Cleantek Industries : Q1 2024 Management Discussion & Analysis

Management's Discussion and Analysis

For the three months ended March 31, 2024 and 2023

MANAGEMENT'S DISCUSSION AND ANALYSIS

BASIS OF PRESENTATION AND DESCRIPTION OF THE COMPANY

May 23, 2024 - 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 months ended March 31, 2024 ("Q1 2024") and March 31, 2024 ("Q1 2024") and should be read in conjunction with the Company's unaudited condensed consolidated interim financial statements for the three months ended March 31, 2024 ("Interim Financial Statements") and the audited consolidated financial statements for the years ended December 31, 2024 and 2023 ("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 IFRS Accounting Standards 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 May 23, 2024.

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.

2024 Q1 MD&A CLEANTEK Industries Inc. 2

HIGHLIGHTS FOR THE FIRST QUARTER 2024

• Cleantek generated revenue of $3,670 for Q1 2024, a decrease of $147 or 4%, from Q1 2023. The decreased revenue in 2024 is primarily due to lower utilization of the HALO fleet partially offset by the sale of HALO lighting units;
• Cleantek's gross profit of $2,372 or 65% of revenue for Q1 2024 was inline with target and improved when compared with gross profit of $2,301 and 60% of revenue for Q1 2023;
• Cleantek's net income of $522 for Q1 2024 was a $342 improvement from the net income of $180 for Q1 2023; and,
• Cleantek's Adjusted EBITDA(1) was $1,210 for Q1 2024, a slight decrease of $121 when compared to Q1 2023 due primarily to the decreased revenue.

FINANCIAL AND OPERATIONAL HIGHLIGHTS

	Three months ended
(Canadian $000's, except	March 31
per share amounts and percentages)	2024	2023	Change
Revenue	3,670	3,817	(147)
Gross profit	2,372	2,301	71
Gross profit %	65	60	4%
Net income	522	180	342
Net income per share - basic and diluted ($)	$0.02	$0.01	$0.01
EBITDA(1)	1,405	1,112	293
Adjusted EBITDA(1)	1,210	1,331	(121)
Capital expenditures	150	125	25

As at:	March 31, 2024	December 31, 2023	Change
Total assets	14,379	15,263	(884)
Working capital deficit(1)	(2,739)	(2,942)	203
Non-current debt(1)	7,758	8,470	712
Total non-current liabilities	7,804	8,516	712

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 litigation expenses and settlements and the impact of unrealized foreign exchange gains and losses. 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. Non-current debt includes the non-current portion of long-term debt and lease liabilities per the Non-Current Liabilities on 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.

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.

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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 waste gas fired GZeroE. Both growth initiatives will utilize the Company's existing asset base and require minimal capital investment for what the Company believes could be substantial growth opportunities in adjacent industry verticals.

• International Expansion - Expanding on the Company's recent success with the first HALOTM sale in a geographic area historically not serviced by Cleantek, Cleantek completed a proof-of-concept trial with the Kingdom of Saudi Arabia for its HALOTM line and is exploring a number of promising opportunities diversifying Cleantek's geographic focus and customer base, including exploring opportunities across the Middle East for rental and/or product sales.
• 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 utilizes waste-gas as its primary energy source, allowing for deployment of the ZeroE system into areas without a waste- heat source while providing substantial ESG and cost benefits. The first system was launched in March 2024 to one of a growing number of clientele and has received excellent feedback. The manufacture of additional units will be determined based off customer demand and feedback.

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

• maximizing 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;
• evaluating and assessing markets, including International expansion, suitable for sales of sustainable lighting solutions to compliment our rental revenues and grow total revenue for the Company;
• 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;
• focusing on growth, generating positive return for shareholders and improving the Company's financial position now that long-term financing is in place and the longstanding legal disputes have been settled; 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.

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RESULTS OF OPERATIONS

Revenue

Three months ended

March 31

(Canadian $000's)	2024	2023	Change
Sustainable lighting solutions	2,835	3,413	(579)
ZeroE dehydration	400	404	(4)
HALO sales	435	-	435
Total revenue	3,670	3,817	(147)
Fleet Utilization percentage	46%	53%	(7)%

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 months ended March 31, 2024, decreased to $3,670 compared to $3,817 for the same period in 2023. Revenue for the three-month period decreased due to lower utilization of assets, primarily in the HALO lighting systems, in that period partially offset by the increased fleet size. Revenue for Q1 2024 included a sale of multiple HALO lighting systems demonstrating the Company's commitment to near-term strategy in expanding equipment sales. General equipment utilization decreased for Q1 2024 when compared to the same period in 2023 due to decreased utilization of HALO fleet.

Direct operating expenses

Three months ended

March 31

(Canadian $000's)	2024	2023	Change
Direct operating expenses	1,298	1,516	218
% of revenue	35%	40%	5%

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 $1,298, or 35% of revenue, for the three months ended March 31, 2024, compared with $1,516, or 40% of revenue, for the same period in 2023. Direct operating expenses decreased primarily as a result of the decreased revenue and fleet utilization partially offset by the inclusion of $92 related to property and equipment cost of sales. Direct operating expenses as a percentage of revenue have decreased for the three months ended March 31, 2024 due to the decrease in revenue combined with the lower cost of HALO sales of only 22% when compared to the HALO sales revenue.

Gross profit

Three months ended

(Canadian $000's,					March 31
except percentage)				2024	2023		Change
Gross profit	2,372	2,301			71
% of revenue	65%	60%			5%
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Management considers gross profit a key metric in analyzing operational efficiency and performance and the Company's ability to generate cash flow. Cleantek's gross profit is measured as revenue less direct operating expenses.

Cleantek's gross margin was 65% for the three months ended March 31, 2024, compared to 60% for the same period in 2023. Increased gross margin in 2024 is directly related to the decreased direct operating expenses as a percentage of revenue explained above.

General and administrative expenses

Three months ended

March 31

(Canadian $000's)		2024	2023	Change
General and administrative expenses					1,176	1,145	(31)

General and administrative expenses consist of salaries and wages and related benefit costs, professional and consulting fees and other general and administrative expenses.

General and administrative expenses for the three months ended March 31, 2024 increased to $1,176, compared to $1,145 for the same period in 2023. Increased General and administrative expenses were due to increased other general and administrative expenses which include higher research costs due to the inclusion of a research cost recovery booked in Q1 2023 partially offset by decreased professional fees primarily due to the completion of significant legal matters at the end of 2023. See note 9 Direct Operating Expenses and General and Administrative Expenses of the Interim Financial Statements for further details on general and administrative expenses.

Depreciation and amortization

Three months ended

March 31

(Canadian $000's)	2024	2023	Change
Depreciation and amortization	593	551	(42)

Depreciation is recognized on property and equipment and right-of-use assets. Amortization is recognized on the intangible assets including patents.

Depreciation and amortization expense for the three months ended March 31, 2024 increased to $593, compared with the $551 in the same periods in 2023. Depreciation expense increased in 2024 due to the larger fleet size.

Share-based compensation expense

Three months ended

March 31

(Canadian $000's)	2024	2023	Change
Share-based compensation expense	29	71	42

Cleantek has equity-settled incentive programs and payment plans for the granting of additional Common Shares.

The Company has established a long-term incentive plan (the "Omnibus Plan") whereby the Company may grant stock options ("Options"), restricted share units ("RSUs"), performance share units or deferred share units ("DSUs") from time to time to employees, officers, directors, service providers and consultants of the Company to recognize the contributions made by individuals to the Company's growth and furnish an incentive to the future success and prosperity of the Company.

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The share-based compensation expense for the three months ended March 31, 2024, of $29, compared to $71 for the same period in 2024, decreased as no new share-based compensation was granted in 2024. See note 7, Share-BasedPayments of the Interim Financial Statements for further details on share-based compensation.

Finance costs

Three months ended

March 31

(Canadian $000's)	2024	2023	Change
Finance costs	255	381	126

Finance costs consist primarily of the interest expense recognized on bank debt, long-term debt, the interest component of lease liability payments, debt renewal and other lending fees, accretion of the decommissioning offset by interest income.

Cleantek recognized finance costs of $255 for the three months ended March 31, 2024, compared to $381 in the same periods in 2023. The decreased finance costs are due to lower interest rate debt on the completion of the refinancing with BDC and HSBC in December of 2023.

Other (income) expenses

Three months ended

March 31

(Canadian $000's)	2024	2023	Change
(Gain) loss on disposal of long-lived assets	(4)	(44)	(40)
Foreign exchange (gain) loss	(224)	33	257
Other income	(11)	(16)	(5)

In 2024 and 2023, the Company recognized gains on dispositions of long-lived assets that were not being used in the normal course of operations.

Foreign exchange (gain) loss arises from exchange differences resulting from the translation of foreign denominated financial instruments as well as realized (gain) loss on the settlement of foreign denominated financial instruments. The foreign exchange gains recognized in 2024 are due to the weakening of the Canadian dollar in 2024 and resulting impact on the US dollar denominated accounts receivables and cash balances.

Other income arises from sub rental income of unused office space.

Income taxes

Three months ended

March 31

(Canadian $000's)	2024	2023	Change
Current tax expense (recovery)	36	-	(36)
Deferred tax expense (recovery)	-	-	-
Total tax expense (recovery)	36	-	(36)

Income taxes consist of current and deferred income taxes.

The Company did not recognize any deferred tax expense or recovery for the first quarter of 2024 or 2023.

The Company did incur current taxes in 2024 due to the Company's US operations and tax limitations on using prior year tax losses to offset only 80% of current year income. Due to the Company's significant unrecognized deferred tax assets, no deferred tax expense is recognized in 2024 due to the unrecognized

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tax assets. Deferred tax assets are recognized only to the extent that it is probable that the assets can be recovered through deductions available against future taxable income.

Net income

Three months ended

March 31

(Canadian $000's)	2024	2023	Change
Net income for the period	522	180	342

Net income of $522 for the three months ended March 31, 2024, was a $342 improvement from the net income of $180 for the same period in 2023. The increased net income in 2024 were mainly due to the lower finance costs combined with the foreign exchange gain, which have been explained in detail above.

EBITDA and Adjusted EBITDA

Three months ended

March 31

(Canadian $000's)	2024	2023	Change
EBITDA(1)	1,405	1,112	293
Adjusted EBITDA(1)	1,210	1,331	(122)

1. These items are not defined and have no standardized meaning under IFRS. 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.

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 unusual items not representative of ongoing business performance such as litigation expense and settlements and impact of unrealized foreign exchange gains and losses. EBITDA and adjusted EBITDA are non-IFRS measures as defined under "Non-IFRS Measurement".

Cleantek's EBITDA of $1,405 for the three months ended March 31, 2024, increased from EBITDA of $1,112 in the same period in 2024 mainly due to the increased net income, which has been explained in detail above.

Cleantek's adjusted EBITDA was $1,210 in the three months ended March 31, 2024, compared with the adjusted EBITDA of $1,331 in the same period in 2023. Movements for adjusted EBITDA were due to the same reasons described above.

CAPITAL EXPENDITURES

Three months ended

March 31

(Canadian $000's)	2024	2023	Change
Additions to property and equipment	150	118	32
Additions to intangible assets	-	7	(7)
Total capital expenditures	150	125	25

Capital expenditures include additions to property and equipment and intangible assets.

In 2024, Cleantek had capital expenditures that included the new GZeroE and additions to the HALOTM crown-mounted lighting system fleet.

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SUPPLEMENTAL QUARTERLY INFORMATION

The table below summarizes Cleantek's quarterly financial and operational highlights for the three months ended March 31, 2024 as well as the previous seven quarters:

(Canadian $000's, except
per share amounts and	2024	2023	2023	2023	2023	2022	2022	2022
percentages)	Q1	Q4	Q3	Q2	Q1	Q4	Q3	Q2
Revenue	3,670	3,188	3,588	3,397	3,817	3,483	3,391	3,125
Gross profit	2,372	1,716	2,284	2,084	2,301	2,232	2,029	1,706
Gross profit %	65	54	64	61	60	65	60	55
Net income (loss)	522	(1,562)	245	(687)	180	(388)	(1,023)	(1,443)
Net income (loss) per
share
- basic and diluted ($)	$0.02	$(0.06)	$0.01	$(0.02)	$0.01	$(0.01)	$(0.04)	$(0.05)
EBITDA(1)	1,405	(373)	1,193	252	1,112	612	(24)	(241)
Adjusted EBITDA(1)	1,210	559	1,258	903	1,331	1,273	1,163	704
Total assets	14,379	15,263	15,675	15,810	16,601	15,917	15,852	15,075
Working capital
deficit (1)	(2,739)	(2,942)	(7,982)	(8,196)	(8,043)	(8,348)	(1,083)	(57)
Non-current debt(1)	7,758	8,470	2,053	2,205	2,304	2,121	9,102	8,124
Total non-current
liabilities	7,804	8,516	2,099	2,251	2,350	2,167	9,159	8,181

1. These items are not defined and have no standardized meaning under IFRS. 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.

Reported revenue, net loss, EBITDA, adjusted EBITDA are generally higher in the first and fourth quarters due to higher activity in the oil and gas sector.

Net loss attributable to shareholders has also been impacted by the following variations and events:

• Increase in net loss in the fourth quarter of 2023 due to increased general and administrative expense and other expense due to related litigation expense and settlement combined with the lower revenue.
• Increase in net loss in the second and third quarters of 2022 due to higher general and administrative expense primarily related to the legal spend on the patent litigation. The increased general and administrative expense also contributed to the draw on the Revolving Debt Facility and resulting additional non-current debt borrowings.
• Increase in working capital deficiency in the fourth quarter of 2022 due to there being less than twelve months remaining on the current credit facility at that time.
• Improved working capital deficiency in the fourth quarter of 2023 reflects the new BDC term loan and long term financing completed during this this quarter.

Working capital was in a large deficit starting in the fourth quarter of 2022 due to there being less than twelve months remaining on the credit facility and all associated debt being classified as current until the new long term financing was completed in the fourth quarter of 2023. See the Annual Financial Statements for further details on these events.

CONSOLIDATED LIQUIDITY AND CAPITAL RESOURCES

The following discussion relates to the consolidated position of liquidity and capital of Cleantek as at March 31, 2024 and December 31, 2023

The Company's strategy is to carry a capital base to maintain investor, creditor and market confidence and to sustain future development of the business.

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Cleantek considers its capital structure to include working capital, long-term debt, lease liabilities and shareholders' equity.

To maintain or adjust the capital structure, the Company may issue additional debt, issue new shares and adjust capital and operating expenditures to manage its current and projected debt levels.

The capital structure of Cleantek consists of the following:
	March 31	December 31
(Canadian $000's)	2024	2023
Current assets	3,037	3,404
Current liabilities	5,776	6,346
Working capital deficit	(2,739)	(2,942)
Long-term debt - non-current	7,474	7,806
Lease liabilities - non-current	284	664
Shareholders' equity	799	401
	11,296	11,813

Debt and credit facilities
Cleantek's debt and credit facilities are comprised of the following:
		March 31	December 31
(Canadian $000's)		2024	2023
Revolving Current Debt	1,309	1,880
Bank Operating Line
Long-term debt
BDC term loan	6,937	6,926
Loans payable	1,221	1,299
Promissory notes	489	494
		8,647	8,719
Current portion of long-term debt
BDC Term Loan	802	555
Loans payable	355	343
Promissory notes	16	15
		1,173	913
Non-current portion of long-term debt
BDC Term Loan	6,135	6,371
Loans payable	866	956
Promissory notes	473	479
		7,474	7,806
Credit facilities
		March 31	December 31
(Canadian $000's)		2024	2023
BDC Term Loan
BDC term loan	7,200	7,200
Deferred financing costs	(263)	(274)
		6,937	6,926
Current portion of BDC term loan	(802)	(555)
Non-current portion of BDC term loan	6,135	6,371
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