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.






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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.

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.





Results of Operations



Revenues

We recognized revenues of $51,815 for the year ended December 31, 2019, compared to revenues of $194,681 for the year ended December 31, 2018, a decrease of $142,866. The decrease is primarily a result of sales of our remaining inventory located in Australia during the year ended December 31, 2018. As testing is either underway or completed with several potential new customer supply contracts on which negotiations are near completion, it is expected revenue should show increases throughout 2020.

The primary source of revenue for the years ended December 31, 2019 and 2018 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 and a related lack of new customers. As testing is either underway or completed with several potential new customers and in new areas with existing customers, more sales should occur. Based on the value of two pending new customer supply contract on which negotiations are near completion it is expected that sales should show increases throughout 2020.





Gross Profit

Gross profit, defined as revenues less cost of goods sold, was $39,536, or 76.3% of revenue, for the year ended December 31, 2019, compared to $149,186, or 76.6% of revenue, for the year ended December 31, 2018. We feel confident that there will be improvement in gross profits in future periods, as several recently completed successful tests have reached the negotiation stage and our manufacturing proficiency continues to improve for our core products.

Cost of goods sold was $12,279 for the year ended December 31, 2019 which represented 23.7% of revenues compared to $45,495 for the year ended December 31, 2018 which represented 23.4% of revenues.





Cost and Expenses

Operating expenses were $1,016,903 for the year ended December 31, 2019 as compared to $877,531 for the year ended December 31, 2018, an increase of $139,372. The increase is due primarily to an increase in professional fees and other costs associated with business development.






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Net Loss

We reported a net loss of $1,208,391 for the year ended December 31, 2019 as compared to a net loss of $932,402 for the year ended December 31, 2018, an increase of $275,989. The expectation is that sales will increase in 2020 due to the success of certain completed testing and negotiations for and with new customers.





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.

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 2019 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. We have recently started to supply 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.

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.





Capital Resources

On December 31, 2019, we had working capital deficit of $8,652,036 and stockholders' deficit of $8,473,307 compared to working capital deficit of $7,460,127 and stockholders' deficit of $7,264,916 on December 31, 2018. Our continuing deficit levels are primarily due to poor sales. On December 31, 2019, the Company had $19,876 in cash, total assets of $277,538 and total liabilities of $8,750,845, compared to $11,851 in cash, total assets of $318,444 and total liabilities of $7,583,360 on December 31, 2018.

Net cash used in operating activities was $560,210 for the year ended December 31, 2019 as compared to $450,663 for the year ended December 31, 2018, an increase of $109,547. This increase was primarily due to the timing of payments of accounts payable and other accrued liabilities during the year ended December 31, 2019.

Cash used in investing activities was $0 for the years ended December 31, 2019 and 2018.

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 $568,235 for the year ended December 31, 2019 with $43,425 provided by the financing of prepaid insurance, repayments on the financing of prepaid insurance of $45,190 and $570,000 from related party notes and advances as compared to cash provided by financing activities of $443,141 for the year ended December 31, 2018 which was comprised $445,000 of related party notes and advances, $51,100 in financing of prepaid insurance and repayments on the financing of prepaid insurance of $52,959.

No warrants were issued during the years ended December 31, 2019 and 2018. Due to the extension of all warrants previously set to expire during 2016, which was approved by the Board of Directors in September 2016, no warrants expired for the years ended December 31, 2019 and 2018, respectively. All warrants so effected were extended five additional years from their original expiration date at their original strike prices and terms.






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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 $3.0 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 expect that sales should show increases in 2020. 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 beyond 2020 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. As of December 31, 2019, such loans and advances from related parties total $2,432,500 as compared to $1,862,500 for the previous year. During the year ended December 31, 2018, 5,227,147 shares of common stock were issued in full satisfaction and discharge of $1,044,250 of these advances and contributions. All of the remaining notes and advances are past due. 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.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, and results of operations, liquidity or capital expenditures.

Significant Accounting Policies





Revenue Recognition

The Company recognizes revenues when evidence of a completed transaction and customer acceptance exists, and when title passes, if applicable. Effective January 1, 2018, the Company adopted ASC 606, Revenue from Contracts With Customers, using the modified retrospective adoption approach. As the result of adoption, the Company noted there were no changes or modifications required to previously recorded revenues for years prior to 2018.

While the Company has 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. The Company does not accept returns nor does it provide warranty on its 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. The Company's sole performance obligation to our customers and distributors is the manufacturing and shipment of EnerBurn. Revenues from sales of the Company's product are recognized at the point when a customer order has been completed and shipped. Sales of all product are f.o.b. shipping point, with the distributors responsible for the freight and delivery. Revenue from shipments to related party distributors is recognized when our product is sold to unrelated third-party customers. All negotiation on sales contracts between the individual distributor and end customer and 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.






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As stated above, the Company does not accept returns nor does it provide warranty on its product's performance, as control of performance is based on the proper utilization by the final user. The Company periodically tests 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. The Company will provide a Certificate of Analysis, ("C of A") on each shipment of its product, if requested for 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.

Our consolidated financial instruments recorded on the balance sheet include cash and cash equivalents, trade receivables and trade payables. The carrying amounts approximate fair value because of the short-term nature of these items.





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 we will be unable to meet our 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 we will be unable to meet our 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 our 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 our 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 our ability to continue as a going concern.

The accompanying consolidated financial statements have been prepared assuming that we 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, 2019 and 2018, we incurred recurring net losses of $1,208,391 and $932,402, respectively. Further, most of our notes payable are overdue and payment may be demanded at any time. These conditions raise substantial doubt about our ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.

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. We have been able to obtain cash in the past through private placements and issuing promissory notes and we believe that these avenues will remain available to us. 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.






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Issued Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09, Revenue From Contracts With Customers that introduces a new five-step revenue recognition model in which an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also requires disclosures sufficient to enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative disclosures about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. This standard is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. The Company has adopted this update. See Note 2 for further discussion.

In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)," which requires lessees to recognize most lease liabilities on their balance sheets but recognize the expenses on their income statements in a manner similar to current practice. The update states that a lessee would recognize a lease liability for the obligation to make lease payments and a right-to-use asset for the right to use the underlying asset for the lease term. The update is effective for interim and annual periods beginning after December 15, 2018, and early adoption is permitted. The Company has adopted this update effective January 1, 2019 with no material impact 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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