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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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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 theSecurities Exchange Act of 1934 (United States) related to the furnishing and content of proxy statements.

The Company was incorporated as “Kelso"Kelso Resources Ltd.”" pursuant to theCompany Act (British Columbia) on March 16, 1987. On July 21, 1994, the Company changed itsthe Company's corporate name to “Kelso"Kelso Technologies Inc.”". The Company is currently organized pursuant to theBusiness Corporations Act (British Columbia) (“("BCBCA”") which replaced theCompany Act (British Columbia) in 2004.

The Company’sCompany's registered office is located at Suite 900 –2200 - 885 West Georgia Street, Vancouver, British Columbia V6C 3H1.3E8. The Company’sCompany's corporate head office is located at 13966 18B Avenue, Surrey, British Columbia V4A 8J1.V4A8J1. The Company’sCompany's head office telephone number is (250) 764-3618.(604) 590-1525.

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

The Common Shares have been publicly traded on the Toronto Stock Exchange (the (“("TSX”" or the "Exchange") under the symbol “KLS”"KLS" since May 22, 2014, prior to which the Common Shares traded on the TSX Venture Exchange (“("TSXV”"). The Common Shares havewere traded on the NYSE MKT (“American ("NYSE MKTAmerican”") under the symbol “KIQ” since"KIQ" from October 14, 2014 to March 25, 2024, prior to which the Common Shares traded on the U.S. OTCQX over the counter market (“("OTCQX International”") under the symbol “KEOSF”"KEOSF".

-On December 12, -2023 the Company received notice (the "Notice") from the NYSE American stating that the Company was not in compliance with the continued listing standards as set forth in Section 1003(f)(v) of the NYSE American Company Guide ("Company Guide"). The Notice stated that the NYSE American staff had determined that the Company's securities had been trading at a low price per share for a substantial period of time. The Notice further stated that the Company's continued listing was predicated on it effecting a reverse stock split of its common shares or otherwise demonstrating sustained price improvement within a reasonable period of time, which the NYSE American determined to be no later than June 12, 2024.

After careful consideration, the Company evaluated the benefits and costs of continuing its listing on NYSE American and concluded that it was appropriate to voluntarily delist from the NYSE American. With the Common Shares concurrently trading on the TSX, the Company believed the costs associated with a continued U.S. stock exchange listing, as well as the administrative burdens and requirements associated with maintaining a dual listing, could no longer be justified. The Company also concluded that a reverse split of the Company's Common Shares of a magnitude necessary to bring the Company into compliance with the listing standards set forth in the Company Guide was not a desirable alternative and would not be in the best interest of the Company's shareholders.  The Company filed a Form 25 with the U.S. Securities and Exchange Commission on March 15, 2024 and the Common Shares were delisted from NYSE American effective as of March 26, 2024. The Company does not expect to seek to list its shares on another U.S. national securities exchange or U.S. quotation system.

The Company operates in conjunction with its two wholly-ownedthe Company's five wholly owned subsidiaries Kelso USATechnologies (USA) Inc. ("KTI"), Kel-Flo Industries Inc., ("Kel-Flo"); KIQ Industries Inc. ("KIQ"); KIQ X Industries Inc. ("KIQX") and Kelso Innovative.KXI™ Wildertec™ Industries Inc. ("KXI"). The Company owns 100% of the voting securities of each of itsthe Company's subsidiaries. Neither subsidiaryNone of the subsidiaries has a class of restricted securities. Kelso USAKTI was incorporated on August 3, 2005, in the State of Nevada. Kelso InnovativeNevada for potential use for operations in the United States. KIQ was incorporated on October 7, 2014 in the State of Nevada for the purpose of working on the general development of new equipment concepts should they develop market interest. Kel-Flo was incorporated on June 20, 2012, in the State of Nevada. Kelso USANevada and is used as a structure to pursue the operational armdevelopment of high-speed no-spill fuel loading technologies for locomotives. KIQX was incorporated on December 12, 2017, in the Province of British Columbia, Canada as an operating subsidiary for the development, production and sales of the Company and Kelso Innovative focuses on industrial designs and distribution plans for the Company’s KKMCompany'sproprietary KXI vehicle suspension system for applications for the roadway trucking and trailer market.wilderness terrain vehicles.

General Development of the Business

General

The CompanyKelso is a railroaddiverse product engineering company that specializes in the development, production and distribution of proprietary equipment used in transportation applications. Over the past decade the Company's reputation has been earned as a developer and reliable supplier that produces and sells proprietaryof high-quality rail tank car service equipment used in the safe loading, unloadinghandling and containment of hazardous and non-hazardous and hazardous materialscommodities during transport. Products

All Kelso products are specifically designed to providedeveloped with emphasis on economic and operational advantages to customers while reducingmitigating the potential effectsimpact of human error and environmental harm during the transport of non-hazardous and hazardous materials.

releases. The Company currently offers approximately 60 products. The key products thatspecialized rail tank car and truck tanker equipment, no-spill fuel loading systems, first responder emergency response equipment and "road-to-no-road" suspension systems for motor vehicles being used in rugged wilderness terrains.

Over the last fourteen years the Company offershas established itself as a leading North American producer and supplier of specialized rail tank car equipment. The Company's core rail tank car products include a series of 47 types of EPRVs for pressure management; 4 types of KKMs; 4 types ofrelief valves, top ball valves, vacuum relief valves and bottom outlet valves (BOV), 4 typesas well as a proprietary one-bolt manway. These products provide some of vacuum relief valves (VRV)the key elements of a rail tank car's structure to ensure the safe handling and 1 ETS product that address the technical requirements of load and unload operations and the containment of hazardous commoditiesmaterials during transport. See “Key Products” below forWith a descriptionsolid history of innovative technology solutions and a reputation anchored by the Company’s key productsreliability of supply, the Company serves many of North America's largest tank car builders 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.shippers with a wide range of custom engineering and production services.

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’sCompany's unaudited 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$3,069,359 for the quarter ended December 31, 2014, $5,936,5972023; $3,138,137 for the quarter ended September 30, 2014, $5,648,3842023; $2,152,462 for the quarter ended June 30, 2014 and $5,480,0342023; $2,459,958 for the quarter ended March 31, 2014. 2023; $2,389,477 for the quarter ended December 31, 2022; $2,708,364 for the quarter ended September 30, 2022; $2,869,496 for the quarter ended June 30, 2022; $2,963,851 for the quarter ended March 31, 2022.

The Company’sCompany's unaudited net income/lossincome (loss) over the last eight quarters were as follows: net loss of $2,283,515$(165,368) for the quarter ended December 31, 2015, net loss of $661,2632023; $(66,174) for the quarter ended September 30,2015, net income of $105,08330, 2023; $(1,047,119) for the quarter ended June 30,2015, net income of $328,86930, 2023; $(786,677) for the quarter ended March 31,2015,net income of $762,32131, 2023; $(420,316) for the quarter ended December 31, 2014, net income of $959,0392022; $(361,522) for the quarter ended September 30, 2014, net income of $1,080,8462022; $(519,443) for the quarter ended June 30, 2014 and net income of $1,223,5752022; $(54,136) for the quarter ended March 31, 2014. The Company also believes that2022.

Three Year History

2021

Mr. Chris Stewart replaced James R. Bond as President of KIQX with Mr. Bond remaining as Chief Executive Officer of KIQX. Mr. Stewart assumed the management team has improved the Company’s business reputationexecutive authority and gained the confidenceresponsibility for all aspects of the railroadKXI Suspension System project. Mr. Stewart served as the General Manager of KIQX for several years and investment community by making deliveries on time and satisfying payment obligations on time, which was not alwayshas been a key developer of 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 certificationsstrategic business model 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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Three Year History

2013KXI project.

In March 2013,2021, the Company announcedterminated its technology development agreement dated November 10, 2016 (the "Technology Development Agreement") with service provider, G & J Technologies Inc. (the "Service Provider"), and the inventor/innovator, Gebhard Charles Wager (the "Inventor"), which served as the development agreement for the Company's KXI Suspension System. The Company had a dispute with the Service Provider and the Inventor with respect to the terms of the Technology Development Agreement and received a demand letter from the Service Provider with respect to the ownership of certain intellectual property rights referenced in the Technology Development Agreement. The Service Provider commenced an arbitration proceeding for ownership of IP assets and damages for wrongful termination of the Technology Development Agreement. The Company filed a counterclaim for damages for misrepresentations by the Service Provider. The Company anticipates that it entered intowill have to monetarily settle these claims but the amount is undetermined at this time.

On March 4, 2021, the Company completed a joint salesprivate placement to raise aggregate gross proceeds of CAD $6,370,000. A total of 7,000,000 units were issued at a price of CAD $0.91 per unit, with each unit being comprised of one common share of the Company and marketing agreement with Bulk Tank Inc. (“BTI”),one-half of one common share purchase warrant. Each whole warrant could be exercised at a trucking industry supplier, whereby BTIprice of CAD $1.15 on or before 4:00 p.m. (Vancouver time) on March 4, 2022, and CAD $1.30 on or before 4:00 p.m. (Vancouver time) on March 4, 2023. The private placement was entirely arm's length, 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 wouldtransaction did not take possessionmaterially affect control 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 ½” 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.Company.

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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In November 2013,On August 25, 2021, the Company reported that it had reviewedcompleted the performance characteristicsdesign, engineering and required regulatory testing 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 argumentstwo key pieces of truck tanker equipment created for the commercialreliable containment and pressure management of commodities that are transported via roads. The specialized products included a combined pressure/vacuum relief valve ("PVR") and a one-bolt manway ("OBM)". These new products were based on existing patents that are utilized in rail tank car applications and meet all Department of Transport ("DOT") 407 49 CFR 178.345 regulations. The Company commenced marketing and sales initiatives to promote wide scale adoption of the KKM. See “Key Products”truck tanker OBM and PVR.

In early November 2021, the Company received final certification of the Company's pressure relief valve ("PCH") for additional informationuse on rail pressure cars from the economic advantagesAAR. The PCH had gone through rigorous field service trials over the past several years which concluded with a successful teardown and argumentstesting of a sample of field service trialed PCH valves by the AAR inspector. Pressure tank cars designated by DOT-105 and DOT-112 specifications are used to transport flammable, non-flammable or toxic liquefied compressed gases that must be shipped under pressure. The PCH is a key milestone for the commercialCompany because it allows the Company to pursue sizable untapped revenue opportunities in the rail pressure car market. The Company commenced marketing and sales initiatives to promote wide scale adoption of the KKM. AlsoPCH.

On November 17, 2021, the Company's wholly owned subsidiary, KIQX, secured two key prototype development partners in November 2013,its KXI™ Wildertec™ Heavy Duty ("HD") Suspension project. Vector Truck Designs ("Vector") and Kinetic Drive Solutions ("KDS") were contracted by KIQX to provide a team of automotive engineers, control system designers and software specialists that can guide KIQX to a regulatory compliant final production-ready HD prototype. Design ambitions are to meet the needs of the Company's target markets with technological performance that can deliver new standards for safety and efficiency while providing environmental and cultural responsibility for vocational wilderness transportation applications. Vector will lead the project in final stage prototype design and development of all mechanical components. KDS joins KIQX as a specialist engineering partner who can lead to the development and completion of an integrated suspension control system for the HD prototype. The KDS design team brings a wealth of experience in control system development integrating ride height, stability, central tire inflation systems, rear steering functions featuring intelligent computerized vehicle control systems.

The prototype vehicle, when completed will go through extensive engineering integrity and Canadian Motor Vehicle Safety Standards compliance testing. This is to ensure that equipment operators are able to utilize the full efficiency of the KXI technology without compromising the safety of the occupants or the general public. COVID-19 has created many supply chain issues in the automotive industries, but the completion of the prototype is currently expected in the second or third quarter of 2023.

Financial results in 2021 worsened due to a decline in revenues of 33% as the hazardous tanker rail car market continued to decline. The gross profit margin remained strong at 43% and operating expenses increased by 2% over 2020 after adjusting for non-cash items. Expenses rose due to the increased activity of the Company's suspension program. In addition, the Company recorded a gain on revaluation of derivative warrant liability of $658,626. This gain was as a result of the Company conducting a private placement in Canadian dollars with warrants also priced in Canadian dollars.

The Company's working capital remained strong at $8,670,165 as at December 31, 2021 and cash at $3,377,464. This strong position was mainly due to the private placement that the Company conducted earlier in the year. Trade payables were $1,118,573 at December 31, 2021 and the only long-term debt the Company has is the long-term portion of leases.

2022

During 2022 the owners and shippers that utilize rail tank cars began to cautiously commit to investments in new tank car equipment and/or retrofitting their current rail tank car fleets. Total OEM production output in 2022 was 9,812 rail tank cars. Kelso provided 4,609 valves (47%) for new tank car production and 2,445 valves for retrofit and repair activity in 2022. This increase in business activity after a prolonged slowdown due COVID-19 reflected in a 47% increase in the Company's sales in 2022 compared to the same period 2021.

Rail tank car activity requiring Kelso components grew modestly based on general economic recoveries and manufacturing supply chain disruptions that require an increase in rail tank car transportation solutions. Traditional foreign supply chains in the rail tank car industry have become unreliable and more costly for shippers' operations. The Company's "100% American-Made" reputation and its proven ability to service customer orders even during the most challenging of times improved Kelso's service reputation to the point that the Company's market share grew to approximately 47% of new tank car production volume in 2022.

On February 17, 2022 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 whichall 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 crudeparticipating 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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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 participantsrefiners engaged in the service trials of the Company’sK2AV (the Company's new vacuum relief valve (VRV) have2" angle valve) successfully installed the VRVrequisite number of K2AV units and begun testing.full AAR compliance testing continued. The VRVKelso K2AV is a device specifically designed to protect railtransfer LP-Gas and anhydrous ammonia in pressurized railroad tank car applications.

The current pressure car fleet includes approximately 85,000 tank cars and each pressure tank car utilizes three K2AV units. These are high value specialty products and management's objectives are to generate multi-million-dollar revenues from the effectsK2AV as oil refiners specify our products in larger numbers. The pressure tank car market is a previously untapped market for Kelso to develop.

The development of excessive vacuum which can cause implosionKelso's K2AV has been driven by customers' demand for better performing angle valves due to irregular performance of the tank car.current products used in the market today. The Kelso K2AV is a single piece of high-quality fabricated steel eliminating porosity weakness found in foreign castings. It is designed for universal use, so there are no wetted or outlet O-rings to change out; it has a self-draining, self-cleaning seat; it has a low operating torque for ease of use; it has an adjustable packing gland; and it is a serviceable valve. The K2AV has an AAR standard mounting that will allow for ease of inter-changeability with other 2" angle valves. The K2AV is completely manufactured in the USA.

October 28, 2015The K2AV rounds out Kelso's Pressure Car Kit which includes the PCH, an excess flow check valve, a thermometer well, a needle (sampling) valve and magnetic gauging device. The availability of the Kelso Pressure Car Kit provided customers with the opportunity for one-stop sourcing for pressure car needs.

The K2AV progressed well in its AAR service field trials throughout 2022 without incident.

In 2022 the Company's Standard Profile Bottom Outlet Valve went through the final engineering design stages with the cooperation of shippers to meet current OEM design specifications. This was an essential step for the Company received United States Patent Number: 9,163,738to seek AAR service field trial approval which is a key component of attaining full AAR approval over the next few years.

The Company has been engaged with automotive engineers and experts allowing KIQ to move the R&D focus for KXI to equipping a heavy-duty (one ton or greater) "host" vehicle platform (KXI HD) which represents a larger and more accessible commercial market opportunities. The Company secured the services of several military and automotive OEM suppliers and highly qualified control system engineers along with specialized wilderness experts. This team of professionals agreed to support our R&D schedules to design and produce an initial KXI HD prototype in 2022 utilizing best available technologies with the goal of pilot production and sales in 2023. The KXI HD platform represents a much more realistic and accessible commercial market opportunity to pursue.

The fundamental objective of the KXI HD project has been the creation of a new legally road compliant suspension control technology that can greatly improve the technical performance of a combined road and wilderness vehicle. The focus of the KXI HD technology is to manage the center-of-gravity of the vehicle to provide better traction and better balance for passengers and payloads during commercial wilderness and disaster response operations. 

To accomplish this in 2022, KXI HD utilized state of the art hydraulic mechatronic technologies controlled by the Company's encryption protected Road-To-No-Road™ wilderness driver assistance software system. Initial proprietary trademarks established in 2022 include PreciseRide™ and AdaptiveGrip™. The design objectives are to ensure all vehicle manoeuvres, whether automated or manual, are performed in a stable balanced position when driven in complex and dynamic environments including ledge climbs, ledge drops, extreme obstacles and severe side-slope challenges. The prototype is anticipated to be completed in 2023. Early testing of the design indicates that commercial stakeholders can expect the KXI HD to provide:

●   Enhanced mobilitywith unique dual steering control technologies - The KXI HD rear steering control system combined with its new software functions vastly improve the safe manoeuverability of the KXI HD vehicle by reducing the potential margins of operator error through automated intuitive adjustments provided in the wilderness software drive modes.

●   Traction technology to better grip terrain in revolutionary ways - Supporting the vehicle center of gravity will be a responsive central tire inflation system and other key controls. KXI HD is expected to diminish wheel slip and enable safer climbing, traversing and descending operations resulting that can lower ecological impact and fuel consumption.

●  Gyroscopic balanced ride control capabilities through preset and automatically adjusting configurations that improve ride quality to enable safer travel speeds on forest service roads and rugged trails, as well as enhanced access to heavily sloped and complex wilderness terrain.

●   KXI HD expects to combine its mobility, traction and ride control technologies with a true all weather, all terrain, legally compliant road and wilderness solution for mission-critical events that require quick response times to emergency locations. KXI HD is designed to increase overall effectiveness and efficiencies for operators working in the wilderness through its single-vehicle solution which is expected to eliminate expensive and time-consuming trailer transportation for heavy equipment needed in difficult service areas.

Engineering design goals have been focused on the non-serviced needs of our target markets with new technological performance that can deliver new standards for safety, effectiveness and efficiency. It is expected that KXI HD can accomplish these goals while providing environmental and cultural responsibility for extreme vocational transportation applications.

Since 2021 the KXI HD prototype vehicle moved through initial engineering design processes, construction to completion in late 2022. All mechanical and hydraulic components are proven technologies that were sourced from well-established OEM suppliers and stakeholders. Component designs have been scaled from existing uses in military and commercial applications to fit the specifications of KXI HD. The engineering design included utilization and full integration of the Company's proprietary KXI HD encryption protected Road-To-No-Road™ wilderness driver assistance software that was also completed in late 2022. This process included simulation testing of the software as a prerequisite to commissioning the KXI HD prototype vehicle in 2023.

During 2022 the Company remained financially healthy with final working capital in the amount of $7,000,568 as at December 31, 2022. Key components of working capital at December 31, 2022 included cash on deposit in the amount of $2,712,446 and accounts receivable of $1,381,979 to cover trade payables in the amount $1,184,163. The only noninterest bearing long-term debt the Company has recorded is the long-term portion of the Company's leases.

2023

During Fiscal 2023, Kelso continued to strengthen the portfolio of its rail products by closely monitoring those products near completion of the required AAR service trial period. The strategic focus is to obtain full AAR approvals in 2024 for our entire portfolio of rail pressure car products to better grow our financial performance in a sustainable meaningful way.  This has been the Company's core branding ambition over the past fourteen years and it is now close to fruition in 2024. 

Rail operations at our Bonham, Texas facilities are effective and efficient productive systems that have been well developed since April 2010.  All functional elements of plant and equipment, production planning and controls, labour and staffing and product design/engineering are fully developed and productive at above average contribution margins from sales.  No further material capital investments in rail operations are anticipated for the unique designforeseeable future.

Financial performance during 2023 fell short of original expectations with our 5-year average at $12,175,532 per year.  This has been due to many macroeconomic factors far beyond the control of the Company’s new high pressure constant-force spring pressure relief valve (HPRV) for specialized useCompany, that have created the current deep recession of business activities in the “Pressure Tank Cars” category of the rail tank car market. The Company’s HPRV is a derivativeindustry.  This includes the penalizing effects of COVID-19, high interest rates, inflationary pressures, supply chain issues and lengthy AAR approval processes.  Despite 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, 2015many challenges the Company launches an innovative solutionhas persisted and still believes 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 sealsit can exploit its growing competitive advantages in the rail industry. 

Key to the development of the Company's rail revenue growth ambitions in 2024 is the full AAR approval of our pressure car package.  This package sells at a much higher tank car unit value.  It is expected to grow rail car revenue from an average of $1,500 per tank car to over $10,000 per tank car.  Our specialized angle valves for the pressure car package have completed their service trial and are in the final stages of the full AAR approval process.  The AAR approvals are the key milestone to establish new revenue growth from rail related products.  Our goal is to fully service the needs of the pressure car market fleet that that stands at approximately 86,000 tank cars.  This provides a significant financial growth opportunity to pursue while continuing to obtain AAR approvals for the additional products in the R&D pipeline. 

Since mid-2021 the Company's automotive innovation development operations have been heavily engaged in creating a unique fully automated "center-of-gravity" oriented Advanced Driver-Assistance System ("ADAS") designed specifically for wilderness travel.  In 2023 the Company confirmed that it had created the first "field-tested" automated suspension-based ADAS for emergency and commercial mission-critical wilderness operations.  Our ADAS technologies are specifically designed to address the challenging issues of worker well-being and safety as well as ecological protection while delivering effective and efficient operational advantages to wilderness operating stakeholders.  The innovation design objectives are to create products that diminish the potentially dangerous effects of human and technology error through the use of the Company's proprietary engineered solutions.

On April 25, 2023 the Company and G&J Technologies Inc. ("G&J") received the arbitrator's final judgment to legally resolve all the disputed issues. The judgement is binding for all parties and required Kelso to provide final financial payouts of US$465,360 to G&J for termination fees, asset payment issues and legal fees. This amount has been paid and was included in the financial results for the year ended December 31, 2023. The final judgement of the arbitrator in no way affects the Company's ability to continue the KXI Wildertec Heavy Duty Suspension program and the KXI technology remains unencumbered. According to the terms of the Technology Development Agreement (the "TDA"), the Company maintains intellectual property rights acquired under the TDA and is liable for a 2.5% royalty to the service provider or their assigns should Kelso use their technologies in a commercially sold product.

On September 12, 2023 the Company's KXI Wildertec™ Software Division filed the first stage proprietary patent application for its Automated Traction Optimization Method for Vehicle Suspension Systems ("Method").  The Patent Application forms the Company's initial proprietary claims and intellectual foundation for its future KXI Wildertec™ technologies.  This patent application filing begins the Company's comprehensive proprietary protection program for additional protectable full automation ADAS developments and firmly positions the Company's artificial intelligence intentions.  The grant of the Canadian Patent on our Method technologies expected to be in 2024.  This will be a key cornerstone event for the Company's business development ambitions.

In the automotive industry, today.ADAS refers to specialized automated technical features that are designed to increase the safety of operating motor vehicles on existing roadways.  Current automotive industry design ambitions are to use human-machine interfaces that can assist a driver's ability to react to dangers on established roads.  Upon extensively field testing the unique Method, Kelso's intelligence supports that the Company is the first enterprise to demonstrate a functional automated suspension-specific ADAS for commercial wilderness applications.  This is a major technology development advantage for the Company to grow future revenues from specialized automotive markets.

Very little emphasis, if any, by the automotive world has addressed ADAS requirements in wilderness operations.  Our strategic business objectives are to lead the way on ADAS for no-road environments for emergency responders, commercial/industrial stakeholders and humanitarian aide and defense customers.  Our business ambition is to participate in the emerging global ADAS software market which is estimated to reach the $80 billion mark by 2030 as reported by industry experts, McKinsey & Company.

The Company will concentrate its production resources on delivering safety enhancing technology solutions for customers in, but not limited to, disaster response, wilderness fire fighting, mobile medical treatment, evacuation and emergency response, mining and exploration, energy transmission, civil engineering projects, telecommunications and geographic/environmental data systems.

In 2023, the Company made considerable progress in its research and development to create new innovative products.  Timing of required regulatory approvals on new rail and automotive products and corresponding revenue streams remains unpredictable and cannot be guaranteed to be successful. 

The Company feels it is on course for new value creation as we look forward to new business success in both rail and automotive markets.  Management has determined a clear path for the commercialization of our new products in order to provide longer-term profitable revenue growth.  With no interest-bearing long-term debt to service and improved sales prospects from larger diverse markets, Kelso can focus on the growth of its equity value from financial performance generated from a wider range of new proprietary products. 

The Company deploys capital resources sensibly to maintain financial health and liquidity. The Company's working capital was $5,026,580 as at December 31, 2023. Current working capital and anticipated sales activity for 2024 is expected to protect the Company's ability to conduct ongoing business operations and R&D initiatives for the foreseeable future. With no interest-bearing long-term debt to service and improved sales prospects from a larger product portfolio, Kelso can continue to concentrate on stronger financial performance from a more diverse range of products.

Subsequent to Fiscal 2023

In February 2024 the Company established an initial Phase-One Pilot production facility with additional leased space at its current R&D facility in West Kelowna, BC, Canada.  This production facility is being designed and tooled to convert different classes of heavy duty "host" vehicles with the Company's patents pending proprietary Method technologies.  These vehicles are designed to be sold to customers operating in extreme terrain environments who have specified their custom user case requirements utilizing our Method technologies.

The Method is now regulatory compliant for sales to commercial wilderness operations including existing forestry roads.  The KXI equipped vehicle is compliant for operation on all resource and private roads through an all-terrain vehicle insurance policy.

The Phase-One facility does not require new equity or debt capital at this time.  The low capital investment reflects the ease of conversion of the "host" vehicle to the Method system in order to minimize the costs of the final salable vehicle.  Management is currently developing longer-term scheduling logistics, supply chain procurement systems, optimal inventory levels, labor and staffing needs and product design enhancements, continuing R&D needs, advancing engineering quality controls and general risk management controls.

Once completed the Phase-One facility is expected to have the potential production capacity to generate approximately $25 million of annual revenue commencing in late 2024.  With the assistance of the landlord, the current facility can be scaled to meet long term production volumes to service in excess of $100 million per year at the same location.  The facility will house R&D, Phase-One production and an on-site test track.

Capital Expenditures

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

Takeover Offers

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

The CompanyU.S. Securities and Exchange Commission (the "SEC") maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that site is www.sec.gov. The Company's website is www.kelsotech.com.

B.Business Overview

Kelso is a railroaddiverse product engineering company that specializes in the development, production and distribution of proprietary equipment used in transportation applications. Over the past decade the Company's reputation has been earned as a developer and reliable supplier that produces and sells proprietaryof high-quality rail tank car service equipment used in the handling and containment of hazardous and non-hazardous commodities during transport.

All Kelso products are developed with emphasis on economic and operational advantages to customers while mitigating the impact of human error and environmental releases. The Company offers specialized rail tank car and truck tanker equipment, no-spill fuel loading systems, first responder emergency response equipment and "road-to-no-road" suspension systems for motor vehicles being used in rugged wilderness terrains.

The Company has firmly established itself as a leading North American producer and supplier of specialized rail tank car equipment. The Company's core rail tank car products include pressure relief valves, top ball valves, vacuum relief valves and bottom outlet valves as well as a proprietary one-bolt manway. These products provide some of the key elements of a rail tank car's structure to ensure the safe loading, unloadinghandling and containment of hazardous materials during transport. ProductsWith a solid history of innovative technology solutions and a reputation anchored by the reliability of supply, the Company serves many of North America's largest tank car builders and shippers with a wide range of custom engineering and production services.

The Company's common shares are specifically designed to provide economic and operational advantages while reducingpublicly traded on the potential effects of human error and environmental harm duringToronto Stock Exchange under the transport of hazardous materials.

trading symbol KLS. The Company currently offers approximately 60 products. The key products thatwas listed on 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 useToronto Stock Exchange on applications on railroad tank cars but can be modified for use in other markets such as trucking.May 22, 2014. The Company operates in combination with the Company's wholly owned subsidiaries Kelso Technologies (USA) Inc, KIQ X Industries Inc., Kel-Flo Industries Inc. (formerly Kelso Innovative Solutions Inc.), KIQ Industries Inc. and KXI™ Wildertec™ Industries Inc.

Over the past five years Management 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 descriptionestablished multi-million-dollar sales 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 newCompany's 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 (OEM) and many retrofit/repair businesses. Revenues over the last five audited year end periods were as follows: $10,819,916 for the year ended December 31, 2023; $10,931,188 for the year ended December 31, 2022; $7,425,707 for the year ended December 31, 2021; $11,149,130 for the year ended December 31, 2020; and $20,550,682 for the year ended December 31, 2019.

The Company's net earnings (loss) performance over the last five year end periods were as follows: net loss of $2,101,886 for the year ended December 31, 2023; net loss of $1,355,417 for the year ended December 31, 2022; net loss of $2,758,567 for the year ended December 31, 2021; net loss of $1,307,890 for the year ended December 31, 2020; and net income of $3,334,043 for the year ended December 31, 2019.

The rail tank car industry is historically cyclical.  The Company's primary market (hazmat rail tank cars) slowed considerably during the rail recession in 2016 and 2017 and improved in 2018 and 2019 to restore the Company's financial health.  From 2020 through 2023 COVID-19 delivered a powerful economic setback for Kelso as the pandemic significantly reshaped the business dynamics of the rail tank car industry as it fell into a deep recession from which it has not recovered. 

Given the unprecedented challenges of this crisis the Company's main focus was the containment of negative impacts on the Company's longer-term business model and the protection of the Company's key productive assets, research and development ambitions and its ability to continue business operations.  The Company concentrated on preparedness for post-pandemic normalization and readiness for a strong restart of business growth.  In 2022 revenues improved by 47% over the previous and maintained the same level in 2023.  This allowed Kelso to continue to grow its R&D projects in both the rail and automotive industries.

Financial performance in 2023 diminished by 1% over 2022, which saw recession affected sales recover by 47% after a dramatic 33% setback in 2021.  Weakened financial performance raised Management's concerns of the Company's abilities to continue business operations.  While the new build OEM rail tank car producers slowed in April 2020 and have remained depressed the retrofit and repair business segments remain open.  This has allowed the Company to continue the Company's rail operations productively. 

Industry experts anticipate that new car production will track replacement demand for the 438,000 tank car fleet in the range of 7,000 - 10,000 cars per year.  Tank car re-qualifications will be in the range of 40,000 - 50,000 cars per year for the next several years.  Management believes that revenue streams from rail tank car operations should continue to improve slowly over the upcoming years when new product offerings gain final AAR regulatory approvals. 

The Company's working capital was $5,026,580 as at December 31, 2023 that includes $3,376,005 in inventories required for timely future deliveries. Capital resources from rail operations are expected to protect the Company's ability to conduct ongoing business operations for the foreseeable future.

Rail tank car product development requires long AAR approval processes which continue to impede Kelso's ability to improve sales with additional rail tank car equipment.  The Company has active service field trials in process with the AAR for the Company's new standard profile ceramic ball bottom outlet valve, top ball valve and angle valve, although final AAR approval processes take considerable time to complete.  Our pressure tank car PCH valve has been approved for full commercial use adding to our sales growth potential.  These new product developments have been derived through co-engineering and testing support from the Company's key customers which may strengthen the probability of longer-term adoption by the rail industry.

The Company's non-rail product development initiatives concentrate on a wider range of transportation technology products that are designed to provide unique economic benefits and safe operational advantages to commercial customers. The Company's goal is to spread the Company's business risk to diminish the severe negative impacts of the historic down cycles in the rail industry.

Since 2017, Management has actively pursued new diverse marketplace opportunities outside of the rail industry. The overall strategic plan is to spread business risks by accessing non-rail markets to diminish the severe negative impact of the reliance on a small number of customers and the historic down cycles in the rail industry.

As part of this strategic plan, Kelso, through the Company's wholly owned subsidiary KIQ X Industries (KIQ) focused on the research and development of an advanced "Road-To-No-Road™" suspension system known as the KXI™ Wildertec™ Suspension System (KXI). KXI is a system designed to provide safer, more effective, efficient and ecologically responsible capability for commercial wilderness operations. The KXI is a pioneer brand initiated by Kelso to service the needs of the commercial wilderness transportation technologies marketplace. The Company's goal is to utilize well established automotive engineering practices to solve the challenges of extreme wilderness terrain travel and create opportunities and efficiencies for both industrial and public service customers.

The Phase-One half-ton "concept" vehicles were fitted with the service providers' air suspension innovations, initial component tooling and parts and installation of the mechanical KXI components on a light duty half ton "host" vehicle. Multiple vehicles were converted and tested. Desired performance fell well short of expectations due to software automation deficiencies, regulatory compliance problems and engineering durability requirements.  The key issue was that the design specifications could not attain full compliance with the Canadian Motor Vehicle Safety Standards (CMVSS). Unfortunately, ongoing research and testing of the original half-ton KXI prototypes revealed engineering, safety and economic issues that rendered the half-ton KXI prototype concept commercially unfeasible.

In March, 2021 the Company terminated the original TDA with G&J, including the consulting agreement for $10,000 per month.  The termination was disputed by the service providers and arbitration commenced.  On April 25, 2023 the Company and G&J received the arbitrator's final judgment to legally resolve all the disputed issues. The judgement is binding for all parties and required Kelso to provide final financial payouts of US$465,360 to G&J for termination fees, asset payment issues and legal fees. This amount has been paid and was included in the financial results for the year ended December 31, 2023. The final judgement of the arbitrator in no way affects the Company's ability to continue the KXI Wildertec Heavy Duty Suspension program and the KXI technology remains unencumbered. According to the terms of the TDA the Company maintains intellectual property rights acquired under the TDA and is liable for a 2.5% royalty to the service provider or their assigns should Kelso use their technologies in a commercially sold product.

In 2021 based on knowledge gained from inputs from automotive engineers and wilderness experts KIQ moved the R&D focus for a brand new KXI Heavy Duty (KXI HD) suspension system that would be legally compliant.  The goal was to create a "Road-To-No Road™" vehicle that featured a durable, automated state-of-the-art hydraulic suspension system.  The design ambition was to equip and enable a heavy-duty (one ton or greater) "host" vehicle platform that would represent larger and more achievable commercial market opportunities. 

The Company continuessecured the services of several military and automotive OEM suppliers and highly qualified software and suspension engineers as well as specialized wilderness experts.  These stakeholders confirmed that our new R&D direction was a unique bona fide opportunity to build a quality brandpursue.  They agreed to support our R&D schedules to design and produce an initial KXI HD prototype.

The KXI HD prototype vehicle was completed in late 2022.  All mechanical and hydraulic components are proven technologies that are sourced from well-established OEM suppliers and stakeholders.  Component designs have been scaled from existing uses in military and commercial applications to fit the specifications of KXI HD.  The prototype vehicle has been commissioned with the Company's proprietary encryption protected Road-To-No-Road® wilderness driver assistance software which encompasses our trademarks PreciseRide™ and AdaptiveGrip™.  The commissioned prototype vehicle is currently going through extensive software and engineering integrity tests in preparation for Canadian Motor Vehicle Safety Standards compliance testing.

Once completed these design specifications will have to attain full compliance with the Canadian Motor Vehicle Safety Standards (CMVSS).  Successful completion of the CMVSS requirements should allow the Company to meet the Federal Motor Vehicle Safety Standards (FMVSS) in the railroad industry based on its reputationUnited States including the majority of compliance requirements for each Canadian province and American state.  This is expected 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,provide the Company has successfully gainedwith a national safety mark awarded as a final stage manufacturer which is a key prerequisite for enabling full scale marketing initiatives and initial commercial sales in 2024.

Business Model

Kelso is working to become a leading developer and supplier of a wide range of proprietary tank car valves designed primarily for use in the railroad industry’s confidence, approvalhazmat shipment market. The Company's valves help shippers safely deliver hazmat commodities wherever they need to go in North America. Customer driven product development and their willingnessbusiness strategies now bring Kelso's unique competitive advantages with customers as Management pursues the Company's goals of positive financial performance for years 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”.come.

The Company operates in combination with its wholly-owned subsidiaries,keeps rail products smart, simple and focused on customer needs. Kelso USAconcentrates on sound business fundamentals, operational practices, adjusted EBITDA returns and Kelso Innovative. Kelso USA is the operational arm ofcareful capital management. Today, the Company whileinvests in customer driven co-engineered product development to improve the probability of market adoption. This allows Kelso Innovative focusesto prepare marketing initiatives to capitalize on engineering industrial designssales opportunities. Management monitors industry trends and distribution plansregulated technology requirements to select R&D projects that can be fruitful for the Company’s KKM system for applications in the roadway trucking and trailer market.

Markets

Company's future revenue streams. 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 productsambition 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:

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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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 regulationsCompany's engineering team can proactively resolve issues for customers before reactionary measures 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.required.

The Company believes the key components of the Company’sCompany's business model include:

• experienced executive management, including directors and officers with severalmany years of business experience as described under “Directors and Senior Management”;experience;
• 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’customers' specific criteria;
• growth of a “next generation”"next generation" transportation service equipment cataloguefor rail, road and wilderness transportation applications through in-house product development that moves awaydevelopment;
• product diversification plans to diminish revenue risk factors from historical products to significantly different technology;historically cyclical products;
• acquisition of new or established products that can grow new markets under ourthe Company's management;
• marketing initiatives that promote awareness of our products being “best available technology” as evidenced by increasing revenue from salesthe quality of the Company’sCompany's products and adoption rates for the Company’s products in the marketplace;economic value proposition they offer to interested stakeholders;
• reliable order base fromloyal customers to fuel predictable profitable business growth; and
• maintenance of a proven effective and efficient production infrastructure and capacity that can supplydesigned to meet demand.

Although still a small enterprise the Company believes that it isremains at the forefront of technology development for the railroad industry becauseas it has successfully developed products using new technologyproducts 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’sCompany's business model is focused on becoming a leader in the design and supply of new technologies aimed at worker safetysafe operational effectiveness and economic efficiencies in transportation systems. We are focused on our rail equipment and the safe handlingdevelopment of our wilderness transportation equipment that can diversify and containmentgrow our revenues in new market segments.

Market and Products

Kelso is working to become a leading developer and supplier of hazardous materialsa wide range of proprietary tank car valves designed primarily for use in transportation systems.

Key Productsthe hazmat shipment market. The Company's valves help shippers safely deliver hazmat commodities wherever they need to go in North America. Customer driven product development and business strategies now bring Kelso's unique competitive advantages with customers as Management pursues the Company's goals of positive financial performance for years to come.

The Company currently offers approximately 60 products.keeps products smart, simple and focused on customer needs. Kelso concentrates on sound business fundamentals, operational practices, Adjusted EBITDA returns and careful capital management. Today, the Company invests in customer driven co-engineered product development to improve the probability of market adoption. This allows Kelso to prepare marketing initiatives to capitalize on sales opportunities. Management monitors industry trends and regulated technology requirements to select R&D projects that can be fruitful for the Company's future revenue streams. The key productsambition is that the Company's engineering team can proactively resolve issues for customers before reactionary measures are required.

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External Constant Force Spring Pressure Relief Valves (EPRV)

short lead times for delivery. Over the past decade Kelso has been involvedable to develop a niche in the marketplace for many of the Company's products. Key products include:

Rail and Road Transport Equipment

• Pressure relief valves
• Vacuum relief valves
• Bottom outlet valves (under AAR field service trials)
• Pressure car pressure relief valves (AAR approved - new market)
• Pressure car angle valves (under AAR field service trials - new market)
• Top ball valves (under AAR field service trials)
• DOT 407 PRV/VRV for truck tankers (new market)
• One-bolt manways and related equipment
• Emergency response equipment for hazmat first responders
• No spill locomotive fueling equipment
• Other specialty valves, parts, equipment and services

Rail Tank Car Market Indicators

The rail tank car market in North America is not considered a growth industry but rather a cyclical commodity market that is historically unpredictable. Kelso is focused on growing the rail business through the sales of a wider range of pressure relief valves, vacuum relief valves, ball valves, bottom outlet valves, manway equipment, angle valves and other specialized equipment.

Based on current projections from industry analysts (Freight Transportation Research ("FTR") Associates) new tank car demand is expected to reach 8,290 tank cars in 2023.  In addition, significant re-qualifications of existing rail tank cars are planned to address the 135,000 tank cars that were delivered between 2012 and 2017 and will now come due for recertification during the next few years.  The anticipated new build and re-qualification activity combined with a growing number of qualified Kelso products are expected to fuel new financial growth from rail operations.

The Company will continue to develop new rail products that are anticipated to provide new financial growth opportunities.  The Company's focus on core design objectives that are:

• To ensure public safety by mitigating the potential negative environmental impacts of non-accidental releases of hazardous materials in transit.
• To manage negative and positive pressure within the tank thereby reducing the risks of implosion or explosion ensuring the safe containment of hazardous materials while being loaded, transported and unloaded.
• To improve the customers' operating effectiveness producing economic rewards with proven reliable equipment.
• To build reliable equipment featuring high-quality milled or U.S. cast parts eliminating problematic imported cast parts that lead to complex expensive repairs for customers.
• To ensure that customers benefit with more profitable in-service time for tank cars.

Wilderness Transportation Equipment Market

KXI™ Wildertec™ Suspension System (KXI HD) For Heavy Duty Operations

In 2017 Kelso through the Company's wholly owned subsidiary KIQ X Industries Inc. (KIQ) began the development regulatory approval,of a unique vehicle suspension system that provided new rapid response "road-to-no-road" capabilities regardless of the climate or the severity of the terrain.  The KXI Suspension System is being developed under the product brand (Wildertec™) initiated by Kelso to service the niche industries of commercial wilderness and emergency management transportation technologies.  The Company's goal is to utilize well established automotive and equipment engineering practices to solve the challenges of extreme terrain travel and create opportunities and efficiencies for both industry and public service customers.

The catalyst to the Company's interest in this business development opportunity were the requests to the engineering community from governments, firefighters, emergency responders and other stakeholders for the creation of better technologies that can most effectively respond to threats to public safety and better protection of emergency responders in the wilderness. 

The Company considered the engineering challenge and ambition worth pursuing.  Environmental experts continue to warn that the net damage costs of climate change events are likely to significantly increase in the upcoming years due to intensified weather events such as wildfires, hurricanes, tornadoes, flooding and drought.  Wilderness and populated areas will be in harm's way and society will have to respond to these events with better capabilities, faster response times and improved effectiveness to preserve human lives and prevent property damage.

In 2021 the Company engaged automotive engineers and experts allowing KIQ to move the R&D focus for KXI to equipping a heavy-duty (one ton or greater) "host" vehicle platform (KXI HD) which represents a larger and more accessible commercial market opportunity.  The Company secured the services of several military and automotive OEM suppliers and highly qualified control system engineers along with specialized wilderness experts.  They agreed to support our R&D schedules to design and produce an initial KXI HD prototype utilizing best available technologies with the goal of pilot production in early 2024.  The KXI HD platform represents a much more realistic and accessible commercial market opportunity to pursue. 

The fundamental objective of the KXI HD project has been the creation of a new legally road compliant suspension control technology that can greatly improve the technical performance of a combined road and wilderness vehicle.  The focus of the KXI HD technology is to manage the center-of-gravity of the vehicle to provide better traction and better balance for passengers and payloads during commercial wilderness and disaster response operations. 

To accomplish this, KXI HD has utilized state of the art hydraulic mechatronic technologies controlled by the Company's proprietary encryption protected wilderness driver assistance software system.  Initial proprietary trademarks include PreciseRide™ and AdaptiveGrip™. The design objective is to ensure all vehicle maneuvers, whether automated or manual, are performed in a stable balanced position when driven in complex and dynamic environments including ledge climbs, ledge drops, extreme obstacles and severe side-slope challenges.  The prototype has been completed and early testing of the design indicates that commercial stakeholders can expect the KXI HD to provide:

●   Enhanced mobilitywith unique dual steering control technologies - The KXI HD rear steering control system combined with its new software functions vastly improve the safe maneuverability of the KXI HD vehicle by reducing the potential margins of operator error through automated intuitive adjustments provided in the wilderness software drive modes.

●   Traction technology to better grip terrain in revolutionary ways - Supporting the vehicle center of gravity will be a responsive central tire inflation system and other key controls.  KXI HD is expected to diminish wheel slip and enable safer climbing, traversing and descending operations results that can lower ecological impact and fuel consumption.

●   Gyroscopic balanced ride control capabilities through preset and automatically adjusting configurations.  This improves ride quality to enable safer travel speeds on forest service roads and rugged trails, as well as enhanced access to heavily sloped and complex wilderness terrain.

●   KXI HD expects to combine its mobility, traction and ride control technologies with a true all weather, all terrain, legally compliant road and wilderness solution for mission-critical events that require quick response times to emergency locations.  KXI HD is designed to increase overall effectiveness and efficiencies for operators working in the wilderness through its single-vehicle solution which is expected to eliminate expensive and time-consuming trailer transportation for heavy equipment needed in difficult service areas.

Engineering design goals have been focused on the non-serviced needs of our target markets with new technological performance that can deliver new standards for safety, effectiveness and efficiency.  It is expected that KXI HD can accomplish these goals while providing environmental and cultural responsibility for extreme vocational transportation applications.

The KXI HD prototype was completed in late 2022.  All mechanical and hydraulic components are proven technologies that are sourced from well-established OEM suppliers and stakeholders.  Component designs have been scaled from existing uses in military and commercial applications to fit the specifications of KXI HD.  The prototype vehicle is going through extensive engineering integrity testing, software commissioning and debugging to prove the Road-To-No-Road® design principle is achievable.

Once completed these design specifications will have to attain full compliance with the Canadian Motor Vehicle Safety Standards (CMVSS).  Successful completion of the CMVSS requirements should allow the Company to meet the Federal Motor Vehicle Safety Standards (FMVSS) in the United States including the majority of compliance requirements for each Canadian province and American state.  This is expected to provide KIQ a National Safety Mark awarded as a final stage manufacturer which is a key prerequisite for enabling commercial sales in late 2024.

The goal is to attain full legal compliance of the design that ensures that equipment operators are able to utilize the full efficiency of the KXI HD technology without compromising the safety of the vehicle, occupants and the general public.  This is expected to qualify the KXI HD vehicle for full scale marketing and manufacturesales.

In September 2023 the Company's KXI Wildertec™ Software Division filed its first proprietary Patent application for its Method.  The Patent Application forms the Company's initial proprietary claims and intellectual foundation for its automotive wilderness technologies.  This patent application filing begins the Company's comprehensive proprietary protection program for its current technologies and firmly positions the Company's artificial intelligence intentions.  The grant of EPRVsthe Canadian Patent on our Method technologies expected to be in 2024 will be a key cornerstone event for the Company's development ambitions.

In the automotive industry, ADAS refers to specialized automated technical features that are designed for railroad tank carsto increase the safety of operating motor vehicles on existing roadways.  Current automotive industry design ambitions are to use human-machine interfaces that carry hazardous and nonhazardous commodities. The Company currently has approximately 47 versions of EPRVs in its product line, includingcan assist a number of high-performance EPRVs. As required,driver's ability to react to dangers on established roads.  Upon extensively field testing 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 valvesunique Method, Kelso's intelligence supports that the Company is not aware of);
• technological improvement over older valve systems as it eliminates the helical coil spring,first enterprise to demonstrate a functional automated suspension-specific ADAS for commercial wilderness applications.  This is a major technology development advantage for the internal valve stemsCompany to grow future revenues from specialized automotive markets.

  Very little emphasis, if any, by the automotive world has addressed ADAS requirements in wilderness operations.  Our strategic business objectives are to lead the way on ADAS for no-road environments for emergency responders, commercial/industrial stakeholders, and spring guide tube;

• humanitarian aide and defense customers.  Our business ambition is to participate in 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 sealemerging global ADAS software market which is more tolerantestimated to contamination;
• low profile provides for better roll-over safety; and
• external design allows complete inspection during loading.

See “Information onIn February 2024 the Company – Business Overview – Competitive Conditions” below.established an initial Phase-One Pilot production facility with additional leased space at its current R&D facility in West Kelowna, BC, Canada.  This production facility is being designed and tooled to convert multiple classes of heavy duty "host" vehicles with the Company's patents pending proprietary Method technologies.  These vehicles are designed to be sold to customers operating in extreme terrain environments who have specified their custom user case requirements utilizing our Method technologies.

“Kelso Klincher®” Manway (KKM)The Method is now regulatory compliant for sales to commercial wilderness operations including existing forestry roads.  The KXI equipped vehicle is compliant for operation on all resource and private roads through an all-terrain vehicle insurance policy.  The ambition is to obtain the necessary federal and regional compliance approvals to enable the technology to operate on all roadways as early as 2025.

The Company holds the patent rightsis now concentrating its resources on developing KXI Wildertec Application Development Agreements with interested customers in, but not limited to, safer working environments for a new manway technology trademarkeddrivers/operators working in wilderness environments such as the “Kelso Klincher®”. The Company believes the KKM is a technology change for the railroad industry where the return on investmentfirefighting, medical/evacuation operations, emergency response capabilities, mining, energy transmission and arguments for customers’ adoption of the KKM are compelling. The Company believes they include:geographic/environmental data mapping systems.

• 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;

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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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 ServicesR&D Facilities

The CompanyKelso currently operates one 44,000 sq. ft.two rail equipment production facility and one 6,000 sq. ft. engineering development facility bothR&D facilities totalling 50,000 square feet in Bonham, Texas. The Company is fully qualified and certified to produce products for the railroad industry. Itand other industries. The Company has been granted the required certifications including holding an AAR M1002 Class D Registration and AAR M1003 Quality Assurance System Certification for itsthe Company's production facilities from the AAR.

LocationKXI HD research and development operations are located in a new facility in West Kelowna, British Columbia, Canada.  This facility is modern and well suited to supply chainsthe development of the heavy-duty vehicle initiatives.  It facilitates our key engineers, specialists and OEM suspension control experts and strategic R&D schedules to produce a regulatory compliant KXI HD prototype. This strategic direction and new facility is expected to reduce R&D costs and maintain strategic business timetables. 

In February 2024, the Company established an initial 3,000 square foot Phase-One (Pilot) production facility with additional leased space at its current R&D facility in West Kelowna, BC, Canada.  This production facility is being designed and tooled to convert different classes of heavy duty "host" vehicles with the Company's patents pending proprietary Method technologies.  These vehicles are designed to be sold to customers is a critical factoroperating in extreme terrain environments who have specified their custom user case requirements utilizing our Method technologies.

The Phase-One facility does not require new equity or debt capital at this time.  The low capital investment reflects the Company’s production strategyease of conversion of the "host" vehicle to the Method system in order to reduce distributionminimize the costs of inbound componentsthe final salable vehicle.  Management is currently developing longer-term scheduling logistics, supply chain procurement systems, optimal inventory levels, labor and shipping costs associated with outgoing finished products. Bonham, Texasstaffing needs and product design enhancements, continuing R&D needs, advancing engineering quality controls and general risk management controls.

Once completed the Phase-One facility is withinexpected to have the potential production capacity to generate approximately 250 miles$25 million of annual revenue commencing in late 2024.  With the assistance of the Company’s main customers. The Company controls assembly, testing, certification and shipping processes for its products. Production outputlandlord, the current facility can be scaled upwards when required with minimal investment.to meet long term production volumes to service in excess of $100 million per year at the same location.  The facility houses R&D, Phase-One production and an on-site test track.

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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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 itsthe Company's internal hiring standards require that individuals performing critical operations for component parts must have demonstrated a minimum of five years’years' experience with similar production operations. The Company has also engaged a management team with extensive experience managing public companies. See “Directors,"Directors, Senior Management and Employees”Employees". The loss of any of these individuals could have an adverse effect on the Company. See “Risk Factors”"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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The ability of the Company to compete for and acquire production contracts for itsthe Company's products in the future will depend on a number of factors, including the Company’sCompany's ability to continue to offer best availablereliable high-quality technology, competitive pricing, timely delivery of purchase orders and strong customer service.

Raw Materials/ComponentsIntangible Properties

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’sCompany's intangible property, particularly itsthe Company's intellectual property rights, plays an important role in securing the Company’sCompany's competitive advantage. The Company held the patent for the Company's PRV technology Patent 5,855,225 which expired January 29, 2016. The Company holds the patents for its EPRV technology (Patentthe Company's PRV Patent No. 5,855,225 which expires January 29, 2016)9,568,146 B1 issued February 14, 2017, and for its KKM (Patent No. USthe Company's OBM Patent 7,104,722 B2 which expires in 2023),2023 and has a trademark for its Kelso Klincher®the Company's One Bolt Manway (Registration Number 4,282,652). The Company holds the patent for the Company's ceramic BOV Patent 9470320 issued on January 13, 2016. The Company also holds the patent for the Company's VRV, Patent 9,441,749, expiring in 2033. On February 8, 2017, the Company filed a United States provisional patent application and a corresponding Canadian patent application for an Active Suspension Control System and Method for No-Road Vehicles ("ASCS") and continued patent work and international patent applications were filed on February 3, 2018.

On September 12, 2023 the Company reported that it has filed a trademarkits first Patent application for its Kelso Tiger Tube products.Automated Traction Optimization Method for Vehicle Suspension Systems ("Method").  The Company does not have a patentPatent Application forms the Company's initial proprietary claims and intellectual foundation for its ETS technology. The Company applied for aautomotive wilderness technologies.  This patent on June 3, 2013 under a “Non-Publication Request”application filing begins the Company's comprehensive proprietary protection program for its new BOV, on January 6, under a “non-Publication Request” for its new DPRV2014current 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”.future technologies.

These patents and trademarks are critical to the Company’sCompany's success as they provide a significant advantage to the Company over itsthe Company's competitors. See “Risk Factors”"Risk Factors" for a discussion of risk factors relating to the Company’sCompany's intellectual property and competition.

Seasonality/Cycles

The cyclical nature of the Company’sCompany's rail business reflects the cyclical nature of business in the railroadtank car industry. Generally,Historically, uptrend cycles can last up to 3 to 5 years, followed by reduced building activity for 3 to 5 years as inventories of new cars are worked into the first quarter is the quietest for the Company and others in the railroad industry, while the third and fourth quarters are the busiest. The quiet first quarter is attributable, in large part, to this being the time of the year when companies in the railroad sector are planning their development and purchase needs for the year, while the delivery of products tends to happen in the third and fourth quarter.

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Economic Dependence

The Company’sCompany's business is substantially dependent on Patent No. 5,855,225 for the Company’s EPRV technology which expired on January 29, 2016Company's ability to create, produce and Patent No. US 7,104,722 B2 for its KKM technology which expires in 2023.distribute the Company's unique proprietary products such as the Company's patented pressure relief valves, one-bolt manway, vacuum relief valves bottom outlet valves and Wilderness Response Transportation Technologies. See “Material Contracts”"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, 2015,2023, the Company hashad 42 employees (December 31, 2015 – 422022 - 38 employees), including employees of itsthe Company's subsidiaries. The largest group of employees works at the Company’sCompany'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 itsthe Company's management team. In connection with this reorganization, in May 2010, the Company completed a consolidation of itsthe Company's Common Shares on the basis of seven old Common Shares for one new Common Share.

Government Regulations

The railroad transportation industry is highly regulated by governments. In both the United States and Canada, governments regulate, among other things, transportation of non-hazardous and HAZMAT commodities as well as rail safety. The primary regulatory body in the United States for the railroad transportation industry is the U.S. Department of Transportation and itsthe Federal Railroad Administration, PHMSA and in Canada it is Transport Canada.TheCanada. The Company endeavours to develop all of itsthe Company's products and operate itsthe Company's business in compliance with all applicable government regulations and testing requirements. The Company certifies itsthe Company's products on an ongoing basis in accordance with AAR guidelines and government regulations. As

The Company's KXI Suspension System must meet and fully comply with the rules and regulations set forth by the Canadian Motor Vehicle Safety Standards and the Federal Motor Vehicle Safety Standards in the United States. Failure to meet these requirements could have a material negative impact on the Company's ability to obtain purchase orders and generate meaningful revenues.

Intellectual Property Dispute

The Company had a dispute with Service Provider, G&J and the Inventor, Gebhard Charles Wager, in respect of the TDA between the parties dated November 10, 2016. On January 7, 2020, the Company assembles its products rather than manufactures them,received a demand letter from the Service Provider with respect to the ownership of certain intellectual property rights referenced in the TDA. The Company then terminated the TDA following which the Service Provider commenced an arbitration proceeding for ownership of IP assets and damages for wrongful termination of the TDA. The Company filed a counterclaim for damages for misrepresentations by the Service Provider.

On April 25, 2023, the Company and received the arbitrator's final judgment to legally resolve all disputed issues. The judgement was binding on all parties and required Kelso to provide final financial payouts of US$465,360 under the TDA for termination fees, asset payment issues and legal fees. This amount has been paid. The final judgement of the arbitrator in no way affects the Company's ability to continue the KXI Wildertec Heavy Duty Suspension program and the KXI technology remains unencumbered. According to the terms of the TDA, the Company maintains intellectual property rights acquired under the TDA and is not subjectliable for a 2.5% royalty to any environmental regulations other than the standard water and sewage regulations.service provider or their assigns should Kelso use their technologies in a commercially sold product.

C.Organizational Structure

We have twoThe Company has five wholly-owned subsidiaries, Kelso USATechnologies (U.S.A.) Inc., KIQ Industries Inc., Kel-Flo Industries Inc., KIQ X Industries Inc. and Kelso Innovative.KXI™ Wildertec™ Industries Inc. The Company owns 100% of the voting securities of each of itsthese subsidiaries. NeitherNo subsidiary has a class of restricted securities. See “Information"Information on ourthe Company –- History and Development of Our Company”the Company".