---

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

FORM 20-F

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

OR

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

For the fiscal year endedDecember 31,
  2015

OR

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

OR

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

Date of event requiring this shell company report N/A

For the transition period fromN/A toN/A

Commission file number 001-36685

|KELSO TECHNOLOGIES INC.                                                                      
|---------------------------------------------------------------------------------------------
|(Exact name of Registrant as specified in its charter)                                       
|                                                                                             
|Not Applicable                                                                               
|(Translation of Registrants name into English)                                              
|                                                                                             
|British Columbia, Canada                                                                     
|(Jurisdiction of incorporation or organization)                                              
|                                                                                             
|13966 18B Avenue, Surrey, British Columbia V4A 8J1,
      Canada                             
|(Address of principal executive offices)                                                     
|                                                                                             
|James R. Bond, CEO                                                                           
|13966 18B Avenue                                                                             
|Surrey, British Columbia V4A 8J1, Canada                                                     
|Telephone: 250.764.3618                                                                      
|Email: bond@kelsotech.com                                                                    
|(Name, Telephone, E-mail and/or Facsimile number and
      Address of Company Contact Person)
|                                                                                             
|Copy of communications to:                                                                   
|Bernard Pinsky                                                                               
|Clark Wilson LLP                                                                             
|Suite 900  885 West Georgia Street                                                          
|Vancouver, British Columbia, Canada, V6C 3H1                                                 
|Telephone: 604.687.5700                                                                      
|Facsimile: 604.687.6314                                                                      

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-ii-

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

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

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

Nil(Title of Class)

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

Not Applicable(Title of Class)

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

46,071,752 common shares without par
  value outstanding on December 31, 2015. 
  There were no Class A non-cumulative
  preference shares outstanding on December 31, 2015.

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

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

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

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

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

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

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


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

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

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

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-iii-

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

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

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-i-

TABLE OF CONTENTS

|                                 |                                                             |                                                            | Page
|-------------------------------- | ----------------------------------------------------------- | ---------------------------------------------------------- | ----
|FORWARD-LOOKING
      STATEMENTS | 3                                                          
|PART
      I                     |                                                             |                                                            | 3   
|Item
      1.                    | Identity
      of Directors, Senior Management and Advisers | 3                                                         
|                                 | A.                                                          | Advisers                                                   | 4   
|                                 | B.                                                          | Auditors                                                   | 4   
|Item
      2.                    | Offer
      Statistics and Expected Timetable               | 4                                                         
|Item
      3.                    | Key
      Information                                       | 4                                                         
|                                 | A.                                                          | Selected
      Financial Data                              | 4   
|                                 | B.                                                          | Capitalization
      and Indebtedness                      | 5   
|                                 | C.                                                          | Reasons
      for the Offer and Use of Proceeds            | 5   
|                                 | D.                                                          | Risk
      Factors                                         | 5   
|Item
      4.                    | Information
      on our Company                            | 11                                                        
|                                 | A.                                                          | History
      and Development of Our Company               | 11  
|                                 | B.                                                          | Business
      Overview                                    | 16  
|                                 | C.                                                          | Organizational
      Structure                             | 24  
|                                 | D.                                                          | Property,
      Plants and Equipment                       | 25  
|Item
      5.                    | Operating
      and Financial Review and Prospects          | 25                                                        
|                                 | A.                                                          | Operating
      Results                                    | 26  
|                                 | B.                                                          | Liquidity
      and Capital Resources                      | 29  
|                                 | C.                                                          | Research
      and Development, Patents and Licenses, etc. | 31  
|                                 | D.                                                          | Trend
      Information                                    | 31  
|                                 | E.                                                          | Off-Balance
      Sheet Arrangements                       | 31  
|                                 | F.                                                          | Tabular
      Disclosure of Contractual Obligations        | 31  
|Item
      6.                    | Directors,
      Senior Management and Employees            | 32                                                        
|                                 | A.                                                          | Directors
      and Senior Management                      | 32  
|                                 | B.                                                          | Compensation                                               | 34  
|                                 | C.                                                          | Board
      Practices                                      | 36  
|                                 | D.                                                          | Employees                                                  | 39  
|                                 | E.                                                          | Share
      Ownership                                      | 39  
|Item
      7.                    | Major
      Shareholders and Related Party Transactions     | 40                                                        
|                                 | A.                                                          | Major
      Shareholders                                   | 40  
|                                 | B.                                                          | Related
      Party Transactions                           | 41  
|Item
      8.                    | Financial
      Information                                 | 41                                                        
|                                 | A.                                                          | Financial
      Statements and Other Financial Information | 41  
|                                 | B.                                                          | Significant
      Changes                                  | 42  
|Item
      9.                    | The
      Offer and Listing                                 | 42                                                        
|                                 | A.                                                          | Offer
      and Listing Details                            | 42  
|                                 | B.                                                          | Plan
      of Distribution                                 | 44  
|                                 | C.                                                          | Markets                                                    | 44  
|                                 | D.                                                          | Selling
      Shareholders                                 | 44  
|                                 | E.                                                          | Dilution                                                   | 44  
|Item
      10.                   | Additional
      Information                                | 44                                                        
|                                 | A.                                                          | Share
      Capital                                        | 44  
|                                 | B.                                                          | Memorandum
      and Articles of Association               | 44  
|                                 | C.                                                          | Material
      Contracts                                   | 44  
|                                 | D.                                                          | Exchange
      Controls                                    | 46  
|                                 | E.                                                          | Taxation                                                   | 46  
|                                 | F.                                                          | Dividends
      and Paying Agents                          | 48  
|                                 | G.                                                          | Statement
      by Experts                                 | 48  
|                                 | H.                                                          | Documents
      on Display                                 | 48  

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-ii-

|               | I.                                                                                  | Subsidiary
      Information                                                  | 48
|-------------- | ----------------------------------------------------------------------------------- | ----------------------------------------------------------------------------- | --
|Item
      11. | Quantitative
      and Qualitative Disclosures About Market Risk                    | 49                                                                           
|Item
      12. | Description
      of Securities Other than Equity Securities                        | 50                                                                           
|Part
      II  |                                                                                     |                                                                               | 50
|Item
      13. | Defaults,
      Dividend Arrearages and Delinquencies                               | 50                                                                           
|Item
      14. | Material
      Modifications to the Rights of Security Holders and Use of Proceeds. | 50                                                                           
|Item
      15. | Controls
      and Procedures                                                       | 51                                                                           
|Item
      16. | [Reserved]                                                                          | 52                                                                           
|               | A.                                                                                  | Audit
      Committee Financial Expert                                        | 52
|               | B.                                                                                  | Code
      of Ethics                                                          | 52
|               | C.                                                                                  | Principal
      Accountant Fees and Services                                  | 52
|               | D.                                                                                  | Exemptions
      from the Listing Standards for Audit Committees.             | 53
|               | E.                                                                                  | Purchases
      of Equity Securities by the Issuer and Affiliated Purchasers. | 53
|Part
      III |                                                                                     |                                                                               | 55
|Item
      17. | Financial
      Statements                                                          | 55                                                                           
|Item
      18. | Financial
      Statements                                                          | 55                                                                           
|Item
      19. | Exhibits                                                                            | 55                                                                           

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- 3 -

FORWARD-LOOKING STATEMENTS

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

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

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

As used in this annual report, the terms we, us and our
refer to Kelso Technologies Inc. and its wholly-owned subsidiaries Kelso
Technologies (U.S.A.) Inc. and of Kelso Innovative Solutions Inc. (collectively
the Company).

PART I

|Item 1. | Identity of Directors, Senior Management and
      Advisers
|------- | -----------------------------------------------------------

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

Name and Office Held
    FunctionJames R. Bond Director, President and Chief
      Executive Officer
    As President and Chief Executive Officer, Mr. Bond is
      responsible for strategic planning and operations, as well as managing our
      relations with the Companys legal advisers, regulatory authorities and
      the investment community; as a director, Mr. Bond participates in
      management oversight and helps to ensure compliance with the Companys
      corporate governance policies and standards.William Troy Director and Audit
      Committee Member Neil Gambow Director, Managing Director
      Corporate Development and former Chief Operating
      Officer(1)
    As an independent director, Mr. Troy supervises the
      Companys management and helps to ensure compliance with our corporate
      governance policies and standards. As a director, Mr. Gambow supervises
      the Companys management and helps to ensure compliance with the Companys
      corporate governance policies and standards. As Managing Director
      Corporate Development, Mr. Gambow is responsible for the daily operations
      of the Companys plant in Bonham, TX as well as the development, sales,
      marketing and engineering of the Companys products.Peter Hughes Director and Audit
      Committee Member
    As an independent director, Mr. Hughes supervises the
      Companys management and helps to ensure compliance with the Companys
      corporate governance policies and standards.Anthony Andrukaitis Director and
      Executive Vice President Business Development and Chief
      Operating Officer(1)
    As a director, Mr. Andrukaitis supervises the Companys
      management and helps to ensure compliance with the Companys corporate
      governance policies and standards. As Vice President Business Development
      and COO, Mr, Andrukaitis is responsible for the daily operations of the
      Compnys plant in Bonham, Texas andwill continue to take an active
      management role in pursuing growth of business opportunities, including
      mergers and acquisitions.


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- 4 -

Name and Office Held
    FunctionPhil Dyer Director and Audit Committee
      Member
    As an independent director, Mr. Dyer supervises
      the Companys management and helps to ensure compliance with the Companys
      corporate governance policies and standards.John R. ONeill
      Director
    As an independent director, Mr.
      ONeill supervises the Companys management and helps to ensure compliance
      with the Companys corporate governance policies and standards.Richard Lee Chief Financial
      Officer
    As our Chief Financial Officer, Mr. Lee is
      responsible for the management and supervision of all of the financial
      aspects of the Companys business.


|(1) | On March 1, 2015 Mr. Gambow resigned as Chief Operating
      Officer of the Company and was appointed Managing Director Corporate
      Development. Mr. Andrukaitis was appointed Chief Operating Officer of the
      Company on March 1, 2016.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

Advisers

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

Auditors

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

|Item 2. | Offer Statistics and Expected Timetable
|------- | ---------------------------------------

Not Applicable.

|Item 3. | Key Information
|------- | ---------------

|A. | Selected Financial
Data
|-- | -----------------------

Prepared In Accordance With IFRS

The following table summarizes selected financial data for the
Company for the years ended December 31, 2015, 2014 and 2013 prepared in
accordance with IFRS as issued by the International Accounting Standards Board
(IASB). Effective December 31, 2012, we changed our fiscal year end
from August 31st to December 31st. The information in the table was extracted
from the detailed financial statements and related notes included in this annual
report and should be read in conjunction with such financial statements and with
the information appearing under the heading, Item 5  Operating and Financial
Review and Prospects beginning at page 25 below.

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- 5 -

Selected Financial Data

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


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


|B. | Capitalization and
  Indebtedness
|-- | ---------------------------------

Not applicable.

|C. | Reasons for the Offer and Use of
      Proceeds
|-- | -----------------------------------------------

Not applicable.

|D. | Risk Factors
|-- | ------------

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

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

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- 6 -

Risks Relating to the Business

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

The success of the Company will be dependent on the Companys
ability to protect and develop our technology. The Company has obtained patents
for its external constant force spring pressure relief valves (each, an
EPRV) (Patent No. 5,855,225) and a manway securement system trademarked
the Kelso Klincher® (the KKM) (Patent No. US 7,104,722 B2); however,
the Company does not have a patent for its Kelso Tiger Tube - Eduction
Technology eduction tube (the ETS) technology. The patent for the ETS
technology expired several years ago, although the Company does hold
manufacturing, sale and technology rights. The Company has also obtained
trademarks for its product names, particularly Kelso Klincher® (issued on
January 29, 2013under number 4,282,652)and has filed a trademark
application for its Kelso Tiger Tube. The Company has also filed a patent
application under a Non-Publication Request for its Bottom Outlet Valve
(BOV) design and its Vacuum Relief Valve (VRV). A
Non-Publication Request keeps the patent filing private until the patent is
issued. Patent applications filed under a Non-Publication Request only provide
protection in the U.S. and not internationally. See Information on our Company
 History and Development of our Company  Three Year History  2013 for
additional information on Non-Publication Request. See Information on our
Company  Business Overview  Key Products for additional details regarding
EPRVs, KKMs and ETS.

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

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

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

Although the Company had a positive working capital in the
amount of $10,099,390 as at December 31, 2015, the Company may, from time to
time, report a working capital deficit. The Company reported a net loss and
comprehensive loss for the year ended December 31, 2015 of $2,510,826, net
income and comprehensive income for the fiscal year ended December 31, 2014 of
$4,025,781, December 31, 2013 of $2,456,636. To maintain its activities, the
Company may require additional funds which may be obtained either by the sale of
securities or obtaining debt financing. There is no assurance that the Company
will be successful in obtaining such additional financing; failure to do so
could result in the inability of the Company to develop new products, meet
production and delivery demands and continue its operations.

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- 7 -

The Company has a limited operating history and may not
achieve its growth objectives.

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

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

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

Competition may affect the Companys ability to acquire
additional market share or to maintain revenue at current and projected
levels.

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

Customer orders that are placed may be cancelled.

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

The Company is dependent on a limited number of customers.

Although the Company is optimistic about its future as a
railroad equipment supplier, the Company is dependent upon a limited number of
customers for a significant portion of its revenue. In particular, the Company
is dependent on four major corporations as customers. The sales to these four
customers (Customer A, B, C and Customer D) exceeded 10% of the Companys
revenues during the years ended December 31, 2015, 2014 and 2013. During the
year ended December 31,2015 the Company had $18,910,122 of revenues of which
sales of $8,555,088 were from Customer A, sales of $2,045,215were from Customer
B, sales of $3,196,253 were from Customer C abd sales of $1,959,883 were from
Customer D. During the year ended December 31, 2014 the Company had $
$23,816,809 of revenue of which sales of $14,997,197 were from Customer A and
sales of $3,180,348 were from Customer B. During the year ended December 31,
2013, the Company had $13,131,387 of revenue of which sales of $8,782,478 were
from Customer A and sales of $3,409,289 were from Customer B. Although Customers
A, B, C, and D have displayed a pattern of consistent timely payment of accounts
owing, there is no guarantee that sales to these customers will continue at
current levels or that these customers will continue to satisfy their payment
obligations to the Company in a timely manner. The Company does not have any
formal agreements for long term, large-scale purchase orders with these customers and only sells to them
based on purchase orders received. The Company expects that a limited number of
customers will continue to represent a substantial portion of its sales for the
foreseeable future. The loss of any of these customers could have a material
negative impact upon the Company and its results of operations.

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Products may not perform as well as expected.

There is a risk that the Companys products may not perform as
well as expected, which may result in customer complaints, returned products,
product recalls and/or loss of repeat customers. Any one of these effects may
have a material negative impact on the Companys ability to generate revenue and
continue operations. The Company maintains product liability insurance and
commercial general liability insurance at levels which the Company believes are
adequate based on the Companys customer base and revenue from product sales.
However, the amount of the Companys insurance coverage may not be sufficient to
cover future products claims. In 2015, the Companys product liability insurance
premiums were $338,719 for up to $2,000,000 of aggregate product liability
insurance coverage and up to $1,000,000 of coverage per incident. In 2015, the
Companys commercial general liability insurance premiums were $94,975 for up to
$2,000,000 aggregate coverage and $1,000,000 of coverage per incident.

There may be a shortage of parts and raw materials.

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

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

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

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

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

The Company may face uninsurable or underinsured
risks.

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

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- 9 -

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

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

Risks Relating to Management

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

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

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

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

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

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

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

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

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- 10 -

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

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

The Companys business reputation and relationship with
customers and suppliers may be negatively impacted by the actions of former
directors and officers of the Company.

In April 2010, a new management team was appointed by the
Company. The Company believes that the new management team has improved the
Companys business reputation and gained the confidence of the railroad and
investment community by making deliveries on time and satisfying payment
obligations on time, which was not always the case before the Companys current
management came on board. Although the Company and its current management team
strive to make deliveries and payments on time and to operate the business of
the Company in a manner which maintains the Companys business reputation and
the confidence of the railroad and investment community, there is a risk that
the actions of the Companys current and former directors and officers, and in
particular their failure to make certain deliveries and payments on time, may
negatively impact the Companys current and future business reputation and
relationships with customers and suppliers, including the risk that certain
prospective customers and suppliers may not do business with the Company due to
the actions of the Companys former management team.

Risks Relating to the Common Shares

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

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

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

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

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- 11 -

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

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

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

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

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

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

|Item 4. | Information on our Company
|------- | --------------------------

|A. | History and Development of Our
    Company
|-- | ------------------------------------------

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

The Companys registered office is located at Suite 900  885
West Georgia Street, Vancouver, British Columbia V6C 3H1. The Companys
corporate head office is located at 13966 18B Avenue, Surrey, British Columbia
V4A 8J1. The Companys head office telephone number is (250) 764-3618.

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

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

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The Company operates in conjunction with its two wholly-owned
subsidiaries Kelso USA and Kelso Innovative. The Company owns 100% of the voting
securities of each of its subsidiaries. Neither subsidiary has a class of
restricted securities. Kelso USA was incorporated on August 3, 2005 in the State
of Nevada. Kelso Innovative was incorporated on June 20, 2012 in the State of
Nevada. Kelso USA is the operational arm of the Company and Kelso Innovative
focuses on industrial designs and distribution plans for the Companys KKM
system for applications for the roadway trucking and trailer market.

General Development of the Business

General

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

The Company currently offers approximately 60 products. The key
products that the Company offers include a series of 47 types of EPRVs for
pressure management; 4 types of KKMs; 4 types of bottom outlet valves (BOV), 4
types of vacuum relief valves (VRV) and 1 ETS product that address the technical
requirements of load and unload operations and the containment of hazardous
commodities during transport. See Key Products below for a description of the
Companys key products and Markets for the revenue generated from each key
product. In addition to current product offerings, Kelso Innovative, the
Companys wholly-owned product development enterprise, has been working on new
products to add to the Companys catalogue by incorporating customer feedback
into product development decisions.

The Company recruited and appointed a new executive management
team in April 2010 at which time a commercial business plan was established. In
accordance with this strategic plan, the new management team has since
consolidated the Companys share capital on the basis of one new Common Share
for seven old Common Shares; accessed new equity development capital;
established a new production infrastructure whereby the Company believes it has
a strong supply chain which provides services and technology to produce the
products necessary to satisfy customer purchase orders and fluctuating demand;
secured required regulatory approvals; secured product liability insurance;
implemented educational marketing initiatives; and grown sales and distribution
of products to North American rail tank car manufacturers and retrofit/repair
businesses. The Companys revenues over the last eight quarters were as follows:
$3,071,130 for the quarter ended December 31,2015,$4,370,567 for the quarter
ended September 30,2015, $4,596,741 for the quarter ended June 30,2015,
$6,871,684 for the quarter ended March 31,2015,$6,751,794 for the quarter ended
December 31, 2014, $5,936,597 for the quarter ended September 30, 2014,
$5,648,384 for the quarter ended June 30, 2014 and $5,480,034 for the quarter
ended March 31, 2014. The Companys net income/loss over the last eight quarters
were as follows: net loss of $2,283,515 for the quarter ended December 31, 2015,
net loss of $661,263 for the quarter ended September 30,2015, net income of
$105,083 for the quarter ended June 30,2015, net income of $328,869 for the
quarter ended March 31,2015,net income of $762,321 for the quarter ended
December 31, 2014, net income of $959,039 for the quarter ended September 30,
2014, net income of $1,080,846 for the quarter ended June 30, 2014 and net
income of $1,223,575 for the quarter ended March 31, 2014. The Company also
believes that the management team has improved the Companys business reputation
and gained the confidence of the railroad and investment community by making
deliveries on time and satisfying payment obligations on time, which was not
always the case before the Companys current management came on board.

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

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- 13 -

Three Year History

2013

In March 2013, the Company announced that it entered into a
joint sales and marketing agreement with Bulk Tank Inc. (BTI), a
trucking industry supplier, whereby BTI and the Company would market each
others products to their respective customer bases. BTI is the number one
supplier by sales volume and quality for pressure differential trailers in the
trucking industry. Pursuant to this agreement, the Company agreed to market
BTIs products in the rail industry in the United States, Canada and Mexico and
BTI agreed to pay the Company a fee equivalent to any mark-up charged to its end
customers on sales brought to BTI by the Company upon payment by such end
customers, and the parties agreed that all orders for BTI product would be
placed directly with BTI and that the Company would not take possession of the
goods at any time. The mark-up payable to the Company is typically 30% of the
selling price which is determined by BTI. Amounts are payable each quarter that
the product has shipped. The term of the agreement is for one year ending March
12, 2014, which term may be automatically renewed for additional one year terms,
subject to earlier termination. The agreement may be terminated by providing at
least 30 days notice prior to the end of the initial or any subsequent term. As
of the date of this filing, the Company has been paid $11,384 for sales of BTIs
products. The Company does not believe that this agreement is material. Also in
March 2013, the Company reported that it received AAR approval (AAR Approval
Number 079002) for a new 75 PSI pressure relief valve that has the highest flow
rating for this pressure rating and mounting size. The new JS75XL fits a 3 tank
car nozzle with a 6 1⁄2 nominal mounting bolt circle and has a flow rating of
4,099 scfm. It can also be mounted inside the protective housing on new tank
cars.

In May 2013, the Company reported that it successfully
completed independent testing of its KKM. This evaluation was the last stage of
qualification of the KKM for railroad use and confirmed that the KKM is a
leading technology product when compared to similar legacy technology products
currently in use in the industry. The Company is ready for commercial production
of its KKMs, and upon receiving orders will move the KKM into commercial
production at its production facility in Bonham, Texas.

In June 2013, the Company reported that it has filed a patent
application for a new BOV design for use on new rail tank cars and retrofits of
existing rail tank cars. The patent application was filed on June 3, 2013 under
a Non-Publication Request which keeps the patent filing private until the
patent is issued. The final patent is expected to take two or more years to be
granted, and if granted, to have a lifespan of 17 years from the date of grant.
Also in June 2013, the Company received its M-1003 certification.

In September 2013, the Company reported that its new JS330 EPRV
for pressure tank cars had been successfully pressure and flow tested and
confirmed by an independent AAR approved engineering test facility in Colorado.
Our JS330 is a derivative of our existing EPRV patent and meets the performance
specifications and regulatory requirements for pressure tank cars. It is
designed for demanding applications in the transport of pressurized commodities
such as propane and anhydrous ammonia. A patent application is in process. Kelso
has applied to the Association of American Railroads for an application number
and service trial approval. It is anticipated that the service trial will
commence in mid 2015 and be completed in two years.

In October 2013, the Company reported that the Tank Car
Committee (TCC) of the AAR has cleared the KKM for unrestricted
commercial use. The Company agreed to continue to report on those KKM units in
the original FST for a one year period using the FST format, and to keep the TCC
apprised of all commercial KKM installations in terms of number of units and in
what service they are being used.

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- 14 -

In November 2013, the Company reported that it had reviewed the
performance characteristics of its KKM with loading terminal operators and
management at the Bakken Oil Fields in North Dakota. The review confirmed that
there are several compelling economic advantages and arguments for the
commercial adoption of the KKM. See Key Products for additional information on
the economic advantages and arguments for the commercial adoption of the KKM.
Also in November 2013, the Company reported that it intends to commence
construction of its new production facility in Bonham, Texas in December 2013.
Construction on this new facility began in February, 2014. The new facility will
be approximately 44,000 square feet and is expected to be completed in June of
2014. The facility is expected to cost approximately US$2,400,000 which the
Company plans to fund through its internal capital resources. The Company also
reported that effective December 13, 2013, its headquarters in the United States
was moved to 2777 Finley Road, Suite 15, Downers Grove, IL 60515.

In December 2013, the Company reported that the SEC completed
its review of the Companys Registration Statement on Form 20-F and that the
Company became registered as a reporting issuer under the United States
Securities and Exchange Act of 1934.

2014

In February 2014, the Company reported that it has filed a
patent application for a new externally mounted dual rating pressure relief
valve (DPRV) design for use on new rail tank cars and retrofits of
existing rail tank cars that are in Packaging Groups 1 & 2 (US Bureau of
Explosives designations) which include all tank cars carrying crude oil and
ethanol as well as other flammable chemicals. In general terms, in an accident
involving fire, the DPRV is intended to lower its operating pressure rating to a
level that will keep the valve open in order to evacuate the tank car in less
than 100 minutes as required by AAR recommendations. The Company believes, based
on managements knowledge of current industry standards and other products on
the market that the DPRV is a significant change compared to currently available
technology, and that the DPRV will provide economic advantages to the impact of
the expense of retrofits facing the railroad industry. The patent has been filed
under a non-Publication Request which keeps the patent filing private until
the patent is issued. This has been done for competitive reasons. The Company
expects the DPRV to enter the AAR approval process shortly after the prototypes
are completed, which management expects to be done in May 2014. The final patent
is expected to take two years or more to be granted and to carry a 17 year life
starting from the date the patent is granted.

In March 2014, the Company reported that it has formed a
strategic business and engineering alliance with SafeRack Loading Rack
Technologies (SafeRack) with the goal of incorporating the Companys
KKM technology as part of a new generation of high-capacity crude oil loading
terminal systems designed and provided by SafeRack. The Company believes that
SafeRack is the leading expert in crude oil and liquid natural gas loading
terminal engineering, procurement and construction services for the railroad and
trucking industries based on the knowledge of management of the Company of such
industries. Under this arrangement, the Company and SafeRack have developed and
tested a fully functional loading arm adaptor that fits both the KKM and hinged
6 and 8 eye-bolt manway currently in service on tank cars in North America. The
Company and SafeRack are also educating HAZMAT shippers on the economic
advantages and operational benefits for the commercial adoption of the KKM. The
Company does not believe that its arrangement with SafeRack is material.

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

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

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

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

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- 15 -

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

On October 8, 2014 the Company filed a patent application for
the VRV. Service trials for the VRV are expected to start in 2015. The VRV valve
design applies the constant force spring technology used in all of our pressure
relief valves. The patent application was filed on under a Non-Publication
Request which keeps the patent filing private until the patent is issued. The
final patent is expected to take two or more years to be granted, and if
granted, to have a lifespan of 17 years from the date of grant.

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

In November, 2014 the Company increased engineering manpower in
November by 40% to increase the speed of product development.

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

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

2015

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

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

On April 23, 2015 the Company completed the commercial design
and internal testing of its new innovative bottom outlet valve (BOV). The
Company has submitted the final required application information to the
Association of American Railroads (AAR) for service trial testing and the
eventual commercial approval of the BOV.

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

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

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

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

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

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

On September 23, 2015 the Company establishes an in-house
inspection and re-certification service for our pressure relief valves (PRV) due
to high customer demand. It is customary in the railway industry that every 5
years a PRV in service should be inspected, repaired or retrofitted, and
re-certified for commercial service.

On September 30, 2015 the Company announces that all
participants in the service trials of the Companys new vacuum relief valve
(VRV) have installed the VRV and begun testing. The VRV is a device specifically
designed to protect rail tank cars from the effects of excessive vacuum which
can cause implosion of the tank car.

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

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

Capital Expenditures

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

Takeover Offers

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

|B. | Business Overview
|-- | -----------------

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

The Company currently offers approximately 60 products. The key
products that the Company offers include a series of 47 types of EPRVs for
pressure management; 4 types of KKM manway securement systems, 4 types of bottom
outlet valves (BOV), 4 types of vacuum relief valves (VRV); and 1 ETS product
that address the technical requirements of load and unload operations and the
containment of non-hazardous and hazardous commodities during transport.
Products are proprietary and patent protected and designed for use on
applications on railroad tank cars but can be modified for use in other markets
such as trucking. The Company has obtained patents for its EPRV (Patent No.
5,855,225) and KKM (Patent No. US 7,104,722 B2), but the patent for the
Companys ETS technology has expired. The Company has filed patent applications
under non-Publication Requests for a new BOV design and for the DPRV. See Risk Factors  Risks Relating to the
Business for additional information on patents for the Companys product. See
Key Products below for a description of the Companys key products. In
addition to current product offerings, Kelso Innovative, the Companys
wholly-owned product development enterprise, receives feedback from key
customers on new products to add to the Companys catalogue and considers, and
where appropriate incorporates, this customer feedback into product development
decisions. The Company does not have any agreements with its customers in this
regard.

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The Company recruited and appointed a new executive management
team in April 2010 at which time a commercial business plan was established. In
accordance with this strategic plan, the new management team has since
consolidated the Companys share capital on the basis of one new Common Share
for seven old Common Shares; repaired Kelsos business reputation; gained the
confidence of the railroad and investment community; accessed new equity
development capital; established a modern state-of-the-art production
infrastructure; secured required regulatory approvals; secured product liability
insurance; implemented educational marketing initiatives; and steadily grown
sales and distribution of products to key North American rail tank car
manufacturers and many retrofit/repair businesses.

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

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

The Company operates in combination with its wholly-owned
subsidiaries, Kelso USA and Kelso Innovative. Kelso USA is the operational arm
of the Company, while Kelso Innovative focuses on engineering industrial designs
and distribution plans for the Companys KKM system for applications in the
roadway trucking and trailer market.

Markets

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

The Companys key products are the ETS, the BOV, the VRV, the
KKM and the EPRV. Each of these key products is at the commercial production
stage. The Company, through Kelso Innovative, continues to work on the
development of new products and on finding new and economic applications for its
existing products, including, for example, applications for the Companys
products in the trucking industry.

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

Year Ended
    Total Revenue (audited)
    ETS (unaudited)
    Key Product KKM
      (unaudited)
    EPRV (unaudited)
    Geographic JurisdictionUnited States (unaudited)
    Canada (unaudited)December 31, 2013
    $13,131,387
    $64,975 (0.5%)
    Nil (0%)
    $13,066,412 (99.5%)
    $13,131,387 (100%)
    Nil (0%)December 31, 2014
    $23,816,809
    $46,097 (0.2%)
    151,027 (0.6%)
    $23,569,460 (99.2%)
    $22,875,589 (96%)
    941,220 (4%)December 31, 2015
    $18,910,122
    $5,480 (0 %)
    $1,678,092 (9%)
    $17,226,550 (91%)
    $16,950,239 (89.6%)
    $1,959,883 (10.4%)


Business Model

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

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- 18 -

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

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

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

- experienced executive management, including directors and officers with
  several years of business experience as described under Directors and Senior
  Management;
- focused strategic plans that are achievable, flexible and sustainable;
- access to development capital through reputable public company governance;
- corporate branding as a reliable supplier of high-quality railroad
  equipment;
- exceptional customer service;
- industrial engineering capability for product solutions based on
  customers specific criteria;
- growth of a next generation equipment catalogue through in-house product
  development that moves away from historical products to significantly
  different technology;
- acquisition of new or established products that can grow new markets under
  our management;
- marketing initiatives that promote awareness of our products being best
  available technology as evidenced by increasing revenue from sales of the
  Companys products and adoption rates for the Companys products in the
  marketplace;
- reliable order base from customers to fuel predictable profitable business
  growth; and
- production infrastructure and capacity that can supply demand.

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

Key Products

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

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- 19 -

External Constant Force Spring Pressure Relief Valves (EPRV)

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

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

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

Kelso Klincher® Manway (KKM)

The Company holds the patent rights for a new manway technology
trademarked as the Kelso Klincher®. The Company believes the KKM is a
technology change for the railroad industry where the return on investment and
arguments for customers adoption of the KKM are compelling. The Company
believes they include:

- one bolt-and-strap design eliminates eye-bolt problems and possible leaks
  due to crushed gaskets (the strap system design applies uniform force on the
  gaskets when they are drawn together to secure the lid, whereas the eye-bolts
  point load the gasket at each eye-bolt location which can crush the gasket
  during securement. The absence of eye-bolts on the Companys KKM is obvious
  simply by looking at pictures of the old and new manways; since the Companys
  KKM does not have eye-bolts the Company has eliminated them as a problem;
- eliminates lid deformation and nozzle distortion due to the over-torque of
  eye-bolts;
- eliminates relaxation of gaskets under eye-bolt location (the strap system
  uniformly loads the gasket which can cause a leak;
- reduces eye-bolt nuts loosening in transit due to vibration and improper
  cross-bolting technique, which can result in a $5,000 fine imposed by FRA for
  every loose eye bolt (loose eye-bolts have many causes including: failure by
  employees to tighten, improper torque procedure, damaged eye-bolt, much of
  which is due to employees not following procedures; we believe that our
  single-bolt design substantially reduces the risk of errors due to employee
  error; it is standard practice for an FRA field inspector to inspect for loose
  eye-bolts on a manway by climbing on top of a tank car, standing in the center
  of the manway and actually kicking each eye-bolt to see if it is loose; since
  the Companys KKM does not have eye-bolts there is nothing for the field
  inspector to kick; the Companys tee-bolt is protected by a handle and cannot
  be kicked as it is not accessible to the foot of the inspector
- standard AAR-approved gasket retention method with currently used hard and
  soft gaskets;

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- 20 -

- ACME Thread on T-Bolt virtually eliminates loosening due to vibration
  (this type of thread is typically used on ships where vibrations are constant;
  this is a well-known design feature of ACME threads);
- rigid collar at top of nozzle reduces risk of nozzle distortion;
- much faster opening and closing operation with one bolt management system,
  considering the industry recommended practice generally takes approximately 25
  to 35 minutes as documented in AAR Pamphlet 34 whereas the KKM procedure takes
  approximately 5 minutes;
- increases daily terminal loading capacity up to 32%, thus increasing
  revenues of terminal operations that are paid by the volume of oil loaded and
  shipped (confirmed by loading terminal operators and management at the Bakken
  Oil Fields);
- uniform load on the gasket prolongs service life as evidenced by field
  service experience;
- reduces possible release of hazardous commodity in a roll-over accident by
  moving threaded closing mechanism below the plane of the lid; and
- the KKM comes in 3 models which include various levels of stainless steel
  construction for corrosion prevention to meet specific customer needs.

Kelso Tiger Tube - Eduction Technology (ETS)

The Kelso Tiger Tube ETS is a long-hose device used in the
loading and unloading of highly corrosive chemicals from rail and road tank
cars. It is constructed of specialty materials and has been specifically
designed for the rigors of acid handling and transport.

Kelso Bottom Outlet Valve (BOV)

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

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

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- 21 -

The Kelso BOV is expected to substantially reduce the risk of a
leak and offer tank car owners a more cost-effective product. The Kelso BOV is
currently approved for AAR field service trial. Patent applications for the
valve are in process.

Kelso Vacuum Relief Valve (VRV)

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

The Kelso design uses its constant force spring technology to
provide a stronger spring to reduce possible leaks. The spring is housed in a
protected environment to protect it from the environment. The Kelso VRV is
currently in AAR field service trials. Patent applications for the valve are in
process.

Production and Services

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

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

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

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

Marketing

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

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- 22 -

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

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

Research and Development

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

Specialized Skill and Knowledge

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

Competitive Conditions

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

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- 23 -

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

Raw Materials/Components

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

Intangible Properties

The Companys intangible property, particularly its
intellectual property rights, plays an important role in securing the Companys
competitive advantage. The Company holds the patents for its EPRV technology
(Patent No. 5,855,225 which expires January 29, 2016) and for its KKM (Patent
No. US 7,104,722 B2 which expires in 2023), and has a trademark for its Kelso
Klincher® Manway (Registration Number 4,282,652) and has filed a trademark
application for its Kelso Tiger Tube products. The Company does not have a
patent for its ETS technology. The Company applied for a patent on June 3, 2013
under a Non-Publication Request for its new BOV, on January 6, under a
non-Publication Request for its new DPRV2014 and on October 8, 2014 for its
new VRV under a non-Publication Request. The granting of the final patents for
the BOV, VRV and DPRV are expected to take two or more years, and if granted,
are expected to have a lifespan of 17 years from the date of grant. See
Information on our Company  History and Development of our Company  Three
Year History  2013 for additional information on Non-Publication Request.

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

Seasonality/Cycles

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

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- 24 -

Economic Dependence

The Companys business is substantially dependent on Patent No.
5,855,225 for the Companys EPRV technology which expired on January 29, 2016
and Patent No. US 7,104,722 B2 for its KKM technology which expires in 2023. See
Material Contracts.

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

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

Employees

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

Reorganizations

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

Government Regulations

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

C.Organizational Structure

We have two wholly-owned subsidiaries, Kelso USA and Kelso
Innovative. The Company owns 100% of the voting securities of each of its
subsidiaries. Neither subsidiary has a class of restricted securities. See
Information on our Company  History and Development of Our Company.

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|D. | Property, Plants and
  Equipment
|-- | --------------------------------

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

As at December 31, 2015, the total carrying value for our
property, plant and equipment was $3,396,893 (December 31, 2014: $3,396,922),
the breakdown of which is as follows: land - $12,558 (December 31, 2014:
$12,558), buildings - $2,762,440 (December, 2014: $2,859,616), leasehold
improvements - $19,080 (December 31, 2014: $23,850), production equipment -
$595,306 (December 31, 2014: $490,172), and vehicles - $7,509 (December 31,
2014: $10,726).

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

|Item 4A. | Unresolved Staff Comments
|-------- | -------------------------

Not applicable

|Item 5. | Operating and Financial Review and
      Prospects
|------- | --------------------------------------------------

The following discussion and analysis of our financial
condition and results of operations for the years ended December 31, 2015
(Fiscal 2015), December 31, 2014 (Fiscal 2014) and December
31, 2013 (Fiscal 2013) should be read in conjunction with our financial
statements and related notes included in this annual report in accordance with
Item 8  Financial Information. Our financial statements for Fiscal 2015,
Fiscal 2014 and Fiscal 2013 (collectively, the Reported Periods) were
prepared in accordance IFRS.

In April 2010 a new management team was brought in to help
rejuvenate the Company which at that time was in poor financial health and had
few business opportunities. Revenues have been: Fiscal 2013 $13,131,387, Fiscal
2014 $23,816,809 and Fiscal 2015 $18,910,122. At the same time the gross profit
margins have been; 40.4% for Fiscal 2013, 46% for Fiscal 2014 and 27% for Fiscal
2015. Revenues for Fiscal 2013 and 2014 grew steadily due to the increased
demand from crude oil suppliers for new tanker cars with which to move their
product. This demand caused OEM manufacturers to increase their production of
tank cars. Revenues for Fiscal 2015 decreased due to a significant drop in oil
prices which in turn lessened demand for crude oil tank cars. Management expects
that this decrease in demand for more profitable valves for crude oil tank cars
will continue for the foreseeable future. Our gross profit for Fiscal 2013 and
Fiscal 2014 increased due to economies of scale and also due to a product mix
that sees the industry ordering stainless steel EPRVs in an attempt to reduce
the corrosive effect of the sulphur content of the crude oil that is being
transported. The gross profit for Fiscal 2015 declined due in part to a pricing
conflict brought on by a foreign competitor as well as the introduction of our
KKM manway system which had higher than expected start up costs. Our
administrative costs were $389,285 per month for Fiscal 2014 and have since
risen to $463,888 (excluding share-based payments) per month for Fiscal 2015.
These costs have risen due to the general costs associated with an expanding
business. Management is realigning its business model and believes that these
costs will reduce over the ensuing year as the overall demand in the sector is
anticipated to be flat for the upcoming year. There have been no unusual or
infrequent events that have affected the Company directly with the exception of
the decreased demand for tank cars attributable to the commodity prices in the
crude oil industry.

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

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- 26 -

|A. | Operating Results
|-- | -----------------

The financial results for the Reported Periods are indicative
of an industrial railroad equipment supply company transitioning from a product
development organization to a profitable business enterprise that distributes
commercial products from a high production infrastructure that can reliably
supply to a heavily regulated railroad industry. The growth in revenues,
corresponding expenses and resulting earnings reflect the Companys successful
progress in the execution of its business plan. The steady growth of sales and
distribution of our products to the larger OEM segment of the rail tank car
industry began in April 2012. Financial results reflect the costs and
investments associated with ongoing product development and the expansion of our
production capacity (including equipment, lease costs, training and qualifying
human resources) in advance of higher profitable sales levels. The strategic
plan for commercialization has also required the Company to make considerable
ongoing investments in production infrastructure; industrial engineering and
testing; railroad regulatory filings; liability insurance; and new market
initiatives. The majority of these costs are written off in the period when they
occur and reflect in the reported profitability of the Company in the period in
which they were incurred.

The Company saw rapid growth for Fiscal 2013 and 2014 but
Fiscal 2015 saw decreased revenues and profits as a result of a decrease in
demand from the crude oil sector, competitive pricing issues as well as bringing
on the KKM manway securement system with all the production costing issues that
are usually associated with a new product. Revenues have grown steadily from
$13,131,387 in Fiscal 2013 to $23,816,809 in Fiscal 2014. Fiscal 2015 saw a
decline in revenues to $18,910,122. The greatest increase in units sold has been
realized in Fiscal 2014 as the OEM manufacturers have been receiving orders from
crude oil producers for more hazardous tanker cars to move their product. Fiscal
2015 saw a marked decline in orders from crude oil producers for our EPRV and
the Company believes that this decreased demand will continue for Fiscal 2016.
The Company saw more orders for stainless steel EPRVs in Fiscal 2013 and Fiscal
2014. This is evidenced by the gross profit increase to 40.4% for Fiscal 2013
and 46% in Fiscal 2014. The margin on stainless steel valves is better than the
margin on the conventional carbon valve. However Fiscal 2015 saw margins shrink
to 27% as the Company encountered issues with pricing as well as a sector with
lower demand than prior years due to a slowdown in the oil sector. EPRVs for
the crude oil sector yield a greater margin than those valves sold to other
sectors. Our administrative costs have increased due to the necessity of
increased marketing to keep our products in the forefront of the industry as
well as the added costs of running a public company on two exchanges. In
addition the Company has spent considerably extra funds on the development of
new products which will expand our product line. For Fiscal 2013, 2014 and 2015
our monthly overhead costs were approximately $240,000, $389,285 and $463,888
respectively. Our net income or loss is a result of the previous factors. During
Fiscal 2015 we recorded a write-off of intangible costs of $298,484. In addition
the Company conducted a tax review to determine the Companys exposure to US
tax. For Fiscal 2015 the Company has recorded a net tax expense of $1,104,088.
This expense pertains mainly to prior years and is net of the taxes that the
Company has already paid to the Canadian government. The Company is pursuing
other measures that may result in significant recoveries in the near future. The
Company showed a profit for Fiscal 2013 ($2,456,636) and Fiscal 2014
($4,025,781). Fiscal 2015 reported a loss of $2,510,826. Prior to these
reporting periods the Company had been incurring losses.

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

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

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

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- 27 -

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

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

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

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

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

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

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

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

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

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

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- 28 -

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

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

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

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

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

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

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

Year Ended December 31, 2013 Compared to Four Months
Ended December 31, 2012

For Fiscal 2013, the Company reported net income of $2,456,636
($0.06 per share) against revenue of $13,131,387 compared to a net income of
$10,988 (Nil per share) against revenue of $2,830,778 for the four months ended
December 31, 2012. The Companys gross profit percentage has increased to 40.4%
as a result of greater sales of stainless steel EPRVs in the latter part of
Fiscal 2013. Financial results are in line with business development budgets
established by management.

Positive cash flow from operations for Fiscal 2013 was
$2,456,636 before deduction of non-cash working capital items. In accordance
with IFRS, reported income includes items not involving cash. These include
amortization of $71,731 and share based payments (Black-Scholes) of $743,756
which were offset in part by deferred income tax recovery of $832,171.

Factors in the reported income for Fiscal 2013 include expenses
of $157,397 (Transition Period - $49,868) related to the lease costs of
production and headquarter facilities in Lisle, Illinois and Bonham, Texas; and
on-going industrial product design and development costs of $253,308 (Transition
Period - $36,802). The Company started the current fiscal year with only one engineer in this division but added
another engineer in June of 2013. This has added to our design and development
costs.

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- 29 -

Other key costs include production infrastructure; human
resource education; and marketing related expenses for products that have not
yet seen sales results. As our business is expanding so have our administrative
salaries and benefits. For Fiscal 2013 salaries and benefits rose to $245,409
(Transition Period - $58,876). The Company employs four administrative people in
this area as compared to two for the comparative period. Executive management
contract fees have risen from $146,727 in the Transition Period to $809,392 in
Fiscal 2013. This rise is due to previously negotiated management contracts for
the three senior operating officers of the Company. Fees for the Transition
Period were $12,500 per month for each of the three senior operating officers.
For Fiscal 2013 the fees were $12,500 for the first three months of the
reporting period and $15,000 for the next nine months. In addition the Company
paid a bonus to three senior operating officers totaling $269,434. This bonus
was pursuant to each officers management contract. The Companys consulting
fees have risen to $339,552 for Fiscal 2013 (Transition Period - $74,083).
During Fiscal 2013 the Company had retained two investor relations parties, one
administrative support person and one web-site/communications consultant. In
addition this account includes transfer agent fees as well as a one-time payment
to a recruitment specialist.

Business growth expenses included marketing costs of $371,681
(Transition Period - $114,845) and related travel costs of $223,019 for Fiscal
2013 (Transition Period - $41,006). The Companys marketing efforts have
increased substantially as reflected in our increased sales. For Fiscal 2013 the
Company employed three full time marketing people whereas for most of Transition
Period we employed only one person in this capacity. Travel costs have risen
with our added marketing efforts as our sales people are constantly travelling
around the United States.

Share based payments rose dramatically due to the granting of
share purchase options during Fiscal 2013 to $743,756 as compared to $167,656
for the Transition Period when the charge was only for the vesting of
consultants options.

Accounting, audit and legal fees are a key cost component in
the access to capital resources and administration functions of a publicly
listed industrial company. Costs for these professional services were $167,929
for Fiscal 2013 (Transition Period - $66,414).

The Companys products are used for the safe management of
hazardous materials and require product liability insurance. Premiums are
established by the number units of our products being used in the transport
industry. As our business grows so will our insurance costs. Total insurance
costs for product liability, general commercial and health insurance for Fiscal
2013 were $372,402 (Transition Period - $81,724).

B.Liquidity and Capital Resources

The Companys primary source of revenue is from new rail tank
car builders and retrofit/repair customers. The Company is confident that the
demand for our current EPRV products and new KKM technology will continue to
improve in future periods. Indicators in the rail industry suggest that the
demand for new tank car builds will remain constant during 2016. As such
management expects that the demand on our liquidity and capital resources will
remain constant in the short term. The Company is very fortunate to have
negotiated very favorable payment terms with its largest customers and this will
ease some of the added burden on our liquidity and capital resources.

As at the end of Fiscal 2015 there were no material commitments
for capital expenditures. During 2014 the Company completed the construction of
a new 44,000 square foot building for a cost of $2,700,000.

The Company plans to generate the necessary capital resources
to finance operations by way of the sales of its products, and the exercise
incentive stock options. During 2015 the Company raised $373,723 from the
exercise of 825,000 share purchase options. If the Company is unsuccessful in
generating adequate capital resources from one or more of the anticipated
sources and is unable to replace any shortfall with capital resources from
another source, the Company may not be able to meet its future financial
obligations and its operations may be adversely affected.

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- 30 -

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

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

December 31, 2015 Compared to December 31,
2014

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

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

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

December 31, 2014 Compared to December 31,
2013

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

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

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

December 31, 2013 Compared to December 31,
2012

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

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

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

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- 31 -

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

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

The Company has spent the following amounts on research in
recent years: $783,680 during Fiscal 2015, $440,600 during Fiscal 2014 and
$253,308 during Fiscal 2013.

|D. | Trend Information
|-- | -----------------

In 2015 the Company managed its business development strategies
in the worst rail tank car market since 2008. HAZMAT businesses cut back on
production which led to lower demand for rail tank cars. There are many reasons
for this trend which include political climate, regulatory uncertainty, low
commodity prices and diminishing economic activity. This is expected to continue
through early 2016.

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

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

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

|E. | Off-Balance Sheet
  Arrangements
|-- | --------------------------------

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

|F. | Tabular Disclosure of Contractual
      Obligations
|-- | ---------------------------------------------------

The Company does not have any contractual obligations as of
December 31, 2015 relating to long-term debt obligations, capital (finance)
lease obligations, operating lease obligations, purchase obligations or other
long-term liabilities reflected on our latest balance sheet as at December 31,
2015.

---

- 32 -

|Item 6. | Directors, Senior Management and
      Employees
|------- | ------------------------------------------------

|A. | Directors and Senior
  Management
|-- | ---------------------------------

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

Name
    Position(s) Held with
      Company
    Principal Business
      Activities and Other Principal DirectorshipsJames R. Bond
    Director, President and CEO
    President of Bondwest Enterprises Inc. a private
      company specializing in public company management, corporate finance,
      entrepreneurial management and business development since 1988.Richard Lee
    CFO
    CFO of the Company since April 8,
      2010 and self-employed businessman.William Troy
    Director and 
      Audit Committee
      Member
    BusinessmanNeil Gambow
    Director, former COO,
      
      Managing Director Corporate Development(1), CEO of
      Kelso USA and CEO of Kelso Innovative
    CEO of Kelso Innovative from June
      21, 2012 to Present; President and CEO, Kelso USA from November 2007
      to present; President Nexnine LLC a consultancy business since
      November 2006.Peter Hughes
    Director and 
      Audit Committee
      Member
    Self-employed businessman. Director
      of Broome Capital Inc. (BCP.HNEX), Gourmet Ocean Products Inc. (GOP.V)
      and Naturally Splendid Enterprises Ltd. (NSP  TSXV).Anthony Andrukaitis
    Director, Executive Vice
      
      President Business Development, COO(1)
    Independent Business Consultant;
      Chief Operations Officer of Trinity Industries, Inc. (holding company
      providing products and services to industrial, energy, transportation,
      and construction sectors) from July 2004 to March 2009.Phil Dyer
    Director and Audit Committee
      
      Member
    Businessman. President of
      LegacyTexas Bank Plano, Texas from November 1996 to January of 2015.
      Former mayor of Plano, TX, having served from 2009 to 2013.John R. ONeill
    Director
    John R. O'Neill is the President
      and CEO of the Firefighters Education and Training Foundation (the
      Safety Train) which he founded in 1994. Prior to his involvement with
      the Safety Train, he was a private building contractor.


|(1) | On March 1, 2015 Mr. Gambow resigned as Chief Operating
      Officer of the Company and was appointed Managing Director Corporate
      Development. Mr. Andrukaitis was appointed Chief Operating Officer of the
      Company on March 1, 2016.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

James R. Bond (62 years)  President, CEO and
Director

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

Richard Lee (60 years)  CFO

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

---

- 33 -

William Troy (74 years)  Director

Mr. Troy has been a director of the Company since November 21,
2005 and is a member of our Audit Committee. My. Troy has 36 years of business
experience including operating and managing several multi-modal transportation
companies in the Pacific Northwest and Alaska. Most recently he was owner and
CEO of a major northwest regional trucking company that provided agricultural
and liquid trucking contract services for several Fortune 500 companies. Mr.
Troy has a B.A. and an M.B.A. from the University of Oregon.

Neil Gambow (70 years)  Managing Director Corporate
Development, former COO

Mr. Gambow is currently Managing Director of Corporate
Development. Mr. Gambow held the position of COO of the Company until March 1,
2016. Mr. Gambow has been a director of the Company since December 28, 2009. Mr.
Gambow has served as CEO of Kelso Innovative (engineering industrial designs and
distribution plans for patented Kelso Klincher) since June 21, 2012 and as
President and CEO of Kelso USA (sales and marketing of pressure relief valves
and manways) since November 2007. Mr. Gambow is the former President of Midland
Manufacturing, a subsidiary of the Dover Corporation, a US Fortune 500 company.
Midland produces valves and valve-related products for the North American rail
tank car market. Mr. Gambow is based in Chicago, Illinois and is responsible for
the daily operations of the Companys plant in Bonham, TX as well as the
business development of the technologies of the Company.

Peter Hughes (54 years) - Director

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

Anthony Andrukaitis (61 years)  Director, Executive
Vice-President Business Development and COO

Mr. Andrukaitis has been a director of the Company since August
24, 2011 and was appointed COO on March 1, 2016. Mr. Andrukaitis was a member of
the Audit Committee until January 2, 2015 when he was appointed Executive Vice
President Business Development. Mr. Andrukaitis has served as Chief Operations
Officer of Trinity Industries, Inc. (Holding company providing products and
services to industrial, energy, transportation, and construction sectors) July
2004  March 2009. Mr. Andrukaitis has over 26 years of senior corporate
management experience in finance, accounting, strategic planning, business
development and turn-around activities. He was the Chief Operations Officer of
Trinity Rail and former President of Trinity Tank Car, Inc., both subsidiaries
of Trinity Industries of Dallas, Texas. Prior to that, he was the President and
CEO of GATX Terminals Corporation of Chicago, IL. Mr. Andrukaitis is a CPA and
holds a Bachelor of Science degree in Accounting from the University of Illinois
and Master of Business Administration degree from DePaul University.

Phil Dyer (64 years)  Director

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

---

- 34 -

John R. ONeill (67 years)  Director

Mr. ONeill has be a Director of the Company since June 4,
2015. Mr. ONeill is the President and CEO of the Firefighters Education and
Training Foundation (the Safety Train) which he founded in 1994.

Family Relationships

There are no family relationships between any of our directors
and senior management listed above.

|B. | Compensation
|-- | ------------

During Fiscal 2015, the Companys directors and members of its
administrative, supervisory or management bodies received compensation for
services, as follows:

Name and Principal
      Position
    Year Ended
    Salary
      ($)
    Option based
      Awards ($)
    All other
      compensation ($)
    Total
      compensation ($)James R. Bond Director, President and CEO
    December 31, 2015
    $180,000
    N/A
    $700
    $180,700Richard Lee CFO
    December 31, 2015
    $180,000
    N/A
    N/A
    $180,000Neil Gambow Director, Managing
      Director of Business Development and former COO of
      the Company(1), CEO Kelso USA
      and CEO Kelso Innovative
    December 31, 2015
    $180,000
    N/A
    $700
    $180,700William Troy Director
    December 31, 2015
    N/A
    N/A
    $8,000
    $8,000Peter Hughes Director
    December 31, 2015
    N/A
    N/A
    $14,000
    $14,000Anthony Andrukaitis Director,
      Executive Vice President Business Development and
      COO(1)
    December 31, 2015
    $180,000
    N/A
    $1,000
    $181,000Phil Dyer Director
    December 31, 2015
    N/A
    N/A
    $6,400
    $6,400John R. ONeill Director
    December 31, 2015
    N/A
    N/A
    $3,700
    $3,700


|(1) | On March 1, 2015 Mr. Gambow resigned as Chief Operating
      Officer of the Company and was appointed Managing Director Corporate
      Development. Mr. Andrukaitis was appointed Chief Operating Officer of the
      Company on March 1, 2016.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Employment Agreements

The Company entered into an employment agreement with James R.
Bond effective January 1, 2014 with regards to his employment as the President
and Chief Executive Officer of the Company. The agreement is for a 36-month
term. The agreement provides for a severance clause of twelve months notice for
termination. Pursuant to the agreement, the Company has agreed to pay Mr. Bond a
base salary of $15,000 per month for the term of the agreement. Mr. Bond is
eligible to receive a bonus based on the performance of the Company.

The Company entered into an employment agreement with Richard
Lee effective January 1, 2014 with regards to his employment as the Chief
Financial Officer of the Company. The agreement is for a 36-month term. The
agreement provides for a severance clause of twelve months notice for
termination. Pursuant to the agreement, the Company has agreed to pay Mr. Lee a
base salary of $15,000 for the term of the agreement. Mr. Lee is eligible to
receive a bonus based upon the performance of the Company.

---

- 35 -

The Company entered into an employment agreement with Neil
Gambow effective January 1, 2014 with regards to his employment as the President
and Chief Executive Officer of Kelso USA . The agreement is for a 36-month term.
The agreement provides for a severance clause of twelve months notice for
termination. Pursuant to the agreement, the Company has agreed to pay Mr. Gambow
a base salary of $15,000 per month for the term of the agreement. Mr. Gambow is
eligible to receive a bonus based upon the performance of the Company.

Stock Option Plan

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

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

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

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

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

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

---

- 36 -

Option-Based Awards

The following table sets forth the share-based awards or
option-based awards for each of directors and officers of the Company
outstanding as at December 31, 2015:

Name
    Option Based AwardsNumber of securities underlying
      unexercised options (#)
    Option exercise
      price ($)
    Option
      expiration date
    Value of
      unexercised in-the-money options
      ($)(1)James R. Bond(1)
    100,000 
      100,000
    CAD$0.58 
      $1.45
    July 22, 2016 
      March 31,
      2017
    CAD$0 
    $36,849Richard Lee(1)
    100,000 
      100,000
    CAD$0.58 
      $1.45
    July 22, 2016 
      March 31,
      2017
    CAD$0 
    $36,849Neil Gambow(1)
    100,000 
      200,000
    CAD$0.58 
      $1.45
    July 22, 2016 
      March 31,
      2017
    CAD$0 
    $36,849William Troy(1)
    100,000
    $1.45
    March 31, 2017
    $36,849Peter Hughes(1)
    15,000 
      150,000
    CAD$0.58 
      $1.45
    July 22, 2016 
      March 31,
      2017
    $0 
    $55,274Anthony Andrukaitis(1)
    100,000 
      50,000
      300,000
    $0.58 
      $1.45 $5.90
    August 24, 2016 
      March 31,
      2017 January 2, 2016
    $0 
    $18,424 $0Phil Dyer(1)John R. ONeill(1)
    200,000 
      200,000
    $5.90 
      $2.12
    January 2, 2016 
      August 25, 2017
    $0 
$0


|(1) | Value is calculated based on the difference between the
      market value of the securities underlying the options as at December 31,
      2015 being CAD$1.50 and the exercise price of the option. The quoted share
      price is in CAD dollars and has been converted to US dollars using the
      Bank of Canada rate on December 31, 2015 of USD 1.3840 [CAD
  0.7225].
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Termination and Change of Control Benefits

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

Pension, Retirement or Similar Benefits

We have not set aside or accrued any amounts to provide
pension, retirement or similar benefit for our directors or senior management
during Fiscal 2015.

|C. | Board Practices
|-- | ---------------

Term of Office

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

---

- 37 -

Service Contracts

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

Committees

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

Audit Committee

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

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

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

Compensation Committee

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

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

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

---

- 38 -

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

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

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

Corporate Governance and Nominating Committee

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

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

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

|a) | Develop and monitor the Companys overall approach to
      corporate governance issues and, subject to approval by the Board,
      implement and administer this process.                             
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|b) | Advise the Board or any of the committees of the Board of
      any corporate governance issues which the Committee determines ought to be
      considered by the Board or any such committees.        
|c) | Review with the Board, on a regular basis, but not less
      than annually, the terms of reference for the Board, each committee of the
      Board, the Chairman and the Chief Executive Officer.     
|d) | Review with the Board, on a regular basis, the methods
      and processes by which the Board fulfils its duties and responsibilities,
      including without limitation:                              
|   | i.                                                                                                                                                                                                      
|   | ii.                                                                                                                                                                                                     
|   | iii.                                                                                                                                                                                                    
|   | iv.                                                                                                                                                                                                     
|   | v.                                                                                                                                                                                                      
|   | vi.                                                                                                                                                                                                     
|e) | Review and, as necessary, authorize a committee or an
      individual director to engage separate independent counsel and/or advisors
      at the expense of the Company in appropriate circumstances.
|f) | Make
        recommendation to the Board regarding changes or revisions to the Boards
    Corporate Governance Guidelines;                                                                             

---

- 39 -

|g) | Evaluate and make recommendations to the Board concerning
      the appointment of directors to the committees and the selection of Board
      committee chairs;                                                                                                                      
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|h) | Annually evaluate and report to the Board on the
      performance and effectiveness of the Board and its committees;                                                                                                                                                                  
|i) | Annually, in conjunction with the Chief Executive
      Officer, evaluate the performance of the Companys management (other than
      the Chief Executive Officer). Conduct an annual review of succession
      planning and report its findings and recommendations to the
  Board;
|j) | Evaluate and lead the Boards annual review of the Chief
      Executive Officers performance; and                                                                                                                                                                                    
|k) | Annually review and evaluate its
  performance.                                                                                                                                                                                                                                        

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

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

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

|D. | Employees
|-- | ---------

As at December 31, 2015, the Company had 42 employees,
including employees of its subsidiaries. The largest group of employees works at
the Companys production facilities in Bonham, Texas and the remainder work in
Chicago, Illinois and Surrey, British Columbia, .There has been no
significant change in the number of employees since December 31, 2015. As at the
date of this filing, the Companys employees are not unionized and all employees
are full-time. As at December 31, 2014, the Company had 42 employees, including
employees of its subsidiaries).

|E. | Share Ownership
|-- | ---------------

As of December 31, 2015, our directors and senior management
beneficially owned the following common shares and stock options of the
Company:

Name and
      Office Held
    Number of Common
      Shares Owned and Percent of Total Outstanding Common
      **Shares**
    Options Owned# of Shares
    % of
      Class(1)James R. Bond Director, President
      and CEO
    1,267,500 (2)
    2.75%
    200,000(2)William Troy Director
    1,041,021(3)
    2.26%
    100,000(3)


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- 40 -

Name and
      Office Held
    Number of Common
      Shares Owned andPercent of Total Outstanding CommonShares
    Options Owned# of Shares
    % of
      Class(1)Neil Gambow Director, Managing
      Director CorporateDevelopment and former COO(10)CEO Kelso USA and CEO Kelso Innovative
    447,169(4)
    0.97%
    200,000(4)Peter Hughes Director
    1,000(5)
    0.00%
    165,000(5)Anthony Andrukaitis Director,
      Executive Vice President BusinessDevelopment and
      COO(10)
    145,000(6)
    0.314%
    450,000(6)Phil Dyer(7)Director
    10,000(7)(8)
    0.021%
    200,000(7)John R. ONeill DirectorRichard Lee CFO
    0 
      14,500(9)
    0% 
      0.031%
    (8) 
      200,000
200,000(9)


|(1)  | Based on 46,071,752 common shares issued and outstanding
      as at December 31, 2015.                                                                                                                                                                                                                                                                                     
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2)  | Mr. Bond holds 487,500 common shares directly; 625,000
      common shares indirectly through Bondwest Enterprises Inc., a company
      owned and controlled by Mr. Bond; and 155,000 common shares jointly with
      Serena Sardar, Mr. Bonds spouse; and he also holds 200,000 stock options
      exercisable into Common Shares that are not included in the
  total.
|(3)  | Mr. Troy also holds 100,000 stock options exercisable
      into Common Shares that are not included in the total.                                                                                                                                                                                                                                                          
|(4)  | Mr. Gambow also holds 200,000 stock options exercisable
      into Common Shares that are not included in the total.                                                                                                                                                                                                                                                        
|(5)  | Mr. Hughes holds 165,000 stock options exercisable into
      Common Shares that are not included in the total.                                                                                                                                                                                                                                                             
|(6)  | Mr. Andrukaitis holds 450,000 stock options exercisable
      into Common Shares that are not included in the total.                                                                                                                                                                                                                                                        
|(7)  | Mr. Dyer holds 200,000 stock options exercisable into
      Common Shares that are not included in the total.                                                                                                                                                                                                                                                               
|(8)  | Mr. ONeill holds 200,000 stock options exercisable into
      Common Shares that are not included in the total.                                                                                                                                                                                                                                                            
|(9)  | Mr. Lee holds 200,000 stock options exercisable into
      Common Shares that are not included in the total.                                                                                                                                                                                                                                                                
|(10) | On March 1, 2015 Mr. Gambow resigned as Chief Operating
      Officer of the Company and was appointed Managing Director Corporate
      Development. Mr. Andrukaitis was appointed Chief Operating Officer of the
      Company on March 1, 2016.                                                                                                                          

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

|Item 7. | Major Shareholders and Related Party
      Transactions
|------- | -------------------------------------------------------

|A. | Major Shareholders
|-- | ------------------

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

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

As at December 31, 2015, the registrar and transfer agent for
the Company reported that there were 46,071,752 common shares of the Company
issued and outstanding. Of these, 42,122,109 were registered to Canadian
residents (14 recorded shareholders), 3,938,215 were registered to residents of
the United States (19recorded shareholders) and 11,428 were registered
to residents of other foreign countries (1 recorded shareholders).

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

---

- 41 -

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

|B. | Related Party
Transactions
|-- | --------------------------

For Fiscal 2015, management fees for our Company were $727,217
(Fiscal 2014 $1,243,763; Fiscal 2013 $809,392). As at December 31, 2015, amounts
due to related parties, which are unsecured and have no interest is $2,795 (2014
$709,954) consisting of $Nil (2014 $694,767) for management bonus payment due
not later than five months after the year end and $2,795 (2014 $15,187) for
reimbursement of expenses to a director of the Company. These expenses are due
on demand.

Share based payments (calculated using the Black-Scholes option
pricing model) were $553,011 for Fiscal 2015 ($208,023 for Fiscal 2014; Fiscal
2013 $340,000) related party transactions during Fiscal 2015, Fiscal 2014 and
Fiscal 2013 were in the normal course of operations and were measured at their
fair value.

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

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

Compensation

For information regarding compensation for our directors and
senior management, see Item 6.B. Compensation.

Interests of Experts and Counsel

Not applicable.

|Item 8. | Financial Information
|------- | ---------------------

|A. | Financial Statements and Other Financial
      Information
|-- | ----------------------------------------------------------

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

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

| | (a) | audited consolidated financial statements for the year
      ended December 31, 2015 including: independent auditors report by Smythe
      CPA, Chartered Professional Accountants,
consolidated statements of financial position as at
December 31, 2015 and 2014, consolidated statements of operations and
comprehensive income (loss), changes in equity and cash flows for the years
December 31, 2015 and 2014 and 2013.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

- 42 -

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

Export Sales

All sales are domestic to the US.

Legal Proceedings

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

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

Policy on Dividend Distributions

On April 2, 2015, the Company announced the declaration of an
annual cash dividend of $0.03 per share payable in cash on April 30, 2015 to
shareholders of record at the close of business on April 15, 2015 (the 2015
Annual Dividend).

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

Significant Changes

We are not aware of any significant change that has occurred
since December 31, 2015 that has not been disclosed in this annual report.

|Item 9. | The Offer and Listing
|------- | ---------------------

|A. | Offer and Listing
Details
|-- | -------------------------

Price History

Full Financial Years (five most recent full financial years)

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

Year Ended
    TSX(1) (Canadian
      dollars, $)
    NYSE MKT(2)
      (U.S. dollars, $)High
    Low
    High
    LowDecember 31, 2015
    5.70
    1.30
    5.11
    .79


---

- 43 -

Year Ended
    TSX(1) (Canadian
      dollars, $)
    NYSE MKT(2)
      (U.S. dollars, $)December 31, 2014
    7.32
    3.11
    6.73
    2.77December 31, 2013
    3.46
    0.58
    3.33
    0.5875December 31, 2012(3)
    0.68
    0.51
    0.66
    0.528August 31, 2012
    0.72
    0.485
    0.72
    0.488August 31, 2011
    0.78
    0.155
    0.7386
    0.0097


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

Full Financial Quarters (two most recent full financial
years)

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

Quarter Ended
    TSX(1) (Canadian dollars, $)
    NYSE
      MKT(2) (U.S. dollars, $)High
    Low
    High
    LowDecember 31, 2015
    1.56
    1.30
    1.62
    0.79September 30, 2015
    2.66
    2.55
    2.63
    1.83June 30, 2015
    4.38
    4.26
    4.16
    3.08March 31, 2015
    5.70
    5.51
    5.11
    3.99December 31, 2014
    6.98
    5.61
    6.24
    5.03September 30, 2014
    7.15
    5.22
    6.54
    4.81June 30, 2014
    7.32
    4.80
    6.73
    4.13March 31, 2014
    4.68
    3.01
    4.20
    2.77


|(1) | The common shares of the Company were listed for trading
      on the TSX on May 22, 2014 prior to which they traded on the
  TSXV.                                                     
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | The common shares of the Company were listed for trading
      on the NYSE MKT on October 14, 2014 prior to which they traded on the
      OTCQX International under the symbol KEOSF.

Most Recent 6 Months

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

Month Ended
    TSX(1) (Canadian
      dollars, $)
    NYSE MKT(2)
      (U.S. dollars, $)High
    Low
    High
    LowFebruary 29, 2016
    1.34
    1.07
    .97
    .79January 31, 2016
    1.52
    1.21
    1.15
    .82December 31, 2015
    1.52
    1.41
    1.25
    0.76November 30, 2015
    1.41
    1.29
    1.49
    0.748October 31, 2015
    1.74
    1.60
    1.70
    0.886September 30, 2015
    2.15
    2.12
    1.85
    1.57


---

- 44 -

| | (1) | The common shares of the Company were listed for trading
      on the TSX on May 22, 2014 prior to which they traded on the
  TSXV.                                                      
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (2) | The common shares of the Company were listed for trading
      on the NYSE MKT on October 14, 2014 prior to which they traded on the
      OTCQX International under the symbol KEOSF).

Transfers of Common Shares

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

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

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

|B. | Plan of
Distribution
|-- | --------------------

Not applicable.

|C. | Markets
|-- | -------

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

|D. | Selling
Shareholders
|-- | --------------------

Not applicable.

|E. | Dilution
|-- | --------

Not applicable.

|F. | Expenses of the
Issue
|-- | ---------------------

Not applicable.

|Item 10. | Additional Information
|-------- | ----------------------

|A. | Share Capital
|-- | -------------

Not applicable.

|B. | Memorandum and Articles of
    Association
|-- | ------------------------------------------

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

|C. | Material Contracts
|-- | ------------------

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

---

- 45 -

|1. | The Companys patent for the EPRV is in good standing
      until January 29, 2016. The patent abstract describes the EPRV as a
      pressure relief valve for releasing fluid through a vent in a railway tank
      car, tank trucks and similar vessels. A valve disc is normally biased in a
      closed position by a plurality of constant- force springs of laminated
      steel tapes on drums supported on upright angle brackets symmetrically
      arranged around a valve seat. The pressure at which the valve opens is
      determined by a pre-selection of the number of springs, laminated tapes
      per spring and the restoring force of each tape. See Business
      Overview.                                                          
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|2. | On May 26, 2010, the Company entered into an agreement
      with Barry LaCroix whereby the Company acquired Manhole Cover Patent No.
      US 7,104,722 B2 from Mr. LaCroix and related technology and intellectual
      property in consideration for CDN$40,000 and the grant of a 5% royalty on
      gross sales of the manhole covers sold under the auspices of the patent in
      favour of Mr. LaCroix on the terms and conditions set out in the
      agreement. This patent expires 2023.                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|3. | The Company has a shareholder rights plan pursuant to an
      agreement between the Company and Computershare Trust Company of Canada
      dated February 3, 2011. This plan was re-approved by the shareholders of
      the Company on June 4, 2014 and by the TSX as part of the Companys
      approval for the listing of its common shares. A copy of the shareholder
      rights plan is available under the Companys profile on SEDAR at
      www.sedar.comin Canada on EDGAR at www.sec.govin the
      United States.                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|4. | The Company has a 10% rolling stock option plan which was
      last approved by the shareholders of the Company on June 4, 2014. A copy
      of the Option Plan is available under the Companys profile on SEDAR at
      www.sedar.comin Canada on EDGAR at www.sec.govin
      the United States.                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|5. | Effective January 1, 2014, the Company entered into an
      employment agreement with James R. Bond, the President and CEO of the
      Company. The agreement is for a 36-month term. The agreement provides for
      a severance clause of twelve months notice for termination. Pursuant to
      the agreement, the Company has agreed to pay Mr. Bond a base salary of
      $15,000 per month for the term of the agreement. Mr. Bond is eligible to
      receive a bonus on the performance of the Company.                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|6. | Effective January 1, 2014, the Company entered into an
      employment agreement with Richard Lee, the CFO of the Company. The
      agreement is for a 36-month term. The agreement provides for a severance
      clause of twelve months notice for termination. Pursuant to the
      agreement, the Company has agreed to pay Mr. Lee a base salary of $15,000
      per month for the term of the agreement. Mr. Lee is eligible to receive a
      bonus on the performance of the Company.                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|7. | Effective January 1, 2014, the Company entered into an
      employment agreement with Neil Gambow, the President and CEO of Kelso USA.
      The agreement is for a 36-month term. The Agreement provides for a
      severance clause of twelve months notice for termination. Pursuant to the
      agreement, the Company has agreed to pay Mr. Gambow a base salary of
      $15,000 per month for the term of the agreement. Mr. Gambow is eligible to
      receive a bonus on the performance of the Company.                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|8. | On November 28, 2012, the Company acquired all
      proprietary and manufacturing rights from the James Wilson Company of
      Houston, Texas for their eduction tubes, currently marketed as the Tiger
      Tube, for US$65,000. The Company intends to trademark the product as the
      Kelso Tiger Tube. To support the Companys activities, Jim Wilson has
      agreed to serve as a consultant to the Company and will receive a fee of
      $6,500 per month for 24 months. In addition the Company will pay a 7%
      royalty from sales over the duration of the consulting
agreement.                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|9. | On November 28, 2012, the Company entered into a
      consulting agreement with James Wilson for client consulting services
      regarding the engineering, design, manufacture and sale of eduction tubes
      and all matters relating to eduction tubes. The agreement is for a
      24-month term and at the sole discretion of the Company can be renewed for
      up to three six-month periods. Pursuant to the agreement, the Company has
      agreed to pay Mr. Wilson a monthly fee of $6,500 in consideration for a
      minimum of 80 hours per month devoted to the affairs of the Company. The
      agreement is the result of the sale and purchase agreement between the
      Company and James Wilson Company dated as at November 28,
  2012.

---

- 46 -

|10. | On November 1, 2012, the Company entered into a lease
      with Bonham Associates Management Ltd. (BAML) whereby BAML agreed
      to lease a 41,600 square foot facility to the Company in Bonham, Texas for
      $8,667 per month for a period of 13 months, with an option to renew for an
      additional 12 months at the same monthly rate.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                       
|11. | On February 28, 2014, the Company entered into a renewal
      lease with BAML whereby BAML agreed to lease a 41,000 square foot facility
      in use by the Company in Bonham, Texas for $8,667 per month for a period
      of 6 months with an option to renew monthly for an additional 12
      months.                                         

|D. | Exchange Controls
|-- | -----------------

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

|E. | Taxation
|-- | --------

Certain Canadian Federal Income Taxation

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

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

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

Dividends

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

---

- 47 -

Capital Gains

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

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

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

United States Federal Income Taxation

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

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

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

U.S. Holders

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

Distributions

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

---

- 48 -

Capital Gains

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

Foreign Tax Credit

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

|F. | Dividends and Paying
  Agents
|-- | -----------------------------

Not applicable.

|G. | Statement by
Experts
|-- | --------------------

Not applicable.

|H. | Documents on
Display
|-- | --------------------

Additional information, including the Companys Consolidated
Financial Statements, press releases and other required filing documents are
available under the Companys profile on SEDAR at www.sedar.com in
Canada, on EDGAR at www.sec.gov in the United States and on the Companys
website at www.kelsotech.com. Copies of such documents may also be viewed
by appointment during normal business hours at our registered and records office
being the offices of Clark Wilson LLP, 900  885 West Georgia Street, Vancouver,
British Columbia, Canada V6C 3H1 during normal business hours.

|I. | Subsidiary
  Information
|-- | ------------------------

The Company operates in conjunction with its two wholly-owned
subsidiaries Kelso USAand Kelso Innovative. The Company owns 100% of the
voting securities of each of its subsidiaries. Neither subsidiary has a class of
restricted securities. Kelso USA was incorporated on August 3,
2005in the State of Nevada. Kelso Innovative was incorporated on June
20, 2012 in the State of Nevada.

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- 49 -

|Item 11. | Quantitative and Qualitative Disclosures
      About Market Risk
|-------- | ----------------------------------------------------------------

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

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

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

Credit Risk

Credit risk is the risk that one party to a financial
instrument will cause a financial loss for the other party by failing to
discharge an obligation. Cash is placed with a major Canadian financial
institution and the Companys concentration of credit risk for cash and maximum
exposure thereto as at December 31, 2015 was $3,175,292 (December 31, 2014 -
$9,895,463).

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 as at December 31, 2015 was $1,706,488 (December 31, 2014 -
$2,850,180). The Companys concentration of credit risk for accounts receivable
with respect to Customer A (see note 15 to audited annual financial statements
for the year ended December 31, 2015) as at December 31, 2015 was $894,224
(December 31, 2014 - $987,819), while Customer B was $236,037 (December 31, 2014
 $305,730). Customers C and D do not have any accounts receivable as at
December 31, 2015

Liquidity Risk

Liquidity risk is the risk that the Company will be unable to
meet its financial obligations as they fall due. The Companys approach to
managing liquidity risk is to ensure, as far as possible, that it will have
sufficient liquid funds to meet its liabilities when due, under both normal and
stressed conditions, without incurring unacceptable losses or risking damage to
the Companys reputation. At December 31, 2014, the Company had $3,175,292
(December 31, 2014 - $9,895,463) of cash to settle current liabilities with the
following due dates: accounts payable of $543,903 (December 31, 2014 -
$2,412,302); management bonus payable of $Nil (Fiscal 2014-$694,767); taxes
payable of $2,004,272 (Fiscal 2014-$975,000) and; due to related party balance
of $2,795 (Fiscal 2014-$15,187). All payables are due within a year.

Market Risk

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

Interest Rate Risk

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

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- 50 -

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, 2015 and December 31, 2014, the Companys
net exposure to foreign currency risk is as follows (in USD):

As at December 31, 2015
    As at December 31, 2014Net Assets
    $2,206,745
    $5,696,267


Based on the above, assuming all other variables remain
constant, a 16% weakening or strengthening of the USD against the CAD would
result in approximately $353,000 (December 31, 2014 - $570,000) foreign exchange
loss or gain in the consolidated statements of operations.

Other Price Risk

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

See Item 17. Financial Statements.

|Item 12. | Description of Securities Other than Equity
      Securities
|-------- | ------------------------------------------------------------

Not applicable.

PART II

|Item 13. | Defaults, Dividend Arrearages and
      Delinquencies.
|-------- | ------------------------------------------------------

None.

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

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

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

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- 51 -

|Item 15. | Controls and Procedures
|-------- | -----------------------

|A. | Disclosure Controls and
  Procedures
|-- | ------------------------------------

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

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

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

Management assessed our internal control over financial
reporting as of December 31, 2015, the end of our fiscal year. Management based
its assessment on criteria established in Internal ControlIntegrated
Framework (COSO Framework) published by The Committee of Sponsoring
Organizations (COSO 2013). Managements assessment included evaluation of
such elements as the design and operating effectiveness of key financial
reporting controls, process documentation, accounting policies, and our overall
control environment.

Based on our assessment, management has concluded that our
internal control over financial reporting was effective, as of the end of the
fiscal year, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
reporting purposes in accordance with International Accounting Standards Board
(IFRS) as issued by the International Accounting Standards Board (IASB).

Attestation Report of the Registered Public Accounting Firm

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

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- 52 -

Changes in Internal Control over Financial Reporting

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

|Item 16. | [Reserved]
|-------- | ----------

|A. | Audit Committee Financial
  Expert
|-- | ----------------------------------

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

|B. | Code of Ethical
Conduct
|-- | -----------------------

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

|C. | Principal Accountant Fees and
    Services
|-- | ------------------------------------------

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

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

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

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

Our current independent public accountants provided audit and
other services during the fiscal year ended December 31, 2015 and the fiscal
year ended December 31, 2014:

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- 53 -

December
    
    
    December31, 2015
    
    
    31, 2014($)
    
    
    ($)Audit Fees
    
    95,000
    
    
    80,000Audit-Related Fees
    
    2,500
    
    
    2,500Tax Fees
    
    30,000
    
    
    N/AAll Other Fees
    
    N/A
    
    
    N/ATotal Fees
    
    125,000
    
    
    82,500


Pre-Approval Policies and Procedures

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

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

|D. | Exemptions from the Listing Standards for Audit
      Committees.
|-- | -----------------------------------------------------------------

Not Applicable.

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

Not Applicable.

|F. | Change in Registrants Certifying
  Account
|-- | ------------------------------------------

Not applicable.

|G. | Corporate Governance
|-- | --------------------

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

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

---

- 54 -

|H. | Mine Safety Disclosure
|-- | ----------------------

Not applicable.

---

- 55 -

PART III

|Item 17. | Financial Statements
|-------- | --------------------

Financial Statements filed as part of the annual
report:

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

Audited consolidated financial statements for the year ended
December 31, 2015 including: independent auditors report by Smythe CPA,
Chartered Professional Accountants, consolidated statements of financial
position as at December 31, 2015 and 2014.

|Item 18. | Financial Statements
|-------- | --------------------

See Item 17. Financial Statements.

|Item 19. | Exhibits
|-------- | --------

Exhibit No.
    Description(3)
    Articles of Incorporation
      and Bylaws3.01
    Certificate of Incorporation(1)3.01a
    Certificate of Name
      Change(1)3.01b
    Notice of Articles(1)3.01c
    Articles(1)(4)
    Securityholder Rights4.01
    Shareholders Rights Plan dated
      February 3, 2011(1)(10)
    Material Contracts10.01
    Professional Services Agreement
      with Bondwest Enterprises Inc. dated January 1, 2014(3)10.02
    Professional Services Agreement with Richard
      Lee dated January 1, 2014(3)10.03
    Professional Services Agreement
      with Neil Gambow dated January 1, 2014(3)10.04
    Stock Option Plan(1)10.05
    Lease Agreement with Bonham
      Associates Management Ltd. dated November 1, 2012(1)10.06
    Sale and Purchase Agreement with James Wilson
      Company dated November 28, 2012(1)10.07
    Consulting Agreement with James
      Wilson dated November 28, 2012(1)10.08
    Agreement with Barry LaCroix for Patent No. US
      7,104,722 B2 dated May 26, 2010(1)10.09
    Notice of Recordation of
      Assignment Document for US Patent No. 7104722(1)10.10
    Notice of Recordation of Assignment Document
      for US Patent No. 5855225(1)11
    Code of Business Conduct and
      Ethics dated March 23, 2015(3)12.1*
    Certification of Chief Executive Officer
      pursuant to Section 302 of the Sarbanes-Oxley Act of 200212.2*
    Certification of Chief
      Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
      200213.1*
    Certification of Chief Executive Officer
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002


---

- 56 -

Exhibit No.
    Description13.2*
    Certification of Chief
      Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
      to Section 906 of the Sarbanes-Oxley Act of 2002(21)
    Subsidiaries21.01
    List of
      Subsidiaries(1)(99)
    Additional Exhibits99.1
    Audited annual financial
      statements for the year ended December 31, 2013(2)99.2
    Audited annual financial statements for the
      year ended December 31, 2014(4)99.3
    Audited annual financial
  statements for the year ended December 31, 2015(5)


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

---

- 57 -

SIGNATURES

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

KELSO TECHNOLOGIES INC.

|By: /s/ James
      R. Bond           | 
|------------------------------------- | 
|James R. Bond                         | 
|President and Chief Executive Officer | 
|(Principal Executive Officer)         | 
|                                      | 
|                                      | 
|Date: March 30, 2016                  | 
|                                      | 
|                                      | 
|                                      | 
|By: /s/ Richard
      Lee             | 
|Richard Lee                           | 
|Chief Financial Officer               | 
|(Principal Financial Officer          | 
|and Principal Accounting Officer)     | 
|                                      | 
|                                      | 
|Date: March 30, 2016                  | 

---