Kelso Technologies Inc 6-K, filed Nov 10, 2021
Kelso Technologies Inc (KIQSF)
About this 6-K
Kelso Technologies Inc filed this 6-K on November 10, 2021.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
Report Of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16
of the Securities Exchange Act of 1934
For the month of November, 2021
Commission File No. 001-36685
Kelso Technologies Inc.
(Translation of registrant's name into English)
13966 18B Avenue, Surrey, British Columbia V4A 8J1
(Address of principal executive office)
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.
Form 20-F [X] Form 40-F [ ]
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1) [ ]
NOTE: Regulation S-T Rule 101(b)(1) only permits the submission in paper of a Form 6-K if submitted solely to provide an attached annual report to security holders.
SUBMITTED HEREWITH
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
KELSO TECHNOLOGIES INC.
| /s/ James R. Bond |
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James R. Bond Date: November 10, 2021 |
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NEWS RELEASE |
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Kelso Technologies Inc. |
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(The "Company" or "Kelso") |
November 10, 2021 |
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Canada: TSX: KLS |
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United States: NYSE American: KIQ |
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KELSO TECHNOLOGIES INC. FINANCIAL RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2021 |
Vancouver, British Columbia and Bonham, Texas, Kelso Technologies Inc. ("Kelso" or the "Company"), (TSX: KLS), (NYSE American: KIQ) reports that the Company has released the unaudited consolidated interim financial statements and Management Discussion and Analysis for the nine months ended September 30, 2021.
The unaudited consolidated interim financial statements were prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB"). All amounts herein are expressed in United States dollars (the Company's functional currency) unless otherwise indicated.
SUMMARY OF FINANCIAL PERFORMANCE
| Nine months ended September 30 | 2021 | 2020 | ||||
| Revenues | $ | 5,429,090 | $ | 9,754,172 | ||
| Gross profit | $ | 2,247,453 | $ | 4,298,760 | ||
| Gross profit margin | 41 | % | 44 | % | ||
| Adjusted EBITDA (loss) | $ | (1,204,877 | ) | $ | 990,074 | |
| Non-cash expenses | $ | 275,496 | $ | 524,485 | ||
| Taxes | $ | 147,222 | $ | 118,249 | ||
| Net income (loss) | $ | (1,627,595 | ) | $ | 347,340 | |
| Basic earnings (loss) per share | $ | (0.03 | ) | $ | 0.01 | |
| Three months ended September 30 | ||||||
| Revenues | $ | 2,093,252 | $ | 1,586,206 | ||
| Gross profit | $ | 844,645 | $ | 600,754 | ||
| Gross profit margin | 40 | % | 38 | % | ||
| Adjusted EBITDA (loss) | $ | (308,834 | ) | $ | (449,855 | ) |
| Net Income (loss) | $ | (433,261 | ) | $ | (681,527 | ) |
| Basic earnings (loss) per share | $ | (0.01 | ) | $ | (0.01 | ) |
LIQUIDITY AND CAPITAL RESOURCES
As at September 30, 2021 the Company had cash on deposit in the amount of $3,198,231, accounts receivable of $1,253,910, prepaid expenses of $224,731 and inventory of $5,717,310 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 September 30, 2021 compared to income tax payable of $91,566 as at December 31, 2020.
The working capital position of the Company as at September 30, 2021 was $9,140,729 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 $14,017,652 as at September 30, 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 September 30, 2021.
OUTLOOK
The anticipated return to pre-pandemic business volumes in 2021 is happening very slowly. The dismal rail tank car activity experienced over the past 18 months remains an impediment to the recovery of financial performance. A momentum build in 2022 based on anticipated new product offerings in trucking tank trailers, pressure rail cars and compliance requirements for the ethanol industry continue to encourage Management about the Company's recovery prospects in 2022 and beyond.
During the COVID-19 driven rail recession Management has focused on the containment of the potential negative impacts on the Company's business model and the protection of the Company's key productive assets. Kelso has prepared itself for the anticipated post-pandemic growth in business activity by way of maintaining larger inventories, key employees, a new equity financing secured in the first quarter of 2021 and continuing R&D activities to broaden out product lines.
The Company is fully prepared for stronger business growth anticipated in 2022. Rail industry experts anticipate that in 2021 the OEM producers will manufacture approximately 8,000 new tank cars. In addition, significant retrofits are being evaluated to address the pending 2023 changes in ethanol regulations as the ethanol industry plans for the appropriate post 2023 fleet size which currently stands at more than 30,000 tank cars. Also, a significant number of tank cars are due for re-certification and some owners are planning to address these tank cars now while there is repair shop space available.
Industry projections indicate that the tank car market is entering a period of modest fleet growth coupled with growth in rail tank car utilization. New tank car demand is expected to grow to 14,300 tank cars in 2022 and 19,125 tank cars in 2023. The anticipated upswing in new build and retrofit activity for ethanol and pressure tank cars combined with a growing number of certified Kelso products are expected to provide new longer-term financial growth opportunities from rail operations.
With respect to the KXI™ Wildertec™ Suspension System (KXI) program, the Company has secured the services of key engineers, software specialists and OEM suspension experts that will support the Company's R&D schedules to equip a "heavy duty" (HD) vehicle with a regulatory compliant KXI by mid 2022. Once accomplished the goal is to initiate pilot production and sales in late 2022 or early 2023 although scheduling has been negatively impacted by the well documented supply chain disruptions in the automotive industry. The HD platform represents a much larger accessible commercial market opportunity to pursue. This strategic direction is expected to reduce R&D costs and maintain strategic timetables. Once completed the HD design advancements will have to attain full compliance with the Canadian Motor Vehicle Safety Standards and the Federal Motor Vehicle Safety Standards in the United States. This is expected to provide the Company a national safety mark awarded as a final stage manufacturer which is a key prerequisite for enabling commercial sales.
In addition to KXI, the Company continues the development of promising new rail products. Kelso's pressure car PCH valve has successfully completed field service trials, final inspection and gained full Association of American Railroads approval. Field service trials are ongoing with the Company's pressure car angle valve, top ball valve and bottom outlet valves despite current uncertainties and economic disruptions. Valve products for trucking applications are in full marketing initiatives.
In the heavily regulated transportation industry, the Company's R&D projects are complex, time consuming and expensive. The primary purpose of Kelso's R&D investments is to advance and elevate the probability of future financial successes from a larger and more diverse product line. Despite the many challenges imposed by the COVID-19 recession Management remains bullish on the potential of all of its new product developments although timing of regulatory approvals and new revenue streams remains unpredictable and certainly not guaranteed to develop at all. Management continues to assess research discoveries, new product viability, tighter budget restrictions and market potential of all of the Company's R&D programs and adjusts strategic plans as part of the Company's R&D risk management.
The Company has deployed capital resources sensibly to maintain financial health and liquidity during the pandemic. The Company's balance sheet strength and working capital position remained healthy at $9,140,729 as at September 30, 2021. The financial capital secured during the first quarter is expected to protect the Company's ability to conduct ongoing business operations for the foreseeable future.
The Company's future business prospects for rail tank car products over the next three years are encouraging despite the current uncertainties. Kelso has unique products to service new regulatory guidelines that require a fleet of more than 30,000 ethanol tank cars to be regulatory compliant in early 2023. In addition the Company is developing new products that can service a fleet of approximately 85,000 pressure tank cars, a market that is completely new to Kelso and represents a significant business growth opportunity.
The Company has maintained the ability to fully service customer needs when the pandemic subsides. Management's focus has been to concentrate on what Kelso has done well in the past enhancing the importance of the Company's corporate brand in the rail industry and a clear ambition for the future of Kelso with new product opportunities in more diverse transportation markets. With no interest-bearing long-term debt to service, replenished capital reserves secured through a new equity financing, broader sales prospects from a larger product portfolio, Kelso is working to exit the pandemic crisis with stronger financial performance on behalf of the shareholders of Kelso.
About Kelso Technologies
Kelso is a diverse product development company that specializes in the design, production and distribution of proprietary service equipment used in transportation applications. The Company's reputation has been earned as a designer and reliable supplier of unique high-quality rail tank car valve equipment that provides for the safe handling and containment of hazardous and non-hazardous commodities during transport. All Kelso products are specifically designed to provide economic and operational advantages to customers while reducing the potential effects of human error and environmental harm.
For a more complete business and financial profile of the Company, please view the Company's website at www.kelsotech.com and public documents posted under the Company's profile on SEDAR at www.sedar.com in Canada and on EDGAR at www.sec.gov in the United States.
On behalf of the Board of Directors,
James R. Bond, CEO and President
Notice to Reader: References to Adjusted EBITDA refer to net earnings from continuing operations before interest, taxes, amortization, unrealized foreign exchange and noncash share-based expenses (Black Scholes option pricing model) 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.
Legal Notice Regarding Forward-Looking Statements: This news release contains "forward-looking statements" within the meaning of applicable securities legislation. Forward-looking statements are indicated expectations or intentions. Forward-looking statements in this news release include that a momentum build for new rail tank cars is expected in 2022; that the Company is prepared for post-pandemic normalization and ready for a strong restart of business growth; that the OEM rail tank car producers projections of new tank car and retrofits will be realized; that 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; that new tank car demand is expected to grow, that the Company's KXI engineering group can produce a regulatory compliant heavy-duty prototype vehicle in 2022 that complies to all federal standards and regional regulations in order to receive a national safety mark as a final stage manufacturer which is a key prerequisite for enabling commercial sales in 2022; that the Company can initiate KXI pilot production and sales in late 2022 or early 2023; that the Company can reduce R&D costs and maintain strategic timetables; that the financial capital secured subsequent in March 2021 is expected to protect the Company's ability to conduct ongoing business operations for the foreseeable future; that the Company will continue with new product development; that Company has new products nearing AAR approvals that can service a fleet of approximately 85,000 pressure tank cars; and that broader sales prospects from a larger product portfolio will allow Kelso to exit the pandemic crisis with stronger financial performance. Although Kelso believes the Company's anticipated future results, performance or achievements expressed or implied by the forward-looking statements and information are based upon reasonable assumptions and expectations, they can give no assurance that such expectations will prove to be correct. The reader should not place undue reliance on forward-looking statements and information as such statements and information involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Kelso to differ materially from anticipated future results, performance or achievement expressed or implied by such forward-looking statements and information, including without limitation the risk that the effects of COVID-19 may last much longer than expected delaying business orders from OEM customers; the Company's development of new products may proceed slower than expected, cost more or may not result in a salable product; tank car producers may produce and retrofit fewer than expected cars and even if they meet expectations, they may not purchase the Company's products for many of the cars; new equity may not be adequate enough to fund future operations as intended; that regulatory compliance may be delayed or cancelled; the Company's products may not provide the intended economic or operational advantages; or reduce the potential effects of human error and environmental harm during the transport of hazardous materials; or grow and sustain anticipated revenue streams; the Company's new rail and automotive products may not receive regulatory certification; customer orders may not develop or be cancelled; that competitors may enter the market with new product offerings which could capture some of the Company's market share; that a new product idea under development may be dropped if ongoing product testing reveal engineering and economic issues that render a new product concept infeasible; and that the Company's new equipment offerings may not capture market share as well as expected. Except as required by law, the Company does not intend to update the forward-looking information and forward-looking statements contained in this news release.
For further information, please contact:
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James R. Bond, CEO and President |
Richard Lee, Chief Financial Officer |
Corporate Address: |
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Email: bond@kelsotech.com |
Email: lee@kelsotech.com |
13966 - 18B Avenue South Surrey, BC V4A 8J1 www.kelsotech.com |
KELSO TECHNOLOGIES INC.
Consolidated Interim Financial Statements
For the Nine months ended September 30, 2021
(Unaudited - Prepared by Management)
(Expressed in US Dollars)
NOTICE OF NO AUDITOR REVIEW OF INTERIM FINANCIAL REPORT
The accompanying unaudited interim financial report of the Company has been prepared by and is the responsibility of the Company's management. The Company's independent auditor has not performed a review or audit of this financial report.
Kelso Technologies Inc.
Consolidated Interim Statements of Financial Position
September 30,
(Unaudited - Prepared by Management)
(Expressed in US Dollars)
| September 30, | December 31, | |||||
| 2021 | 2020 | |||||
| Assets | ||||||
| Current | ||||||
| Cash (Note 5) | $ | 3,198,231 | $ | 1,049,049 | ||
| Accounts receivable (Note 5) | 1,253,910 | 535,659 | ||||
| Prepaid expenses | 224,731 | 162,739 | ||||
| Inventory (Note 6) | 5,717,310 | 5,462,532 | ||||
| 10,394,182 | 7,209,979 | |||||
| Property, plant and equipment (Note 7) | 4,491,253 | 4,198,577 | ||||
| Intangible assets (Note 8) | 607,959 | 607,959 | ||||
| $ | 15,493,394 | $ | 12,016,515 | |||
| Liabilities | ||||||
| Current | ||||||
| Accounts payable and accrued liabilities (Note 11) | $ | 1,152,362 | $ | 814,777 | ||
| Income tax payable | - | 91,566 | ||||
| Current portion of lease liability (Note 9) | 101,091 | 51,743 | ||||
| 1,253,453 | 958,086 | |||||
| Long term portion of lease liability (Note 9) | 222,289 | 97,506 | ||||
| 1,475,742 | 1,055,592 | |||||
| Shareholders' Equity | ||||||
| Capital Stock (Note 10) | 27,996,264 | 23,366,542 | ||||
| Reserves (Note 10 (b)) | 4,716,450 | 4,661,847 | ||||
| Deficit | (18,695,062 | ) | (17,067,466 | ) | ||
| 14,017,652 | 10,960,923 | |||||
| $ | 15,493,394 | $ | 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 interim financial statements
Kelso Technologies Inc.
Consolidated Interim Statements of Changes in Equity
For the Nine months ended September 30, 2021 and 2020
(Unaudited - Prepared by Management)
(Expressed in US Dollars)
| Capital Stock | ||||||||||||||||||
| Number | Obligation to | |||||||||||||||||
| of shares | Amount | issue shares | Reserve | Deficit | Total | |||||||||||||
| Balance, December 31, 2019 | 47,170,086 | $ | 23,366,542 | $ | - | $ | 4,238,309 | $ | (15,759,576 | ) | $ | 11,845,275 | ||||||
| Share-based expense | - | - | - | 127,500 | - | 127,500 | ||||||||||||
| Net income for the period | - | - | - | - | 347,340 | 347,340 | ||||||||||||
| Balance, September 30, 2020 | 47,170,086 | $ | 23,366,542 | $ | - | $ | 4,365,809 | $ | (15,412,236 | ) | $ | 12,320,115 | ||||||
| Balance December 31, 2020 | 47,170,086 | $ | 23,366,542 | $ | - | $ | 4,661,847 | $ | (17,067,466 | ) | $ | 10,960,923 | ||||||
| Shares issued | 7,150,000 | 4,629,722 | - | - | - | 4,629,722 | ||||||||||||
| Share-based expense | - | - | - | 54,603 | - | 54,603 | ||||||||||||
| Net loss for the period | - | - | - | - | (1,627,595 | ) | (1,627,595 | ) | ||||||||||
| Balance, September 30, 2021 | 54,320,086 | $ | 27,996,264 | $ | - | $ | 4,716,450 | $ | (18,695,061 | ) | $ | 14,017,653 | ||||||
See notes to consolidated interim financial statements
Kelso Technologies Inc.
Consolidated Interim Statements of Operations and Comprehensive Income (Loss)
For the Nine months ended September 30, 2021 and 2020
(Unaudited - Prepared by Management)
(Expressed in US Dollars)
| Three months ended September 30, |
Three months ended September 30, |
Nine months |
Nine months ended September 30, |
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| 2021 | 2020 | 2021 | 2020 | |||||||||
| Revenues | $ | 2,093,252 | $ | 1,586,206 | $ | 5,429,090 | $ | 9,754,172 | ||||
| Cost of Goods Sold | 1,248,607 | 985,452 | 3,181,638 | 5,455,412 | ||||||||
| Gross Profit | 844,645 | 600,754 | 2,247,453 | 4,298,760 | ||||||||
| Expenses | ||||||||||||
| Share-based expense (Note 10 (b)) | - | 97,500 | 54,603 | 127,500 | ||||||||
| Management fees (Note 11) | 179,077 | 155,625 | 538,154 | 581,675 | ||||||||
| Consulting and filing fees | 79,714 | 62,291 | 288,476 | 180,261 | ||||||||
| Investor relations | 21,000 | 21,000 | 63,000 | 63,000 | ||||||||
| Accounting and legal | 77,324 | 59,455 | 234,487 | 202,581 | ||||||||
| Office and administration | 540,577 | 503,236 | 1,667,895 | 1,529,929 | ||||||||
| Research | 160,534 | 221,984 | 480,425 | 688,414 | ||||||||
| Travel | 22,948 | 3,730 | 35,264 | 46,224 | ||||||||
| Marketing | 92,621 | 91,560 | 243,313 | 282,618 | ||||||||
| Unrealized foreign exchange loss (gain) |
47,656 | 53,200 | 14,615 | 33,528 | ||||||||
| Amortization | 37,455 | 35,110 | 107,593 | 97,441 | ||||||||
| 1,258,906 | 1,304,691 | 3,727,825 | 3,833,171 | |||||||||
| Income (Loss) before the following | (414,261 | ) | (703,937 | ) | (1,480,373 | ) | 465,589 | |||||
| Income tax recovery (expense) | (19,000 | ) | 22,410 | (147,222 | ) | (118,249 | ) | |||||
| Net Income (Loss) and Comprehensive Income (Loss) for the Period | $ | (433,261 | ) | $ | (681,527 | ) | $ | (1,627,595 | ) | $ | 347,340 | |
| Basic and Diluted Earnings (Loss) Per Share | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.03 | ) | $ | 0.01 | |
| Weighted Average Number of Common Shares Outstanding | ||||||||||||
| Basic | 51,242,414 | 47,170,086 | 51,242,414 | 47,170,086 | ||||||||
| Diluted | 52,792,414 | 48,670,086 | 52,792,414 | 48,670,086 |
See notes to consolidated interim financial statements
Kelso Technologies Inc.
Consolidated Interim Statements of Cash Flows
For the Nine months ended September 30, 2021 and 2020
(Unaudited - Prepared by Management)
(Expressed in US Dollars)
| September 30, | September 30, | |||||
| 2021 | 2020 | |||||
| Operating Activities | ||||||
| Net income (loss) | $ | (1,627,595 | ) | $ | 347,340 | |
| Items not involving cash | ||||||
| Amortization of equipment and patent | 206,278 | 363,457 | ||||
| Share-based expense | 54,603 | 127,500 | ||||
| Unrealized foreign exchange | 14,615 | 33,528 | ||||
| (1,352,099 | ) | 871,825 | ||||
| Changes in non-cash working capital | ||||||
| Accounts receivable | (718,251 | ) | 1,284,739 | |||
| Prepaid expenses and deposit | (61,991 | ) | (205,917 | ) | ||
| Inventory | (254,778 | ) | (2,603,074 | ) | ||
| Accounts payable and accrued liabilities | 550,794 | (451,512 | ) | |||
| Income tax payable | (91,566 | ) | (101,546 | ) | ||
| (575,792 | ) | (2,077,310 | ) | |||
| Cash Provided by (Used in) Operating Activities | (1,927,891 | ) | (1,205,485 | ) | ||
| Investing Activities | ||||||
| Acquisition of property, plant and equipment | (498,955 | ) | (818,347 | ) | ||
| Cash Used in Investing Activities | (498,955 | ) | (818,347 | ) | ||
| Financing Activities | ||||||
| Issuance of common shares | 4,629,722 | - | ||||
| Lease liability payments | (39,078 | ) | (54,642 | ) | ||
| Cash Used in Financing Activities | 4,590,642 | (54,642 | ) | |||
| Foreign exchange effect on cash | (14,615 | ) | (33,528 | ) | ||
| Inflow (Outflow) of Cash | 2,149,181 | (2,112,002 | ) | |||
| Cash, Beginning of Period | 1,049,050 | 4,418,236 | ||||
| Cash, End of Period | $ | 3,198,231 | $ | 2,306,234 |
Supplemental Cash Flow Information (Note 11)
See notes to consolidated interim financial statements
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KELSO TECHNOLOGIES INC. Notes to Consolidated Interim Financial Statements For the Nine months September 30, 2021 and 2020 (Unaudited – Prepared by Management) (Expressed in US Dollars) |
1. NATURE OF OPERATIONS
Kelso Technologies Inc. (the "Company") was incorporated under the laws of British Columbia on March 16, 1987. The Company designs, engineers, markets, produces and distributes various proprietary pressure relief valves and manway securement systems designed to reduce the risk of environmental harm due to non-accidental events in the transportation of hazardous commodities via railroad tank cars. In addition, the Company is an engineering development company specializing in proprietary service equipment used in transportation applications. The Company trades on the Toronto Stock Exchange ("TSX") under the symbol "KLS", and the New York Stock Exchange ("NYSE") under the trading symbol "KIQ". The Company listed on the TSX on May 22, 2014 and on the NYSE on October 14, 2014. The Company's head office is located at 13966 18B Avenue, South Surrey, British Columbia, V4A 8J1.
Since December 31, 2019, the outbreak of the novel strain of coronavirus, specifically identified as "COVID-19", has resulted in governments worldwide enacting emergency measures to combat the spread of the virus. These measures, which include the implementation of travel bans, self-imposed quarantine periods and physical distancing, have caused material disruption to business globally resulting in an economic slowdown. Global equity markets have experienced significant volatility and weakness. 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 unaudited consolidated interim 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"), applicable to the preparation of interim financial statements, including International Accounting Standards ("IAS") 34 Interim Financial Reporting. The condensed unaudited interim financial statements do not include all of the disclosures required for a complete set of annual financial statements and should be read in conjunction with the audited annual consolidated financial statements for the year ended December 31, 2020, which have been prepared in accordance with IFRS as issued by the IASB.
These consolidated interim financial statements have been prepared under the historical cost basis, except for financial instruments, which are stated at their fair values. These consolidated interim financial statements have been prepared using the accrual basis of accounting, except for cash flow information.
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KELSO TECHNOLOGIES INC. Notes to Consolidated Interim Financial Statements For the Nine months September 30, 2021 and 2020 (Unaudited – Prepared by Management) (Expressed in US Dollars) |
2. BASIS OF PREPARATION (Continued)
(b) Basis of presentation and consolidation
The consolidated interim 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 interim 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 interim 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.
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KELSO TECHNOLOGIES INC. Notes to Consolidated Interim Financial Statements For the Nine months September 30, 2021 and 2020 (Unaudited – Prepared by Management) (Expressed in US Dollars) |
2. BASIS OF PREPARATION (Continued)
(d) Significant management judgments and estimation uncertainty (continued)
Significant management judgments (continued)
(ii) Functional currency
The functional currency for the Company and its subsidiaries is the currency of the primary economic environment in which the entity operates. The Company has determined its functional currency and that of its subsidiaries is the USD. Determination of functional currency may involve certain judgments to determine the primary economic environment and the Company reconsiders the functional currency of its entities if there is a change in events and conditions that determined the primary economic environment.
(iii) Research and development expenditures
The application of the Company's accounting policy for research and development expenditures requires judgment in determining whether an activity is determined to be research or development, and if deemed to be development, whether it is probable that future economic benefits will flow to the Company, which may be based on assumptions about future events or circumstances. Estimates and assumptions may change if new information becomes available. If new information becomes available indicating that it is unlikely that future economic benefits will flow to the Company, the amount capitalized is written off to profit or loss in the period the new information becomes available.
(iv) Going concern assumption
The assessment of whether the going concern assumption is appropriate requires management to take into account all available information about the future, which is at least, but not limited to, twelve months from the end of the reporting period.
Estimation uncertainty
Information about estimates and assumptions that have the most significant effect on the recognition and measurement of assets, liabilities, income and expenses is provided below. Actual results may be substantially different.
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KELSO TECHNOLOGIES INC. Notes to Consolidated Interim Financial Statements For the Nine months September 30, 2021 and 2020 (Unaudited – Prepared by Management) (Expressed in US Dollars) |
2. BASIS OF PREPARATION (Continued)
(d) Significant management judgments and estimation uncertainty (continued)
Estimation uncertainty (continued)
(i) Impairment of long-lived assets
Long-lived assets consist of intangible assets and property, plant and equipment.
At the end of each reporting period, the Company reviews the carrying amounts of its long-lived assets to determine whether there is any indication that the carrying amount is not recoverable. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). When an individual asset does not generate independent cash flows, the Company estimates the recoverable amount of the cash-generating unit to which the asset belongs. Assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets. When a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual cash-generating units, or otherwise they are allocated to the smallest group of cash-generating units for which a reasonable and consistent allocation basis can be identified.
Recoverable amount is the higher of fair value less costs of disposal and value in use. Fair value is determined as the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.
(ii) Useful lives of depreciable assets
The Company reviews its estimate of the useful lives of depreciable assets at each reporting date, based on the expected utilization of the assets. Uncertainties in these estimates relate to technical obsolescence that may change the utilization of certain intangible assets and equipment.
(iii) Inventories
The Company estimates the net realizable value of inventories, taking into account the most reliable evidence available at each reporting date. The future realization of these inventories may be affected by future technology or other market-driven changes that may reduce future selling prices. A change to these assumptions could impact the Company's inventory valuation and impact gross margins.
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KELSO TECHNOLOGIES INC. Notes to Consolidated Interim Financial Statements For the Nine months September 30, 2021 and 2020 (Unaudited – Prepared by Management) (Expressed in US Dollars) |
2. BASIS OF PREPARATION (Continued)
(d) Significant management judgment and estimation uncertainty (Continued)
Estimation uncertainty (Continued)
(iv) Share-based expense
The Company grants share-based awards to certain officers, employees, directors and other eligible persons. For equity settled awards, the fair value is charged to the consolidated statements of operations and comprehensive income (loss) and credited to the reserves, over the vesting period using the graded vesting method, after adjusting for the estimated number of awards that are expected to vest.
The fair value of the equity-settled awards is determined at the date of the grant using the Black-Scholes option pricing model. Option pricing models require the input of highly subjective assumptions, including the expected volatility and expected life of the options. Changes in these assumptions can materially affect the fair value estimate, and therefore, the existing models do not necessarily provide a reliable measure of the fair value of the Company's stock options.
(v) Allowance for credit losses
The Company provides for doubtful debts by analyzing the historical default experience and current information available about a customer's credit worthiness on an account by account basis. Uncertainty relates to the actual collectability of customer balances that can vary from the Company's estimation.
(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 are 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 judgement 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 interim financial statements
The consolidated interim financial statements of the Company for nine months ended September 30, 2021 were approved and authorized for issue by the Board of Directors on November 9, 2021.
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KELSO TECHNOLOGIES INC. Notes to Consolidated Interim Financial Statements For the Nine months September 30, 2021 and 2020 (Unaudited – Prepared by Management) (Expressed in US Dollars) |
2. BASIS OF PREPARATION (Continued)
(f) New accounting standards issued but not yet effective
The Company has performed an assessment of new standards issued by the IASB that are not yet effective. The Company has assessed that the impact of adopting these accounting standards on its consolidated financial statements would not be significant.
3. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies:
(a) Inventory
Inventory components include raw materials and supplies used to assemble valves and manway covers, as well as finished valves and manway covers. All inventories are recorded at the lower of cost on a weighted average basis and net realizable value. The stated value of all inventories includes purchase and assembly costs of all raw materials and supplies, and attributable overhead and amortization. A regular review is undertaken to determine the extent of any provision for obsolescence.
(b) Intangible assets
Intangible assets acquired separately are measured on initial recognition at cost. Following initial recognition, intangible assets are carried at cost less any accumulated amortization and accumulated impairment losses, if any. The useful lives of intangible assets are assessed as either finite or indefinite.
Intangible assets with finite lives are amortized over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortization period and the amortization method for an intangible asset with a finite useful life are reviewed at least at the end of each reporting period. A change in the expected useful life of the expected pattern of consumption of future economic benefits embodied in the asset is accounted for by changing the amortization period or method, as appropriate, and treated as changes in accounting estimates. Intangible assets with indefinite useful lives are not amortized, but are tested for impairment annually, either individually or at the cash-generating unit level. The assessment of indefinite life is reviewed annually to determine whether the indefinite life continues to be supportable. If not, the change in useful life from indefinite to finite is made on a prospective basis.
The Company amortizes intangible assets with finite lives on a straight-line basis over their estimated useful lives as follows:
Patents - 5 years
Rights - 2 years
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KELSO TECHNOLOGIES INC. Notes to Consolidated Interim Financial Statements For the Nine months September 30, 2021 and 2020 (Unaudited – Prepared by Management) (Expressed in US Dollars) |
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.
(d) 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 is 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).
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KELSO TECHNOLOGIES INC. Notes to Consolidated Interim Financial Statements For the Nine months September 30, 2021 and 2020 (Unaudited – Prepared by Management) (Expressed in US Dollars) |
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 1% of the lesser of: (a) 70% of a taxable entity's revenue; and (b) 100% of total revenue less, at the election of the taxpayer: (i) cost of goods sold; or (ii) compensation. A provision for the margin tax owing has been recorded in the consolidated interim 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).
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KELSO TECHNOLOGIES INC. Notes to Consolidated Interim Financial Statements For the Nine months September 30, 2021 and 2020 (Unaudited – Prepared by Management) (Expressed in US Dollars) |
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 grants share options to acquire common shares of the Company to directors, officers, employees and consultants. The fair value of share-based expense to employees is measured at grant date, using the Black-Scholes option pricing model, and is recognized over the vesting period for employees using the graded vesting method. Fair value of share-based expenses for non-employees is recognized and measured at the date the goods or services are received based on the fair value of the goods or services received. If it is determined that the fair value of goods and services received cannot be reliably measured, the share-based expense is measured at the fair value of the equity instruments issued using the Black-Scholes option pricing model.
For both employees and non-employees, the fair value of share-based expense is recognized on the consolidated interim 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 options expected to vest. Consideration received on the exercise of stock options is recorded in capital stock and the related share-based expense in reserves is transferred to capital stock.
(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.
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KELSO TECHNOLOGIES INC. Notes to Consolidated Interim Financial Statements For the Nine months September 30, 2021 and 2020 (Unaudited – Prepared by Management) (Expressed in US Dollars) |
3. SIGNIFICANT ACCOUNTING POLICIES (Continued)
(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 interim statements of financial position at fair value with changes in fair value therein, recognized in the consolidated statements of operations and comprehensive income (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.
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.
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KELSO TECHNOLOGIES INC. Notes to Consolidated Interim Financial Statements For the Nine months September 30, 2021 and 2020 (Unaudited – Prepared by Management) (Expressed in US Dollars) |
3. SIGNIFICANT ACCOUNTING POLICIES (Continued)
(k) Financial instruments (Continued)
(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.
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 re-measured at fair value, and a gain or loss is recognized in profit or loss in the reporting period in which it arises.
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.
(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.
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KELSO TECHNOLOGIES INC. Notes to Consolidated Interim Financial Statements For the Nine months September 30, 2021 and 2020 (Unaudited – Prepared by Management) (Expressed in US Dollars) |
3. SIGNIFICANT ACCOUNTING POLICIES (Continued)
(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.
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.
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KELSO TECHNOLOGIES INC. Notes to Consolidated Interim Financial Statements For the Nine months September 30, 2021 and 2020 (Unaudited – Prepared by Management) (Expressed in US Dollars) |
3. SIGNIFICANT ACCOUNTING POLICIES (Continued)
(l) Leases (continued)
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 nine months ended September 30, 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, and accounts payable and accrued liabilities, as their carrying values approximate their fair values due to their short-term nature. The lease liability is 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 are placed with major Canadian and US financial institutions and the Company's concentration of credit risk for cash and maximum exposure thereto is $3,198,231 (2020 - $1,049,049).
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KELSO TECHNOLOGIES INC. Notes to Consolidated Interim Financial Statements For the Nine months September 30, 2021 and 2020 (Unaudited – Prepared by Management) (Expressed in US Dollars) |
5. FINANCIAL INSTRUMENTS (Continued)
(a) Credit risk (continued)
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 $1,253,910 (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 $120,881 (2020 - $105,820), Customer B is $675,585 (2020 - $150,300) and Customer C is $68,359 (2020 - $15,349) (Note 14).
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.
(b) Liquidity risk
Liquidity risk is the risk that the Company will be unable to meet its financial obligations as they fall due. The Company's approach to managing liquidity risk is to ensure, as far as possible, that it will have sufficient liquid funds to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Company's reputation.
At September 30, 2021, the Company has $3,198,231 (2020 - $1,049,049) of cash to settle current liabilities of $1,253,453 (2020 - $958,086) consisting of the following: accounts payable and accrued liabilities of $1,111,612 (2020 - $786,354), due to related party balance of $40,750 (2020 - $28,423), income tax payable of $Nil (2020 - $91,566) and current portion of lease liability of $101,091 (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 $354,908 (2020 - $106,709) which are 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.
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KELSO TECHNOLOGIES INC. Notes to Consolidated Interim Financial Statements For the Nine months September 30, 2021 and 2020 (Unaudited – Prepared by Management) (Expressed in US Dollars) |
5. FINANCIAL INSTRUMENTS (Continued)
(c) Market risk (continued)
(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 September 30, 2021 and December 31, 2020, the Company had the following net monetary assets denominated in CAD (amounts presented in USD):
| September 30, 2021 | December 31, 2020 | |||||
| Cash | $ | 1,583,026 | $ | 52,084 | ||
| Accounts receivable | 87,910 | 92,210 | ||||
| Accounts payable | (258,126 | ) | (109,519 | ) | ||
| $ | 1,412,810 | $ | (34,775 | ) |
Based on the above, assuming all other variables remain constant, a 2% (2020 - 2%) weakening or strengthening of the USD against the CAD would result in approximately $28,256 (2020 - $1,520) foreign exchange loss or gain in the consolidated statements of operations and comprehensive income (loss).
6. INVENTORY
| September 30, 2021 | December 31, 2020 | |||||
| Finished goods | $ | 212,732 | $ | 124,290 | ||
| Raw materials and supplies | 5,504,578 | 5,338,242 | ||||
| $ | 5,717,310 | $ | 5,462,532 |
Included in cost of goods sold is $2,301,893, (2020 - $4,288,154) of direct material costs recognized as expense.
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KELSO TECHNOLOGIES INC. Notes to Consolidated Interim Financial Statements For the Nine months September 30, 2021 and 2020 (Unaudited – Prepared by Management) (Expressed in US Dollars) |
7. PROPERTY, PLANT AND EQUIPMENT
| Leasehold | Production | ||||||||||||||||||||
| Cost | Land | Building | Improvements | Equipment | Prototypes | ROU Asset | Total | ||||||||||||||
| Balance, December 31, 2019 | $ | 12,558 | $ | 2,955,901 | $ | 43,715 | $ | 817,148 | $ | 970,394 | $ | 117,004 | $ | 4,916,720 | |||||||
| Additions | - | 8,082 | - | 175,467 | 1,527,451 | - | 1,711,000 | ||||||||||||||
| Balance, December 31, 2020 | $ | 12,558 | $ | 2,963,983 | $ | 43,715 | $ | 992,615 | $ | 2,497,845 | $ | 117,004 | $ | 6,627,720 | |||||||
| Additions | - | - | - | 17,895 | 292,078 | 188,980 | 498,953 | ||||||||||||||
| Balance, September 30, 2021 | $ | 12,558 | $ | 2,963,983 | $ | 43,715 | $ | 1,010,510 | $ | 2,789,923 | $ | 305,984 | $ | 7,126,673 | |||||||
| 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 | - | 70,389 | 972 | 44,739 | 39,299 | 50,878 | 206,277 | ||||||||||||||
| Balance, September 30, 2021 | $ | - | $ | 777,947 | $ | 39,508 | $ | 692,029 | $ | 988,954 | $ | 136,982 | $ | 2,635,420 | |||||||
| Carrying Value | |||||||||||||||||||||
| September 30, 2021 | $ | 12,558 | $ | 2,186,036 | $ | 4,207 | $ | 318,481 | $ | 1,800,969 | $ | 169,002 | $ | 4,491,253 | |||||||
| 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 $98,685 (2020 - $100,550) of amortization related to property, plant and equipment.
Included in expenses is $107,593 (2020 - $97,440) of amortization related to property, plant and equipment.
Included in research is $Nil (2020 - $183,939) of amortization related to property, plant and equipment.
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KELSO TECHNOLOGIES INC. Notes to Consolidated Interim Financial Statements For the Nine months September 30, 2021 and 2020 (Unaudited – Prepared by Management) (Expressed in US Dollars) |
8. INTANGIBLE ASSETS
| Cost | Patent | Rights | Total | ||||||
| Balance, December 31, 2019 | $ | 40,840 | $ | 672,959 | $ | 713,799 | |||
| Impairment | - | - | (328,010 | ) | |||||
| Balance, December 31, 2020 and September 30, 2021 |
$ | 40,840 | $ | 672,959 | $ | 713,799 | |||
| Accumulated Amortization | |||||||||
| Balance, December 31, 2019 | $ | 40,840 | $ | 65,000 | $ | 105,840 | |||
| Amortization | - | - | - | ||||||
| Balance, December 31, 2020 and September 30, 2021 |
$ | 40,840 | $ | 65,000 | $ | 105,840 | |||
| Carrying Value | |||||||||
| December 31, 2020 and September 30, 2021 |
$ | - | $ | 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 14).
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 March 31, 2021 the Company has not earned any revenue from the sale of the Products.
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.
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KELSO TECHNOLOGIES INC. Notes to Consolidated Interim Financial Statements For the Nine months September 30, 2021 and 2020 (Unaudited – Prepared by Management) (Expressed in US Dollars) |
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 periods ended June 30, 2021 and December 31, 2020 is as follows:
| Lease liability | Warehouse | Vehicles | Total | ||||||
| Lease liability recognized as of December 31, 2019 | $ | - | $ | - | $ | - | |||
| Lease liability recognized | 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 recognized as of December 31, 2020 | $ | 31,418 | $ | 117,831 | $ | 149,249 | |||
| Additions | 188,983 | 45,519 | 234,502 | ||||||
| Lease payments | (42,509 | ) | (23,815 | ) | (66,324 | ) | |||
| Lease interest | 3,431 | 2,522 | 5,953 | ||||||
| Leasing liability recognized as of September 30, 2021 | $ | 181,323 | $ | 142,057 | $ | 323,380 | |||
| Current portion | $ | 69,768 | $ | 31,323 | $ | 101,091 | |||
| Long-term portion | 111,555 | 110,734 | 222,289 | ||||||
| $ | 181,323 | $ | 142,057 | $ | 323,380 |
The Company's non-current contractual lease obligations are as follows:
| Year | Amount | ||
| 2022 | $ | 102,183 | |
| 2023 | 133,915 | ||
| 2024 | 38,052 | ||
| 2025 | 12,865 | ||
| 2026 | 7,322 | ||
| 2027 | 7,322 | ||
| 2028 | 4,512 | ||
| $ | 306,171 |
10. 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.
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KELSO TECHNOLOGIES INC. Notes to Consolidated Interim Financial Statements For the Nine months September 30, 2021 and 2020 (Unaudited – Prepared by Management) (Expressed in US Dollars) |
10. CAPITAL STOCK (Continued)
a) Common shares
During the three months ended March 31, 2021, the Company issued 7,000,000 units at CAD$0.91 pursuant to a private placement gross proceeds of CAD$6,370,000. Each unit consists of one common share and one-half share purchase warrant. Each whole warrant entitles the holder thereof to acquire one common share at a price of CAD$1.15 in year one and CAD$1.30 in year two.
During the period ended June 30, 2021, the Company issued 150,000 shares pursuant to the exercise of stock options for gross proceeds of $55,000.
(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.
Options to purchase common shares have been granted to directors, employees and consultants as follows:
| Exercise | Expiry | December 31, | September 30, | |||||||||||||
| Price | Date | 2020 | Granted | Exercised | Expired | 2021 | ||||||||||
| $1.30(USD) | August 18, 2021 | 1,175,000 | - | - | (1,175,000 | ) | - | |||||||||
| $0.90(USD) | July 6, 2022 | 50,000 | - | - | - | 50,000 | ||||||||||
| $0.30(USD) | November 28, 2022 | 750,000 | - | 100,000 | - | 650,000 | ||||||||||
| $0.50(USD) | August 20, 2023 | 750,000 | - | 50,000 | - | 700,000 | ||||||||||
| $0.57(USD) | April 17, 2023 | 200,000 | - | - | - | 200,000 | ||||||||||
| $1.45(USD) | May 17, 2024 | 10,000 | - | - | - | 10,000 | ||||||||||
| $0.78(USD) | August 19, 2024 | 700,000 | - | - | - | 700,000 | ||||||||||
| $0.82(USD) | November 8, 2024 | 10,000 | - | - | - | 10,000 | ||||||||||
| $0.76(USD) | February 11, 2025 | 200,000 | - | - | - | 200,000 | ||||||||||
| $0.75(USD) | 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 | ) | 2,396,667 | |||||||||
| Exercise | Expiry | December 31, | December 31, | |||||||||||||
| Price | Date | 2019 | Granted | Exercised | Expired | 2020 | ||||||||||
| $1.30(USD) | August 18, 2021 | 1,175,000 | - | - | - | 1,175,000 | ||||||||||
| $0.90(USD) | July 6, 2022 | 50,000 | - | - | - | 50,000 | ||||||||||
| $0.30(USD) | November 28, 2022 | 750,000 | - | - | - | 750,000 | ||||||||||
| $0.50(USD) | August 20, 2023 | 750,000 | - | - | - | 750,000 | ||||||||||
| $0.57(USD) | April 17, 2023 | 200,000 | - | - | - | 200,000 | ||||||||||
| $1.45(USD) | May 17, 2024 | 10,000 | - | - | - | 10,000 | ||||||||||
| $0.78(USD) | August 19, 2024 | 700,000 | - | - | - | 700,000 | ||||||||||
| $0.82(USD) | November 8, 2024 | 10,000 | - | - | - | 10,000 | ||||||||||
| $0.76(USD) | February 11, 2025 | - | 200,000 | - | - | 200,000 | ||||||||||
| $0.75(USD) | 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 | |||||||||||
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KELSO TECHNOLOGIES INC. Notes to Consolidated Interim Financial Statements For the Nine months September 30, 2021 and 2020 (Unaudited – Prepared by Management) (Expressed in US Dollars) |
10. CAPITAL STOCK (Continued)
(b) Stock options (Continued)
A summary of the Company's stock options as at September 30, 2021 and December 31, 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, September 30, 2021 | 3,270,000 | $ | 0.60 |
The weighted average contractual life for the remaining options at September 30, 2021 is 1.75 years (2020 - 2.52).
Share-based expense
Share-based expense of $54,603 (2020 - $30,000) was recognized in the period ended September 30, 2021 for stock options. The share-based expense relates to options granted during December 31, 2020, 2019, 2018 and 2017, 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 | Year ended | |||||||
| December 31, 2020 |
December 31, 2019 |
December 31, 2018 |
|||||||
| Risk-free interest rate (average) | 0.51 | % | 1.32 | % | 2.15 | % | |||
| Estimated volatility (average) | 67.29 | % | 69.93 | % | 66.56 | % | |||
| Expected life in years | 5.00 | 5.00 | 5.00 | ||||||
| Expected dividend yield | 0.00 | % | 0.00 | % | 0.00 | % | |||
| Estimated forfeitures | 0.00 | % | 0.00 | % | 0.00 | % | |||
| Grant date fair value per option | $ | 0.38 | $ | 0.45 | $ | 0.29 |
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.
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KELSO TECHNOLOGIES INC. Notes to Consolidated Interim Financial Statements For the Nine months September 30, 2021 and 2020 (Unaudited – Prepared by Management) (Expressed in US Dollars) |
11. 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:
| September 30, | September 30, | |||||
| 2021 | 2020 | |||||
| Management compensation | $ | 538,154 | $ | 460,000 | ||
| Management bonus* | - | 121,675 | ||||
| Share-based expense** | 42,504 | 45,000 | ||||
| Directors' fees | 122,250 | 122,250 | ||||
| $ | 702,908 | $ | 748,925 |
* The Company has management bonus agreements whereby 10% of the annual income before taxes, amortization and share-based expense is equally distributed to management.
** Share-based expense consists of the key management portion of the fair value of options granted calculated using the Black-Scholes option pricing model and does not include any cash compensation.
As at September 30, 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 $40,750 (2020 - $Nil) for directors' fees and $Nil (2020 - $121,675) for management bonus.
12. SUPPLEMENTAL CASH FLOW INFORMATION
| September 30, | September 30, | |||||
| 2021 | 2020 | |||||
| Property, plant and equipment in accounts payable and accrued liabilities | $ | 365,535 | $ | 170,041 | ||
| Interest paid | $ | 5,954 | $ | 4,076 | ||
| Income taxes paid (recovered) | $ | 147,222 | $ | 129,313 |
13. EARNINGS PER SHARE
The calculation of basic and diluted earnings (loss) per share for the relevant periods is based on the following:
| September 30, | December 31, | |||||
| 2021 | 2020 | |||||
| Net income (loss) for the period | $ | (1,627,595 | ) | $ | (1,307,890 | ) |
| Basic weighted average number of common shares outstanding | 51,242,414 | 47,170,086 | ||||
| Effect on dilutive securities: | ||||||
| Options | 1,550,000 | - | ||||
| Diluted weighted average number of common shares outstanding | 52,792,414 | 47,170,086 | ||||
| Basic income (loss) per share | $ | (0.03 | ) | $ | (0.03 | ) |
| Diluted income (loss) per share | $ | (0.03 | ) | $ | (0.03 | ) |
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KELSO TECHNOLOGIES INC. Notes to Consolidated Interim Financial Statements For the Nine months September 30, 2021 and 2020 (Unaudited – Prepared by Management) (Expressed in US Dollars) |
14. SIGNIFICANT CUSTOMERS
The following table represents sales to individual customers exceeding 10% of the Company's revenues:
| September 30, | June 30, | |||||
| 2021 | 2020 | |||||
| Customer A | $ | 2,011,299 | $ | 4,767,300 | ||
| Customer B | $ | 1,681,140 | $ | 3,656,190 | ||
| Customer C | $ | 764,410 | $ | - |
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 period ended September 30, 2021, there were revenues from sales of the manway securement systems totalling $6,100 (2020 - $Nil).
15. EMPLOYEE BENEFITS
Total employee benefit expenses, including salary and wages, management compensation, share-based expense and benefits for the period ended September 30, 2021 amounted to $2,810,181 (2020 - $2,899,491).
16. SEGMENTED INFORMATION
The Company operates in two business segments with operations and long-term assets in 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 September 30, 2021, long term assets of $2,577,930 (2020 - $2,001,034) relates to the active suspension control system located in Canada and $2,521,282 (2020 - $2,941,310) relates to the rail sector located in the United States. Operating results for each segment are as follows:
| Three months ended | Nine months ended | |||||||||||
| September 30, | September 30, | September 30, | September 30, | |||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||
| Rail Segment | ||||||||||||
| Revenues | $ | 2,093,252 | $ | 1,586,206 | $ | 5,429,090 | $ | 9,754,172 | ||||
| Cost of Goods Sold | 1,248,607 | 985,452 | 3,181,638 | 5,455,412 | ||||||||
| Gross profit | 844,645 | 600,754 | 2,247,453 | 4,298,760 | ||||||||
| Expenses | 1,082,735 | 1,153,556 | 3,198,813 | 3,342,546 | ||||||||
| Profit (loss) before tax | (238,090 | ) | (552,802 | ) | (892,360 | ) | 956,214 | |||||
| Taxes (expense) | (19,000 | ) | 22,410 | (147,222 | ) | (118,249 | ) | |||||
| Profit (loss) | $ | (257,090 | ) | $ | (530,392 | ) | $ | (1,039,582 | ) | $ | 837,965 | |
| Suspension Control Segment | ||||||||||||
| Revenue | $ | - | $ | - | $ | - | $ | - | ||||
| Expense | (176,172 | ) | (151,135 | ) | (588,013 | ) | (490,625 | ) | ||||
| Profit (loss) | $ | (176,172 | ) | $ | (151,135 | ) | $ | (588,013 | ) | $ | (490,625 | ) |
KELSO TECHNOLOGIES INC.
MANAGEMENT DISCUSSION & ANALYSIS
NINE MONTHS ENDED
September 30, 2021
(Expressed in US Dollars unless otherwise indicated)
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Kelso Technologies Inc. |
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MANAGEMENT DISCUSSION AND ANALYSIS
GENERAL
The following management discussion and analysis ("MD&A") of the operations and financial condition of Kelso Technologies Inc. (the "Company" or "Kelso") provides an overview of significant developments that have affected the Company's performance during the nine months ended September 30, 2021. It should be read in conjunction with the unaudited interim consolidated financial statements of the Company together with the related notes thereto for the nine months ended September 30, 2021.
The unaudited interim consolidated financial statements for the nine months ended September 30, 2021 referred to in this MD&A have been prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB"). The following MD&A and the Company's unaudited interim consolidated financial statements were approved by the Audit Committee and the Board of Directors on November 9, 2021.
All amounts herein are expressed in United States dollars (the Company's functional currency) unless otherwise indicated.
References to Adjusted EBITDA in this MD&A 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) 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.
LEGAL NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This MD&A contains "forward-looking statements" within the meaning of applicable securities laws that reflect the Company's current expectations, forecasts and assumptions. Generally, forward looking statements can be identified by the use of forward-looking terminology such as "plans", "expects" or "does not expect", "is expected", "budget", "scheduled", "estimates", "forecasts", "intends", "anticipates" or "does not anticipate", or "believes", or variations of such words or phrases or state that certain actions, events or results "may", "could", "would", "might" or "will be taken", "occur" or "be achieved".
Such forward looking statements 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 such forward looking statements.
These include but are not limited to the economic condition of the railroad industry, which is affected by numerous factors beyond the Company's control including slow sales cycles, creation and adoption of new technologies, the existence of present and possible government regulation and competition. Although Kelso believes the Company's anticipated future results, performance or achievements expressed or implied by the forward-looking statements are based upon reasonable assumptions and expectations, they can give no assurance that such expectations will prove to be correct. The reader should not place undue reliance on forward-looking statements as such statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Kelso to differ materially from anticipated future results, performance or achievement expressed or implied by such forward-looking statements. Such risks and uncertainties include, without limitation; the risk that the Company's products may not work as well as expected; the Company may not be able to break in to new markets because such markets are served by strong and embedded competitors or because of long-term supply contracts; the Company may not be able to grow and sustain anticipated revenue streams; the Company may have underestimated the cost of product development and the time it takes to bring products to market; the Company may not be able to finance the Company's intended product development; that Management may not be able to continue to initiate new product strategies to secure a more reliable growth of financial performance in the future; the Company's products may not sell as well as expected, and competitors may offer better or cheaper alternatives to the Company's products; the Company's technologies may not be patentable, and if patents are granted, the Company may not be able to protect the Company's investment in intellectual property if the Company's patents are challenged; the Company's intended technologies may infringe on the intellectual property of other parties; the Company may not have any parties interested in licensing the Company's technology as expected and certain other risks detailed from time-to-time in Kelso's public disclosure documents.
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Kelso Technologies Inc. |
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Although the Company has attempted to identify important risk factors that could cause actual results to differ materially from those contained in forward-looking statements, there may be other factors that could cause results not to be as anticipated, estimated or intended. There can be no assurance that such statements will prove to be accurate as actual results and future events could differ materially from those anticipated in such statements.
Accordingly, readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statements were made. Readers are advised to consider such forward-looking statements in light of the risks set forth in the Risks and Uncertainties section of this MD&A (Page 19). The Company does not undertake to update any forward-looking statements that are incorporated by reference herein, except in accordance with applicable securities laws. Additional information about the Company and Kelso's business activities is available under the Company's profile on SEDAR at www.sedar.com in Canada and on EDGAR at www.sec.gov in the United States or the Company's website at www.kelsotech.com.
DATE OF REPORT
November 9, 2021
SUMMARY OF FIANANCIAL RESULTS FOR THE PERIODS ENDED SEPTEMBER 30
| Nine months ended September 30 | 2021 | 2020 | ||||
| Revenues | $ | 5,429,090 | $ | 9,754,172 | ||
| Gross profit | $ | 2,247,453 | $ | 4,298,760 | ||
| Gross profit margin | 41 | % | 44 | % | ||
| Adjusted EBITDA (loss) | $ | (1,204,877 | ) | $ | 990,074 | |
| Non-cash expenses | $ | 275,496 | $ | 524,485 | ||
| Taxes | $ | 147,222 | $ | 118,249 | ||
| Net income (loss) | $ | (1,627,595 | ) | $ | 347,340 | |
| Basic earnings (loss) per share | $ | (0.03 | ) | $ | 0.01 | |
| Three months ended September 30 | ||||||
| Revenues | $ | 2,093,252 | $ | 1,586,206 | ||
| Gross profit | $ | 844,645 | $ | 600,754 | ||
| Gross profit margin | 40 | % | 38 | % | ||
| Adjusted EBITDA (loss) | $ | (308,834 | ) | $ | (449,855 | ) |
| Net Income (loss) | $ | (433,261 | ) | $ | (681,527 | ) |
| Basic earnings (loss) per share | $ | (0.01 | ) | $ | (0.01 | ) |
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Kelso Technologies Inc. |
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| Liquidity and Capital Resources | September 30, 2021 |
Dec 31, 2020 |
||||
| Working capital | $ | 9,140,729 | $ | 6,251,893 | ||
| Cash | $ | 3,198,231 | $ | 1,049,049 | ||
| Accounts receivable | $ | 1,253,910 | $ | 535,659 | ||
| Interest bearing long-term debt | Nil | Nil | ||||
| Net equity | $ | 14,017,652 | $ | 10,960,923 | ||
| Total assets | $ | 15,493,394 | $ | 12,016,515 | ||
| Common shares outstanding | 54,320,086 | 47,170,086 |
CORPORATE 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 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 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 was 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 the Company's wholly owned subsidiaries Kelso Technologies (USA) Inc, KIQ X Industries Inc., Kel-Flo Industries Inc. (formerly Kelso Innovative Solutions Inc.), KIQ Industries Inc. and KXI™ Wildertec™ Industries Inc.
Over the past five years Management has established multi-million dollar sales of the Company's 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: $11,149,130 for 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; $6,062,778 for the year ended December 31, 2017 and $8,077,143 for the year ended December 31, 2016.
The Company's net earnings (loss) performance over the last five year end periods were as follows: 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; a net loss of $5,015,911 for the year ended December 31, 2017 and a net loss of $2,465,592 for the year ended December 31, 2016.
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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 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 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.
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 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 of the Company's operations. Industry experts 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 remained at a healthy level of $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 in the quarter ended March 31, 2021. Capital resources are now expected to protect the Company's ability to conduct ongoing business operations for the foreseeable future. Working capital improved to $9,140,729 as at September 30, 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.
In response to a dismal financial performance in 2017 Management actively looked for new diverse marketplace opportunities outside of the rail industry to pursue. The overall corporate objectives are to spread business risks to diminish the severe negative impact of reliance on a small number of customers and the historic down cycles in the rail industry.
Kelso, through the Company's wholly owned subsidiary KIQ X Industries (KIQ) is focused on the development of an advanced "Road-To-No-Road™" suspension system known as the KXI™ Wildertec™ Suspension System (KXI). KXI is being designed to provide safer, more effective, efficient and environmentally responsible capability for commercial wilderness operations. The KXI is a new pioneer brand 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.
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The Phase-One "concept" vehicles fitted with KXI included inventor's innovations, prototype production component parts, fabrication tooling and installation of the mechanical KXI components on a light duty half ton "host" vehicle. Multiple vehicles have been converted and tested. Performance deficiencies are being addressed with final design specifications still to be determined in the areas of reliable components, user interface and computer software functions. Once completed these design advancements will have to attain full compliance with the Canadian Motor Vehicle Safety Standards and the Federal Motor Vehicle Safety Standards in the United States as well as compliance requirements for each Canadian province and American state. This should provide KIQ a national safety mark awarded as a final stage manufacturer which is a key prerequisite for enabling initial commercial fleet sales viability.
The original plans for the KXI in 2020 were to take a concept vehicle to regulatory compliant light-duty truck design specifications. Due to many challenging variables, budgets and engineering deficiencies the Company was unable to complete the regulatory compliant "blueprint" for the Company's first product offerings as originally scheduled. Given that the current R&D environment for light duty specialty vehicles continues to be problematic and unpredictable the Company is carefully revising the Company's R&D strategies.
Going forward, the Company's KXI engineering group includes professional automotive engineers, software and regulatory experts who will push toward final design specifications. Third party wilderness experts and market researchers have confirmed that the Company's "concept" KXI is unique with good market potential. They confirm that a new non-serviced market exists for heavy duty commercial vehicles and is worth pursuit. Although the KXI concept has achieved some off-road performance requirements in light weight vehicles the Company will phase out of the development of half-ton vehicles.
KIQ is scaling the KXI to a heavy-duty (one ton or greater) "host" vehicle which represents a larger more accessible commercial market opportunity. This strategic direction is expected to have lower R&D costs because of better transmissions, diesel options, better payload and towing capacity and tougher durability. The design objectives are to allow commercial users to get to wilderness terrain safely with fewer human errors and fatigue-caused accidents. The goal is for KXI to demonstrate better wilderness performance in a heavy duty vehicle than any other known wheeled vehicle featuring low ecological impact on the ground and meeting complete compliance to all federal standards and regional regulations including warranty support from KIQ, component suppliers and host vehicle OEMs. The Company's experts have indicated that there are regulatory advantages to pursue the development of a heavy-duty vehicle and the KXI development is underway.
The Company will be focusing on developing commercial heavy-duty specialty vehicle markets in 2021 and 2022. The KXI Suspension System is going through a detailed engineering design analysis to move from innovative invention concept to a viable commercial vehicle for a variety of promising wilderness 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.
The Company has secured the services of several OEM suspension and wilderness experts that will support our R&D schedules to produce a market ready product in 2022 with the goal of pilot production and sales in late 2022 with product deliveries in 2023. The HD platform represents a much larger and more accessible commercial market opportunity to pursue.
The Company's main objective is to ensure the KXI provides complete safety compliance with all federal safety standards and regional safety regulations including warranty support from the Company along with the host vehicle OEMs and is a key prerequisite to a market launch in 2022.
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MARKETS AND PRODUCTS
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 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.
Currently the Company offers a wide range of proprietary valves and other specialty equipment for rail tank cars and road tankers. In the 1990's 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 77,000 valves generating more than $111 million in revenues.
The Company's products provide a rewarding economic value proposition for all rail 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 the Company's products. Key products include:
Rail and Road Transport Equipment
- Pressure relief valves
- Vacuum relief valves
- Bottom outlet valves (under AAR field service trials)
- Pressure car pressure relief valves (new market under AAR field service trials)
- Pressure car angle valves (new market under AAR field service trials)
- Top ball valves (under AAR field service trials)
- DOT 407 PRV/VRV for truck tankers (new market)
- One-bolt manways and related equipment
- Emergency response equipment for hazmat first responders
- No spill locomotive fueling equipment
- Other specialty valves, parts, equipment and services
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Rail Tank Car Market Indicators
The rail tank car market in North America is not considered a growth industry but rather a cyclical commodity market that is historically unpredictable. Kelso is focused on growing the rail business through the sales of a wider range of pressure relief valves, vacuum relief valves, ball valves, bottom outlet valves, manway equipment, angle valves and other specialized equipment.
Based on current projections from industry analysts (Freight Transportation Research ("FTR") Associates) total tank car loading levels in 2021 are expected to remain slightly above 2020 levels. Industry experts anticipate that the OEM producers will produce approximately 8,000 new tank cars 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. New tank car demand is expected to grow to 14,300 tank cars in 2022 and 19,125 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.
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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.
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To improve the customers' operating effectiveness producing economic rewards with proven reliable equipment.
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To build reliable equipment featuring high-quality milled parts eliminating problematic cast parts that lead to complex expensive repairs for customers.
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To ensure that customers benefit with more profitable in-service time for tank cars.
KXI™ Wildertec™ 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 X Industries Inc. (KIQ) began the development of a unique vehicle suspension system that provided new rapid response "road-to-no-road-and-back" capabilities regardless of the climate or the severity of the terrain. The KXI Suspension System is being developed under 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 and equipment 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 emergency responders in the wilderness.
The Company considered the engineering challenge and ambition worth pursuing. 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 harms way and society will have to respond to these events with better capabilities, faster response times and improved effectiveness to preserve human lives and prevent property damage.
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The basic design premise of KXI Suspension System is to manage the center-of-gravity to better balance a wheeled vehicle featuring gyroscopic control system and driver assist software. This ensures that the driver, passengers and payload remain in a stable balanced 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:
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All weather - all terrain "Road-To-No-Road™" emergency response capabilities that can eliminate time consuming trailer transportation costs for heavy equipment needed in difficult service areas.
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Better mobility with dual steering technologies for commercial customers. These customers must operate in extreme rough wilderness terrains in wheeled vehicles for the purpose of safely reaching remote destinations with multiple passengers and maximum payload all while having a minimal negative impact on the environment.
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Low environmental impact where the KXI Suspension System reduces nominal ground pressure of the vehicle (floatation weight) to under the government's recommended 2 PSI resulting in no traceable disturbance or negative impact on the ground, wildlife or plant life.
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Gyroscopic balanced ride improves access in heavily sloped wilderness areas and provides higher speed of response to emergency events.
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Cost reductions when helicopters, track-based vehicles and heavy equipment transport can be diminished by less expensive KXI equipped vehicles.
During the three months ended March 31, 2021 the Company terminated the Technology Development Agreement with the inventor of the KXI Suspension System, including the consulting agreement for $10,000 per month. The Company will still maintain intellectual property rights acquired under the agreement and will still be liable for the 2.5% royalty to the service provider, inventor or their assigns. This termination is currently in the arbitration process pursuant to the terms of the agreement.
In 2021 the Company's KXI Suspension System is going 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 and the overall objective 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.
PRODUCTION AND R&D 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.
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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 our 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 the HD design advancements will have to attain full compliance with the Canadian Motor Vehicle Safety Standards and the Federal Motor Vehicle Safety Standards in the United States as well as compliance with 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.
PUBLIC INFORMATION POLICY
The Company advises the public about the Company's business progress by way of quarterly and consolidated annual financial statements as well as MD&A reports for those periods. The Company will issue press releases announcing material events that affect the business health of the Company in accordance with the policies and guidelines of the Toronto Stock Exchange and the NYSE American Exchange. The Company does not give investment advice to investors and does not respond to solicitations to discuss privileged information from the public in accordance with securities laws in Canada and the United States.
Further, Kelso does not provide forward looking revenue projections to the public. Kelso is a product development enterprise and Management is unable to measure or determine the future financial impact related to new rail regulations, uncertain technology adoption strategies of customers and the cyclical conditions surrounding the rail tank car industry. All of these factors are well beyond the control of Kelso.
RESULTS OF OPERATIONS
The financial results for the nine and three months ended September 30, 2021 are representative of a light industrial organization that continues to build the Company's brand through the research and design, development and marketing of a diverse range of rail and automotive transportation equipment. Kelso currently generates its revenues from the sales of equipment in the rail tank car industry. Kelso's financial performance is reliant on tank car business activity which was severely impacted by COVID-19 in 2020 and 2021.
During the unprecedented challenges of the COVID-19 crisis the Company's main focus has been the containment of negative impacts on the Company's longer-term business model and the protection of the Company's key productive assets. The Company has concentrated on preparedness for post-pandemic normalization, scheduled product development and readiness for a strong restart of business growth.
Financial performance in the nine months ended September 30, 2021 suffered due to a steep decline in sales activity over the prior nine months ended September 30, 2020. This economic decline clearly demonstrated the seriousness of the potential threat to the Company's business survival. The OEM rail tank car producers went into shut down in April 2020 and are slowly restarting in a more meaningful way. There are encouraging signs of new activity for the latter part of 2021 with momentum building in 2022 by the OEMs. Combined with repair and retrofit operations business activity is expected to allow the continuation and growth of the Company's operations.
Revenues, corresponding expenses, financial performance and capital management during the nine months ended September 30, 2021 reflected Kelso's continued ability to manage the Company's capital resources, source new equity funding and to navigate difficult market conditions results in accordance with the Company's revised COVID-19 strategic plans. Financial results met the Company's expectations and reflect the revenues and related operational costs of marketing, producing and distributing the Company's proven line of rail tank equipment including key investments in new product development and production capability associated with a more diverse product mix in both rail and automotive markets.
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The Company's longer-term strategic plans require Kelso to make ongoing investments in the Company's production capabilities (including equipment, lease costs, training and qualifying human resources); railroad regulatory filings; liability insurance; marketing initiatives; independent lab testing and outsourced specialized industrial engineering services; new patent applications; regulatory public company administration processes in Canada and the United States; pre-sales production planning and tooling for the Company's growing portfolio of rail and automotive products. These costs are written off in the period when they occur and their impact is reflected in the reported financial performance of the Company in the period in which they were incurred.
Nine months ended September 30, 2021
For the nine months ended September 30, 2021, the Company reported a net loss of $1,627,595 ($0.03 per share) against revenues of $5,429,090 compared to a net income of $347,340 ($0.01 per share) against revenues of $9,754,172 for the nine months ended September 30, 2020.
Gross profit margin returns were $2,247,453 (41% of revenues) for the nine months ended September 30, 2021 compared to $4,298,760 (44% of revenues) for the nine months ended September 30, 2020. Gross profit margin decreased slightly because of the inefficiencies of low production volumes due to the industry wide shutdowns and increases in material costs.
Total operational expenses declined slightly to $3,727,825 for the nine months ended September 30, 2021 compared to $3,833,171 for the nine months ended September 30, 2020. Expenses are in line with Management's expectations and COVID-19 strategic plans to facilitate the pending restart of rail business and the continued development of the Company's new product lines.
Adjusted EBITDA refers 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) 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. Adjusted EBITDA for the nine months ended September 30, 2021 and 2020 has been calculated as follows:
| Nine months ended September 30, 2021 |
Nine months ended September 30, 2020 |
|||||
| Net income (loss) | $ | (1,627,595 | ) | $ | 347,340 | |
| Share-based expense | $ | 54,603 | $ | 127,500 | ||
| Unrealized foreign exchange loss (gain) | $ | 14,615 | $ | 33,528 | ||
| Amortization | $ | 206,278 | $ | 363,457 | ||
| Income taxes | $ | 147,222 | $ | 118,249 | ||
| Adjusted EBITDA (Loss) | $ | (1,204,877 | ) | $ | 990,074 |
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Factors in the reported income for the nine months ended September 30, 2021 include expenses related to ongoing marketing initiatives in the amount of $243,313 (2020 - $282,618) and related travel costs of $35,264 (2020 - $46,224). These expenses are related to ongoing marketing programs for existing and new products. Travel costs have been reduced due to COVID 19 "work-from-home" initiatives.
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 nine months ended September 30, 2021 the Company's industrial product design and development costs were $480,425 (2020 - $688,414). 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 products.
Management continues to carefully administrate both the Company's rail operations and KXI Suspension System development with the goal of longer-term business growth. This is reflected in the Company's investments in human resources, marketing, sales and production operations for the nine months ended September 30, 2021. The Company recorded office and administrative costs of $1,667,895 (2020 - $1,529,929) and management compensation was $538,154 (2020 - $581,675). There was no accrual for contractual management performance bonuses for the nine months ended September 30, 2021 (2020 - $156,050). 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 $288,476 (2020 - $180,261) while investor relations remained unchanged at $63,000 (2020 - $63,000).
Accounting, audit and legal fees are cost components of the Company's corporate and product 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 $234,487 for the nine months ended September 30, 2021 (2020 - $202,581). 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 loss of $14,615 for the nine months ended September 30, 2021.
The Company has recorded an income tax expense of $147,222 for the nine months ended September 30, 2021 compared to $118,249 for the nine months ended September 30, 2020.
Third Quarter - Three months ended September 30, 2021
The results for the three months ended September 30, 2021 continued to be impacted by the circumstances surrounding the COVID-19 pandemic. The net loss for the three months ended September 30, 2021 was $433,261 ($0.01 per share) compared to reported net loss of $681,527 ($0.01 per share) for the three months ended September 30, 2020 against revenues for the three months ended September 30, 2021 of $2,093,252 compared to $1,586,206 for the three months ended September 30, 2020.
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Gross profit was $844,645 (40% of revenues) for the three months ended September 30, 2021 compared to $600,754 (38% of revenues) for the three months ended September 30, 2020. Gross profit margin returns remained consistent due to marketing and sales practices that utilize a disciplined quoting system.
Quarterly expenses were in line with management expectations and consistent with the results of the first half of 2021.
CRITICAL ACCOUNTING ESTIMATES
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 the Company's 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.
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.
(a) Impairment of long-lived assets
Long-lived assets consist of intangible assets and property, plant and equipment.
Determining the amount of impairment of intangible assets requires an estimation of the recoverable amount, which is defined as the higher of fair value less the cost of disposal or value in use. Many factors used in assessing recoverable amounts are outside of the control of Management and it is reasonably likely that assumptions and estimates will change from period to period.
(b) Useful lives of depreciable assets
The Company reviews the Company's 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.
(c) 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.
(d) Share-based expense
The Company grants share-based awards to certain officers, employees, directors and other eligible persons. The fair value of the equity-settled awards is determined at the date of the grant using the Black-Scholes option pricing model. Option pricing models require the input of highly subjective assumptions, including the expected volatility and expected life of the options. Changes in these assumptions can materially affect the fair value estimate, and therefore, the existing models do not necessarily provide a reliable measure of the fair value of the Company's stock options.
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(e) 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. As at September 30, 2021, the Company has made no allowance for doubtful accounts.
LIQUIDITY AND CAPITAL RESOURCES
As at September 30, 2021 the Company had cash on deposit in the amount of $3,198,231, accounts receivable of $1,253,910, prepaid expenses of $224,731 and inventory of $5,717,310 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 September 30, 2021 compared to income tax payable of $91,566 as at December 31, 2020.
The working capital position of the Company as at September 30, 2021 was $9,140,729 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 $14,017,652 as at September 30, 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 September 30, 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 exiting 2021 and into 2022 however the Company is still operating in uncertain times. There is a possibility of further diminishment of the Company's financial performance during 2021 due to the pandemic protocols although the duration of the downturn still remains uncertain. The Company feels 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. Business risks are detailed in the Risks and Uncertainties section of this MD&A (Page 19).
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SELECTED QUARTERLY INFORMATION
| Three months ended September 30, 2021 |
Three months ended June 30, 2021 |
Three months ended March 31, 2021 |
Three months ended December 31, 2020 |
|||||||||
| Revenues | $ | 2,093,252 | $ | 2,115,352 | $ | 1,220,487 | $ | 1,394,958 | ||||
| Gross profit | $ | 844,645 | $ | 949,292 | $ | 453,517 | $ | 493,918 | ||||
| Expenses including non-cash items | $ | 1,277,906 | $ | 1,343,511 | $ | 1,253,629 | $ | 1,817,056 | ||||
| Net income (loss) for the quarter | $ | (433,261 | ) | $ | (394,220 | ) | $ | (800,113 | ) | $ | (1,655,230 | ) |
| Basic earnings (loss) per share | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.02 | ) | $ | (0.05 | ) |
| Adjusted EBITDA (loss) | $ | (308,834 | ) | $ | (208,195 | ) | $ | (687,848 | ) | $ | (623,917 | ) |
| Common shares outstanding | 54,270,086 | 54,270,086 | 54,270,086 | 47,170,086 |
| Three months ended September 30, 2020 |
Three months ended June 30, 2020 |
Three months ended March 31, 2020 |
Three months ended December 31, 2019 |
|||||||||
| Revenues | $ | 1,586,206 | $ | 2,524,538 | $ | 5,643,428 | $ | 5,303,193 | ||||
| Gross profit | $ | 600,754 | $ | 1,095,680 | $ | 2,602,326 | $ | 2,553,236 | ||||
| Expenses including non-cash items | $ | 1,282,281 | $ | 1,350,108 | $ | 1,319,031 | $ | 1,149,218 | ||||
| Net income for the quarter | $ | (681,527 | ) | $ | (254,428 | ) | $ | 1,283,295 | $ | 1,242,539 | ||
| Basic earnings (loss) per share | $ | (0.01 | ) | $ | (0.00 | ) | $ | 0.03 | $ | 0.03 | ||
| Adjusted EBITDA (loss) | $ | (449,855 | ) | $ | 35,441 | $ | 1,404,488 | $ | 1,071,276 | |||
| Common shares outstanding | 47,170,086 | 47,170,086 | 47,170,086 | 47,170,086 |
SELECTED ANNUAL INFORMATION
| Year ended December 31 2020 |
Year ended December 31 2019 |
Year ended December 31 2018 |
|||||||
| Revenues | $ | 11,149,130 | $ | 20,550,682 | $ | 12,716,596 | |||
| Cost of goods sold | $ | 6,356,452 | $ | 10,967,803 | $ | 7,429,380 | |||
| Gross profit | $ | 4,792,678 | $ | 9,582,879 | $ | 5,287,216 | |||
| Expenses including non cash items | $ | 5,768,476 | $ | 6,087,357 | $ | 4,955,448 | |||
| Income tax expense (recovery) | $ | 248,992 | $ | 99,077 | $ | (251,164 | ) | ||
| Net income (Loss) for the year | $ | (1,307,890 | ) | $ | 3,334,043 | $ | 194,453 | ||
| Number of common shares outstanding | 47,170,086 | 47,170,086 | 47,170,086 | ||||||
| Basic and diluted earnings (Loss) per common share | $ | (0.03 | ) | $ | 0.07 | $ | 0.00 | ||
| Adjusted EBITDA (Loss) | $ | 366,157 | $ | 4,233,339 | $ | 1,017,153 | |||
| Cash | $ | 1,049,049 | $ | 4,418,236 | $ | 1,246,244 | |||
| Working capital | $ | 6,251,893 | $ | 7,937,873 | $ | 4,469,882 | |||
| Total assets | $ | 12,016,515 | $ | 13,731,571 | $ | 9,944,990 | |||
| Shareholders' equity | $ | 10,960,923 | $ | 11,845,275 | $ | 8,165,734 |
OFF BALANCE SHEET TRANSACTIONS
There are no off-balance sheet arrangements which could have a material effect on current or future results of operations or on the financial condition of the Company.
CHANGES IN ACCOUNTING POLICIES INCLUDING INITIAL ADOPTION
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 the Company's consolidated financial statements would not be significant.
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FINANCIAL INSTRUMENTS
Financial instruments are agreements between two parties that result in promises to pay or receive cash or equity instruments. The carrying values of cash, accounts receivable and accounts payable and accrued liabilities approximate their fair values due to their short term to maturity. The Company has exposure to the following risks from 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 $3,198,231 as at September 30, 2021 (December 31, 2020 - $1,049,049).
With respect to the Company's 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 $1,253,910 as at September 30, 2021 (December 31, 2020 - $535,659).
The Company's concentration of credit risk for accounts receivable as at September 30, 2021 with respect to Customer A is $120,881 (2020 - $105,820), Customer B is $675,585 (2020 - $150,300) and Customer C is $68,359 (2020 - $15,349).
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 the Company's 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 the Company's liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Company's reputation.
As at September 30, 2021, the Company has cash in the amount of $3,198,231 (December 31, 2020 - $1,049,049) and accounts receivable of $1,253,910 (December 31, 2020 - $535,659) to settle current liabilities of $1,253,453 (December 31, 2020 - $958,086) with the following due dates; trade accounts payable of $1,111,612 (December 31, 2020 - $786,354) are due within three months; and due to related party balances of $40,750 (December 31, 2020 - $28,423), income tax payable of $Nil (December 31, 2020 - $91,566) and current portion of lease liability of $101,091 (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 $354,908 (December 31, 2020 - $100,709) which are due between one to five years.
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(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.
As at September 30, 2021 and December 31, 2020, the Company's net exposure to foreign currency risk is as follows (in US):
| September 30, 2021 | December 31, 2020 | |||||
| Net (liabilities) | $ | 1,412,810 | $ | (34,775 | ) |
Based on the above, assuming all other variables remain constant, a 2% (2020 - 2%) weakening or strengthening of the USD against the CAD would result in approximately $28,256 (2020 - $1,520) foreign exchange loss or gain in the consolidated statements of operations.
(iii) Other price risk
Other price risk is the risk that the future cash flows of a financial instrument will fluctuate due to changes in market prices, other than those arising from interest rate risk or currency risk. The Company is not exposed to other price risk.
CAPITAL MANAGEMENT
The Company considers the Company's capital to be comprised of capital stock. The Company's objective in managing the Company's capital is to maintain the Company's ability to continue to operate as a going concern and to further develop the Company's business goals.
In order to facilitate the management of the Company's 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 business objectives are met. There were no changes to the Company's approach to capital management during 2021. There are no externally-imposed restrictions on the Company's capital.
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The Company's capital needs for 2020 were successfully financed from operations and existing capital reserves. Given the persisting unpredictable COVID-19 economic circumstances Management carefully assessed the Company's future capital needs going forward. The sharp decline of the Company's revenues in 2020 continuing into 2021 compromised the Company's available capital reserves to fund the Company's 2021 business affairs. It was determined by the Board of Directors 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.
On March 4, 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 is 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.
DISCLOSURE CONTROLS AND PROCEDURES
The Company maintains appropriate information systems, procedures and controls to ensure that information used internally and disclosed externally is complete, accurate, reliable and timely. The disclosure controls and procedures ("DC&P") are designed to provide reasonable assurance that information required to be disclosed in the annual filings, interim filings or other reports filed under securities legislation is recorded, processed, summarized and reported within the time periods specified in the securities legislation and include controls and procedures designed to ensure that information required to be disclosed is accumulated and communicated to Management, including the Company's certifying officers, as appropriate to allow timely decisions regarding required disclosure.
The President and Chief Executive Officer and Chief Financial Officer of the Company have evaluated, or caused the evaluation of, under their direct supervision, the design effectiveness of the Company's DC&P (as defined in Regulation 52-109 - Certification of Disclosure in Issuer's Annual and Interim Filings) as at September 30, 2021 and have concluded that such DC&P were designed effectively.
INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal controls over financial reporting ("ICFR") to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS.
Management has evaluated the design of the Company's ICFR as defined in Regulation 52-109 - Certification of Disclosure in Issuer's Annual and Interim Filings. The evaluation was based on the criteria established in the "Internal Control-Integrated Framework" issued by the Committee of Sponsoring Organizations (2013) ("COSO"). This evaluation was performed by the President and Chief Executive Officer and Chief Financial Officer of the Company with the assistance of other Company's management and staff to the extent deemed necessary. Based on this evaluation, the President and Chief Executive Officer and Chief Financial Officer concluded that the ICFR were effectively designed as at September 30, 2021.
In spite of the Company's evaluation, Management does recognize that any controls and procedures; no matter how well designed and administrated, can only provide reasonable assurance and not absolute assurance of achieving the desired control objectives.
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RISKS AND UNCERTAINTIES
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 MD&A. 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 through December 2020 and subsequent to the date of the financial statements. The situation continues to rapidly evolve. The duration and magnitude of COVID-19's effects on the economy, and on the Company's financial and operational performance remains uncertain at this time.
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 2021, 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.
"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.
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"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 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 be unable to secure or maintain regulatory qualifications for the Company's products."
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 could have a material negative impact on the Company's ability to obtain purchase orders and generate meaningful revenues.
"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 $9,140,729 as at September 30, 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 the beginning of 2021. The sharp 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. On March 4, 2021 the Company completed a private placement whereby 7,000,000 units were issued at a price of CAD$0.91 per unit, raising CAD$6,370,000 before expenses.
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"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 able to mitigate the risk of loss to the Company from cancelled orders in this manner.
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"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. 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 proprietary new products for the railroad industry and road-to-no-road 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.
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"The Company may face uninsurable or underinsured risks."
In the course of development and production of railroad equipment products, certain risks, and in particular, destruction of production facilities by a natural disaster, acts of terrorism, acts of war or patent infringement may occur. It is not always possible to fully insure against such risks and the Company may decide not to take out insurance against such risks as a result of high premiums or other reasons. Should such liabilities arise, they could reduce or eliminate any future profitability and result in increasing costs and a decline in the value of the securities of the Company. Of the above listed risks, only an act of war is truly uninsurable. The Company maintains commercial general liability insurance for claims up to $4,000,000 in aggregate and $1,000,000 per incident, as well as product liability insurance for claims up to $4,000,000 in aggregate and $1,000,000 per incident.
Although the Company believes that the insurance policies currently in place adequately insure the Company given the size of 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.
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RELATED PARTY TRANSACTIONS
The remuneration of the Company's directors and three 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:
| Nine months ended September 30, 2021 |
Nine months ended September 30, 2020 |
|||||
| Management compensation | $ | 538,154 | $ | 460,000 | ||
| Management bonuses* | $ | - | $ | 121,675 | ||
| Share-based expense | $ | 42,504 | $ | 45,000 | ||
| Directors' fees | $ | 122,250 | $ | 122,250 |
* The Company has Management bonus agreements whereby 10% of the annual income before taxes, amortization and share-based expense is equally distributed to Management. This bonus is accrued by quarter and is paid based upon the audited year end balance not later than May 15 of the year following.
As at September 30, 2021, amounts due to related parties included in accounts payable which are unsecured and have no interest or specific terms of payments, consist of $40,750 (2020 - $Nil) for directors' fees and $Nil (2020 - $121,675) for Management bonuses.
DISCLOSURE OF OUTSTANDING SHARE DATA
1) Common shares issued and outstanding: 54,320,086
2) Share purchase options outstanding: 3,270,000
3) Share purchase warrants outstanding: 3,500,000
4) Restricted share units outstanding: 355,000
SUBSEQUENT EVENTS
On November 2, 2021 Kelso reported that it had received final certification of the Company's pressure relief valve (PCH) for use on rail pressure cars from the Association of American Railroads (AAR). The PCH has 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 Department of Transport (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 Kelso because it allows the Company to pursue sizable untapped revenue opportunities in the rail pressure car market. There are more than 438,000 rail tank cars in the North American fleet and approximately 85,000 of those are pressure cars. The PCH is now fully qualified to be distributed to the pressure car market as ordered by rail car customers.
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OUTLOOK
The anticipated return to pre-pandemic business volumes in 2021 is happening very slowly. The dismal rail tank car activity experienced over the past 18 months remains an impediment to the recovery of financial performance. A momentum build in 2022 based on anticipated new product offerings in trucking tank trailers, pressure rail cars and compliance requirements for the ethanol industry continue to encourage Management about the Company's recovery prospects in 2022 and beyond.
During the COVID-19 driven rail recession Management has focused on the containment of the potential negative impacts on the Company's business model and the protection of the Company's key productive assets. Kelso has prepared itself for the anticipated post-pandemic growth in business activity by way of maintaining larger inventories, key employees, a new equity financing secured in the first quarter of 2021 and continuing R&D activities to broaden out product lines.
The Company is fully prepared for stronger business growth anticipated in 2022. Rail industry experts anticipate that in 2021 the OEM producers will manufacture approximately 8,000 new tank cars. In addition, significant retrofits are being evaluated to address the pending 2023 changes in ethanol regulations as the ethanol industry plans for the appropriate post 2023 fleet size which currently stands at more than 30,000 tank cars. Also, a significant number of tank cars are due for re-certification and some owners are planning to address these tank cars now while there is repair shop space available. (Tony to update)
Industry projections indicate that the tank car market is entering a period of modest fleet growth coupled with growth in rail tank car utilization. New tank car demand is expected to grow to 14,300 tank cars in 2022 and 19,125 tank cars in 2023. The anticipated upswing in new build and retrofit activity for ethanol and pressure tank cars combined with a growing number of certified Kelso products are expected to provide new longer-term financial growth opportunities from rail operations.
With respect to the KXI Wildertec™ Suspension System program, the Company has secured the services of key engineers, software specialists and OEM suspension experts that will support our R&D schedules to equip a "heavy duty" (HD) vehicle with a regulatory compliant KXI suspension in the second half of 2022. Once accomplished the goal is to initiate pilot production and sales in late 2022 or early 2023 although scheduling has been negatively impacted by the well documented supply chain disruptions in the automotive industry. The HD platform represents a much larger accessible commercial market opportunity to pursue. This strategic direction is expected to reduce R&D costs and maintain strategic timetables. Once completed the HD design advancements will have to attain full compliance with the Canadian Motor Vehicle Safety Standards and the Federal Motor Vehicle Safety Standards in the United States as well as compliance with 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 addition to KXI, the Company continues the development of promising new rail products. Our pressure car PCH valve has successfully completed field service trials, final inspection and full AAR approval subsequent to September 30, 2021. Field service trials are ongoing with our pressure car angle valve, top ball valve and bottom outlet valves despite current uncertainties and economic disruptions. Valve products for trucking applications are in full market development.
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In the heavily regulated transportation industry the Company's R&D projects are complex, time consuming and expensive. The primary purpose of our R&D investments is to advance and elevate the probability of future financial successes from a larger and more diverse product line. Despite the many challenges imposed by the COVID-19 recession Management remains bullish on the potential of all of its new product developments although timing of regulatory approvals and new revenue streams remains unpredictable and certainly not guaranteed to develop at all. Management continues to assess research discoveries, new product viability, tighter budget restrictions and market potential of all of the Company's R&D programs and adjusts strategic plans as part of the Company's R&D risk management.
The Company has deployed capital resources sensibly to maintain financial health and liquidity during the pandemic. The Company's balance sheet strength and working capital position remained healthy at $9,140,729 as at September 30, 2021. The financial capital secured during the first quarter is expected to protect the Company's ability to conduct ongoing business operations for the foreseeable future.
The Company's future business prospects for rail tank car products over the next three years are encouraging despite the current uncertainties. We have unique products to service new regulatory guidelines that require a fleet of more than 30,000 ethanol tank cars to be regulatory compliant in early 2023. In addition we are developing new products that can service a fleet of approximately 85,000 pressure tank cars - a market that is completely new to Kelso and represents a significant business growth opportunity.
The Company has maintained its abilities to fully service customer needs when the pandemic subsides. Management's focus has been to concentrate on what Kelso has done well in the past enhancing the importance of our corporate brand in the rail industry and a clear ambition for the future of Kelso with new product opportunities in more diverse transportation markets. With no interest-bearing long-term debt to service, replenished capital reserves secured through a new equity financing, broader sales prospects from a larger product portfolio, Kelso is working to exit the pandemic crisis with stronger financial performance on behalf of the shareholders of Kelso.
Kelso Technologies Inc.
James R. Bond,
President and Chief Executive Officer
Form 52-109F2
Certification of Interim Filings
Full Certificate
I, James R. Bond, President and Chief Executive Officer of Kelso Technologies Inc., certify the following:
1. Review: I have reviewed the interim financial report and interim MD&A (together, the "interim filings") of Kelso Technologies Inc. (the "issuer") for the interim period ended September 30, 2021.
2. No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings.
3. Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings.
4. Responsibility: The issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as those terms are defined in National Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings, for the issuer.
5. Design: Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer's other certifying officer(s) and I have, as at the end of the period covered by the interim filings
(a) designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that
(i) material information relating to the issuer is made known to us by others, particularly during the period in which the interim filings are being prepared; and
(ii) information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and
(b) designed ICFR, or caused it 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 the issuer's GAAP.
5.1 Control framework: The control framework the issuer's other certifying officer(s) and I used to design the issuer's ICFR is published by The Committee of Sponsoring Organizations of the Treadway Commission.
5.2 n/a
5.3 n/a
6. Reporting changes in ICFR: The issuer has disclosed in its interim MD&A any change in the issuer's ICFR that occurred during the period beginning on July 1, 2021 and ended on September 30, 2021 that has materially affected, or is reasonably likely to materially affect, the issuer's ICFR.
Date: November 10, 2021.
| /s/ "James R. Bond" |
|
JAMES R. BOND President & Chief Executive Officer Kelso Technologies Inc. |
Form 52-109F2
Certification of Interim Filings
Full Certificate
I, Richard Lee, Chief Financial Officer of Kelso Technologies Inc., certify the following:
1. Review: I have reviewed the interim financial report and interim MD&A (together, the "interim filings") of Kelso Technologies Inc. (the "issuer") for the interim period ended September 30, 2021.
2. No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings.
3. Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings.
4. Responsibility: The issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as those terms are defined in National Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings, for the issuer.
5. Design: Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer's other certifying officer(s) and I have, as at the end of the period covered by the interim filings
(a) designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that
(i) material information relating to the issuer is made known to us by others, particularly during the period in which the interim filings are being prepared; and
(ii) information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and
(b) designed ICFR, or caused it 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 the issuer's GAAP.
5.1 Control framework: The control framework the issuer's other certifying officer(s) and I used to design the issuer's ICFR is published by The Committee of Sponsoring Organizations of the Treadway Commission.
5.2 n/a
5.3 n/a
6. Reporting changes in ICFR: The issuer has disclosed in its interim MD&A any change in the issuer's ICFR that occurred during the period beginning on July 1, 2021 and ended on September 30, 2021 that has materially affected, or is reasonably likely to materially affect, the issuer's ICFR.
Date: November 10, 2021.
| /s/ "Richard Lee" |
|
RICHARD LEE Chief Financial Officer Kelso Technologies Inc. |
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