Kelso Technologies Inc.
TSX VENTURE : KLS

Kelso Technologies Inc.

July 27, 2011 12:25 ET

Kelso Technologies Inc.: Third Quarter Ended May 31, 2011

VANCOUVER, BRITISH COLUMBIA--(Marketwire - July 27, 2011) - Kelso Technologies Inc. (The "Company" or "Kelso") (TSX VENTURE:KLS) -

The Company reports that it has released its unaudited consolidated financial statements for the three and nine month periods ended May 31, 2011.

Results of Operations

The results for the three and nine months ended May 31, 2011 are indicative of a revitalized company working to establish a business infrastructure that can reliably produce and sell its products to customers in adequate volume. Kelso has invested heavily in pre-sales marketing of its patented technologies to gain a commercial foothold in the railroad industry. The Company's technologies have proven to be very relevant in the eyes of customers and regulators. Management is working with key customers on infrastructure strategies that will determine their rates of adoption over the coming years.

With the success of its marketing efforts during the year to date Kelso must now invest diligently in building its production capability to satisfy customer demand. Kelso commenced sales, assembly production and distribution of its external constant pressure valves from its new facility in Bonham, Texas in January 2011. Production infrastructure investment has been costly but is expected to become more effective, efficient and economic as productive systems mature over the next 12 to 24 months.

The third quarter loss for the three months ended May, 2011 was $332,212 against revenue of $351,267 compared to a loss of $146,788 against revenue of $3,723 for the same period in 2010.

The loss for the nine months ended May 31, 2011 was $800,325 against revenue of $851,995 compared to a profit of $42,800 against revenue of $31,434 for the same period in 2010. In 2010 the reported profit was created by the forgiveness and restructuring of a large portion of debt by related parties and shareholders totaling $438,510.

Factors in the loss for the nine months ended May 31, 2011 included the expenses related to the establishment of operational facilities in Lisle, Illinois and Bonham, Texas as well as product development expenditures and marketing expenses for the MSS technology that will not see sales until late 2011.

Other factors include non-cash stock-based compensation expense of $163,816 for options granted during the year to date and accounting and legal costs which totaled $78,926. These costs are high due to financing activities. Research and development costs were $137,244 and represented expenditures on the Company's MSS and coatings laboratory in Lisle (Chicago), Illinois. Coatings research and development has been suspended.

The Company is staffing and training for the future full scale marketing and production operations hence higher salaries and benefits costs of $182,693 and management fees of $165,283 were recorded. Travel costs were higher as the Company has undertaken a full scale marketing program to increase customer awareness of our products.

Gross profit margins improved to 35% for the three months ended May 31, 2011 and improved year-to-date margins to 32% as new supply chains and employees gain experience in the production of our products. Gross profit improvement from the prior period results on a percentage basis is expected to improve further as production operations become more efficient and effective. The Company is beginning to gain better control of its production processes and cost minimization is a key goal.

Kelso held cash deposits of $142,633 against outstanding customer orders. For reporting purposes these deposits have been recorded as deferred revenue on the balance sheet at May 31, 2011 until the products are distributed in future periods.

Liquidity, Capital Resources and Shareholder Equity

At May 31, 2011, the Company had cash on deposit in the amount of $1,264,006; accounts receivable in the amount of $140,388; HST receivable of $70,673 and prepaid expenses and inventory of $177,244 compared to cash on deposit of $284,207; accounts receivable of $142,834 and HST receivable of $28,933 and prepaid expenses of $17,690 at August 31, 2010.

The working capital position of the Company at May 31, 2011 was $1,262,401 which includes $16,390 due to related parties and $142,633 in deferred revenue representing deposits on product orders received compared to a working capital position of $91,950 which included $111,344 due to related parties and a $75,000 note payable at August 31, 2010.

Subsequent to May 31, 2011 Kelso closed a non-brokered private placement in the amount of $1,000,000. The Company issued 2,000,000 units of the Company at a price of $0.50 per unit. Each unit consists of one common share and one-half of one share purchase warrant. One whole warrant will entitle the holder to purchase one additional common share of the Company exercisable at a price of $0.70 until July 22, 2013. All the securities issued in connection with this private placement are subject to a four-month hold period expiring November 23, 2011. The Company paid 8% finder's fees in accordance with TSX Venture Exchange policies and guidelines in connection with the private placement.

Shareholder equity was $1,465,055 at May 31, 2011 compared to $128,873 at August 31, 2010. Total assets were $1,854,965 at May 31, 2011 compared to $510,587 at August 31, 2010.

Outlook

Kelso is dedicated to becoming the dominate leader in the design and supply of new innovative technologies aimed at the safe containment of hazardous materials in transportation systems. Our key goal is to generate above average returns and benefits for the environment, society, customers, industry work forces and our stakeholders worldwide.

Our patented constant pressure relief valves ("PRV") and "Klincher™" Manway Securement System ("MSS") products are proving to be "best available technology" designs that reduce the risk of environmental harm due to non-accidental events in the transportation of hazardous commodities via railroad tank cars. The Company is currently working with a number of key customers on infrastructure strategies that will determine rates of adoption for our PRV and MSS products.

Our new MSS offering is a very revolutionary technology change for the railroad industry. It offers substantial rates of return on investment and the arguments for customers' adoption of the MSS are compelling. Our MSS positively addresses modern environmental sensitivities, human error, safety, product performance and cost benefits of ownership. The MSS has recently captured the attention and support of the railroad industry including key shippers, leasing agents, railroaders, the AAR, the Federal Rail Administration of the United States and Transport Canada.

Although small in number the Kelso PRV products in service have continued to serve their users well. Over an eight year period with over 1,000 valves in service there have been no reported leaks of any valve.

Our main challenge to market penetration and business growth is that the railroad industry has been very slow to design or adopt new technologies. Budgets and testing requirements are time consuming, and contrary to profit goals. In many cases designs have not changed in decades even though environmental sensitivities and engineering problems haunt and perplex the industry. This circumstance provides Kelso with a strong and unique business platform from which to create, develop and distribute innovative products that provide solutions for our customers in terms of improved performance, cost benefits and longevity.

With the encouragement of the railroad industry and its regulators the Company is developing two key segments of the marketplace. The first is the OEM market for new tank car production whose design and production cycle can run up to 36 months. The second is the retrofit and repair market that can be developed within the next six months.

A key sign of our progress was Kelso's admission as a member of the Railroad Supply Institute ("RSI"), one of the oldest trade groups in the rail industry. The mission of the RSI is to support, connect and advocate for railway suppliers. RSI connects members to their customers and partners, supports the improvement of the industry, assists members in the global marketplace and represents the industry during the regulatory and legislative process.

Management believes that with the economic recovery of the railroad industry in North America combined with the more stringent enforcement of United States and Canadian environmental regulations for shippers of chemical commodities and the adverse effects of wear and tear on existing railroad tank cars the railroad industry will rebound significantly. Management is confident that its corporate reorganization in 2010 and investments made in production infrastructure and marketing laid a solid foundation from which to pursue a commercially viable revenue stream from a market made up of over 700 new tank-car builders, major chemical shippers, repair shops and retrofitters.

In addition to PRV production Kelso has commenced the first stage of its strategic plan to produce its MSS for commercial sales and distribution. Kelso established its first dedicated assembly plant for MSS with the purchase of a 6,000 square foot building in Bonham, Texas for US$129,000 in July 2011.

Kelso is well financed and positioned with a "best available technology" product line that meets the demanding design and testing requirements of the AAR. The stage has been set for Kelso to thrive. The Company intends to aggressively grow its new MSS and PRV business successfully over the upcoming years.

For a more complete business and financial profile of the Company, management encourages interested parties to view the Company's website at www.kelsotech.com and public documents posted on www.sedar.com.

On behalf of the Board of Directors

James R. Bond, CEO and President

Legal Notice Regarding Forward Looking Statements: This news release contains "forward-looking statements within the meaning of applicable Canadian securities legislation. Forward-looking statements are indicated expectations or intentions. Forward-looking statements in this news release include that production systems will become more effective, efficient and economic as they mature, that gross profits will improve, , that the railroad market will rebound significantly and that a market of over 700 potential customers exists, and that we intend to aggressively grow our MSS and PRV business successfully over the upcoming years. The Company's products involve detailed proprietary and engineering knowledge and specific customer adoption criteria, hence factors that could cause actual results to be materially different include that we may be unsuccessful in raising any additional capital needs that may arise; we may not have sufficient capital to develop, produce and deliver new orders; orders that are placed may be cancelled; product may not perform as well as expected; markets may not develop as quickly as anticipated or at all; or that the productive capacity of Kelso may not be large enough to handle market demand. Further, we are reliant on certain key employees who may leave the Company and we may be unable to protect or defend our intellectual property. Investors are cautioned against placing undue reliance on forward-looking statements. We assume no responsibility to update these forward looking statements except to the extent required by law.

Neither the TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in the policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this release.

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