UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2021
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[ ] SHELL COMPANY PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report N/A
For the transition period from N/A to N/A
Commission file number 001-36685
KELSO TECHNOLOGIES INC.
(Exact name of Registrant as specified in its charter)
Not Applicable
(Translation of Registrant's name into English)
British Columbia, Canada
(Jurisdiction of incorporation or organization)
13966 18B Avenue, Surrey, British Columbia, Canada, V4A 8J1
(Address of principal executive offices)
James R. Bond, CEO
13966 18B Avenue
Surrey, British Columbia, Canada, V4A 8J1
Telephone: 604.590.1525
Email: bond@kelsotech.com
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Copy of communications to:
Nafeesa Valli-Hasham
Clark Wilson LLP
Suite 900 - 885 West Georgia Street
Vancouver, British Columbia, Canada, V6C3H1
Telephone: 604.687.5700
Facsimile: 604.687.6314
- ii -
Securities registered or to be registered pursuant to Section 12(b) of the Act.
| Title of Class |
Trading Symbols |
Name of each exchange on which registered |
| Common Shares Without Par Value |
KIQ
|
NYSE American |
Securities registered or to be registered pursuant to Section 12(g) of the Act.
Not Applicable
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
Not Applicable
(Title of Class)
Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report.
54,320,086 common shares without par value outstanding on December 31, 2021.
There were no Class A non-cumulative preference shares outstanding on December 31, 2021.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
[ ] YES [X] NO
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
[ ] YES [X] NO
Note - Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
[X] YES [ ] NO
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
[ ] YES [X] NO
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of "large accelerated filer," "accelerated filer," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer [ ] |
Accelerated filer [ ] |
Non-accelerated filer [X] |
| |
|
Emerging growth company [X] |
- iii -
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. [ ]
† The term "new or revised financial accounting standard" refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. [ ]
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
| U.S. GAAP [ ] |
International Financial Reporting Standards as issued |
Other [ ] |
| |
by the International Accounting Standards Board [X] |
|
If "Other" has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
[ ] ITEM 17 [ ] ITEM 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
[ ] YES [X] NO
Under the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act"), Kelso Technologies Inc. is classified as an "Emerging Growth Company." Under the JOBS Act, Emerging Growth Companies are exempt from certain reporting requirements, including the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act. Under this exemption, the company's auditor will not be required to attest to and report on management's assessment of the company's internal controls over financial reporting. The company is also exempt from certain other requirements, including the requirement to adopt certain new or revised accounting standards until such time as those standards would apply to private companies. The company will remain an Emerging Growth Company for up to the last day of the fiscal year following the fifth anniversary of the date of the first sale of common equity securities pursuant to an effective registration statement under the Securities Act of 1933, although it will lose that status earlier if revenues exceed US$1 billion, or if the company issues more than US$1 billion in non-convertible debt in a three year period, or the company will lose that status on the date that it is deemed to be a large accelerated filer. Emerging Growth Companies have less than $1,070,000,000 in annual gross revenues.
TABLE OF CONTENTS
Page
FORWARD-LOOKING STATEMENTS
This annual report contains forward-looking statements. These statements relate to future events or future financial performance. In some cases, you can identify forward-looking statements by terminology such as "estimate", "project", "believe", "anticipate", "intend", "expect", "plan", "predict", "may", "should", "potential", or "continue", the negative thereof or other variations thereon or comparable terminology. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Kelso Technologies Inc. to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.
There can be no assurance that the forward-looking statements will prove to be accurate as actual results and future events could differ materially from those anticipated in such statements. Accordingly, readers should not place undue reliance on forward-looking statements. The forward-looking statements in this annual report speak only as to the date hereof, or such other date as may be indicated herein. Except as required by applicable law, including the securities laws of the United States and Canada, the Company does not intend to update any of the forward-looking statements to conform these statements to actual results.
In this annual report, unless otherwise stated, all dollar amounts are expressed in United States dollars ("$"). The financial statements and summaries of financial information contained in this annual report are also reported in United States dollars unless otherwise stated. All such financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS"), as issued by the International Accounting Standards Board ("IASB"), unless expressly stated otherwise.
References to Adjusted EBITDA refer to net earnings from continuing operations before interest, taxes and tax recoveries, amortization, deferred income tax recovery, unrealized foreign exchange losses, non-cash share-based expenses (Black-Scholes option pricing model) gain on revaluation of derivative warrant liability and write-off of assets. Adjusted EBITDA is not an earnings measure recognized by IFRS and does not have a standardized meaning prescribed by IFRS. Management believes that Adjusted EBITDA is an alternative measure in evaluating the Company's business performance. Readers are cautioned that Adjusted EBITDA should not be construed as an alternative to net income as determined under IFRS; nor as an indicator of financial performance as determined by IFRS; nor a calculation of cash flow from operating activities as determined under IFRS; nor as a measure of liquidity and cash flow under IFRS. The Company's method of calculating Adjusted EBITDA may differ from methods used by other issuers and, accordingly, the Company's Adjusted EBITDA may not be comparable to similar measures used by any other issuer.
As used in this annual report, Company means Kelso Technologies Inc. ("Kelso") and the Company's wholly-owned subsidiaries Kelso Technologies (U.S.A.) Inc., KIQ Industries Inc., Kel-Flo Industries Inc., KIQ X Industries Inc. and KXI Wildertec Industries Inc. (collectively the "Company"). Information on the Company's website www.kelsotech.com is not incorporated by reference into this annual report.
COVID-19 IMPACT UPDATE ON NORTH AMERICAN OPERATIONS
While certain government authorities in North America have ordered the closure or minimization of all non-essential business operations in regions where they operate, the Company falls within the exemptions for essential businesses that provide essential products and workforces that carry out critical manufacturing. Kelso therefore plans to continue operations at its valve assembly facility in Bonham, Texas, while being mindful of the potential impacts of COVID-19.
The Company carries out essential services as a producer and reliable supplier of specialized rail tank car service equipment necessary for the safe operation and maintenance of rail tank car transportation systems. As a producer of specialized valves used in the transport of hazardous commodities, our products remain crucial for the safe delivery of hazardous materials by rail transport in North America as they can mitigate the negative impacts of human error and environmental harm.
The Company continues to be committed to the health and safety of our employees, business partners and communities where we operate. We are applying comprehensive and rigorous hygiene policies and employee temperature monitoring practices lower risk. Management will maintain full adherence to measures put in place by applicable government authorities.
Although there can be no assurance against a severe downturn in the Company's valve business given the current crisis conditions the Company intends to fulfill its responsibility to continue operations to allow critical rail transportation to operate resiliently during the COVID-19 pandemic response.
PART I
Item 1. Identity of Directors, Senior Management and Advisers
The directors and the senior management of the Company are as follows:
|
Name and Office Held
|
Function
|
|
James R. Bond
Director, President and Chief Executive Officer
|
As President and Chief Executive Officer, Mr. Bond is responsible for strategic planning and operations, as well as managing the Company's relations with the Company's legal advisers, regulatory authorities and the investment community; as a director, Mr. Bond participates in management oversight and helps to ensure compliance with the Company's corporate governance policies and standards.
|
|
Peter Hughes
Director and Lead Director
|
As an independent director, Mr. Hughes supervises the Company's senior management and Board and helps to ensure compliance with the Company's corporate governance policies and standards.
|
|
Anthony ("Tony") Andrukaitis
Director and Executive Vice President Business Development and Chief Operating Officer
|
As a director, Mr. Andrukaitis supervises the Company's management and helps to ensure compliance with the Company's corporate governance policies and standards. As Vice President Business Development and COO, Mr. Andrukaitis is responsible for the daily operations of the Company's plant in Bonham, Texas and will continue to take an active management role in pursuing growth of business opportunities, including mergers and acquisitions.
|
|
Edward Paul ("Paul") Cass
Director and Audit Committee Member
|
As an independent director, Mr. Cass supervises the Company's management and helps to ensure compliance with the Company's corporate governance policies and standards.
|
|
Laura Roach
Director
|
As an independent director, Ms. Roach supervises the Company's management and helps to ensure compliance with the Company's corporate governance policies and standards.
|
|
Jesse V. Crews
Director and Audit Committee Member
|
As an independent director, Mr. Crews supervises the Company's management and helps to ensure compliance with the Company's corporate governance policies and standards.
|
|
Frank Busch
Director and Audit Committee Member
|
As an independent director, Mr. Busch supervises the Company's management and helps to ensure compliance with the Company's corporate governance policies and standards.
|
|
Richard Lee
Chief Financial Officer
|
As the Company's Chief Financial Officer, Mr. Lee is responsible for the management and supervision of all financial aspects of the Company's business.
|
|
Chris Stewart
President of KIQ X Industries Inc.
|
As President of the Company's wholly owned subsidiary, KIQ X Industries Inc. Mr. Stewart is responsible for all aspects of the KXI Suspension System project.
|
The business address for the Company is 13966 18B Avenue, Surrey, British Columbia, CanadaV4A 8J1.
Advisers
The Company's legal advisers are Clark Wilson LLP with a business address at #900 - 885 West Georgia Street, Vancouver, British Columbia, Canada V6C 3H1.
Auditors
The Company's independent registered auditors are Smythe LLP, Chartered Professional Accountants, with a business address at #1700 - 475 Howe Street, Vancouver, British Columbia, Canada V6C 2B3. Smythe LLP, Chartered Professional Accountants, are members of the Chartered Professional Accountants of British Columbia and are registered with both the Canadian Public Accountability Board and the U.S. Public Company Accounting Oversight Board. Smythe LLP, Chartered Professional Accountants, has advised that it is independent with respect to the Company in accordance with the Code of Professional Conduct of the Chartered Professional Accountants of British Columbia. Smythe LLP, Chartered Professional Accountants were first appointed as the Company's auditors on November 23, 2006.
Item 2. Offer Statistics and Expected Timetable
Not Applicable.
Item 3. Key Information
A. Selected Financial Data
Prepared In Accordance With IFRS
The following table summarizes selected financial data for the Company for the years ended December 31, 2021, 2020 and 2019 prepared in accordance with IFRS, as issued by the IASB. The information in the table was extracted from the consolidated financial statements and related notes included in this annual report and should be read in conjunction with such financial statements and with the information appearing under the heading, "Item 5 - Operating and Financial Review and Prospects" beginning at page 22 below.
Selected Financial Data
|
Statements of Income
(Loss) Data
|
Year ended
December 31,
2021
(audited)
($)
|
Year ended
December 31,
2020
(audited)
($)
|
Year ended
December 31,
2019
(audited)
($)
|
|
Revenues
|
7,425,707
|
11,149,130
|
20,550,682
|
|
Gross Profit
|
3,196,492
|
4,792,678
|
9,582,879
|
|
Net Income/(Loss) and Comprehensive Income/(Loss)
|
(2,758,567)
|
(1,307,890)
|
3,334,043
|
|
Basic and Diluted Earning/(Loss) per Share
|
(0.05)
|
(0.03)
|
0.07
|
|
Statement of Financial
Position Data
|
As at
December 31,
2021
(audited)
($)
|
As at
December 31,
2020
(audited)
($)
|
As at
December 31,
2019
(audited)
($)
|
|
Assets
|
13,728,510
|
12,016,515
|
13,731,571
|
|
Current Liabilities
|
1,210,356
|
958,086
|
1,795,745
|
|
Shareholders' Equity
|
12,055,113
|
10,960,923
|
11,845,275
|
|
Capital Stock
|
27,123,039
|
23,366,542
|
23,366,542
|
|
(Deficit)
|
(19.826,033)
|
(17,067,466)
|
(15,759,576)
|
|
Outstanding Common Shares
|
54,320,086
|
47,170,086
|
47,170,086
|
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable.
D. Risk Factors
The Company's business operations involve a number of known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results expressed or implied by forward looking statements in this annual report. The Company is diligent in minimizing exposure to business risk, but by the nature of the Company's activities and size, will always involve some risk. These risks are not always quantifiable due to their uncertain nature.
"Covid-19"
On March 11, 2020, the World Health Organization declared the ("COVID-19") outbreak a pandemic creating an unprecedented global health and economic crisis. COVID-19's impact on global markets has been significant throughout 2021 and remains so as at the date of this annual report. The situation continues to evolve but the success of immunization programs by some world governments has reduced many risks and economic activity is improving in 2022.
The Company will continue to closely monitor the potential impact of the COVID-19 on the Company's business. Should the duration, spread or intensity of the COVID-19 pandemic further deteriorate in 2022, there could be a potentially material and negative impact on the Company's operating plans, the Company's liquidity and cash flows, and the valuation of the Company's long-lived assets, potential future decreases in revenue from the sale of the Company's products and the profitability of the Company's ongoing operations.
Risks Relating to the Business
"The Company's products involve detailed proprietary and engineering knowledge and specific customer adoption criteria. If the Company is not able to effectively protect the Company's intellectual property or cater to specific customer adoption criteria, the Company's business may suffer a material negative impact and could fail."
The success of the Company will be dependent on the Company's ability to successfully develop; qualify under current industry regulations; and protect the Company's technologies by way of patents and trademarks.
The Company has obtained patents for the Company's external constant force spring pressure relief valves and a one-bolt manway system, vacuum relief valve and bottom outlet valve. If the Company is unable to secure trademark and patent protection for the Company's intellectual property in the future, or that protection is inadequate for future products, the Company's business may be materially adversely affected.
Further, there is no assurance that the Company's railroad equipment products and other aspects of the Company's business do not or will not infringe upon patents, copyrights or other intellectual property rights held by third parties. Although the Company is not aware of any such claims, the Company may become subject to legal proceedings and claims from time to time relating to the intellectual property of others in the ordinary course of the Company's business. If the Company is found to have violated the intellectual property rights of others, the Company may be enjoined from using such intellectual property, and the Company may incur licensing fees or be forced to develop alternatives. In addition, the Company may incur substantial expenses and diversion of management time in defending against these third-party infringement claims, regardless of their merit. Successful infringement or licensing claims against the Company may result in substantial monetary liabilities, which may materially and adversely disrupt the Company's business.
"The Company may be unable to secure or maintain regulatory qualifications for the Company's products."
The Association of American Railroads ("AAR") has specific adoption criteria that must be met before the Company's products can be utilized by customers in the railroad industry. The Company has been successful in obtaining AAR approvals for the Company's key products; however, there is no guarantee that the Company's products will continue to meet AAR standards and adoption criteria as they evolve or that new products developed by the Company will receive AAR approval. In addition, certain customers may have specific adoption criteria beyond what is required by the AAR, and there is no guarantee that the Company will be able to cater to these specific adoption criteria. The Company's failure to meet AAR and customer adoption criteria could have a material negative impact on the Company's ability to obtain purchase orders and generate revenue.
The Company'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 would have a material negative impact on the Company's ability to create a compliant saleable product. The Company could not obtain purchase orders and generate meaningful revenues should this occur.
"The Company is engaged in complex research and development activities where testing results may deem prospective products technologically or economically infeasible."
The Company invests in research and development ("R&D") activities that focus on the innovation of new products for rail/road tank cars and wilderness automotive suspension technology. The primary purpose of these R&D investments is to advance and broaden the Company's portfolio of commercial products that can improve the growth of future financial performance of the Company. These R&D activities focus on a longer-term horizon and are not anticipated to generate immediate financial performance returns. Returns on investment on R&D are always uncertain and cannot be guaranteed. There is a risk that during the processes of R&D development that testing results may reveal that some or all products being developed are technologically or economically infeasible for market development and may be dropped.
"The Company may not have sufficient capital to meet increases in business demands and may be unable to sustain the Company's ability to grow the Company's operations as anticipated."
Although the Company had a positive working capital in the amount of $8,670,165 as at December 31, 2021, the Company can, from time to time, face a working capital deficit. To maintain the Company's activities, the Company may require access to additional capital through the sale of securities or obtaining debt financing. There can be no assurance that the Company will be successful in obtaining such additional financing and failure to do so could result in the inability of the Company to develop new products; meet production schedules; execute delivery orders; and continue the Company's operations.
Given the unpredictable COVID-19 economic circumstances, Management carefully assessed the Company's future capital needs at year end. The decline of the Company's revenues in 2020 compromised the Company's available capital reserves to fund the Company's 2021 business affairs. It was determined that the Company should access new equity capital to ensure that Kelso has adequate working capital to service the Company's 2021 and 2022 needs. In March 2021, the Company completed a private placement whereby 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 one-half of one common share purchase warrant. Each whole warrant can be exercised at a price 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 transaction did not materially affect control of the Company. Capital resources are now expected to protect the Company's ability to conduct ongoing business operations as planned for the foreseeable future.
"The Company has a limited history of earnings and may not be able to achieve the Company's growth objectives."
The Company has a limited history of earnings. The Company is subject to all of the business risks and uncertainties associated with any business enterprise which is transitioning from product development to profitable operations, including the risk that the Company will not achieve the Company's growth objectives.
There is no assurance that the Company will be able to successfully complete the Company's business development plans or operate profitably over the short or long-term. The Company is dependent upon the good faith and expertise of Management to identify, develop and operate commercially viable product lines. No assurance can be given that the Company's efforts will result in the development of additional commercially viable product lines or that the Company's current product lines will prove to be commercially viable in the long-term. If the Company's efforts are unsuccessful over a prolonged period of time, the Company may have insufficient working capital to continue to meet ongoing obligations and the Company's ability to obtain additional financing necessary to continue operations may also be adversely affected. Even if the Company is successful in developing one or more additional product lines, there is no assurance that these product lines or the Company's existing product lines will be profitable.
"New commercial markets for the Company's products may not develop as quickly as anticipated or at all."
Markets for the Company's products may not develop as quickly as anticipated, or at all, resulting in the Company being unable to meet the Company's revenue and production targets. This may have a material negative impact on the Company, particularly if the Company has incurred significant expenses to cater to increased market demand and such market demand does not materialize.
"Unforeseen competition could affect the Company's ability to grow revenues as projected."
Although the Company has patents, trademarks and other protections in place to protect the proprietary technology on which the Company's business is dependent, competitive products may be developed in the future. Competition could adversely affect the Company's ability to acquire additional market share or to maintain revenue at current and projected levels.
"Customer orders that are placed may be cancelled or rescheduled."
Although the Company makes efforts to ensure customers are satisfied with the Company's products, there is a risk that customers may cancel purchase orders before they are filled. This may have a material negative impact on the Company, particularly if the Company has already ordered the component parts required to assemble the finished products for that order or if the Company has assembled the required finished products. The negative impact may be mitigated by the Company's ability to utilize the component parts and finished products to satisfy other purchase orders, but there is no guarantee that the Company will be able to mitigate the risk of loss to the Company from cancelled orders in this manner.
"The Company is dependent on a small number of OEM customers."
Although Management is optimistic about the Company's future as a railway equipment supplier, the Company is dependent upon three major customers that comprise the railroad tank car manufacturers for a significant portion of the Company's revenue. Although customers have displayed a pattern of consistent product orders over the past 24 months and timely payment of accounts owing, there is no guarantee that sales to these customers will continue at current levels or that these customers will continue to satisfy their payment obligations to the Company in a timely manner. The Company does not have any formal agreements for long-term, large-scale purchase orders with these customers and only sells to them when purchase orders are received. The Company expects that this limited number of customers will continue to represent a substantial portion of the Company's sales for the foreseeable future. The loss of any of these customers could have a material negative impact upon the Company and the Company's results of operations.
"Current products may not perform as well as expected."
There is a risk that the Company's products may not perform as well as expected, which may result in customer complaints, returned products, product recalls and/or loss of repeat customer orders. Any one of these effects may have a material negative impact on the Company's ability to generate revenue and continue operations.
"There may be a shortage of parts and raw materials."
The Company currently has multiple suppliers in the United States and Canada for each of the component parts and raw materials required to assemble the Company's finished products. There is a potential risk that, from time to time, the Company could face a shortage of parts and raw materials in the future if the Company's suppliers are unable to support current or increased customer demand for the Company's products. This could have a material negative impact on the business development plans of the Company, the Company's revenues and continued operations.
"Production capacity may not be large enough to handle growth in market demand."
The Company's production facilities may not be large enough to handle growing market demand for the Company's products if market demand is above projected levels. The Company may not have sufficient capital to fund increased production at the Company's existing facilities or to add new production facilities, and even if the Company did have sufficient funds for these purposes, the turnaround time to increase production may not be fast enough to meet market demand. This may have a material negative impact on the Company's ability to maintain existing customers and expand the Company's customer base, and the Company's ability to generate revenue at current and projected levels.
"The Company's product development efforts may not result in new qualified commercial products."
The Company's ambition to design research and develop new products for the railroad industry and outback terrain vehicle suspension market and to successfully develop new markets for the Company's products in other industries, such as the trucking industry, may not result in commercially accepted products or applications. This may have a negative impact on the Company as the Company's current products may cease to be best-available technology and the Company may not have a replacement or alternative product offering. The Company's investment in new product research and development is written off in the period in which it is incurred to account for the unpredictable nature of R&D projects.
"The Company may face uninsurable or underinsured risks."
During development and production of railroad equipment products, certain risks, and in particular, destruction of production facilities by a natural disaster, acts of terrorism, acts of war or patent infringement may occur. It is not always possible to fully insure against such risks and the Company may decide not to take out insurance against such risks as a result of high premiums or other reasons. Should such liabilities arise, they could reduce or eliminate any future profitability and result in increasing costs and a decline in the value of the securities of the Company. Of the above listed risks, only an act of war is truly uninsurable. The Company maintains commercial general liability insurance for claims up to $4,000,000 in aggregate and $1,000,000 per incident, as well as product liability insurance for claims up to $4,000,000 in aggregate and $1,000,000 per incident.
Although the Company believes that the insurance policies currently in place adequately insure the Company given the size of the Company's customer base and revenues from product sales, there is a risk that the Company's insurance coverage may not be sufficient to cover future products claims.
"Raw materials used by the Company for the production of the Company's products are subject to price fluctuations which could change profitability expectations."
Many of the materials used in the Company's products are common raw materials such as steel and rubber. These raw materials can be subject to significant price fluctuations. A steep rise in the price of such raw materials may have an adverse effect on the financial returns of the Company's products and could negatively impact the Company's operating results. As the Company does not have any purchase agreements with customers, the Company are able to mitigate the risks associated with price fluctuations in the Company's raw materials by adjusting the pricing of the Company's products per quoted purchase order. However, there is no guarantee that customers will continue to purchase the Company's products if prices are adjusted due to the fluctuation in the price of raw materials.
"The success of the Company's business depends substantially on the continuing efforts of the Company's senior executives, and the Company's business may be severely disrupted if the Company loses their services."
The future success of the Company heavily depends upon the continued services of the Company's senior executives and other key employees. In particular, the Company relies on the expertise and experience of the Company's Chief Executive Officer and Chief Financial Officer and the Chief Operating Officer of Kelso Technologies Inc., Kelso Technologies (USA) Inc., KIQ X Industries Inc., KIQ Industries Inc., Kel-Flo Industries Inc. (formerly Kelso Innovative Solutions Inc.) and KXI Wildertec Industries Inc. These individuals are under contractual obligations to the Company expiring on June 30, 2023, however, if one or more of the Company's senior executives were unable or unwilling to continue in their present positions, the Company might not be able to replace them easily or at all. If any of the Company's senior executives joins a competitor or forms a competing company, the Company may lose clients, suppliers, key professionals, technical know-how and staff members.
Should one or more of these risks and uncertainties materialize, or should underlying assumptions prove incorrect, then actual results may vary materially from those described on forward-looking statements.
Item 4. Information on the Company
A. History and Development of the Company
The Company was incorporated as "Kelso Resources Ltd." pursuant to the Company Act (British Columbia) on March 16, 1987. On July 21, 1994, the Company changed the Company's corporate name to "Kelso Technologies Inc.". The Company is currently organized pursuant to the Business Corporations Act (British Columbia) ("BCBCA") which replaced the Company Act (British Columbia) in 2004.
The Company's registered office is located at Suite 900 - 885 West Georgia Street, Vancouver, British Columbia V6C 3H1. The Company's corporate head office is located at 13966 18B Avenue, Surrey, British Columbia V4A 8J1. The Company's head office telephone number is (604) 590-1525.
In February 2007, the Company replaced the Company's original Articles with new Articles to reflect the adoption of the BCBCA. On May 13, 2010, the Company consolidated the Company's share capital on the basis of one new common share in the capital of the Company (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 the Company's annual general and special meeting held on June 5, 2013, the Company obtained shareholder approval of certain amendments to the Articles of the Company to include, among other things, advance notice provisions. Advance notice provisions provide a framework whereby the Company can fix a deadline for submission of director nominations by shareholders prior to any annual or special meeting of shareholders and can set forth the information regarding director nominees that a shareholder must include in their notice to the Company for such notice to be in proper written form.
The Common Shares have been publicly traded on the Toronto Stock Exchange ("TSX" or the "Exchange") under the symbol "KLS" since May 22, 2014, prior to which the Common Shares traded on the TSX Venture Exchange ("TSXV"). The Common Shares have traded on the NYSE American ("NYSE American") under the symbol "KIQ" since October 14, 2014, prior to which the Common Shares traded on the U.S. OTCQX over the counter market ("OTCQX International") under the symbol "KEOSF".
The Company operates in conjunction with the Company's five wholly-owned subsidiaries Kelso Technologies (USA) Inc. ("KTI"), Kel-Flo Industries Inc., ("Kel-Flo"); KIQ Industries Inc. ("KIQ"); KIQ X Industries Inc. ("KIQX") and KXI Wildertec Industries Inc. ("KXI"). The Company owns 100% of the voting securities of each of the Company's subsidiaries. None of the subsidiaries has a class of restricted securities. KTI was incorporated on August 3, 2005, in the State of Nevada 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 and is used as a structure to pursue the development 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'sproprietary KXI vehicle suspension system for wilderness terrain vehicles. KXI is currently an inactive corporation.
General Development of the Business
General
Kelso is a diverse 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 of high-quality rail tank car 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.
Over the last eight years the Company has 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 handling and containment of hazardous materials during transport. With 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 unaudited revenues over the last eight quarters were as follows: $1,996,616 for the quarter ended December 31, 2021; $2,093,252 for the quarter ended September 30, 2021; $2,115,352 for the quarter ended June 30, 2021; and $1,220,487 for the quarter ended March 31, 2021; $1,394,958 for the quarter ended December 31, 2020; $1,586,206 for the quarter ended September 30, 2020; $2,524,538 for the quarter ended June 30, 2020; $5,643,428 for the quarter ended March 31, 2020.
The Company's unaudited net income (loss) over the last eight quarters were as follows: ($1,130,973) for the quarter ended December 31, 2021; ($433,261) for the quarter ended September 30, 2021; ($394,220) for the quarter ended June 30, 2021; ($800,113) for the quarter ended March 31, 2021; ($1,655,230) for the quarter ended December 31, 2020; ($681,527) for the quarter ended September 30, 2020; ($254,428) for the quarter ended June 30, 2020; $1,283,295 for the quarter ended March 31, 2020.
Three Year History
2019
During 2019 Kelso continued to build on the stature of its brand as a leading developer and supplier of a wide range of proprietary tank car valves designed for use in the hazmat shipment market. The Company promoted its strategic plan of customer driven product development and business strategies to bring Kelso unique competitive advantages with its customers. Investments in customer driven co-engineered product development improved the probability of future market adoption. This allowed focus on marketing initiatives to capitalize on future sales opportunities.
Kelso focused on its high-quality production capabilities. On January 15, 2019 Kelso received its M-1003 certification from the AAR after completion of a detailed audit which resulted in no material negative findings. The certification was in effect until January 15, 2022. In January 2022, the Company completed another detailed audit which resulted in no material negative findings and the certification was renewed until January 15, 2025.
In 2019 our products proved to deliver a longer-term economic value proposition for tank car stakeholders. This value included reliable high-quality equipment, unprecedented warranties, high service standards and short lead times for delivery. Diverse products sold in 2019 included pressure relief valves, vacuum relief valves, pressure car valves, one-bolt manways and related equipment, emergency response equipment for hazmat first responders, no spill locomotive fuelling equipment and other specialty valves, parts, equipment and services. For the year ended December 31, 2019, the Company reported growth of net income to $3,334,043 ($0.07 per share) against revenues of $20,550,682 compared to a net income of $194,453 ($0.00 per share) against revenues of $12,716,596 for the year ended December 31, 2018.
During 2019, in response to the continued concerns for the safety of emergency responders fighting wilderness fires Kelso continued the development 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 catalyst for pursuing this business development opportunity was the Company's dedication to public safety and the requests to the engineering community from governments, firefighters, emergency responders and other stakeholders for the creation of better technologies that can better respond to threats to public safety and better protection of firefighters in the wilderness.
The Company considered the engineering challenge and ambition worth pursuit as environmental experts warn that that the net damage costs and human safety issues due to 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 harms way and society will have to respond to these events with better capabilities, faster response times and improved effectiveness.
Kelso through its wholly-owned subsidiary, KIQX, continued its plans to become a leading developer of this new generation of specialized wilderness response transportation equipment. Products in development grew to include the proprietary KXI vehicle suspension system, ordinance trailers, custom tires and other specialty equipment.
During 2019 the Company registered the Company's stock option plan by filing a Form S-8, Registration Statement under the Securities Act of 1933 with the Securities and Exchange Commission, permitting our US based employees to exercise their stock options without further regulatory registration.
2020
In March 2020, the World Health Organization declared the COVID-19 outbreak a global pandemic. The pandemic delivered a powerful economic setback for Kelso during Fiscal 2020 (as defined) as it reshaped the business dynamics in the rail tank car industry, which is historically cyclical. The Company focused on containment of the negative impacts of the pandemic on the Company's business model and the protection of the Company's key productive assets.
While certain government authorities in North America ordered the closure or minimization of all non-essential business operations in regions where it operates, the Company fell within the exemptions for businesses that provide essential products and workforces that carry out critical manufacturing. Throughout 2020, Kelso continued operations at its valve assembly facility in Bonham, Texas, and implemented preventative measures across the organization to ensure the safety of its employees, business partners and communities where it operates.
Given the unprecedented challenges of this crisis the Company adapted to a new way of operating and continues to manage and respond to the COVID-19 pandemic and maintain full adherence to measures put in place by applicable government authorities.
The original plans for the KXI Suspension System in 2020 before the negative impacts of the COVID-19 pandemic became reality were to take KXI Suspension System to the final commercial design specifications, regulatory approvals and revenue generation for light duty trucks. Due to many challenging variables, budgets and problematic R&D discoveries the Company was unable to complete the regulatory approved commercial "blueprint" for the Company's first product offerings of light duty trucks as originally scheduled. Given that current COVID-19 uncertainties continue to be problematic and unpredictable the Company is carefully revising the Company's R&D objectives. Kelso had to delay ambitions for light duty truck "pilot" production operations and marketing initiatives. The Company will be focusing on the Heavy-Duty truck market for 2021 and 2022.
On February 11, 2020, Mr. Frank C. Busch was appointed to the board of directors of the Company (the "Board of Directors"), as an independent director to fill the vacancy created by the resignation of Mr. Phil Dyer. Mr. Dyer continues to serve the Company as an advisor.
In May 2020, the AAR approved the Company's new standard profile (4") bottom outlet valve with a ceramic ball ("BOV") for commercial field service trial testing. The standard profile BOV field service trial joined the Company's low-profile bottom outlet valve currently in field service trial testing, completion of which is required for final AAR approvals. Kelso is committed to complete the field service trials of both low and standard profile BOV.
In July 2020, the AAR approved Kelso's new top ball valve ("KTBV") for commercial field service trial testing. The KTBV joined the Company's low-profile bottom outlet valve and standard-profile bottom outlet valve ("KBOV") in field service trial testing as a prerequisite for final AAR approvals. This achievement represented another successful milepost in the Company's revised product development initiatives for rail tank car equipment.
In September 2020, one of the Company's key customers started the installation of the Company's new 2" pressure car angle valve ("K2AV") for commercial field service trial testing as required by the AAR. The K2AV is a high-value specialized valve specifically designed for pressure tank cars. The service trial will test a total of fifteen K2AV units on five tank cars. Currently, there are approximately 85,000 pressure tank cars in the rail fleet today according to AAR statistics. The K2AV represents a significant opportunity for the Company to expand the Company's product footprint in rail tank car equipment.
Financial performance in 2020 suffered due to a 46% decline in sales activity over the prior year but operating expenses were reduced by 5% which allowed Kelso to stay cash flow positive (net of non-cash charges). This economic decline clearly highlighted the seriousness of the potential threat to the Company's business survival. The original equipment manufacturer ("OEM") rail tank car producers went into hibernation in April 2020 and have yet to return in a meaningful way but the retrofit and repair business remained open allowing the continuation the Company's operations. Industry analysts (Freight Transportation Research ("FTR") Associates) anticipate that the OEM producers will return to production in 2021 and revenue streams from rail should begin to improve in the back half of 2021 and carry new momentum into 2022 and 2023.
The Company's working capital was $6,251,893 as at December 31, 2020 although much of this is invested in inventories for future deliveries. At year end the Company's available cash reserves for operations were becoming depleted therefore new equity capital in the amount of CAD$6,370,000 (before expenses) was secured subsequent to December 31, 2020. Capital resources are now expected to protect the Company's ability to conduct ongoing business operations for the foreseeable future.
2021
Mr. Chris Stewart replaced James R. Bond as President of KIQX. Mr. Bond remains as Chief Executive Officer of KIQX. Mr. Stewart assumed the executive authority and responsibility for all aspects of the KXI Suspension System project. Mr. Stewart has served as the General Manager of KIQX for several years and has been a key developer of the strategic business model for the KXI project.
In March 2021, the Company terminated 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 Wager (the "Inventor"), which served as the development agreement for the Company's KXI Suspension System. The Company has 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 has a counterclaim for damages for misrepresentations by the Service Provider. This arbitration is scheduled for hearing in September 2022.
On March 4, 2021, the Company completed a private placement to raise aggregate gross proceeds of CAD $6,370,000 whereby 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 one-half of one common share purchase warrant. Each whole warrant can be exercised at a price 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 transaction did not materially affect control of the Company. Capital resources are now expected to protect the Company's ability to conduct ongoing business operations as planned for the foreseeable future.
On August 25, 2021, the Company reported that it had completed the design, engineering and required regulatory testing of two key pieces of truck tanker equipment created for the reliable 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 truck tanker OBM and PVR.
In early November 2021, the Company received final certification of the Company's pressure relief valve ("PCH") for use on rail pressure cars from the AAR. The PCH had gone through rigorous field service trials over the past several years which concluded with a successful teardown and testing 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 Company because it allows the Company to pursue sizable untapped revenue opportunities in the rail pressure car market. The Company has commenced marketing and sales initiatives to promote wide scale adoption of the PCH.
On November 17, 2021, the Company's wholly owned subsidiary, KIQX, secured two key prototype development partners in its KXI™ Wildertec™ Heavy Duty ("HD") Suspension ("KXI") 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 2022.
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 is 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 at December 31, 2021 and cash is $3,377,464. This strong position is mainly due to the private placement that the Company conducted earlier in the year. Trade payables are $1,118,573 at December 31, 2021 and the only long-term debt the Company has is the long-term portion of leases. Management believes that the capital resources are sufficient to see the Company through Fiscal 2022 (as defined) and into 2023.
Subsequent to Fiscal 2021
On February 17, 2022 the Company reported that all the participating oil refiners engaged in the service trials of the K2AV (the Company's new 2" angle valve) have successfully installed the requisite number of K2AV units and full AAR compliance testing continues. The Kelso K2AV is a device specifically designed to transfer 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 K2AV 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 our K2AV has been driven by customers' demand for better performing angle valves due to irregular performance of the current products used in the market today. The Kelso K2AV is a single piece of high-quality fabricated steel eliminating porosity weakness found in commonly used 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 interchangeability with other 2" angle valves. The K2AV is completely manufactured in the USA.
The K2AV rounds out the Kelso 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 provides customers with the opportunity for one-stop sourcing for pressure car needs.
Capital Expenditures
The Company has no material capital expenditures planned at this time nor does it have any divestitures planned.
Takeover Offers
The Company is not aware of any indication of any public takeover offers by third parties in respect of the Company's common shares during the Company's last financial year or current financial year.
Additional Information
The U.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 diverse 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 of high-quality rail tank car 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.
Over the last ten years the Company has 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 handling and containment of hazardous materials during transport. With 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 publicly traded on the Toronto Stock Exchange under the trading symbol KLS and the NYSE American Exchange under the trading symbol KIQ. The Company listed on the Toronto Stock Exchange on May 22, 2014, and on the NYSE American Exchange on October 14, 2014. The Company operates in combination with its wholly owned subsidiaries Kelso Technologies (USA) Inc, KIQ X Industries Inc., Kel-Flo Industries Inc., KIQ Industries Inc. and KXI Wildertec Industries Inc.
Over the past five years management has established multi-million-dollar sales of its products to North American rail tank car manufacturers (OEM) and retrofit/repair businesses. Revenues over the last five audited year end periods were as follows: $7,425,707 for the year ended December 31, 2021; $11,149,130 the year ended December 31, 2020; $20,550,682 for the year ended December 31, 2019; $12,716,596 for the year ended December 31, 2018; and $6,062,778 for the year ended December 31, 2017.
The Company's net earnings (loss) performance over the last five-year end periods were as follows: 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; net income of $3,334,043 for the year ended December 31, 2019; net income of $194,453 for the year ended December 31, 2018; and a net loss of $5,015,911 for the year ended December 31, 2017.
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. In 2020 and 2021 the COVID-19 pandemic delivered a powerful economic setback for Kelso as the pandemic reshaped the business dynamics in the rail tank car industry. Given the unprecedented challenges of this crisis the Company's main focus was and continues to be, the containment of negative impacts on the Company's business model and the protection of the Company's key productive assets. The Company concentrated on preparedness for post-pandemic normalization and readiness for a strong restart of business growth when all is clear.
Tank car production in 2019 was just over 21,000 tank cars with just over 15,000 cars delivered in 2020 and 8,288 new tank cars were delivered in 2021. In addition, significant retrofits are being evaluated to address the pending 2023 ethanol regulations as the ethanol industry plans for the appropriate post-2023 fleet size. According to industry analysts FTR Associates, new tank car demand is expected to grow to 11,300 tank cars in 2022 and 15,125 tank cars in 2023. The anticipated upswing in new-build and retrofit activity combined with a growing number of qualified Kelso products are expected to fuel new financial growth from rail operations. Depending on the makeup of customers' specifications and the status of our AAR approvals, sales of our valves can range to over $10,000 per tank car in future periods. Overall tank car loadings decreased 8% in 2020 and increased slightly in 2021. Kelso supplied its specialized tank car equipment to over 12,000 tank cars in 2019, over 8,300 tank cars in 2020 and 5,000 tank cars in 2021.
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, pressure car pressure relief valve, top ball valve and angle valve although final AAR approval processes take considerable time to complete. 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.
The growing challenges regarding the safety and access capabilities of emergency responders fighting wilderness fires motivated Kelso to begin the development of a unique vehicle suspension system that would provide rapid response road-to-no-road capabilities regardless of weather, climate or the severity of the terrain. This innovative equipment, known as the KXI™ Suspension System (the "KXI Suspension System"), is being developed through the Company's wholly owned subsidiary, KIQ X Industries ("KIQ"). The KXI Suspension System is based years of active wilderness research and experience and is a new pioneer brand (WILDERTEC™) initiated by Kelso to service the niche industry of wilderness transportation technologies. The Company's goal is to utilize well established automotive engineering practices to solve the environmental and operational challenges of extreme wilderness terrain travel and create opportunities and efficiencies for both industry and public service customers.
The original plans for the KXI Suspension System in 2020 before the negative impacts of the COVID-19 pandemic became reality were to take KXI Suspension System to the final commercial design specifications, regulatory approvals and revenue generation for light duty trucks. Due to many challenging variables, budgets and problematic R&D discoveries the Company was unable to complete the regulatory approved commercial "blueprint" for the Company's first product offerings of light duty trucks as originally scheduled. Given that current COVID-19 uncertainties continue to be problematic and unpredictable the Company is carefully revising the Company's R&D objectives. Kelso had to delay ambitions for light duty truck "pilot" production operations and marketing initiatives.
In 2021 the Company's KXI Suspension System went through a detailed engineering design analysis to move from innovative invention to a viable heavy duty commercial vehicle for a variety of promising wilderness related markets. This assessment by industry specialists has provided essential clarity to scale KXI from a "concept" half-ton vehicle to a more robust heavy-duty ("HD") host vehicle that is greater than 10,000 lbs. The Company has secured the services of several OEM suspension experts and wilderness experts that will support our R&D schedules. The overall objective is to produce a market ready product in 2022 with the goal of pilot production and sales in 2022/2023.
The HD platform represents a much larger and more accessible commercial market opportunity to pursue. This strategic direction is expected to reduce R&D costs as HD vehicles feature better transmissions, diesel options, payload and towing capacity and tougher durability. The Company's main objective is to ensure the KXI Suspension System provides complete safety compliance with all federal safety standards and regional safety regulations including warranty support from the Company and host vehicle OEMs prior to a market launch in 2022/2023.
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 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 keeps rail 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 ambition is that the Company's engineering team can proactively resolve issues for customers before reactionary measures are required.
The Company believes the key components of the Company's business model include:
- experienced executive management, including directors and officers with many years of business 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' specific criteria;
- growth of "next generation" transportation service equipment for rail, road and wilderness transportation applications through in-house product development;
- product diversification plans to diminish revenue risk factors from historically cyclical products;
- acquisition of new or established products that can grow new markets under the Company's management;
- marketing initiatives that promote awareness of the quality of the Company's products and the economic value proposition they offer to interested stakeholders;
- reliable loyal customers to fuel predictable profitable business growth; and
- maintenance of a proven effective and efficient production infrastructure and capacity designed to meet demand.
Although still a small enterprise the Company believes that it remains at the forefront of technology development for the railroad industry as it has successfully developed new products which are designed to address current industry and customer demand and which replace products that are based on technology which was developed in some cases over 80 years ago. The Company's business model is focused on becoming a leader in the design and supply of new technologies aimed at safe operational effectiveness and economic efficiencies in transportation systems. We are focused on our rail equipment and the development of our wilderness transportation equipment that can diversify and grow our revenues in new market segments.
Currently, the Company offers a wide range of proprietary valves and other specialty equipment for rail tank cars and road tankers. In the 1990s Kelso's origins were based on unique inventions that better served problematic safety issues in the transport of hazmat commodities. The Company's commercial business evolution began with the adoption of the Company's patented constant force pressure relief valves during the surge in crude-by-rail ("CBR") shipments from 2012 to 2015. Since 2012, the Company has distributed over 82,000 valves generating over $118 million in revenues.
The Company's products provide a rewarding economic value proposition for all tank car stakeholders. This value includes reliable high-quality equipment, unprecedented warranties, high service standards and short lead times for delivery. Over the past decade Kelso has been able to develop a niche in the marketplace for many of its 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
- Pressure car angle valves (under AAR field service trials)
- Top ball valves (under AAR field service trials)
- One-bolt manways and related equipment
- Emergency response equipment for hazmat first responders
- 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 its 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.
In order to measure and manage rail tank market opportunities the Company analyses the number of total tank car loadings annually to determine best business practices and key commodities to concentrate on in any given period.
The key industry metrics are as follows:
Measure |
2015 |
2016 |
2017 |
2018 |
2019 |
2020 |
2021 |
| |
|
|
|
|
|
|
|
| Total tank car loadings (in thousands): |
3,796 |
3,323 |
3,375 |
3,637 |
3,731 |
3,424 |
3,529 |
| |
|
|
|
|
|
|
|
| Number of tank cars delivered |
36,065 |
17,841 |
8,948 |
10,455 |
21,122 |
15,176 |
8,288 |
| Performance (In thousands of $) |
|
|
|
|
|
|
|
| Kelso revenues |
$ 18,911 |
$ 8,077 |
$ 6,063 |
$ 12,717 |
$ 20,550 |
$ 11,149 |
7,425 |
| Adjusted EBITDA (loss) |
$ 386 |
$(3,056) |
$ (4,609) |
$ 1,002 |
$ 4,233 |
$ 366 |
(1,436) |
| Earnings (loss) |
$ (2,511) |
$(2,466) |
$(5,016) |
$ 194 |
$ 3,334 |
$ (1,308) |
(2,758) |
(1) The introduction of new types of valves in 2020 and in future years should favourably impact Kelso's ability to sell more valves per railcar and thus improve revenue opportunity per new or retrofitted railcar.
Based on current projections from industry analysts (FTR Associates) total tank car loading levels in 2022 are expected to be slightly above 2021 levels. In addition, significant retrofits are being evaluated to address the pending 2023 ethanol regulations as the ethanol industry plans for the appropriate post 2023 fleet size. New tank car demand is expected to grow to 11,300 tank cars in 2022 and 15,125 tank cars in 2023. The anticipated upswing in new build and retrofit 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 and economic rewards with proven reliable equipment.
- To build reliable equipment featuring high quality milled parts eliminating problematic cast parts that cause a high level of negative performance issues that lead to complex expensive repair logistics for customers.
- To ensure that customers benefit with more profitable in-service time for tank cars.
Wilderness Transportation Equipment Market
KXI™ Suspension System
In 2017, in response to the growing problems and the safety of emergency responders fighting wilderness fires Kelso through the Company's wholly owned subsidiary, KIQ, began the development 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 a new pioneer brand (WILDERTEC™) initiated by Kelso to service the niche industry of wilderness transportation technologies. 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 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 better respond to threats to public safety and better protection of firefighters in the wilderness.
The Company considered the engineering challenge and ambition worth pursuit as environmental experts continue to warn that 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 property damage.
The basic design premise of KXI Suspension System is to manage the center-of-gravity to better balance a wheeled vehicle with automated gyroscopic controlled air suspension. This ensures that the driver, passengers and payload remain in a stable level position when driving in difficult remote wilderness terrains including extreme hills and side-hill challenges. The Company's testing has confirmed that commercial stakeholders can expect the KXI Suspension System to provide:
- All weather - all terrain "road to road" emergency response capabilities that eliminates time consuming trailer transportation costs for heavy equipment needed in difficult service areas.
- Better mobility with dual steering technologies for commercial customers who must operate in extreme rough wilderness terrains in wheeled vehicles for the purpose of safely reaching remote destinations with multiple passengers and maximum payload with minimal negative impact on the environment.
- Low environmental impact where the KXI Suspension System reduces nominal ground pressure of the vehicle (floatation weight) to a rating equivalent of that of a walking adult resulting in no traceable disturbance or negative impact on the ground, wildlife or plant life.
- under the government's recommended 2 PSI resulting in no traceable disturbance or negative impact on the ground, wildlife or plant life.
- Gyroscopic balanced ride improves access in heavily sloped wilderness areas and provides higher speed of response to emergency events.
- Cost reductions when helicopters, track-based vehicles and heavy equipment transport can be diminished by less expensive KXI equipped vehicles.
The Phase-One "concept" half-ton KXI Suspension System (prototype) included inventor's innovations, prototype component parts, fabrication tooling and installation of the mechanical KXI Suspension System components on a light duty "host" vehicle. Multiple prototypes have been mostly completed, tested and performance deficiencies determined with final design specifications still to be dimensioned in the areas of reliable engineering tested components, user interface and automation functions.
During the three months ended March 31, 2021 based on R&D testing results the Company terminated the Technology Development Agreement with the inventor of the KXI Suspension System, including the consulting agreement for $10,000 per month. According to the terms of the Technology Development Agreement (TDA) the Company will still maintain intellectual property rights acquired under the TDA. Kelso will still be liable for a 2.5% royalty to the service provider, inventor or their assigns should Kelso use their technologies in a commercially sold product. The terms of the termination are currently being disputed by the service provider and inventor. The dispute has entered an arbitration process to provide a final legal resolution pursuant to the terms of the TDA.
During 2021 the Company's KXI Suspension System went through a detailed engineering design analysis to move from innovative invention to a viable heavy duty commercial vehicle for a variety of promising wilderness related markets. This assessment by industry specialists has provided essential clarity to scale KXI from a "concept" half-ton vehicle to a more robust heavy-duty ("HD") host vehicle that is greater than 10,000 lbs. The Company has secured the services of several OEM suspension experts and wilderness experts that will support the R&D schedules. The overall objective is to produce a market ready product in 2022 with the goal of pilot production and sales in 2022/2023.
The HD platform represents a much larger and more accessible commercial market opportunity to pursue. This strategic direction is expected to reduce R&D costs as HD vehicles feature better transmissions, diesel options, payload and towing capacity and tougher durability.
Our key engineers, specialists and OEM suspension experts have committed to our strategic R&D schedules to produce a regulatory compliant HD prototype in the second half of 2022 with the goal of pilot production and sales in late 2022/2023. This strategic direction is expected to reduce R&D costs and maintain business timetables. Once completed the production prototype 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 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 2022.
Production Facilities
Kelso currently operates two rail equipment production and R&D facilities totaling 50,000 square feet in Bonham, Texas. The Company is fully qualified and certified to produce products for the railroad and other industries. The Company has been granted the required certifications including holding an AAR M1002 Class D Registration and AAR M1003 Quality Assurance System Certification for the Company's production facilities from the AAR.
KXI Wildertec™ Suspension System R&D operations are now located in a new facility in West Kelowna, British Columbia, Canada. This new facility is modern and well suited to the development of the heavy-duty vehicle initiatives. It will facilitate our key engineers, specialists and OEM suspension experts and strategic R&D schedules to produce a regulatory compliant HD prototype in the second half of 2022 with the goal of pilot production and sales in late 2022. This strategic direction and new facility is expected to reduce R&D costs and maintain business timetables. 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 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 2022.
Specialized Skill and Knowledge
The Company relies on the specialized skills of management, employees and consultants in the areas of product development and assembly, business development and public company management. In particular, the Company believes that it has engaged individuals with extensive production expertise and railroad industry experience with the overall goal of attaining economic, effective and efficient assembly operations. The Company believes it has engaged individuals with extensive production expertise because the Company's internal hiring standards require that individuals performing critical operations for component parts must have demonstrated a minimum of five years' experience with similar production operations. The Company has a management team with extensive experience managing public companies. See "Directors, Senior Management and Employees". The loss of any of these individuals could have an adverse effect on the Company. See "Risk Factors".
Competitive Conditions
The ability of the Company to compete for and acquire production contracts for the Company's products in the future will depend on a number of factors, including the Company's ability to continue to offer reliable high-quality technology, competitive pricing, timely delivery of purchase orders and strong customer service.
Intangible Properties
The Company's intangible property, particularly the Company's intellectual property rights, plays an important role in securing the Company's competitive advantage. The Company held the patent for the Company's PRV technology Patent 5,855,225 which expired January 29, 2016. The Company holds the patents for the Company's PRV Patent No. 9,568,146 B1 issued February 14, 2017, and for the Company's OBM Patent 7,104,722 B2 which expires in 2023 and has a trademark for the Company's 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.
These patents and trademarks are critical to the Company's success as they provide a significant advantage to the Company over the Company's competitors. See "Risk Factors" for a discussion of risk factors relating to the Company's intellectual property and competition.
Seasonality/Cycles
The cyclical nature of the Company's rail business reflects the cyclical nature of the tank car industry. 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 fleet.
Economic Dependence
The Company's business is dependent on the Company's ability to create, produce and distribute the Company's unique proprietary products such as the Company's patented pressure relief valves, one-bolt manway, vacuum relief valves bottom outlet valves and Wilderness Response Transportation Technologies. See "Material Contracts".
Employees
As at December 31, 2021, the Company had 45 employees (December 31, 2020 - 43 employees), including employees of the Company's subsidiaries. The largest group of employees works at the Company's production facilities in Bonham, Texas and the remainder work in British Columbia.
Reorganizations
In April 2010, the Company completed a reorganization of the Company's management team. In connection with this reorganization, in May 2010, the Company completed a consolidation of the Company's Common Shares on the basis of seven old Common Shares for one new Common Share.
Government Regulations
The railroad transportation industry is highly regulated by governments. In both the United States and Canada, governments regulate, among other things, transportation of non-hazardous and HAZMAT commodities as well as rail safety. The primary regulatory body in the United States for the railroad transportation industry is the U.S. Department of Transportation and the Federal Railroad Administration, PHMSA and in Canada it is Transport Canada. The Company endeavours to develop all of the Company's products and operate the Company's business in compliance with all applicable government regulations and testing requirements. The Company certifies the Company's products on an ongoing basis in accordance with AAR guidelines and government regulations.
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 has a dispute with the Service Provider and the Inventor in respect of the Technology Development Agreement between the parties dated November 10, 2016. On January 7, 2020, the Company received a demand letter the Service Provider with respect to the ownership of certain intellectual property rights referenced in the Technology Development Agreement. The Company then terminated the Agreement with the Inventor and the Service Provider, and the Service Provider then commenced an arbitration proceeding for ownership of IP assets and damages for wrongful termination of the Technology Development Agreement. The Company has a counterclaim for damages for misrepresentations by the Service Provider. This arbitration is scheduled for hearing in September 2022.
Although management believes that the claim by the Service Provider is without merit, arbitrating the claim may be costly and time consuming. In addition, if the Service Provider's proceeding is successful against the Company, it could result in the Company's business, intellectual property rights, operating results and financial condition being materially adversely affected.
C. Organizational Structure
The Company has five wholly-owned subsidiaries, Kelso Technologies (U.S.A.) Inc., KIQ Industries Inc., Kel-Flo Industries Inc., KIQ X Industries Inc. and KXI Wildertec Industries Inc. Kelso Technologies Inc. owns 100% of the voting securities of each of the Company's subsidiaries. No subsidiary has a class of restricted securities. See "Information on the Company - History and Development of the Company".
D. Property, Plants and Equipment
The Company currently operates two facilities totalling 50,000 square feet in Bonham, Texas. The Company is fully qualified and certified to produce products for the railroad and other industries. It has been granted the required certifications including holding an AAR M1002 Class D Registration and AAR M1003 Quality Assurance System Certification for its production facilities from the Association of American Railroads. See "Business Overview" for additional information regarding the Company's facilities, including a discussion of the productive capacity and extent of utilization of the Company's facilities and products produced. To the best of the Company's knowledge, there are no environmental issues that may affect the Company's utilization of the Company's assets.
KXI production operations are located in West Kelowna, British Columbia, Canada. The Company is currently shifting its R&D focus to Heavy Duty trucks that will form the foundation of Kelso's pilot production program. Production drawings and tooling are expected be completed and ready to be tested in 2022.
As at December 31, 2021, the total carrying value for the Company's property, plant and equipment was $3,246,394 (December 31, 2020: $4,198,577), the breakdown of which is as follows: land - $12,558 (December 31, 2020: $12,558), buildings - $2,166,168 (December, 2020: $2,256,425), leasehold improvements - $4,143 (December 31, 2020: $5,179), production equipment - $308,059 (December 31, 2020: $345,325), prototypes $605,866 (December 31, 2020: $1,548,190) and Right of Use assets - $149,600 (December 31, 2020: $30,900).
At the time of this filing, the Company has no new plans for further acquisition or construction of new buildings as management believes that the Company's current space will handle all capacity issues in the year.
Item 4A. Unresolved Staff Comments
Not applicable
Item 5. Operating and Financial Review and Prospects
The following discussion and analysis of the Company's financial condition and results of operations for the years ended December 31, 2021 ("Fiscal 2021"), December 31, 2020 ("Fiscal 2020") and December 31, 2019 ("Fiscal 2019") should be read in conjunction with the Company's audited consolidated financial statements and related notes included in this annual report in accordance with "Item 8 - Financial Information". The Company's financial statements for Fiscal 2021, Fiscal 2020 and Fiscal 2019 (collectively, the "Reported Periods") were prepared in accordance with IFRS as issued by the IASB.
| |
Year ended
December 31 2021 |
Year ended
December 31 2020 |
Year ended
December 31 2019 |
| Revenues |
$ 7,425,707 |
$ 11,149,130 |
$ 20,550,682 |
| Cost of goods sold |
$ 4,229,215 |
$ 6,356,452 |
$ 10,967,803 |
| Gross profit |
$ 3,196,492 |
$ 4,792,678 |
$ 9,582,879 |
| Gross profit margin |
43% |
43% |
47% |
| Expenses including non-cash items |
$ 6,254,981 |
$ 5,768,476 |
$ 6,087,357 |
| Gain on revaluation of derivative warrant liability |
$ 658,626 |
$ - |
$ - |
| Income tax expense (recovery) |
$ 172,639 |
$ 248,992 |
$ 99,077 |
| Net income (Loss) for the year |
$ (2,758,567) |
$ (1,307,890) |
$ 3,334,043 |
| Number of common shares outstanding |
54,320,086 |
47,170,086 |
47,170,086 |
| Basic earnings (Loss) per common share |
(0.05) |
$ (0.03) |
$ 0.07 |
| Adjusted EBITDA (Loss) |
$ (1,436,435) |
$ 366,157 |
$ 4,233,339 |
| Cash |
$ 3,377,464 |
$ 1,049,049 |
$ 4,418,236 |
| Working capital |
$ 8,670,165 |
$ 6,251,893 |
$ 7,937,873 |
| Total assets |
$ 13,728,510 |
$ 12,016,515 |
$ 13,731,571 |
| Shareholders' equity |
$ 12,055,113 |
$ 10,960,923 |
$ 11,845,275 |
| Dividends paid per share |
$ 0.00 |
$ 0.00 |
$ 0.00 |
Revenues for 2020 and 2021 declined due to the general shutdown of the economy as a result of the COVID-19 pandemic. Revenues for 2019 rose due to increased demand for our rail tank car service equipment for applications in chemicals, petrochemicals, food and crude oil. Throughout 2019 Kelso continued to take successful measures to improve positive cash flows from operations. We began to see the correction of several years of weak financial performance in 2018 and the turnaround of sales momentum was very apparent in 2019. The uptrend in capital spending in the rail and truck hazmat marketplace fuelled our positive performance in 2019. However, that uptrend ceased in 2020 due to COVID-19.
From 2017 through 2020 our strategic plan has been focused on re-branding Kelso as a reliable American made supplier of high-quality performance equipment for the rail tank car industry. This was an imperative strategic goal as management believed that it was essential to achieve a healthy turnaround of our future financial performance after a dismal 2017.
We have been able to stabilize our business environment, cut costs and eliminate an inefficient marketing workforce. Under these initiatives we have experienced improved sales growth with better contribution margins providing a steady improvement of our available capital reserves. This turn of events has allowed us to continue to pursue our ambitions to develop new business opportunities, sales growth and new products requiring regulatory certifications.
Although many operational and human resource expenses have been reduced over the past three years, our capital management remains challenging. However, recent improvements in cash flows from sales growth that started in 2018 and continued in 2019 have been more than adequate to fund our ongoing business activities. With the impact of COVID-19 the Company's cash flow in 2020 was greatly diminished and it was necessary for the Company to seek an influx of capital after the 2020-year end. The subsequent private placement that was completed is expected to be more than enough capital to keep the Company in good financial standing for 2021 and into 2022. The Company's goal is to avoid dilutive equity funding activities and to remain free of interest-bearing long-term debt.
Throughout the last four years, we have been able to stabilize Kelso with new business processes, new personnel, dramatic changes to our corporate culture and the successful introduction of a more effective and economic approach to customer service, marketing and sales. Our key objectives to achieve balanced growth of profitability through revenue streams from a more diverse portfolio of products were achieved in 2018 and 2019.
See "Item 17 - Financial Statements" and the notes to the financial statements enclosed herewith for a discussion of the significant accounting policies and significant estimates and judgments required to be made by management.
A. Operating Results
Year Ended December 31, 2021 Compared to the Year Ended December 31, 2020
For the year ended December 31, 2021, the Company reported a net loss of $2,758,567 ($0.05 per share) against revenues of $7,425,707 compared to a net loss of $1,307,890 ($0.03 per share) against revenues of $11,149,130 for the year ended December 31, 2020.
Gross profit margin returns were $3,196,492 (43% of revenues) for the year ended December 31, 2021, compared to $4,792,678 (43% of revenues) for the year ended December 31, 2020. Gross profit margin decreased slightly due to increased material costs.
Total operational expenses increased to $6,254,981 for the year ended December 31, 2021, compared to $5,768,476 for the year ended December 31, 2020. Expenses increased by 8% and fell in line with management's COVID-19 revised strategic plans and expectations to facilitate the current rail business and the development of the Company's KXI Suspension System.
Factors in the reported income for the year ended December 31, 2021, include expenses related to ongoing marketing initiatives in the amount of $353,010 (2020 - $365,193) and related travel costs of $64,419 (2020 - $52,497). These expenses are related to ongoing marketing programs for existing and new products. Travel costs have been greatly minimized due to COVID 19 "work-from-home" circumstances.
A key component of the Company's future business growth is the research, design, testing and qualification of new rail and automotive products. During the year ended December 31, 2021, the Company's industrial product design and development costs were $1,697,497 (2020 - $1,391,712). In addition to the Company's ongoing rail equipment R&D the majority of these expenses relates to design and continuing testing of the Company's KXI Suspension System. New product developments are necessary to provide diverse opportunities for Kelso to grow the Company's future revenues beyond the COVID-19 crisis from new markets. The Company's goal is to diminish the financial effects of a historically cyclical rail tank car market with non-rail product development.
Management continues to carefully manage both the Company's rail operations and KXI Suspension System research and development with the goal of new longer term diverse business growth. This is reflected in the Company's investments in human resources, marketing, sales and production operations for the year ended December 31, 2021. The Company recorded office and administrative costs of $2,243,413 (2020 - $2,074,623) and Management compensation was $720,923 (2020 - $670,269). Management compensation includes an accrual for contractual management performance bonuses for the year ended December 31, 2021, of $Nil (2020 - $28,423). Management bonuses are accrued by quarter and are paid based upon the audited year-end balance not later than May 15 of the year following. Management bonuses declined based on the financial performance of the Company. Consulting fees were $325,024 (2020 - $265,507) while investor relations remained unchanged at $84,000 (2020 - $84,000).
Accounting, audit and legal fees are cost components of the Company's corporate development strategies and the required administration functions of a publicly listed industrial company listed on two stock exchanges. Costs for these professional audit and legal services were $271,613 for the year ended December 31, 2021 (2020 - $312,213). This includes ongoing US tax and audit requirements. Other legal costs relate to an increase in patent applications, public company administration including arbitration costs, reorganization costs, the preparation and filing of press releases, documentation and reviewing possible acquisition targets and new business arrangements. Also included are the costs of complying with the rules and regulations of both the Toronto Stock Exchange and NYSE American Exchange including the complexities of regulatory documentation and Annual Information Form (AIF) and Securities Exchange Commission documentation (20-F).
The Company's functional currency is US dollars, but Kelso also holds various assets in Canadian dollars. The Canadian dollar has remained volatile in value against the US dollar therefore the Company has recorded a foreign exchange gain of $78,428 for the year ended December 31, 2021 (2020 - $11,254).
The Company has recorded an income tax expense of $172,639 for the year ended December 31, 2021 compared to an income tax expense of $248,992 for the year ended December 31, 2020. The tax expense is calculated on the income for tax purposes which is a result of adjusting accounting income (loss) for non-cash items. In the past, the Company has had losses to apply against taxes payable. These losses have been exhausted.
The Company has recorded a gain on revaluation of derivative warrant liability of $658,626 (2020 - $Nil). This is a result of the Company completing a Canadian $ private placement during the year. There were warrants attached to the private placement which are exercisable in Canadian $. As the Company's functional currency is the US dollars, this gave rise to a derivative liability.
Year Ended December 31, 2020 Compared to the Year Ended December 31, 2019
For the year ended December 31, 2020, the Company reported a net loss of 1,307,890 ($0.03 per share) against revenues of $11,149,130 compared to a net income of $3,334,043 ($0.07 per share) against revenues of $20,550,682 for the year ended December 31, 2019.
Gross profit margin returns were $4,792,678 (43% of revenues) for the year ended December 31, 2020, compared to $9,582,879 (47% of revenues) for the year ended December 31, 2019. Gross profit margin decreased slightly due to increased material costs.
Total operational expenses declined to $5,768,476 for the year ended December 31, 2020, compared to $6,087,357 for the year ended December 31, 2019. Expenses were reduced by 5% and fell in line with Management's COVID-19 revised strategic plans and expectations to facilitate the current rail business and the development of the Company's KXI Suspension System.
Factors in the reported income for the year ended December 31, 2020, include expenses related to ongoing marketing initiatives in the amount of $365,193 (2019 - $288,893) and related travel costs of $52,497 (2019 - $197,293). These expenses are related to ongoing marketing programs for existing and new products. Travel costs have been greatly minimized due to COVID 19 "work-from-home" circumstances.
A key component of the Company's future business growth is the research, design, testing and qualification of new rail and automotive products. During the year ended December 31, 2020, the Company's industrial product design and development costs were $1,391,712 (2019 - $1,129,007). In addition to the Company's ongoing rail equipment R&D the majority of these expenses relates to design and continuing testing of the Company's KXI Suspension System. New product developments are necessary to provide diverse opportunities for Kelso to grow the Company's future revenues beyond the COVID-19 crisis from new markets. The Company's goal is to diminish the financial effects of a historically cyclical rail tank car market with non-rail product development.
Management continues to carefully manage both the Company's rail operations and KXI Suspension System development with the goal of new diverse business growth. This is reflected in the Company's investments in human resources, marketing, sales and production operations for the year ended December 31, 2020. The Company recorded office and administrative costs of $2,074,623 (2019 - $2,219,711) and management compensation was $670,269 (2019 - $1,037,586). Management compensation includes an accrual for contractual management performance bonuses for the year ended December 31, 2020, of $28,423 (2019 - $496,894). Management bonuses are accrued by quarter and are paid based upon the audited year-end balance not later than May 15 of the year following. Management bonuses declined based on the financial performance of the Company. Consulting fees were $265,507 (2019 - $386,681) while investor relations remained unchanged at $84,000 (2019 - $84,000).
Accounting, audit and legal fees are cost components of the Company's corporate development strategies and the required administration functions of a publicly listed industrial company listed on two stock exchanges. Costs for these professional audit and legal services were $312,213 for the year ended December 31, 2020 (2019 - $321,945). This includes ongoing US tax and audit requirements. Other legal costs relate to an increase in patent applications, public company administration including reorganization costs, the preparation and filing of press releases, documentation and reviewing possible acquisition targets and new business arrangements. Also included are the costs of complying with the rules and regulations of both the Toronto Stock Exchange and NYSE American Exchange including the complexities of regulatory documentation and Annual Information Form (AIF) and Securities Exchange Commission documentation (20-F).
The Company's functional currency is US dollars, but Kelso also holds various assets in Canadian dollars. The Canadian dollar has remained volatile in value against the US dollar therefore the Company has recorded an unrealized foreign exchange gain of $11,254 for the year ended December 31, 2020 (2019 - $27,698 loss).
The Company has recorded an income tax expense of $248,992 for the year ended December 31, 2020 compared to an income tax expense of $99,077 for the year ended December 31, 2019. The tax expense is calculated on the income for tax purposes which is a result of adjusting accounting income (loss) for non-cash items. In the past, the Company has had losses to apply against taxes payable, however, those losses were applied in prior years.
B. Liquidity and Capital Resources
The Company's primary source of revenue to date has been from new rail tank car builders and retrofit/repair customers. Management expects that the Company's capital resources may grow and diminish in line with the historic up and down economic cycles of the railroad industry. As at the end of Fiscal 2021 there were no material commitments for capital expenditures.
The Company plans to generate the necessary capital resources to finance operations by way of the sales of the Company's products. If the Company is unsuccessful in generating adequate capital resources from one or more of the anticipated sources and is unable to replace any shortfall with capital resources from another source, the Company may not be able to meet the Company's future financial obligations and the Company's operations may be adversely affected.
Management takes all necessary precautions to minimize risks however additional risks could affect the future performance of the Company. They include that the Company's products are new entries to the railroad industry and involve detailed proprietary and engineering knowledge and specific customer adoption criteria, hence factors that could cause actual financial results to be materially different include that the Company may be unsuccessful in raising any additional capital needs that may arise; the Company may not have sufficient capital to develop, produce and deliver new orders; product development may face unexpected delays; orders that are placed may be cancelled; product may not perform as well as expected; markets may not develop as quickly as anticipated or at all; or that the construction or other plans for plants run into permit, labor or other problems. See "Risk Factors".
In the past, the Company has raised funds through private placement equity financings and through the exercise of options and warrants. Although the Company has been successful in raising funds and funding itself in the past, there is no guarantee that the Company will be able to do so in the future.
December 31, 2021 Compared to December 31, 2020
As at December 31, 2021 the Company had cash on deposit in the amount of $3,377,464, accounts receivable of $807,009, prepaid expenses of $161,490 and inventory of $5,534,558 compared to cash on deposit in the amount of $1,049,049, accounts receivable of $535,659, prepaid expenses of $162,739 and inventory of $5,462,532 as at December 31, 2020.
The Company had no income tax payable as at December 31, 2021 compared to income tax payable of $91,566 as at December 31, 2020.
The working capital position of the Company as at December 31, 2021 was $8,670,165 compared to $6,251,893 as at December 31, 2020. The improvement in the working capital position came about on March 4, 2021 when the Company completed a private equity placement whereby 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 one-half of one common share purchase warrant. Each whole warrant can be exercised at a price of CAD$1.15 per common share 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 transaction did not materially affect control of the Company. Capital resources are now expected to protect the Company's ability to conduct ongoing business operations as planned for the foreseeable future.
Net assets of the Company improved to $12,055,113 as at December 31, 2021 compared to $10,960,923 as at December 31, 2020 due to the new equity placement. The Company had no interest-bearing long-term liabilities or debt as at December 31, 2021.
The Company's post COVID-19 business prospects are encouraging as the OEMs and owners of tank cars have become optimistic about the market trends improving in 2022 however the Company is still operating in uncertain times. There is a possibility of further diminishment of the Company's financial performance during 2022 due to the pandemic protocols although the duration of the downturn still remains uncertain. The Company believes that Kelso's debt free financial position and available capital reserves at the date of this report will allow Kelso to make it through the COVID-19 crisis.
Management takes all necessary precautions to minimize risks however additional risks could affect the future performance of the Company.
December 31, 2020 Compared to December 31, 2019
As at December 31, 2020 the Company had cash on deposit in the amount of $1,049,049, accounts receivable of $535,659, prepaid expenses of $162,739 and inventory of $5,462,532 compared to cash on deposit in the amount of $4,418,236, accounts receivable of $1,824,563, prepaid expenses of $96,627 and inventory of $3,394,192 as at December 31, 2019.
The Company has accrued income tax payable of $91,566 as at December 31, 2020 compared to income tax payable of $71,341 as at December 31, 2019.
The working capital position of the Company as at December 31, 2020 was $6,251,893 compared to $7,937,873 as at December 31, 2019. Most of the Company's working capital as at December 31, 2020 was comprised of inventories to service future deliveries hence, the Company's available cash reserves for operations were becoming depleted. Given COVID-19 economic uncertainties new equity capital was secured subsequent to year end. On March 4, 2021 the Company completed a private placement to raise aggregate gross proceeds of CAD$6,370,000 whereby 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 one-half of one common share purchase warrant. Each whole warrant can be exercised at a price of CAD$1.15 per common share 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 transaction did not materially affect control of the Company. Capital resources are now expected to protect the Company's ability to conduct ongoing business operations as planned for the foreseeable future.
Net assets of the Company declined to $10,960,923 as at December 31, 2020 compared to $11,845,275 as at December 31, 2019. The Company had no interest-bearing long-term liabilities or debt as at December 31, 2020.
C. Research, Development, Patents and Licenses, etc.
A key component of the Company's future business growth is the research, design, testing and qualification of new rail and automotive products. New product developments are necessary to provide diverse opportunities for Kelso to grow the Company's future revenues beyond the COVID-19 crisis from new markets. The Company's goal is to diminish the financial effects of a historically cyclical rail tank car market with non-rail product development. See "Business Overview", "Intangible Properties", "Economic Dependence" and "Risk Factors" above for a discussion of the Company's patents and licenses.
The Company has spent the following amounts on research in last three years: $1,697,497 in Fiscal 2021; $1,391,712 in Fiscal 2020; and $1,129,007 in Fiscal 2019. In addition to the Company's ongoing rail equipment R&D the majority of these expenses relates to design and continuing testing of the Company's KXI Suspension System.
D. Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on the Company's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resource that is material to investors.
E. Tabular Disclosure of Contractual Obligations
The Company does not have any contractual obligations as of December 31, 2021 relating to long-term debt obligations, purchase obligations or other long-term liabilities reflected on the Company's latest statement of financial position as at December 31, 2021. The Company has lease obligations for warehouse space in Kelowna, British Columbia as well as for vehicles used in the development of prototypes. Under IFRS these leases are recorded on the Company's consolidated statement of financial position.
Item 6. Directors, Senior Management and Employees
A. Directors and Senior Management
The following information sets forth the name, office held, age, and functions and areas of experience in the Company of each of the Company's directors, senior management, and certain significant employees:
|
Name
|
Position(s) Held with Company
|
Principal Business Activities and Other Principal Directorships
|
|
James R. Bond
|
Director
President and CEO
|
President of Bondwest Enterprises Inc.; Director of SIQ Mountain Industries Inc. (SIQ: TSXV).
|
|
Richard Lee
|
CFO
|
Self-employed businessman. CFO of the Company since April 8, 2010. CFO and Director of SIQ Mountain Industries Inc. (SIQ: TSXV) and CFO of Happy Creek Minerals Inc. (HPY: TSXV).
|
|
Peter Hughes
|
Director
Compensation Committee Member (Chair)
|
Self-employed businessman; Director and CEO of SIQ Mountain Industries Inc. (SIQ: TSXV); CEO and Director of Gourmet Ocean Products Inc. (GOP: TSXV), Director of Navion Capital Inc. (NAVN.P: TSXV); Director, President and CEO of Happy Creek Minerals Ltd (HPY: TSXV) and Director, Plantable Health Inc. (PLBL: NEO).
|
|
Anthony (Tony) Andrukaitis
|
Director
Executive Vice President Business Development, COO
|
Independent Business Consultant.
|
|
Paul Cass
|
Director
Audit Committee Member (Chair)
Compensation Committee Member
|
Self-Employed Businessman.
|
|
Name
|
Position(s) Held with Company
|
Principal Business Activities and Other Principal Directorships
|
|
Laura Roach
|
Director
Compensation Committee Member
Corporate Governance and Nominating Committee Member
|
Attorney and partner at the national law firm McCathern Law located in Frisco, Texas.
|
|
Jesse V. Crews
|
Director
Audit Committee Member
Corporate Governance and Nominating Committee Member (Chair)
|
Senior Adviser to Trinity Industries Leasing Company, the railcar leasing subsidiary of Trinity Industries Inc.
|
|
Frank Busch
|
Director
Audit Committee Member Corporate Governance and Nominating Committee Member
|
Chief Executive Officer of NationFUND Access Capital Corporation
|
|
Chris Stewart
|
President KIQ X Industries Inc.
|
President of KIQ X Industries Inc.
|
James R. Bond (68 years) - President, CEO and Director
Mr. Bond has been a director and acted as President and CEO of the Company since April 7, 2010. Mr. Bond is the President of Bondwest Enterprises Inc., a private Canadian company established in 1988 that specializes in corporate architecture, financial networking, entrepreneurial management, strategic business development and distress turnarounds. Over the past 36 years he has served in advisory, consulting, executive management, director and corporate officer roles in numerous private and public companies conducting business in the technology, manufacturing and processing industries. Mr. Bond currently serves as a director on SIQ Mountain Industries Inc, a company listed on the TSXV.
Richard Lee (66 years) - CFO
Mr. Lee has been the Company's CFO since April 8, 2010. Mr. Lee is a graduate of the University of British Columbia with a Bachelors' degree in Commerce. In addition, he is a Chartered Professional Accountant, Certified Management Accountant having obtained his designation in 1991. Mr. Lee spent more than 27 years working for public accounting firms or for companies that trade on recognized stock exchanges. He has gained a wealth of experience in corporate finance, acquisitions and accounting while working with and for listed public companies trading in Canada as well as registered with the SEC in the United States. Mr. Lee serves as CFO and a Director of SIQ Mountain Industries Inc, a company listed on the TSXV; as well as CFO of Happy Creek Minerals Inc., a company listed on the TSXV and Plantable Health Inc., which is listed on the NEO Exchange in Canada. Mr. Lee was also a director of Invictus MD Strategies Corp. from June 4, 2019 to February 25, 2020.
Peter Hughes (60 years) -Lead Director
Mr. Hughes has been a director of the Company since October 4, 2010 and is a member of the Company's Compensation Committee and Corporate Governance & Nominating Committee. Mr. Hughes has 35 years' business experience including senior-level executive and director positions in both private and public companies specializing in pharmaceuticals, alternative energy, mining, aquaculture and sports technology. Mr. Hughes is a graduate of the University of British Columbia with a Bachelors' degree in Science, Canadian Securities Course and Director's and Officer's Course. Mr. Hughes currently serves as CEO and director of SIQ Mountain Industries Inc., President, CEO and a director of Happy Creek Minerals Inc., CEO and director of Gourmet Ocean Products Inc. and a director of Navion Capital Inc., all of which are on the TSXV, as well as a director of Plantable Health Inc., which is listed on the NEO Exchange in Canada.
Anthony (Tony) Andrukaitis (67 years) - Director, Executive Vice-President Business Development and COO
Mr. Andrukaitis has been a director of the Company since August 24, 2011 and was appointed COO on March 1, 2016. Mr. Andrukaitis was a member of the Audit Committee until January 2, 2015 when he was appointed Executive Vice President Business Development. Mr. Andrukaitis holds the position of President and CEO of Kelso Technologies (USA) Inc. since August 3, 2016 and President and CEO of Kel-Flo Industries Inc. (engineering industrial designs and distribution plans for patented OBM) since February 2, 2017. Mr. Andrukaitis has over 26 years of senior corporate management experience in finance, accounting, strategic planning, business development and turn-around activities. He was the Chief Operations Officer of Trinity Rail and former President of Trinity Tank Car, Inc., both subsidiaries of Trinity Industries of Dallas, Texas. Prior to that, he was the President and CEO of GATX Terminals Corporation of Chicago, IL. Mr. Andrukaitis is a CPA and holds a Bachelor of Science degree in Accounting from the University of Illinois and Master of Business Administration degree from DePaul University.
Paul Cass (65 years) - Director
Mr. Cass has been a director of the Company since 2016 and is a member of the Audit Committee. Mr. Cass was formerly COO of Whitewater West Industries, a privately held design/manufacturing firm specializing in waterpark and amusement park equipment installations around the world. Previously Mr. Cass was COO at Ballard Power Systems Ltd., a public company specializing in the development and manufacture of fuel cell technology for automotive and non-automotive markets. Mr. Cass is a registered Professional Engineer in British Columbia, and he also holds an MBA from Simon Fraser University.
Laura Roach (50 years) - Director
Ms. Roach is partner at the national law firm McCathern Law located in Frisco, Texas, where she is a civil and family law attorney primarily focused on mediation, divorce, and civil litigation. Ms. Roach is also an entrepreneur, founding and running a referral and marketing business. Ms. Roach has been recognized as one of D Magazine's Best Lawyers in Texas and Texas Monthly magazine's Super Lawyers every year since 2013. Ms. Roach has received the highest ranking in Legal and Ethical standards by Martindale Hubbell. Ms. Roach earned a Juris Doctor from St. Mary's University School of Law and a BS from the University of Arizona.
Jesse V. Crews (69 years) - Director
Mr. Crews was the Chief Investment Officer of TILC up until February 15, 2022 when he was appointed Senior Adviser to TILC. Mr. Crews joined TILC in June 2011. During his tenure as Chief Investment Officer, Mr. Crews was responsible for the leasing company's long-term portfolio investment strategy, wide-ranging capital market activities, as well as major transaction initiatives. From 2009 to 2011, he served as the Chief Operating Officer and Executive Vice President of Willis Lease Finance Corp. From 2004 to 2009, he served as a Managing Director for Fortress Investment Group. Previously, he served as the President and Chief Executive Officer of GATX Financial Corporation (formerly GATX Capital Corporation). Mr. Crews joined GATX in 1977 as a Financial Analyst and held a progression of positions through 2002, including Manager in Singapore, Regional Manager in New Orleans/Houston, head of New Business Development in their San Francisco main office, head of Corporate Finance, Chief Investment Officer, and culminated in his election as Chief Executive Officer in 1998. Mr. Crews is a member "Emeritus" of the Board of Trustees for the Darden Graduate School of Business at the University of Virginia. He earned a Master's in Business Administration from the University of Virginia and a Bachelor of Arts degree in Economics from Yale University.
Frank Busch (43 years) - Director
Mr. Busch's expertise is finance, business development and indigenous relations as Director of Community Engagement with the First Nations Finance Authority in Canada. Mr. Busch received his Bachelor of Arts from the University of Manitoba and has completed five specialized financial certificates from the Canadian Securities Institute and a post-graduate Certificate in Finance from Harvard University in preparation for entering the Master of Liberal Arts in Extension Studies Field: Finance at Harvard. Mr. Busch is an expert in the field of Indigenous Engagement and Relations and has spoken publicly, published articles and advised companies and organizations of all sizes on the subject. Mr. Busch was appointed to the Board of Directors on February 11, 2020.
Chris Stewart (44) - President KIQ X Industries Inc.
Mr. Stewart brings a vast expertise in market and business development that extend from environmental projects in the energy and construction sectors to new product launches in consumer markets. In the last 20 years, Mr. Stewart has consulted in the tourism, transportation, construction and consumer food industries to guide or support in M&A initiatives as well as to maximizing value and opportunities for divestiture strategies. Mr. Stewart received his Bachelor of Business Administration with Distinction from University of British Columbia Okanagan and was awarded top honours for his graduation project for the application of leading-edge pattern-recognition AI analysis to guide high-level HR strategy development for international company BTI Travel Corp. Mr. Stewart holds three real estate certifications from UBC's Sauder School of Business as well as a Management Certificate from Harvard Business School. Mr. Stewart was named President of Kelso's wholly owned subsidiary KIQ X Industries Inc. on January 20, 2021.
Family Relationships
There are no family relationships between any of the Company's directors and senior management listed above.
B. Compensation
During Fiscal 2021, the Company's directors and members of the Company's administrative, supervisory or management bodies received compensation for services, as follows:
|
Name and Principal Position
|
|
Fiscal Year Ended December 31, 2021
|
|
Salary
($)
|
Option-
based
Awards
($)
|
Share-
Based
Awards
($)
|
All other
compensation
($)
|
Total compensation
($)
|
|
James R. Bond
Director, President and CEO
|
240,000
|
N/A
|
15,050
|
N/A
|
255,050
|
|
Richard Lee
CFO
|
240,000
|
N/A
|
15,050
|
N/A
|
255,050
|
|
Peter Hughes
Director
|
N/A
|
N/A
|
7,525
|
49,500
|
57,025
|
|
Tony Andrukaitis
Director, Executive Vice President Business Development and COO
|
240,923
|
N/A
|
15,050
|
N/A
|
255,973
|
|
Paul Cass
Director
|
N/A
|
N/A
|
7,525
|
34,000
|
41,525
|
|
Laura Roach
Director
|
N/A
|
N/A
|
7,525
|
24,000
|
31,525
|
|
Jesse V. Crews
Director
|
N/A
|
N/A
|
7,525
|
31,500
|
39,025
|
|
Frank Busch
Director
|
N/A
|
N/A
|
25,166
|
24,000
|
49,166
|
|
Chris Stewart
President, KIQ X Industries Inc.
|
120,000
|
N/A
|
3,834
|
N/A
|
123,834
|
Management Agreements
On July 1, 2020, the Company and Bondwest Enterprises Inc., a private company 100% owned and controlled by Mr. Bond ("Bondwest") entered into a Professional Services Agreement expiring on June 30, 2023, unless extended thereafter for further 1-year terms, subject to the approval of the Board (the "CEO PSA"). Under the terms of the CEO PSA, Bondwest will receive a base fee of US$20,000 per month (the "Base Fee") or US$240,000 annually during the initial 3-year term with no escalation provision. Bondwest is also eligible to receive an annual performance bonus not to exceed the equivalent of one year's Base Fee. The performance bonus will be calculated at one-third of 10% of the adjusted income which will be based on the audited annual income adjusted for non-cash items (e.g., stock-based compensation, deferred taxes, unrealized foreign exchange and amortization) and income taxes. The CEO PSA also provides that Bondwest shall be entitled to an annual stock option grant in accordance with the framework for option grants adopted by the Company, as amended from time to time, and includes a severance clause of equal to 24 months Base Fee in the event of termination without cause or a change of control in the Company.
On July 1, 2020, the Company and Kitchener Holdings Corp. ("Kitchener") a private company 100% owned and controlled by Mr. Lee entered into a Professional Services Agreement expiring on June 30, 2023, unless extended thereafter for further 1-year terms, subject to the approval of the Board (the "CFO PSA"). Under the terms of the CFO PSA, Kitchener will receive a base fee of US$20,000 per month (the "Base Fee") or US$240,000 annually during the initial 3-year term with no escalation provision. Kitchener is also eligible to receive an annual performance bonus not to exceed the equivalent of one year's Base Fee. The performance bonus will be calculated at one-third of 10% of the adjusted income which will be based on the audited annual income adjusted for non-cash items (e.g., stock-based compensation, deferred taxes, unrealized foreign exchange and amortization) and income taxes. The CFO PSA also provides that Kitchener shall be entitled to an annual stock option grant in accordance with the framework for option grants adopted by the Corporation, as amended from time to time, and includes a severance clause of equal to 24 months Base Fee in the event of termination without cause or a change of control in the Corporation.
On July 1, 2020, the Company and Mr. Anthony Andrukaitis entered into a Professional Services Agreement expiring on June 30, 2023, unless extended thereafter for further 1-year terms, subject to the approval of the Board (the "COO PSA"). Under the terms of the COO PSA, Mr. Andrukaitis will receive a base fee of US$20,000 per month (the "Base Fee") or US$240,000 annually during the initial 3-year term with no escalation provision. Mr. Andrukaitis is also eligible to receive an annual performance bonus not to exceed the equivalent of one year's Base Fee. The performance bonus will be calculated at one-third of 10% of the adjusted income which will be based on the audited annual income adjusted for non-cash items (e.g., stock-based compensation, deferred taxes, unrealized foreign exchange and amortization) and income taxes. The COO PSA also provides that Mr. Andrukaitis shall be entitled to an annual stock option grant in accordance with the framework for option grants adopted by the Company, as amended from time to time, and includes a severance clause of equal to 24 months Base Fee in the event of termination without cause or a change of control in the Company.
Stock Option Plan
Pursuant to the policies of the TSX, the Company is required to adopt stock option plan prior to granting incentive stock options and, accordingly, the Company has adopted a stock option plan (the "Stock Option Plan"). The purpose of the Stock Option Plan is to ensure that the Company is able to provide an incentive program for directors, officers, employees and persons providing services to the Company (the "Optionee") that provides enough flexibility in the structuring of incentive benefits to allow the Company to remain competitive in the recruitment and maintenance of key personnel.
The maximum aggregate number of common shares that may be reserved for issuance pursuant to the Stock Option Plan shall be a rolling number of common shares equal to 10% of the total issued and outstanding common shares of the Company from time to time. Any common shares in respect of which previously granted options have been exercised shall not be deducted from the number of common shares reserved for issuance under the Stock Option Plan and shall again be available for grant under the Stock Option Plan. In addition, the aggregate number of common shares which may be reserved for issuance pursuant to the Stock Option Plan or any other share compensation arrangement (pre-existing or otherwise) to any one participant under the Stock Option Plan within a one-year period shall not exceed 5% of the common shares (on a non-diluted basis) outstanding at the time of the grant. The maximum number of common shares which may be issued to insiders within any one-year period under the Stock Option Plan or under any other share compensation arrangement taken together shall not exceed 10% of the common shares outstanding from time to time.
The exercise price of any option granted under the Stock Option Plan is to be determined from time to time by the Board but in any event shall be no lower than the last closing price of the Company's shares before the grant of options. The Board, or a committee appointed for such purposes, also has the authority under the Stock Option Plan to determine other terms and conditions relating to the grant of options, including any applicable vesting provisions. Options issued to any Optionee providing investor relations services to the Company must vest (and not otherwise be exercisable) in stages over a minimum of twelve months with no more than one quarter of the options vesting in any three-month period and will expire within a maximum of thirty days after the Optionee ceases to be employed by the Company.
The term of options granted under the Stock Option Plan shall not exceed ten years from the date of grant, and all options granted under the Stock Option Plan are not transferable other than by will or the laws of dissent and distribution. If an Optionee ceases to be an Optionee for any reason whatsoever other than death or termination for cause, each option held by such Optionee will cease to be exercisable the earlier of 90 days following the termination date (being the date on which such Optionee ceases to be an Optionee) and the original expiry date of such option. If an Optionee dies, the legal representative of the Optionee may exercise the Optionee's options within one year after the date of the Optionee's death but only up to and including the original option expiry date.
If at any time the expiry of the term of an option should be determined to occur either during a period in which the trading of common shares by the Optionee is restricted under the insider trading policy or other policy of the Company or within ten business days following such a period, then the expiry date (and the option term) of such option shall be automatically extended to the tenth trading day following the date the relevant black-out period or other trading restriction imposed by the Company is lifted, terminated or removed.
The Company's directors and senior management are eligible to participate in the Stock Option Plan. The Company does not provide any financial assistance to participants in order to facilitate the purchase of common shares under the Stock Option Plan. The Board of Directors can amend the terms of the Stock Option Plan, provided that, among other things, no such amendment may be made that would increase the maximum aggregate number of common shares available for issuance as options or that would affect the terms of any previously granted stock option unless the Company receives shareholder approval for such amendment in accordance with the policies of the TSX.
As at December 31, 2021, there were a total of 3,270,000 options outstanding under the Stock Option Plan. During Fiscal 2021, a total of 1,175,000 options expired (unexercised) and a total of 150,000 options were exercised.
Option-Based Awards
The following table sets forth the option-based awards for each of directors and officers of the Company outstanding as at December 31, 2021:
| Name |
Option Based Awards |
Number of securities
underlying
unexercised options
(#) |
Option exercise
price
(US$) |
Option expiration date |
Value of unexercised
in-the-money options
(US$)(1) |
| James R. Bond |
100,000
100,000
100,000
100,000 |
0.30
0.50
0.78
0.75 |
November 28, 2022
August 20, 2023
August 19, 2024
August 18, 2025 |
25,000
5,000
0
0 |
| Richard Lee |
100,000
100,000
100,000
100,000 |
0.30
0.50
0.78
0.75 |
November 28, 2022
August 20, 2023
August 19, 2024
August 18, 2025 |
25,000
5,000
0
0 |
| Name |
Option Based Awards |
Number of securities
underlying
unexercised options
(#) |
Option exercise
price
(US$) |
Option expiration date |
Value of unexercised
in-the-money options
(US$)(1) |
| Peter Hughes |
50,000
50,000
50,000
50,000 |
0.30
0.50
0.78
0.75 |
November 28, 2022
August 23, 2023
August 19, 2024
August 18, 2025 |
12,500
2,500
0
0 |
Anthony (Tony)
Andrukaitis |
100,000
100,000
100,000
100,000 |
0.30
0.50
0.78
0.75 |
November 28, 2022
August 23, 2023
August 19, 2024
August 18, 2025 |
25,000
5,000
0
0 |
| Paul Cass |
50,000
50,000
50,000
50,000 |
0.30
0.50
0.78
0.75 |
November 28, 2022
August 23, 2023
August 19, 2024
August 18, 2025 |
12,500
2,500
0
0 |
| Laura Roach |
50,000
50,000
50,000
50,000 |
0.30
0.50
0.78
0.75 |
November 28, 2022
August 23, 2023
August 19, 2024
August 18, 2025 |
12,500
2,500
0
0 |
| Jesse V. Crews |
200,000
50,000
50,000
50,000 |
0.57
0.50
0.78
0.75 |
April 17, 2023
August 23, 2023
August 19, 2024
August 18, 2025 |
0
2,500
0
0 |
| Frank Busch |
200,000
50,000 |
0.76
0.75 |
February 11, 2025
August 18, 2025 |
0
0 |
| Chris Stewart |
75,000
25,000 |
0.78
0.75 |
August 19, 2024
August 18, 2025 |
0
0 |
(1) Value is calculated based on the difference between the market value of the securities underlying the options as at December 31, 2021 (being US$0.45) and the exercise price of the option.
The following table sets forth the details of the exercise of compensation securities (Stock Options) by directors and officers of the Company during Fiscal 2021:
|
Name
|
Number of
Underlying
Securities
Issued
|
Exercise
Price of
Security
(US$)
|
Date of
Exercise
|
Closing Price
Per Security
on Date of
Exercise
(US$)
|
Difference Between
Exercise Price and
Closing Price on
Date of Exercise
(US$)
|
Value on
Exercise Date
(US$) (1)
|
|
Phil Dyer (2)
|
50,000
50,000
|
$0.30
$0.50
|
Feb. 8, 2021
Feb. 8, 2021
|
1.21
1.21
|
0.91
0.71
|
45,500
35,500
|
|
Laura Roach
|
50,000
|
$0.30
|
May 5, 2021
|
0.72
|
0.42
|
21,000
|
(1) Value is calculated based on the difference between the exercise price of the security and the market value of the securities underlying the options on the date of exercise.
(2) Mr. Dyer resigned as a director of the Company on February 11, 2020 but continued to serve in an advisory capacity to the Board during Fiscal 2021.
Restricted Share Unit Plan
The Board of Directors (the "Board") adopted the Restricted Share Unit Plan (the "RSU Plan") for the benefit of the Company's employees, directors and consultants. The RSU Plan has been established to assist the Company in the recruitment and retention of highly qualified employees, directors and eligible consultants by providing a means to reward performance, to motivate participants under the RSU Plan to achieve important corporate and personal objectives and, through the proposed issuance by the Company of Common Shares under the RSU Plan, to better align the interests of participants with the long-term interests of the Company's shareholders (the "Shareholders").
The Board intends to use Restricted Share Units ("RSUs") issued under the RSU Plan, as well as options issued under the Stock Option Plan, as part of the Company's overall executive compensation plan. Since the value of RSUs increase or decrease with the price of the Common Shares, RSUs reflect a philosophy of aligning the interests of executives with those of the Shareholders by tying executive compensation to share price performance. In addition, RSUs assist in the retention of qualified and experienced executives by rewarding those individuals who make a long-term commitment.
Eligible Participants: The RSU Plan is administered by the Compensation Committee of the Board or such other committee of the Board as may be designated by the Board (the "Committee"). Employees, directors and eligible consultants of the Company and its designated subsidiaries are eligible to participate in the RSU Plan. In accordance with the terms of the RSU Plan, the Company, under the authority of the Board of Directors through the Committee, will approve those employees, directors and eligible consultants who are entitled to receive RSUs and the number of RSUs to be awarded to each participant. RSUs awarded to participants are credited to them by means of an entry in a notional account in their favour on the books of the Company. Each RSU awarded conditionally entitles the participant to receive one Common Share (or the cash equivalent) upon attainment of the RSU vesting criteria.
Vesting: The vesting of RSUs is conditional upon the expiry of a time-based or performance-based vesting period. The duration of the vesting period and other vesting terms applicable to the grant of the RSUs shall be determined at the time of the grant by the Committee. Once the RSUs vest, the participant is entitled to receive the equivalent number of underlying Common Shares or cash equal to the Market Value of the equivalent number of Common Shares. The vested RSUs may be settled through the issuance of Common Shares from treasury by the delivery of Common Shares purchased in the open market, in cash or in any combination of the foregoing (at the discretion of the Company). If settled in cash, the amount shall be equal to the number of Common Shares in respect of which the participant is entitled multiplied by the Market Value of a Common Share on the payout date. Market Value per share is defined in the RSU Plan and means, subject to the exceptions, if any, prescribed by the Exchange from time to time (i) the last closing price of the Company's Common Shares before the issuance of the RSUs; (ii) if the Company's Common Shares trade on the TSX or another stock exchange where the majority of the trading volume and value of the shares occurs, the price is calculated based on a reasonable pre-determined formula, which formula is accepted by the Exchange and is based on a volume weighted average trading price or average daily high and low board lot trading price for the five trading days prior to the issuance of the RSUs. In the event that the Common Shares are not listed and posted for trading on any stock exchange, the Share Price shall be the Share Price as determined by the Board in its discretion, acting reasonably and in good faith. Fractional Common Shares will not be issued and any fractional entitlements will be rounded down to the nearest whole number.
The RSUs may be settled on the payout date, which shall be the third anniversary of the date of the grant or such other date as the Committee may determine at the time of the grant, which in any event shall be no later than the expiry date for such RSUs. The expiry date of RSUs is the date determined by the Company for such purpose for such grant, which date shall be no later than the date which is one year after the Participant's Termination Date and shall, in all cases, be in compliance with the requirements pertaining to the exception to the application of the salary deferral arrangement rules in paragraph 248(1)(k) of the Income Tax Act (Canada), as such section may be amended or re-enacted from time to time.
Maximum Number of Common Shares Issued: (a) shall not exceed 5% of the total number of issued and outstanding Common Shares on a non-diluted basis; and (b) in combination with the aggregate number of Common Shares which may be issuable under any and all of the Company's Security Based Compensation Arrangements, as defined in the RSU Plan, in existence from time to time, shall not exceed 10% of the total number of issued and outstanding Common Shares on a non-diluted basis, or such other number of Common Shares as shall have been duly approved by the Board, by the Exchange and by the Shareholders.
Participation Limits: The number of Common Shares which may be reserved for issuance under the RSU Plan within anyone-year period: (a) to any one Participant, shall not exceed 5% of the total number of issued and outstanding Common Shares on the Grant Date on a non-diluted basis; (b) under the RSU Plan and any other of the Company's Security Based Compensation Arrangements (i) the aggregate number of Common Shares issued to Insiders, within any one year period; and (ii) the aggregate number of Common Shares issuable to Insiders at any time, shall not exceed 10% of the issued and outstanding Common Shares; and (c) to any one Consultant shall not exceed 2% in the aggregate of the total number of issued and outstanding Common Shares on the Grant Date on a non-diluted basis.
Cessation of Entitlement: Unless otherwise determined by the Company in accordance with the RSU Plan, RSUs which have not vested on a participant's termination date shall terminate and be forfeited. If a participant who is an employee ceases to be an employee as a result of termination of employment without cause, in such case, at the Company's discretion, or for good reason (unless otherwise provided in the applicable Grant Agreement), all or a portion of such participant's RSUs may be permitted to continue to vest, in accordance with their terms, during any statutory or common law severance period or any period of reasonable notice required by law or as otherwise may be determined by the Company in its sole discretion. All forfeited RSUs are available for future grants.
Transferability: RSUs are not assignable or transferable other than by will or the laws of descent and distribution.
Amendments to the RSU Plan: The Board reserves the right, in its sole discretion, to amend, suspend or terminate the RSU Plan or any portion thereof at any time, in accordance with Applicable Law, without obtaining the approval of Shareholders, unless required by the policies of the Exchange. Notwithstanding the foregoing, the Company will be required to obtain disinterested Shareholder approval for any amendment related to: (a) the number or percentage of issued and outstanding Common Shares available for grant under the Plan (other than by virtue of adjustments pursuant to Section 13.1 of the RSU Plan); (b) a change in the method of calculation of the payout of RSUs held by Participants; and (c) an extension of the Payout Date of RSUs held by Participants.
The Board may, without notice, at any time and from time to time, without shareholder approval, amend the RSU Plan or any provisions thereof in such manner as the Board, in its sole discretion, determines appropriate including, without limitation: (a) amendments to the terms and conditions of the RSU Plan necessary to ensure that the RSU Plan complies with the applicable regulatory requirements, including the rules of the Exchange, in place from time to time; (b) amendments to the provisions of the RSU Plan respecting administration of the RSU Plan and eligibility for participation under the RSU Plan; (c) amendments to the provisions of the RSU Plan respecting the terms and conditions on which RSUs may be granted pursuant to the RSU Plan, including the provisions relating to the payment of the RSUs; (d) amendments necessary to suspend or terminate the RSU Plan; (e) amendments to the RSU Plan that are of a "housekeeping" nature; and (f) any other amendment, fundamental or otherwise, not requiring Shareholder approval under Applicable Laws or the applicable rules of the Exchange. Provided, however, that no such amendment of the RSU Plan may be made without the consent of each affected Participant in the RSU Plan if such amendment would adversely affect the rights of such affected Participant(s) under the RSU Plan.
As at December 31, 2021 there were 355,000 RSU's outstanding.
Non-Employee Directors Deferred Share Unit Plan
The Board has adopted the Non-Employee Directors Deferred Share Unit Plan (the "DSU Plan") for the benefit of the Company's non-executive directors of which currently there are five. The DSU Plan has been established to assist the Company in the recruitment and retention of qualified persons to serve on the Board and, through the proposed issuance by the Company of Common Shares under the DSU Plan, to promote better alignment of the interests of directors and the long-term interests of Shareholders. The Board intends to use the Deferred Share Units ("DSUs") issued under the DSU Plan, as well as options issued under the Stock Option Plan and RSUs issued under the RSU Plan, if any, as part of the Company's overall director compensation plan. Since the value of DSUs increase or decrease with the price of the Common Shares, DSUs reflect a philosophy of aligning the interests of directors with those of the Shareholders by tying compensation to share price performance.
As at December 31, 2021, there were no DSUs outstanding.
Administration of Plan: The DSU Plan provides that non-executive directors may elect to receive up to 50% of their annual compensation amount (the "Annual Base Compensation") in DSUs. A DSU is a unit credited to a participant by way of a bookkeeping entry in the books of the Company, the value of which is equivalent to a Common Share. All DSUs paid with respect to Annual Base Compensation will be credited to the director by means of an entry in a notional account in their favour on the books of the Company (a "DSU Account") when such Annual Base Compensation is payable. The director's DSU Account will be credited with the number of DSUs calculated to the nearest thousandth of a DSU, determined by dividing the dollar amount of compensation payable in DSUs on the payment date by the Share Price of a Common Share at the time. Share Price is defined in the DSU Plan and means subject to the exceptions, if any, prescribed by the Exchange from time to time (i) the last closing price of the Company's Common Shares before the issuance of the Share Units; (ii) if the Company's Common Shares trade on the TSX or another stock exchange where the majority of the trading volume and value of the shares occurs, the price is calculated based on a reasonable pre-determined formula, which formula is accepted by the Exchange and is based on a volume weighted average trading price or average daily high and low board lot trading price for the five trading days prior to the issuance of the DSUs. In the event that the Common Shares are not listed and posted for trading on any stock exchange, the Share Price shall be the Share Price as determined by the Board in its discretion, acting reasonably and in good faith. Fractional Common Shares will not be issued and any fractional entitlements will be rounded down to the nearest whole number.
Additionally, subject to certain participation limits prescribed by the Exchange, the Board may award such number of DSUs to a non-executive director as the Board deems advisable to provide the director with appropriate equity- based compensation for the services he or she renders to the Company. The Board shall determine the date on which such DSUs may be granted and the date as of which such DSUs shall be credited to the director's DSU Account. The Company and a director who receives such an additional award of DSUs shall enter into a DSU award agreement to evidence the award and the terms applicable thereto.
Generally, a participant in the DSU Plan shall be entitled to redeem his or her DSUs during the period commencing on the business day immediately following the date upon which the non-executive director ceases to hold any position as a director of the Company and its subsidiaries and is no longer otherwise employed by the Company or its subsidiaries, including in the event of death of the participant (the "Termination Date") and ending on the 90th day following the Termination Date. Redemptions under the DSU Plan may be in Common Shares issued from treasury subject to the Shareholder approval being sought at this Meeting, may be purchased by the Company on the open market for delivery to the director, may be settled in cash or any combination of the foregoing.
Maximum Number of Common Shares Issued: (a) shall not exceed 2% of the total number of issued and outstanding Common Shares on a non-diluted basis; and (b) in combination with the aggregate number of Common Shares which may be issuable under any and all of the Company's Security Based Compensation Arrangements, as defined in the DSU Plan, in existence from time to time, shall not exceed 10% of the total number of issued and outstanding Common Shares on a non-diluted basis, or such other number of Common Shares as shall have been duly approved by the Board, by the Exchange and by the Shareholders.
Participation Limits: The number of Common Shares which may be reserved for issuance under the DSU Plan within any one-year period: (a) to any one Participant, shall not exceed 2% of the total number of issued and outstanding Common Shares on the Grant Date on a non-diluted basis; and (b) under the DSU Plan and any other of the Company's Security Based Compensation Arrangements (i) the aggregate number of Common Shares issued to Insiders, within any one year period; and (ii) the aggregate number of Common Shares issuable to Insiders at any time, shall not exceed 10% of the issued and outstanding Common Shares.
Transferability: No right to receive payment of deferred compensation or retirement awards shall be transferable or assignable by any participant under the DSU Plan except by will or laws of descent and distribution.
Amendments to the DSU Plan: The Board may at any time, and from time to time, and without shareholder approval, amend any provision of the DSU Plan, subject to any regulatory or stock exchange requirement at the time of such amendment, including, without limitation: (a) amendments to the terms and conditions of the DSU Plan necessary to ensure that the Plan complies with the applicable regulatory requirements, including the rules of the Exchange, in place from time to time; (b) amendments to the provisions of the DSU Plan respecting administration of the DSU Plan and eligibility for participation under the DSU Plan; (c) amendments to the provisions of the DSU Plan respecting the terms and conditions on which DSUs may be granted pursuant to the DSU Plan, including the provisions relating to the payment of the DSUs; (d) amendments necessary to suspend or terminate the DSU Plan; (e) amendments to the DSU Plan that are of a "housekeeping" nature; and (f) any other amendment, fundamental or otherwise, not requiring shareholder approval under applicable laws or the applicable rules of the Exchange; provided, however, that no such amendment of the DSU Plan may be made without the consent of each affected participant if such amendment would adversely affect the rights of such affected participant(s) under the DSU Plan.
Termination and Change of Control Benefits
Except as disclosed above with respect to James R. Bond, Richard Lee and Tony Andrukaitis, the Company has no plans or arrangements in respect of remuneration received or that may be received by the Company's directors and senior management in respect of compensating such person in the event of termination of employment (as a result of resignation, retirement, change of control, etc.) or a change in responsibilities.
Pension, Retirement or Similar Benefits
The Company has not set aside or accrued any amounts to provide pension, retirement or similar benefit for the Company's directors or senior management during Fiscal 2021.
C. Board Practices
Term of Office
Each director of the Company holds office until the next annual general meeting of the Company or until his successor is elected or appointed, unless his office is earlier vacated in accordance with the articles of the Company or the provisions of the BCBCA. Each member of the Company's senior management is appointed to serve at the discretion of the Company's Board, subject to the terms of the personal service agreements described above.
Service Contracts
See "Employment Agreements" and "Termination and Change of Control Benefits" above for particulars of certain directors' service contracts with the Company and the Company's subsidiaries, as applicable. Other than as disclosed herein, the Company does not have any service contracts with directors which provide for benefits upon termination of employment.
Committees
The Company currently has three standing committees, the Audit Committee, the Corporate Governance and Nominating Committee and the Compensation committee.
Audit Committee
During Fiscal 2021, the members of the audit committee were Paul Cass (Chairman), Jesse V. Crews and Frank Busch. As defined in National Instrument 52-110 - Audit Committees of the Canadian Securities Administrator, Messrs. Cass, Crews and Busch are independent, meaning that they have no direct or indirect material relationship with the Company that could, in the view of the Board, reasonably interfere with the exercise of their independent judgment. They are also financially literate, meaning that they have the ability to read and understand a set of financial statements that present a breadth of complexity of accounting issues that are generally comparable to the breadth and complexity of the issues that can reasonably be expected to be raised by the Company's financial statements. The Company has adopted a charter for the Company's audit committee. The full text of the Charter of the Audit Committee is available on the Company's website at www.kelsotech.com. The audit committee is responsible for review of both interim and annual financial statements for the Company. For the purposes of performing their duties, the members of the audit committee have the right at all times, to inspect all the books and financial records of the Company and any subsidiaries and to discuss with management and the external auditors of the Company any accounts, records and matters relating to the financial statements of the Company. The audit committee members meet periodically with management and annually with the external auditors. The Company's audit committee has the overall duties and responsibilities to:
- review the financial reporting process to ensure the accuracy of the financial statements of the Company;
- assist the Board to properly and fully discharge its responsibilities;
- strengthen the role of the Board by facilitating in depth discussions between directors, management and external auditors;
- evaluate the independent auditor's qualifications, performance and independence;
- facilitate the independence of the independent auditor;
- assess the processes relating to the determination and mitigation of risks and the maintenance of an effective control environment; and
- review the processes to monitor compliance with laws and regulations.
Compensation Committee
The principal purpose of the Compensation Committee is to implement and oversee compensation policies approved by the Board. The duties and responsibilities of the Compensation Committee include, without limitation, the following:
- to recommend to the Board compensation policies and guidelines for the Company; and
- to review and approve corporate goals and objectives relevant to the compensation of the Chief Executive Officer and, in light of those goals and objectives, to recommend to the Board the annual salary, bonus and other benefits, direct and indirect, of the Chief Executive Officer and to approve compensation for all other designated officers of the Company, after considering the recommendations of the Chief Executive Officer, all within the human resources and compensation policies and guidelines approved by the Board.
The Company has adopted a formal written mandate for the Compensation Committee which can be viewed on the Company's website at www.kelsotech.com. The mandate provides that the committee shall consist of at least three members of the Board, all of whom shall be "independent" in accordance with applicable legal requirements, including currently the requirements published by the Canadian Securities Administrators under National Policy 58-201 "Corporate Governance Guidelines" and the applicable NYSE American rules. The members of the Compensation Committee are Messrs. Hughes (Chairman) and Cass and Ms. Roach.
All members of the Compensation Committee have direct experience which is relevant to their responsibilities as Compensation Committee members. All of the members of the Compensation Committee have or have had senior level executive and director positions in both private and public companies, and therefore have a good understanding of how compensation works and how to motivate staff. All of the members have good financial understanding which allows them to assess the costs versus benefits of compensation plans. The members combined experience in the resource sector provides them with the understandings of the Company's success factors and risks which is very important when determining the metrics for measuring success.
The Board appoints the members of the Compensation Committee for the ensuing year at the Company's organizational meeting held in conjunction with each annual general meeting of the Company's Shareholders. The Board may at any time remove or replace any member of the Compensation Committee and may fill any vacancy in the committee.
The Compensation Committee meets regularly each year on such dates and at such locations as the Chair of the Compensation Committee determines. The Compensation Committee has access to such officers and employees of the Company and to such information respecting the Company and may engage independent counsel or advisors at the expense of the Company, all as it considers to be necessary or advisable in order to perform its duties and responsibilities.
Corporate Governance and Nominating Committee
The purpose of the Corporate Governance and Nominating Committee is to provide a focus on corporate governance that will enhance corporate performance, and to ensure on behalf of the Board and Shareholders that the Company's corporate governance system is effective in the discharge of the Company's obligations to the Shareholders.
The Corporate Governance and Nominating Committee also has the responsibility of proposing nominees for director. The Committee considers the competencies and skills that the Board as a whole should possess, the competencies and skills of existing Board members and the competencies and skills of proposed new Board members. The Committee members utilize their extensive knowledge of the industry and personal contacts to identify potential nominees that possess the desired skills and competencies.
The duties and responsibilities of the Corporate Governance and Nominating Committee include, without limitation, the following:
- Develop and monitor the Company's overall approach to corporate governance issues and, subject to approval by the Board, implement and administer this process.
- Advise the Board or any of the committees of the Board of any corporate governance issues which the Committee determines ought to be considered by the Board or any such committees.
- Review with the Board, on a regular basis, but not less than annually, the terms of reference for the Board, each committee of the Board, the Chairman and the Chief Executive Officer.
- Review with the Board, on a regular basis, the methods and processes by which the Board fulfils its duties and responsibilities, including without limitation:
i. the size of the Board;
ii. the number and content of meetings;
iii. the annual schedule of issues to be presented to the Board at its meetings or those of its committees;
iv. material which is to be provided to the directors generally and with respect to the meetings of the Board or its committees;
v. resources available to the directors; and
vi. the communication process between the Board and management.
- Review and, as necessary, authorize a committee or an individual director to engage separate independent counsel and/or advisors at the expense of the Company in appropriate circumstances.
- Make recommendation to the Board regarding changes or revisions to the Board's Corporate Governance Guidelines;
- Evaluate and make recommendations to the Board concerning the appointment of directors to the committees and the selection of Board committee chairs;
- Annually evaluate and report to the Board on the performance and effectiveness of the Board and its committees;
- Annually, in conjunction with the Chief Executive Officer, evaluate the performance of the Company's management (other than the Chief Executive Officer). Conduct an annual review of succession planning and report its findings and recommendations to the Board;
- Evaluate and lead the Board's annual review of the Chief Executive Officer's performance; and
- Annually review and evaluate its performance.
The Company has adopted a formal written mandate for the Corporate Governance and Nominating Committee, which can be viewed on the Company's website at www.kelsotech.com. The mandate provides that the Corporate Governance and Nominating Committee shall consist of at least three directors, all of whom will be "independent directors" in accordance with applicable legal requirements, including currently the requirements published by the Canadian Securities Administrators under National Policy 58-201 "Corporate Governance Guidelines" and the applicable NYSE American rules.
Each member will have skills and/or experience which are relevant to the mandate of the Committee. During the financial year ended December 31, 2021, the members of the Corporate Governance and Nominating Committee were Messrs. Jesse V. Crews (Chairman), Mr. Frank Busch and Ms. Roach.
The Board appoints the members of the Corporate Governance and Nominating Committee for the ensuing year at the Company's organizational meeting held in conjunction with each annual general meeting of the Shareholders of the Company. The Board may at any time remove or replace any member of the Corporate Governance and Nominating Committee and may fill any vacancy in the committee.
The Corporate Governance and Nominating Committee meets regularly each year on such dates and at such locations as the Chair of the committee determines. The Corporate Governance and Nominating Committee has access to such officers and employees of the Company and to such information respecting the Company and may engage independent counsel and advisors at the expense of the Company, all as it considers to be necessary or advisable in order to perform its duties and responsibilities.
D. Employees
As at December 31, 2021, the Company had 45 employees, including employees of the Company's subsidiaries. The majority of employees work at the Company's production facilities in Bonham, Texas. Canadian personnel work in West Kelowna, British Columbia.There has been no significant change in the number of employees since December 31, 2019. At the date of this filing, the Company's employees are not unionized, and all employees are full-time.
E. Share Ownership
As of December 31, 2021, the Company's directors and senior management beneficially owned the following common shares and stock options of the Company:
|
Name and Office Held
|
Number of Common Shares Owned and
Percent of Total Outstanding
Common Shares
|
Stock Options
Held
|
Restricted Share
Units Held
|
|
# of Shares
|
% of Class(1)
|
|
James R. Bond
Director, President and CEO
|
1,368,300(2)
|
2.52
|
400,000
|
40,000
|
|
Peter Hughes
Director
|
16,000
|
0.029
|
200,000
|
20,000
|
|
Tony Andrukaitis
Director,
Executive Vice President Business Development and COO
|
264,000
|
0.49
|
400,000
|
40,000
|
|
Paul Cass
Director
|
79,000
|
0.15
|
200,000
|
20,000
|
|
Laura Roach
Director
|
56,390
|
0.10
|
150,000
|
20,000
|
|
Jesse V. Crews
Director
|
122,125
|
0.23
|
350,000
|
20,000
|
|
Frank Busch
Director
|
20,000
|
0.037
|
250,000
|
20,000
|
|
Richard Lee
CFO
|
144,500
|
0.27
|
400,000
|
40,000
|
|
Chris Stewart (3)
President, KIQ X Industries Inc.
|
27,000
|
0.050
|
100,000
|
40,000
|
(1) Based on 54,320,086 common shares issued and outstanding as at December 31, 2021.
(2) Mr. Bond holds 547,500 common shares directly; 660,800 common shares indirectly through Bondwest Enterprises Inc., a company owned and controlled by Mr. Bond; and 160,000 common shares jointly with Serena Sardar, Mr. Bond's spouse.
(3) Mr. Stewart was appointed President of KIQ X Industries Inc. on January 20, 2021.
The voting rights attached to the common shares owned by the Company's directors and senior management do not differ from those voting rights attached to shares owned by people who are not directors or senior management of the Company.
Item 7. Major Shareholders and Related Party Transactions
A. Major Shareholders
As at December 31, 2021 Tocqueville Asset Management LP reported on their Schedule 13G that they held 2,736,300 common shares/voting rights (5%) of the Company. To the best of the Company's knowledge, there are no other persons or companies who beneficially own, directly or indirectly, or exercise control or direction over, securities carrying more than 5% of the voting rights attached to any class of voting securities of the Company.
The voting rights of the Company's major shareholders do not differ from the voting rights of holders of the Company's common shares who are not the Company's major shareholders.
As at December 31, 2021, the registrar and transfer agent for the Company reported that there were 54,320,086 shares of the Company issued and outstanding. Of these, 46,762,689 were registered to Canadian residents (11 recorded shareholders), 7,545,969 shares were registered to residents of the United States (56 recorded shareholders) and 11,428,000 shares were registered to residents of other foreign countries (1 recorded shareholder).
To the best of the Company's knowledge, the Company is not directly or indirectly owned or controlled by another corporation, by any foreign government or by any other natural or legal person severally or jointly, except as disclosed in the above table regarding the Company's major shareholders.
There are no arrangements known to the Company, the operation of which may at a subsequent date result in a change in control of the Company.
B. Related Party Transactions
For Fiscal 2021, management fees for the Company were $720,923 (Fiscal 2020 - $641,845; 2019 - $540,692). As at December 31, 2021, the amount due to related parties (which are unsecured and have no interest or specific terms of payments) was $Nil (Fiscal 2020 - $28,423; Fiscal 2019 - $537,644). Management bonuses of $Nil were earned in Fiscal 2021 (Fiscal 2020 - $28,423; Fiscal 2019 - $496,894); $Nil related to accrued Directors fees (Fiscal 2020 - Nil; Fiscal 2019 - $40,750) and there were no amounts due for reimbursement of expenses to a director of the Company. Expense reimbursements are due on demand. Related party transactions during Fiscal 2021, Fiscal 2020 and Fiscal 2019 were in the normal course of operations and were measured at their fair value.
Share-based expenses (calculated using the Black-Scholes option pricing model) for Fiscal 2021 were $104,250 (Fiscal 2020 - $335,155; Fiscal 2019 - $255,902).
Other than as disclosed in this annual report and the financial statements attached hereto and other than in the ordinary course of business, since the beginning of the Company's preceding three financial years, there have been no transactions or loans between the Company and:
(a) enterprises that directly or indirectly through one or more intermediaries, control or are controlled by, or are under common control with, the Company;
(b) associates, meaning unconsolidated enterprises in which the Company has a significant influence or which have significant influence over the Company;
(c) individuals owning, directly or indirectly, an interest in the voting power of the Company that gives them significant influence over the Company, and close members of any such individual's family;
(d) key management personnel, that is, those persons having authority and responsibility for planning, directing and controlling the activities of the Company, including directors and senior management of the Company and close members of such individuals' families; and
(e) enterprises in which a substantial interest in the voting power is owned, directly or indirectly, by any person described in (c) or (d) or over which such a person is able to exercise significant influence, including enterprises owned by directors or major shareholders of the Company and enterprises that have a member of key management in common with the Company.
Compensation
For information regarding compensation for the Company's directors and senior management, see Item 6.B. Compensation.
Interests of Experts and Counsel
Not applicable.
Item 8. Financial Information
A. Financial Statements and Other Financial Information
The Company's financial statements are stated in United States dollars and are prepared in accordance with IFRS, as issued by the IASB.
The following financial statements and notes thereto are filed with and incorporated herein as part of this annual report:
(a) audited consolidated financial statements for the year ended December 31, 2021, including: report of the independent registered public accountant, Smythe LLP, Chartered Professional Accountants, comprising the consolidated statements of financial position as at December 31, 2021 and 2020, the consolidated statements of operations and comprehensive income (loss), changes in equity and cash flows for the years ended December 31, 2021, 2020 and 2019.
These financial statements can be found under "Item 17. Financial Statements" below.
Export Sales
All sales are domestic to the US.
Legal Proceedings
During the three months ended March 31, 2021 based on R&D testing results the Company terminated the Technology Development Agreement with G&J Technologies Inc. and Gebhard Wager who were the service provider and contractor engaged for the KXI Suspension System, including the consulting agreement for $10,000 per month. According to the terms of the Technology Development Agreement (TDA) the Company will still maintain intellectual property rights acquired under the TDA. Kelso will still be liable for a 2.5% royalty to the service provider or their assigns should Kelso use their technologies in a commercially sold product. The terms of the termination are currently being disputed by the service provider and inventor. The dispute has entered an arbitration process to provide a final legal resolution pursuant to the terms of the TDA. This arbitration is not expected to have a material effect on the Company's financial position or profitability.
Other than mentioned above there have not been any other legal or arbitration proceedings, including those relating to bankruptcy, receivership or similar proceedings, those involving any third party, and governmental proceedings pending or known to be contemplated, which may have, or have had in the recent past, significant effect the Company's financial position or profitability.
Also, there have been no material proceedings in which any director, any member of senior management, or any of the Company's affiliates is either a party adverse to the Company or the Company's subsidiaries or has a material interest adverse to the Company or the Company's subsidiaries.
Policy on Dividend Distributions
The Company's Board of Directors may give consideration on an annual basis to the payment of future dividends. The amount of any future annual dividends will be determined based on a number of factors that may include the results of operations, financial condition, cash requirements and future prospects of the Company. The Board is, however, under no obligation to declare dividends and the declaration of dividends is wholly within their discretion. Further, the Company's Board of Directors may cease declaring dividends or may declare dividends in amounts that are different from those previously declared.
Significant Changes
The Company is not aware of any significant change that has occurred since December 31, 2020 that have not been disclosed in this annual report.
Item 9. The Offer and Listing
A. Offer and Listing Details
Price History
Full Financial Years (five most recent full financial years)
The annual high and low market prices of the Company's common shares for the five most recent full financial years on the TSX and NYSE American were as follows:
|
Year Ended
|
TSX(1)
(Canadian dollars, $)
|
NYSE American(2)
(U.S. dollars, $)
|
|
High
|
Low
|
High
|
Low
|
|
December 31, 2021
|
1.85
|
0.54
|
1.48
|
0.42
|
|
December 31, 2020
|
1.32
|
0.55
|
1.00
|
0.45
|
|
December 31, 2019
|
2.19
|
0.55
|
1.66
|
0.41
|
|
December 31, 2018
|
1.25
|
0.46
|
0.96
|
0.3591
|
|
December 31, 2017
|
1.40
|
0.315
|
1.08
|
0.27
|
(1) The common shares of the Company were listed for trading on the TSX on May 22, 2014 prior to which they traded on the TSXV.
(2) The common shares of the Company were listed for trading on the NYSE American on October 14, 2014prior to which they traded on the OTCQX International under the symbol "KEOSF".
Full Financial Quarters (two most recent full financial years)
The high and low market prices of the Company's common shares for each full financial quarter for the two most recent full financial years on the TSX and NYSE American were as follows:
|
Quarter Ended
|
TSX
(Canadian dollars, $)
|
NYSE American
(U.S. dollars, $)
|
|
High
|
Low
|
High
|
Low
|
|
December 31, 2021
|
1.23
|
0.54
|
1.02
|
0.42
|
|
September 30, 2021
|
0.89
|
0.67
|
0.73
|
0.52
|
|
June 30, 2021
|
1.42
|
0.73
|
0.82
|
0.59
|
|
March 31, 2021
|
1.85
|
0.68
|
1.48
|
0.53
|
|
December 31, 2020
|
0.80
|
0.55
|
0.62
|
0.45
|
|
September 30, 2020
|
1.07
|
0.62
|
0.80
|
0.47
|
|
June 30, 2020
|
0.97
|
0.65
|
0.72
|
0.46
|
|
March 31, 2020
|
1.32
|
0.64
|
1.00
|
0.45
|
Most Recent 6 Months
The high and low market prices of the Company's common shares for each month for the most recent six months on the TSX and NYSE American were as follows:
|
Month End/Period
|
TSX
(Canadian dollars, $)
|
NYSE American
(U.S. dollars, $)
|
|
High
|
Low
|
High
|
Low
|
|
March 1-15, 2022
|
0.66
|
0.60
|
0.53
|
0.47
|
|
February 28, 2022
|
0.67
|
0.58
|
0.54
|
0.44
|
|
January 31, 2022
|
0.72
|
0.52
|
0.58
|
0.40
|
|
December 31, 2021
|
0.74
|
0.54
|
0.54
|
0.42
|
|
November 30, 2021
|
0.92
|
0.67
|
0.74
|
0.51
|
|
October 31, 2021
|
1.23
|
0.72
|
1.02
|
0.56
|
Transfers of Common Shares
The Company's common shares are in registered form and the transfer of the Company's common shares is managed by the Company's transfer agent, Computershare Investor Services Inc. with transfer facilities in Vancouver and Toronto.
Computershare Trust Company, Denver, Colorado, serves as co-transfer agent and co-registrar for the Company's shares in the US.
Requests for information should be directed to Computershare Investor Services Inc., 100 University Avenue, 8th Floor, Toronto, Ontario, Canada M5J 2Y1, Telephone 1 800 564 6253 (toll free in Canada and the United States) between the hours of 8:30 a.m. and 8:00 p.m. Eastern Time or 514 982 7555 (international direct dial).
B. Plan of Distribution
Not applicable.
C. Markets
The Common Shares are publicly traded on the TSX under the symbol "KLS", and on the NYSE American under the symbol "KIQ".
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
Item 10. Additional Information
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
The information required by this item is incorporated herein by reference from the Company's Registration Statement on Form 20-F filed on filed on August 29, 2013, as amended on October 23, 2013, November 21, 2013, and December 3, 2013.
C. Material Contracts
There are no other contracts, other than those disclosed in this annual report and those entered into in the ordinary course of the Company's business, that are material to the Company, and which were entered into in the most recently completed fiscal year or which were entered into before the most recently completed fiscal year but are still in effect as of the date of this annual report:
1. The patent abstract describes the PRV as "a pressure relief valve for releasing fluid through a vent in a railway tank car, tank trucks and similar vessels. A valve disc is normally biased in a closed position by a plurality of constant-force springs of laminated steel tapes on drums supported on upright angle brackets symmetrically arranged around a valve seat. The pressure at which the valve opens is determined by a pre-selection of the number of springs, laminated tapes per spring and the restoring force of each tape." See "Business Overview".
2. On May 26, 2010, the Company entered into an agreement with Barry LaCroix whereby the Company acquired Manhole Cover Patent No. US 7,104,722 B2 from Mr. LaCroix and related technology and intellectual property in consideration for CAD$40,000 and the grant of a 5% royalty on gross sales of the manhole covers sold under the auspices of the patent in favour of Mr. LaCroix on the terms and conditions set out in the agreement. This patent expires 2023.
3. The Company has a 10% rolling stock option plan which was last approved by the shareholders of the Company on June 25, 2020. A copy of the Stock Option Plan is available under the Company's profile on SEDAR at www.sedar.com in Canada on EDGAR at www.sec.gov in the United States.
4. On July 1, 2020, the Company entered into Professional Services Agreements with each of Bondwest Enterprises Inc. ("Bondwest") (the "CEO PSA"), Kitchener Holdings Corp. ("Kitchener") (the "CFO PSA") and Mr. Anthony Andrukaitis (the "COO PSA"), Reference is made to the section entitled "Management Agreements" under Item 6, Directors, Senior Management and Employees, herein, for further details.
5. The Company has a Restricted Share Unit Plan which was approved by the shareholders of the Company on June 3, 2021. A copy of the RSU Plan is available under the Company's profile on SEDAR at www.sedar.com in Canada on EDGAR at www.sec.gov in the United States.
6. The Company has a Non-Employee Directors Deferred Share Unit Plan which was approved by the shareholders of the Company on June 2, 2021. A copy of the Deferred Share Unit Plan is available under the Company's profile on SEDAR at www.sedar.com in Canada on EDGAR at www.sec.gov in the United States.
D. Exchange Controls
There are no government laws, decrees or regulations in Canada which restrict the export or import of capital, or which affect the remittance of dividends, interest or other payments to non-resident holders of the Company's common shares. Any remittances of dividends to United States residents and to other non-residents are, however, subject to withholding tax. See "Taxation" below.
E. Taxation
Certain Canadian Federal Income Taxation
The Company considers that the following general summary fairly describes the principal Canadian federal income tax consequences applicable to a holder of the Company's common shares who is a resident of the United States, who is not, will not be and will not be deemed to be a resident of Canada for purposes of the Income Tax Act (Canada) and any applicable tax treaty and who does not use or hold, and is not deemed to use or hold, his, her or its common shares in the capital of the Company in connection with carrying on a business in Canada (a "non-resident holder").
This summary is based upon the current provisions of the Income Tax Act (Canada), the regulations thereunder (the "Regulations"), the current publicly announced administrative and assessing policies of the Canada Revenue Agency and the Canada-United States Tax Convention as amended by the Protocols thereto (the "Treaty"). This summary also takes into account the amendments to the Income Tax Act (Canada) and the Regulations publicly announced by the Minister of Finance (Canada) prior to the date hereof (the "Tax Proposals") and assumes that all such Tax Proposals will be enacted in their present form. However, no assurances can be given that the Tax Proposals will be enacted in the form proposed, or at all. This summary is not exhaustive of all possible Canadian federal income tax consequences applicable to a holder of the Company's common shares and, except for the foregoing, this summary does not take into account or anticipate any changes in law, whether by legislative, administrative or judicial decision or action, nor does it take into account provincial, territorial or foreign income tax legislation or considerations, which may differ from the Canadian federal income tax consequences described herein.
This summary is of a general nature only and is not intended to be, and should not be construed to be, legal, business or tax advice to any particular holder or prospective holder of the Company's common shares, and no opinion or representation with respect to the tax consequences to any holder or prospective holder of the Company's common shares is made, accordingly, holders and prospective holders of the Company's common shares should consult their own tax advisors with respect to the income tax consequences of purchasing, owning and disposing of the Company's common shares in their particular circumstances.
Dividends
Dividends paid on the Company's common shares to a non-resident holder will be subject under the Income Tax Act (Canada) to withholding tax at a rate of 25% subject to a reduction under the provisions of an applicable tax treaty, which tax is deducted at source by the Company. The Treaty provides that the Income Tax Act (Canada) standard 25% withholding tax rate is reduced to 15% on dividends paid on shares of a corporation resident in Canada (such as the Company) to residents of the United States, and also provides for a further reduction of this rate to 5% where the beneficial owner of the dividends is a corporation resident in the United States that owns at least 10% of the voting shares of the corporation paying the dividend.
Capital Gains
A non-resident holder is not subject to tax under the Income Tax Act (Canada) in respect of a capital gain realized upon the disposition of a common share of the Company unless such share represents "taxable Canadian property", as defined in the Income Tax Act (Canada), to the holder thereof. The Company's common shares generally will be considered taxable Canadian property to a non-resident holder if:
- the non-resident holder;
- persons with whom the non-resident holder did not deal at arm's length; or
- the non-resident holder and persons with whom such non-resident holder did not deal at arm's length,
owned, or had an interest in an option in respect of, not less than 25% of the issued shares of any class of the Company's capital stock at any time during the 60-month period immediately preceding the disposition of such shares. In the case of a non-resident holder to whom shares of the Company represent taxable Canadian property and who is resident in the United States, no Canadian taxes will generally be payable on a capital gain realized on such shares by reason of the Treaty unless the value of such shares is derived principally from real property situated in Canada.
United States Federal Income Taxation
The following is a general discussion of United States federal foreign income tax matters under current law, generally applicable to a U.S. Holder (as defined below) of the Company's common shares who holds such shares as capital assets. This discussion addresses the material United States federal income tax consequences but does not address consequences peculiar to persons subject to special provisions of federal income tax law, such as those described below as excluded from the definition of a U.S. Holder. In addition, this discussion does not cover any state, local or foreign tax consequences. See "Certain Canadian Federal Income Tax Consequences" above.
The following discussion is based upon the Internal Revenue Code of 1986, as amended (the "Code"), Treasury Regulations, published Internal Revenue Service ("IRS") rulings, published administrative positions of the IRS and court decisions that are currently applicable, any or all of which could be materially and adversely changed, possibly on a retroactive basis, at any time. In addition, this discussion does not consider the potential effects, both adverse and beneficial, of any recently proposed legislation which, if enacted, could be applied, possibly on a retroactive basis, at any time. No assurance can be given that the IRS will agree with such statements and conclusions, or will not take, or a court will not adopt, a position contrary to any position taken herein.
Holders and prospective holders of common shares should consult their own tax advisors with respect to federal, state, local, and foreign tax consequences of purchasing, owning and disposing of the Company's common shares.
U.S. Holders
As used herein, a "U.S. Holder" includes a holder of less than 10% of the Company's common shares who is a citizen or resident of the United States, a corporation created or organized in or under the laws of the United States or of any political subdivision thereof, any entity which is taxable as a corporation for U.S. tax purposes and any other person or entity whose ownership of the Company's common shares is effectively connected with the conduct of a trade or business in the United States. A U.S. Holder does not include persons subject to special provisions of federal income tax law, such as tax-exempt organizations, qualified retirement plans, financial institutions, insurance companies, real estate investment trusts, regulated investment companies, broker-dealers, non-resident alien individuals or foreign corporations whose ownership of the Company's common shares is not effectively connected with the conduct of a trade or business in the United States and shareholders who acquired their shares through the exercise of employee stock options or otherwise as compensation.
Distributions
The gross amount of a distribution paid to a U.S. Holder will generally be taxable as dividend income to the U.S. Holder for U.S. federal income tax purposes to the extent paid out of the Company's current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Distributions which are taxable dividends, and which meet certain requirements will be "unqualified dividend income" and taxed to U.S. Holders at a maximum U.S. federal rate of 15%. Distributions in excess of the Company's current and accumulated earnings and profits will be treated first as a tax-free return of capital to the extent of the U.S. Holder's tax basis in the common shares and, to the extent in excess of such tax basis, will be treated as a gain from a sale or exchange of such shares.
Capital Gains
In general, upon a sale, exchange or other disposition of common shares, a U.S. Holder will generally recognize a capital gain or loss for U.S. federal income tax purposes in an amount equal to the difference between the amount realized on the sale or other distribution and the U.S. Holder's adjusted tax basis in such shares. Such gain or loss will be U.S. source gain or loss and will be treated as a long-term capital gain or loss if the U.S. Holder's holding period of the shares exceeds one year. If the U.S. Holder is an individual, any capital gain will generally be subject to U.S. federal income tax at preferential rates if specified minimum holding periods are met. The deductibility of capital losses is subject to significant limitations.
Foreign Tax Credit
A U.S. Holder who pays (or has had withheld from distributions) Canadian income tax with respect to the ownership of the Company's common shares may be entitled, at the option of the U.S. Holder, to either a deduction or a tax credit for such foreign tax paid or withheld. Generally, it will be more advantageous to claim a credit because a credit reduces United States federal income taxes on a dollar-for-dollar basis, while a deduction merely reduces the taxpayer's income subject to tax. This election is made on a year-by-year basis and generally applies to all foreign income taxes paid by (or withheld from) the U.S. Holder during that year. There are significant and complex limitations which apply to the tax credit, among which are an ownership period requirement and the general limitation that the credit cannot exceed the proportionate share of the U.S. Holder's United States income tax liability that the U.S. Holder's foreign source income bears to his or its worldwide taxable income. In determining the application of this limitation, the various items of income and deduction must be classified into foreign and domestic sources. Complex rules govern this classification process. There are further limitations on the foreign tax credit for certain types of income such as "passive income", "high withholding tax interest", "financial services income", "shipping income", and certain other classifications of income. The availability of the foreign tax credit and the application of these complex limitations on the tax credit are fact specific and holders and prospective holders of the Company's common shares should consult their own tax advisors regarding their individual circumstances.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
Additional information, including the Company's Consolidated Financial Statements, press releases and other required filing documents are available under the Company's profile on SEDAR at www.sedar.com. in Canada, on EDGAR at www.sec.gov in the United States and on the Company's website at www.kelsotech.com. Copies of such documents may also be viewed by appointment during normal business hours at the Company's registered and records office being the offices of Clark Wilson LLP, 900 - 885 West Georgia Street, Vancouver, British Columbia, Canada V6C 3H1 during normal business hours.
I. Subsidiary Information
The Company operates in conjunction with the Company's five wholly-owned subsidiaries Kelso Technologies (USA) Inc. (incorporated on August 3, 2005 in the State of Nevada), Kel-Flo Industries Inc. (incorporated on June 20, 2012 in the State of Nevada), KIQ Industries Inc. (incorporated on October 7, 2014 in the State of Nevada) and KIQ X Industries Inc. (incorporated on December 12, 2017 in the Province of British Columbia, Canada). KXI Wildertec Industries Inc. (incorporated on February 17, 2020 in the Province of British Columbia, Canada). Kelso Technologies Inc. owns 100% of the voting securities of each of the Company's subsidiaries and none of the subsidiaries has a class of restricted securities.
Item 11. Quantitative and Qualitative Disclosures About Market Risk
Financial instruments are agreements between two parties that result in promises to pay or receive cash or equity instruments. The Company classifies the Company's financial instruments as follows: cash is classified as a financial asset at FVTPL, accounts receivable and due to related parties and accounts payable and accrued liabilities are classified as financial instruments measured at amortized cost. The carrying value of these instruments approximates their fair values due to their short term to maturity.
The Company has exposure to the following risks from the Company's use of financial instruments:
- Credit risk;
- Liquidity risk; and
- Market risk.
(a) Credit risk
Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. Cash is placed with a major Canadian financial institution and the Company's concentration of credit risk for cash and maximum exposure thereto is $3,377,464 at December 31, 2021 (December 31, 2020 - $1,049,049).
With respect to its accounts receivable, the Company assesses the credit rating of all customers and maintains provisions for potential credit losses, and any such losses to date have been within management's expectations. The Company's credit risk with respect to accounts receivable and maximum exposure thereto is $807,009 at December 31, 2021 (December 31, 2020 - $535,659).
The Company's concentration of credit risk for accounts receivable at December 31, 2021 with respect to Customer A is $93,865 (2020 - $105,820) and Customer B is $25,009 (2020 - $15,349); Customer C is $47,250 (2020 - $Nil) and Customer D is $155,520 (2020 - $150,300). The Company has an allowance for doubtful accounts of $2,000 at December 31, 2021 (2020 - $Nil).
To reduce the credit risk of accounts receivable, the Company regularly reviews the collectability of accounts receivable to ensure there is no indication that these amounts will not be fully recovered.
(b) Liquidity risk
Liquidity risk is the risk that the Company will be unable to meet its financial obligations as they fall due. The Company's approach to managing liquidity risk is to ensure, as far as possible, that it will have sufficient liquid funds to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Company's reputation.
As at December 31, 2021, the Company has cash in the amount of $3,377,464 (December 31, 2020 - $1,049,049) and accounts receivable of $807,009 (December 31, 2020 - $535,659) to settle current liabilities of $1,210,356 (December 31, 2020 - $958,086) with the following due dates; trade accounts payable of $1,118,573 (December 31, 2020 - $786,354) are due within three months; and due to related party balances of $Nil (December 31, 2020 - $ 28,423), income tax payable of $Nil (December 31, 2020 - $91,566) and current portion of lease liability of $91,783 (December 31, 2020 - $51,743). All payables are due within a year. The amount of the Company's remaining undiscounted contractual maturities for the lease liabilities is approximately $307,456 (December 31, 2020 - $100,709) which are due between one to five years.
(c) Market risk
The significant market risks to which the Company is exposed are interest rate risk and currency risk.
(i) Interest rate risk
Interest rate risk is the risk that the fair value or future cash flows will fluctuate as a result of changes in market interest rates. The Company's cash consists of cash held in bank accounts that earn interest at variable rates. Due to the short-term nature of this financial instrument, fluctuations in market rates of interest do not have a significant impact on the estimated fair value or future cash flows.
(ii) Currency risk
The Company is exposed to currency risk to the extent expenditures incurred or funds received, and balances maintained by the Company are denominated in Canadian dollars ("CAD"). The Company does not manage currency risk through hedging or other currency management tools.
At December 31, 2021 and December 31, 2020, the Company's net exposure to foreign currency risk was as follows (in US):
| |
|
December 31, 2021 |
|
|
December 31, 2020 |
|
| Net (liabilities) |
$ |
1,210,161 |
|
$ |
(34,775 |
) |
Based on the above, assuming all other variables remain constant, a 1% (2020 - 2%) weakening or strengthening of the USD against the CAD would result in approximately $12,102 (December 31, 2020 - $696) foreign exchange loss or gain in the consolidated statements of operations and comprehensive income (loss).
(iii) Other price risk
Other price risk is the risk that the future cash flows of a financial instrument will fluctuate due to changes in market prices, other than those arising from interest rate risk or currency risk. The Company is not exposed to other price risk.
See "Item 17. Financial Statements".
Item 12. Description of Securities Other than Equity Securities
Not applicable.
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies.
None
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds.
At the Company's annual general and special meeting held on June 5, 2013, the Company obtained shareholder approval of certain amendments to the Articles of the Company to include provisions for: (i) uncertificated shares; (ii) conversion of fractional shares into whole shares in accordance with the Business Corporations Act (British Columbia); (iii) participation in shareholders' meetings by telephone and other communication mediums; (iv) flexibility to the board of directors to make certain alterations to the Company's authorized share structure by way of directors resolution as opposed to the Company having to incur the additional costs of obtaining shareholder approval; and (v) allowing for change of the Company's name by directors resolution instead of by an ordinary resolution of the shareholders of the Company. In addition, shareholders approved the adoption of advance notice provisions. Advance notice provisions provide a framework whereby the Company can fix a deadline for submission of director nominations by shareholders prior to any annual or special meeting of shareholders and can set forth the information regarding director nominees that a shareholder must include in their notice to the Company for such notice to be in proper written form.
Item 15. Controls and Procedures
As required by paragraph (b) of Rules13a-15 or 15d-15 under the Securities Exchange Act of 1934 (the "Exchange Act"), the Company's principal executive officer and principal financial officer evaluated the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this annual report on Form 20-F. Based on this evaluation, these officers concluded that as of the end of the period covered by this Annual Report on Form 20-F, the Company's disclosure controls and procedures were effective. These disclosure controls and procedures include controls and procedures designed to ensure that such information is accumulated and communicated to the Company's management, including the Company's principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.
The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of the Company's financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company's company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of the Company's management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements.
Because of the Company's inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the Company's internal control over financial reporting as of December 31, 2021, the end of the Company's fiscal year. Management based its assessment on criteria established in Internal Control-Integrated Framework (COSO Framework) published by The Committee of Sponsoring Organizations (COSO2013). Management's assessment included evaluation of such elements as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, and the Company's overall control environment.
Based on the Company's assessment, management has concluded that the Company's internal control over financial reporting was effective as of December 31, 2021.
Attestation Report of the Registered Public Accounting Firm
Because the Company is an "emerging growth company" as defined in the United States Jumpstart Our Business Startups Act of 2012, the Company will not be required to comply with the auditor attestation requirements of the United States Sarbanes-Oxley Act of 2002 for as long as the Company remains an "emerging growth company", which may be for as long as five years following its initial registration on October 9, 2014 in the United States.
Changes in Internal Control over Financial Reporting
The Company's management has evaluated, with the participation of the Company's chief executive officer and chief financial officer, whether any changes in the Company's internal control over financial reporting that occurred during the Company's last fiscal year have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. Based on the evaluation the Company conducted, the Company's management has concluded that no such changes occurred during the period covered by this annual report on Form 20-F.
Item 16. [Reserved]
A. Audit Committee Financial Expert
The Company's board of directors has determined that Paul Cass qualified as an "audit committee financial expert" as defined in Item 16A(b) of Form 20-F and is an "independent director" as the term is defined by Section 803 of the NYSE American Company Guide.
B. Code of Ethical Conduct
The Company adopted a Code of Business Conduct and Ethics on August 1, 2014, which was amended and restated by the Board of Directors on March 16, 2021, that applies to all of the Company's directors and employees, including the Company's principal executive officer and principal financial officer. The full text of the Company's Code of Business Conduct and Ethics is available under the Company's profile on SEDAR at www.sedar.com in Canada, on EDGAR at www.sec.gov in the United States and on the Company's website at www.kelsotech.com.
C. Principal Accountant Fees and Services
Audit Fees. This category includes the fees for the audit of the Company's financial statements and the quarterly reviews of interim financial statements. This category also includes advice on audit and accounting matters that arose during or as a result of the audit or the review of interim financial statements and services in connection with Securities and Exchange Commission filings.
Audit-Related Fees. This category includes assurance and related services that are reasonably related to the performance of the audit or review of the financial statements that are not reported under Audit Fees and describes the nature of the services comprising the fees disclosed under this category.
Tax Fees. This category includes the fees for professional services rendered for tax compliance, tax advice and tax planning, and describes the nature of the services comprising the fees disclosed under this category.
All Other Fees. This category includes products and services provided by the principal accountant, other than the services reported under Audit Fees, Audit-Related Fees or Tax Fees.
The Company's independent registered public accountants provided audit and other services during the fiscal year ended December 31, 2021, and the fiscal year ended December 31, 2020:
|
|
December
31, 2021
(CAD$)
|
|
|
December
31, 2020
(CAD$)
|
|
|
Audit Fees
|
112,000
|
|
|
105,000
|
|
|
Audit-Related Fees
|
6,500
|
|
|
5,000
|
|
|
Tax Fees
|
10,000
|
|
|
8,500
|
|
|
All Other Fees
|
N/A
|
|
|
N/A
|
|
|
Total Fees
|
128,500
|
|
|
118,500
|
|
Pre-Approval Policies and Procedures
The Company's audit committee pre-approves all services provided by the Company's independent auditors. All of the services and fees described under the categories of "Audit Fees", "Audit Related Fees", "Tax Fees" and "All Other Fees" were reviewed and approved by the audit committee before the respective services were rendered, and none of such services were approved by the audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.
The audit committee has considered the nature and amount of the fees billed by Smythe LLP, Chartered Professional Accountants, and believes that the provision of the services for activities unrelated to the audit is compatible with maintaining the independence of Smythe LLP, Chartered Professional Accountants.
D. Exemptions from the Listing Standards for Audit Committees.
Not Applicable.
E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
Not Applicable.
F. Change in Registrants Certifying Account
Not applicable.
G. Corporate Governance
The Company's common shares are listed on NYSE American. Section 110 of the NYSE American Company Guide permits the NYSE American to consider the laws, customs and practices of foreign issuers, and to grant exemptions from NYSE American listing criteria based on these considerations. A company seeking relief under these provisions is required to provide written certification from independent local counsel that the non-complying practice is not prohibited by home country law. A description of the significant ways in which the Company's governance practices differ from those followed by domestic companies pursuant to NYSE American standards is as follows:
Shareholder Meeting Quorum Requirement: NYSE American recommends a quorum of at least 33 1/3%. The Company's quorum requirement is set forth in the Company's articles, which provides that a quorum for the transaction of business at a meeting of shareholders is one or more persons, present in person or by proxy.
Proxy Delivery Requirement: NYSE American requires the solicitation of proxies and delivery of proxy statements for all shareholder meetings and requires that these proxies be solicited pursuant to a proxy statement that conforms to SEC proxy rules. The Company is a "foreign private issuer" as defined in Rule 3b-4 under the Exchange Act, and the equity securities of the Company are accordingly exempt from the proxy rules set forth in Sections 14(a), 14(b), 14(c) and 14(f) of the Exchange Act. The Company solicits proxies in accordance with applicable rules and regulations in Canada.
H. Mine Safety Disclosure
Not applicable.
I. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable.
PART III
Item 17. Financial Statements
Financial Statements filed as part of the annual report:
The following financial statements and notes thereto are filed with and incorporated herein as part of this annual report:
Audited consolidated financial statements including the report of the independent registered public accounting firm issued by Smythe LLP, Chartered Professional Accountants, comprising the consolidated statements of financial position as at December 31, 2021 and 2020, and the consolidated statements of operations and comprehensive income (loss), changes in equity and cash flows for the years ended December 31, 2021, 2020 and 2019.
Item 18. Financial Statements
See "Item 17. Financial Statements".
Item 19. Exhibits -
|
Exhibits
Exhibit No.
|
Description
|
|
(3)
|
Articles of Incorporation and Bylaws
|
|
3.01
|
Certificate of Incorporation(1)
|
|
3.01a
|
Certificate of Name Change(1)
|
|
3.01b
|
Notice of Articles(1)
|
|
3.01c
|
Articles(1)
|
|
(4)
|
Security holder Rights
|
|
4.01
|
Shareholders Rights Plan dated February 3, 2011(1)
|
|
(10)
|
Material Contracts
|
|
10.01
|
Professional Services Agreement with Bondwest Enterprises Inc. dated July 1, 2020
|
|
10.02
|
Professional Services Agreement with Kitchener Holdings Corp. dated July 1, 2020
|
|
10.03
|
Professional Services Agreement with Anthony Andrukaitis dated July 1, 2020
|
|
10.04
|
Stock Option Plan dated June 25, 2020
|
|
10.05
|
Agreement with Barry LaCroix for Patent No. US 7,104,722 B2 dated May 26, 2010(1)
|
|
10.06
|
Notice of Recordation of Assignment Document for US Patent No. 7104722(1)
|
|
10.07
|
Notice of Recordation of Assignment Document for US Patent No. 5855225(1)
|
|
10.08*
|
Restricted Share Unit Plan dated June 3, 2021
|
|
10.09*
|
Non-Employee Directors Deferred Share Unit Plan dated June 3, 2021
|
|
11
|
Code of Business Conduct and Ethics dated March 16, 2021
|
|
12.1*
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
12.2*
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
13.1*
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
13.2*
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
(21)
|
Subsidiaries
|
|
21.01
|
List of Subsidiaries
|
|
(99)
|
Additional Exhibits
|
|
99.1
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Audited annual financial statements for the year ended December 31, 2018(2)
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99.2
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Audited annual financial statements for the year ended December 31, 2019(3)
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99.3
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Audited annual financial statements for the year ended December 31, 2020(4)
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99.4*
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Audited annual financial statements for the year ended December 31, 2021(5)
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*Filed herewith
(1) Incorporated by reference from the applicable exhibit to the Company's Form 6-K filed on August 29, 2013.
(2) Incorporated by reference from the applicable exhibit to the Company's Form 6-K filed on April 2, 2019.
(3) Incorporated by reference from the applicable exhibit to the Company's Form 6-K filed March 21, 2020.
(4) Incorporated by reference from the applicable exhibit to the Company's Form 6-K filed March 17, 2021.
(5) Incorporated by reference from the applicable exhibit to the Company's Form 6-K filed March 28, 2022.
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
KELSO TECHNOLOGIES INC.
By: /s/ James R. Bond
James R. Bond
President and Chief Executive Officer
(Principal Executive Officer)
Date: March 31, 2022
By: /s/ Richard Lee
Richard Lee
Chief Financial Officer
(Principal Financial Officer
and Principal Accounting Officer)
Date: March 31, 2022
KELSO TECHNOLOGIES INC.
(the "Corporation")
2021 RESTRICTED SHARE UNIT PLAN
1. PURPOSE
1.1 Purpose of the Plan
This Plan has been established by the Corporation to assist the Corporation in the recruitment and retention of highly qualified employees and consultants by providing a means to reward superior performance, to motivate Participants under the Plan to achieve important corporate and personal objectives and, through the issuance of Restricted Share Units in the Corporation to Participants under the Plan, to better align the interests of Participants with the long-term interests of Shareholders.
2. PLAN DEFINITIONS AND INTERPRETATIONS
In this Plan, the following terms have the following meanings:
(a) "Account" means the bookkeeping account established and maintained by the Corporation for each Participant in which the number of Restricted Share Units of the Participant are recorded.
(b) "Applicable Law" means any applicable provision of law, domestic or foreign, including, without limitation, applicable securities legislation, together with all regulations, rules, policy statements, rulings, notices, orders or other instruments promulgated thereunder and Stock Exchange Rules.
(c) "Beneficiary" means any person designated by the Participant as his or her beneficiary under the Plan in accordance with Section 15.1 or, failing any such effective designation, the Participant's legal representative.
(d) "Board" means the Board of Directors of the Corporation.
(e) "Change of Control" means:
(i) the acquisition by any persons acting jointly or in concert (as determined by the Securities Act (British Columbia)), whether directly or indirectly, of voting securities of the Corporation that, together with all other voting securities of the Corporation held by such persons, constitute in the aggregate more than 50% of all outstanding voting securities of the Corporation;
(ii) a Reorganization or other form of business combination of the Corporation with another corporation that results in the holders of voting securities of that other corporation holding, in the aggregate, more than 50% of all outstanding voting securities of the corporation resulting from the business combination;
(iii) the sale, lease or exchange of all or substantially all of the property of the Corporation to another person, other than in the ordinary course of business of the Corporation or to a related entity; or
(iv) any other transaction or event that is deemed to be a "Change of Control" for the purposes of this Plan by resolution of the Board, in its sole discretion.
(f) "Committee" means the Compensation Committee of the Board or any other committee or person designated by the Board to administer the Plan.
(g) "Consultant" means a person, other than an Employee or a Director or Officer, that:
(i) is engaged to provide on an ongoing bona fide basis consulting, technical, management or other services to the Corporation or to an affiliate of the Corporation, other than services provided in relation to a distribution, (ii) provides the services under a written contract with Corporation or the affiliate, (iii) in the reasonable opinion of the Corporation, spends or will spend a significant amount of time and attention on the affairs and business of the Corporation or an affiliate of the Corporation, and (iv) has a relationship with the Corporation or an affiliate of the Corporation that enables the individual to be knowledgeable about the business and affairs of the Corporation; and includes: (v) for a Consultant who is an individual, a corporation of which the individual is an employee or shareholder, and a partnership of which the individual is an employee or partner; and (vi) for a Consultant that is not an individual, an employee, executive officer, or director of the Consultant, provided that the individual employee, executive officer, or director spends or will spend a significant amount of time and attention on the affairs and business of the Corporation or a related entity of the Corporation.
(h) "Corporation" means Kelso Technologies Inc. and its respective successors and assigns, and any reference in the Plan to action by the Corporation means action by or under the authority of the Board or any person or committee that has been designated for the purpose by the Board including, without limitation, the Committee.
(i) "Designated Subsidiary" means an entity (including a partnership) in which the Corporation holds, directly or indirectly, a majority voting interest and which has been designated by the Corporation for purposes of the Plan from time to time.
(j) "Director" means a director of the Corporation or any Designated Subsidiary.
(k) "Employee" means an employee of the Corporation or any of its Designated Subsidiaries or any combination or partnership of such corporations.
(l) "Employer" means the Corporation, the Designated Subsidiary or the combination or partnership of such corporations that employs the Participant or that employed the Participant immediately prior to the Participant's Termination Date.
(m) "Exchange" means the TSX or another stock exchange where the majority of the trading volume and value of the common shares of the Corporation occurs.
(n) "Exchange Hold Period" has the meaning ascribed thereto by Exchange for a hold period prior to which the securities are not freely tradeable.
(o) "Expiry Date" means, with respect to Restricted Share Units granted to a Participant, the date determined by the Corporation for such purpose for such grant, which date shall be no later than the date which is one year after the Participant's Termination Date and shall, in all cases, be in compliance with the requirements pertaining to the exception to the application of the salary deferral arrangement rules in paragraph 248(1)(k) of the Income Tax Act (Canada), as such section may be amended or re-enacted from time to time.
(p) "Good Reason" means the occurrence of any one or more of the following without a Participant's written consent:
(i) a material change in the Participant's position or duties, responsibilities, title or office in effect immediately prior to or in connection with a Change of Control, which includes any removal of the Participant from or any failure to re-elect or re-appoint the Participant to any such position or office;
(ii) a reduction in the Participant's overall annual compensation for services provided to the Corporation in the cumulative amount of 5% or more within a 12 month period;
(iii) any change to the terms or conditions of the employment of the Participant that would constitute "constructive dismissal" as that term is defined at common law which the Corporation fails to remedy within thirty (30) days of receiving written notice from the Participant of any such change; or
(iv) the Corporation relocating the Participant to any place other than the location at which the Participant reported for work on a regular basis immediately prior to or in connection with a Change of Control or a place within 15 kilometres of that location.
(q) "Grant Agreement" means an agreement between the Corporation and a Participant under which Restricted Share Units are granted, together with such amendments, deletions or changes thereto as are permitted under the Plan.
(r) "Grant Date" means the date a Share Unit is granted to a Participant under the Plan.
(s) "Insider" means:
(i) a director or senior officer of the Corporation;
(ii) a director or senior officer of a person that is itself an insider or subsidiary of the Corporation;
(iii) a person that beneficially owns or controls, directly or indirectly, voting securities carrying more than 10% of the voting rights attached to all outstanding voting securities of the Corporation; or
(iv) the Corporation itself if it holds any of its own securities.
(t) "Market Value" with respect to a Share as at any date means, subject to the exceptions, if any, prescribed by the Exchange from time to time:
(i) the last closing price of the Corporation's shares before the issuance of the Restricted Share Units; and
(ii) if the Corporation's shares trade on the TSX, or another stock exchange where the majority of the trading volume and value of the shares occurs, the price is calculated based on a reasonable pre-determined formula, which formula is accepted by the Exchange and is based on a volume weighted average trading price or average daily high and low board lot trading price for the five trading days prior to the issuance of the Restricted Share Units.
In the event that the Common Shares are not listed and posted for trading on any stock exchange, the Share Price shall be the Share Price as determined by the Board in its discretion, acting reasonably and in good faith. Fractional Common Shares will not be issued and any fractional entitlements will be rounded down to the nearest whole number.
(u) "Officer" means an executive officer of the Corporation or any Designated Subsidiary.
(v) "Participant" means a bona fide full-time or part-time Employee, a Consultant or a Director or Officer who, in any such case, has been designated by the Corporation for participation in the Plan, provided that a "investor relations person" (as such term is defined Securities Act (British Columbia)) shall not be an eligible Participant.
(w) "Payout Date" in respect of any Share Unit means the third anniversary of the Grant Date of the Share Unit, unless (i) an earlier date has been approved by the Committee as the Payout Date in respect of such Share Unit, or (ii) Section 7.1, 8.3, or 13.4 is applicable, in which case the Payout Date in respect of such Share Unit shall be the date established as such in accordance with the applicable Section; provided that, notwithstanding any other provision hereof, in no event will the Payout Date in respect of any Share Unit be after the Expiry Date or after December 31 of the calendar year which is three years following the end of the year in which services to which the grant of such Share Unit relates were performed by the Participant to whom such Share Unit was granted.
(x) "Plan" means this 2021 Restricted Share Unit Plan.
(y) "Reorganization" means any (i) capital reorganization (including but not limited to a share consolidation or split), (ii) merger, (iii) amalgamation, or (iv) arrangement or other scheme of reorganization.
(z) "Security Based Compensation Arrangements" means any and all plans or other arrangements whereby equity shares of the Corporation or securities convertible into shares are issued, reserved for issuance or rights to such securities granted, where such rights are granted primarily for compensation purposes and are not issued as part of a securities offering for cash or other tangible consideration.
(aa) "Shareholders" means the holders of Shares.
(bb) "Shares" mean common shares of the Corporation and includes any securities of the Corporation into which such common shares may be converted, reclassified, redesignated, subdivided, consolidated, exchanged or otherwise changed, pursuant to a Reorganization or otherwise.
(cc) "Share Unit" means a restricted share unit credited by means of an entry on the books of the Corporation to a Participant pursuant to the Plan, representing the right to receive, subject to and in accordance with the Plan, for each Vested Share Unit one Share or cash equal to the Market Value of one Share, at the time, in the manner, and subject to the terms, set forth in the Plan and the applicable Grant Agreement.
(dd) "Stock Exchange Rules" means the applicable rules of any stock exchange upon which Shares are listed.
(ee) "Stock Option Plan" means the Corporation's stock option plan approved by Shareholders on June 25, 2020.
(ff) "Termination Date" means the date on which a Participant ceases, for any reason including resignation, retirement, termination, death or disability, to be an active Employee, a Consultant, or a Director or Officer, as the case may be, and, in the case of a Participant who is an Employee, where the employment is terminated by the Employer, whether wrongful or for cause or otherwise, such date shall be the date notice of termination is provided (and for greater certainty does not include any period of contractual or common law notice after the effective date in the notice of termination) and, in the case of a Participant who is an Consultant, the date the written contract between the Consultant and the Corporation or any Designated Subsidiary is terminated or expires and the Consultant no longer provides services thereunder.
(gg) "TSX" means the Toronto Stock Exchange;
(hh) "Vested Restricted Share Units" shall mean Restricted Share Units in respect of which all vesting terms and conditions set forth in the Plan and the applicable Grant Agreement have been either satisfied or waived in accordance with the Plan.
2.2 In this Plan, unless the context requires otherwise, words importing the singular number may be construed to extend to and include the plural number, and words importing the plural number may be construed to extend to and include the singular number.
3. GRANT OF RESTRICTED SHARE UNITS AND TERMS
3.1 Grant of Restricted Share Units
The Corporation may grant Restricted Share Units to such Participant or Participants in such number and at such times as the Corporation may, in its sole discretion, determine, as a bonus or similar payment in respect of services rendered by the Participant for a fiscal year. Unless otherwise determined by the Board in its discretion, the award of a Share Unit is considered a bonus for services rendered in the calendar year in which the award is granted.
3.2 Number and Terms of Restricted Share Units
In granting any Restricted Share Units pursuant to Section 3.1, the Corporation shall designate:
(a) the number of Restricted Share Units which are being granted to the Participant;
(b) any time or performance based conditions as to vesting of the Restricted Share Units to become Vested Restricted Share Units;
(c) the Payout Date; and
(d) the Expiry Date;
which shall be set out in the Grant Agreement. For greater certainty, no term or condition imposed under a Grant Agreement may have the effect of causing settlement or payment of the value of a Share Unit to a Participant to occur after December 31 of the third calendar year following the end of the year in which the service to which the grant of such Share Unit relates were rendered.
3.3 Share Unit Conditions
The conditions may relate to all or any portion of the Restricted Share Units in a grant and may be graduated such that different percentages of the Restricted Share Units in a grant will become Vested Restricted Share Units depending on the extent of satisfaction of one or more such conditions. The Corporation may, in its discretion and having regard to the best interests of the Corporation, subsequent to the Grant Date of a Share Unit, waive any resulting conditions.
4. GRANT AGREEMENT
4.1 Grant Agreement Required
Each grant of a Share Unit will be set forth in a Grant Agreement containing terms and conditions required under the Plan (and, for greater certainty, the terms of this Plan shall be deemed to be incorporated by reference into any Grant Agreement) and such other terms and conditions not inconsistent herewith as the Corporation may, in its sole discretion, deem appropriate.
5. SHARE UNIT GRANTS AND ACCOUNTS
5.1 Participant Accounts
An Account shall be maintained by the Corporation for each Participant. On the Grant Date, the Account will be credited with the Restricted Share Units granted to a Participant on that date.
6. PAYOUTS
6.1 Forms of Payout
On each Payout Date, the Participant shall be entitled to receive, and the Corporation shall issue or provide, a payout with respect to those Vested Restricted Share Units in the Participant's Account to which the Payout Date relates, in one of the following forms:
(a) subject to Shareholder approval of this Plan and the limitations set forth in Section 12 below and in accordance with any Applicable Law, Shares issued from treasury equal in number to the Vested Restricted Share Units in the Participant's Account to which the Payout Date relates, subject to any applicable deductions and withholdings;
(b) subject to and in accordance with any Applicable Law, Shares purchased by an independent administrator of the Plan (if and when an independent administration is so engaged by the Corporation) in the open market for the purposes of providing Shares to Participants under the Plan equal in number to the Vested Restricted Share Units in the Participant's Account to which the Payout Date relates, subject to any applicable deductions and withholdings;
(c) the payment of a cash amount to a Participant on the Payout Date equal to the number of Vested Restricted Share Units in respect of which the Corporation makes such a determination, multiplied by the Market Value on the Payout Date, subject to any applicable deductions and withholdings; or
(d) any combination of the foregoing,
as determined by the Corporation, in its sole discretion.
6.2 No Fractional Shares
No fractional Shares shall be issued and any fractional entitlements will be rounded down to the nearest whole number.
6.3 Shares Issued from Treasury Are Fully Paid
Shares issued by the Corporation from treasury under Section 6.1(a) of this Plan shall be considered fully paid in consideration of past service that is no less in value than the fair equivalent of the money the Corporation would have received if the Shares had been issued for money.
6.4 Exchange Hold Period and Legend
If required by the policies of the Exchange or any Applicable Laws, the certificates representing Shares issued upon the payout of Vested Restricted Share Units (if paid out prior to the expiry of the Exchange Hold Period) may bear the following Exchange Hold Period or similar legend:
"Without prior written approval of the Exchange and compliance with all applicable securities legislation, the securities represented by this certificate may not be sold, transferred, hypothecated or otherwise traded on or through the facilities of the Exchange or otherwise in Canada or to or for the benefit of a Canadian resident until [insert date that is four months and a day after the distribution date]."
7. CHANGE OF CONTROL
7.1 Effect of Change of Control
Notwithstanding the conditions as to vesting of Restricted Share Units contained in any individual Grant Agreement, if at any time within one year from the date of a Change of Control: (i) a Participant's relationship with the Corporation is terminated by the Corporation other than for cause or (ii) a Participant resigns for Good Reason, all outstanding Restricted Share Units held by such Participant shall become Vested Restricted Share Units and the Payout Date in connection with such Participant's Vested Restricted Share Units shall be accelerated to the date of such Participant's termination or resignation for Good Reason and the Corporation shall issue Shares to such Participants with respect to such Vested Restricted Share Units in accordance with Section 6.
8. TERMINATION OF EMPLOYMENT AND FORFEITURES
8.1 Effect of Termination
Unless otherwise determined by the Corporation pursuant to Section 8.2, on a Participant's Termination Date, any Restricted Share Units in a Participant's Account which are not Vested Restricted Share Units shall terminate and be forfeited.
8.2 Termination Without Cause
Notwithstanding Section 8.1, where a Participant ceases to be an Employee as a result of the termination of his or her employment without cause, then in respect of each grant of Restricted Share Units made to such Participant, at the Corporation's discretion, all or a portion of such Participant's Restricted Share Units may be permitted to continue to vest, in accordance with their terms, during any statutory or common law severance period or any period of reasonable notice required by law or as otherwise may be determined by the Corporation in its sole discretion.
8.3 Acceleration of Payout Date for Vested Restricted Share Units
In the event a Participant's Termination Date is prior to the Payout Date with respect to any Vested Restricted Share Units in such Participant's Account, the Payout Date with respect to such Vested Restricted Share Units shall, notwithstanding any provision in the Grant Agreement, be accelerated to the Participant's Termination Date and the Corporation shall, as soon as practicable following such Termination Date, issue or provide Shares or make payment to such Participant, or Beneficiary thereof, as applicable, with respect to such Vested Restricted Share Units in accordance with Section 6.
9. FORFEITED RESTRICTED SHARE UNITS
9.1 Termination of Restricted Share Units on Expiry Date
Notwithstanding any other provision of the Plan or a Grant Agreement, Restricted Share Units granted hereunder shall terminate on, if not paid out or previously terminated and forfeited in accordance with the Plan, and be of no further force and effect after, the Expiry Date.
10. DIVIDENDS
10.1 Payment of Dividend Equivalents
A Grant Agreement may, but need not, provide for the accrual of dividend equivalent amounts for the account of a Participant with respect to cash dividends paid in the ordinary course to Shareholders in respect of outstanding Shares. If the Grant Agreement provides that dividend amount will accrue, then if and when a cash dividend is paid to Shareholders on the Shares while a Share Unit is outstanding, no payment in cash shall be made to each Participant in respect of the Restricted Share Units; however, each Participant will be credited with additional Restricted Share Units reflective of the cash dividends to such Participant. In such case, the number of additional Restricted Share Units will be equal to the aggregate amount of dividends that would have been paid to the Participant if the Restricted Share Units in the Participant's Account on the record date had been Shares divided by the Market Value of a Share on the date on which dividends were paid by the Corporation. If the foregoing shall result in a fractional Share Unit, the fraction shall be disregarded.
10.2 Vesting of Restricted Share Units Granted as Dividend Equivalents
The additional Restricted Share Units will vest and be settled on the Participant's Payout Date of the particular award of a Share Unit to which the additional Restricted Share Units relate.
11. ALTERATION OF NUMBER OF SHARES SUBJECT TO THE PLAN
11.1 Subdivisions, Consolidations, or Distributions Payable in Shares
In the event that there is a Reorganization pursuant to which the number or kind of outstanding Shares shall be subdivided or consolidated into a different number of Shares or a distribution shall be declared upon the Shares payable in Shares, the number of Restricted Share Units then recorded in the Participant's Account shall be adjusted by replacing such number by a number equal to the number of Shares which would be held by the Participant immediately after the distribution, subdivision or consolidation, should the Participant have held a number of Shares equal to the number of Restricted Share Units recorded in the Participant's Account on the record date fixed for such distribution, subdivision or consolidation, such adjustment, to be reasonably determined by the Committee and to be effective and binding for all purposes.
11.2 Other Reorganizations
In the event that there is Reorganization or other change, other than as specified in Section 11.1, pursuant to which the number or kind of outstanding Shares or of any shares or other securities into which such Shares shall have been changed or for which they shall have been exchanged, then there shall be substituted for each Share referred to in the Plan or for each share into which such Share shall have been so changed or exchanged, the kind of securities into which each outstanding Share shall be so changed or exchanged and an equitable adjustment shall be made, if required, in the number of Restricted Share Units then recorded in the Participant's Account, such adjustment, if any, to be reasonably determined by the Committee and to be effective and binding for all purposes.
11.3 Take-Over Bids
If a bona fide offer (the "Offer") for Shares is made to Shareholders generally (or to a class of Shareholders that would include the Participant), which Offer, if accepted in whole or in part, would result in the offeror (the "Offeror") exercising control over the Corporation within the meaning of the Securities Act (British Columbia), then the Corporation shall, as soon as practicable following receipt of the Offer, notify each Participant of the full particulars of the Offer. The Board will have the sole discretion to amend, abridge or otherwise eliminate any vesting schedule related to each Participant's Restricted Share Units so that notwithstanding the other terms of this Plan, the underlying Shares may be issued to each Participant holding Restricted Share Units so as to permit the Participant to tender the Shares received in connection with the Restricted Share Units pursuant to the Offer.
11.4 Adjustments
In the case of any such substitution, change or adjustment as provided for in this Section 11, the variation shall generally require that the aggregate Market Value of the Restricted Share Units then recorded in the Participant's Account prior to such substitution, change or adjustment will be proportionately and appropriately varied so that it be equal to such aggregate Market Value after the variation.
12. RESTRICTIONS ON ISSUANCES
12.1 The number of Shares which may be reserved for issuance under the Plan:
(a) shall not exceed 5% of the total number of issued and outstanding Shares on a non-diluted basis; and
(b) in combination with the aggregate number of Shares which may be issuable under any and all of the Corporation's Security Based Compensation Arrangements in existence from time to time, shall not exceed 10% of the total number of issued and outstanding Shares on a non-diluted basis, or such other number of Shares as shall have been duly approved by the Board, by the Exchange and by the Shareholders.
12.2 Participation Limits
The number of Shares which may be reserved for issuance under the Plan within any one-year period:
(a) to any one Participant, shall not exceed 5% of the total number of issued and outstanding Shares on the Grant Date on a non-diluted basis;
(b) under the Plan and any other of the Corporation's Security Based Compensation Arrangements (i) the aggregate number of Shares issued to Insiders, within any one year period; and (ii) the aggregate number of Shares issuable to Insiders at any time, shall not exceed 10% of the issued and outstanding Shares;
(c) to any one Consultant shall not exceed 2% in the aggregate of the total number of issued and outstanding Shares on the Grant Date on a non-diluted basis.
13. AMENDMENT, SUSPENSION OR TERMINATION OF THE PLAN
13.1 Amendments Requiring Shareholder Approval
The Board reserves the right, in its sole discretion, to amend, suspend or terminate the Plan or any portion thereof at any time, in accordance with Applicable Law, without obtaining the approval of Shareholders, unless required by the policies of the Exchange. Notwithstanding the foregoing, the Corporation will be required to obtain disinterested Shareholder approval for any amendment related to:
(a) the number or percentage of issued and outstanding Shares available for grant under the Plan (other than by virtue of adjustments pursuant to Section 11);
(b) a change in the method of calculation of the payout of Restricted Share Units held by Participants; and
(c) an extension of the Payout Date of Restricted Share Units held by Participants.
13.2 Amendments Not Requiring Shareholder Approval
Without limiting the generality of the foregoing, unless otherwise required by the policies of the Exchange, the Board may make the following amendments to the Plan, without obtaining Shareholder approval:
(a) amendments to the terms and conditions of the Plan necessary to ensure that the Plan complies with the applicable regulatory requirements, including the rules of the Exchange, in place from time to time;
(b) amendments to the provisions of the Plan respecting administration of the Plan and eligibility for participation under the Plan;
(c) amendments to the provisions of the Plan respecting the terms and conditions on which Restricted Share Units may be granted pursuant to the Plan, including the provisions relating to the payment of the Restricted Share Units;
(d) amendments necessary to suspend or terminate the Plan;
(e) amendments to the Plan that are of a "housekeeping" nature; and
(f) any other amendment, fundamental or otherwise, not requiring Shareholder approval under Applicable Laws or the applicable rules of the Exchange;
provided, however, that no such amendment of the Plan may be made without the consent of each affected Participant in the Plan if such amendment would adversely affect the rights of such affected Participant(s) under the Plan.
13.3 Amendments Require Approval of the Exchange
All amendments to the Plan require prior approval of the Exchange.
13.4 Termination of the Plan
If the Corporation terminates the Plan, Restricted Share Units previously credited shall, at the discretion of the Corporation, either:
(a) be settled immediately in accordance with the terms of the Plan in effect at such time; or
(b) remain outstanding and in effect and settled in due course in accordance with the applicable terms and conditions, in either case without shareholder approval.
14. ADMINISTRATION
14.1 Powers and Duties of the Committee
Unless otherwise determined by the Board, the Plan shall be administered by the Committee subject to Applicable Laws. The Committee shall have full and complete authority to interpret the Plan, to prescribe such rules and regulations and to make such other determinations as it deems necessary or desirable for the administration of the Plan. All actions taken and decisions made by the Committee shall be final, conclusive and binding on all parties concerned, including, but not limited to, the Participants and their beneficiaries and legal representatives, each Designated Subsidiary and the Corporation. All expenses of administration of the Plan shall be borne by the Corporation.
14.2 Records and Accounts
The Corporation shall keep or cause to be kept such records and accounts as may be necessary or appropriate in connection with the administration of the Plan and the discharge of its duties. At such times as the Corporation shall determine, the Corporation shall furnish the Participant with a statement setting forth the details of his or her Restricted Share Units including the Grant Date and the Vested Restricted Share Units and unvested Restricted Share Units held by each Participant. Such statement shall be deemed to have been accepted by the Participant as correct unless written notice to the contrary is given to the Corporation within 30 days after such statement is given to the Participant.
14.3 Services in Connection with Administration of Plan
The Corporation may, at its discretion, appoint one or more persons or companies to provide services in connection with the Plan including without limitation, administrative and record-keeping services.
15. BENEFICIARIES AND CLAIMS FOR BENEFITS
15.1 Designation of Beneficiary
Subject to the requirements of Applicable Law, a Participant may designate in writing a Beneficiary to receive any benefits that are payable under the Plan upon the death of such Participant. The Participant may, subject to Applicable Law, change such designation from time to time. Such designation or change shall be in such form and executed and filed in such manner as the Corporation may from time to time determine.
16. GENERAL
16.1 Transfer of Employment and Leave of Absence
The transfer of an Employee from the Corporation to a Designated Subsidiary, from a Designated Subsidiary to the Corporation or from a Designated Subsidiary to another Designated Subsidiary, shall not be considered a termination of employment for the purposes of the Plan, nor shall it be considered a termination of employment if a Participant is placed on such other leave of absence which is considered by the Corporation as continuing intact the employment relationship.
16.2 Withholding
The Corporation or a Designated Subsidiary may withhold from any amount payable to a Participant, either under this Plan, or otherwise, such amount as may be necessary so as to ensure that the Corporation or the Designated Subsidiary will be able to comply with the provisions of any Applicable Law relating to the withholding of tax or other required deductions, including on the amount, if any, includable in the income of a Participant. For greater certainty, if a Participant is or becomes subject to tax in more than one jurisdiction, the Corporation or a Designated Subsidiary may be required to withhold or account for taxes in more than one jurisdiction. Each of the Corporation or a Designated Subsidiary shall also have the right in its discretion to satisfy any such withholding tax liability by, among other things, requiring the Participant to remit such amounts to the Corporation or a Designated Subsidiary, or by retaining, acquiring or selling on behalf of a Participant any Shares which would otherwise be issued or provided to a Participant hereunder.
Notwithstanding any provision in this Plan, the ultimate liability for all taxes legally payable by a Participant is and remains the Participant's responsibility, and such tax liability may exceed the amount actually withheld by the Corporation or a Designated Subsidiary. Neither the Corporation nor a Designated Subsidiary (a) makes any representations or undertakings regarding the treatment of any taxes under Applicable Laws in connection with any aspect of this Plan; and (b) commits to or is under any obligation to structure the terms of this Plan to reduce or eliminate a Participant's liability for taxes or achieve any particular tax result under any Applicable Law.
16.3 Successors and Assigns
The Plan shall enure to the benefit of and be binding upon the Corporation, its successors and assigns.
16.4 Assignment and Transfer
The interest of any Participant under the Plan or in any Share Unit shall not be transferable or assignable other than by will or the laws of descent and distribution.
16.5 Compliance with Applicable Law
The Corporation's grant of any Restricted Share Units or issuance of any Shares hereunder is subject to compliance with Applicable Law applicable thereto. As a condition of participating in the Plan, each Participant agrees to comply with all Applicable Law and agrees to furnish to the Corporation or a Designated Subsidiary all information and undertakings as may be required to permit compliance with Applicable Law.
16.6 No Shareholder Rights
A Participant shall not have the right or be entitled to exercise any voting rights, receive any distribution or have or be entitled to any other rights as a Shareholder in respect of any Restricted Share Units.
16.7 No Right to Employment or Entitlement to Grant
Neither designation of an Employee as a Participant nor the grant of any Restricted Share Units to any Participant entitles any Participant to the grant, or any additional grant, as the case may be, of any Restricted Share Units under the Plan. Neither the Plan nor any action taken thereunder shall interfere with the right of the Corporation or a Designated Subsidiary to terminate a Participant's employment, or service under contract, at any time. Neither any period of notice, if any, nor any payment in lieu thereof, upon termination of employment, wrongful or otherwise, shall be considered as extending the period of employment for the purposes of the Plan.
16.8 Participation Voluntary
Participation in the Plan shall be entirely voluntary and any decision not to participate shall not affect any Employee's employment or any consultant's contractual relationship with the Corporation or a Designated Subsidiary.
16.9 Unfunded Plan
The Plan shall be an unfunded obligation of the Corporation. Neither the establishment of the Plan nor the grant of any Restricted Share Units or the setting aside of assets by the Corporation (if, in its sole discretion, it chooses to do so) shall be deemed to create a trust. The right of the Participant or Beneficiary to receive payment pursuant to the Plan shall be no greater than the right of other unsecured creditors of the Corporation.
16.10 No Other Benefits
The Corporation makes no representation or warranty as to the future market value of any Shares delivered in accordance with the provisions of the Plan. In seeking the benefits of participation in the Plan, a Participant agrees to exclusively accept all risks associated with a decline in the market price of Shares and all other risks associated with the holding of a Share Unit.
16.11 Final Determination
Any determination or decision by or opinion of the Committee made or held pursuant to the terms of the Plan shall be final, conclusive and binding on all parties concerned. All rights, entitlements and obligations of Participants under the Plan are set forth in the terms of the Plan and cannot be modified by any other documents, statements or communications, except by Plan amendments referred to in the Plan.
16.12 Ability to Reorganize Corporation Notwithstanding Restricted Share Units
The existence of any Restricted Share Units shall not affect in any way the right or power of the Corporation or its Shareholders to make or authorize any adjustment, recapitalization, Reorganization or other change in the Corporation's capital structure or its business, or any amalgamation, combination, merger or consolidation involving the Corporation or to create or issue any bonds, debentures, shares or other securities of the Corporation or the rights and conditions attaching thereto or to affect the dissolution or liquidation of the Corporation or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar nature or otherwise.
16.13 Interpretation
In this text, words importing the singular meaning shall include the plural and vice versa, and words importing the masculine shall include the feminine and neutral genders.
16.14 Governing Law
This Plan is established under the laws of the Province of British Columbia and the rights of all parties and the construction of each and every provision of the Plan and any Restricted Share Units granted hereunder shall be construed according to the laws of the Province of British Columbia.
16.15 Severability
The invalidity or unenforceability of any provision of the Plan shall not affect the validity or enforceability of any other provision and any invalid or unenforceable provision shall be severed from the Plan.
16.16 Effective Date
The effective date of this Plan shall be April 28, 2021.
Approved by the Shareholders on June 3, 2021
KELSO TECHNOLOGIES INC.
(the "Corporation")
2021 NON-EMPLOYEE DIRECTORS DEFERRED SHARE UNIT PLAN
1. PURPOSE OF THE PLAN
1.1 This 2021 Non-Employee Directors Deferred Share Unit Plan (the "Plan") has been established by the Corporation to promote the interests of the Corporation by attracting and retaining qualified persons to serve on the Board and to promote a greater alignment of long term interests between such Participants and the Shareholders of the Corporation.
2. PLAN DEFINITIONS AND INTERPRETATIONS
In this Plan, the following terms have the following meanings:
(a) "Account" means an account maintained for each Participant on the books of the Corporation which will be credited with Deferred Share Units, in accordance with the terms of the Plan.
(b) "Applicable Law" means any applicable provision of law, domestic or foreign, including, without limitation, applicable securities legislation, together with all regulations, rules, policy statements, rulings, notices, orders or other instruments promulgated thereunder and Stock Exchange Rules.
(c) "Board" means the Board of Directors of the Corporation.
(d) "Committee" means the Compensation Committee of the Board or any other committee or person designated by the Board to administer the Plan.
(e) "Corporation" means Kelso Technologies Inc. and its respective successors and assigns, and any reference in the Plan to action by the Corporation means action by or under the authority of the Board or any person or committee that has been designated for the purpose by the Board including, without limitation, the Committee.
(f) "Designated Subsidiary" means an entity (including a partnership) in which the Corporation holds, directly or indirectly, a majority voting interest and which has been designated by the Corporation for purposes of the Plan from time to time.
(g) "Director" means a non-Employee director of the Corporation who is designated by the Committee as eligible to participate in the Plan.
(h) "DSU" or "Deferred Share Unit" means a deferred share unit credited to a Participant's Account by way of a bookkeeping entry in the books of the Corporation pursuant to this Plan, the value of which is equivalent in value to a Share.
(i) "Employee" means an employee of the Corporation or any of its Designated Subsidiaries or any combination or partnership of such corporations.
(j) "Exchange" means the TSX or another stock exchange on which the majority of the trading volume and value of on which the common shares of the Corporation occurs.
(k) "Exchange Hold Period" has the meaning ascribed thereto by the Exchange for a hold period prior to which the securities are not freely tradeable.
(l) "Grant" means any Deferred Share Unit credited to the Account of a Participant.
(m) "Grant Agreement" means an agreement between the Corporation and the Participant under which Deferred Share Units are granted, together with such amendments, deletions, or changes thereto as are permitted under the Plan.
(n) "Insider" means:
(i) a director or senior officer of the Corporation;
(ii) a director or senior officer of a person that is itself an insider or subsidiary of the Corporation;
(iii) a person that beneficially owns or controls, directly or indirectly, voting securities carrying more than 10% of the voting rights attached to all outstanding voting securities of the Corporation; or
(iv) the Corporation itself if it holds any of its own securities.
(o) "Notice of Redemption" means written notice, on a prescribed form, by the Participant, or the administrator or liquidator of the estate of the Participant, to the Corporation of the Participant's wish to redeem his or her Deferred Share Units.
(p) "Participant" means a non-Employee Director of the Corporation who is designated by the Committee as eligible to participate in the Plan.
(q) "Redemption Date" means the date that a Notice of Redemption is received by the Corporation.
(r) "Reorganization" means any (i) capital reorganization (including but not limited to a share consolidation or split), (ii) merger, (iii) amalgamation, or (iv) arrangement or other scheme of reorganization.
(s) "Security Based Compensation Arrangements" means any and all plans or other arrangements whereby equity shares of the Corporation or securities convertible into shares are issued, reserved for issuance or rights to such securities granted, where such rights are granted primarily for compensation purposes and are not issued as part of a securities offering for cash or other tangible consideration.
(t) "Share Price" with respect to a Share means, subject to the exceptions, if any, prescribed by the Exchange from time to time:
(i) the last closing price of the Corporation's shares before the issuance of the Deferred Share Units; and
(ii) if the Corporation's shares trade on the TSX, or another stock exchange where the majority of the trading volume and value of the shares occurs, the price calculated based on a reasonable pre-determined formula, which formula is accepted by the Exchange and is based on a volume weighted average trading price or average daily high and low board lot trading price for the five trading days prior to the issuance of the Deferred Share Units.
In the event that the Common Shares are not listed and posted for trading on any stock exchange, the Share Price shall be the Share Price as determined by the Board in its discretion, acting reasonably and in good faith. Fractional Common Shares will not be issued and any fractional entitlements will be rounded down to the nearest whole number.
(u) "Shareholders" means the holders of Shares.
(v) "Shares" means common shares of the Corporation and includes any securities of the Corporation into which such Shares may be converted, reclassified, redesignated, subdivided, consolidated, exchanged or otherwise changed, pursuant to a Reorganization or otherwise.
(w) "Stock Exchange Rules" means the applicable rules of any stock exchange upon which the Shares are listed.
(x) "Termination Date" means the date of a Participant's death, or retirement from, or loss of office with the Corporation, within the meaning of paragraph 6801(d) of the regulations under the Income Tax Act (Canada) or any successor to such provision, including the Participant's resignation, retirement, death or otherwise.
(y) "TSX" means the Toronto Stock Exchange.
3. NON-EMPLOYEE DIRECTOR COMPENSATION
3.1 Establishment of Annual Base Compensation
An annual compensation amount (the "Annual Base Compensation") payable in cash and/or DSUs to non-Employee Directors shall be established from time-to-time by the Board. The amount of Annual Base Compensation will be reported annually in the Corporation's management information circular.
3.2 Payment of Annual Base Compensation
(a) The Annual Base Compensation shall be payable in quarterly installments, with each installment payable as promptly as practicable following the last business day of the fiscal quarter to which it applies. Quarterly payments shall be pro-rated if Board service commences or terminates during a fiscal quarter. The number of DSUs to be paid and the terms of the DSUs shall be determined as provided in the following sections of this Plan.
(b) Each Director may elect, in lieu of a cash payment relating to the amount application to the election, to receive in DSUs up to 50% of his or her Annual Base Compensation by completing and delivering a written election to the Corporation on or before December 31 of the calendar year ending immediately before the calendar year with respect to which such DSU payment shall be made. For greater certainty, such election will be effective with respect to compensation payable for fiscal quarters beginning during the calendar year following the calendar year in which such written election is made. Further, where an individual becomes a Director for the first time during a fiscal year or where any Director is serving as a director of the Corporation in the first calendar year in which the Plan is adopted, such individual may elect to participate in the Plan with respect to fiscal quarters of the Corporation commencing after the Corporation receives such individual's written election, which election must be received by the Corporation no later than 30 days after such individual's appointment as a Director or the Plan has been adopted, as applicable. For greater certainty, new Directors will not be entitled to receive DSUs pursuant to an election for the quarter in which they submit their first election to the Corporation or any previous quarter. Elections hereunder shall be irrevocable with respect to compensation earned during the period to which such election relates.
(c) All DSUs granted with respect to Annual Base Compensation will be credited to the Participant's Account when such Annual Base Compensation is payable (the "Grant Date").
(d) The Participant's Account will be credited with the number of DSUs calculated by dividing the dollar amount of compensation payable in DSUs on the Grant Date by the Share Price. Fractional DSUs or Shares will not be issued and any fractional entitlements will be rounded down to the nearest whole number.
3.3 Additional Deferred Share Units
In addition to DSUs granted pursuant to Section 3.2, and subject to the limitations set out in Section 6, the Board may award such number of DSUs to a Participant as the Board deems advisable to provide the Participant with appropriate equity-based compensation for the services he or she renders to the Corporation. The Board shall determine the Grant Date on which such DSUs may be granted and the date as of which such DSUs shall be credited to a Participant's Account. The Corporation and a Participant who receives an award of DSUs pursuant to this Section 3.3 shall enter into a Grant Agreement to evidence the award and the terms applicable thereto. Each grant of a DSU set forth in such Grant Agreement shall contain terms and conditions required under the Plan (and, for greater certainty, the terms of this Plan shall be deemed to be incorporated by reference into any Grant Agreement) and such other terms and conditions not inconsistent herewith as the Corporation may, in its sole discretion, deem appropriate.
4. ADMINISTRATION OF DSU ACCOUNTS
4.1 Administration of Plan
Except as required to ensure that the Plan continues to meet the requirements of paragraph 6801(d) of the regulations under the Income Tax Act (Canada) or any successor to such provision, the Committee shall have the power, where consistent with the general purpose and intent of the Plan and subject to the specific provisions of the Plan:
(a) to establish policies and to adopt rules and regulations for carrying out the purposes, provisions and administration of the Plan and to amend and rescind such rules and regulations from time to time;
(b) to interpret and construe the Plan and to determine all questions arising out of the Plan and any such interpretation, construction or determination made by the Committee shall be final, binding and conclusive for all purposes;
(c) to prescribe the form of the instruments used in conjunction with the Plan; and
(d) to determine which members of the Board are eligible to participate in the Plan.
4.2 Services in Connection with Administration of Plan
The Corporation may, at its discretion, appoint one or more persons or companies to provide services in connection with the Plan including without limitation, administrative and record-keeping services.
4.3 Redemption of Deferred Share Units
(a) Each Participant shall be entitled to redeem his or her Deferred Share Units during the period commencing on the business day immediately following the Termination Date and ending on the 90th day following the Termination Date by providing a written Notice of Redemption to the Corporation. In the event of death of a Participant, the Notice of Redemption shall be filed by the legal representative of the Participant.
(b) Upon redemption, the Participant shall be entitled to receive, and the Corporation shall issue or provide:
(i) subject to shareholder approval of this Plan and the limitations set forth in Section 6 below and in accordance with any Applicable Law, a number of Shares issued from treasury equal to the number of DSUs in the Participant's Account, subject to any applicable deductions and withholdings;
(ii) subject to and in accordance with any Applicable Law, a number of Shares purchased by an independent administrator of the Plan (if and when an independent administrator is so engaged by the Corporation) in the open market for the purposes of providing Shares to Participants under the Plan equal in number to the DSUs in the Participant's Account, subject to any applicable deductions and withholdings;
(iii) the payment of a cash amount to a Participant equal to the number of DSUs multiplied by the Share Price, subject to any applicable deductions and withholdings; or
(iv) any combination of the foregoing,
as determined by the Corporation, in its sole discretion.
4.4 Payment Notwithstanding
Notwithstanding any other provision of this Plan, all amounts payable to, or in respect of, a Participant hereunder shall be paid on or before December 31 of the calendar year commencing immediately after the Participant's Termination Date.
4.5 Exchange Hold Period and Legend
In addition to any resale restrictions under applicable legislation, the certificates representing Shares issued upon the redemption of Deferred Share Units (if redeemed prior to the expiry of the Exchange Hold Period) may bear the following Exchange Hold Period or similar legend:
"Without prior written approval of the Exchange and compliance with all applicable securities legislation, the securities represented by this certificate may not be sold, transferred, hypothecated or otherwise traded on or through the facilities of the Exchange or otherwise in Canada or to or for the benefit of a Canadian resident until [insert date that is four months and a day after the distribution date]."
DIVIDENDS
4.6 Payment of Dividend Equivalents
A Grant Agreement may, but need not, provide for the accrual of dividend equivalent amounts for the account of a Participant with respect to cash dividends paid in the ordinary course to Shareholders in respect of outstanding Shares. If the Grant Agreement provides that dividend amounts will accrue, then if and when a cash dividend is paid to Shareholders on the Shares while a DSU is outstanding, no payment in cash shall be made to each Participant in respect of the DSU; however, each Participant will be credited with additional DSUs reflective of the cash dividends to such Participant. In such case, the number of additional DSUs will be equal to the aggregate amount of dividends that would have been paid to the Participant if the DSUs in the Participant's account on the record date had been Shares divided by the Share Price of a Share on the date on which dividends were paid by the Corporation. If the foregoing shall result in a fractional DSU, the fraction shall be disregarded.
4.7 Vesting of Deferred Share Units Granted as Dividend Equivalents
The additional DSUs will vest and be settled on the Participant's Payout Date of the particular award of a Share Unit to which the additional Deferred Share Units relate.
5. ALTERATION OF NUMBER OF SHARES SUBJECT TO THE PLAN
5.1 Subdivisions or Consolidations
In the event that there is a Reorganization pursuant to which the number or kind of outstanding Shares shall be subdivided or consolidated into a different number of Shares or a distribution shall be declared upon the Shares payable in Shares, the number of DSUs then recorded in the Participant's Account shall be adjusted by replacing such number by a number equal to the number of Shares which would be held by the Participant immediately after the distribution, subdivision or consolidation, should the Participant have held a number of Shares equal to the number of DSUs recorded in the Participant's Account on the record date fixed for such distribution, subdivision or consolidation, such adjustment, to be reasonably determined by the Committee and to be effective and binding for all purposes.
5.2 Other Reorganizations
In the event that there is a Reorganization or other change, other than as specified in Section 5.1, pursuant to which the number or kind of outstanding Shares or of any shares or other securities into which such Shares shall have been changed or for which they shall have been exchanged, then there shall be substituted for each Share referred to in the Plan or for each share into which such Share shall have been so changed or exchanged, the kind of securities into which each outstanding Share shall be so changed or exchanged and an equitable adjustment shall be made, if required, in the number of DSUs then recorded in the Participant's Account, such adjustment, if any, to be reasonably determined by the Committee and to be effective and binding for all purposes.
5.3 Take-Over Bids
If a bona fide offer (the "Offer") for Shares is made to Shareholders generally (or to a class of Shareholders that would include the Participant), which Offer, if accepted in whole or in part, would result in the offeror (the "Offeror") exercising control over the Corporation within the meaning of the Securities Act (British Columbia), then the Corporation shall, as soon as practicable following receipt of the Offer, notify each Participant of the full particulars of the Offer. The Board will have the sole discretion to amend, abridge or otherwise eliminate any terms related to each Participant's Deferred Share Units so that notwithstanding the other terms of this Plan, the underlying Shares may be issued to each Participant holding Deferred Share Units so as to permit the Participant to tender the Shares received in connection with the Deferred Share Units pursuant to the Offer.
5.4 Adjustments
In the case of any such substitution, change or adjustment as provided for in this Section 5, the variation shall generally require that the number of DSUs then recorded in the Participant's Account prior to such substitution, change or adjustment will be proportionately and appropriately varied.
6. RESTRICTIONS ON ISSUANCES
6.1 Maximum Number of Shares Issuable Under Plan
(a) shall not exceed 2% of the total number of issued and outstanding Shares on a non-diluted basis; and
(b) in combination with the aggregate number of Shares which may be issuable under any and all of the Corporation's Security Based Compensation Arrangements in existence from time to time, shall not exceed 10% of the total number of issued and outstanding Shares on a non-diluted basis, or such other number of Shares as shall have been duly approved by the Board, by the Exchange and by the Shareholders.
6.2 Participation Limits
The number of Shares which may be reserved for issuance under the Plan within any one-year period:
(a) to any one Participant, shall not exceed 2% of the total number of issued and outstanding Shares on the Grant Date on a non-diluted basis; and
(b) under the Plan and any other of the Corporation's Security Based Compensation Arrangements (i) the aggregate number of Shares issued to Insiders, within any one year period; and (ii) the aggregate number of Shares issuable to Insiders at any time, shall not exceed 10% of the issued and outstanding Shares.
7. AMENDMENT, SUSPENSION OR TERMINATION OF THE PLAN
7.1 Amendments Requiring Shareholder Approval
The Board reserves the right, in its sole discretion, to amend, suspend or terminate the Plan or any portion thereof at any time, in accordance with Applicable Law, without obtaining the approval of Shareholders, unless required by the policies of the Exchange. Notwithstanding the foregoing, the Corporation will be required to obtain disinterested Shareholder approval for any amendment related to:
(a) the number or percentage of issued and outstanding Shares available for grant under the Plan (other than by virtue of adjustments pursuant to Section 5);
(b) a change in the method of calculation of the value of DSUs held by Participants; and
(c) an extension of the Expiry Date of DSUs held by Participants.
7.2 Amendments Not Requiring Shareholder Approval
Without limiting the generality of the foregoing, unless otherwise required by the policies of the Exchange, the Board may make the following amendments to the Plan, without obtaining shareholder approval:
(a) amendments to the terms and conditions of the Plan necessary to ensure that the Plan complies with the applicable regulatory requirements, including the rules of the Exchange, in place from time to time;
(b) amendments to the provisions of the Plan respecting administration of the Plan and eligibility for participation under the Plan;
(c) amendments to the provisions of the Plan respecting the terms and conditions on which DSUs may be granted pursuant to the Plan, including the provisions relating to the payment of the DSUs;
(d) amendments necessary to suspend or terminate the Plan;
(e) amendments to the Plan that are of a "housekeeping" nature; and
(f) any other amendment, fundamental or otherwise, not requiring shareholder approval under Applicable Laws or the applicable rules of the Exchange;
provided, however, that no such amendment of the Plan may be made without the consent of each affected Participant in the Plan if such amendment would adversely affect the rights of such affected Participant(s) under the Plan.
7.3 Amendments Require Approval of the Exchange
All amendments to this Plan require prior approval of the Exchange.
8.4 Tax Matters
Notwithstanding any other provision of the Plan, any amendment of the Plan or interpretation thereof shall be such that the Plan continuously meets the requirements of paragraph 6801(d) of the regulations under the Income Tax Act (Canada) or any successor to such provision.
7.4 Termination of the Plan
The Committee may decide to discontinue granting awards under the Plan at any time in which case no further Deferred Share Units shall be awarded or credited under the Plan. Any Deferred Share Units which remain outstanding in a Participant's Account at that time shall continue to be dealt with according to the terms of the Plan. The Plan shall terminate when all payments owing pursuant to Section 4.2 of the Plan have been made and all Deferred Share Units have been cancelled in all Participants' Accounts. Notwithstanding the foregoing, termination of the Plan shall be such that the Plan continuously meets the requirements of paragraph 6801(d) of the regulations under the Income Tax Act (Canada) or any successor to such provision.
8. GENERAL PROVISIONS
8.1 Withholding
The Corporation may withhold from any amount payable to a Participant, either under this Plan, or otherwise, such amount as may be necessary so as to ensure that the Corporation will be able to comply with the provisions of any Applicable Law relating to the withholding of tax or other required deductions, including on the amount, if any, includable in the income of a Participant. For greater certainty, if a Participant is or becomes subject to tax in more than one jurisdiction, the Corporation may be required to withhold or account for taxes in more than one jurisdiction. The Corporation shall also have the right in its discretion to satisfy any such withholding tax liability by, among other things, requiring the Participant to remit such amounts to the Corporation, or by retaining, acquiring or selling on behalf of a Participant any Shares which would otherwise be issued or provided to a Participant hereunder.
Notwithstanding any provision in this Plan, the ultimate liability for all taxes legally payable by a Participant is and remains the Participant's responsibility, and such tax liability may exceed the amount actually withheld by the Corporation. The Corporation (a) makes no representations or undertakings regarding the treatment of any taxes under Applicable Laws in connection with any aspect of this Plan; and (b) does not commit to and is under no obligation to structure the terms of this Plan to reduce or eliminate a Participant's liability for taxes or achieve any particular tax result under any Applicable Law.
8.2 Successors and Assigns
The Plan shall be binding on all successors and assigns of the Corporation.
8.3 Assignment and Transfer
No right to receive payment of DSUs and other benefits under the Plan shall be transferable or assignable by a Participant except by will or laws of descent and distribution.
8.4 Compliance with Applicable Law
The Corporation's grant of any DSUs or issuance of any Shares hereunder is subject to compliance with Applicable Law applicable thereto. As a condition of participating in the Plan, each Participant agrees to comply with all Applicable Law and agrees to furnish to the Corporation all information and undertakings as may be required to permit compliance with Applicable Law.
8.5 No Shareholder Rights
Under no circumstances shall Deferred Share Units be considered Shares nor shall they entitle any Participant to exercise voting rights or any other rights attaching to the ownership of Shares nor shall any Participant be considered the owner of Shares by virtue of the award of Deferred Share Units.
8.6 No Right to Be Retained as Director
Participation in the Plan shall not be construed to give any Participant a right to be retained as a Director.
8.7 No Other Benefit
No amount will be paid to, or in respect of, a Participant under the Plan to compensate for a downward fluctuation in the price of Shares nor will any other form of benefit be conferred upon, or in respect of, a Participant for such purpose. The Corporation makes no representations or warranties to a Participant with respect to the Plan or any Deferred Share Units whatsoever. In seeking the benefits of participation in the Plan, a Participant agrees to exclusively accept all risks associated with a decline in the market price of Shares and all other risks associated with the holding of a Deferred Share Unit.
8.8 Participation Voluntary
Participation in the Plan shall be entirely voluntary.
8.9 Unfunded Plan
Unless otherwise determined by the Committee, the Plan shall be unfunded. To the extent any Participant or his or her estate holds any rights by virtue of a grant of Deferred Share Units under the Plan, such rights (unless otherwise determined by the Committee) shall be no greater than the rights of an unsecured creditor of the Corporation.
8.10 Final Determination
Any determination or decision by or opinion of the Committee made or held pursuant to the terms of the Plan shall be final, conclusive and binding on all parties concerned. All rights, entitlements and obligations of Participants under the Plan are set forth in the terms of the Plan and cannot be modified by any other documents, statements or communications, except by Plan amendments referred to in Section 7 of the Plan.
8.11 Ability to Reorganize Corporation Notwithstanding DSUs
The existence of any Deferred Share Units shall not affect in any way the right or power of the Corporation or its Shareholders to make or authorize any adjustment, recapitalization, Reorganization or other change in the Corporation's capital structure or its business, or any amalgamation, combination, merger or consolidation involving the Corporation or to create or issue any bonds, debentures, shares or other securities of the Corporation or the rights and conditions attaching thereto or to affect the dissolution or liquidation of the Corporation or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar nature or otherwise.
8.12 Interpretation
In this text, words importing the singular meaning shall include the plural and vice versa, and words importing the masculine shall include the feminine and neuter genders.
8.13 Governing Law
The validity, construction and effect of the Plan and any actions taken or relating to the Plan shall be governed by the laws of the Province of British Columbia and the federal laws of Canada applicable therein.
8.14 Severability
The invalidity or unenforceability of any provision of the Plan shall not affect the validity or enforceability of any other provision and any invalid or unenforceable provision shall be severed from the Plan.
8.15 Effective Date
The effective date of this Plan shall be April 28, 2021.
Approved by the Shareholders on June 3, 2021.
CERTIFICATION
1. I, James R. Bond, President and Chief Executive Officer have reviewed this annual report on Form 20-F of Kelso Technologies Inc. (the "Company");
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;
4. The Company's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the Company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the Company's internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting; and
5. The Company's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company's auditors and the audit committee of the Company's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal control over financial reporting.
Date: March 31, 2022
/s/ James R. Bond
James R. Bond
Chief Executive Officer
CERTIFICATION
1. I, Richard Lee, Chief Financial Officer have reviewed this annual report on Form 20-F of Kelso Technologies Inc. (the "Company");
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;
4. The Company's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the Company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the Company's internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting; and
5. The Company's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company's auditors and the audit committee of the Company's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal control over financial reporting.
Date: March 31, 2022
/s/ Richard Lee
Richard Lee
Chief Financial Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned, James R. Bond, President, Chief Executive Officer and a director of Kelso Technologies Inc., hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) the annual report on Form 20-F of Kelso Technologies Inc. for the fiscal year ended December 31, 2021 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Kelso Technologies Inc.
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Dated: March 31, 2022
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/s/ James R. Bond
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James R. Bond
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President, Chief Executive Officer and a director
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Kelso Technologies Inc.
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A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Kelso Technologies Inc. and will be retained by Kelso Technologies Inc. and furnished to the Securities and Exchange Commission or is staff upon request.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned, Richard Lee, Chief Financial Officer of Kelso Technologies Inc., hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) the annual report on Form 20-F of Kelso Technologies Inc. for the fiscal year ended December 31, 2021 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Kelso Technologies Inc.
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Dated: March 31, 2022
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/s/ Richard Lee
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Richard Lee
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Chief Financial Officer
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Kelso Technologies Inc.
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A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Kelso Technologies Inc. and will be retained by Kelso Technologies Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
KELSO TECHNOLOGIES INC.
Consolidated Financial Statements
For the Years ended December 31, 2021, 2020 and 2019
(Expressed in US Dollars)
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE SHAREHOLDERS AND DIRECTORS OF KELSO TECHNOLOGIES INC.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated statements of financial position of Kelso Technologies Inc. and its subsidiaries (the "Company") as of December 31, 2021 and 2020, and the related consolidated statements of operations and comprehensive income (loss), changes in equity and cash flows for the years ended December 31, 2021, 2020 and 2019, and the related notes (collectively referred to as the "consolidated financial statements").
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for the years ended December 31, 2021, 2020 and 2019, in conformity with International Financial Reporting Standards ("IFRS"), as issued by the International Accounting Standards Board.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Valuation of net realizable value of inventory
At December 31, 2021, the Company's inventory balance was $5,534,558. As discussed in Note 3 to the consolidated financial statements, the Company records inventory at the lower of cost on a weighted average basis and net realizable value. To assess inventory valuation, the Company conducts regular reviews of on-hand inventory quantities in excess of forecasted demand, by considering recent historical activity as well as anticipated or forecasted demand.
We identified the assessment of valuation net realizable value of inventory as a critical audit matter. Auditing management's inventory valuation involved significant judgment because the estimates are based on several factors that are affected by market, industry, and competitive conditions outside the Company's control. In particular, in estimating inventory carrying value, management developed assumptions such as expectations of future sales quantities and the selling prices, which are sensitive to customer requirements, and economic conditions. These significant assumptions are forward looking and could be affected by future economic and market conditions.
The following are the primary procedures we performed to address this critical audit matter. We obtained an understanding, evaluated the design and tested the operating effectiveness of internal controls over the Company's costing of inventory. We compared the inventory on hand to related unit sales to assess the valuation of inventory and held discussions with management and operational personnel to help identify any slow-moving obsolete inventory. In addition, we performed physical test counts and inspected inventory on-hand at year-end for any signs of obsolescence.
Valuation of prototypes in the active suspension control system operating segment
As discussed in Note 7 to the consolidated financial statements, the prototypes balance as of December 31, 2021 was $605,866. This balance consists of costs incurred to develop physical prototype vehicles as part of the Company's active suspension control system operating segment. The Company determines whether there are any indicators of impairment at each reporting period, or whenever events or changes in circumstances indicate that the carrying value of a cash generating unit ("CGU") may exceed its recoverable amount. The recoverable amount is the greater of fair value less costs to sell and value in use. The recoverable value was determined using the fair value less costs to sell method. The significant assumptions were determined to be the intended use of the prototypes going forward and the potential residual value. The estimated recoverable value exceeds the carrying value as at December 31, 2021, therefore, the Company did not record an impairment charge in the CGU.
We identified the assessment of the fair value of prototypes in the active suspension control system operating segment as a critical audit matter. There was a high degree of auditor judgment required to evaluate the significant assumptions used in determining the recoverable amount. The sensitivity of reasonably possible changes to those assumptions could have a significant impact on the determination of the recoverable amount and the Company's assessment of impairment.
The following are the primary procedures we performed to address this critical audit matter. We reviewed management's assessment of whether any indicators of impairment existed. We evaluated the reasonableness of the Company's estimated residual values by reviewing comparable market transactions and recent disposals of parts. We evaluated the intended use of the prototypes through discussions with operational personnel and reviewing results of current testing being performed with the prototypes. In addition, we reviewed external market research to support the validity of the intended use of the prototypes assumption and specific testing recommended.
Chartered Professional Accountants
We have served as the Company's auditor since 2006.
Vancouver, Canada
March 24, 2022
Kelso Technologies Inc.
Consolidated Statements of Financial Position
December 31
(Expressed in US Dollars)
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2021 |
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2020 |
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| Assets |
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| Current |
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| Cash (Note 5) |
$ |
3,377,464 |
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$ |
1,049,049 |
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| Accounts receivable (Note 5) |
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807,009 |
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535,659 |
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| Prepaid expenses |
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161,490 |
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162,739 |
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| Inventory (Note 6) |
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5,534,558 |
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5,462,532 |
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| |
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9,880,521 |
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7,209,979 |
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| Property, plant and equipment (Note 7) |
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3,246,394 |
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4,198,577 |
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| Deposit (Note 8) |
|
127,643 |
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- |
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| Intangible assets (Note 8) |
|
473,952 |
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607,959 |
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$ |
13,728,510 |
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$ |
12,016,515 |
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| Liabilities |
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| Current |
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| Accounts payable and accrued liabilities (Note 12) |
$ |
1,118,573 |
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$ |
814,777 |
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| Income tax payable |
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- |
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91,566 |
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| Current portion of lease liability (Note 9) |
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91,783 |
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51,743 |
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| |
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1,210,356 |
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|
958,086 |
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| Long term portion of lease liability (Note 9) |
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195,930 |
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|
97,506 |
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| Derivative warrant liability (Note 10) |
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267,111 |
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- |
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1,673,397 |
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1,055,592 |
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| Shareholders' Equity |
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| Capital Stock (Note 11) |
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27,123,039 |
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23,366,542 |
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| Reserves (Note 11) |
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4,758,107 |
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4,661,847 |
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| Deficit |
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(19,826,033 |
) |
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(17,067,466 |
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| |
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12,055,113 |
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10,960,923 |
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| |
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$ |
13,728,510 |
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$ |
12,016,515 |
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| Approved on behalf of the Board: |
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| "Peter Hughes" (signed) |
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| Peter Hughes, Director |
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| "Paul Cass" (signed") |
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| Paul Cass, Director |
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See notes to consolidated financial statements
Kelso Technologies Inc.
Consolidated Statements of Changes in Equity
For the Years ended December 31, 2021, 2020 and 2019
(Expressed in US Dollars)
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Capital Stock |
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Number of |
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| |
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Common |
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Shares |
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Amount |
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Reserve |
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Deficit |
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Total |
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| Balance, September 30, 2018 |
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47,170,086 |
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$ |
23,366,542 |
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$ |
3,892,811 |
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$ |
(19,093,619 |
) |
$ |
8,165,734 |
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| Share-based expense |
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- |
|
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- |
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|
345,498 |
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- |
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|
345,498 |
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| Net income for the year |
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- |
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- |
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- |
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3,334,043 |
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3,334,043 |
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| Balance, December 31, 2019 |
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47,170,086 |
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$ |
23,366,542 |
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$ |
4,238,309 |
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$ |
(15,759,576 |
) |
$ |
11,845,275 |
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| Share-based expense |
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- |
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- |
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|
423,538 |
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- |
|
|
423,538 |
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| Net loss for the year |
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- |
|
|
- |
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|
- |
|
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(1,307,890 |
) |
|
(1,307,890 |
) |
| Balance, December 31, 2020 |
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47,170,086 |
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$ |
23,366,542 |
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$ |
4,661,847 |
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$ |
(17,067,466 |
) |
$ |
10,960,923 |
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| Share-based expense |
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- |
|
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- |
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|
133,645 |
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- |
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|
133,645 |
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| Private placement, net of issue costs |
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7,000,000 |
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3,664,112 |
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- |
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- |
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3,664,112 |
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| Exercise of options |
|
150,000 |
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|
92,385 |
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(37,385 |
) |
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- |
|
|
55,000 |
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| Net loss for the year |
|
- |
|
|
- |
|
|
- |
|
|
(2,758,567 |
) |
|
(2,758,567 |
) |
| Balance, December 31, 2021 |
|
54,320,086 |
|
$ |
27,123,039 |
|
$ |
4,758,107 |
|
$ |
(19,826,033 |
) |
$ |
12,055,113 |
|
See notes to consolidated financial statements
Kelso Technologies Inc.
Consolidated Statements of Operations and Comprehensive Income (Loss)
For the years ended December 31,
(Expressed in US Dollars)
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|
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|
|
|
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| |
|
2021 |
|
|
2020 |
|
|
2019 |
|
| Revenues (Note 16) |
$ |
7,425,707 |
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$ |
11,149,130 |
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$ |
20,550,682 |
|
| Cost of Goods Sold (Notes 6 and 7) |
|
4,229,215 |
|
|
6,356,452 |
|
|
10,967,803 |
|
| |
|
|
|
|
|
|
|
|
|
| Gross Profit |
|
3,196,492 |
|
|
4,792,678 |
|
|
9,582,879 |
|
| |
|
|
|
|
|
|
|
|
|
| Expenses |
|
|
|
|
|
|
|
|
|
| Office and administration |
|
2,243,413 |
|
|
2,074,623 |
|
|
2,219,711 |
|
| Management compensation (Note 12) |
|
720,923 |
|
|
670,269 |
|
|
1,037,586 |
|
| Research (Note 7) |
|
1,697,497 |
|
|
1,391,712 |
|
|
1,129,007 |
|
| Marketing |
|
353,010 |
|
|
365,193 |
|
|
288,893 |
|
| Travel |
|
64,419 |
|
|
52,497 |
|
|
197,293 |
|
| Accounting and legal |
|
271,613 |
|
|
312,213 |
|
|
321,945 |
|
| Share-based expense (Notes 11 and 12) |
|
133,645 |
|
|
423,538 |
|
|
345,498 |
|
| Consulting |
|
325,024 |
|
|
265,507 |
|
|
386,661 |
|
| Investor relations |
|
84,000 |
|
|
84,000 |
|
|
84,000 |
|
| Foreign exchange (gain) loss |
|
(78,428 |
) |
|
(11,254 |
) |
|
27,698 |
|
| Amortization (Notes 7 and 8) |
|
437,865 |
|
|
140,178 |
|
|
69,271 |
|
| Bad debts |
|
2,000 |
|
|
- |
|
|
(20,206 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
6,254,981 |
|
|
5,768,476 |
|
|
6,087,357 |
|
| |
|
|
|
|
|
|
|
|
|
| Income (Loss) Before the Following: |
|
(3,058,489 |
) |
|
(975,798 |
) |
|
3,495,522 |
|
| Interest income |
|
- |
|
|
30,966 |
|
|
- |
|
| Gain on sale of property, plant and equipment |
|
8,389 |
|
|
- |
|
|
- |
|
| Write-off of inventory (Note 6) |
|
(117,403 |
) |
|
(114,066 |
) |
|
(62,402 |
) |
| Gain on revaluation of derivative warrant liability (Note 10) |
|
658,626 |
|
|
- |
|
|
- |
|
| Unit issuance costs (Note 11) |
|
(77,051 |
) |
|
- |
|
|
- |
|
| |
|
|
|
|
|
|
|
|
|
| Income (Loss) Before Taxes: |
|
(2,585,928 |
) |
|
(1,058,898 |
) |
|
3,433,120 |
|
| |
|
|
|
|
|
|
|
|
|
| Income Tax Expense (Note 13) |
|
|
|
|
|
|
|
|
|
| Current |
|
172,639 |
|
|
248,992 |
|
|
99,077 |
|
| |
|
|
|
|
|
|
|
|
|
| Net Income (Loss) and Comprehensive Income (Loss) for the year |
$ |
(2,758,567 |
) |
$ |
(1,307,890 |
) |
$ |
3,334,043 |
|
| |
|
|
|
|
|
|
|
|
|
| Basic Gain (Loss) Per Share (Note 15) |
$ |
(0.05 |
) |
$ |
(0.03 |
) |
$ |
0.07 |
|
| |
|
|
|
|
|
|
|
|
|
| Diluted Gain (Loss) Per Share (Note 15) |
$ |
(0.05 |
) |
$ |
(0.03 |
) |
$ |
0.07 |
|
Weighted Average Number of Common
Shares Outstanding |
|
|
|
|
|
|
|
|
|
| Basic (Note 15) |
|
53,082,689 |
|
|
47,170,086 |
|
|
47,170,086 |
|
| Diluted (Note 15) |
|
53,082,689 |
|
|
47,170,086 |
|
|
48,186,522 |
|
See notes to consolidated financial statements
Kelso Technologies Inc.
Consolidated Statements of Cash Flows
For the years ended December 31,
(Expressed in US Dollars)
| |
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|
|
|
|
|
|
|
|
| |
|
2021 |
|
|
2020 |
|
|
2019 |
|
| |
|
|
|
|
|
|
|
|
|
| Operating Activities |
|
|
|
|
|
|
|
|
|
| Net income (loss) |
$ |
(2,758,567 |
) |
$ |
(1,307,890 |
) |
$ |
3,334,043 |
|
| Items not involving cash: |
|
|
|
|
|
|
|
|
|
| Amortization (Notes 7 and 8) |
|
1,573,091 |
|
|
898,705 |
|
|
384,827 |
|
| Write-off of inventory (Note 6) |
|
117,403 |
|
|
114,066 |
|
|
62,402 |
|
| Gain on sale of property, plant and equipment |
|
8,389 |
|
|
- |
|
|
- |
|
| Share-based expense |
|
133,645 |
|
|
423,538 |
|
|
345,498 |
|
| Bad debts (recovery) |
|
2,000 |
|
|
- |
|
|
(20,206 |
) |
| Gain on revaluation of derivative warrant liability (Note 10) |
|
(658,626 |
) |
|
- |
|
|
- |
|
| Unrealized foreign exchange gain |
|
(26,409 |
) |
|
(100 |
) |
|
(1,669 |
) |
| |
|
(1,609,074 |
) |
|
128,319 |
|
|
4,104,895 |
|
| Changes in non-cash working capital |
|
|
|
|
|
|
|
|
|
| Accounts receivable |
|
(273,350 |
) |
|
1,288,904 |
|
|
(580,122 |
) |
| Prepaid expenses |
|
1,249 |
|
|
(66,112 |
) |
|
13,631 |
|
| Inventory |
|
(182,655 |
) |
|
(2,178,694 |
) |
|
213,283 |
|
| Accounts payable and accrued liabilities |
|
332,076 |
|
|
(754,343 |
) |
|
262,725 |
|
| Income tax payable |
|
(91,566 |
) |
|
20,225 |
|
|
(395,398 |
) |
| |
|
(214,246 |
) |
|
(1,690,020 |
) |
|
(485,881 |
) |
| Cash Provided by (Used in) Operating Activities |
|
(1,823,320 |
) |
|
(1,561,701 |
) |
|
3,619,014 |
|
| Investing Activities |
|
|
|
|
|
|
|
|
|
| Proceeds from disposition of property, plant and equipment |
|
27,704 |
|
|
- |
|
|
- |
|
| Acquisition of property, plant and equipment |
|
(131,382 |
) |
|
(1,713,875 |
) |
|
(428,954 |
) |
| Deposit on intangible assets |
|
(127,643 |
) |
|
- |
|
|
- |
|
| Acquisition of intangible assets |
|
(169,973 |
) |
|
- |
|
|
- |
|
| Cash Used in Investing Activities |
|
(401,294 |
) |
|
(1,713,875 |
) |
|
(428,954 |
) |
| Financing Activities |
|
|
|
|
|
|
|
|
|
Issue of common shares, net of share issue
costs |
|
4,589,849 |
|
|
- |
|
|
- |
|
| Exercise of options |
|
55,000 |
|
|
- |
|
|
- |
|
| Lease liability payments |
|
(104,493 |
) |
|
(93,711 |
) |
|
(19,737 |
) |
| Cash Provided by (Used in) Financing Activities |
|
4,540,356 |
|
|
(93,711 |
) |
|
(19,737 |
) |
| Foreign Exchange Effect on Cash |
|
12,673 |
|
|
100 |
|
|
1,669 |
|
| Inflow (Outflow) of Cash and Cash Equivalents |
|
2,328,415 |
|
|
(3,369,187 |
) |
|
3,171,992 |
|
| Cash and Cash Equivalents, Beginning of Year |
|
1,049,049 |
|
|
4,418,236 |
|
|
1,246,244 |
|
| |
|
|
|
|
|
|
|
|
|
| Cash and Cash Equivalents, End of Year |
$ |
3,377,464 |
|
$ |
1,049,049 |
|
$ |
4,418,236 |
|
Supplemental Cash Flow Information (Note 14)
See notes to consolidated financial statements
1. NATURE OF OPERATIONS
Kelso Technologies Inc. (the "Company") was incorporated under the laws of British Columbia on March 16, 1987. The Company designs, engineers, markets, produces and distributes various proprietary pressure relief valves and manway securement systems designed to reduce the risk of environmental harm due to non-accidental events in the transportation of hazardous commodities via railroad tank cars. In addition, the Company is an engineering development company specializing in proprietary service equipment used in transportation applications. The Company trades on the Toronto Stock Exchange ("TSX") under the symbol "KLS", and the New York Stock Exchange ("NYSE") under the trading symbol "KIQ". The Company listed on the TSX on May 22, 2014 and on the NYSE on October 14, 2014. The Company's head office is located at 13966 18B Avenue, South Surrey, British Columbia, V4A 8J1.
In March 2020, the World Health Organization declared COVID-19 a global pandemic. This contagious disease outbreak and the related adverse public health developments have adversely affected workforces, economies, and financial markets, leading to a global economic downturn. Governments and central banks have reacted with significant monetary and fiscal interventions designed to stabilize economic conditions. The duration and impact of the COVID-19 outbreak is unknown at this time, as is the efficacy of the government and central bank interventions. It is not possible to reliably estimate the length and severity of these developments and the impact on the financial results and condition of the Company in future periods.
2. BASIS OF PREPARATION
(a) Statement of compliance
These consolidated financial statements of the Company have been prepared in accordance with International Financial Reporting Standards ("IFRS"), as issued by the International Accounting Standards Board ("IASB").
These consolidated financial statements have been prepared under the historical cost basis, except for financial instruments, which are stated at their fair values. These consolidated financial statements have been prepared using the accrual basis of accounting, except for cash flow information.
2. BASIS OF PREPARATION (Continued)
(b) Basis of presentation and consolidation
The consolidated financial statements include the accounts of the Company and its integrated wholly owned subsidiaries, Kelso Technologies (USA) Inc., Kel-Flo Industries Inc. (formerly Kelso Innovative Solutions Inc.), KIQ Industries Inc., and KXI Wildertec Industries Inc., which are all Nevada, USA corporations except KIQ X Industries Inc., and KXI Wildertec Industries Inc., which were incorporated in British Columbia. Intercompany transactions and balances have been eliminated on consolidation. A subsidiary is consolidated from the date upon which control is acquired by the Company and all material intercompany transactions and balances have been eliminated on consolidation.
Control is achieved when the Company is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee.
(c) Functional and presentation currency
The functional and presentation currency of the Company and its subsidiaries is the US dollar ("USD").
(d) Significant management judgments and estimation uncertainty
The preparation of consolidated financial statements in conformity with IFRS requires the Company's management to undertake a number of judgments, estimates and assumptions that affect amounts reported in the consolidated financial statements and notes thereto. Actual amounts may ultimately differ from these estimates and assumptions. The Company reviews its estimates and underlying assumptions on an ongoing basis. Revisions are recognized in the period in which the estimates are revised and may impact future periods.
Significant management judgments
The following are significant management judgments in applying the accounting policies of the Company that have the most significant effect on recognition and measurement of assets, liabilities, income and expenses:
(i) Income taxes
The extent to which deferred tax assets can be recognized is based on an assessment of the probability of the Company generating future taxable income against which the deferred tax assets can be utilized. In addition, significant judgment is required in classifying transactions and assessing probable outcomes of tax positions taken, and in assessing the impact of any legal or economic limits or uncertainties in various tax jurisdictions.
2. BASIS OF PREPARATION (Continued)
(d) Significant management judgments and estimation uncertainty (Continued)
Significant management judgments (Continued)
(ii) Functional currency
The functional currency for the Company and its subsidiaries is the currency of the primary economic environment in which the entity operates. The Company has determined its functional currency and that of its subsidiaries is the USD. Determination of functional currency may involve certain judgments to determine the primary economic environment and the Company reconsiders the functional currency of its entities if there is a change in events and conditions that determined the primary economic environment.
(iii) Research and development expenditures
The application of the Company's accounting policy for research and development expenditures requires judgment in determining whether an activity is determined to be research or development, and if deemed to be development, whether it is probable that future economic benefits will flow to the Company, which may be based on assumptions about future events or circumstances. Estimates and assumptions may change if new information becomes available. If new information becomes available indicating that it is unlikely that future economic benefits will flow to the Company, the amount capitalized is written off to profit or loss in the period the new information becomes available.
(iv) Going concern assumption
The assessment of whether the going concern assumption is appropriate requires management to take into account all available information about the future, which is at least, but not limited to, twelve months from the end of the reporting period.
Estimation uncertainty
Information about estimates and assumptions that have the most significant effect on the recognition and measurement of assets, liabilities, income and expenses is provided below. Actual results may be substantially different.
2. BASIS OF PREPARATION (Continued)
(d) Significant management judgments and estimation uncertainty (Continued)
Estimation uncertainty (Continued)
(i) Impairment of long-lived assets
Long-lived assets consist of intangible assets and property, plant and equipment.
At the end of each reporting period, the Company reviews the carrying amounts of its long-lived assets to determine whether there is any indication that the carrying amount is not recoverable. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). When an individual asset does not generate independent cash flows, the Company estimates the recoverable amount of the cash-generating unit to which the asset belongs. Assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets. When a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual cash-generating units, or otherwise they are allocated to the smallest group of cash-generating units for which a reasonable and consistent allocation basis can be identified.
Recoverable amount is the higher of fair value less costs of disposal and value in use. Fair value is determined as the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.
(ii) Useful lives of depreciable assets
The Company reviews its estimate of the useful lives of depreciable assets at each reporting date, based on the expected utilization of the assets. Uncertainties in these estimates relate to technical obsolescence that may change the utilization of certain intangible assets and equipment.
(iii) Inventories
The Company estimates the net realizable value of inventories, taking into account the most reliable evidence available at each reporting date. The future realization of these inventories may be affected by future technology or other market-driven changes that may reduce future selling prices. A change to these assumptions could impact the Company's inventory valuation and impact gross margins.
2. BASIS OF PREPARATION (Continued)
(d) Significant management judgment and estimation uncertainty (Continued)
Estimation uncertainty (Continued)
(iv) Share-based expense
The Company grants share-based awards to certain officers, employees, directors and other eligible persons. For equity settled awards, the fair value is charged to the consolidated statements of operations and comprehensive income (loss) and credited to the reserves, over the vesting period using the graded vesting method, after adjusting for the estimated number of awards that are expected to vest.
The Company measures the cost of equity-settled transactions by reference to the fair value of the equity instruments at the date at which they are granted for share-based payments made to employees or others providing similar services. Estimating fair value for share-based payment transactions requires determining the most appropriate valuation model, which is dependent on the terms and conditions of the grant. This estimate also requires determining the most appropriate inputs to the valuation model including the fair value of the underlying common shares, the expected life of the share option or warrant, volatility and dividend yield and making assumptions about them. Changes in these assumptions can materially affect the fair value estimate, and therefore, the existing models do not necessarily provide a reliable measure of the fair value of the Company's share-based awards. Warrant liabilities are accounted for as derivative liabilities as they are exercisable in Canadian dollars (note 10).
(v) Allowance for credit losses
The Company provides for doubtful debts by analyzing the historical default experience and current information available about a customer's credit worthiness on an account-by-account basis. Uncertainty relates to the actual collectability of customer balances that can vary from the Company's estimation.
(vi) Lease liability
The Company uses estimation in determining the incremental borrowing rate used to measure the lease liability, specific to the asset, underlying currency, and geographic location. Where the rate implicit in the lease is not readily determinable, the discount rate of the lease obligations is estimated using a discount rate similar to the Company's specific borrowing rate. This rate represents the rate that the Company would incur to obtain the funds necessary to purchase the asset of a similar value, with similar payment terms and security in a similar environment. The Company applies judgment in determining whether the contract contains an identified asset, whether they have the right to control the asset, and the lease term.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.
(e) Approval of the consolidated financial statements
The consolidated financial statements of the Company for year ended December 31, 2021 were approved and authorized for issue by the Board of Directors on March 24, 2022.
2. BASIS OF PREPARATION (Continued)
(f) New accounting standards issued but not yet effective
The Company has performed an assessment of new standards issued by the IASB that are not yet effective. The Company has assessed that the impact of adopting these accounting standards on its consolidated financial statements would not be significant.
3. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies:
(a) Inventory
Inventory components include raw materials and supplies used to assemble valves and manway covers, as well as finished valves and manway covers. All inventories are recorded at the lower of cost on a weighted average basis and net realizable value. The stated value of all inventories includes purchase and assembly costs of all raw materials and supplies, and attributable overhead and amortization. A regular review is undertaken to determine the extent of any provision for obsolescence.
(b) Intangible assets
Intangible assets acquired separately are measured on initial recognition at cost. Following initial recognition, intangible assets are carried at cost less any accumulated amortization and accumulated impairment losses, if any. The useful lives of intangible assets are assessed as either finite or indefinite.
Intangible assets with finite lives are amortized over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortization period and the amortization method for an intangible asset with a finite useful life are reviewed at least at the end of each reporting period. A change in the expected useful life of the expected pattern of consumption of future economic benefits embodied in the asset is accounted for by changing the amortization period or method, as appropriate, and treated as changes in accounting estimates. Intangible assets with indefinite useful lives are not amortized, but are tested for impairment annually, either individually or at the cash-generating unit level. The assessment of indefinite life is reviewed annually to determine whether the indefinite life continues to be supportable. If not, the change in useful life from indefinite to finite is made on a prospective basis.
The Company amortizes intangible assets with finite lives on a straight-line basis over their estimated useful lives as follows:
Patents - 5 years
Rights - 2 years
Intellectual Property - 7 years
3. SIGNIFICANT ACCOUNTING POLICIES (Continued)
(b) Intangible assets (Continued)
Amortization begins when the intangible asset is ready for use. Product and technology development costs, which meet the criteria for deferral and are expected to provide future economic benefits with reasonable certainty, are deferred and amortized over the estimated life of the products or technology once commercialization commences.
(c) Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated amortization. Leasehold improvements and prototypes are amortized on a straight-line basis over the lease term and estimated useful life respectively. Amortization is calculated over the estimated useful life of the property, plant and equipment at the following annual rates:
|
Building
|
- 4% declining-balance
|
|
Production equipment
|
- 20% declining-balance
|
|
Vehicles
|
- 30% declining-balance
|
|
Leasehold improvements
|
- 5 year straight-line
|
|
Prototypes
|
- 2 year straight-line
|
(d) Revenue recognition
Revenues from the sale of pressure relief valves, manway securement systems and related products are recognised when all the performance obligations identified in the customer contract, typically consisting of a purchase order, are satisfied. The performance obligations in a typical purchase order are the manufacture of the pressure relief valve, manway securement system and related accessories and delivery of those items. The Company recognizes revenue when collection is reasonably assured.
(e) Impairment of long-lived assets
The Company's tangible and intangible assets are reviewed for any indication of impairment at each statement of financial position date. If indication of impairment exists, the asset's recoverable amount is estimated. An impairment loss is recognized when the carrying amount of an asset, or its cash-generating unit, exceeds its recoverable amount. A cash-generating unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of cash inflow from other assets or groups of assets.
The recoverable amount is the greater of the asset's fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the assets. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs.
(f) Income taxes
(i) Current and deferred income taxes
Income tax expense, consisting of current and deferred tax expense, is recognized in the consolidated statements of operations and comprehensive income (loss).
3. SIGNIFICANT ACCOUNTING POLICIES (Continued)
(f) Income taxes (Continued)
(i) Current and deferred income taxes (Continued)
Current tax expense is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at period-end, adjusted for amendments to tax payable with regard to previous years.
Deferred tax assets and liabilities and the related deferred income tax expense or recovery are recognized for deferred tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis.
Deferred tax assets and liabilities are measured using the enacted or substantively enacted tax rates expected to apply when the asset is realized or the liability settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income (loss) in the period that substantive enactment occurs.
A deferred tax asset is recognized to the extent that it is probable that future taxable profits will be available against which the asset can be utilized. To the extent that the Company does not consider it probable that a deferred tax asset will be recovered, the deferred tax asset is reduced. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Company intends to settle its current tax assets and liabilities on a net basis.
(ii) Texas margin tax
Effective January 1, 2007, the state of Texas enacted an annual franchise tax known as the Texas margin tax, which is equal to 0.75% of the lesser of: (a) 70% of a taxable entity's revenue in Texas; and (b) 100% of total revenue in Texas less, at the election of the taxpayer: (i) cost of goods sold; or (ii) compensation. A provision for the margin tax owing has been recorded in the consolidated statements of operations and comprehensive income (loss).
(g) Foreign currency translation
The accounts of foreign balances and transactions are translated into USD as follows:
(i) Monetary assets and liabilities, at the rate of exchange in effect at the consolidated statement of financial position date;
(ii) Non-monetary assets and liabilities, at the exchange rates prevailing at the time of the acquisition of the assets or assumption of the liabilities; and
(iii) Revenue and expense items (excluding amortization, which is translated at the same rate as the related asset), at the rate of exchange prevailing at the transaction date.
Gains and losses arising from translation of foreign currency are included in the determination of net income (loss).
3. SIGNIFICANT ACCOUNTING POLICIES (Continued)
(h) Earnings per share
The Company presents basic earnings per share data for its common shares, calculated by dividing the earnings attributable to common shareholders of the Company by the weighted average number of shares outstanding during the period. The Company uses the treasury stock method for calculating diluted earnings per share. Under this method the dilutive effect on earnings per share is calculated on the use of the proceeds that could be obtained upon exercise of options, warrants and similar instruments. It assumes that the proceeds of such exercise would be used to purchase common shares at the average market price during the period. However, the calculation of diluted loss per share excludes the effects of various conversions and exercise of options and warrants that would be anti-dilutive.
(i) Share-based expense
The Company has a stock option plan, restricted share unit plan, and deferred share unit plan, which are described in note 11. The Company grants equity-settled share-based expense to directors, officers, employees, and consultants. Share-based expense to employees is measured at the fair value of the equity instruments at the grant date. The fair value of share options is measured using the Black-Scholes option pricing model. Restricted and deferred share units are measured using the fair value of the shares on the grant date. The share-based expense to employees is recognized over the vesting period using the graded vesting method.
Fair value of share-based expenses for non-employees is recognized and measured at the date the goods or services are received based on the fair value of the goods or services received. If it is determined that the fair value of goods and services received cannot be reliably measured, the share-based expense is measured at the fair value of the equity instruments issued.
For both employees and non-employees, the fair value of share-based expense is recognized on the consolidated statements of operations and comprehensive income (loss), with a corresponding increase in reserves. The amount recognized as expense is adjusted to reflect the number of share-based awards expected to vest. Consideration received on the exercise of stock options is recorded in capital stock and the related share-based expense in reserves is transferred to capital stock.
(j) Capital stock
Proceeds from the exercise of stock options and warrants are recorded as capital stock in the amount for which the option or warrant enabled the holder to purchase a share in the Company. Any previously recorded share-based expense included in the share-based expenses reserve is transferred to capital stock on exercise of options. Capital stock issued for non-monetary consideration is valued at the closing market price at the date of issuance. The proceeds from the issuance of units are allocated between common shares and warrants based on the residual value method. Under this method, the proceeds are allocated first to capital stock based on the fair value of the common shares at the time the units are priced and any residual value is allocated to the warrants reserve. Consideration received for the exercise of warrants is recorded in capital stock, and any related amount recorded in warrants reserve is transferred to capital stock.
3. SIGNIFICANT ACCOUNTING POLICIES (Continued)
(j) Capital stock (Continued)
Canadian dollar denominated share purchase warrants are classified as a derivative warrant liability under the principles of IFRS 9 Financial Instruments (note 10). As the exercise price of the share purchase warrant is fixed in Canadian dollars and the functional currency of the Company is the USD, the share purchase warrants are considered a derivative liability in accordance with IAS 32 Financial Instruments: Presentation as a variable amount of cash in the Company's functional currency will be received upon exercise. These types of share purchase warrants are recognized at fair value using an option pricing model at the date of issue. Share purchase warrants are initially recorded as a liability at fair value with any subsequent changes in fair value recognized in profit or loss. Upon exercise of the share purchase warrants with exercise prices in a currency other than the Company's functional currency, the share purchase warrants are revalued at the date of exercise and the total fair value of the exercised share purchase warrants is reallocated to equity. The proceeds generated from the payment of the exercise price are also allocated to equity.
(k) Financial instruments
(i) Financial assets
Initial recognition and measurement
A financial asset is measured initially at fair value plus, for an item not at fair value through profit or loss, transaction costs that are directly attributable to its acquisition or issue. On initial recognition, a financial asset is classified as measured at amortized cost or fair value through profit or loss. A financial asset is measured at amortized cost if it meets the conditions that i) the asset is held within a business model whose objective is to hold assets to collect contractual cash flows, ii) the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding, and iii) is not designated as fair value through profit or loss.
Subsequent measurement
The subsequent measurement of financial assets depends on their classification as follows:
Financial assets at fair value through profit or loss
Financial assets measured at fair value through profit and loss are carried in the consolidated statements of financial position at fair value with changes in fair value therein, recognized in the consolidated statements of operations and comprehensive income (loss). The Company classifies cash as measured at fair value through profit or loss.
Financial assets measured at amortized cost
A financial asset is subsequently measured at amortized cost, using the effective interest method and net of any impairment allowance. The Company classifies accounts receivable and prepaid expenses as measured at amortized cost.
3. SIGNIFICANT ACCOUNTING POLICIES (Continued)
(k) Financial instruments (Continued)
(i) Financial assets (Continued)
Derecognition
A financial asset or, where applicable, a part of a financial asset or part of a group of similar financial assets is derecognized when:
• the contractual rights to receive cash flows from the asset have expired; or
• the Company has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a 'pass-through' arrangement; and either (a) the Company has transferred substantially all the risks and rewards of the asset, or (b) the Company has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.
(ii) Financial liabilities
Financial liabilities are recognized when the Company becomes a party to the contractual provisions of the financial instrument. A financial liability is derecognized when it is extinguished, discharged, cancelled or when it expires. Financial liabilities are classified as either financial liabilities at fair value through profit or loss or financial liabilities subsequently measured at amortized cost. All interest-related charges are reported in profit or loss within interest expense, if applicable.
Amortized cost
A financial liability at amortized cost is initially measured at fair value less transaction costs directly attributable to the issuance of the financial liability. Subsequently, the financial liability is measured at amortized cost based on the effective interest rate method. The Company classifies accounts payable and accrued liabilities, income tax payable and lease liabilities as measured at amortized cost.
Fair value through profit or loss ("FVTPL")
A financial liability measured at FVTPL is initially measured at fair value with any associated transaction costs being recognized in profit or loss when incurred. Subsequently, the financial liability is remeasured at fair value, and a gain or loss is recognized in profit or loss in the reporting period in which it arises. The Company's derivative warrant liability is classified as measured at fair value through profit or loss.
Derecognition
The Company derecognizes a financial liability when the financial liability is discharged, cancelled or expired. Generally, the difference between the carrying amount of the financial liability derecognized and the consideration paid and payable, including any non-cash assets transferred or liabilities assumed, is recognized in the consolidated statements of loss and comprehensive loss.
3. SIGNIFICANT ACCOUNTING POLICIES (Continued)
(k) Financial instruments (Continued)
(iii) Fair value hierarchy
The Company categorizes financial instruments measured at fair value at one of three levels according to the reliability of the inputs used to estimate fair values. The fair value of financial assets and financial liabilities included in Level 1 are determined by reference to quoted prices in active markets for identical assets and liabilities. Financial assets and liabilities in Level 2 are valued using inputs other than quoted prices for which all significant inputs are based on observable market data. Level 3 valuations are based on inputs that are not based on observable market data.
(l) Leases
At inception, the Company assesses whether a contract contains an embedded lease. A contract contains a lease when the contract conveys a right to control the use of an identified asset for a period of time in exchange for consideration.
The Company, as lessee, is required to recognize a right-of-use asset ("ROU asset"), representing its right to use the underlying asset, and a lease liability, representing its obligation to make lease payments.
IFRS 16 Leases, provides a single lessee accounting model, requiring lessees to recognize assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value.
The Company recognizes a ROU asset and a lease liability at the commencement of the lease. The ROU asset is initially measured based on the present value of lease payments, plus initial direct cost, less any incentives received. It is subsequently measured at cost less accumulated amortization, impairment losses and adjusted for certain remeasurements of the lease liability. The ROU asset is amortized from the commencement date over the shorter of the lease term or the useful life of the underlying asset. The ROU asset is subject to testing for impairment if there is an indicator of impairment.
The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted by the interest rate implicit in the lease, or if that rate cannot be readily determined, the incremental borrowing rate. The incremental borrowing rate is the rate which the operation would have to pay to borrow over a similar term and with similar security, the funds necessary to obtain an asset of similar value to the ROU asset in a similar economic environment.
3. SIGNIFICANT ACCOUNTING POLICIES (Continued)
(l) Leases (Continued)
Lease payments included in the measurement of the lease liability are comprised of:
• fixed payments, including in-substance fixed payments;
• variable lease payments that depend on an index or a rate, initially measured using the index or rate as at the commencement date;
• amounts expected to be payable under a residual value guarantee;
• the exercise price under a purchase option that the Company is reasonably certain to exercise;
• lease payments in an optional renewal period if the Company is reasonably certain to exercise an extension option; and
• penalties for early termination of a lease unless the Company is reasonably certain not to terminate early.
The lease liability is subsequently increased by the interest cost on the lease liability and decreased by lease payments made. It is remeasured when there is a change in future lease payments arising from a change in an index or a rate, a change in the estimate of the amount expected to be payable under a residual value guarantee, or as appropriate, changes in the assessment of whether a purchase or extension option is reasonably certain to be exercised or a termination option is reasonably certain not to be exercised.
Variable lease payments that do not depend on an index or a rate not included in the initial measurement of the ROU asset and lease liability are recognized as an expense in profit or loss in the period in which they are incurred.
The ROU assets are presented within "Property, plant and equipment" and the lease liabilities are presented in "Lease liability" on the consolidated statements of financial position.
4. CAPITAL MANAGEMENT
The Company considers its capital to be comprised of shareholders' equity.
The Company's objectives in managing its capital are to maintain its ability to continue as a going concern and to further develop its business. To effectively manage the Company's capital requirements, the Company has a planning and budgeting process in place to meet its strategic goals.
In order to facilitate the management of its capital requirements, the Company prepares expenditure budgets that are updated as necessary depending on various factors, including successful capital deployment and general industry conditions. Management reviews the capital structure on a regular basis to ensure the above objectives are met. There have been no changes to the Company's approach to capital management during the year ended December 31, 2021. There are no externally imposed restrictions on the Company's capital.
5. FINANCIAL INSTRUMENTS
Financial instruments are agreements between two parties that result in promises to pay or receive cash or equity instruments. The Company's financial instruments classified as level 1 in the fair value hierarchy are cash, accounts receivable, accounts payable and accrued liabilities and income tax payable, as their carrying values approximate their fair values due to their short-term nature. The lease liability and derivative warrant liability are classified as level 3.
The Company has exposure to the following risks from its use of financial instruments:
• Credit risk;
• Liquidity risk; and
• Market risk.
(a) Credit risk
Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. Cash is placed with major Canadian and US financial institutions and the Company's concentration of credit risk for cash and maximum exposure thereto is $3,377,464 (2020 - $1,049,049).
With respect to its accounts receivable, the Company assesses the credit rating of all customers and maintains provisions for potential credit losses, and any such losses to date have been within management's expectations. The Company's credit risk with respect to accounts receivable and maximum exposure thereto is $807,009 (2020 - $535,659). The Company's concentration of credit risk for accounts receivable with respect to its significant customers is as follows: Customer A is $93,865 (2020 - $105,820), Customer B is $25,009 (2020 - $15,349), Customer C is $47,250 (2020 - $Nil), and Customer D is $155,520 (2020 - $150,300) (Note 16).
To reduce the credit risk of accounts receivable, the Company regularly reviews the collectability of the accounts receivable to ensure there is no indication that these amounts will not be fully recoverable. The Company's aging of accounts receivable, excluding goods and services tax receivable, at December 31, 2021 and 2020 is as follows:
| |
|
December 31, 2021 |
|
|
December 31, 2020 |
|
| Current |
$ |
341,746 |
|
$ |
227,308 |
|
| 1 - 60 days |
|
319,346 |
|
|
195,231 |
|
| 61 days and over |
|
27,952 |
|
|
20,910 |
|
| |
$ |
689,044 |
|
$ |
443,449 |
|
(b) Liquidity risk
Liquidity risk is the risk that the Company will be unable to meet its financial obligations as they fall due. The Company's approach to managing liquidity risk is to ensure, as far as possible, that it will have sufficient liquid funds to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Company's reputation.
5. FINANCIAL INSTRUMENTS (Continued)
(b) Liquidity risk (Continued)
At December 31, 2021, the Company has $3,377,464 (2020 - $1,049,049) of cash to settle current liabilities of $1,210,356 (2020 - $958,086) consisting of the following: accounts payable and accrued liabilities of $1,118,573 (2020 - $814,777), income tax payable of $Nil (2020 - $91,566) and current portion of lease liability of $91,783 (2020 - $51,743). All payables classified as current liabilities are due within a year. The amount of the Company's remaining undiscounted contractual maturities for the lease liabilities is approximately $307,456 (2020 - $100,709) which is due between one to five years (Note 9).
(c) Market risk
The significant market risks to which the Company could be exposed are interest rate risk and currency risk.
(i) Interest rate risk
Interest rate risk is the risk that the fair value or future cash flows will fluctuate as a result of changes in market interest rates. The Company is not exposed to significant interest rate risk.
(ii) Currency risk
The Company is exposed to currency risk to the extent expenditures incurred or funds received, and balances maintained by the Company are denominated in Canadian dollars ("CAD"). The Company does not manage currency risk through hedging or other currency management tools.
As at December 31, 2021 the Company had the following net monetary assets denominated in CAD (amounts presented in USD):
| |
|
December 31, 2021 |
|
|
December 31, 2020 |
|
| Cash |
$ |
1,210,548 |
|
$ |
52,084 |
|
| Accounts receivable |
|
116,186 |
|
|
92,210 |
|
| Accounts payable and accrued liabilities |
|
(116,573 |
) |
|
(109,519 |
) |
| |
$ |
1,210,161 |
|
$ |
(34,775 |
) |
Based on the above, assuming all other variables remain constant, a 1% (2020 - 2%) weakening or strengthening of the USD against the CAD would result in approximately $12,102 (2020 - $696) foreign exchange loss or gain in the consolidated statements of operations and comprehensive income (loss).
6. INVENTORY
| |
|
December 31, 2021 |
|
|
December 31, 2020 |
|
| Finished goods |
$ |
172,865 |
|
$ |
124,290 |
|
| Raw materials and supplies |
|
5,361,693 |
|
|
5,338,242 |
|
| |
$ |
5,534,558 |
|
$ |
5,462,532 |
|
Included in cost of goods sold is $3,091,973 (2020 - $4,937,761; 2019 - $9,443,243) of direct material costs recognized as expense. Inventory write-off during the year was $117,403 (2020 - $114,066; 2019 - $62,402).
7. PROPERTY, PLANT AND EQUIPMENT
| |
|
|
|
|
|
|
|
Leasehold |
|
|
Production |
|
|
|
|
|
|
|
|
|
|
| Cost |
|
Land |
|
|
Building |
|
|
Improvements |
|
|
Equipment |
|
|
Prototypes |
|
|
ROU Asset |
|
|
Total |
|
| Balance, December 31, 2019 |
$ |
12,558 |
|
$ |
2,955,901 |
|
$ |
43,715 |
|
$ |
817,148 |
|
$ |
970,394 |
|
$ |
117,004 |
|
$ |
4,916,720 |
|
| Additions |
|
- |
|
|
8,082 |
|
|
- |
|
|
175,467 |
|
|
1,527,451 |
|
|
- |
|
|
1,711,000 |
|
| Balance, December 31, 2020 |
$ |
12,558 |
|
$ |
2,963,983 |
|
$ |
43,715 |
|
$ |
992,615 |
|
$ |
2,497,845 |
|
$ |
117,004 |
|
$ |
6,627,720 |
|
| Additions |
|
- |
|
|
- |
|
|
- |
|
|
63,465 |
|
|
85,156 |
|
|
199,466 |
|
|
348,087 |
|
| Disposals |
|
- |
|
|
- |
|
|
- |
|
|
(31,854 |
) |
|
- |
|
|
- |
|
|
(31,854 |
) |
| Balance, December 31, 2021 |
$ |
12,558 |
|
$ |
2,963,983 |
|
$ |
43,715 |
|
$ |
1,024,226 |
|
$ |
2,583,001 |
|
$ |
316,470 |
|
$ |
6,943,953 |
|
| Accumulated Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, December 31, 2019 |
$ |
- |
|
$ |
613,709 |
|
$ |
37,241 |
|
$ |
579,506 |
|
$ |
284,058 |
|
$ |
12,212 |
|
$ |
1,526,726 |
|
| Amortization |
|
- |
|
|
93,849 |
|
|
1,295 |
|
|
67,784 |
|
|
665,597 |
|
|
73,892 |
|
|
902,417 |
|
| Balance, December 31, 2020 |
$ |
- |
|
$ |
707,558 |
|
$ |
38,536 |
|
$ |
647,290 |
|
$ |
949,655 |
|
$ |
86,104 |
|
$ |
2,429,143 |
|
| Amortization |
|
- |
|
|
90,257 |
|
|
1,036 |
|
|
76,346 |
|
|
1,027,480 |
|
|
80,766 |
|
|
1,275,885 |
|
| Disposals |
|
- |
|
|
- |
|
|
- |
|
|
(7,469 |
) |
|
- |
|
|
- |
|
|
(7,469 |
) |
| Balance, December 31, 2021 |
$ |
- |
|
$ |
797,815 |
|
$ |
39,572 |
|
$ |
716,167 |
|
$ |
1,977,135 |
|
$ |
166,870 |
|
$ |
3,697,559 |
|
| Carrying Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2021 |
$ |
12,558 |
|
$ |
2,166,168 |
|
$ |
4,143 |
|
$ |
308,059 |
|
$ |
605,866 |
|
$ |
149,600 |
|
$ |
3,246,394 |
|
| December 31, 2020 |
$ |
12,558 |
|
$ |
2,256,425 |
|
$ |
5,179 |
|
$ |
345,325 |
|
$ |
1,548,190 |
|
$ |
30,900 |
|
$ |
4,198,577 |
|
Included in cost of goods sold is $131,580 (2020 - $134,067; 2019 - $131,617) of amortization related to property, plant and equipment.
Included in expenses is $437,865 (2020 - $140,178; 2019 - $69,271) of amortization related to property, plant and equipment.
Included in inventory is $6,774 (2020 - $3,712; 2019 - $1,476) of amortization related to property, plant and equipment.
Included in research is $1,011,445 (2020 - $624,460; 2019 - $183,939) of amortization related to property, plant and equipment.
Included in prototype additions are vehicles under lease of $73,223 (2020 - $66,025; 2019 - $79,668).
8. INTANGIBLE ASSETS
| Cost |
|
Patent |
|
|
Rights |
|
|
Intellectual Property |
|
|
Total |
|
| Balance, December 31, 2019 and 2020 |
$ |
40,840 |
|
$ |
672,959 |
|
$ |
- |
|
$ |
713,799 |
|
| Additions |
|
- |
|
|
- |
|
|
169,973 |
|
|
169,973 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, December 31, 2021 |
$ |
40,840 |
|
$ |
672,959 |
|
$ |
169,973 |
|
$ |
883,772 |
|
| Accumulated Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, December 31, 2019 |
$ |
40,840 |
|
$ |
65,000 |
|
$ |
- |
|
$ |
105,840 |
|
| Amortization |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
| Balance, December 31, 2020 |
$ |
40,840 |
|
$ |
65,000 |
|
$ |
- |
|
$ |
105,840 |
|
| Amortization |
|
- |
|
|
303,980 |
|
|
- |
|
|
303,980 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, December 31, 2021 |
$ |
40,840 |
|
$ |
368,980 |
|
$ |
- |
|
$ |
409,820 |
|
| Carrying Value |
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2021 |
$ |
- |
|
$ |
303,979 |
|
$ |
169,973 |
|
$ |
473,952 |
|
| December 31, 2020 |
$ |
- |
|
$ |
607,959 |
|
$ |
- |
|
$ |
607,959 |
|
During the year ended December 31, 2010, the Company entered into an agreement to acquire a patent related to their manway securement systems. The Company is obligated to pay a 5% royalty in accordance with the agreement (Note 16).
On November 10, 2016, the Company entered into a technology development agreement to acquire all intellectual property rights (the "Products") of G & J Technologies, Inc. (the "Vendor") for consideration of $217,946, consisting of $25,000 in cash and 250,000 common shares with a fair value of $192,946. The shares were issued during the year ended December 31, 2017. On November 10, 2016, the Vendor also entered into a consulting agreement with the Company for a fee of $10,000 per month.
In addition, the Company will pay an additional $75,000 in cash and issue 750,000 common shares of the Company to the Vendor based on the following milestones:
• $25,000 cash and 250,000 common shares issuable on the filing of the first new patent application related to the Products (the Company paid the cash and issued the shares with a fair value of $208,486 during the year ended December 31, 2017);
• $25,000 cash and 250,000 common shares issuable on the successful completion of a production prototype for the first Product (the Company accrued for the cash payment and shares to be issued with a fair value of $131,527 at December 31, 2017); the cash and shares were issued during the year ended December 31, 2018; and
• $25,000 cash and 250,000 common shares issuable on the completion of the sale of the first ten commercial vehicles incorporating the Products.
The Company is also required to pay a royalty to the Vendor of 2.5% of the net sales earned by the Company, to be paid within 30 days of the end of each calendar quarter. As at December 31, 2021 the Company has not earned any revenue from the sale of the Products.
8. INTANGIBLE ASSETS (Continued)
On March 3, 2021, the Company terminated the technology development agreement, including the consulting agreement for $10,000 per month. The Company will still maintain all intellectual property rights acquired under the agreement and will still be liable for the 2.5% royalty. This termination is currently in the arbitration process pursuant to the terms of the agreement.
On October 25, 2021, the Company entered into a technology services agreement with a third-party developer (the "Agreement") to further develop its internal intellectual property related to the active suspension control system for no road vehicles. The Agreement consists of total payments of $650,734 ($825,000 CAD) over the term which is estimated to be eight months. Intellectual property developed under the Agreement will be the property of the Company and certain background technology of the developer will be licensed by the Company for the purposes of manufacturing and selling the related products. The royalty payment for the license will be $27,000 CAD per year for a period of 10 years (the "License Fee") with the first-year fee waived and the second year discounted 50%. If the Company purchases a minimum of 10 control systems designed under the Agreement in any year, the License Fee for that year will be waived. The Company may receive an unrestricted license to use the background technology of the developer at any time by paying the cumulative remaining License Fees plus a one-time payment of $50,000.
During the year ended December 31, 2021, the Company incurred a total of $56,416 (2020 - $Nil) with this vendor which was capitalized to intellectual property. In addition, the Company had a deposit of $127,643 (2020 - $Nil) at December 31, 2021 to be applied over the term of the Agreement.
9. LEASE LIABILITY
The Company has lease agreements for its warehouse space in Kelowna, British Columbia and for vehicles used in the development of prototypes (Note 7).
The continuity of the lease liability for the years ended December 31, 2021 and 2020 is as follows:
| Lease liability |
|
Warehouse |
|
|
Vehicles |
|
|
Total |
|
| Lease liability, as of December 31, 2019 |
$ |
104,785 |
|
$ |
72,150 |
|
$ |
176,935 |
|
| Additions |
|
- |
|
|
66,025 |
|
|
66,025 |
|
| Lease payments |
|
(77,009 |
) |
|
(22,586 |
) |
|
(99,595 |
) |
| Lease interest |
|
3,642 |
|
|
2,242 |
|
|
5,884 |
|
| Lease liability, as of December 31, 2020 |
$ |
31,418 |
|
$ |
117,831 |
|
$ |
149,249 |
|
| Additions |
|
199,466 |
|
|
43,491 |
|
|
242,957 |
|
| Lease payments |
|
(84,353 |
) |
|
(31,769 |
) |
|
(116,122 |
) |
| Lease interest |
|
6,757 |
|
|
4,871 |
|
|
11,628 |
|
| Leasing liability, as of December 31, 2021 |
$ |
153,288 |
|
$ |
134,424 |
|
$ |
287,712 |
|
| |
|
|
|
|
|
|
|
|
|
| Current portion |
$ |
65,886 |
|
$ |
25,896 |
|
$ |
91,782 |
|
| Long-term portion |
|
87,402 |
|
|
108,528 |
|
|
195,930 |
|
| |
|
|
|
|
|
|
|
|
|
| |
$ |
153,288 |
|
$ |
134,424 |
|
$ |
287,712 |
|
9. LEASE LIABILITY (Continued)
The Company's non-current contractual lease obligations are as follows:
| Year |
|
Amount |
|
| 2022 |
$ |
103,404 |
|
| 2023 |
|
135,419 |
|
| 2024 |
|
37,855 |
|
| 2025 |
|
12,342 |
|
| 2026 |
|
7,049 |
|
| 2027 |
|
7,049 |
|
| 2028 |
|
4,338 |
|
| |
$ |
307,456 |
|
10. DERIVATIVE WARRANT LIABILITY
The Company's derivative warrant liability arises as a result of the issuance of warrants exercisable in CAD. As the denomination is different from the Company's USD functional currency, the Company recognizes a derivative liability for these warrants and remeasures the liability at the end of each reporting period.
Changes in respect of the Company's derivative warrant liability are as follows:
| Balance, December 31, 2019 and 2020 |
$ |
- |
|
| Fair value of warrants issued |
|
925,737 |
|
| Fair value adjustment |
|
(658,626 |
) |
| |
|
|
|
| Balance, December 31, 2021 |
$ |
267,111 |
|
Valuation of the derivative warrant liability requires the use of highly subjective estimates and assumptions. The expected volatility used is based on the Company's historical share prices. The risk-free interest rate for the periods within the expected life of the warrants is based on Canadian government benchmark bond with an approximate equivalent term. The expected life is based on the contractual term. Changes in the underlying assumptions can materially affect the fair value estimates.
On December 31, 2021, the Company revalued the derivative warrant liability at an estimated fair value of $267,111. The Company uses an option pricing model to estimate the liability's fair value. The following weighted average assumptions were used:
| |
|
As of
December 31, 2021 |
|
|
At Issuance -
March 4, 2021 |
|
| Risk-free interest rate |
|
0.95% |
|
|
0.28% |
|
| Expected life |
|
1.17 years |
|
|
2.00 years |
|
| Annualized volatility |
|
96.32% |
|
|
81.02% |
|
| Dividend yield |
|
0.00% |
|
|
0.00% |
|
| Fair value per warrant |
|
$0.08 |
|
|
$0.26 |
|
11. CAPITAL STOCK
Authorized:
Unlimited Class A non-cumulative, preferred shares without par value, of which 5,000,000 are designated Class A, convertible, voting, preferred shares. No preferred shares have been issued.
Unlimited common shares without par value.
a) Common shares
During the year ended December 31, 2021, the Company issued 7,000,000 units at $0.91 CAD per unit pursuant to a private placement for gross proceeds of $4,922,510 ($6,370,000 CAD). Each unit consists of one common share and one-half share purchase warrant expiring two years from the date of issue. Each whole warrant entitles the holder thereof to acquire one common share at a price of $1.15 CAD in year one and $1.30 CAD in year two. At issuance, the remainder of the proceeds from the private placement financings, after subtracting the value of the derivative warrant liability (note 10) in the amount of $925,737, totaled $3,996,773 and was allocated to issued capital using the residual method. In connection with the private placement, the Company incurred issuance costs of $409,712, of which $77,051 was recorded as unit issuance costs in the consolidated statements of operations and comprehensive income (loss).
During the year ended December 31, 2021, the Company issued 150,000 shares pursuant to the exercise of stock options for gross proceeds of $55,000. A value of $37,385 was transferred from reserves to share capital as a result.
There were no share issuances during the year ended December 31, 2020.
(b) Stock options
The Company has a stock option plan (the "Plan") available to employees, directors, officers and consultants with grants under the Plan approved from time to time by the Board of Directors. Under the Plan, the Company is authorized to issue options to purchase an aggregate of up to 10% of the Company's issued and outstanding common shares. Each option can be exercised to acquire one common share of the Company. The exercise price for an option granted under the Plan may not be less than the market price at the date of grant less a specified discount dependent on the market price.
11. CAPITAL STOCK (Continued)
(b) Stock options (Continued)
Options to purchase common shares have been granted to directors, employees and consultants as follows:
| Exercise |
Expiry |
|
December 31, |
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
| Price |
Date |
|
2020 |
|
|
Granted |
|
|
Exercised |
|
|
Expired |
|
|
2021 |
|
| $1.30 |
August 18, 2021 |
|
1,175,000 |
|
|
- |
|
|
- |
|
|
(1,175,000 |
) |
|
- |
|
| $0.90 |
July 6, 2022 |
|
50,000 |
|
|
- |
|
|
- |
|
|
- |
|
|
50,000 |
|
| $0.30 |
November 28, 2022 |
|
750,000 |
|
|
- |
|
|
(100,000 |
) |
|
- |
|
|
650,000 |
|
| $0.57 |
April 17, 2023 |
|
200,000 |
|
|
- |
|
|
- |
|
|
- |
|
|
200,000 |
|
| $0.50 |
August 20, 2023 |
|
750,000 |
|
|
- |
|
|
(50,000 |
) |
|
- |
|
|
700,000 |
|
| $1.45 |
May 17, 2024 |
|
10,000 |
|
|
- |
|
|
- |
|
|
- |
|
|
10,000 |
|
| $0.78 |
August 19, 2024 |
|
700,000 |
|
|
- |
|
|
- |
|
|
- |
|
|
700,000 |
|
| $0.82 |
November 8, 2024 |
|
10,000 |
|
|
- |
|
|
- |
|
|
- |
|
|
10,000 |
|
| $0.76 |
February 11, 2025 |
|
200,000 |
|
|
- |
|
|
- |
|
|
- |
|
|
200,000 |
|
| $0.75 |
August 18, 2025 |
|
750,000 |
|
|
- |
|
|
- |
|
|
- |
|
|
750,000 |
|
| Total outstanding |
|
4,595,000 |
|
|
- |
|
|
(150,000 |
) |
|
(1,175,000 |
) |
|
3,270,000 |
|
| Total exercisable |
|
3,721,667 |
|
|
- |
|
|
(150,000 |
) |
|
(1,175,000 |
) |
|
2,953,333 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Exercise |
Expiry |
|
December 31, |
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
| Price |
Date |
|
2019 |
|
|
Granted |
|
|
Exercised |
|
|
Expired |
|
|
2020 |
|
| $1.30 |
August 18, 2021 |
|
1,175,000 |
|
|
- |
|
|
- |
|
|
- |
|
|
1,175,000 |
|
| $0.90 |
July 6, 2022 |
|
50,000 |
|
|
- |
|
|
- |
|
|
- |
|
|
50,000 |
|
| $0.30 |
November 28, 2022 |
|
750,000 |
|
|
- |
|
|
- |
|
|
- |
|
|
750,000 |
|
| $0.57 |
April 17, 2023 |
|
200,000 |
|
|
- |
|
|
- |
|
|
- |
|
|
200,000 |
|
| $0.50 |
August 20, 2023 |
|
750,000 |
|
|
- |
|
|
- |
|
|
- |
|
|
750,000 |
|
| $1.45 |
May 17, 2024 |
|
10,000 |
|
|
- |
|
|
- |
|
|
- |
|
|
10,000 |
|
| $0.78 |
August 19, 2024 |
|
700,000 |
|
|
- |
|
|
- |
|
|
- |
|
|
700,000 |
|
| $0.82 |
November 8, 2024 |
|
10,000 |
|
|
- |
|
|
- |
|
|
- |
|
|
10,000 |
|
| $0.76 |
February 11, 2025 |
|
- |
|
|
200,000 |
|
|
- |
|
|
- |
|
|
200,000 |
|
| $0.75 |
August 18, 2025 |
|
- |
|
|
750,000 |
|
|
- |
|
|
- |
|
|
750,000 |
|
| Total outstanding |
|
3,645,000 |
|
|
950,000 |
|
|
- |
|
|
- |
|
|
4,595,000 |
|
| Total exercisable |
|
2,831,667 |
|
|
316,665 |
|
|
- |
|
|
- |
|
|
3,721,667 |
|
A summary of the Company's stock options as at December 31, 2021 and 2020, and changes for the years then ended are as follows:
| |
|
|
|
|
Weighted |
|
| |
|
|
|
|
Average Exercise |
|
| |
|
Number |
|
|
Price |
|
| Outstanding, December 31, 2019 |
|
3,645,000 |
|
$ |
0.78 |
|
| Granted |
|
950,000 |
|
$ |
0.75 |
|
| Outstanding, December 31, 2020 |
|
4,595,000 |
|
$ |
0.78 |
|
| Exercised |
|
(150,000 |
) |
$ |
0.37 |
|
| Expired |
|
(1,175,000 |
) |
$ |
1.30 |
|
| Outstanding, December 31, 2021 |
|
3,270,000 |
|
$ |
0.61 |
|
The weighted average contractual life for the remaining options at December 31, 2021 is 2.22 years (2020 - 2.52).
11. CAPITAL STOCK (Continued)
(b) Stock options (Continued)
Share-based expense
Share-based expense of $108,696 (2020 - $423,538; 2019 - $345,498) was recognized in the year ended December 31, 2021 for stock options. The share-based expense relates to options granted during December 31, 2020 and 2019, which vest over time.
The fair value of stock options is estimated using the Black-Scholes option pricing model with the following weighted average assumptions:
| |
|
Year ended |
|
|
Year ended |
|
| |
|
December 31,
2020 |
|
|
December 31,
2019 |
|
| Risk-free interest rate (average) |
|
0.51% |
|
|
1.32% |
|
| Estimated volatility (average) |
|
67.29% |
|
|
69.93% |
|
| Expected life in years |
|
5.00 |
|
|
5.00 |
|
| Expected dividend yield |
|
0.00% |
|
|
0.00% |
|
| Estimated forfeitures |
|
0.00% |
|
|
0.00% |
|
| Grant date fair value per option |
$ |
0.38 |
|
$ |
0.45 |
|
Option pricing models require the use of highly subjective estimates and assumptions. The expected volatility assumption is based on the historical and implied volatility of the Company's common share price on the TSX. The risk-free interest rate assumption is based on yield curves on Canadian government zero-coupon bonds with a remaining term equal to the stock options' expected life. The Company uses historical data to estimate option exercise, forfeiture and employee termination within the valuation model.
(c) Warrants
Warrants outstanding as at December 31, 2021 are summarized below:
| |
|
Share purchase
warrants |
|
|
Weighted average
exercise price |
|
| Outstanding, December 31, 2019 and 2020 |
|
- |
|
$ |
- |
|
| Issued |
|
3,500,005 |
|
$ |
0.91 |
(1) |
| Outstanding and exercisable, December 31, 2021 |
|
3,500,005 |
|
$ |
0.91 |
|
(1) These warrants are denominated in CAD and have been translated based on the exchange rate of $1.00 = $1.2637 CAD, which is the rate in effect on the date of issuance of March 4, 2021.
The warrants outstanding at December 31, 2021 expire on March 4, 2023 and have a remaining life of 1.17 years at December 31, 2021.
11. CAPITAL STOCK (Continued)
(d) Restricted share units
On April 28, 2021, the Company implemented a Restricted Share Unit Plan (the "RSU Plan"). Pursuant to the RSU Plan, the Company will grant restricted share units ("RSUs") to directors, officers, employees, and consultants for services as approved from time to time by the Board. The maximum number of common shares made available for issuance pursuant to the RSU Plan shall not exceed 5% of the common shares issued and outstanding and shall not exceed 10% of the common shares issued and outstanding less any common shares reserved for issuance under all other share compensation arrangements. The vesting terms, settlement, and method of settlement of the RSUs granted under the RSU Plan will be determined by the Board of Directors.
A summary of the Company's RSUs as at December 31, 2021 and 2020, and changes for the years then ended are as follows:
| |
|
Equity settled |
|
| Outstanding, December 31, 2020 and 2019 |
|
- |
|
| Granted |
|
355,000 |
|
| Outstanding, December 31, 2021 |
|
355,000 |
|
The estimated fair value of the equity settled RSUs granted during the year ended December 31, 2021 were $244,950 (2020 - $Nil; 2019 - $Nil) and was based on the fair market value of one common share on the date of issuance. The fair value will be recognized as an expense over the vesting period with 33% vesting on October 27, 2022 and 33% every year thereafter. Share-based expense of $24,949 (2020 - $Nil; 2019 - $Nil) was recognized in the year ended December 31, 2021 for RSUs.
(e) Deferred share units
On April 28, 2021, the Company implemented a Non-Employee Directors Deferred Share Unit Plan (the "DSU Plan"). Pursuant to the DSU Plan, non-employee directors may elect to receive deferred share units ("DSUs") in lieu of a cash payment of up to 50% of their annual base compensation determined by the Board. The maximum number of common shares made available for issuance pursuant to the DSU Plan shall not exceed 2% of the common shares issued and outstanding and shall not exceed 10% of the common shares issued and outstanding less any common shares reserved for issuance under all other share compensation agreements.
As at December 31, 2021, no DSUs have been granted to non-employee directors.
12. RELATED PARTY TRANSACTIONS
Related party transactions not otherwise described in these consolidated financial statements are shown below. The remuneration of the Company's directors and other members of key management, being the Chief Executive Officer, Chief Financial Officer, and Chief Operating Officer who have the authority and responsibility for planning, directing and controlling the activities of the Company, consist of the following amounts:
| |
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
| |
|
2021 |
|
|
2020 |
|
|
2019 |
|
| Management compensation |
$ |
720,923 |
|
$ |
641,845 |
|
$ |
540,692 |
|
| Management bonus* |
|
- |
|
|
28,423 |
|
|
496,894 |
|
| Share-based expense** |
|
104,250 |
|
|
335,155 |
|
|
255,902 |
|
| Directors' fees |
|
163,000 |
|
|
163,000 |
|
|
120,500 |
|
| |
$ |
988,173 |
|
$ |
1,168,423 |
|
$ |
1,413,988 |
|
* The Company has management bonus agreements whereby 10% of the annual income before taxes, amortization and share-based expense are equally distributed to management.
** Share-based expense consists of the key management portion of the fair value of options and RSUs and does not include any cash compensation.
As at December 31, 2021, amounts due to related parties included in accounts payable and accrued liabilities, which are unsecured and have no interest or specific terms, consist of $Nil (2020 - $Nil) for directors' fees and $Nil (2020 - $28,423) for management bonus.
13. INCOME TAXES
The Company has $Nil in non-capital losses in the US that may be applied against future taxable income.
The tax effect items that give rise to significant portions of the deferred income tax assets and deferred income tax liabilities at December 31, 2021 and 2020 are as follows:
| |
|
December 31,
2021 |
|
|
December 31,
2020 |
|
| Deferred income tax assets |
|
|
|
|
|
|
| Non-capital loss carry-forwards |
$ |
216,826 |
|
$ |
22,609 |
|
| Deferred income tax assets |
$ |
216,826 |
|
$ |
22,609 |
|
Deficiency (excess) of carrying value over tax value
of property, plant and equipment |
$ |
(216,826 |
) |
$ |
- |
|
| Excess of carrying value over tax value of intangible assets |
|
- |
|
|
(22,609 |
) |
| Deferred income tax liability |
$ |
(216,826 |
) |
$ |
(22,609 |
) |
| Net deferred tax asset (liability) |
$ |
- |
|
$ |
- |
|
13. INCOME TAXES (Continued)
Significant unrecognized tax benefits and unused tax losses for which no deferred tax assets is recognized as of December 31, 2021 and 2020 are as follows:
| |
|
December 31,
2021 |
|
|
December 31,
2020 |
|
| Excess of tax value over carrying value of mineral properties |
$ |
1,135 |
|
$ |
1,536 |
|
| Non-capital losses carried forward |
|
1,411,411 |
|
|
936,086 |
|
| Property, plant and equipment |
|
- |
|
|
14,809 |
|
| Intangible assets |
|
49,992 |
|
|
- |
|
| Lease liability |
|
77,682 |
|
|
40,297 |
|
| Unrecognized deductible temporary differences |
$ |
1,540,220 |
|
$ |
992,728 |
|
Income tax expense differs from the amount that would be computed by applying the Canadian statutory income tax rate of 27.00% (2020 - 27.00%; 2019 - 27.00%) to income (loss) before income taxes as follows:
| |
|
December 31,
2021 |
|
|
December 31,
2020 |
|
|
December 31,
2019 |
|
| Income (loss) before income taxes |
$ |
(2,758,567 |
) |
$ |
(1,307,890 |
) |
$ |
3,334,043 |
|
| Statutory income tax rate |
|
27.00% |
|
|
27.00% |
|
|
27.00% |
|
| Income tax (benefit) liability computed at statutory tax rate |
|
(744,813 |
) |
|
(353,130 |
) |
|
900,192 |
|
| Items not deductible for income tax purposes |
|
(107,916 |
) |
|
147,116 |
|
|
(12,564 |
) |
| Under provision of taxes in prior years |
|
99,873 |
|
|
(84,532 |
) |
|
36,225 |
|
| Change in timing differences |
|
91,007 |
|
|
499,718 |
|
|
135,130 |
|
| Impact of foreign exchange on tax assets and liabilities |
|
4,444 |
|
|
(7,163 |
) |
|
(39,116 |
) |
| Unused tax losses and tax offsets not recognized |
|
813,044 |
|
|
33,082 |
|
|
(983,204 |
) |
| Income tax expense |
|
155,639 |
|
|
235,091 |
|
|
36,663 |
|
| Penalties and interest included in income tax expense |
|
- |
|
|
- |
|
|
27,989 |
|
| Texas margin tax and branch tax |
|
17,000 |
|
|
13,901 |
|
|
34,425 |
|
| Income tax expense |
$ |
172,639 |
|
$ |
248,992 |
|
$ |
99,077 |
|
14. SUPPLEMENTAL CASH FLOW INFORMATION
| |
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
| |
|
2021 |
|
|
2020 |
|
|
2019 |
|
| Property, plant and equipment in accounts payable and accrued liabilities |
$ |
- |
|
$ |
28,280 |
|
$ |
97,180 |
|
| Interest paid |
$ |
9,054 |
|
$ |
9,088 |
|
$ |
737 |
|
| Income taxes paid |
$ |
342,000 |
|
$ |
229,233 |
|
$ |
487,206 |
|
15. EARNINGS PER SHARE
The calculation of basic and diluted earnings (loss) per share for the relevant years is based on the following:
| |
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
| |
|
2021 |
|
|
2020 |
|
|
2019 |
|
| Net income (loss) for the period |
$ |
(2,758,567 |
) |
$ |
(1,307,890 |
) |
$ |
3,334,043 |
|
| Basic weighted average number of common shares outstanding |
|
53,082,689 |
|
|
47,170,086 |
|
|
47,170,086 |
|
| Effect on dilutive securities: |
|
|
|
|
|
|
|
|
|
| Options |
|
- |
|
|
- |
|
|
1,016,436 |
|
| Diluted weighted average number of common shares outstanding |
|
53,082,689 |
|
|
47,170,086 |
|
|
48,186,522 |
|
| Basic income (loss) per share |
$ |
(0.05 |
) |
$ |
(0.03 |
) |
$ |
0.07 |
|
| Diluted income (loss) per share |
$ |
(0.05 |
) |
$ |
(0.03 |
) |
$ |
0.07 |
|
16. SIGNIFICANT CUSTOMERS
The following table represents sales to individual customers exceeding 10% of the Company's revenues:
| |
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
| |
|
2021 |
|
|
2020 |
|
|
2019 |
|
| Customer A |
$ |
2,787,027 |
|
$ |
5,505,214 |
|
$ |
11,043,962 |
|
| Customer B |
$ |
252,804 |
|
$ |
485,674 |
|
$ |
2,660,840 |
|
| Customer C |
$ |
932,248 |
|
$ |
2,710,540 |
|
$ |
1,957,400 |
|
| Customer D |
$ |
1,314,843 |
|
$ |
1,280,155 |
|
$ |
308,443 |
|
The customers are major US and Canadian corporations who have displayed a pattern of consistent timely payment of amounts owing from sales.
The Company is obligated to pay a 5% royalty from sales of their manway securement systems until 2023 in accordance with the original acquisition agreement. During the year ended December 31, 2021, there were revenues from sales of the manway securement systems totaling $11,000 (2020 - $10,500; 2019 - $133,486).
17. EMPLOYEE BENEFITS
Total employee benefit expenses, including salary and wages, management compensation, share-based expense and benefits for the year ended December 31, 2021 amounted to $2,965,045; (2020 - $3,803,757; 2019 - $4,451,529).
18. SEGMENTED INFORMATION
The Company operates in two business segments with operations and long-term assets in the United States and Canada. The two business segments include the design, production, and distribution of various proprietary products for the rail sector and active suspension control system for no road vehicles. At December 31, 2021, long term assets of $1,250,676 (2020 - $2,001,034) relates to the active suspension control system located in Canada and $2,597,313 (2020 - $2,941,310) relates to the rail sector located in the United States. During the years ended December 31, 2021, 2020 and 2019 there was no revenue related to the active suspension control system.
