 26 -

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 PRV
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 OBM against competitive products determined that the Companys OBM 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.

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 PRV
technology Patent 5,855,225 which expired January 29, 2016. The Company holds
the patents for the Companys PRV Patent No. 9,568,146 B1 issued February 14,
2017 and for the Companys OBM 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 9,441,749expiring in 2033. On February 8,
2017 the 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)and continued patent work and
international patent applications were filed on February 3, 2018.

---

- 27 -

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.

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 PRV, OBM and 1 ETS product. The
Company is a preferred supplier for Trinity and ARI as evidenced by the
Companys PRV 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.

In an attempt to reduce its economic dependence on a limited
number of customers, the Company is introducing new products for sale in the
trucking, military and consumer industries, as described elsewhere in this
document.

Employees

As at December 31, 2017, the Company had 40 employees (December
31, 2016  47 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.

---

- 28 -

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.

C.Organizational Structure

The Company has four wholly-owned subsidiaries, Kelso
Technologies (U.S.A.) Inc., KIQ Industries Inc., Kel-Flo Industries Inc.
(formerly: Kelso Innovative Solutions Inc.) and KIQ X Industries Inc. 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 currently operates two facilities totaling 50,000
square feet in Bonham, Texas. The Company is fully qualified and certified to
produce products for the railroad and other industries. It has been granted the
required certifications including holding an AAR M1002 Class D Registration and
AAR M1003 Quality Assurance System Certification for its production facilities
from the Association of American Railroads.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, 2017, the total carrying value for the
Companys property, plant and equipment was $2,991,546 (December 31, 2016:
$3,194,492), the breakdown of which is as follows: land - $12,558 (December 31,
2016: $12,588), buildings - $2,545,864 (December, 2016: $2,651,942), leasehold
improvements - $10,791 (December 31, 2016: $13,487), production equipment -
$385,318 (December 31, 2016: $481,648), and vehicles - $37,015 (December 31,
2016:$34,857).

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,
2017 (Fiscal 2017), December 31,2016 (Fiscal 2016) and
December 31, 2015 (Fiscal 2015)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 2017, Fiscal 2016 and Fiscal 2015(collectively, the
Reported Periods) were prepared in accordance IFRS.

---

- 29 -

Revenues have been: Fiscal 2015 $18,910,122, Fiscal 2016
$8,077,143 and Fiscal 2017 $6,062,778. At the same time the gross profit margins
have been: 27% for Fiscal 2015, 24.5% for Fiscal 2016 and 16.8% for Fiscal 2017.
Revenues for Fiscal 2016 and 2017 decreased due to a significant drop in oil
prices which in turn lessened demand for crude oil tank cars. The deep recession
in rail tank car production continued to batter financial results throughout
2017. HAZMAT businesses remained in cut back positions due to low commodity
prices and diminished business activity which has led to lower demand for rail tank cars
causing a significant negative impact on the sales of Kelso products. 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 One-Bolt
Manway system which had higher than expected start up costs. The profit margin
continued to decline in Fiscal 2016 and Fiscal 2017 due to the rail market being
very slow and the Company was required to adjust selling prices to attract
business. In addition, in 2017 the Company wrote-off $470,654 of obsolete
inventory to cost of goods sold. Without that write-off the gross profit margin
for 2017 would have been 24.6% . The Companys administrative costs were
$463,888 per month for Fiscal 2015, declined to $431,336 for Fiscal 2016 and
$450,855 for Fiscal 2017 (excluding share-based expenses and bad debts). These
costs have continued to remain relatively stable due to management monitoring
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.

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 showing the effects of a
depressed 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 three 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.

During the Reporting Periods, decreased revenues and profits
were recorded due to a decrease in demand from the crude oil sector, competitive
pricing issues and bringing the One-Bolt Manway into production with the
inefficient costing issues that are associated with new production systems.
Fiscal 2015 saw the beginning of a decline in revenues to $18,910,122 which
continued into Fiscal 2016 and Fiscal 2017 where revenues declined to $8,077,143
and $6,062,778, respectively. Fiscal 2015, Fiscal 2016 and Fiscal 2017 saw a
steady decline in orders from crude oil producers for the Companys PRV, however
the Company believes that this decreased demand will not continue in 2018. 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 and
Fiscal 2017 saw margins further declined to 24.5% and 16.8%, respectively, 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. Also
2017 saw a write-off of obsolete inventory that lowered the margin by 7.8% .
PRVs for the crude oil sector yield a greater margin than those valves sold to
other sectors. The Companys administrative costs have remained stable due to
the necessity of conserving capital. In Fiscal 2015, 2016 and 2017, the
Companys monthly overhead costs were approximately$463,888, $431,336 and
$450,855, respectively. The Companys net income or loss is a result of the
previous factors. During Fiscal 2017 the Company recorded a net tax recovery of
$150,296. The Company showed a loss for Fiscal 2015 of $2,510,826. In Fiscal
2016 the Company reported a loss of $2,465,592 and in Fiscal 2017 the Company
reported a loss of $5,015,911. In Fiscal 2014 the Company showed a profit of
$4,025,781.

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.

---

- 30 -

Year Ended December 31, 2017 Compared to the Year Ended
December 31, 2016

For Fiscal 2017, the Company reported net loss of $5,015,911
($0.11 per share) against revenue of $6,062,778 compared to a net loss of
$2,465,592 ($0.05 per share) against revenue of $8,077,143 for the year ended
December 31, 2016. The Companys gross profit percentage decreased to 16.8% from
24.5% in 2016. The decline in gross profit percentage is mainly due to an
inventory write-off of $470,654 in 2017. Excluding this write-off the margin
would have been 24.6% for 2017. Net loss and comprehensive loss for Fiscal 2017
was $5,015,911 after deducting non-cash working capital items. In accordance
with IFRS, reported income includes items not involving cash. These include
amortization of $203,980, share-based expense (Black-Scholes) of $469,187 and
net income tax recovery of $150,296.

Factors in the reported income for Fiscal 2017 include expenses
of $1,701,723 (Fiscal 2016 - $2,076,460) related to office and administration
costs mainly in Bonham, Texas; and on-going industrial product design and
development costs of $1,572,714 (Fiscal 2016 - $704,868). The Company currently
has 3 members in the engineering department. 2017 product design and development
costs rose significantly in 2017 due to the development of the Companys Active
Suspension Control System.

Other key costs include production infrastructure; human
resource education; and marketing related expenses for products that have not
yet seen sales results. For Fiscal 2017 salaries and benefits decreased slightly
to $477,104 (Fiscal 2016 - $492,732). The Company employs 7 administrative
people in this area which remains consistent with the prior year. Executive
management contract fees have decreased to $544,014 (Fiscal 2016 - $717,369). In
Fiscal 2017 and 2016 there was no executive bonus paid. The Companys consulting
fees have risen marginally to $251,055 (Fiscal 2016 - $246,501). During Fiscal
2017 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
in Fiscal 2017 and 2016.

Business growth expenses included marketing costs of $554,458
(Fiscal 2016 - $587,553) and related travel costs of $430,304 (Fiscal 2016 -
$526,451). The Companys marketing efforts continue in an attempt to keep the
Companys products at the forefront of the industry. For Fiscal 2017 the Company
employed three full time marketing people which is half of Fiscal 2016. Salaries
were restructured for 2016 and remained constant during 2017. Compensation
packages continued to be more heavily composed of incentive targets as opposed
to higher base salaries. Travel costs have declined due to fewer people in the
marketing function.

Share-based expenses were incurred due to the granting of share
purchase options during Fiscal 2017. Share-based expenses for Fiscal 2017 were
$469,187 compared to $285,745 during Fiscal 2016.

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 $370,495
for Fiscal 2017 (Fiscal 2016 - $357,876).

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 2017 were $352,388 (Fiscal 2016 - $570,102).

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.

---

- 31 -

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 $704,868(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 PRVs in Fiscal 2015.

Net loss and comprehensive loss for Fiscal 2015 was
$2,510,826after 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 $672,533and
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
the Companys design and development costs.

---

- 32 -

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 officers 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 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 $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 the Companys products at the forefront of
the industry. For Fiscal 2015 the Company employed five full time marketing
people whereas for most of Fiscal 2014the 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 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 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.

B.Liquidity and Capital
Resources

The Companys primary source of revenue to date is from new
rail tank car builders and retrofit/repair customers. The Company is optimistic
that the demand for the Companys rail tank car products will eventually improve
in future periods. Rail industry analysts are predicting consistent production
of 12,000 to 20,000 tank cars annually for the next three years. Management
expects that the Companys capital resources will diminish over the short term
until revenues from both old and new products begin to improve in future
periods.

As at the end of Fiscal 2017 there were no material commitments
for capital expenditures.

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 Fiscal 2017 no share purchase options
were exercised. 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 the Company may be
unsuccessful in raising any additional capital needs that may arise; the Company
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.

---

- 33 -

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, 2017 Compared to December 31,
2016

At December 31, 2017 the Company had cash and cash equivalents
in the amount of $411,223; accounts receivable of $653,445; prepaid expenses of
$183,966; and inventory of $3,980,243 compared to 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 at
December 31, 2016.

The working capital position of the Company at December 31,
2017 was $3,628,911 compared to a working capital position of $8,511,809
December 31, 2016.

Net assets of the Company were $7,565,233 at December 31, 2017
compared to $11,771,944 at December 31, 2016. At December 31, 2017, the Company
had no interest bearing long-term liabilities or debt.

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 $709,954due to related
parties at December 31, 2014.

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

---

- 34 -

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 Kel-Flo Industries Inc. (formerly: Kelso
Innovative Solutions Inc.). Kel-Flo Industries Inc. 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: $1,572,714 during Fiscal 2017, $704,868 during Fiscal 2016 and
$783,680 during Fiscal 2015.

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 2018.

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.

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.

---

- 35 -

F.Tabular Disclosure of
Contractual Obligations

The Company does not have any contractual obligations as of
December 31, 2017 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, 2017.

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. Director
      of SIQ Mountain Industries Inc. (SIQ:TSXV).Richard Lee
    CFO
    CFO of the Company since April 8, 2010 and self-employed
      businessman. CFO and Director of SIQ Mountain Industries Inc. (SIQ: TSXV)Peter Hughes
    Director and Audit
      Committee Member
    Self-employed businessman. President and CEO of SIQ
      Mountain Industries Inc. (SIQ:TSXV); Director of Broome Capital Inc.
      (BCP:TSXV), Gourmet Ocean Products Inc. (GOP:TSXV) 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 Technologies (USA) Inc. from August 3, 2016 to present; President
      and CEO Kel-Flo Industries Inc. (formerly: Kelso Innovative Solutions
      Inc.) from February 2, 2017 to present.Phil Dyer
    Director and Audit Committee
      Member
    Businessman. LegacyTexas 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.Paul Cass
    Director and Audit Committee
      Member
    Businessman. Chief Operating Officer at Whitewater West
      Industries.Laura Roach
    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.


James R. Bond (64 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. Mr. Bond currently
serves as a Director on SIQ Mountain Industries Inc, a company listed on the
TSXV;

---

- 36 -

Richard Lee (62 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. Mr. Lee serves as CFO and a Director of SIQ Mountain Industries
Inc, a company listed on the TSXV;

Peter Hughes (56 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 SIQ Mountain Industries Inc, a company listed on the TSXV; President, CEO and
a director of Broome Capital Inc., a company listed on the TSXV; 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 (64 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 Technologies (USA) Inc. since August 3, 2016 and President and
CEO of Kel-Flo Industries Inc. (formerly: Kelso Innovative Solutions Inc.)
(engineering industrial designs and distribution plans for patented OBM) since
February 2, 2017. Mr. Andrukaitis has over 26 years of senior corporate
management experience in finance, accounting, strategic planning, business
development and turn-around 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.

Phil Dyer (66 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 (61 years)  Director

Mr. Cass has been a director of the Company since 2016 and is a
member of the Audit Committee. Mr. Cass is currently COO of Whitewater West
Industries, a privately held design/manufacturing firm specializing in waterpark
and amusement park equipment installations around the world. Previously Mr. Cass
was COO at Ballard Power Systems Ltd., a public company specializing in the
development and manufacture of fuel cell technology for automotive and
non-automotive markets. Mr. Cass is a registered Professional Engineer in
British Columbia and he also holds an MBA from Simon Fraser University.

---

- 37 -

Laura Roach (46 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 2017, 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
    Fiscal Year Ended December
      31, 2017Salary
      ($)
    Option based
      Awards ($)
    All other
      compensation ($)
    Total
      compensation ($)James R. Bond Director, President and CEO
    $180,000
    16,520
    N/A
    196,520Richard Lee CFO
    $180,000
    16,520
    N/A
    196,520Neil Gambow(1)Director, Chief Technology
      Officer), CEO Kelso Technologies (USA)
      Inc. and CEO Kel-Flo Industries Inc. (formerly: Kelso
      Innovative Solutions Inc.)
    $N/A
    N/A
    1,000
    1,000Peter Hughes Director
    N/A
    8,260
    30,000
    38,260Tony Andrukaitis Director, Executive Vice
      President Business Development and COO
    $180,000
    16,520
    N/A
    196,520Phil Dyer Director
    N/A
    8,260
    12,000
    20,820Paul Cass Director
    N/A
    8,260
    12,000
    20,820Laura Roach Director
    N/A
    8,260
    12,000
  20,820


|(1) | Mr. Gambow resigned as a Director and Chief Technology
      Officer of the Company on February 2, 2017. During fiscal 2017 Mr. Gambow
      was paid $1,000 for sitting as a Director until his
  resignation.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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 fiscal2020 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.

---

- 38 -

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 CFO PSA). Under the terms of the CFO PSA Kitchener will
receive a base fee ofUS$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.

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.

---

- 39 -

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.

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, 2017:

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
    100,000 100,000
    1.30 0.30
    August 18, 2021 November 28, 2022
    0 28,695.60Richard Lee
    100,000 100,000
    1.30 0.30
    August 18, 2021 November 28, 2022
  0 28,695.60


---

- 40 -

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)Peter Hughes
    50,000 50,000
    1.30 0.30
    August 18, 2021 November 28, 2022
    0 14,347.80Tony Andrukaitis
    100,000 100,000
    1.30 0.30
    August 18, 2021 November 28, 2022
    0 28,695.60Phil Dyer
    200,000 50,000
    1.30 0.30
    August 18, 2021 November 28, 2022
    0 14,347.80Paul Cass
    200,000 50,000
    1.30 0.30
    August 18, 2021 November 28, 2022
    0 14,347.80Laura Roach
    200,000 50,000
    1.30 0.30
    August 18, 2021 November 28, 2022
    0 14,347.80Neil Gambow(2)
    100,000
    1.30
    February 2, 2018
    0


|(1) | Value is calculated based on the difference between the
      market value of the securities underlying the options as at December 29,
      2017 (being CAD$0.66) 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 29, 2017 of USD 0.7971.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Mr. Gambow resigned as a director and executive officer
      of the Company on February 2, 2017. Mr. Gambows option award expired on
      February 2, 2018, being one year from the date of his resignation,
      unexercised in whole or in part.                                                                                                              

Termination and Change of Control Benefits

Except as disclosed above with respect to James R. Bond,
Richard Lee and Tony Andrukaitis, the Company has 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 2017.

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.

---

- 41 -

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 Committeesof 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.

The Company has adopted a charter for the Companys audit
committee. The full text of the Charter of the Audit Committee is available on
the Companys website at www.kelsotech.com.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 which can be viewed on the Companys website at www.kelsotech.com.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 and 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.

---

- 42 -

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.

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;                                                                                 

---

- 43 -

|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, which can be viewed on the
Companys website at www.kelsotech.com. 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
NP58-201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.

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, 2017, the Company had 40 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, 2017. At the date of this filing, the
Companys employees are not unionized and all employees are full-time. At
December 31, 2016, the Company had 47 employees, including employees of the
Companys subsidiaries.

E.Share Ownership

As of December 31, 2017, 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 CommonShares
    Options Owned# of Shares
    % of
      Class(1)James R. Bond Director, President and
      CEO
    1,287,500(2)
    2.56
    200,000Peter Hughes Director
    1,000(3)
    .003
    200,000Tony Andrukaitis Director, Executive
      Vice President BusinessDevelopment and COO
    222,480(4)
    .56
    200,000Phil Dyer Director
    10,000 (5)
    .021
    200,000Paul Cass(6)Director
    69,000(6)
    .147
  200,000


---

- 44 -

Name and Office Held
    Number of Common Shares
      Owned and Percent of Total Outstanding CommonShares
    Options Owned# of Shares
    % of
      Class(1)Laura Roach(7)Director
    6,390(7)
    .014
    200,000Richard Lee(8)CFO
    114,500(8)
    .287
  200,000


|(1) | Based on 46,911,752common shares issued and outstanding
      as at December 31, 2017.                                                                                                                                                                                                                                                                                      
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.
|(3) | Mr. Hughes holds 200,000 stock options exercisable into
      Common Shares that are not included in the total.                                                                                                                                                                                                                                                             
|(4) | Mr. Andrukaitis holds 150,000 stock options exercisable
      into Common Shares that are not included in the total.                                                                                                                                                                                                                                                        
|(5) | Mr. Dyer holds 200,000 stock options exercisable into
      Common Shares that are not included in the total.                                                                                                                                                                                                                                                               
|(6) | Mr. Cass also holds 200,000 stock options exercisable
      into Common Shares that are not included in the total.                                                                                                                                                                                                                                                          
|(7) | Ms. Roach also holds 200,000 stock options exercisable
      into Common Shares that are not included in the total.                                                                                                                                                                                                                                                         
|(8) | Mr. Lee holds 200,000 stock options exercisable into
      Common Shares that are not included in the total.                                                                                                                                                                                                                                                                

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, 2017, the registrar and transfer agent for
the Company reported that there were 46,911,752 common shares of the Company
issued and outstanding. Of these, 42,892,109 were registered to Canadian
residents (10 recorded shareholders), 4,008,215 were registered to residents of
the United States (16 recorded shareholders) and 11,428 were registered to
residents of other foreign countries (1 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 2017, management fees for the Company were $544,014
(Fiscal 2016-$717,368; Fiscal 2015-$727,217). At December 31, 2017, the amount
due to related parties (unsecured and have no interest) was $45,262 (Fiscal
2016- $36,000; Fiscal 2015-$2,795).There were no management bonuses earned in
Fiscal 2017, Fiscal 2016 or Fiscal 2015) the $45,262 related to accrued
Management and Directors fees and there were no amounts due (Fiscal 2016-
$36,000; Fiscal 2015-$2,795) for reimbursement of expenses to a director of the
Company. Expense reimbursements are due on demand. Related party transactions
during Fiscal 2017, Fiscal 2016 and Fiscal 2015 were in the normal course of
operations and were measured at their fair value.

---

- 45 -

Share-based expenses (calculated using the Black-Scholes option
pricing model) were $264,172 for Fiscal 2017 ($160,854 for Fiscal 2016 and
$553,011 for Fiscal 2015).

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:

| | (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
      the Company has 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, 2017 including: independent auditors report by Smythe
      CPA, Chartered Professional Accountants, consolidated statements of
      financial position as at December 31, 2017 and 2016, consolidated
      statements of operations and comprehensive income (loss), changes in
      equity and cash flows for the years December 31, 2017, 2016 and
    2015.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

Export Sales

All sales are domestic to the US.

---

- 46 -

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.

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, 2017 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
    LowDecember 31, 2017
    1.40
    0.315
    1.08
    0.27December 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
    0.5875


| | (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.

---

- 47 -

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, 2017
    0.75
    0.315
    .06172
    0.27September 30, 2017
    1.08
    0.445
    0.83
    0.373June 30, 2017
    1.20
    0.71
    0.89
    0.5244March 31, 2017
    1.40
    0.94
    1.08
    0.71December 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
    0.78March 31, 2016
    1.52
    1.05
    1.09
    0.80


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, 2018
    0.97
    0.59
    0.73
    0.5003January 31, 2018
    1.05
    0.62
    1.05
    0.91December 31, 2017
    0.75
    0.385
    .6172
    .3203November 30, 2017
    0.53
    0.315
    .4099
    0.27October 31, 2017
    0.54
    0.435
    .4438
    0.35September 30, 2017
    0.80
    0.445
    0.65
    0.373


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).

---

- 48 -

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.

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 PRV was in good standing
      until January 29, 2016. The patent abstract describes the PRV 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.                                                                                                                                                                                                      

---

- 49 -

|3. | The Company has a 10% rolling stock option plan which was
      last approved by the shareholders of the Company on June 8, 2017. 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|4. | 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 productionofproprietary 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. In consideration for
      the Agreement the Company agreed to pay G & J a fee of US$100,000 and
      1,000,000 common shares of the Company, which shares are scheduled to be
      released over four key milestones under the Agreement. In addition, Kelso
      pays US$10,000 per month to G & J and a 2.5% royalty on a pre-approved
      sales formula. During Fiscal 2017, a total of 250,000 common shares were
      issued to G & J at a deemed price of $1.00/share (Fiscal 2016 
      250,000 shares at a deemed price of $1.00/share). A total of 250,000
      common shares remain to be issued pursuant to the Agreement.                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|5. | 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.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|6. | 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.            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|7. | 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.                                                                                                              

---

- 50 -

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.

---

- 51 -

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:

- 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.

---

- 52 -

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.

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.

---

- 53 -

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.comin Canada, on EDGAR at www.sec.govin 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 four
wholly-owned subsidiaries Kelso Technologies (USA) Inc. (incorporated on August
3, 2005 in the State of Nevada), Kel-Flo Industries Inc. (formerly: Kelso
Innovative Solutions Inc.) (incorporated on June 20, 2012 in the State of
Nevada), KIQ Industries Inc. (incorporated on October 7, 2014 in the State of
Nevada) and KIQ X Industries Inc. (incorporated on December 12, 2017 in the
Province of British Columbia, Canada).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

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.

|(a) | Credit risk                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | Credit risk is the risk that one party to a financial
      instrument will cause a financial loss for the other party by failing to
      discharge an obligation. Cash is placed with a major Canadian financial
      institution and the Companys concentration of credit risk for cash and
      maximum exposure thereto is $411,223 at December 31, 2017 (December 31,
      2016 - $2,312,279).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    | With respect to its accounts receivable, the Company
      assesses the credit rating of all customers and maintains provisions for
      potential credit losses, and any such losses to date have been within
      managements expectations. The Companys credit risk with respect to
      accounts receivable and maximum exposure thereto is $735,487 at December
      31, 2017 (December 31, 2016 - $637,845). The Companys concentration of
      credit risk for accounts receivable at December 31, 2017 with respect to
      Customer A is $94,114 (December 31, 2016 - $73,500), Customer B is $78,306
      (December 31, 2016 - $Nil) while Customer C is $150,000 related to expense
      recovery (2016-$Nil). The Company has provided for an allowance for
      doubtful accounts amounting to $82,042 at December 31,2017
    (2016-$Nil).                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|(b) | Liquidity risk                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | Liquidity risk is the risk that the Company will be
      unable to meet its financial obligations as they fall due. The Companys
      approach to managing liquidity risk is to ensure, as far as possible, that
      it will have sufficient liquid funds to meet its liabilities when due,
      under both normal and stressed conditions, without incurring unacceptable
      losses or risking damage to the Companys reputation. At December 31,
      2017, the Company has cash in the amount of $411,223 (December 31, 2016 -
      $2,312,279) to settle current liabilities of $844,516 with the following
      due dates; trade accounts payable of $799,254 (December 31, 2016 -
      $235,600) are due within three months; management bonus payable of $Nil (2016 -
      $Nil) are due within five and one-half months of the year end and due to
      related party balances of $45,262 (December 31, 2016 - $36,000) are due on
  demand.

---

- 54 -

|(c) | Market risk                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------
|    | The significant market risks to which the Company is
      exposed are interest rate risk and currency
risk.

| | (i)  | Interest rate risk                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |      | Interest rate risk is the risk that the fair value or
      future cash flows will fluctuate as a result of changes in market interest
      rates. The Company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.
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | (ii) | Currency risk                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |      | The Company is exposed to currency risk to the extent
      expenditures incurred or funds received and balances maintained by the
      Company are denominated in Canadian dollars (CAD). The Company does not
      manage currency risk through hedging or other currency management
      tools.                                                                                                                                                       
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |      | At December 31, 2017 and December 31, 2016, the Companys
      net exposure to foreign currency risk is as follows (in
  US):                                                                                                                                                                                                                                                                                                                                

| |            | December 31, 2017 | December 31, 2016
| | ---------- | ----------------- | -----------------
| | Net assets | $(31,142)         | $1,932,850       

| |       | 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 $4,400 (December 31, 2016 - $271,000)
      foreign exchange loss or gain in the consolidated statements of
      operations.
| | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |       |                                                                                                                                                                                                                                                                                                      
| | (iii) | 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 had 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 expired at the close of business
on June 9, 2017.

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.

---

- 55 -

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 the Companys
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, 2017, 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.

---

- 56 -

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.

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 the Company 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.comin Canada, on EDGAR at www.sec.govin 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.

---

- 57 -

The Companys current independent public accountants provided
audit and other services during the fiscal year ended December 31, 2017 and the
fiscal year ended December 31, 2016:

December
    
    December31, 2017
    
    31, 2016($)
    
    ($)Audit Fees
    85,000
    
    90,000Audit-Related Fees
    N/A
    
    N/ATax Fees
    6,500
    
    55,000All Other Fees
    N/A
    
    N/ATotal Fees
    91,500
    
    145,000


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.

---

- 58 -

H.   Mine Safety Disclosure

Not applicable.

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, 2017 including: independent auditors report by Smythe CPA,
Chartered Professional Accountants, consolidated statements of financial
position as at December 31, 2017 and 2016.

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, 2017(8)10.02
    Professional Services Agreement
      with Kitchener Holdings Corp. dated January 1, 2017(8)10.03
    Professional Services Agreement
      with Anthony Andrukaitis dated January 1, 2017(8)10.04
    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 2002


---

- 59 -

Exhibit No.
    Description13.2*
    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)
    Subsidiaries21.01*
    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)99.5
    Audited annual financial
  statements for the year ended December 31, 2017(9)


*Filed herewith

|(1) | Incorporated by reference from the applicable exhibit to
      the Companys registration statement on Form 20-F filed on August 29,
      2013.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Incorporated by reference from the applicable exhibit to
      the Companys Form 6-K filed on March 31, 2014.                                  
|(3) | Incorporated by reference from the applicable exhibit to
      the Companys Form 6-K filed on March 26, 2015.                                  
|(4) | Incorporated by reference from the applicable exhibit to
      the Companys Form 6-K filed on March 26, 2015.                                  
|(5) | Incorporated by reference from the applicable exhibit to
      the Companys Form 6-K filed March 29, 2016.                                     
|(6) | Incorporated by reference from the applicable exhibit to
      the Companys Form 6-K filed November 21, 2016.                                  
|(7) | Incorporated by reference from the applicable exhibit to
      the Companys Form 6-K filed March 30, 2017.                                     
|(8) | Incorporated by reference from the applicable exhibit to
    the Companys Form 20-F filed April 3, 2017.                                       
|(9) | Incorporated by reference from the applicable exhibit to
    the Companys Form 6-K filed April 2, 2018.                                        

---

- 60 -

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. BondPresident and Chief Executive
Officer(Principal Executive Officer)



Date: April 2, 2018



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

Date: April 2, 2018

---



KELSO TECHNOLOGIES INC.

Consolidated Financial Statements For the years ended
December 31, 2017, 2016 and 2015 (Expressed in US Dollars)

|Index                                                              | Page  
|------------------------------------------------------------------ | ------
|                                                                   |       
|Report of
      Independent Registered Public Accounting Firm      | 2 - 3 
|                                                                   |       
|Consolidated Financial
      Statements                            |       
|                                                                   |       
|Consolidated Statements of Financial Position                      | 4     
|                                                                   |       
|Consolidated Statements of Changes in Equity                       | 5     
|                                                                   |       
|Consolidated Statements of Operations and Comprehensive
      Loss | 6     
|                                                                   |       
|Consolidated Statements of Cash Flows                              | 7     
|                                                                   |       
|Notes to
      Consolidated Financial Statements                   | 8  30

---



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM

TO THE SHAREHOLDERS AND DIRECTORS OF KELSO TECHNOLOGIES
INC.

Opinion on the Consolidated Financial StatementsWe
have audited the accompanying consolidated financial statements of Kelso
Technologies Inc. (the "Company"), which comprise the consolidated statements of
financial position as at December 31, 2017 and 2016, the consolidated statements
of operations and comprehensive loss, changes in equity, and cash flows, for the
years ended December 31, 2017, 2016 and 2015, and the related notes, comprising
a summary of significant accounting policies and other explanatory information
(collectively referred to as the "consolidated financial statements").

In our opinion, the consolidated financial statements present
fairly, in all material respects, the consolidated financial position of the
Company as at December 31, 2017 and 2016, and its consolidated financial
performance and its consolidated cash flows for the years ended December 31,
2017, 2016 and 2015, in accordance with International Financial Reporting
Standards, as issued by the International Accounting Standards Board.

Material Uncertainty Related to Going ConcernWithout
modifying our opinion, we draw attention to Note 1 to the consolidated financial
statements, which indicates that the Company has an accumulated deficit of
$19,288,072 as at December 31, 2017 and for the past few years has negative cash
flows from operations. As stated in Note 1 to the consolidated financial
statements, these events or conditions, along with other matters as set forth in
Note 1, indicate that a material uncertainty exists that casts substantial doubt
on the Companys ability to continue as a going concern.

Basis for OpinionManagements Responsibility for
the Consolidated Financial Statements Management is responsible for the
preparation and fair presentation of these consolidated financial statements in
accordance with International Financial Reporting Standards as issued by the
International Accounting Standards Board, and for such internal control as
management determines is necessary to enable the preparation of consolidated
financial statements that are free from material misstatement, whether due to
fraud or error.

Auditors ResponsibilityOur responsibility is to
express an opinion on these consolidated financial statements based on our
audits. We conducted our audits in accordance with Canadian generally accepted
auditing standards and the standards of the Public Company Accounting Oversight
Board (United States) ("PCAOB). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free from material misstatement, whether due to error
or fraud. Those standards also require that we comply with ethical requirements,
including independence. We are a public accounting firm registered with the
PCAOB and are required to be independent with respect to the Company in
accordance with the United States federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.

|                           | Vancouver                | Langley             | Nanaimo                        
|-------------------------- | ------------------------ | ------------------- | -------------------------------
|                           | 7th Floor 355 Burrard St | 305  9440 202 St   | 201  1825 Bowen Rd            
|                           | Vancouver, BC V6C 2G8    | Langley, BC V1M 4A6 | Nanaimo, BC V9S 1H1            
|                           | T:604 687 1231           | T:604 282 3600      | T:250 755
      2111          2
|Smythe LLP | smythecpa.com | F:604 688 4675           | F:604 357 1376      | F:250 984 0886                 

---



An audit includes performing procedures to assess the risks of
material misstatements of the consolidated financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, audit evidence regarding the
amounts and disclosures in the consolidated financial statements. The procedures
selected depend on our judgment, including the assessment of the risks of
material misstatement of the consolidated financial statements, whether due to
fraud or error. In making those risk assessments, we consider internal control
relevant to the entitys preparation and fair presentation of the consolidated
financial statements in order to design audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the entitys internal control. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Accordingly, we express no such opinion.

An audit also includes evaluating the appropriateness of
accounting policies and principles used and the reasonableness of accounting
estimates made by management, as well as evaluating the overall presentation of
the consolidated financial statements.

We believe that the audit evidence we have obtained in our
audits is sufficient and appropriate to provide a reasonable basis for our audit
opinion.



Chartered Professional Accountants

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

Vancouver, Canada March 27, 2018

|                           | Vancouver                | Langley             | Nanaimo                        
|-------------------------- | ------------------------ | ------------------- | -------------------------------
|                           | 7th Floor 355 Burrard St | 305  9440 202 St   | 201  1825 Bowen Rd            
|                           | Vancouver, BC V6C 2G8    | Langley, BC V1M 4A6 | Nanaimo, BC V9S 1H1            
|                           | T:604 687 1231           | T:604 282 3600      | T:250 755
      2111          3
|Smythe LLP | smythecpa.com | F:604 688 4675           | F:604 357 1376      | F:250 984 0886                 

---

Kelso Technologies Inc.Consolidated Statements of
Financial Position December 31, (Expressed in US Dollars)

|                                                         |   |             |   |   |             |  
|-------------------------------------------------------- | - | ----------- | - | - | ----------- | -
|                                                         |   | 2017        |   |   | 2016        |  
|                                                         |   |             |   |   |             |  
|Assets                                                   |   |             |   |   |             |  
|Current                                                  |   |             |   |   |             |  
|Cash and cash
      equivalents (Note 12)                | $ | 411,223     |   | $ | 2,312,279   |  
|Accounts receivable                                      |   | 653,445     |   |   | 637,845     |  
|Income tax receivable                                    |   | -           |   |   | 753,223     |  
|Prepaid expenses                                         |   | 183,966     |   |   | 708,100     |  
|Inventory (Note 6)                                       |   | 3,980,243   |   |   | 5,206,129   |  
|                                                         |   |             |   |   |             |  
|                                                         |   | 5,228,877   |   |   | 9,617,576   |  
|Deposit                                                  |   | -           |   |   | 3,763       |  
|Property, plant and equipment
      (Note 7)             |   | 2,991,546   |   |   | 3,194,492   |  
|Intangible assets (Note 8)                               |   | 944,776     |   |   | 234,313     |  
|                                                         |   |             |   |   |             |  
|                                                         | $ | 9,165,199   |   | $ | 13,050,144  |  
|                                                         |   |             |   |   |             |  
|Liabilities                                              |   |             |   |   |             |  
|Current                                                  |   |             |   |   |             |  
|Accounts payable and accrued
      liabilities (Note 10) | $ | 878,699     |   | $ | 271,600     |  
|Income tax payable (Note 11)                             |   | 721,267     |   |   | 834,167     |  
|                                                         |   |             |   |   |             |  
|                                                         |   | 1,599,966   |   |   | 1,105,767   |  
|Deferred income tax liability (Note 11)                  |   | -           |   |   | 172,433     |  
|                                                         |   |             |   |   |             |  
|                                                         |   | 1,599,966   |   |   | 1,278,200   |  
|Shareholders Equity                                     |   |             |   |   |             |  
|Capital Stock(Note 9)                                    |   | 23,231,252  |   |   | 22,829,820  |  
|Obligation to Issue Shares(Notes 8 and 9)                |   | 131,527     |   |   | 192,946     |  
|Reserves(Note 9 (b))                                     |   | 3,490,526   |   |   | 3,021,339   |  
|Deficit                                                  |   | (19,288,072 | ) |   | (14,272,161 | )
|                                                         |   |             |   |   |             |  
|                                                         |   | 7,565,233   |   |   | 11,771,944  |  
|                                                         |   |             |   |   |             |  
|                                                         | $ | 9,165,199   |   | $ | 13,050,144  |  

Approved on behalf of the Board:

Peter
      Hughes (signed)Peter Hughes, DirectorPhil Dyer
      (signed)Phil Dyer, Director


See notes to consolidated financial statements

4

---

KelsoTechnologiesInc.Consolidated
Statements of Changes in Equity For the years ended December 31, 2017, 2016
and 2015 (Expressed in US Dollars)

Capital StockNumber
    
    
    
    
    
    Obligation toof commonshares
    
    
    Amount
    
    
    issue shares
    
    
    Reserves
    
    
    Deficit
    
    
    TotalBalance, December 31,
      2014
    
    45,246,752
    
    $
    22,141,417
    
    $
    -
    
    $
    2,375,598
    
    $
    (7,918,089
    )
    $
    16,598,926Exercise of options
    
    825,000
    
    
    373,723
    
    
    -
    
    
    (149,983
    )
    
    -
    
    
    223,740Share-based expense
    
    -
    
    
    -
    
    
    -
    
    
    672,533
    
    
    -
    
    
    672,533Dividends paid
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    (1,377,654
    )
    
    (1,377,654
    )Loss for the year
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    (2,510,826
    )
    
    (2,510,826
    )Balance, December 31, 2015
    
    46,071,752
    
    $
    22,515,140
    
    $
    -
    
    $
    2,898,148
    
    $
    (11,806,569
    )
    $
    13,606,719Exercise of options
    
    340,000
    
    
    314,680
    
    
    -
    
    
    (162,554
    )
    
    -
    
    
    152,126Shares to be issued
    
    -
    
    
    -
    
    
    192,946
    
    
    -
    
    
    -
    
    
    192,946Share-based expense
    
    -
    
    
    -
    
    
    -
    
    
    285,745
    
    
    -
    
    
    285,745Net
      loss for the year
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    (2,465,592
    )
    
    (2,465,592
    )Balance, December 31,
      2016
    
    46,411,752
    
    $
    22,829,820
    
    $
    192,946
    
    $
    3,021,339
    
    $
    (14,272,161
    )
    $
    11,771,944Shares issued
    
    500,000
    
    
    401,432
    
    
    (192,946
    )
    
    -
    
    
    -
    
    
    208,486Share-based expense
    
    -
    
    
    -
    
    
    -
    
    
    469,187
    
    
    -
    
    
    469,187Shares to be issued
    
    -
    
    
    -
    
    
    131,527
    
    
    -
    
    
    -
    
    
    131,527Net loss for the year
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    (5,015,911
    )
    
    (5,015,911
    )Balance, December 31, 2017
    
    46,911,752
    
    $
    23,231,252
    
    $
    131,527
    
    $
    3,490,526
    
    $
    (19,288,072
    )
    $
    7,565,233


See notes to consolidated financial statements

5

---

Kelso Technologies Inc.Consolidated Statements of
Operations and Comprehensive Loss For the years ended December 31
(Expressed in US Dollars)

|                                                           |   |            |   |   |            |   |   |            |  
|---------------------------------------------------------- | - | ---------- | - | - | ---------- | - | - | ---------- | -
|                                                           |   | 2017       |   |   | 2016       |   |   | 2015       |  
|                                                           |   |            |   |   |            |   |   |            |  
|Revenues(Note 14)                                          | $ | 6,062,778  |   | $ | 8,077,143  |   | $ | 18,910,122 |  
|Cost of Goods Sold(Notes 6 and 7)                          |   | 5,044,093  |   |   | 6,098,902  |   |   | 13,809,993 |  
|                                                           |   |            |   |   |            |   |   |            |  
|Gross Profit                                               |   | 1,018,685  |   |   | 1,978,241  |   |   | 5,100,129  |  
|                                                           |   |            |   |   |            |   |   |            |  
|Expenses                                                   |   |            |   |   |            |   |   |            |  
|Office and
      administration                            |   | 1,701,723  |   |   | 2,076,460  |   |   | 1,547,182  |  
|Management compensation (Note 10)                          |   | 544,014    |   |   | 717,369    |   |   | 727,217    |  
|Research                                                   |   | 1,572,714  |   |   | 704,868    |   |   | 783,680    |  
|Marketing                                                  |   | 554,458    |   |   | 587,553    |   |   | 730,389    |  
|Travel                                                     |   | 430,304    |   |   | 526,451    |   |   | 445,555    |  
|Accounting and legal                                       |   | 370,495    |   |   | 357,876    |   |   | 239,581    |  
|Share-based expense
      (Notes 9 (b)) and 10)            |   | 469,187    |   |   | 285,745    |   |   | 672,533    |  
|Consulting                                                 |   | 251,055    |   |   | 246,501    |   |   | 421,869    |  
|Investor relations                                         |   | 84,000     |   |   | 84,000     |   |   | 84,000     |  
|Foreign exchange (gain) loss                               |   | (115,643   | ) |   | (128,073   | ) |   | 584,162    |  
|Amortization (Notes 7
      and 8)                         |   | 17,088     |   |   | 3,024      |   |   | 3,024      |  
|Bad debts                                                  |   | 82,042     |   |   | -          |   |   | -          |  
|                                                           |   |            |   |   |            |   |   |            |  
|                                                           |   | 5,961,437  |   |   | 5,461,774  |   |   | 6,239,192  |  
|                                                           |   |            |   |   |            |   |   |            |  
|Loss Before the Following:                                 |   | (4,942,752 | ) |   | (3,483,533 | ) |   | (1,139,063 | )
|Interest income                                            |   | 3,875      |   |   | 28,755     |   |   | 30,809     |  
|Write-off of intangible assets (Note 8)                    |   | -          |   |   | -          |   |   | (298,484   | )
|Write-off of inventory
      (Note 6)                      |   | (197,729   | ) |   | -          |   |   | -          |  
|Write-off of property, plant and equipment (Note 7)        |   | (29,601    | ) |   | -          |   |   | -          |  
|                                                           |   |            |   |   |            |   |   |            |  
|Loss Before Taxes:                                         |   | (5,166,207 | ) |   | (3,454,778 | ) |   | (1,406,738 | )
|                                                           |   |            |   |   |            |   |   |            |  
|Income Tax Expense (Recovery)(Note
      11)               |   |            |   |   |            |   |   |            |  
|Current                                                    |   | 22,137     |   |   | (1,248,551 | ) |   | 1,191,020  |  
|Deferred                                                   |   | (172,433   | ) |   | 259,365    |   |   | (86,932    | )
|                                                           |   |            |   |   |            |   |   |            |  
|                                                           |   | (150,296   | ) |   | (989,186   | ) |   | 1,104,088  |  
|                                                           |   |            |   |   |            |   |   |            |  
|Net Loss and Comprehensive Loss for the year               | $ | (5,015,911 | ) | $ | (2,465,592 | ) | $ | (2,510,826 | )
|                                                           |   |            |   |   |            |   |   |            |  
|Basic Loss Per Share(Note 13)                              | $ | (0.11      | ) | $ | (0.05      | ) | $ | (0.05      | )
|                                                           |   |            |   |   |            |   |   |            |  
|Diluted Loss Per Share(Note 13)                            | $ | (0.11      | ) | $ | (0.05      | ) | $ | (0.05      | )
|                                                           |   |            |   |   |            |   |   |            |  
|Weighted Average Number of Common
      Shares Outstanding |   |            |   |   |            |   |   |            |  
|Basic (Note 13)                                            |   | 46,848,053 |   |   | 46,215,861 |   |   | 45,779,903 |  
|Diluted (Note 13)                                          |   | 46,848,053 |   |   | 46,215,861 |   |   | 45,779,903 |  

See notes to consolidated financial statements

6

---

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

|                                                                            |   |            |   |   |            |   |   |            |  
|--------------------------------------------------------------------------- | - | ---------- | - | - | ---------- | - | - | ---------- | -
|                                                                            |   | 2017       |   |   | 2016       |   |   | 2015       |  
|                                                                            |   |            |   |   |            |   |   |            |  
|Operating Activities                                                        |   |            |   |   |            |   |   |            |  
|Net loss                                                                    | $ | (5,015,911 | ) | $ | (2,465,592 | ) | $ | (2,510,826 | )
|Items not involving
      cash                                              |   |            |   |   |            |   |   |            |  
|Deferred income tax
      (recovery)                                        |   | (172,433   | ) |   | 259,365    |   |   | (86,932    | )
|Amortization (Notes 7 and 8)                                                |   | 203,980    |   |   | 241,363    |   |   | 237,201    |  
|Write-off of intangible
      assets (Note 8)                               |   | -          |   |   | -          |   |   | 298,484    |  
|Write-off
      of inventory (Note 6)                                       |   | 668,383    |   |   | -          |   |   | -          |  
|Write-off of property,
      plant and equipment                            |   | 29,601     |   |   | -          |   |   | -          |  
|Share-based expense                                                         |   | 469,187    |   |   | 285,745    |   |   | 672,533    |  
|Bad debts                                                                   |   | 82,042     |   |   | -          |   |   | -          |  
|Unrealized foreign exchange loss
      (gain)                               |   | (115,643   | ) |   | (188,789   | ) |   | 715,292    |  
|                                                                            |   |            |   |   |            |   |   |            |  
|                                                                            |   | (3,850,794 | ) |   | (1,867,908 | ) |   | (674,248   | )
|                                                                            |   |            |   |   |            |   |   |            |  
|Changes in non-cash
      working capital                                   |   |            |   |   |            |   |   |            |  
|Accounts receivable                                                         |   | (97,642    | ) |   | 1,068,643  |   |   | 1,143,692  |  
|Income
      tax receivable                                                 |   | 753,223    |   |   | -          |   |   | -          |  
|Prepaid expenses and
      deposit                                          |   | 527,897    |   |   | 395,748    |   |   | (1,036,399 | )
|Inventory                                                                   |   | 567,764    |   |   | 775,790    |   |   | (1,812,475 | )
|Accounts payable and
      accrued liabilities                              |   | 582,099    |   |   | (275,098   | ) |   | (2,575,558 | )
|Income tax payable (recovery)                                               |   | (112,900   | ) |   | (1,240,165 | ) |   | 346,109    |  
|                                                                            |   |            |   |   |            |   |   |            |  
|                                                                            |   | 2,220,441  |   |   | 724,918    |   |   | (3,934,631 | )
|                                                                            |   |            |   |   |            |   |   |            |  
|Cash Used in Operating Activities                                           |   | (1,630,353 | ) |   | (1,142,990 | ) |   | (4,608,879 | )
|                                                                            |   |            |   |   |            |   |   |            |  
|Investing Activities                                                        |   |            |   |   |            |   |   |            |  
|Intangible assets                                                           |   | (353,010   | ) |   | (25,000    | ) |   | -          |  
|Property, plant and equipment                                               |   | (33,336    | ) |   | (35,938    | ) |   | (242,086   | )
|                                                                            |   |            |   |   |            |   |   |            |  
|Cash Used in Investing Activities                                           |   | (386,346   | ) |   | (60,938    | ) |   | (242,086   | )
|                                                                            |   |            |   |   |            |   |   |            |  
|Financing Activities                                                        |   |            |   |   |            |   |   |            |  
|Issue of and subscription for common
      shares, net of share issue costs |   | -          |   |   | 152,126    |   |   | 223,740    |  
|Dividend paid                                                               |   | -          |   |   | -          |   |   | (1,377,654 | )
|                                                                            |   |            |   |   |            |   |   |            |  
|Cash Provided by (Used in) Financing
      Activities                       |   | -          |   |   | 152,126    |   |   | (1,153,914 | )
|                                                                            |   |            |   |   |            |   |   |            |  
|Foreign Exchange Effect on Cash                                             |   | 115,643    |   |   | 188,789    |   |   | (715,292   | )
|                                                                            |   |            |   |   |            |   |   |            |  
|Outflow of Cash and Cash
      Equivalents                                  |   | (1,901,056 | ) |   | (863,013   | ) |   | (6,720,171 | )
|Cash and Cash Equivalents, Beginning of Year                                |   | 2,312,279  |   |   | 3,175,292  |   |   | 9,895,463  |  
|                                                                            |   |            |   |   |            |   |   |            |  
|Cash and Cash Equivalents, End of Year                                      | $ | 411,223    |   | $ | 2,312,279  |   | $ | 3,175,292  |  

Supplemental Cash Flow Information (Note 12) See notes to
consolidated financial statements

7

---

|KELSO TECHNOLOGIES INC.                             
|----------------------------------------------------
|Notes to Consolidated Financial Statements          
|For the years ended December 31, 2017, 2016 and 2015
|(Expressed in US Dollars)                           
|                                                    

|1. | NATURE OF OPERATIONS
|-- | --------------------

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

The Companys consolidated financial
statements have been prepared on a going concern basis, which presumes that the
Company will be able to realize its assets and discharge its liabilities in the
normal course of business for the foreseeable future.

Several conditions may cast substantial
doubt on the validity of this assumption. The Company has incurred operating
losses of $5,015,911 for the year ended December 31, 2017 (2016 - $2,465,592;
2015 - $2,510,826), has accumulated deficit of $19,288,072 at December 31, 2017
(2016 - $14,272,161), has limited resources and has operating cash outflows for
the past several years. The Company has significant cash requirements to meet
its production costs and administrative overhead. Its continuing operations are
therefore dependent upon its ability to either secure additional equity capital,
as required, or generate positive cash inflows from operations in the future.
Management is planning to raise additional capital to finance operations and
continue operations. There is no assurance that these plans will be successful.

These consolidated financial statements
do not include any adjustments relating to the recoverability and classification
of recorded assets or the recognition of liabilities that might be necessary
should the Company be unable to secure additional equity capital or generate
cash flow from operations in the future. Such adjustments could be material.

|2. | BASIS OF PREPARATION
|-- | --------------------

| | (a) | Statement of compliance
| | --- | -----------------------

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

These consolidated financial
statements have been prepared under the historical cost basis, except for
financial instruments classified as available-for-sale (AFS) and fair value
through profit or loss(FVTPL). These consolidated financial statements have
been prepared using the accrual basis of accounting, except for cash flow
information.

8

---

|KELSO TECHNOLOGIES INC.                             
|----------------------------------------------------
|Notes to Consolidated Financial Statements          
|For the years ended December 31, 2017, 2016 and 2015
|(Expressed in US Dollars)                           
|                                                    

|2. | BASIS OF PREPARATION(Continued)
|-- | -------------------------------

| | (b) | Basis of presentation and
consolidation
| | --- | ---------------------------------------

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

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

| | (c) | Functional and presentation
currency
| | --- | ------------------------------------

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

| | (d) | Significant management judgments and estimation
      uncertainty
| | --- | -----------------------------------------------------------------

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

Significant management judgments

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

| | (i) | Income taxes
| | --- | ------------

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

9

---

|KELSO TECHNOLOGIES INC.                             
|----------------------------------------------------
|Notes to Consolidated Financial Statements          
|For the years ended December 31, 2017, 2016 and 2015
|(Expressed in US Dollars)                           
|                                                    

|2. | BASIS OF PREPARATION(Continued)
|-- | -------------------------------

| | (d) | Significant management judgments and estimation
      uncertainty (Continued)
| | --- | -----------------------------------------------------------------------------

Significant management judgments
(Continued)

| | (ii) | Functional currency
| | ---- | -------------------

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

| | (iii) | Assessment of a transaction as an asset acquisition or
      business combination
| | ----- | ---------------------------------------------------------------------------------

Management applied judgments relating
to the acquisition of intellectual property to assess if the acquisition was a
business combination or an asset acquisition. Management applied a three-element
process to determine whether a business or an asset was purchased, considering
inputs, processes and outputs of each acquisition in order to reach a conclusion
(Note 8).

| | (iv) | Research and development
expenditures
| | ---- | -------------------------------------

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

| | (v) | Going concern assumption
| | --- | ------------------------

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

10

---

|KELSO TECHNOLOGIES INC.                             
|----------------------------------------------------
|Notes to Consolidated Financial Statements          
|For the years ended December 31, 2017, 2016 and 2015
|(Expressed in US Dollars)                           
|                                                    

|2. | BASIS OF PREPARATION(Continued)
|-- | -------------------------------

| | (d) | Significant management judgments and estimation
      uncertainty (Continued)
| | --- | -----------------------------------------------------------------------------

Estimation uncertainty

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

| | (i) | Impairment of long-lived assets
| | --- | -------------------------------

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

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

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

| | (ii) | Useful lives of depreciable
assets
| | ---- | ----------------------------------

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

| | (iii) | Inventories
| | ----- | -----------

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

11

---

|KELSO TECHNOLOGIES INC.                             
|----------------------------------------------------
|Notes to Consolidated Financial Statements          
|For the years ended December 31, 2017, 2016 and 2015
|(Expressed in US Dollars)                           
|                                                    

|2. | BASIS OF PREPARATION(Continued)
|-- | -------------------------------

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

Estimation uncertainty
(Continued)

| | (iv) | Share-based expense
| | ---- | -------------------

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

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

| | (v) | Allowance for credit losses
| | --- | ---------------------------

The Company provides for doubtful
debts by analyzing the historical default experience and current information
available about a customers credit worthiness on an account by account basis.
Uncertainty relates to the actual collectability of customer balances that can
vary from the Companys estimation. At December 31, 2017, the Company has setup
an allowance for doubtful accounts of $82,042 (2016 - $nil).

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

| | (e) | Approval of the consolidated financial
  statements
| | --- | ---------------------------------------------------

The consolidated financial statements
of Kelso Technologies Inc. for year ended December 31, 2017 were approved and
authorized for issue by the Board of Directors on March 27, 2018.

| | (f) | New accounting standards issued but not yet
    effective
| | --- | ---------------------------------------------------------

The standards listed below include
only those which the Company reasonably expects may be applicable to the Company
at a future date. The Company is currently assessing the impact of these future
standards on the consolidated financial statements.

IFRS 9 Financial Instruments

IFRS 9 will replace IAS 39
Financial Instruments: Recognition and Measurementand IFRIC 9
Reassessment of Embedded Derivatives. The final version of this new
standard supersedes the requirements of earlier versions of IFRS 9.

The main features introduced by this
new standard compared with predecessor IFRS are as follows:

12

---

|KELSO TECHNOLOGIES INC.                             
|----------------------------------------------------
|Notes to Consolidated Financial Statements          
|For the years ended December 31, 2017, 2016 and 2015
|(Expressed in US Dollars)                           
|                                                    

|2. | BASIS OF PREPARATION
(Continued)
|-- | --------------------------------

| | (f) | New accounting standards issued but not yet effective
      (Continued)
| | --- | -----------------------------------------------------------------------

| |  | Classification and measurement of financial assets:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |   | Debt instruments are classified and measured on the basis
      of the entity's business model for managing the asset and its contractual
      cash flow characteristics as either: Amortized cost, Fair value through
      other comprehensive income or Fair value through profit or loss
      (default). Equity instruments are classified and measured as Fair value
      through profit or loss unless upon initial recognition elected to be
      classified as Fair value through other comprehensive income.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | Classification and measurement of financial liabilities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |   | When an entity elects to measure a financial liability at
      fair value, gains or losses due to changes in the entitys own credit risk
      is recognized in other comprehensive income (as opposed to previously
      profit or loss).                                                                                                                                                                                                                                                                                      
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | Impairment of financial assets:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |   | An expected credit loss impairment model replaced the
      incurred loss model and is applied to financial assets at Amortized cost
      or Fair value through other comprehensive income, lease receivables,
      contract assets or loan commitments and financial guarantee contracts. An
      entity recognizes 12-month expected credit losses if the credit risk of a
      financial instrument has not increased significantly since initial
      recognition, and lifetime expected credit losses otherwise.     
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | Hedge accounting:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |   | Hedge accounting remains a choice, however is now
      available for a broader range of hedging strategies. Voluntary termination
      of a hedging relationship is no longer permitted. Effectiveness testing
      now needs to be performed prospectively only. Entities may elect to
      continue applying IAS 39 hedge accounting on adoption of IFRS 9 (until the
      IASB has completed its separate project on the accounting for open
      portfolios and macro hedging).                                          

Applicable to the Companys annual
period beginning January 1, 2018.

IFRS 2 Share-based Payment

The amendments provide guidance on the
accounting for:

| |  | the effects of vesting and non-vesting
      conditions on the measurement of cash- settled share-based expenses;                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | share-based expense transactions with a net
      settlement feature for withholding tax obligations; and                                                              
| |  | a modification to the terms and conditions of a
      share-based expense that changes the classification of the transaction
      from cash-settled to equity-settled.

Applicable to the Companys annual
period beginning January 1, 2018.

13

---

|KELSO TECHNOLOGIES INC.                             
|----------------------------------------------------
|Notes to Consolidated Financial Statements          
|For the years ended December 31, 2017, 2016 and 2015
|(Expressed in US Dollars)                           
|                                                    

|2. | BASIS OF PREPARATION
(Continued)
|-- | --------------------------------

| | (f) | New accounting standards issued but not yet effective
      (Continued)
| | --- | -----------------------------------------------------------------------

IFRS 15 Revenue from Contracts with
Customers

IFRS 15 provides a single, principles
based five-step model to be applied to all contracts with customers.

The five steps in the model are as
follows:

| |  | Identify the contract with the customer                                             
| | - | ------------------------------------------------------------------------------------
| |  | Identify the performance obligations in the contract                                
| |  | Determine the transaction price                                                     
| |  | Allocate the transaction price to the performance
      obligations in the contracts
| |  | Recognize revenue when (or as) the entity satisfies a
      performance obligation. 

Guidance is provided on topics such as
the point in which revenue is recognized, accounting for variable consideration,
costs of fulfilling and obtaining a contract and various related matters. New
disclosures about revenue are also introduced.

Applicable to the Companys annual
period beginning on January 1, 2018.

IFRS 16 Leases

This new standard sets out the
principles for the recognition, measurement, presentation and disclosure of
leases for both the lessee and the lessor. The new standard introduces a single
lessee accounting model that requires the recognition of all assets and
liabilities arising from a lease.

The main features of the new standard
are as follows:

| |  | An entity identifies as a lease a contract that conveys
      the right to control the use of an identified asset for a period of time
      in exchange for consideration.                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | A lessee recognizes an asset representing the right to
      use the leased asset, and a liability for its obligation to make lease
      payments. Exceptions are permitted for short- term leases and leases of
      low-value assets.
| |  | A lease asset is initially measured at cost, and is then
      depreciated similarly to property, plant and equipment. A lease liability
      is initially measured at the present value of the unpaid lease payments.                  
| |  | A lessee presents interest expense on a lease liability
      separately from depreciation of a lease asset in the statement of profit
      or loss and other comprehensive income.                                                     
| |  | A lessor continues to classify its leases as operating
      leases or finance leases, and to account for them accordingly.                                                                                                              
| |  | A lessor provides enhanced disclosures about its risk
      exposure, particularly exposure to residual-value risk.                                                                                                                      

Applicable to the Companys annual
period beginning January 1, 2019.

14

---

|KELSO TECHNOLOGIES INC.                             
|----------------------------------------------------
|Notes to Consolidated Financial Statements          
|For the years ended December 31, 2017, 2016 and 2015
|(Expressed in US Dollars)                           
|                                                    

|3. | SIGNIFICANT ACCOUNTING
POLICIES
|-- | -------------------------------

The following is a summary of
significant accounting policies.

| | (a) | Cash equivalents
| | --- | ----------------

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

| | (b) | Inventory
| | --- | ---------

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

| | (c) | Intangible assets
| | --- | -----------------

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

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

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

Patents - 5 years Rights - 2 years

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

15

---

|KELSO TECHNOLOGIES INC.                             
|----------------------------------------------------
|Notes to Consolidated Financial Statements          
|For the years ended December 31, 2017, 2016 and 2015
|(Expressed in US Dollars)                           
|                                                    

|3. | SIGNIFICANT ACCOUNTING POLICIES(Continued)
|-- | ------------------------------------------

| | (d) | Property, plant and equipment
| | --- | -----------------------------

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

| | Building               |  4% declining-balance 
| | ---------------------- | -----------------------
| | Production equipment   |  20% declining-balance
| | Vehicles               |  30% declining-balance
| | Leasehold improvements |  5 year straight-line 

| | (e) | Revenue recognition
| | --- | -------------------

Revenues are recognized when the risks
and rewards of ownership have passed to the customer based on the terms of the
sale, collection of the relevant receivable is probable, evidence of an
arrangement exists and the sales price is fixed or determinable. Risks and
rewards of ownership pass to the customer upon shipment of the pressure relief
valves and/or manway securement systems. Provisions for sales discounts and
returns from customers are made at the time of sale.

| | (f) | Impairment of long-lived assets
| | --- | -------------------------------

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

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

| | (g) | Income taxes
| | --- | ------------

| | (i) | Current and deferred income taxes
| | --- | ---------------------------------

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

16

---

|KELSO TECHNOLOGIES INC.                             
|----------------------------------------------------
|Notes to Consolidated Financial Statements          
|For the years ended December 31, 2017, 2016 and 2015
|(Expressed in US Dollars)                           
|                                                    

|3. | SIGNIFICANT ACCOUNTING POLICIES(Continued)
|-- | ------------------------------------------

| | (g) | Income taxes (continued)
| | --- | ------------------------

| | (i) | Current and deferred income taxes
  (continued)
| | --- | -----------------------------------------------

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

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

| | (ii) | Texas margin tax
| | ---- | ----------------

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

| | (h) | Foreign currency translation
| | --- | ----------------------------

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

| | (i)   | Monetary assets and liabilities, at the rate of exchange
      in effect at the consolidated statement of financial position
  date;                                                  
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |       |                                                                                                                                                                                       
| | (ii)  | Non-monetary assets and liabilities, at the exchange
      rates prevailing at the time of the acquisition of the assets or
      assumption of the liabilities; and                  
| |       |                                                                                                                                                                                       
| | (iii) | Revenue and expense items (excluding amortization, which
      is translated at the same rate as the related asset), at the rate of
      exchange prevailing at the transaction date.

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

17

---

|KELSO TECHNOLOGIES INC.                             
|----------------------------------------------------
|Notes to Consolidated Financial Statements          
|For the years ended December 31, 2017, 2016 and 2015
|(Expressed in US Dollars)                           
|                                                    

|3. | SIGNIFICANT ACCOUNTING POLICIES(Continued)
|-- | ------------------------------------------

| | (i) | Earnings per share
| | --- | ------------------

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

| | (j) | Share-based expense
| | --- | -------------------

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

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

| | (k) | Capital stock
| | --- | -------------

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

18

---

|KELSO TECHNOLOGIES INC.                             
|----------------------------------------------------
|Notes to Consolidated Financial Statements          
|For the years ended December 31, 2017, 2016 and 2015
|(Expressed in US Dollars)                           
|                                                    

|3. | SIGNIFICANT ACCOUNTING POLICIES(Continued)
|-- | ------------------------------------------

| | (l) | Financial instruments
| | --- | ---------------------

| | (i) | Financial assets
| | --- | ----------------

The Company classifies its financial
assets into one of the following categories, depending on the purpose for which
the asset was acquired. The Companys accounting policy for each category is as
follows:

Fair value through profit or loss

This category comprises derivatives,
or assets acquired or incurred principally for the purpose of selling or
repurchasing it in the near term. They are carried at fair value with changes in
fair value recognized through profit or loss. Cash and cash equivalents are
included in this category of financial assets.

Loans and receivables

These assets are non-derivative
financial assets with fixed or determinable payments that are not quoted in an
active market. They are carried at cost less any provision for impairment.
Individually significant receivables are considered for impairment when they are
past due or when other objective evidence is received that a specific
counterparty will default. Accounts receivable are included in this category of
financial assets.

| | (ii) | Financial liabilities
| | ---- | ---------------------

The Company classifies its financial
liabilities in the following category:

Other financial liabilities

Other financial liabilities are
non-derivatives and are recognized initially at fair value, net of transaction
costs incurred, and are subsequently stated at amortized cost using the
effective interest rate method. Any difference between the amounts originally
received, net of transaction costs, and the redemption value is recognized in
profit or loss over the period to maturity using the effective interest method.
Other financial liabilities are classified as current or non-current based on
their maturity date. Accounts payable and accrued liabilities is included in
this category of financial liability.

| | (m) | Fair value hierarchy
| | --- | --------------------

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

19

---

|KELSO TECHNOLOGIES INC.                             
|----------------------------------------------------
|Notes to Consolidated Financial Statements          
|For the years ended December 31, 2017, 2016 and 2015
|(Expressed in US Dollars)                           
|                                                    

|4. | CAPITAL MANAGEMENT
|-- | ------------------

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

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

In order to facilitate the management
of its capital requirements, the Company prepares expenditure budgets that are
updated as necessary depending on various factors, including successful capital
deployment and general industry conditions. Management reviews the capital
structure on a regular basis to ensure the above objectives are met. There have
been no changes to the Companys approach to capital management during the year
ended December 31, 2017. There are no externally imposed restrictions on the
Companys capital.

|5. | FINANCIAL INSTRUMENTS
|-- | ---------------------

Financial instruments are agreements
between two parties that result in promises to pay or receive cash or equity
instruments. The carrying values of accounts receivable and accounts payable and
accrued liabilities approximate their fair values due to their short term to
maturity. The Company has exposure to the following risks from its use of
financial instruments:

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

| | (a) | Credit risk
| | --- | -----------

Credit risk is the risk that one party
to a financial instrument will cause a financial loss for the other party by
failing to discharge an obligation. Cash and cash equivalents are placed with
major Canadian and US financial institutions and the Companys concentration of
credit risk for cash and cash equivalents and maximum exposure thereto is
$411,223 (2016 - $2,312,279).

With respect to its accounts
receivable, the Company assesses the credit rating of all customers and
maintains provisions for potential credit losses, and any such losses to date
have been within managements expectations. The Companys credit risk with
respect to accounts receivable and maximum exposure thereto is $735,487 (2016 -
$637,845). The Companys concentration of credit risk for accounts receivable
with respect to its significant customers is as follows: Customer A is $94,114
(2016 - $73,500), Customer B is $78,306 (2016 - $nil) while Customer C is
$150,000 related to expense recovery (2016 - $Nil) (Note 14). The Company has
provided for an allowance for doubtful accounts amounting to $82,042 at December
31, 2017 (2016 - $nil).

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

20

---

|KELSO TECHNOLOGIES INC.                             
|----------------------------------------------------
|Notes to Consolidated Financial Statements          
|For the years ended December 31, 2017, 2016 and 2015
|(Expressed in US Dollars)                           
|                                                    

|5. | FINANCIAL INSTRUMENTS(Continued)
|-- | --------------------------------

| | (b) | Liquidity risk
| | --- | --------------

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

At December 31, 2017, the Company has
$411,223 (2016 - $2,312,279) of cash and cash equivalents to settle current
liabilities of $844,516 (2016 - $271,600) consisting of the following: trade
accounts payable of $799,254 (2016 - $235,600) and due to related party balance
of $45,262 (2016 - $36,000). All payables are due within a year.

| | (c) | Market risk
| | --- | -----------

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

| | (i) | Interest rate risk
| | --- | ------------------

Interest rate risk is the risk that
the fair value or future cash flows will fluctuate as a result of changes in
market interest rates. The Companys cash and cash equivalents consist of cash
held in bank accounts and short-term liquid investments that earn interest at
variable rates. Due to the short-term nature of these financial instruments,
fluctuations in market rates of interest do not have a significant impact on the
estimated fair value or future cash flows.

| | (ii) | Currency risk
| | ---- | -------------

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

As at December 31, 2017 and 2016, the
Companys had the following assets denominated in CAD (amounts presented in
USD):

| |                           |   | December 31, 2017 |   |   | December 31, 2016 |  
| | ------------------------- | - | ----------------- | - | - | ----------------- | -
| |                           |   |                   |   |   |                   |  
| | Cash and cash equivalents | $ | 15,882            |   | $ | 1,983,028         |  
| | Accounts receivable       |   | 32,976            |   |   | 25,302            |  
| | Accounts payable          |   | (80,000           | ) |   | (75,480           | )
| |                           |   |                   |   |   |                   |  
| |                           | $ | (31,142           | ) | $ | 1,932,850         |  

Based on the above, assuming all other
variables remain constant, a 14% (2016  14%) weakening or strengthening of the
USD against the CAD would result in approximately $4,400 (2016 - $271,000)
foreign exchange loss or gain in the consolidated statements of operations and
comprehensive income (loss).

21

---

|KELSO TECHNOLOGIES INC.                             
|----------------------------------------------------
|Notes to Consolidated Financial Statements          
|For the years ended December 31, 2017, 2016 and 2015
|(Expressed in US Dollars)                           
|                                                    

|6. | INVENTORY
|-- | ---------

| |                                  |   | December 31, 2017 |  |   | December 31, 2016 | 
| | -------------------------------- | - | ----------------- |  | - | ----------------- | 
| | Finished goods                   | $ | 256,185           |  | $ | 218,128           | 
| | Raw
      materials and supplies |   | 3,724,058         |  |   | 4,988,001         | 
| |                                  | $ | 3,980,243         |  | $ | 5,206,129         | 

Included in cost of goods sold is
$3,376,123 (2016 - $4,642,761; 2015 - $10,595,521) of direct material costs
recognized as expense.

Inventory write-off during the year was
$668,383 (2016 - $nil; 2015 - $nil) of which $470,654 (2016- $nil; 2015- $nil)
is included in cost of goods sold and $197,729 (2016 - $nil; 2015 - $nil) is
included in general and administrative expenses.

|7. | PROPERTY, PLANT AND
EQUIPMENT
|-- | -----------------------------

Leasehold
    
    
    ProductionCost
    
    Land
    
    
    Building
    
    
    Improvements
    
    
    Equipment
    
    
    Vehicles
    
    
    TotalBalance, December 31, 2015
    $
    12,558
    
    $
    2,955,901
    
    $
    43,715
    
    $
    803,645
    
    $
    28,181
    
    $
    3,844,000Additions
    
    -
    
    
    -
    
    
    -
    
    
    6,337
    
    
    29,601
    
    
    35,938Balance, December 31, 2016
    $
    12,558
    
    $
    2,955,901
    
    $
    43,715
    
    $
    809,982
    
    $
    57,782
    
    $
    3,879,938Additions
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    33,336
    
    
    33,336Disposition
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    (29,601
    )
    
    (29,601
    )Balance, December 31,2017
    $
    12,558
    
    $
    2,955,901
    
    $
    43,715
    
    $
    809,982
    
    $
    61,517
    
    $
    3,883,673Accumulated AmortizationBalance, December 31, 2015
    $
    -
    
    $
    193,461
    
    $
    24,635
    
    $
    208,339
    
    $
    20,672
    
    $
    447,107Amortization
    
    -
    
    
    110,498
    
    
    5,593
    
    
    119,995
    
    
    2,253
    
    
    238,339Balance, December 31, 2016
    $
    -
    
    $
    303,959
    
    $
    30,228
    
    $
    328,334
    
    $
    22,925
    
    $
    685,446Amortization
    
    -
    
    
    106,078
    
    
    2,696
    
    
    96,330
    
    
    1,577
    
    
    206,681Balance, December 31, 2017
    $
    -
    
    $
    410,037
    
    $
    32,924
    
    $
    424,664
    
    $
    24,502
    
    $
    892,127Carrying ValueDecember 31, 2017
    $
    12,558
    
    $
    2,545,864
    
    $
    10,791
    
    $
    385,318
    
    $
    37,015
    
    $
    2,991,546December 31, 2016
    $
    12,558
    
    $
    2,651,942
    
    $
    13,487
    
    $
    481,648
    
    $
    34,857
    
    $
    3,194,492


Included in cost of goods sold is
$186,892 (2016 - $230,002; 2015 - $237,177) of amortization related to property,
plant and equipment.

Included in general and administrative
expenses is $9,528 (2016 - $nil, 2015 - $nil) of amortization related to
property, plant and equipment.

Included in inventory is $10,261 (2016
- $8,337; 2015 - $4,939) of amortization related to property, plant and
equipment.

22

---

|KELSO TECHNOLOGIES INC.                             
|----------------------------------------------------
|Notes to Consolidated Financial Statements          
|For the years ended December 31, 2017, 2016 and 2015
|(Expressed in US Dollars)                           
|                                                    

|8. | INTANGIBLE ASSETS
|-- | -----------------

ProductDevelopmentCost
    
    Patent
    
    
    Rights
    
    
    Costs
    
    
    TotalBalance, December 31, 2015
    $
    40,840
    
    $
    65,000
    
    $
    -
    
    $
    105,840Additions
    
    -
    
    
    217,946
    
    
    -
    
    
    217,946Balance, December 31, 2016
    
    40,840
    
    
    282,946
    
    
    -
    
    
    323,786Additions
    
    -
    
    
    -
    
    
    718,023
    
    
    718,023Balance, December 31, 2017
    $
    40,840
    
    $
    282,946
    
    $
    718,023
    
    $
    1,041,809Accumulated AmortizationBalance, December 31, 2015
    $
    21,449
    
    $
    65,000
    
    $
    -
    
    $
    86,449Amortization
    
    3,024
    
    
    -
    
    
    -
    
    
    3,024Balance, December 31, 2016
    
    24,473
    
    
    65,000
    
    
    -
    
    
    89,473Amortization
    
    7,560
    
    
    -
    
    
    -
    
    
    7,560Balance, December 31, 2017
    $
    32,033
    
    $
    65,000
    
    $
    -
    
    $
    97,033Carrying ValueDecember 31, 2017
    $
    8,807
    
    $
    217,946
    
    $
    718,023
    
    $
    944,776December 31, 2016
    $
    16,367
    
    $
    217,946
    
    $
    -
    
    $
    234,313


On November 10, 2016, the Company
signed a technology development agreement to acquire all intellectual property
rights (the Products) of G & J Technologies (the Vendor). As
consideration, acquisition costs of $217,946 were incurred, consisting of
$25,000 in cash and 250,000 common shares with a fair value of $192,946. The
shares were issued during the year ended December 31, 2017.

On November 10, 2016, the Vendor also
entered into a consulting agreement with the Company for a fee of $10,000 per
month. In addition, the Company will pay $75,000 in cash and issue 750,000
common shares of the Company as follows:

| |  | $25,000 cash and 250,000 shares issuable on the filing of
      the first new patent application related to the Products (the Company paid
      the cash and issued the shares during the year ended December 31, 2017
      with a fair value of $208,486);                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                       
| |  | $25,000 cash and 250,000 shares issuable on the
      successful completion of a commercially viable production prototype for
      the first Product (the Company accrued for the cash payment and shares to
      be issued at December 31, 2017 with a fair value of $131,527); and
| |   |                                                                                                                                                                                                                                                                                       
| |  | $25,000 cash and 250,000 shares issuable on the
      completion of the sale of the first ten commercial vehicles incorporating
      the Products.                                                                                                                                   

The Company is also required to pay a
royalty to the Vendor of 2.5% of the net sales earned by the Company, to be paid
within 30 days of the end of each calendar quarter. As at December 31, 2017 the
Company has not earned any revenue from the sale of the Products. The Company
has incurred $718,023 (2016 - $nil) of internal product development cost that
has been recorded as deferred development costs at December 31, 2017.

During the year ended December 31,
2015, the Company determined that certain products could not generate
independent cash flows, and accordingly impaired $298,484 of product development
costs.

23

---

|KELSO TECHNOLOGIES INC.                             
|----------------------------------------------------
|Notes to Consolidated Financial Statements          
|For the years ended December 31, 2017, 2016 and 2015
|(Expressed in US Dollars)                           
|                                                    

|9. | CAPITAL STOCK
|-- | -------------

Authorized:

Unlimited Class A non-cumulative,
preferred shares without par value, of which 5,000,000 are designated Class A,
convertible, voting, preferred shares.

Unlimited common shares without par
value.

Issued:

| | (a) | Common shares
| | --- | -------------

During the year ended December 31,
2017, the Company issued 250,000 shares with a fair value of $192,946 pursuant
to the acquisition of intellectual property rights of G&J Technologies and
250,000 shares with a fair value of $208,486 pursuant to achieving the second
milestone of the G&J Technologies technology development agreement. At the
year end, the Company has an obligation to issue 250,000 shares with a fair
value of $131,527 pursuant to the agreement for achieving the third milestone of
the G&J Technologies technology development agreement (Note 17).

During the year ended December 31,
2016, the Company issued 340,000 shares pursuant to the exercise of share
purchase options for gross proceeds of $152,126. Fair value previously
recognized on options exercised of $162,554 was reclassified from reserves to
capital stock. As at December 31, 2016, the Company has an obligation to issue
250,000 shares with a fair value of $192,946 in relation to the intellectual
property rights acquired during the year.

During the year ended December 31,
2015, the Company issued 825,000 shares pursuant to the exercise of share
purchase options for gross proceeds of $223,740. Fair value previously
recognized on options exercised of $149,983 was reclassified from reserves to
capital stock.

| | (b) | Stock options
| | --- | -------------

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

24

---

|KELSO TECHNOLOGIES INC.                             
|----------------------------------------------------
|Notes to Consolidated Financial Statements          
|For the years ended December 31, 2017, 2016 and 2015
|(Expressed in US Dollars)                           
|                                                    

|9. | CAPITAL STOCK(Continued)
|-- | ------------------------

| | (b) | Stock options (Continued)
| | --- | -------------------------

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

ExercisePrice
    
    Expiry
    
    
    December 31,
    
    
    
    
    
    
    
    
    
    
    
    December 31,Date
    
    
    2016
    
    
    Granted
    
    
    Exercised
    
    
    Expired
    
    
    2017$1.45
    
    March 31, 2017
    
    
    670,000
    
    
    -
    
    
    -
    
    
    (670,000
    )
    
    -$2.12
    
    August 25, 2017
    
    
    400,000
    
    
    -
    
    
    -
    
    
    (400,000
    )
    
    -$0.70(CAD)
    
    October 7, 2019
    
    
    28,571
    
    
    -
    
    
    -
    
    
    -
    
    
    28,571$6.85(CAD)
    
    November 14, 2019
    
    
    100,000
    
    
    -
    
    
    -
    
    
    -
    
    
    100,000$1.30
    
    August 18, 2021
    
    
    1,325,000
    
    
    -
    
    
    -
    
    
    -
    
    
    1,325,000$0.90
    
    July 6, 2022
    
    
    -
    
    
    50,000
    
    
    -
    
    
    -
    
    
    50,000$0.30
    
    November 28, 2022
    
    
    -
    
    
    825,000
    
    
    -
    
    
    -
    
    
    825,000Total outstanding
    
    
    
    
    2,523,571
    
    
    875,000
    
    
    -
    
    
    (1,070,000
    )
    
    2,328,571Total exercisable
    
    
    
    
    1,198,571
    
    
    275,000
    
    
    -
    
    
    -
    
    
    845,238


ExercisePrice
    
    Expiry
    
    
    December 31,
    
    
    
    
    
    
    
    
    
    
    
    December 31,Date
    
    
    2015
    
    
    Granted
    
    
    Exercised
    
    
    Expired
    
    
    2016$5.90
    
    January 2, 2016
    
    
    500,000
    
    
    -
    
    
    -
    
    
    (500,000
    )
    
    -$2.12(CAD)
    
    August 25, 2017
    
    
    500,000
    
    
    -
    
    
    -
    
    
    (100,000
    )
    
    400,000$0.58(CAD)
    
    July 22, 2016
    
    
    340,000
    
    
    -
    
    
    (340,000
    )
    
    -
    
    
    -$1.45
    
    March 31, 2017
    
    
    770,000
    
    
    -
    
    
    -
    
    
    (100,000
    )
    
    670,000$0.65
    
    October 30, 2017
    
    
    80,000
    
    
    -
    
    
    -
    
    
    (80,000
    )
    
    -$6.25
    
    July 7, 2019
    
    
    100,000
    
    
    -
    
    
    -
    
    
    (100,000
    )
    
    -$0.70(CAD)
    
    October 7, 2019
    
    
    28,571
    
    
    -
    
    
    -
    
    
    -
    
    
    28,571$6.85(CAD)
    
    November 14, 2019
    
    
    100,000
    
    
    -
    
    
    -
    
    
    -
    
    
    100,000$1.30
    
    August 18, 2021
    
    
    -
    
    
    1,325,000
    
    
    -
    
    
    -
    
    
    1,325,000Total outstanding
    
    
    
    
    2,418,571
    
    
    1,325,000
    
    
    (340,000
    )
    
    (880,000
    )
    
    2,523,571Total exercisable
    
    
    
    
    2,085,238
    
    
    -
    
    
    -
    
    
    -
    
    
    1,198,571


A summary of the Companys stock
options as at December 31, 2017 and 2016, and changes for the years then ended
are as follows:

| |                                      |  |            |   |   | Weighted         | 
| | ------------------------------------ |  | ---------- | - | - | ---------------- | 
| |                                      |  |            |   |   | Average Exercise | 
| |                                      |  | Number     |   |   | Price            | 
| |                                      |  |            |   |   |                  | 
| | Outstanding, December 31,
      2015 |  | 2,418,571  |   | $ | 2.68             | 
| | Granted                              |  | 1,325,000  |   | $ | 1.30             | 
| | Exercised                            |  | (340,000   | ) | $ | 0.43             | 
| | Expired                              |  | (880,000   | ) | $ | 4.52             | 
| | Outstanding, December 31,
      2016 |  | 2,523,571  |   | $ | 1.61             | 
| | Granted                              |  | 875,000    |   | $ | 0.33             | 
| | Exercised                            |  | -          |   |   | -                | 
| | Expired                              |  | (1,070,000 | ) | $ | 1.70             | 
| | Outstanding, December 31, 2017       |  | 2,328,571  |   | $ | 1.11             | 

The weighted average contractual life
for the remaining options at December 31, 2017 is 4.01 years (2016  2.75) .

25

---

|KELSO TECHNOLOGIES INC.                             
|----------------------------------------------------
|Notes to Consolidated Financial Statements          
|For the years ended December 31, 2017, 2016 and 2015
|(Expressed in US Dollars)                           
|                                                    

|9. | CAPITAL STOCK(Continued)
|-- | ------------------------

|(b) | Stock options (Continued)
|--- | -------------------------

Share-based expense

Share-based expense of $469,187 (2016
- $285,745; 2015 - $672,533) was recognized in the year ended December 31, 2017
for stock options. The share-based expense relates to options granted during
December 31, 2017, 2016 and 2015, which vest over time.

The fair value of stock options is
determined using the Black-Scholes option pricing model with assumptions as
follows:

| |                                         |   | Year ended   |  |   | Year ended   |  |   | Year ended   | 
| | --------------------------------------- | - | ------------ |  | - | ------------ |  | - | ------------ | 
| |                                         |   | December 31, |  |   | December 31, |  |   | December 31, | 
| |                                         |   | 2017         |  |   | 2016         |  |   | 2015         | 
| |                                         |   |              |  |   |              |  |   |              | 
| | Risk-free interest rate
      (average) |   | 1.56%        |  |   | 0.58%        |  |   | 0.77%        | 
| | Estimated volatility (average)          |   | 61.95%       |  |   | 64.76%       |  |   | 52.38%       | 
| | Expected life in years                  |   | 5.00         |  |   | 4.18         |  |   | 1.50         | 
| | Expected dividend yield                 |   | 0.00%        |  |   | 0.00%        |  |   | 0.00%        | 
| | Estimated forfeitures                   |   | 0.00%        |  |   | 0.00%        |  |   | 0.00%        | 
| | Grant date fair value per option        | $ | 0.1652       |  | $ | 0.63         |  | $ | 0.77         | 

Option pricing models require the use
of highly subjective estimates and assumptions, including the expected stock
price volatility. Expected volatility was determined using the Companys
historical stock prices.

|10. | RELATED PARTY TRANSACTIONS
|--- | --------------------------

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

| |                             |   | December 31, |  |   | December 31, |  |   | December 31, | 
| | --------------------------- | - | ------------ |  | - | ------------ |  | - | ------------ | 
| |                             |   | 2017         |  |   | 2016         |  |   | 2015         | 
| |                             |   |              |  |   |              |  |   |              | 
| | Management compensation     | $ | 544,014      |  | $ | 717,368      |  | $ | 727,217      | 
| | Management bonus*           | $ | -            |  | $ | -            |  | $ | -            | 
| | Share-based
      expense** | $ | 264,172      |  | $ | 160,854      |  | $ | 553,011      | 
| | Directors fees             | $ | 67,000       |  | $ | 66,000       |  | $ | 34,500       | 

| | *  | The Company has management bonus agreements whereby 10%
      of the annual income before taxes and share-based expense is equally
      distributed to management.                                                  
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                      
| | ** | Share-based expense consists of the key management
      portion of the fair value of options granted calculated using the
      Black-Scholes option pricing model and does not include any cash
      compensation.

As at December 31, 2017, amounts due to
related parties included accounts payable, which are unsecured and have no
interest or specific terms of payments, of $45,262 (2016 - $36,000) consisting
of $16,500 (2016 - $36,000) for directors fees and $28,762 (2016 - $nil) for
management fees.

26

---

|KELSO TECHNOLOGIES INC.                             
|----------------------------------------------------
|Notes to Consolidated Financial Statements          
|For the years ended December 31, 2017, 2016 and 2015
|(Expressed in US Dollars)                           
|                                                    

|11. | INCOME TAXES
|--- | ------------

During the 2015 fiscal year, a tax
liability in the amount of $2,004,272 was recorded with respect to estimated US
outstanding taxes payable. During the year ended December 31, 2016, new
information was obtained indicating that there was a reduction of $1,170,105,
therefore no income tax should be payable. The reversal of the tax provision has
been accounted for as a change in tax estimate and has been adjusted
prospectively as an income tax recovery during the year ended December 31, 2016.
The amounts included in income tax payable represent penalties and interest.

The Company has approximately
$5,748,000 in non-capital losses in the US that may be applied against future
taxable income (expiring in 2032 or later).

The tax effect items that give rise to
significant portions of the deferred income tax assets and deferred income tax
liabilities at December 31, 2017 and 2016 are as follows:

| |                                                                                             |   | December 31, |   |   | December 31, |  
| | ------------------------------------------------------------------------------------------- | - | ------------ | - | - | ------------ | -
| |                                                                                             |   | 2017         |   |   | 2016         |  
| |                                                                                             |   |              |   |   |              |  
| | Non-capital loss carry-forwards                                                             | $ | 372,616      |   | $ | -            |  
| | Deferred income tax assets                                                                  | $ | 372,616      |   | $ | -            |  
| | Deficiency (excess) of
      carrying value over tax value of property, plant and equipment | $ | (154,043     | ) | $ | (169,251     | )
| | Excess of carrying value over tax value of intangible assets                                |   | (218,573     | ) |   | (3,182       | )
| | Deferred income tax liability                                                               | $ | (372,616     | ) | $ | (172,433     | )
| | Net
      deferred tax asset (liability)                                                    | $ | -            |   | $ | (172,433     | )

Significant unrecognized tax benefits
and unused tax losses for which no deferred tax assets is recognized as of
December 31, 2017 and 2016 are as follows:

| |                                                                     |   | December 31, |  |   | December 31, | 
| | ------------------------------------------------------------------- | - | ------------ |  | - | ------------ | 
| |                                                                     |   | 2017         |  |   | 2016         | 
| | Excess of tax value over
      carrying value of mineral properties | $ | 13,807       |  | $ | 13,077       | 
| | Non-capital losses carried forward                                  |   | 4,126,977    |  |   | -            | 
| | Unrealized foreign exchange gain                                    |   | 115,642      |  |   | -            | 
| |                                                                     |   |              |  |   |              | 
| | Unrecognized deductible temporary differences                       | $ | 4,256,426    |  | $ | 13,077       | 

27

---

|KELSO TECHNOLOGIES INC.                             
|----------------------------------------------------
|Notes to Consolidated Financial Statements          
|For the years ended December 31, 2017, 2016 and 2015
|(Expressed in US Dollars)                           
|                                                    

|11. | INCOME TAXES(Continued)
|--- | -----------------------

Income tax expense differs from the
amount that would be computed by applying the Canadian statutory income tax rate
of 26.00% (2016 - $26.00%; 2015  26.00%) to income (loss) before income taxes
as follows:

| |                                                                     |   | December 31, |   |   | December 31, |   |   | December 31, |  
| | ------------------------------------------------------------------- | - | ------------ | - | - | ------------ | - | - | ------------ | -
| |                                                                     |   | 2017         |   |   | 2016         |   |   | 2015         |  
| | Loss before income taxes                                            | $ | (5,166,207   | ) | $ | (3,454,778   | ) | $ | (1,406,738   | )
| | Statutory income tax rate                                           |   | 26.00%       |   |   | 26.00%       |   |   | 26.00%       |  
| | Income tax (benefit)
      liability computed at statutory tax rate |   | (1,343,214   | ) |   | (898,242     | ) |   | (365,752     | )
| | Items not deductible for income tax purposes                        |   | (100,626     | ) |   | 114,580      |   |   | 174,859      |  
| | Under/(over) provision of
      taxes in prior years                |   | -            |   |   | (824,607     | ) |   | 1,201,114    |  
| | Change in timing differences                                        |   | 187,473      |   |   | 372,451      |   |   | (447,394     | )
| | Impact on foreign exchange on
      tax assets and liabilities      |   | 117,313      |   |   | 162,359      |   |   | 133,131      |  
| | Difference between Canadian and foreign taxes                       |   | (464,959     | ) |   | (119,976     | ) |   | -            |  
| | Unused tax losses and tax offsets not recognized                    |   | 1,431,580    |   |   | (414,825     | ) |   | 418,224      |  
| | Income tax expense (recovery)                                       |   | (172,433     | ) |   | (1,608,260   | ) |   | 1,114,182    |  
| | Penalties and interest
      included in income tax expense         |   | -            |   |   | 614,283      |   |   | -            |  
| | Texas margin tax and branch tax (recovery)                          |   | 22,137       |   |   | 4,791        |   |   | (10,094      | )
| | Income tax expense (recovery)                                       | $ | (150,296     | ) | $ | (989,186     | ) | $ | 1,104,088    |  

|12. | SUPPLEMENTAL CASH FLOW
  INFORMATION
|--- | ------------------------------------

| |                                           |   | December 31, |  |   | December 31, |  |   | December 31, | 
| | ----------------------------------------- | - | ------------ |  | - | ------------ |  | - | ------------ | 
| |                                           |   | 2017         |  |   | 2016         |  |   | 2015         | 
| | Obligation to issue shares
      for      |   |              |  |   |              |  |   |              | 
| | intangible assets (Note 8)                | $ | 131,527      |  | $ | 192,946      |  | $ | -            | 
| | Shares issued for intangible
      assets | $ | 401,432      |  | $ | -            |  | $ | -            | 
| | Intangible assets in accounts payable     | $ | 25,000       |  | $ | -            |  | $ | -            | 
| | and accrued liabilities                   |   |              |  |   |              |  |   |              | 
| | Interest paid                             | $ | -            |  | $ | 1,040        |  | $ | -            | 
| | Income taxes paid                         | $ | -            |  | $ | 20,693       |  | $ | 817,774      | 

| |                                                  |   | December 31, |  |   | December 31, | 
| | ------------------------------------------------ | - | ------------ |  | - | ------------ | 
| |                                                  |   | 2017         |  |   | 2016         | 
| | Cash and Cash Equivalents
      is comprised of: |   |              |  |   |              | 
| | Cash                                             | $ | 411,223      |  | $ | 375,799      | 
| | Guaranteed investment certificates               |   | -            |  |   | 1,936,480    | 
| |                                                  |   |              |  |   |              | 
| |                                                  | $ | 411,223      |  | $ | 2,312,279    | 

28

---

|KELSO TECHNOLOGIES INC.                             
|----------------------------------------------------
|Notes to Consolidated Financial Statements          
|For the years ended December 31, 2017, 2016 and 2015
|(Expressed in US Dollars)                           
|                                                    

|13. | EARNINGS PER SHARE
|--- | ------------------

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

| |                                                                  |   | December 31, |   |   | December 31, |   |   | December 31, |  
| | ---------------------------------------------------------------- | - | ------------ | - | - | ------------ | - | - | ------------ | -
| |                                                                  |   | 2017         |   |   | 2016         |   |   | 2015         |  
| |                                                                  |   |              |   |   |              |   |   |              |  
| | Net loss for the year                                            | $ | (5,015,911   | ) | $ | (2,465,592   | ) | $ | (2,510,826   | )
| | Basic weighted average number of common
      shares outstanding |   | 46,848,053   |   |   | 46,215,861   |   |   | 45,779,903   |  
| | Effect on dilutive
      securities:                             |   |              |   |   |              |   |   |              |  
| | Options                                                          |   | -            |   |   | -            |   |   | -            |  
| | Warrants                                                         |   | -            |   |   | -            |   |   | -            |  
| | Diluted weighted average number of common shares outstanding     |   | 46,848,053   |   |   | 46,215,861   |   |   | 45,779,903   |  
| |                                                                  |   |              |   |   |              |   |   |              |  
| | Basic loss per share                                             | $ | (0.11        | ) | $ | (0.05        | ) | $ | (0.05        | )
| | Diluted loss per share                                           | $ | (0.11        | ) | $ | (0.05        | ) | $ | (0.05        | )

|14. | SIGNIFICANT CUSTOMERS
|--- | ---------------------

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

| |            |   | December 31, |  |   | December 31, |  |   | December 31, | 
| | ---------- | - | ------------ |  | - | ------------ |  | - | ------------ | 
| |            |   | 2017         |  |   | 2016         |  |   | 2015         | 
| |            |   |              |  |   |              |  |   |              | 
| | Customer A | $ | 2,934,404    |  | $ | 2,511,850    |  | $ | 8,555,088    | 
| | Customer B | $ | 896,965      |  | $ | 2,107,426    |  | $ | 2,045,215    | 
| | Customer C | $ | -            |  | $ | -            |  | $ | 3,196,253    | 
| | Customer D | $ | -            |  | $ | -            |  | $ | 1,959,883    | 

All Customers are major US and Canadian
corporations who have displayed a pattern of consistent timely payment of
accounts owing.

The Company is obligated to pay a 5%
royalty from sales of their manway securement systems. During the year ended
December 31, 2017, there were revenues from sales of the manway securement
systems totalling $183,337 (2016 - $224,945).

|15. | EMPLOYEE BENEFITS
|--- | -----------------

Total employee benefit expenses,
including salary and wages, management compensation, share-based expense and
benefits for the year ended December 31, 2017 amounted to $3,448,877 (2016 -
$3,800,497; 2015 - $4,525,853).

|16. | SEGMENTED INFORMATION
|--- | ---------------------

The Company operates in two business
segments with operations and long-term assets in the United States. The two
business segments include the design, production and distribution of various
proprietary pressure relief valves, and active suspension control system for off
road vehicles. At December 31, 2017, long-term assets of $1,044,771 (2016 -
$247,547) relates to the active suspension control system segment and the
remaining balance relates to pressure relief valves segment. During the years
ended December 31, 2017, 2016 and 2015 there was no revenue related to the
active suspension control system.

29

---

|KELSO TECHNOLOGIES INC.                             
|----------------------------------------------------
|Notes to Consolidated Financial Statements          
|For the years ended December 31, 2017, 2016 and 2015
|(Expressed in US Dollars)                           
|                                                    

|17. | SUBSEQUENT EVENTS
|--- | -----------------

Subsequent to the year-end, the Company
paid $25,000 and issued 250,000 shares to G&J Technologies for the third
milestone payment of the G&J technology development agreement that was
accrued at December 31, 2017 (Note 8).

30

---