Second Quarter Financial Results Ending November 30, 2021

Custom Equipment Continues to Thrive

Thermal Energy sells its energy efficiency and carbon reduction solutions as either a customized piece of equipment or a fully installed turn-key project. For the first six months of this fiscal year, custom equipment order intake was 29.5% ahead of the same time last year, and 51.7% greater than the pre-Covid levels the year before.

Custom equipment sales require less engineering analysis and site attendance than turn-key projects, and as a result, given increasing market demand for carbon emission solutions our custom equipment orders have continued to thrive, and revenues have continued to grow despite the COVID-19 pandemic.

Turn-Key Solutions - Record Level of Paid Project Development Agreements (PDAs)

In parallel to custom equipment, Thermal Energy also develops and delivers unique and innovative turn-key carbon emissions reduction and sustainable thermal energy solutions for its customers. These turn-key solutions[1] are developed in partnership with the customer often with the implementation of a paid PDA.

A paid PDA is the customer’s commitment to a project whereby, based on an initial estimate of project cost and savings, the customer agrees to front the cost of further project development engineering before a final decision is made to execute the project.

Given the extensive travel and customer site visits required, turn-key projects have been most significantly impacted by the global pandemic, and given the long development and sales cycle required, the turn-key project order intake and revenue have not yet caught up to pre-pandemic levels.

However, in the Last Twelve Months (LTM) ended November 30, 2021, Thermal Energy have received 14 PDA orders. This is 55% higher than the pre-pandemic high in fiscal 2019 levels and the Company currently has the highest number of projects under development in its history.

“We believe these growing levels of custom equipment orders and turn-key solution paid project development agreements, despite the ongoing global pandemic, indicate that our customers’ desire to reduce carbon emissions is stronger than ever” said CEO William Crossland.

Continued Impressive Penetration into Current Strategic Corporate Accounts Base

A key focus of Thermal Energy’s growth strategy is expanding and deepening its relationships with strategic corporate accounts. As previously mentioned in the Q1 results, over the last 5 years the Company have received over $37 million in orders from eight key multinational corporate accounts.

After placing a third turn-key energy efficiency solution order in September 2021 for one of their European sites, one of these global key customers placed a further GEM™ order in August and October 2021 valued at $242,031 for a site in North America, following up again in November 2021 with phase two for $114,905. Over the past few years, Thermal Energy has delivered over $2 million in turn-key projects and around $1 million in GEM™ orders in Europe and North America for this customer alone.

“The hardest part is always getting that first step through the door and the initial major order. But, once the customer starts benefitting from the cost, carbon and energy savings of our solutions, we establish trust in our capabilities and our relationship strengthens. We then continue to collaborate closely with the client to develop further energy and carbon reducing solutions using more of our technologies at more customer sites.” said William Crossland.

Successful and Continued Expansion into Europe

Following the success of expansion in Germany and Poland, the Company has recently further expanded its direct sales capabilities with a new sales team member in France. Having native sales teams enable us to scale the business globally, devoid of language and cultural barriers.

Positive Market Fundamentals

In October 2021, COP26 asked countries to come forward with ambitious 2030 emissions reductions targets that align with reaching net zero by the middle of the century, prompting organizations to look for the quickest and easiest ways to achieve carbon emission reduction targets.

In addition, North American and EU natural gas prices have significantly increased (between 50% and 500%) in the last 12 to 18 months. There is rising demand for carbon allowances under the EU’s cap-and-trade system; EU Carbon Permits reached an all time high of approximately 90 EUR in December 2021, almost a 200% increase from the year before, and Canadian Carbon Taxes are expected to reach $170/t in 2030 (from $40/t in 2021). All these factors make Thermal Energy’s projects even more economically attractive and provide extremely compelling short-term paybacks to the customer.

With approximately 50% of industrial thermal energy lost on site due to inefficiency, energy efficiency is the fastest, cheapest, and most significant way to reduce carbon emissions, and the market opportunity for Thermal Energy is significant and growing. Thermal Energy’s technologies are proven and reliable and provide an immediate and easy route for multinational manufacturers to achieve the required savings.

Investing for Growth

Motivated by the record level of custom equipment orders and turn-key paid project development agreements, Thermal Energy continues to strengthen its competitive position by investing in its people, technology and ongoing customer relationships that are the pillars to their future success.

“Given recent strong growth in the labour market, and especially professional, scientific and technical services, during the quarter we made some one-off investments in our specialist teams to ensure our compensation levels retain our capable and highly trained staff long-term. This allows us to meet our customers’ growing demand for carbon emission reduction solutions. The deep understanding our employees develop of our customers’ operations has fostered strong customer loyalty and helped to achieve high customer retention rates and excellent knowledge transfer across the business over the COVID period.” said William Crossland.

As well as investment in competitive salaries and architecture for growth, this quarter has also reflected the expenses from costs associated with the acquisition of Sofame’s technology.

Summary Financial Results

Second Quarter and Year-to-Date Financial Review

Quarterly revenue was $4.1 million, down 18.8% from last year. The decrease is due to the decrease of revenues from both turn-key heat recovery systems and condensate return systems. The second quarter last year was a catch-up quarter whereby work resumed on many of the turn-key heat recovery projects that were frozen during the severe lockdowns of the proceeding two quarters, the first two quarters of the global pandemic, i.e., Q4 2020 and Q1 2021. Gross profit for the quarter was $1.7 million which was decreased due to COVID-19 related travel restrictions, labour shortages and raw material price increases. This resulted in a gross margin of 42%, compared to 48% for the same quarter prior year. The company has already implemented a number of measures to mitigate these issues including price increases. Operating expenses incurred for the second quarter amounted to $2.3 million which was increased mainly due to reduction in government wage subsidies of $173 thousand, acquisition costs of the technology from Sofame Technologies Inc. of $86 thousand and an increase in other operating expenses of $286 thousand because of lifting temporary COVID-19 related cost control measures, offset by foreign exchange gains of $61 thousand. A net loss of $640 thousand was incurred for the second quarter and EBITDA was $(395) thousand.

For the six months ended November 30, 2021, revenue was $8.0 million, up 1.4% from last year mainly due to the increased revenue from indirect contact heat recovery systems offset by the decrease of revenues from turn-key heat recovery solutions and condensate returns systems. Gross profit for the first six months was $3.4 million which decreased mainly due to COVID-19 related travel restrictions, labour shortages and raw material price increases. This resulted in a gross margin of 42%, compared to 48% for the same period prior year. Operating expenses incurred for the first two quarters amounted to $4.0 million which was increased mainly due to a reduction in government wage subsidies of $433 thousand, an increase in acquisition cost of the technology from Sofame Technologies Inc. of $93 thousand and increases in other operating expenses of $669K because of lifting temporary cost control measures, and increases to staff salary in order to catch up with the significantly increased annual inflation rate and to ensure we remain competitive and are able to effectively execute the projects in our pipeline and capitalize on the current market. These cost increases were offset by foreign exchange gains of $431 thousand. A net loss of $794 thousand was incurred for the first two quarters, and EBITDA was $(314) thousand.

The Company’s cash position was $2.5 million as at November 30, 2021, compared to $4.2 million as at May 31, 2021. The decrease was due to cash used in operating activities of $855 thousand (including $421 thousand from fluctuating levels of non-cash working capital such as accounts receivable, accounts payable etc.), investing activities of $332 thousand (primarily the acquisition of the Sofame assets) and financing activities of $537 thousand (repayment of long-term debt and lease obligations), all of which was offset by the exchange gains of $31 thousand.

Working capital decreased by $1.4 million to $2.4 million on November 30, 2021, compared to $3.8 million on May 31, 2021. The decrease in working capital was mainly due to the decrease in cash and cash equivalents, offset by the increase in inventory, the decrease in deferred revenue, and the decrease in trade payables and other liabilities.

Order Intake and Order Backlog Summary

Orders received during this fiscal year-to-date are 31.9% lower than orders received during the same time last year. However, orders for custom equipment, primarily GEM and Heatsponge, are 29.5% ahead of the same time last year, and 51.7% greater than the pre-Covid levels the year before. The Company ended the quarter with a total order backlog of $7.0 million, up 27% from the $5.5 million at the same time last year, and with the custom equipment order backlog at record levels and 152% higher than the same time last year. Company defines its order backlog as the value of projects for which purchase orders have been received, but that have not yet been fully reflected as revenue in the Company’s published financial statements.

Full financial results including Management’s Discussion and Analysis and accompanying notes to the financial results are available on www.SEDAR.com and www.thermalenergy.com/financial-reports.html.

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• ⁱEBITDA represents earnings before interest, taxation, depreciation, amortization, impairment of intangible assets, and share-based compensation expense.
• ⁱⁱOrder backlog represents any purchase orders that have been received by the Company but have not yet been reflected as revenue in the Company’s published financial statements.
• ⁱⁱⁱCustom equipment refers to indirect contact heat recovery solutions (HEATSPONGE and SIDEKICK), and condensate return system solutions (GEMTM steam traps). Turn-key solution refers to direct contact heat recovery solutions (e.g., FLU-ACE®).