ENERTECK CORP Management’s Discussion and Analysis of Financial Condition and Results of Operations. (form 10-K)

Sub Levels


The following discussion should be read in conjunction with the audited
consolidated financial statements and the notes thereto appearing elsewhere in
this report and is qualified in its entirety by the foregoing.



Executive Overview


EnerTeck Corporation (the “Company” or “EnerTeck Parent”), formerly named Gold
Bond Mining Company and then Gold Bond Resources, Inc., was incorporated in the
State of Washington on July 30, 1935. We acquired EnerTeck Chemical Corp.
(“EnerTeck Sub”) as a wholly owned subsidiary on January 9, 2003. As a result of
this acquisition, we are now acting as a holding company, with EnerTeck Sub as
our primary operating business. Subsequent to this transaction, on November 24,
2003 we changed our domicile from the State of Washington to the State of
Delaware and changed our name from Gold Bond Resources, Inc. to EnerTeck
Corporation. Unless the context otherwise requires, the terms “we,” “us” or
“our” refer to EnerTeck Corporation and its consolidated subsidiary.

EnerTeck Sub, our wholly owned operating subsidiary, was incorporated in the
State of Texas on November 29, 2000. It was formed for the purpose of
commercializing a diesel fuel specific combustion catalyst known as EnerBurn
(TM), as well as other combustion enhancement and emission reduction
technologies. Nalco/Exxon Energy Chemicals, L.P. (“Nalco/Exxon L.P.”), a joint
venture between Nalco Chemical Corporation and Exxon Corporation commercially
introduced EnerBurn in 1998. When Nalco/Exxon L.P. went through an ownership
change in 2000, our founder, Dwaine Reese, formed EnerTeck Sub. It acquired the
EnerBurn trademark and related assets and took over the Nalco/Exxon L.P.
relationship with the EnerBurn formulator and blender, and its supplier, Ruby
Cat Technology, LLC (“Ruby Cat”).

We utilize a sales process that includes detailed proprietary customer fleet
monitoring protocols in on-road applications that quantify data and assists in
managing certain internal combustion diesel engine operating results while
utilizing EnerBurn. Test data prepared by Southwest Research Institute and
actual customer usage has indicated that the use of EnerBurn in diesel engines
improves fuel economy, lowers smoke, and decreases engine wear and the dangerous
emissions of both Nitrogen Oxide (NOx) and microscopic airborne solid matter
(particulates). Our principal target markets have included the trucking, heavy
construction, maritime shipping, railroad and mining industries, as well as
federal, state and international government applications. Each of these
industries shares certain common financial characteristics, i.e. (i) diesel fuel
represents a disproportionate share of operating costs; and (ii) relatively
small operating margins are prevalent. Considering these factors, management
believes that the use of EnerBurn and the corresponding derived savings in
diesel fuel costs can positively affect the operating margins of its customers
while contributing to a cleaner environment.




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During 2011, we acquired a 40% membership interest in an entity called EnerTeck
Environmental, LLC, which was formed for the purpose of marketing and selling a
diesel fuel emission reduction technology with the creators of such specific
technology. Indian Nations Technology, the co-owner of EnerTeck Environmental,
LLC is currently working on a testing protocol which could revive this entity.

Results of Operations



Revenues


We recognized revenues of $100,302 for the year ended December 31, 2022,
compared to revenues of $67,068 for the year ended December 31, 2021, an
increase of $33,234. Several trials and evaluations are currently underway in
the U.S. and various other countries and it is expected revenue should show
increases in 2023.

The primary source of revenue for the years ended December 31, 2022 and 2021 was
from the sale of EnerBurn to oilfield service, heavy construction and mining
industries. Sales delays have occurred due to delays in the completion of
important product testing projects, a lack of new customers and the COVID-19
shutdown and restrictions. As businesses fully reopen following the COVID-19
shutdown, we expect to see progress in ongoing trials and evaluations that are
currently underway in the U.S. and various other countries.



Gross Profit


Gross profit, defined as revenues less cost of goods sold, was $35,959, or 35.9%
of revenue, for the year ended December 31, 2022, compared to $57,081, or 85.1%
of revenue, for the year ended December 31, 2021. Although raw material costs
have increased substantially, we feel confident that there will be an increase
in gross profits in 2023, as several trials and evaluations are currently
underway in the U.S. and various other countries.

Cost of goods sold was $64,343 for the year ended December 31, 2022 which
represented 64.1% of revenues compared to $9,987 for the year ended December 31,
2021 which represented 14.9% of revenues. We wrote off slow-moving inventory
valued at $37,524 in 2022 which led to the increase in 2022 versus 2021.



Cost and Expenses


Operating expenses were $950,139 for the year ended December 31, 2022 as
compared to $1,145,942 for the year ended December 31, 2021 a decrease of
$195,803. Costs and expenses in both periods primarily consisted of payroll,
professional fees, rent expense, amortization expense and other general and
administrative expenses. During the year ended December 31, 2021, we recognized
$202,816 of stock-based compensation for the extension of expiration dates and
the issuance of new stock warrants and stock options.



Net Loss


We reported a net loss of $1,202,348 for the year ended December 31, 2022
compared to a net loss of $1,203,578 for the year ended December 31, 2021 , a
decrease of $1,230. The expectation is that sales will increase in 2023 as
several trials and evaluations are currently underway in the U.S. and various
other countries.




Operations Outlook



The fuel additive industry has historically been mired by a myriad of
technically dubious products. Prospective customers in all targeted market
sectors and geographic locations are primarily concerned about the potential
business risks associated with the adoption of any new fuel or engine treatment.
Our sales process begins with a proof of performance demonstration that is a
thorough analysis of the potential customer, including fleet type, size, and
opportunity. This is followed with sales presentations at both the executive
level and maintenance level.




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The majority of our marketing effort since 2005 has been directed at targeting
and gaining a foothold in one of several major target areas, including the
inland marine diesel market, trucking, heavy construction and mining. Management
concedes that sales revenues for 2022 and prior years have been considerably
less than earlier anticipated. One of the issues we have faced in recent years
has been the very long timeline from initial contact to contract signing
subsequent to completion of an evaluation. Although we believe that many times
in the past, we have proven the benefits of EnerBurn, various evaluating
companies have opted not to move forward for a variety of reasons which we
believe were beyond our control.

Nevertheless, at both the Company and distributor level, we have recently
completed or are proceeding with evaluations of EnerBurn in many field trials.
As we continue to string together a series of positive evaluations in more
industries, we should begin to see more business generated from such results.
New trials are either in progress or should be commencing shortly.

A substantial portion of the last few years was spent re-directing our marketing
emphasis for our primary product, EnerBurn. Our current sales process now
requires a signed commitment letter from the prospective customer for a minimum
of a 3-year supply agreement, prior to the commencement of an evaluation of any
of our products. Should the evaluation meet or exceed the established benchmarks
as outlined in the evaluation protocol document, the supply agreement would
become binding. We have adopted this strategy as we had numerous successful
evaluations in the past that did not result in the customer moving forward and
adopting the technology, with most of those evaluations being at the Company’s
expense.

Additionally, we have contracted with outside sales representatives, both in the
United States and in other parts of the world to act as distributors of our
products. We currently have distribution agreements with Diesel-E Pty Ltd in
Australia and with Green Group in South America. Diesel-E Pty Ltd completed its
first EnerBurn evaluation with Robson Civil Projects Pty Limited of Australia
and is currently working on multiple other opportunities leveraging on that
successful trial. Green Group is currently running two evaluations in Peru, one
for a mining railroad and another for a large mining conglomerate. We also have
a representative working on mining evaluations in Mexico and expect that once
the COVID-19 pandemic subsides, we will commence an evaluation at a large mine
in Mexico. In the U.S. we have a representative working on a number of currently
ongoing EnerBurn evaluations in the Midwest, two of which have been completed
successfully and we have recently started to supply one of them with
chemical. Two other evaluations recently started but were terminated due to the
pandemic. We believe such will resume when it is safe to do so.

Since the latter part of 2022, we have been working on a research and
development project to automate injection of Enerburn. In the past, we have
found that the need to hand treat Enerburn at a customer site has been a
hindrance to our ability to sell our products to potential customers. We believe
this has prevented our success to spread our technology not only to existing
customers to also to potential new customers. In this regard, we recently
completed the design and the building of our first drum automatic system for use
at one of our existing customer’s sites, which was installed at such customer’s
site in Florida at the end of February 2023. If successful, we are encouraged
that this will lead to additional customers in 2023 and the installation of such
additional automatic injection systems. We have also recently been working with
waste haulers on testing Enerburn to improve their DPF filter problems which, if
successful, should lead to additional business opportunities.

It should be noted that the ongoing coronavirus outbreak which began at the
beginning of 2020 has impacted various businesses throughout the world,
including travel restrictions and the extended shutdown of certain businesses in
impacted geographic regions. A pandemic typically results in social distancing,
travel bans and quarantine, and the effects of, and response to, the COVID-19
pandemic has so far limited access to our corporate office, personnel and
professional advisors, and has also hampered, and may continue to hamper, our
efforts to comply with our filing obligations with the Securities and Exchange
Commission. If the coronavirus outbreak situation should worsen, we may
experience additional disruptions to our business. The extent to which the
coronavirus impacts our operations or those of our third-party partners will
depend on future developments, which are highly uncertain and cannot be
predicted, including the duration of the outbreak, new information that may
emerge concerning the severity of the coronavirus and the actions to contain the
coronavirus or treat its impact, among others.




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Capital Resources


On December 31, 2022, we had working capital deficit of $11,894,608 and a
stockholders’ deficit of $11,788,335 compared to working capital deficit of
$10,737,124 and stockholders’ deficit of $10,585,987 on December 31, 2021. Our
continuing deficit levels are primarily due to poor sales. On December 31, 2022,
we had $1,035 in cash, total assets of $314,811 and total liabilities of
$12,103,146, compared to $23,625 in cash, total assets of $269,180 and total
liabilities of $10,855,167 on December 31, 2021.

Net cash used in operating activities was $589,379 for the year ended December
31, 2022 as compared to $505,974 for the year ended December 31, 2021, an
increase of $83,405. The increase was primarily due to an increase of inventory
during the year ended December 31, 2022.

Cash used in investing activities was $5,224 and $0 for the years ended December
31, 2022 and 2021, respectively.

In the past, we have been able to finance our operations primarily from capital
which has been raised. To date, sales have not been adequate to finance our
operations without investment capital. Cash provided by financing activities was
$572,013 for the year ended December 31, 2022, a result of funds received from
related party notes and advances. This is compared to cash provided by financing
activities of $442,779 for the year ended December 31, 2021, primarily resulting
from a PPP Small Business loan in the amount of $73,100 and $435,000 from
related party notes and advances.

We anticipate, based on currently proposed plans and assumptions relating to our
operations, that in addition to our current cash and cash equivalents together
with projected cash flows from operations and projected revenues, we will
require additional investment to satisfy our contemplated cash requirements for
the next 12 months. No assurance can be made that we will be able to obtain such
investment on terms acceptable to us or at all. We anticipate that our costs and
expenses over the next 12 months will be approximately $1.0 million. Our
continuation as a going concern is contingent upon our ability to obtain
additional financing and to generate revenues and cash flow to meet our
obligations on a timely basis. As mentioned above, management acknowledges that
sales revenues have been considerably less than earlier anticipated. This was
primarily due to a combination of circumstances which have been corrected or are
in the process of being corrected and therefore should not reoccur in the future
and the general state of the economy. Management expects that sales should show
increases in 2023. No assurances can be made that we will be able to obtain
required financing on terms acceptable to us or at all. Our contemplated cash
requirements in 2023 and beyond will depend primarily upon level of sales of our
products, inventory levels, product development, sales and marketing
expenditures and capital expenditures.

Due to our lack of meaningful revenues, we have been forced to finance our
operations primarily from capital which has been raised from third parties and
promissory notes and advances from related parties. Such loans and advances from
related parties total $4,112,500 and $3,492,500 on December 31, 2022 and 2021,
respectively. Many of these remaining loans are past due and certain others are
due on demand. The Company does not expect any of such related parties to demand
payment until the Company has adequate resources to pay back such loans and
advances, there can be no assurance that such will be the case. This debt
presents a significant risk to the Company in that in the event any of such
related parties demand payment, the Company may not have the necessary cash to
meet such payment obligations, or if it does, such payments may draw
significantly on the Company’s cash position. Any of such events will likely
have a materially detrimental effect on the Company.

Inflation has not significantly impacted the Company’s operations.




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Significant Accounting Policies



Revenue Recognition


We follow Accounting Standards Update (ASU) 2014-09, Revenues from Contracts
with Customers and all subsequent amendments to the ASU (collectively Topic 606)
which creates a single framework for recognizing revenue from contracts with
customers that fall within its scope. The core principle of Topic 606 is that a
reporting entity should recognize revenue to depict the transfer of promised
goods and services to customers in an amount that reflects the consideration to
which the reporting entity expects to be entitled in exchange for the goods and
services.

While we have had some direct customers over the years, the principal method of
selling our product EnerBurn is through the use of independent distributors, for
both domestic and international markets. The transaction price for each sale is
explicitly stated within the contract with a customer. We do not accept returns
nor do we provide warranty on our product’s performance, as control of
performance is based on the proper utilization by the final user. Normal payment
terms for domestic sales to both customers and distributors shipping within the
United States are net 30 days. All foreign shipments are cash in advance of
shipment from our location. Our sole performance obligation to customers and
distributors is the manufacturing and shipment of EnerBurn. Revenues from sales
of our product are recognized at the point when a customer or distributor order
has been completed and shipped. Sales of all product are f.o.b. shipping point.
All sales contracts between the individual distributor and end customer are the
responsibility of the individual distributor and the amount of mark up above the
distributors’ wholesale price per unit is the purview of the distributor.

As stated above, we do not accept returns nor do we provide warranty on our
product’s performance, as control of performance is based on the proper
utilization by the final user. We periodically test the product manufactured
prior to shipment for its proprietary quality standards and guarantees to the
distributors that the product will always maintain the level of strict quality
standard that is integral to the performance of its product for the end
customer. We will provide a Certificate of Analysis, (“C of A”) on each shipment
of our product, if requested by the customer. The C of A provides proof that the
product is manufactured to meet chemical specifications that insure performance
standards.




Stock Options and Warrants



Compensation cost for equity awards is based on the fair value of the equity
instrument on the date of grant and is recognized over the period during which
an employee is required to provide service in exchange for the award.
Compensation cost for liability awards is based on the fair value of the vested
award at the end of each period.

We value warrant and option awards using the Black-Scholes option pricing model.
Stock options and warrants expire on the dates designated in the instrument. The
Board has agreed and can agree in the future to issue replacement options and
warrants, on a case-by-case basis, if they so determine, that to be appropriate
at the time however there is no set policy in place to do so. Forfeitures of any
options are accounted for as they occur.



Fair value measurements


We estimate fair value at a price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants in the principal market for the asset or liability. The valuation
techniques require inputs that are categorized using a three-level hierarchy,
from highest to lowest level of observable inputs, as follows: (1) significant
observable inputs, including unadjusted quoted prices for identical assets or
liabilities in active markets (“Level 1”), (2) significant other observable
inputs, including direct or indirect market data for similar assets or
liabilities in active markets or identical assets or liabilities in less active
markets (“Level 2”) and (3) significant unobservable inputs, including those
that require considerable judgment for which there is little or no market data
(“Level 3”). When multiple input levels are required for a valuation, we
categorize the entire fair value measurement according to the lowest level of
input that is significant to the measurement even though other significant
inputs that are more readily observable may have also utilized.

Financial instruments consist of cash and cash equivalents, trade receivable,
trade payable and related party notes payable. With the exception of the related
party notes payable, the carrying value of the financial instruments
approximates fair value due to the short-term nature of these items. The
carrying value of the related party notes payable may not represent the fair
values of these financial instruments.




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Going Concern


In accordance with ASC Subtopic 205-40, Going Concern, management evaluates
whether relevant conditions and events that, when considered in the aggregate,
indicate that it is probable the Company will be unable to meet its obligations
as they become due within one year after the date that the financial statements
are issued. When relevant conditions or events, considered in the aggregate,
initially indicate that it is probable that the Company will be unable to meet
its obligations as they become due within one year after the date that the
consolidated financial statements are issued (and therefore they raise
substantial doubt about the Company’s ability to continue as a going concern),
management evaluates whether its plans that are intended to mitigate those
conditions and events, when implemented, will alleviate substantial doubt about
the Company’s ability to continue as a going concern. Management’s plans are
considered only to the extent that 1) it is probable that the plans will be
effectively implemented and 2) it is probable that the plans will mitigate the
conditions or events that raise substantial doubt about the Company’s ability to
continue as a going concern.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern which contemplates the
realization of assets and satisfaction of liabilities in the normal course of
business. During the years ended December 31, 2022 and 2021, the Company
incurred recurring net losses of $1,202,348 and $1,203,578, respectively.
Further, most of the Company’s notes payable are overdue and payment may be
demanded at any time. These conditions raise substantial doubt about the
Company’s ability to continue as a going concern. The consolidated financial
statements do not include any adjustments that might be necessary if the Company
is unable to continue as a going concern.

The Company’s continuation as a going concern is contingent upon its ability to
obtain additional financing and to generate revenues and cash flow to meet its
obligations on a timely basis. The Company has been able to obtain cash in the
past through private placements and issuing promissory notes and believes that
these avenues will remain available to the Company. These financings are
intended to mitigate the substantial doubt raised by our historical operating
results and satisfying our estimated liquidity needs 12 months from the issuance
of the consolidated financial statements. However, there is no certainty that
additional financing can be obtained in the future at terms acceptable to the
Company.

Issued Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses
(Topic 326) Measurement of Credit Losses on Financial Instruments. ASU 2016-13
requires a financial asset (or a group of financial assets) measured at
amortized cost basis to be presented at the net amount expected to be collected.
In addition, the ASU requires credit losses relating to available-for-sale debt
securities to be recorded through an allowance for credit losses. The amendments
in this ASU broaden the information that an entity must consider in developing
its expected credit loss estimate for assets measured either collectively or
individually. For smaller reporting companies, the new standard is effective for
fiscal years, and for interim periods within those fiscal years, beginning after
December 15, 2022. The Company does not currently believe the impact of this
guidance will be material on its consolidated financial statements.

Management does not believe that any other recently issued, but not yet
effective accounting pronouncements, if adopted, would have a material effect on
the accompanying consolidated financial statements.

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