Cleantek Industries : Q2 2022 Management’s Discussion & Analysis

Management's Discussion and Analysis

For the three and six months ended June 30, 2022 and 2021

MANAGEMENT'S DISCUSSION AND ANALYSIS

BASIS OF PRESENTATION AND DESCRIPTION OF THE COMPANY

August 18, 2022 - The following Management's Discussion and Analysis ("MD&A") of the financial condition and results of operations for Cleantek Industries Inc. ("Cleantek" or the "Company" which includes references to "we", "our", "us", "its"), (formerly Raise Production Inc. ("Raise")) is a review of the operations, current financial position and condition for the three and six months ended June 30, 2022 and June 30, 2021 and should be read in conjunction with the Company's unaudited condensed consolidated interim financial statements for the three and six months ended June 30, 2022 ("Interim Financial Statements") and the audited consolidated financial statements for the years ended December 31, 2021 and 2020 ("Annual Financial Statements").

The condensed consolidated interim financial statements of Cleantek have been prepared in accordance with International Accounting Standard 34, Interim Financial Reporting, using accounting policies consistent with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board and interpretations of the International Financial Reporting Interpretations Committee. This MD&A and the unaudited condensed consolidated interim financial statements of Cleantek have been prepared by management and approved by the board of directors (the "Board") as of August 18, 2022.

Cleantek, headquartered in Calgary, Alberta, is an innovative provider of patented, clean technology solutions focused on reducing both cost and carbon intensity in the wastewater management and industrial lighting sectors across North America. Cleantek is a publicly traded company listed on the TSX Venture Exchange (the "TSXV") under the trading symbol CTEK.

READER ADVISORIES

This MD&A contains forward-looking statements and introduces financial measures which are not defined under IFRS aimed at helping the reader in making comparisons to metrics similarly disclosed by industry peers. Readers are cautioned that the MD&A should be read in conjunction with the Company's disclosure under "Non-IFRS Measurements" and "Forward-Looking Information" included at the end of this MD&A.

COMPANY OVERVIEW AND STRATEGY

Cleantek is an environmental technology-based company that provides specialized and fully integrated wastewater treatment and disposal equipment along with turnkey sustainable lighting rental solutions. Cleantek leverages its patented technology and industry expertise to provide equipment to service a diverse range of clientele. Cleantek prioritizes people and the environment through our high-performance safety focused culture and our experienced technical professionals are committed to providing environmentally friendly cost-effective solutions to our clients.

On October 29, 2021 Cleantek completed a reverse takeover of Raise (the "RTO"), a TSXV listed company, pursuant to the terms of the arrangement agreement dated July 12, 2021 between Cleantek and Raise. This resulted in the amalgamated public company continuing under the name Cleantek Industries Inc. (TSXV: CTEK), which began trading on the TSXV on November 10, 2021.

Cleantek provides technology-based solutions for an increasingly demanding water treatment and disposal sector along with location lighting to provide safe working conditions for 24-hour operations. Cleantek provides its technology and services in some of the most active areas in Canada and the United States. Our environmental, safety and operational performance have enabled us to establish and maintain a blue- chip client base, including many exploration and production companies in North America.

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As the market continues its shift towards environmental, social and governance ("ESG") response initiatives and best practices, Cleantek intends to leverage its technology to capture additional market share through organic growth of its ZeroE wastewater treatment and vaporization service offering, along with a forecasted strong utilization of our sustainable lighting rental solutions.

HIGHLIGHTS FOR THE SECOND QUARTER 2022

• Cleantek generated revenue of $3,125 for Q2 2022, an increase of $1,180 or 61%, from Q2 2021 and consistent with Q1 2022 despite a seasonal decline in drilling activity in Canada. On a year-to- date basis, Cleantek generated revenues of $6,272 in the first half of 2022, an increase of $1,870 or 42%, from the first half of 2021. The increased revenue in 2022 is due to a ramp up in rental activity and increased rental prices in both sustainable lighting solutions and ZeroE dehydration;
• Cleantek's gross profit of $1,706 or 55% for Q2 2022 and $3,543 or 56% of revenue for the first half of 2022 was inline with target and improved when compared with gross profits of $922 and 47% for Q2 2021 and $2,351 and 53% for first half of 2021;
• Cleantek's EBITDA was $(241) for Q2 2022, a decrease of $713 when compared to Q2 2021, as the increased revenue was more than offset by $926 of expenses associated with the ongoing patent litigation in the current quarter. On a year-to-date basis EBITDA was $213, a decrease of $934 from the same period in 2021 as the increased revenue was more than offset by $1,484 of expenses associated with the ongoing patent litigation in the current year. Details on the ongoing patent litigation can be found in the Commitments and Contingencies section within this MD&A;
• Mobile ZeroE deployment in the US has increased over 300% to 10 units operating in Q2 2022 when compared to the three units in Q1 2022, and the Company continues to forecast full deployment of the fleet of 35 units before the end of 2022;
• The Company fabricated and deployed an additional six new HALO lighting systems into the US and continues to forecast the deployment of eight additional HALO lighting systems over the balance of 2022 for a total of 20 new units fabricated and deployed in 2022; and,
• as at June 30, 2022 the Company had drawn $1,153 on its revolving debt facility and had $936 cash on hand for a net debt balance of $217, and had available liquidity of approximately $1,893.

FINANCIAL AND OPERATIONAL HIGHLIGHTS
	Three months ended		Six months ended
(Canadian $000's, except		June 30			June 30
per share amounts and percentages)	2022	2021	Change	2022	2021	Change
Revenue	3,125	1,945	1,180	6,272	4,402	1,870
Gross profit	1,706	922	784	3,543	2,351	1,192
Gross profit %	55	47	7%	56	53	3%
Net loss	(1,443)	(627)	(816)	(2,177)	(811)	(1,366)
Net loss per share - basic and diluted ($)	$(0.05)	$(0.04)	$(0.02)	$(0.08)	$(0.05)	$(0.03)
EBITDA(1)	(241)	472	(713)	213	1,147	(934)
Adjusted EBITDA(1)	(94)	(39)	(55)	508	786	(278)
Capital expenditures	429	98	331	726	277	449
		June 30,	December 31,
As at:			2022		2021	Change
Total assets			15,075		17,156	(2,081)
Working capital surplus/(deficit)(1)			(57)		535	(1,744)

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Non-current debt(1,2)	8,124	7,875	904
Total non-current liabilities	8,181	7,932	904

1. Management considers EBITDA and adjusted EBITDA key metrics in analyzing operational performance and the Company's ability to generate cashflow. EBITDA is measured as net income (loss) before interest, tax, depreciation and amortization. Adjusted EBITDA is measured as EBITDA adjusted for share-based compensation, impairment/impairment reversals of non-financial assets, research expense/ recoveries and unusual items not representative of ongoing business performance. Working capital (or also referred to as net current assets/liabilities) for Cleantek is calculated as current assets less current liabilities per the statement of financial position. These items are not defined and have no standardized meaning under IFRS. Presenting these items from period to period provides management and investors with the ability to evaluate earnings trends more readily in comparison with prior periods' results. Please see the Non-IFRS Measurements section of this MD&A for further discussion of these items, and where applicable, reconciliations to measures calculated in accordance with IFRS.
2. Total non-current debt includes the non-current portions of long-term debt and lease liabilities.

OUTLOOK

Cleantek's strategy focuses on delivering innovative and cost-effective solutions that reduce the carbon intensity as well as the capital and operating costs of industrial operations. By focusing on expanding the market awareness and adoption of its sustainable lighting solutions and wastewater treatment assets, Cleantek expects to experience increased utilization of these high-margin product lines in the near-term. This, combined with the expansion of our ZeroE System portfolio of waste energy powered, wastewater treatment and vaporization units across industrial and infrastructure projects throughout North America and globally, is expected to lead to a sustainable increase in revenue and corresponding profitability as the Company's asset base grows over time.

The Company's near-term strategy will continue to focus on:

• taking advantage of increased oil and gas drilling and production activity in North America to maximize utilization rates of its current fleet of sustainable lighting solutions and mobile ZeroE wastewater treatment assets;
• expanding and growing the Company's fleet of sustainable lighting solutions and mobile ZeroE wastewater treatment assets to satisfy increased demand in the oil and gas, midstream, mining, industrial and construction markets;
• leveraging Cleantek's technology to capture additional market share through organic growth of the ZeroE wastewater treatment and vaporization services;
• expanding and diversifying Cleantek's geographic focus and customer base including exploring opportunities outside of the North American market; and,
• vigorously defending its patent portfolio especially related to its ongoing patent litigation related to the HALOtm lighting systems in the United States.

The Company is uniquely positioned with the prospect to capture expansion in both ZeroE wastewater vaporization and sustainable lighting markets. Cleantek expects that wastewater and vaporization opportunities in the oil and gas, municipal grey water, and industrial wastewater industries and a growing awareness regarding the disadvantages and risks of downhole injection will continue to increase the demand for Cleantek's ZeroE products.

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RESULTS OF OPERATIONS
Revenue
	Three months ended		Six months ended
		June 30			June 30
(Canadian $000's)	2022	2021	Change	2022	2021	Change
Sustainable lighting solutions	2,794	1,768	1,026	5,574	3,879	1,695
ZeroE dehydration	331	177	154	698	523	175
Total revenue	3,125	1,945	1,181	6,272	4,402	1,870

Cleantek's revenue is generated primarily from the rental and service of sustainable lighting solutions, including HALO lighting systems and solar hybrid lighting towers, and ZeroE dehydration units, including mobile ZeroE dehydration units and a ZeroE production facility unit, based on fixed or agreed upon service contracts with its customers in the upstream and midstream segments of the energy industry as well as the commercial construction industry in western Canada and the United States.

Revenue for the three and six months ended June 30, 2022, increased to $3,125 and $6,272, respectively, compared to $1,945 and $4,402 for the same periods in 2021. General equipment utilization improved in 2022 compared to 2021 due to the recovery of market fundamentals in the energy sustainability sector as a result of strong commodity prices and an increase in drilling activities and rental rates. As a result, the Company's sustainable lighting solutions rental rates started to improve in the latter half of 2021 and into 2022 and equipment utilization, especially on the HALO products has also improved substantially. ZeroE dehydration revenue increased $154 and $175 for the three and six months ended June 30, 2022, compared to same periods in 2021, primarily due to increased mobile ZeroE dehydration revenue from the recovery in the market fundamentals and the expansion into the US market. Cleantek's operations in the first half 2021 were subject to the impacts of COVID-19 and a global oversupply of oil that caused a decline in commodity prices and drilling activity.

Direct operating expenses
	Three months ended		Six months ended
		June 30			June 30
(Canadian $000's)	2022	2021	Change	2022	2021	Change
Direct operating expenses	1,419	1,023	(396)	2,729	2,051	678
% of revenue	45	53	(7)%	44	47	(3)%

Direct operating expenses are comprised of direct operating costs, including salaries and wages and other labour costs; repairs and maintenance of equipment; transportation and mobilization costs of equipment to and from customers; and other direct operating expenses.

Direct operating expenses were $1,419 and $2,729 for the three and six months ended June 30, 2022, respectively, which increased compared to $1,023 and $2,051 for the same periods in 2021. Direct operating expenses increased in 2022 primarily as a result of increased equipment utilization and resulting revenue. The direct operating expenses as a percentage of revenue actually decreased in both the three and six months ended June 30, 2022 as a result of increased equipment utilization with minimal repair and maintenance expenses.

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