----

 

 

 

**KELSO TECHNOLOGIES INC.**

 

Consolidated Financial Statements

For the Years ended December 31, 2021, 2020 and 2019

(Expressed in US Dollars)

 

 

| Index                                                                 | Page   |
|-----------------------------------------------------------------------|--------|
|                                                                  |   |
| Report of Registered Public Accounting Firm                           | 2 - 4  |
|                                                                  |   |
| **Consolidated Financial Statements**                                 |   |
|                                                                  |   |
| Consolidated Statements of Financial Position                         | 5      |
|                                                                  |   |
| Consolidated Statements of Changes in Equity                          | 6      |
|                                                                  |   |
| Consolidated Statements of Operations and Comprehensive Income (Loss) | 7      |
|                                                                  |   |
| Consolidated Statements of Cash Flows                                 | 8      |
|                                                                  |   |
| Notes to Consolidated Financial Statements                            | 9 - 36 |

----

****

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

**TO THE SHAREHOLDERS AND DIRECTORS OF KELSO TECHNOLOGIES INC.**

***Opinion on the Consolidated Financial Statements***

We have audited the accompanying consolidated statements of financial position of Kelso Technologies Inc. and its subsidiaries (the "Company") as of December 31, 2021 and 2020, and the related consolidated statements of operations and comprehensive income (loss), changes in equity and cash flows for the years ended December 31, 2021, 2020 and 2019, and the related notes (collectively referred to as the "consolidated financial statements").

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for the years ended December 31, 2021, 2020 and 2019, in conformity with International Financial Reporting Standards ("IFRS"), as issued by the International Accounting Standards Board.

***Basis for Opinion***

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

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

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

|  | 2 |
|--|---|

----

***Critical Audit Matters***

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

*Valuation of net realizable value of inventory*

At December 31, 2021, the Company's inventory balance was $5,534,558. As discussed in Note 3 to the consolidated financial statements, the Company records inventory at the lower of cost on a weighted average basis and net realizable value. To assess inventory valuation, the Company conducts regular reviews of on-hand inventory quantities in excess of forecasted demand, by considering recent historical activity as well as anticipated or forecasted demand.

We identified the assessment of valuation net realizable value of inventory as a critical audit matter. Auditing management's inventory valuation involved significant judgment because the estimates are based on several factors that are affected by market, industry, and competitive conditions outside the Company's control. In particular, in estimating inventory carrying value, management developed assumptions such as expectations of future sales quantities and the selling prices, which are sensitive to customer requirements, and economic conditions. These significant assumptions are forward looking and could be affected by future economic and market conditions.

The following are the primary procedures we performed to address this critical audit matter. We obtained an understanding, evaluated the design and tested the operating effectiveness of internal controls over the Company's costing of inventory. We compared the inventory on hand to related unit sales to assess the valuation of inventory and held discussions with management and operational personnel to help identify any slow-moving obsolete inventory. In addition, we performed physical test counts and inspected inventory on-hand at year-end for any signs of obsolescence.

*Valuation of prototypes in the active suspension control system operating segment*

As discussed in Note 7 to the consolidated financial statements, the prototypes balance as of December 31, 2021 was $605,866. This balance consists of costs incurred to develop physical prototype vehicles as part of the Company's active suspension control system operating segment. The Company determines whether there are any indicators of impairment at each reporting period, or whenever events or changes in circumstances indicate that the carrying value of a cash generating unit ("CGU") may exceed its recoverable amount. The recoverable amount is the greater of fair value less costs to sell and value in use. The recoverable value was determined using the fair value less costs to sell method. The significant assumptions were determined to be the intended use of the prototypes going forward and the potential residual value. The estimated recoverable value exceeds the carrying value as at December 31, 2021, therefore, the Company did not record an impairment charge in the CGU.

We identified the assessment of the fair value of prototypes in the active suspension control system operating segment as a critical audit matter. There was a high degree of auditor judgment required to evaluate the significant assumptions used in determining the recoverable amount. The sensitivity of reasonably possible changes to those assumptions could have a significant impact on the determination of the recoverable amount and the Company's assessment of impairment.

|  | 3 |
|--|---|

----

The following are the primary procedures we performed to address this critical audit matter. We reviewed management's assessment of whether any indicators of impairment existed. We evaluated the reasonableness of the Company's estimated residual values by reviewing comparable market transactions and recent disposals of parts. We evaluated the intended use of the prototypes through discussions with operational personnel and reviewing results of current testing being performed with the prototypes. In addition, we reviewed external market research to support the validity of the intended use of the prototypes assumption and specific testing recommended.

 

Chartered Professional Accountants

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

Vancouver, Canada

March 24, 2022

|  | 4 |
|--|---|

----

**Kelso Technologies Inc.**

Consolidated Statements of Financial Position

December 31

(Expressed in US Dollars)

|                                               |   | ** **      |   |   |        |   |
|----------------------------------------------------|--------|-----------------|--------|--------|-------------|--------|
|                                               |   | **2021**        |   |   | 2020        |   |
| **Assets**                                         |   | ** **      |   |   |        |   |
| **Current**                                        |   | ** **      |   |   |        |   |
| Cash (Note 5)                                      | **$**  | **3,377,464**   |   | $      | 1,049,049   |   |
| Accounts receivable (Note 5)                       |   | **807,009**     |   |   | 535,659     |   |
| Prepaid expenses                                   |   | **161,490**     |   |   | 162,739     |   |
| Inventory (Note 6)                                 |   | **5,534,558**   |   |   | 5,462,532   |   |
|                                               |   | ** **      |   |   |        |   |
|                                               |   | **9,880,521**   |   |   | 7,209,979   |   |
| Property, plant and equipment (Note 7)             |   | **3,246,394**   |   |   | 4,198,577   |   |
| Deposit (Note 8)                                   |   | **127,643**     |   |   | -           |   |
| Intangible assets (Note 8)                         |   | **473,952**     |   |   | 607,959     |   |
|                                               |   | ** **      |   |   |        |   |
|                                               | **$**  | **13,728,510**  |   | $      | 12,016,515  |   |
|                                               |   | ** **      |   |   |        |   |
| **Liabilities**                                    |   | ** **      |   |   |        |   |
| **Current**                                        |   | ** **      |   |   |        |   |
| Accounts payable and accrued liabilities (Note 12) | **$**  | **1,118,573**   |   | $      | 814,777     |   |
| Income tax payable                                 |   | **-**           |   |   | 91,566      |   |
| Current portion of lease liability (Note 9)        |   | **91,783**      |   |   | 51,743      |   |
|                                               |   | ** **      |   |   |        |   |
|                                               |   | **1,210,356**   |   |   | 958,086     |   |
| Long term portion of lease liability (Note 9)      |   | **195,930**     |   |   | 97,506      |   |
| Derivative warrant liability (Note 10)             |   | **267,111**     |   |   | -           |   |
| ** **                                         |   | ** **      |   |   |        |   |
| ** **                                         |   | **1,673,397**   |   |   | 1,055,592   |   |
| **Shareholders' Equity**                           |   | ** **      |   |   |        |   |
| **Capital Stock** (Note 11)                        |   | **27,123,039**  |   |   | 23,366,542  |   |
| **Reserves** (Note 11)                             |   | **4,758,107**   |   |   | 4,661,847   |   |
| **Deficit**                                        |   | **(19,826,033** | **)**  |   | (17,067,466 | )      |
|                                               |   | ** **      |   |   |        |   |
|                                               |   | **12,055,113**  |   |   | 10,960,923  |   |
|                                               |   | ** **      |   |   |        |   |
|                                               | **$**  | **13,728,510**  |   | $      | 12,016,515  |   |

| Approved on behalf of the Board: |   |   |
|----------------------------------|--------|--------|
|                             |   |   |
| "*Peter Hughes*" (signed)        |   |   |
| Peter Hughes, Director           |   |   |
|                             |   |   |
| "*Paul Cass*" (signed")          |   |   |
| Paul Cass, Director              |   |   |

 

See notes to consolidated financial statements

5

----

**Kelso Technologies Inc.**

Consolidated Statements of Changes in Equity

For the Years ended December 31, 2021, 2020 and 2019

(Expressed in US Dollars)

|                                  |   | Capital Stock |   |   |       |   |   |      |   |   |        |   |
|---------------------------------------|--------|---------------|--------|--------|------------|--------|--------|-----------|--------|--------|-------------|--------|
|                                  |   | Number of     |   |   |       |   |   |      |   |   |        |   |   |   |   |
|                                  |   | Common        |   |   |       |   |   |      |   |   |        |   |   |   |   |
|                                  |   | Shares        |   |   | Amount     |   |   | Reserve   |   |   | Deficit     |   |   | Total |   |
| **Balance, September 30, 2018**       |   | 47,170,086    |   | $      | 23,366,542 |   | $      | 3,892,811 |   | $      | (19,093,619 | )      | $ | 8,165,734 |   |
| Share-based expense                   |   | -             |   |   | -          |   |   | 345,498   |   |   | -           |   |   | 345,498 |   |
| Net income for the year               |   | -             |   |   | -          |   |   | -         |   |   | 3,334,043   |   |   | 3,334,043 |   |
| **Balance, December 31, 2019**        |   | 47,170,086    |   | $      | 23,366,542 |   | $      | 4,238,309 |   | $      | (15,759,576 | )      | $ | 11,845,275 |   |
| Share-based expense                   |   | -             |   |   | -          |   |   | 423,538   |   |   | -           |   |   | 423,538 |   |
| Net loss for the year                 |   | -             |   |   | -          |   |   | -         |   |   | (1,307,890  | )      |   | (1,307,890 | ) |
| **Balance, December 31, 2020**        |   | 47,170,086    |   | $      | 23,366,542 |   | $      | 4,661,847 |   | $      | (17,067,466 | )      | $ | 10,960,923 |   |
| Share-based expense                   |   | -             |   |   | -          |   |   | 133,645   |   |   | -           |   |   | 133,645 |   |
| Private placement, net of issue costs |   | 7,000,000     |   |   | 3,664,112  |   |   | -         |   |   | -           |   |   | 3,664,112 |   |
| Exercise of options                   |   | 150,000       |   |   | 92,385     |   |   | (37,385   | )      |   | -           |   |   | 55,000 |   |
| Net loss for the year                 |   | -             |   |   | -          |   |   | -         |   |   | (2,758,567  | )      |   | (2,758,567 | ) |
| **Balance, December 31, 2021**        |   | 54,320,086    |   | $      | 27,123,039 |   | $      | 4,758,107 |   | $      | (19,826,033 | )      | $ | 12,055,113 |   |

See notes to consolidated financial statements

6

----

**Kelso Technologies Inc.**

Consolidated Statements of Operations and Comprehensive Income (Loss)

For the years ended December 31,

(Expressed in US Dollars)

|                                                               |   | ** **     |   |   |       |   |   |       |   |
|--------------------------------------------------------------------|--------|----------------|--------|--------|------------|--------|--------|------------|--------|
|                                                               |   | **2021**       |   |   | 2020       |   |   | 2019       |   |
| **Revenues** (Note 16)                                             | **$**  | **7,425,707**  |   | $      | 11,149,130 |   | $      | 20,550,682 |   |
| **Cost of Goods Sold** (Notes 6 and 7)                             |   | **4,229,215**  |   |   | 6,356,452  |   |   | 10,967,803 |   |
|                                                               |   | ** **     |   |   |       |   |   |       |   |
| **Gross Profit**                                                   |   | **3,196,492**  |   |   | 4,792,678  |   |   | 9,582,879  |   |
|                                                               |   | ** **     |   |   |       |   |   |       |   |
| **Expenses**                                                       |   | ** **     |   |   |       |   |   |       |   |
| Office and administration                                          |   | **2,243,413**  |   |   | 2,074,623  |   |   | 2,219,711  |   |
| Management compensation (Note 12)                                  |   | **720,923**    |   |   | 670,269    |   |   | 1,037,586  |   |
| Research (Note 7)                                                  |   | **1,697,497**  |   |   | 1,391,712  |   |   | 1,129,007  |   |
| Marketing                                                          |   | **353,010**    |   |   | 365,193    |   |   | 288,893    |   |
| Travel                                                             |   | **64,419**     |   |   | 52,497     |   |   | 197,293    |   |
| Accounting and legal                                               |   | **271,613**    |   |   | 312,213    |   |   | 321,945    |   |
| Share-based expense (Notes 11 and 12)                              |   | **133,645**    |   |   | 423,538    |   |   | 345,498    |   |
| Consulting                                                         |   | **325,024**    |   |   | 265,507    |   |   | 386,661    |   |
| Investor relations                                                 |   | **84,000**     |   |   | 84,000     |   |   | 84,000     |   |
| Foreign exchange (gain) loss                                       |   | **(78,428**    | **)**  |   | (11,254    | )      |   | 27,698     |   |
| Amortization (Notes 7 and 8)                                       |   | **437,865**    |   |   | 140,178    |   |   | 69,271     |   |
| Bad debts                                                          |   | **2,000**      |   |   | -          |   |   | (20,206    | )      |
|                                                               |   | ** **     |   |   |       |   |   |       |   |
|                                                               |   | **6,254,981**  |   |   | 5,768,476  |   |   | 6,087,357  |   |
|                                                               |   | ** **     |   |   |       |   |   |       |   |
| **Income (Loss) Before the Following:**                            |   | **(3,058,489** | **)**  |   | (975,798   | )      |   | 3,495,522  |   |
| Interest income                                                    |   | **-**          |   |   | 30,966     |   |   | -          |   |
| Gain on sale of property, plant and equipment                      |   | **8,389**      |   |   | -          |   |   | -          |   |
| Write-off of inventory (Note 6)                                    |   | **(117,403**   | **)**  |   | (114,066   | )      |   | (62,402    | )      |
| Gain on revaluation of derivative warrant liability (Note 10)      |   | **658,626**    |   |   | -          |   |   | -          |   |
| Unit issuance costs (Note 11)                                      |   | **(77,051**    | **)**  |   | -          |   |   | -          |   |
| ** **                                                         |   | ** **     |   |   |       |   |   |       |   |
| **Income (Loss) Before Taxes:**                                    |   | **(2,585,928** | **)**  |   | (1,058,898 | )      |   | 3,433,120  |   |
| ** **                                                         |   | ** **     |   |   |       |   |   |       |   |
| **Income Tax Expense**(Note 13)                                    |   | ** **     |   |   |       |   |   |       |   |
| Current                                                            |   | **172,639**    |   |   | 248,992    |   |   | 99,077     |   |
|                                                               |   | ** **     |   |   |       |   |   |       |   |
| **Net Income (Loss) and Comprehensive Income (Loss) for the year** | **$**  | **(2,758,567** | **)**  | $      | (1,307,890 | )      | $      | 3,334,043  |   |
| ** **                                                         |   | ** **     |   |   |       |   |   |       |   |
| **Basic Gain (Loss) Per Share**(Note 15)                           | **$**  | **(0.05**      | **)**  | $      | (0.03      | )      | $      | 0.07       |   |
| ** **                                                         |   | ** **     |   |   |       |   |   |       |   |
| **Diluted Gain (Loss) Per Share**(Note 15)                         | **$**  | **(0.05**      | **)**  | $      | (0.03      | )      | $      | 0.07       |   |
| **Weighted Average Number of Common****Shares Outstanding**        |   | ** **     |   |   |       |   |   |       |   |
| Basic (Note 15)                                                    |   | **53,082,689** |   |   | 47,170,086 |   |   | 47,170,086 |   |
| Diluted (Note 15)                                                  |   | **53,082,689** |   |   | 47,170,086 |   |   | 48,186,522 |   |

See notes to consolidated financial statements

7

----

**Kelso Technologies Inc.**

Consolidated Statements of Cash Flows

For the years ended December 31,

(Expressed in US Dollars)

|                                                          |   | ** **     |   |   |       |   |   |      |   |
|---------------------------------------------------------------|--------|----------------|--------|--------|------------|--------|--------|-----------|--------|
|                                                          |   | **2021**       |   |   | 2020       |   |   | 2019      |   |
|                                                          |   | ** **     |   |   |       |   |   |      |   |
| **Operating Activities**                                      |   | ** **     |   |   |       |   |   |      |   |
| Net income (loss)                                             | **$**  | **(2,758,567** | **)**  | $      | (1,307,890 | )      | $      | 3,334,043 |   |
| Items not involving cash:                                     |   | ** **     |   |   |       |   |   |      |   |
| Amortization (Notes 7 and 8)                                  |   | **1,573,091**  |   |   | 898,705    |   |   | 384,827   |   |
| Write-off of inventory (Note 6)                               |   | **117,403**    |   |   | 114,066    |   |   | 62,402    |   |
| Gain on sale of property, plant and equipment                 |   | **8,389**      |   |   | -          |   |   | -         |   |
| Share-based expense                                           |   | **133,645**    |   |   | 423,538    |   |   | 345,498   |   |
| Bad debts (recovery)                                          |   | **2,000**      |   |   | -          |   |   | (20,206   | )      |
| Gain on revaluation of derivative warrant liability (Note 10) |   | **(658,626**   | **)**  |   | -          |   |   | -         |   |
| Unrealized foreign exchange gain                              |   | **(26,409**    | **)**  |   | (100       | )      |   | (1,669    | )      |
|                                                          |   | **(1,609,074** | **)**  |   | 128,319    |   |   | 4,104,895 |   |
| Changes in non-cash working capital                           |   | ** **     |   |   |       |   |   |      |   |
| Accounts receivable                                           |   | **(273,350**   | **)**  |   | 1,288,904  |   |   | (580,122  | )      |
| Prepaid expenses                                              |   | **1,249**      |   |   | (66,112    | )      |   | 13,631    |   |
| Inventory                                                     |   | **(182,655**   | **)**  |   | (2,178,694 | )      |   | 213,283   |   |
| Accounts payable and accrued liabilities                      |   | **332,076**    |   |   | (754,343   | )      |   | 262,725   |   |
| Income tax payable                                            |   | **(91,566**    | **)**  |   | 20,225     |   |   | (395,398  | )      |
|                                                          |   | **(214,246**   | **)**  |   | (1,690,020 | )      |   | (485,881  | )      |
| **Cash Provided by (Used in) Operating Activities**           |   | **(1,823,320** | **)**  |   | (1,561,701 | )      |   | 3,619,014 |   |
| **Investing Activities**                                      |   | ** **     |   |   |       |   |   |      |   |
| Proceeds from disposition of property, plant and equipment    |   | **27,704**     |   |   | -          |   |   | -         |   |
| Acquisition of property, plant and equipment                  |   | **(131,382**   | **)**  |   | (1,713,875 | )      |   | (428,954  | )      |
| Deposit on intangible assets                                  |   | **(127,643**   | **)**  |   | -          |   |   | -         |   |
| Acquisition of intangible assets                              |   | **(169,973**   | **)**  |   | -          |   |   | -         |   |
| **Cash Used in Investing Activities**                         |   | **(401,294**   | **)**  |   | (1,713,875 | )      |   | (428,954  | )      |
| **Financing Activities**                                      |   | ** **     |   |   |       |   |   |      |   |
| Issue of common shares, net of share issue costs              |   | **4,589,849**  |   |   | -          |   |   | -         |   |
| Exercise of options                                           |   | **55,000**     |   |   | -          |   |   | -         |   |
| Lease liability payments                                      |   | **(104,493**   | **)**  |   | (93,711    | )      |   | (19,737   | )      |
| **Cash Provided by (Used in) Financing****Activities**        |   | **4,540,356**  |   |   | (93,711    | )      |   | (19,737   | )      |
| **Foreign Exchange Effect on Cash**                           |   | **12,673**     |   |   | 100        |   |   | 1,669     |   |
| **Inflow (Outflow) of Cash and Cash Equivalents**             |   | **2,328,415**  |   |   | (3,369,187 | )      |   | 3,171,992 |   |
| **Cash and Cash Equivalents, Beginning of Year**              |   | **1,049,049**  |   |   | 4,418,236  |   |   | 1,246,244 |   |
|                                                          |   | ** **     |   |   |       |   |   |      |   |
| **Cash and Cash Equivalents, End of Year**                    | **$**  | **3,377,464**  |   | $      | 1,049,049  |   | $      | 4,418,236 |   |

Supplemental Cash Flow Information (Note 14)

See notes to consolidated financial statements

8

----

| **KELSO TECHNOLOGIES INC.  **Notes to Consolidated Financial Statements For the Years ended December 31, 2021, 2020 and 2019(Expressed in US Dollars) |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                            |

**1.** **NATURE OF OPERATIONS**

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

In March 2020, the World Health Organization declared COVID-19 a global pandemic. This contagious disease outbreak and the related adverse public health developments have adversely affected workforces, economies, and financial markets, leading to a global economic downturn. Governments and central banks have reacted with significant monetary and fiscal interventions designed to stabilize economic conditions. The duration and impact of the COVID-19 outbreak is unknown at this time, as is the efficacy of the government and central bank interventions. It is not possible to reliably estimate the length and severity of these developments and the impact on the financial results and condition of the Company in future periods.

**2.** **BASIS OF PREPARATION**

(a) Statement of compliance

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

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

9

----

| **KELSO TECHNOLOGIES INC.  **Notes to Consolidated Financial Statements For the Years ended December 31, 2021, 2020 and 2019(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.), KIQ Industries Inc., and KXI Wildertec Industries Inc., which are all Nevada, USA corporations except KIQ X Industries Inc., and KXI Wildertec Industries Inc., which were incorporated in British Columbia. 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.

10

----

| **KELSO TECHNOLOGIES INC.  **Notes to Consolidated Financial Statements For the Years ended December 31, 2021, 2020 and 2019(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) Research and development expenditures

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

(iv) Going concern assumption

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

*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.

11

----

| **KELSO TECHNOLOGIES INC.  **Notes to Consolidated Financial Statements For the Years ended December 31, 2021, 2020 and 2019(Expressed in US Dollars) |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                            |

**2.** **BASIS OF PREPARATION** (Continued)

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

*Estimation uncertainty (Continued)*

(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.

12

----

| **KELSO TECHNOLOGIES INC.  **Notes to Consolidated Financial Statements For the Years ended December 31, 2021, 2020 and 2019(Expressed in US Dollars) |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                            |

**2.** **BASIS OF PREPARATION**(Continued)

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

*Estimation uncertainty (Continued)*

(iv) Share-based expense

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

The Company measures the cost of equity-settled transactions by reference to the fair value of the equity instruments at the date at which they are granted for share-based payments made to employees or others providing similar services. Estimating fair value for share-based payment transactions requires determining the most appropriate valuation model, which is dependent on the terms and conditions of the grant. This estimate also requires determining the most appropriate inputs to the valuation model including the fair value of the underlying common shares, the expected life of the share option or warrant, volatility and dividend yield and making assumptions about them. 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 share-based awards. Warrant liabilities are accounted for as derivative liabilities as they are exercisable in Canadian dollars (note 10).

(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. 

(vi) Lease liability

The Company uses estimation in determining the incremental borrowing rate used to measure the lease liability, specific to the asset, underlying currency, and geographic location. Where the rate implicit in the lease is not readily determinable, the discount rate of the lease obligations is estimated using a discount rate similar to the Company's specific borrowing rate. This rate represents the rate that the Company would incur to obtain the funds necessary to purchase the asset of a similar value, with similar payment terms and security in a similar environment. The Company applies judgment in determining whether the contract contains an identified asset, whether they have the right to control the asset, and the lease term.

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

(e) Approval of the consolidated financial statements

The consolidated financial statements of the Company for year ended December 31, 2021 were approved and authorized for issue by the Board of Directors on March 24, 2022.

13

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| **KELSO TECHNOLOGIES INC.  **Notes to Consolidated Financial Statements For the Years ended December 31, 2021, 2020 and 2019(Expressed in US Dollars) |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                            |

**2.** **BASIS OF PREPARATION**(Continued)

(f) New accounting standards issued but not yet effective

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

**3.** **SIGNIFICANT ACCOUNTING POLICIES**

The following is a summary of significant accounting policies:

(a) 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.

(b) 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

Intellectual Property - 7 years

14

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| **KELSO TECHNOLOGIES INC.  **Notes to Consolidated Financial Statements For the Years ended December 31, 2021, 2020 and 2019(Expressed in US Dollars) |
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|                                                                                                                                                            |

**3.** **SIGNIFICANT ACCOUNTING POLICIES**(Continued)

(b) Intangible assets (Continued)

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.

(c) Property, plant and equipment

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

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

(d) Revenue recognition

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

(e) 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.

(f) Income taxes

(i) Current and deferred income taxes

Income tax expense, consisting of current and deferred tax expense, is recognized in the consolidated statements of operations and comprehensive income (loss). 

15

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| **KELSO TECHNOLOGIES INC.  **Notes to Consolidated Financial Statements For the Years ended December 31, 2021, 2020 and 2019(Expressed in US Dollars) |
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|                                                                                                                                                            |

**3.** **SIGNIFICANT ACCOUNTING POLICIES**(Continued)

(f) Income taxes (Continued)

(i) Current and deferred income taxes (Continued)

Current tax expense is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at period-end, adjusted for amendments to tax payable with regard to previous years.

Deferred tax assets and liabilities and the related deferred income tax expense or recovery are recognized for deferred tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. 

Deferred tax assets and liabilities are measured using the enacted or substantively enacted tax rates expected to apply when the asset is realized or the liability settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income (loss) in the period that substantive enactment occurs.

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

(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 0.75% of the lesser of: (a) 70% of a taxable entity's revenue in Texas; and (b) 100% of total revenue in Texas less, at the election of the taxpayer: (i) cost of goods sold; or (ii) compensation.  A provision for the margin tax owing has been recorded in the consolidated statements of operations and comprehensive income (loss).

(g) 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).

16

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| **KELSO TECHNOLOGIES INC.  **Notes to Consolidated Financial Statements For the Years ended December 31, 2021, 2020 and 2019(Expressed in US Dollars) |
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|                                                                                                                                                            |

**3.** **SIGNIFICANT ACCOUNTING POLICIES**(Continued)****

(h) 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.

(i) Share-based expense

The Company has a stock option plan, restricted share unit plan, and deferred share unit plan, which are described in note 11. The Company grants equity-settled share-based expense to directors, officers, employees, and consultants. Share-based expense to employees is measured at the fair value of the equity instruments at the grant date. The fair value of share options is measured using the Black-Scholes option pricing model. Restricted and deferred share units are measured using the fair value of the shares on the grant date. The share-based expense to employees is recognized over the vesting period 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.

For both employees and non-employees, the fair value of share-based expense is recognized on the consolidated statements of operations and comprehensive income (loss), with a corresponding increase in reserves. The amount recognized as expense is adjusted to reflect the number of share-based awards 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.

(j) 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.

17

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| **KELSO TECHNOLOGIES INC.  **Notes to Consolidated Financial Statements For the Years ended December 31, 2021, 2020 and 2019(Expressed in US Dollars) |
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|                                                                                                                                                            |

**3.** **SIGNIFICANT ACCOUNTING POLICIES**(Continued)****

(j) Capital stock (Continued)

Canadian dollar denominated share purchase warrants are classified as a derivative warrant liability under the principles of IFRS 9 *Financial Instruments* (note 10). As the exercise price of the share purchase warrant is fixed in Canadian dollars and the functional currency of the Company is the USD, the share purchase warrants are considered a derivative liability in accordance with IAS 32 *Financial Instruments: Presentation* as a variable amount of cash in the Company's functional currency will be received upon exercise. These types of share purchase warrants are recognized at fair value using an option pricing model at the date of issue. Share purchase warrants are initially recorded as a liability at fair value with any subsequent changes in fair value recognized in profit or loss. Upon exercise of the share purchase warrants with exercise prices in a currency other than the Company's functional currency, the share purchase warrants are revalued at the date of exercise and the total fair value of the exercised share purchase warrants is reallocated to equity. The proceeds generated from the payment of the exercise price are also allocated to equity.

(k) Financial instruments

(i) Financial assets

Initial recognition and measurement

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

Subsequent measurement

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

*Financial assets at fair value through profit or loss*

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

*Financial assets measured at amortized cost*

A financial asset is subsequently measured at amortized cost, using the effective interest method and net of any impairment allowance. The Company classifies accounts receivable and prepaid expenses as measured at amortized cost.

18

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| **KELSO TECHNOLOGIES INC.  **Notes to Consolidated Financial Statements For the Years ended December 31, 2021, 2020 and 2019(Expressed in US Dollars) |
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|                                                                                                                                                            |

**3.** **SIGNIFICANT ACCOUNTING POLICIES**(Continued)****

(k) Financial instruments (Continued)

(i) Financial assets (Continued)

Derecognition

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

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

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

(ii) Financial liabilities

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

Amortized cost

A financial liability at amortized cost is initially measured at fair value less transaction costs directly attributable to the issuance of the financial liability. Subsequently, the financial liability is measured at amortized cost based on the effective interest rate method. The Company classifies accounts payable and accrued liabilities, income tax payable and lease liabilities as measured at amortized cost.

Fair value through profit or loss ("FVTPL")

A financial liability measured at FVTPL is initially measured at fair value with any associated transaction costs being recognized in profit or loss when incurred. Subsequently, the financial liability is remeasured at fair value, and a gain or loss is recognized in profit or loss in the reporting period in which it arises. The Company's derivative warrant liability is classified as measured at fair value through profit or loss.

Derecognition

The Company derecognizes a financial liability when the financial liability is discharged, cancelled or expired. Generally, the difference between the carrying amount of the financial liability derecognized and the consideration paid and payable, including any non-cash assets transferred or liabilities assumed, is recognized in the consolidated statements of loss and comprehensive loss.

19

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| **KELSO TECHNOLOGIES INC.  **Notes to Consolidated Financial Statements For the Years ended December 31, 2021, 2020 and 2019(Expressed in US Dollars) |
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|                                                                                                                                                            |

**3.** **SIGNIFICANT ACCOUNTING POLICIES**(Continued)

(k) Financial instruments (Continued)

(iii) Fair value hierarchy

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

(l) Leases

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

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

IFRS 16 *Leases*, provides a single lessee accounting model, requiring lessees to recognize assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value.

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

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

20

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| **KELSO TECHNOLOGIES INC.  **Notes to Consolidated Financial Statements For the Years ended December 31, 2021, 2020 and 2019(Expressed in US Dollars) |
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|                                                                                                                                                            |

**3.** **SIGNIFICANT ACCOUNTING POLICIES**(Continued)

(l) Leases (Continued)

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

• fixed payments, including in-substance fixed payments;

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

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

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

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

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

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

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

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

**4.** **CAPITAL MANAGEMENT**

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

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

In order to facilitate the management of its capital requirements, the Company prepares expenditure budgets that are updated as necessary depending on various factors, including successful capital deployment and general industry conditions. Management reviews the capital structure on a regular basis to ensure the above objectives are met. There have been no changes to the Company's approach to capital management during the year ended December 31, 2021. There are no externally imposed restrictions on the Company's capital.

21

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| **KELSO TECHNOLOGIES INC.  **Notes to Consolidated Financial Statements For the Years ended December 31, 2021, 2020 and 2019(Expressed in US Dollars) |
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|                                                                                                                                                            |

**5.** **FINANCIAL INSTRUMENTS**

Financial instruments are agreements between two parties that result in promises to pay or receive cash or equity instruments. The Company's financial instruments classified as level 1 in the fair value hierarchy are cash, accounts receivable, accounts payable and accrued liabilities and income tax payable, as their carrying values approximate their fair values due to their short-term nature. The lease liability and derivative warrant liability are classified as level 3.

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 is placed with major Canadian and US financial institutions and the Company's concentration of credit risk for cash and maximum exposure thereto is $3,377,464 (2020 - $1,049,049).

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 $807,009 (2020 - $535,659).  The Company's concentration of credit risk for accounts receivable with respect to its significant customers is as follows: Customer A is $93,865 (2020 - $105,820), Customer B is $25,009 (2020 - $15,349), Customer C is $47,250 (2020 - $Nil), and Customer D is $155,520 (2020 - $150,300) (Note 16). 

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. The Company's aging of accounts receivable, excluding goods and services tax receivable, at December 31, 2021 and 2020 is as follows:

|             |   | **December 31, 2021** |   |   | December 31, 2020 |   |
|------------------|--------|-----------------------|--------|--------|-------------------|--------|
| Current          | $      | 341,746               |   | $      | 227,308           |   |
| 1 - 60 days      |   | 319,346               |   |   | 195,231           |   |
| 61 days and over |   | 27,952                |   |   | 20,910            |   |
|             | $      | 689,044               |   | $      | 443,449           |   |

(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.

22

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| **KELSO TECHNOLOGIES INC.  **Notes to Consolidated Financial Statements For the Years ended December 31, 2021, 2020 and 2019(Expressed in US Dollars) |
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|                                                                                                                                                            |

**5.** **FINANCIAL INSTRUMENTS**(Continued)****

(b) Liquidity risk (Continued)

At December 31, 2021, the Company has $3,377,464 (2020 - $1,049,049) of cash to settle current liabilities of $1,210,356 (2020 - $958,086) consisting of the following:  accounts payable and accrued liabilities of $1,118,573 (2020 - $814,777), income tax payable of $Nil (2020 - $91,566) and current portion of lease liability of $91,783 (2020 - $51,743).  All payables classified as current liabilities are due within a year. The amount of the Company's remaining undiscounted contractual maturities for the lease liabilities is approximately $307,456 (2020 - $100,709) which is due between one to five years (Note 9).

(c) Market risk

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

(i) Interest rate risk

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

(ii) Currency risk

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

As at December 31, 2021 the Company had the following net monetary assets denominated in CAD (amounts presented in USD):

|                                     |   | **December 31, 2021** |   |   | December 31, 2020 |   |
|------------------------------------------|--------|-----------------------|--------|--------|-------------------|--------|
| Cash                                     | $      | 1,210,548             |   | $      | 52,084            |   |
| Accounts receivable                      |   | 116,186               |   |   | 92,210            |   |
| Accounts payable and accrued liabilities |   | (116,573              | )      |   | (109,519          | )      |
|                                     | $      | 1,210,161             |   | $      | (34,775           | )      |

Based on the above, assuming all other variables remain constant, a 1% (2020 - 2%) weakening or strengthening of the USD against the CAD would result in approximately $12,102 (2020 - $696) foreign exchange loss or gain in the consolidated statements of operations and comprehensive income (loss).

23

----

| **KELSO TECHNOLOGIES INC.  **Notes to Consolidated Financial Statements For the Years ended December 31, 2021, 2020 and 2019(Expressed in US Dollars) |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                            |

**6.** **INVENTORY**

|                       |   | **December 31, 2021** |   |   | December 31, 2020 |   |
|----------------------------|--------|-----------------------|--------|--------|-------------------|--------|
| Finished goods             | $      | 172,865               |   | $      | 124,290           |   |
| Raw materials and supplies |   | 5,361,693             |   |   | 5,338,242         |   |
|                       | $      | 5,534,558             |   | $      | 5,462,532         |   |

Included in cost of goods sold is $3,091,973 (2020 - $4,937,761; 2019 - $9,443,243) of direct material costs recognized as expense.  Inventory write-off during the year was $117,403 (2020 - $114,066; 2019 - $62,402).

24

----

| **KELSO TECHNOLOGIES INC.  **Notes to Consolidated Financial Statements For the Years ended December 31, 2021, 2020 and 2019(Expressed in US Dollars) |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                            |

**7.** **PROPERTY, PLANT AND EQUIPMENT**

|                         |   |   |   |   |      |   |   | Leasehold    |   |   | Production |   |   |       |   |   |      |   |   |      |   |
|------------------------------|--------|--------|--------|--------|-----------|--------|--------|--------------|--------|--------|------------|--------|--------|------------|--------|--------|-----------|--------|--------|-----------|--------|
| **Cost**                     |   | Land   |   |   | Building  |   |   | Improvements |   |   | Equipment  |   |   | Prototypes |   |   | ROU Asset |   |   | Total     |   |
| Balance, December 31, 2019   | $      | 12,558 |   | $      | 2,955,901 |   | $      | 43,715       |   | $      | 817,148    |   | $      | 970,394    |   | $      | 117,004   |   | $      | 4,916,720 |   |
| Additions                    |   | -      |   |   | 8,082     |   |   | -            |   |   | 175,467    |   |   | 1,527,451  |   |   | -         |   |   | 1,711,000 |   |
| Balance, December 31, 2020   | $      | 12,558 |   | $      | 2,963,983 |   | $      | 43,715       |   | $      | 992,615    |   | $      | 2,497,845  |   | $      | 117,004   |   | $      | 6,627,720 |   |
| Additions                    |   | -      |   |   | -         |   |   | -            |   |   | 63,465     |   |   | 85,156     |   |   | 199,466   |   |   | 348,087   |   |
| Disposals                    |   | -      |   |   | -         |   |   | -            |   |   | (31,854    | )      |   | -          |   |   | -         |   |   | (31,854   | )      |
| Balance, December 31, 2021   | $      | 12,558 |   | $      | 2,963,983 |   | $      | 43,715       |   | $      | 1,024,226  |   | $      | 2,583,001  |   | $      | 316,470   |   | $      | 6,943,953 |   |
| **Accumulated Amortization** |   |   |   |   |      |   |   |         |   |   |       |   |   |       |   |   |      |   |   |      |   |
| Balance, December 31, 2019   | $      | -      |   | $      | 613,709   |   | $      | 37,241       |   | $      | 579,506    |   | $      | 284,058    |   | $      | 12,212    |   | $      | 1,526,726 |   |
| Amortization                 |   | -      |   |   | 93,849    |   |   | 1,295        |   |   | 67,784     |   |   | 665,597    |   |   | 73,892    |   |   | 902,417   |   |
| Balance, December 31, 2020   | $      | -      |   | $      | 707,558   |   | $      | 38,536       |   | $      | 647,290    |   | $      | 949,655    |   | $      | 86,104    |   | $      | 2,429,143 |   |
| Amortization                 |   | -      |   |   | 90,257    |   |   | 1,036        |   |   | 76,346     |   |   | 1,027,480  |   |   | 80,766    |   |   | 1,275,885 |   |
| Disposals                    |   | -      |   |   | -         |   |   | -            |   |   | (7,469     | )      |   | -          |   |   | -         |   |   | (7,469    | )      |
| Balance, December 31, 2021   | $      | -      |   | $      | 797,815   |   | $      | 39,572       |   | $      | 716,167    |   | $      | 1,977,135  |   | $      | 166,870   |   | $      | 3,697,559 |   |
| **Carrying Value**           |   |   |   |   |      |   |   |         |   |   |       |   |   |       |   |   |      |   |   |      |   |
| December 31, 2021            | $      | 12,558 |   | $      | 2,166,168 |   | $      | 4,143        |   | $      | 308,059    |   | $      | 605,866    |   | $      | 149,600   |   | $      | 3,246,394 |   |
| December 31, 2020            | $      | 12,558 |   | $      | 2,256,425 |   | $      | 5,179        |   | $      | 345,325    |   | $      | 1,548,190  |   | $      | 30,900    |   | $      | 4,198,577 |   |

Included in cost of goods sold is $131,580 (2020 - $134,067; 2019 - $131,617) of amortization related to property, plant and equipment.

Included in expenses is $437,865 (2020 - $140,178; 2019 - $69,271) of amortization related to property, plant and equipment.

Included in inventory is $6,774 (2020 - $3,712; 2019 - $1,476) of amortization related to property, plant and equipment.

Included in research is $1,011,445 (2020 - $624,460; 2019 - $183,939) of amortization related to property, plant and equipment.

Included in prototype additions are vehicles under lease of $73,223 (2020 - $66,025; 2019 - $79,668).

25

----

| **KELSO TECHNOLOGIES INC.  **Notes to Consolidated Financial Statements For the Years ended December 31, 2021, 2020 and 2019(Expressed in US Dollars) |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                            |

**8.** **INTANGIBLE ASSETS**

| **Cost**                            |   | Patent |   |   | Rights  |   |   | Intellectual Property |   |   | Total   |   |
|-------------------------------------|--------|--------|--------|--------|---------|--------|--------|-----------------------|--------|--------|---------|--------|
| Balance, December 31, 2019 and 2020 | $      | 40,840 |   | $      | 672,959 |   | $      | -                     |   | $      | 713,799 |   |
| Additions                           |   | -      |   |   | -       |   |   | 169,973               |   |   | 169,973 |   |
|                                |   |   |   |   |    |   |   |                  |   |   |    |   |
| Balance, December 31, 2021          | $      | 40,840 |   | $      | 672,959 |   | $      | 169,973               |   | $      | 883,772 |   |
| **Accumulated Amortization**        |   |   |   |   |    |   |   |                  |   |   |    |   |
| Balance, December 31, 2019          | $      | 40,840 |   | $      | 65,000  |   | $      | -                     |   | $      | 105,840 |   |
| Amortization                        |   | -      |   |   | -       |   |   | -                     |   |   | -       |   |
| Balance, December 31, 2020          | $      | 40,840 |   | $      | 65,000  |   | $      | -                     |   | $      | 105,840 |   |
| Amortization                        |   | -      |   |   | 303,980 |   |   | -                     |   |   | 303,980 |   |
|                                |   |   |   |   |    |   |   |                  |   |   |    |   |
| Balance, December 31, 2021          | $      | 40,840 |   | $      | 368,980 |   | $      | -                     |   | $      | 409,820 |   |
| **Carrying Value**                  |   |   |   |   |    |   |   |                  |   |   |    |   |
| December 31, 2021                   | $      | -      |   | $      | 303,979 |   | $      | 169,973               |   | $      | 473,952 |   |
| December 31, 2020                   | $      | -      |   | $      | 607,959 |   | $      | -                     |   | $      | 607,959 |   |

During the year ended December 31, 2010, the Company entered into an agreement to acquire a patent related to their manway securement systems. The Company is obligated to pay a 5% royalty in accordance with the agreement (Note 16).

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

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

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

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

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

The Company is also required to pay a royalty to the Vendor of 2.5% of the net sales earned by the Company, to be paid within 30 days of the end of each calendar quarter. As at December 31, 2021 the Company has not earned any revenue from the sale of the Products. 

26

----

| **KELSO TECHNOLOGIES INC.  **Notes to Consolidated Financial Statements For the Years ended December 31, 2021, 2020 and 2019(Expressed in US Dollars) |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                            |

**8. INTANGIBLE ASSETS** (Continued)

On March 3, 2021, the Company terminated the technology development agreement, including the consulting agreement for $10,000 per month. The Company will still maintain all intellectual property rights acquired under the agreement and will still be liable for the 2.5% royalty. This termination is currently in the arbitration process pursuant to the terms of the agreement.

On October 25, 2021, the Company entered into a technology services agreement with a third-party developer (the "Agreement") to further develop its internal intellectual property related to the active suspension control system for no road vehicles. The Agreement consists of total payments of $650,734 ($825,000 CAD) over the term which is estimated to be eight months. Intellectual property developed under the Agreement will be the property of the Company and certain background technology of the developer will be licensed by the Company for the purposes of manufacturing and selling the related products. The royalty payment for the license will be $27,000 CAD per year for a period of 10 years (the "License Fee") with the first-year fee waived and the second year discounted 50%. If the Company purchases a minimum of 10 control systems designed under the Agreement in any year, the License Fee for that year will be waived. The Company may receive an unrestricted license to use the background technology of the developer at any time by paying the cumulative remaining License Fees plus a one-time payment of $50,000.

During the year ended December 31, 2021, the Company incurred a total of $56,416 (2020 - $Nil) with this vendor which was capitalized to intellectual property. In addition, the Company had a deposit of $127,643 (2020 - $Nil) at December 31, 2021 to be applied over the term of the Agreement.

**9.** **LEASE LIABILITY**

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

The continuity of the lease liability for the years ended December 31, 2021 and 2020 is as follows:

| **Lease liability**                        |   | Warehouse |   |   | Vehicles |   |   | Total    |   |
|--------------------------------------------|--------|-----------|--------|--------|----------|--------|--------|----------|--------|
| Lease liability, as of December 31, 2019   | $      | 104,785   |   | $      | 72,150   |   | $      | 176,935  |   |
| Additions                                  |   | -         |   |   | 66,025   |   |   | 66,025   |   |
| Lease payments                             |   | (77,009   | )      |   | (22,586  | )      |   | (99,595  | )      |
| Lease interest                             |   | 3,642     |   |   | 2,242    |   |   | 5,884    |   |
| Lease liability, as of December 31, 2020   | $      | 31,418    |   | $      | 117,831  |   | $      | 149,249  |   |
| Additions                                  |   | 199,466   |   |   | 43,491   |   |   | 242,957  |   |
| Lease payments                             |   | (84,353   | )      |   | (31,769  | )      |   | (116,122 | )      |
| Lease interest                             |   | 6,757     |   |   | 4,871    |   |   | 11,628   |   |
| Leasing liability, as of December 31, 2021 | $      | 153,288   |   | $      | 134,424  |   | $      | 287,712  |   |
|                                       |   |      |   |   |     |   |   |     |   |
| Current portion                            | $      | 65,886    |   | $      | 25,896   |   | $      | 91,782   |   |
| Long-term portion                          |   | 87,402    |   |   | 108,528  |   |   | 195,930  |   |
|                                       |   |      |   |   |     |   |   |     |   |
| ** **                                 | $      | 153,288   |   | $      | 134,424  |   | $      | 287,712  |   |

27

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| **KELSO TECHNOLOGIES INC.  **Notes to Consolidated Financial Statements For the Years ended December 31, 2021, 2020 and 2019(Expressed in US Dollars) |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                            |

**9.** **LEASE LIABILITY**(Continued)

The Company's non-current contractual lease obligations are as follows:

| **Year** |   | Amount  |   |
|----------|--------|---------|--------|
| 2022     | $      | 103,404 |   |
| 2023     |   | 135,419 |   |
| 2024     |   | 37,855  |   |
| 2025     |   | 12,342  |   |
| 2026     |   | 7,049   |   |
| 2027     |   | 7,049   |   |
| 2028     |   | 4,338   |   |
|     | $      | 307,456 |   |

**10.** **DERIVATIVE WARRANT LIABILITY**

The Company's derivative warrant liability arises as a result of the issuance of warrants exercisable in CAD. As the denomination is different from the Company's USD functional currency, the Company recognizes a derivative liability for these warrants and remeasures the liability at the end of each reporting period.

Changes in respect of the Company's derivative warrant liability are as follows:

| **Balance, December 31, 2019 and 2020** | **$**  | **-**       |   |
|-----------------------------------------|--------|-------------|--------|
| Fair value of warrants issued           |   | 925,737     |   |
| Fair value adjustment                   |   | (658,626    | )      |
|                                    |   |        |   |
| **Balance, December 31, 2021**          | **$**  | **267,111** |   |

Valuation of the derivative warrant liability requires the use of highly subjective estimates and assumptions. The expected volatility used is based on the Company's historical share prices. The risk-free interest rate for the periods within the expected life of the warrants is based on Canadian government benchmark bond with an approximate equivalent term. The expected life is based on the contractual term. Changes in the underlying assumptions can materially affect the fair value estimates.

On December 31, 2021, the Company revalued the derivative warrant liability at an estimated fair value of $267,111. The Company uses an option pricing model to estimate the liability's fair value. The following weighted average assumptions were used:

| ** **              |   | **As of****December 31, 2021** |   |   | **At Issuance -March 4, 2021** |   |
|-------------------------|--------|--------------------------------|--------|--------|--------------------------------|--------|
| Risk-free interest rate |   | 0.95%                          |   |   | 0.28%                          |   |
| Expected life           |   | 1.17 years                     |   |   | 2.00 years                     |   |
| Annualized volatility   |   | 96.32%                         |   |   | 81.02%                         |   |
| Dividend yield          |   | 0.00%                          |   |   | 0.00%                          |   |
| Fair value per warrant  |   | $0.08                          |   |   | $0.26                          |   |

28

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| **KELSO TECHNOLOGIES INC.  **Notes to Consolidated Financial Statements For the Years ended December 31, 2021, 2020 and 2019(Expressed in US Dollars) |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                            |

**11.** **CAPITAL STOCK**

Authorized:

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

Unlimited common shares without par value.

a) Common shares

During the year ended December 31, 2021, the Company issued 7,000,000 units at $0.91 CAD per unit pursuant to a private placement for gross proceeds of $4,922,510 ($6,370,000 CAD). Each unit consists of one common share and one-half share purchase warrant expiring two years from the date of issue. Each whole warrant entitles the holder thereof to acquire one common share at a price of $1.15 CAD in year one and $1.30 CAD in year two. At issuance, the remainder of the proceeds from the private placement financings, after subtracting the value of the derivative warrant liability (note 10) in the amount of $925,737, totaled $3,996,773 and was allocated to issued capital using the residual method. In connection with the private placement, the Company incurred issuance costs of $409,712, of which $77,051 was recorded as unit issuance costs in the consolidated statements of operations and comprehensive income (loss).

During the year ended December 31, 2021, the Company issued 150,000 shares pursuant to the exercise of stock options for gross proceeds of $55,000. A value of $37,385 was transferred from reserves to share capital as a result.

There were no share issuances during the year ended December 31, 2020.

(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.

29

----

| **KELSO TECHNOLOGIES INC.  **Notes to Consolidated Financial Statements For the Years ended December 31, 2021, 2020 and 2019(Expressed in US Dollars) |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                            |

**11.** **CAPITAL STOCK** (Continued)

(b) Stock options (Continued)

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

| Exercise          | Expiry            |      | December 31, |   |    |    |   |     |      |   |       |       |   |      | December 31, |   |
|-------------------|-------------------|-----------|--------------|--------|---------|---------|--------|----------|-----------|--------|------------|------------|--------|-----------|--------------|--------|
| Price             | Date              |      | 2020         |   |    | Granted |   |     | Exercised |   |       | Expired    |   |      | 2021         |   |
| $1.30             | August 18, 2021   |      | 1,175,000    |   |    | -       |   |     | -         |   |       | (1,175,000 | )      |      | -            |   |
| $0.90             | July 6, 2022      |      | 50,000       |   |    | -       |   |     | -         |   |       | -          |   |      | 50,000       |   |
| $0.30             | November 28, 2022 |      | 750,000      |   |    | -       |   |     | (100,000  | )      |       | -          |   |      | 650,000      |   |
| $0.57             | April 17, 2023    |      | 200,000      |   |    | -       |   |     | -         |   |       | -          |   |      | 200,000      |   |
| $0.50             | August 20, 2023   |      | 750,000      |   |    | -       |   |     | (50,000   | )      |       | -          |   |      | 700,000      |   |
| $1.45             | May 17, 2024      |      | 10,000       |   |    | -       |   |     | -         |   |       | -          |   |      | 10,000       |   |
| $0.78             | August 19, 2024   |      | 700,000      |   |    | -       |   |     | -         |   |       | -          |   |      | 700,000      |   |
| $0.82             | November 8, 2024  |      | 10,000       |   |    | -       |   |     | -         |   |       | -          |   |      | 10,000       |   |
| $0.76             | February 11, 2025 |      | 200,000      |   |    | -       |   |     | -         |   |       | -          |   |      | 200,000      |   |
| $0.75             | August 18, 2025   |      | 750,000      |   |    | -       |   |     | -         |   |       | -          |   |      | 750,000      |   |
| Total outstanding |              | 4,595,000 |         |   | -       |    |   | (150,000 | )         |   | (1,175,000 | )          |   | 3,270,000 |         |
| Total exercisable |              | 3,721,667 |         |   | -       |    |   | (150,000 | )         |   | (1,175,000 | )          |   | 2,953,333 |         |
|              |              |      |         |   |    |    |   |     |      |   |       |       |   |      |         |
| Exercise          | Expiry            |      | December 31, |   |    |    |   |     |      |   |       |       |   |      | December 31, |   |
| Price             | Date              |      | 2019         |   |    | Granted |   |     | Exercised |   |       | Expired    |   |      | 2020         |   |
| $1.30             | August 18, 2021   |      | 1,175,000    |   |    | -       |   |     | -         |   |       | -          |   |      | 1,175,000    |   |
| $0.90             | July 6, 2022      |      | 50,000       |   |    | -       |   |     | -         |   |       | -          |   |      | 50,000       |   |
| $0.30             | November 28, 2022 |      | 750,000      |   |    | -       |   |     | -         |   |       | -          |   |      | 750,000      |   |
| $0.57             | April 17, 2023    |      | 200,000      |   |    | -       |   |     | -         |   |       | -          |   |      | 200,000      |   |
| $0.50             | August 20, 2023   |      | 750,000      |   |    | -       |   |     | -         |   |       | -          |   |      | 750,000      |   |
| $1.45             | May 17, 2024      |      | 10,000       |   |    | -       |   |     | -         |   |       | -          |   |      | 10,000       |   |
| $0.78             | August 19, 2024   |      | 700,000      |   |    | -       |   |     | -         |   |       | -          |   |      | 700,000      |   |
| $0.82             | November 8, 2024  |      | 10,000       |   |    | -       |   |     | -         |   |       | -          |   |      | 10,000       |   |
| $0.76             | February 11, 2025 |      | -            |   |    | 200,000 |   |     | -         |   |       | -          |   |      | 200,000      |   |
| $0.75             | August 18, 2025   |      | -            |   |    | 750,000 |   |     | -         |   |       | -          |   |      | 750,000      |   |
| Total outstanding |              | 3,645,000 |         |   | 950,000 |    |   | -        |      |   | -          |       |   | 4,595,000 |         |
| Total exercisable |              | 2,831,667 |         |   | 316,665 |    |   | -        |      |   | -          |       |   | 3,721,667 |         |

A summary of the Company's stock options as at December 31, 2021 and 2020, and changes for the years then ended are as follows:

|                           |   |       |   |   | Weighted         |   |
|--------------------------------|--------|------------|--------|--------|------------------|--------|
|                           |   |       |   |   | Average Exercise |   |
|                           |   | Number     |   |   | Price            |   |
| Outstanding, December 31, 2019 |   | 3,645,000  |   | $      | 0.78             |   |
| Granted                        |   | 950,000    |   | $      | 0.75             |   |
| Outstanding, December 31, 2020 |   | 4,595,000  |   | $      | 0.78             |   |
| Exercised                      |   | (150,000   | )      | $      | 0.37             |   |
| Expired                        |   | (1,175,000 | )      | $      | 1.30             |   |
| Outstanding, December 31, 2021 |   | 3,270,000  |   | $      | 0.61             |   |

The weighted average contractual life for the remaining options at December 31, 2021 is 2.22 years (2020 - 2.52).

30

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| **KELSO TECHNOLOGIES INC.  **Notes to Consolidated Financial Statements For the Years ended December 31, 2021, 2020 and 2019(Expressed in US Dollars) |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                            |

**11.** **CAPITAL STOCK** (Continued)

(b) Stock options (Continued)

*Share-based expense*

Share-based expense of $108,696 (2020 - $423,538; 2019 - $345,498) was recognized in the year ended December 31, 2021 for stock options. The share-based expense relates to options granted during December 31, 2020 and 2019, which vest over time. 

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

|                              |   | Year ended       |   |   | Year ended       |   |
|-----------------------------------|--------|------------------|--------|--------|------------------|--------|
|                              |   | December 31,2020 |   |   | December 31,2019 |   |
| Risk-free interest rate (average) |   | **0.51%**        |   |   | 1.32%            |   |
| Estimated volatility (average)    |   | **67.29%**       |   |   | 69.93%           |   |
| Expected life in years            |   | **5.00**         |   |   | 5.00             |   |
| Expected dividend yield           |   | **0.00%**        |   |   | 0.00%            |   |
| Estimated forfeitures             |   | **0.00%**        |   |   | 0.00%            |   |
| Grant date fair value per option  | **$**  | **0.38**         |   | $      | 0.45             |   |

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

(c) Warrants

Warrants outstanding as at December 31, 2021 are summarized below:

| ** **                                         |   | **Share purchase****warrants** |   |   | **Weighted averageexercise price** |      |
|----------------------------------------------------|--------|--------------------------------|--------|--------|------------------------------------|-----------|
| **Outstanding, December 31, 2019 and 2020**        |   | **-**                          |   | **$**  | **-**                              |      |
| Issued                                             |   | 3,500,005                      |   | $      | 0.91                               |  (1) |
| **Outstanding and exercisable, December 31, 2021** |   | **3,500,005**                  |   | **$**  | **0.91**                           |      |

(1) These warrants are denominated in CAD and have been translated based on the exchange rate of $1.00 = $1.2637 CAD, which is the rate in effect on the date of issuance of March 4, 2021.

The warrants outstanding at December 31, 2021 expire on March 4, 2023 and have a remaining life of 1.17 years at December 31, 2021.

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| **KELSO TECHNOLOGIES INC.  **Notes to Consolidated Financial Statements For the Years ended December 31, 2021, 2020 and 2019(Expressed in US Dollars) |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                            |

**11.** **CAPITAL STOCK** (Continued)

(d) Restricted share units

On April 28, 2021, the Company implemented a Restricted Share Unit Plan (the "RSU Plan"). Pursuant to the RSU Plan, the Company will grant restricted share units ("RSUs") to directors, officers, employees, and consultants for services as approved from time to time by the Board. The maximum number of common shares made available for issuance pursuant to the RSU Plan shall not exceed 5% of the common shares issued and outstanding and shall not exceed 10% of the common shares issued and outstanding less any common shares reserved for issuance under all other share compensation arrangements. The vesting terms, settlement, and method of settlement of the RSUs granted under the RSU Plan will be determined by the Board of Directors.

A summary of the Company's RSUs as at December 31, 2021 and 2020, and changes for the years then ended are as follows:

|                                    |   | Equity settled |   |
|-----------------------------------------|--------|----------------|--------|
| Outstanding, December 31, 2020 and 2019 |   | -              |   |
| Granted                                 |   | 355,000        |   |
| Outstanding, December 31, 2021          |   | 355,000        |   |

The estimated fair value of the equity settled RSUs granted during the year ended December 31, 2021 were $244,950 (2020 - $Nil; 2019 - $Nil) and was based on the fair market value of one common share on the date of issuance. The fair value will be recognized as an expense over the vesting period with 33% vesting on October 27, 2022 and 33% every year thereafter. Share-based expense of $24,949 (2020 - $Nil; 2019 - $Nil) was recognized in the year ended December 31, 2021 for RSUs.

(e) Deferred share units

On April 28, 2021, the Company implemented a Non-Employee Directors Deferred Share Unit Plan (the "DSU Plan"). Pursuant to the DSU Plan, non-employee directors may elect to receive deferred share units ("DSUs") in lieu of a cash payment of up to 50% of their annual base compensation determined by the Board. The maximum number of common shares made available for issuance pursuant to the DSU Plan shall not exceed 2% of the common shares issued and outstanding and shall not exceed 10% of the common shares issued and outstanding less any common shares reserved for issuance under all other share compensation agreements.

As at December 31, 2021, no DSUs have been granted to non-employee directors.

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| **KELSO TECHNOLOGIES INC.  **Notes to Consolidated Financial Statements For the Years ended December 31, 2021, 2020 and 2019(Expressed in US Dollars) |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                            |

**12.** **RELATED PARTY TRANSACTIONS**

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

|                    |   | **December 31,** |   |   | December 31, |   |   | December 31, |   |
|-------------------------|--------|------------------|--------|--------|--------------|--------|--------|--------------|--------|
|                    |   | **2021**         |   |   | 2020         |   |   | 2019         |   |
| Management compensation | **$**  | **720,923**      |   | $      | 641,845      |   | $      | 540,692      |   |
| Management bonus*       |   | **-**            |   |   | 28,423       |   |   | 496,894      |   |
| Share-based expense**   |   | **104,250**      |   |   | 335,155      |   |   | 255,902      |   |
| Directors' fees         |   | **163,000**      |   |   | 163,000      |   |   | 120,500      |   |
|                    | **$**  | **988,173**      |   | $      | 1,168,423    |   | $      | 1,413,988    |   |

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

** Share-based expense consists of the key management portion of the fair value of options and RSUs and does not include any cash compensation.

As at December 31, 2021, amounts due to related parties included in accounts payable and accrued liabilities, which are unsecured and have no interest or specific terms, consist of $Nil (2020 - $Nil) for directors' fees and $Nil (2020 - $28,423) for management bonus.

**13.** **INCOME TAXES**

The Company has $Nil in non-capital losses in the US that may be applied against future taxable income.

The tax effect items that give rise to significant portions of the deferred income tax assets and deferred income tax liabilities at December 31, 2021 and 2020 are as follows:

|                                                                                 |   | **December 31,2021** |   |   | December 31,2020 |   |
|--------------------------------------------------------------------------------------|--------|----------------------|--------|--------|------------------|--------|
| Deferred income tax assets                                                           |   | ** **           |   |   |             |   |
| Non-capital loss carry-forwards                                                      | **$**  | **216,826**          |   | $      | 22,609           |   |
| Deferred income tax assets                                                           | **$**  | **216,826**          |   | $      | 22,609           |   |
| Deficiency (excess) of carrying value over tax valueof property, plant and equipment | **$**  | **(216,826**         | **)**  | $      | -                |   |
| Excess of carrying value over tax value of intangible assets                         |   | **-**                |   |   | (22,609          | )      |
| Deferred income tax liability                                                        | **$**  | **(216,826**         | **)**  | $      | (22,609          | )      |
| Net deferred tax asset (liability)                                                   | **$**  | **-**                |   | $      | -                |   |

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| **KELSO TECHNOLOGIES INC.  **Notes to Consolidated Financial Statements For the Years ended December 31, 2021, 2020 and 2019(Expressed in US Dollars) |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                            |

**13.** **INCOME TAXES** (Continued)

Significant unrecognized tax benefits and unused tax losses for which no deferred tax assets is recognized as of December 31, 2021 and 2020 are as follows:

|                                                          |   | **December 31,2021** |   |   | December 31,2020 |   |
|---------------------------------------------------------------|--------|----------------------|--------|--------|------------------|--------|
| Excess of tax value over carrying value of mineral properties | **$**  | **1,135**            |   | $      | 1,536            |   |
| Non-capital losses carried forward                            |   | **1,411,411**        |   |   | 936,086          |   |
| Property, plant and equipment                                 |   | **-**                |   |   | 14,809           |   |
| Intangible assets                                             |   | **49,992**           |   |   | -                |   |
| Lease liability                                               |   | **77,682**           |   |   | 40,297           |   |
| Unrecognized deductible temporary differences                 | **$**  | **1,540,220**        |   | $      | 992,728          |   |

Income tax expense differs from the amount that would be computed by applying the Canadian statutory income tax rate of 27.00% (2020 - 27.00%; 2019 - 27.00%) to income (loss) before income taxes as follows:

|                                                          |   | **December 31,2021** |   |   | December 31,2020 |   |   | December 31,2019 |   |
|---------------------------------------------------------------|--------|----------------------|--------|--------|------------------|--------|--------|------------------|--------|
| Income (loss) before income taxes                             | **$**  | **(2,758,567**       | **)**  | $      | (1,307,890       | )      | $      | 3,334,043        |   |
| Statutory income tax rate                                     |   | **27.00%**           |   |   | 27.00%           |   |   | 27.00%           |   |
| Income tax (benefit) liability computed at statutory tax rate |   | **(744,813**         | **)**  |   | (353,130         | )      |   | 900,192          |   |
| Items not deductible for income tax purposes                  |   | **(107,916**         | **)**  |   | 147,116          |   |   | (12,564          | )      |
| Under provision of taxes in prior years                       |   | **99,873**           |   |   | (84,532          | )      |   | 36,225           |   |
| Change in timing differences                                  |   | **91,007**           |   |   | 499,718          |   |   | 135,130          |   |
| Impact of foreign exchange on tax assets and liabilities      |   | **4,444**            |   |   | (7,163           | )      |   | (39,116          | )      |
| Unused tax losses and tax offsets not recognized              |   | ******813,044**      |   |   | 33,082           |   |   | (983,204         | )      |
| Income tax expense                                            |   | **155,639**          |   |   | 235,091          |   |   | 36,663           |   |
| Penalties and interest included in income tax expense         |   | **-**                |   |   | -                |   |   | 27,989           |   |
| Texas margin tax and branch tax                               |   | **17,000**           |   |   | 13,901           |   |   | 34,425           |   |
| Income tax expense                                            | **$**  | **172,639**          |   | $      | 248,992          |   | $      | 99,077           |   |

**14.** **SUPPLEMENTAL CASH FLOW INFORMATION**

|                                                                      |   | **December 31,** |   |   | December 31, |   |   | December 31, |   |
|---------------------------------------------------------------------------|--------|------------------|--------|--------|--------------|--------|--------|--------------|--------|
|                                                                      |   | **2021**         |   |   | 2020         |   |   | 2019         |   |
| Property, plant and equipment in accounts payable and accrued liabilities | **$**  | **-**            |   | $      | 28,280       |   | $      | 97,180       |   |
| Interest paid                                                             | **$**  | **9,054**        |   | $      | 9,088        |   | $      | 737          |   |
| Income taxes paid                                                         | **$**  | **342,000**      |   | $      | 229,233      |   | $      | 487,206      |   |

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| **KELSO TECHNOLOGIES INC.  **Notes to Consolidated Financial Statements For the Years ended December 31, 2021, 2020 and 2019(Expressed in US Dollars) |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                            |

**15.** **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, |   |
|--------------------------------------------------------------|--------|------------------|--------|--------|--------------|--------|--------|--------------|--------|
|                                                         |   | **2021**         |   |   | 2020         |   |   | 2019         |   |
| Net income (loss) for the period                             | **$**  | **(2,758,567**   | **)**  | $      | (1,307,890   | )      | $      | 3,334,043    |   |
| Basic weighted average number of common shares outstanding   |   | **53,082,689**   |   |   | 47,170,086   |   |   | 47,170,086   |   |
| Effect on dilutive securities:                               |   |             |   |   | ** **   |   |   |         |   |
| Options                                                      |   | **-**            |   |   | -            |   |   | 1,016,436    |   |
| Diluted weighted average number of common shares outstanding |   | **53,082,689**   |   |   | 47,170,086   |   |   | 48,186,522   |   |
| Basic income (loss) per share                                | **$**  | **(0.05**        | **)**  | $      | (0.03        | )      | $      | 0.07         |   |
| Diluted income (loss) per share                              | **$**  | **(0.05**        | **)**  | $      | (0.03        | )      | $      | 0.07         |   |

**16.** **SIGNIFICANT CUSTOMERS**

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

|       |   | **December 31,** |   |   | December 31, |   |   | December 31, |   |
|------------|--------|------------------|--------|--------|--------------|--------|--------|--------------|--------|
|       |   | **2021**         |   |   | 2020         |   |   | 2019         |   |
| Customer A | **$**  | **2,787,027**    |   | $      | 5,505,214    |   | $      | 11,043,962   |   |
| Customer B | **$**  | **252,804**      |   | $      | 485,674      |   | $      | 2,660,840    |   |
| Customer C | **$**  | **932,248**      |   | $      | 2,710,540    |   | $      | 1,957,400    |   |
| Customer D | **$**  | **1,314,843**    |   | $      | 1,280,155    |   | $      | 308,443      |   |

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

The Company is obligated to pay a 5% royalty from sales of their manway securement systems until 2023 in accordance with the original acquisition agreement. During the year ended December 31, 2021, there were revenues from sales of the manway securement systems totaling $11,000 (2020 - $10,500; 2019 - $133,486).

**17.** **EMPLOYEE BENEFITS**

Total employee benefit expenses, including salary and wages, management compensation, share-based expense and benefits for the year ended December 31, 2021 amounted to $2,965,045; (2020 - $3,803,757; 2019 - $4,451,529).

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| **KELSO TECHNOLOGIES INC.  **Notes to Consolidated Financial Statements For the Years ended December 31, 2021, 2020 and 2019(Expressed in US Dollars) |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                            |

**18.** **SEGMENTED INFORMATION**

The Company operates in two business segments with operations and long-term assets in the United States and Canada. The two business segments include the design, production, and distribution of various proprietary products for the rail sector and active suspension control system for no road vehicles. At December 31, 2021, long term assets of $1,250,676 (2020 - $2,001,034) relates to the active suspension control system located in Canada and $2,597,313 (2020 - $2,941,310) relates to the rail sector located in the United States. During the years ended December 31, 2021, 2020 and 2019 there was no revenue related to the active suspension control system.

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