Cleantek Industries : Q2 2023 Management Discussion & Analysis

Management's Discussion and Analysis

For the three and six months ended June 30, 2023 and 2022

MANAGEMENT'S DISCUSSION AND ANALYSIS

BASIS OF PRESENTATION AND DESCRIPTION OF THE COMPANY

August 03, 2023 - 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"), is a review of the operations, current financial position and condition for the three and six months ended June 30, 2023 ("Q2 2023") and June 30, 2022 ("Q2 2022") 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, 2023 ("Interim Financial Statements") and the audited consolidated financial statements for the years ended December 31, 2022 and 2021 ("Annual Financial Statements"). All amounts are in thousands of Canadian dollars unless otherwise indicated.

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 03, 2023.

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.

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.

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.

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GOING CONCERN

The condensed consolidated interim financial statements have been prepared on a going concern basis, which contemplates the realization of assets and settlement of liabilities in the normal course of business as they become due.

In 2021, a competitor providing lighting solutions in North America initiated legal proceedings against the Company alleging patent infringement by Cleantek on a small fraction of the Company's installed HALOTM lighting units in the United States. The Company fully responded to the asserted claim and filed a counterclaim, which was expected to go to trial in October 2022. Legal costs incurred in 2022 for the patent litigation totaled $3,430, which significantly impacted the Company's cash flows from operating activities and liquidity. At June 30, 2023, the Company had net current liabilities of $8,196, including $8,952 of long-term debt maturing on October 31, 2023, and generated net loss of $687 and $507 for the three months and six ended June 30, 2023, respectively.

However, as a result of legal costs incurred in 2022 from the patent litigation, Cleantek required the support of its Canadian private debt lender in the near term to manage current cash flow restrictions caused by the patent litigation spend to allow time for the Company to generate sufficient cash flows to fund its operations. On October 1, 2022 the Company signed an amending agreement the Canadian private debt lender related to its Non-Revolving Term Facility that eliminated the requirement to make principal repayments from October through March 2023 to assist the Company in operational cash flow management. The Company will continue to require the support of the Canadian private debt lender as the Company seeks to find an alternate lender or obtains an extension of the maturity of the Credit Facilities, which mature on October 31, 2023. The Company has begun formal communications with the current lender to extend the credit facility. There is no certainty that the Company will be successful in obtaining credit facilities with alternate lenders or an extension of the maturity date with the existing Canadian private debt lender. The Company is budgeting that it will not have sufficient cash available to enable repayment of the Credit Facilities upon maturity on October 31, 2023.

Due to facts and circumstances noted above, there are material uncertainties that exist that may cast significant doubt with respect to the Company's ability to continue as a going concern. These financial statements have been prepared in accordance with generally accepted accounting principles applicable to a going concern, which assumes that the Company will be able to realize its assets and discharge its liabilities in the normal course of business.

These financial statements do not reflect adjustments that would be necessary if the going concern assumption were not appropriate. If the going concern basis were not appropriate for these financial statements, then adjustments would be necessary in the carrying value of the assets and liabilities, the reported revenues and expenses, and the balance sheet classifications used. These adjustments could be material.

HIGHLIGHTS FOR THE SECOND QUARTER 2023

• Cleantek generated revenue of $3,397 for Q2 2023, an increase of $271 or 9%, from Q2 2022. The increased revenue in 2023 is primarily 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 $2,084 or 61% of revenue for Q2 2023 was inline with target and improved when compared with gross profit of $1,706 and 55% of revenue for Q2 2022;
• Cleantek's net loss of $687 for Q2 2023 was a $756 improvement from the net loss of $1,443 for Q2 2022; and,
• Cleantek's Adjusted EBITDA(1) was $586 for Q2 2023, an decrease of $246 when compared to Q2 2022 as the increased revenue was offset by increased foreign exchange loss.

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FINANCIAL AND OPERATIONAL HIGHLIGHTS
	Three months ended		Six months ended
(Canadian $000's, except		June 30			June 30
per share amounts and percentages)	2023	2022	Change	2023	2022	Change
Revenue	3,397	3,125	272	7,214	6,260	954
Gross profit	2,084	1,706	378	4,385	3,531	854
Gross profit %	61	55	6%	61	56	5%
Net loss	(687)	(1,443)	756	(507)	(2,177)	1,670
Net loss per share - basic and diluted ($)	$(0.02)	$(0.05)	$0.03	$(0.02)	$(0.08)	$0.06
EBITDA(1)	252	(241)	493	1,363	213	1,150
Adjusted EBITDA(1)	586	832	(246)	1,768	1,992	(224)
Capital expenditures	321	429	(108)	446	726	(280)
		June 30,	December 31,
As at:			2023		2022	Change
Total assets			15,810		15,917	(107)
Working capital deficit(1)			(8,196)		(8,348)	152
Non-current debt(1,2)			2,205		2,121	(84)
Total non-current liabilities			2,251		2,167	(84)

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 and unusual items not representative of ongoing business performance such as patent litigation expense. 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.

EXPANSION AND 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 continues to experience increased utilization of these high-margin product lines.

In 2023, the Company launched two new growth initiatives, including SecureTek, Cleantek's line of remote security services, as well as the company's newest addition to the ZeroE line of wastewater treatment products, the mobile GZeroE. Both growth initiatives will utilize the Company's existing asset base and will require minimal capital investment for what the Company believes could be substantial growth opportunities in adjacent industry verticals.

• SecureTek - Cleantek's line of remote security services, being offered as a stand-alone system or integrated with our sustainable lighting products, is expected to drive higher utilization of existing assets and creating an exciting new recurring revenue stream for the Company. Utilizing our existing infrastructure, SecureTek is an accretive service offering and a great opportunity to expand our reach into the construction, mining, storage, agriculture, and other commercial markets, with minimal new capital investment.
• Mobile GZeroE - Adding to the fleet of ZeroE technology is our new waste-gas powered, wastewater treatment and dehydration system, or "GZeroE". GZeroE will utilize waste-gas as its primary energy source, allowing for deployment of the ZeroE system into areas without a waste-

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heat source while providing substantial ESG and cost benefits. This product is currently under construction and one unit will launch to the market in Q3 of this year to a growing backlog of interested clientele. Additional units will be based off customer demand and feedback.

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

• 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, including the new mobile GZeroE, as well as the new product and service offering in SecureTek;
• expanding and diversifying Cleantek's geographic focus and customer base, including exploring opportunities outside of the North American market for rental or product sales;
• focusing on growth, generating positive return for shareholders and improving financial position now that the patent litigation related to the HALO™ lighting systems in the United States is completed; and,
• evaluating new technology, products and services to increase our offering to our current client base.

The Company is uniquely positioned 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.

RESULTS OF OPERATIONS
Revenue
	Three months ended		Six months ended
		June 30			June 30
(Canadian $000's)	2023	2022	Change	2023	2022	Change
Sustainable lighting solutions	3,015	2,794	221	6,430	5,562	868
ZeroE dehydration	341	331	10	743	698	45
HALO sales	41	-	41	41	-	41
Total revenue	3,397	3,125	272	7,214	6,260	954
Fleet Utilization percentage	43%	47%	(4)%	48%	49%	(1)%

Cleantek's revenue is generated primarily from the rental and service of sustainable lighting solutions, including solar hybrid lighting towers and HALO lighting systems 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, 2023, increased to $3,397 and $7,214, respectively, compared to $3,125 and $6,260 for the same periods in 2022. Revenue improved in 2023 compared to 2022 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 throughout 2022 and into 2023. General

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