TMG:CC - Quarterly results reflect continued pandemic impact. But record Custom Equipment orders and revenue and record Turn-key Project development indicate strong growing demand from customers

(TheNewswire)

OTTAWA, ONTARIO – TheNewswire - April 29, 2022 – Thermal Energy InternationalInc. (“ Thermal Energy ” or the“Company”) (TSXV: TMG ) , ( OTC: TMGEF ) , an innovative cleantech company and global provider ofproprietary energy and carbon emissions reduction solutions to some ofthe world’s largest corporations, has announced its financialresults for the third quarter ended February 28, 2022. All figures arein Canadian dollars.

Quarter-End Highlights:

• Revenue: $3.5million for the quarter and $11.4 million for the year-to-dateperiod.

  • YTD Custom Equipment revenue is 12% ahead of last yearand 23% more than the pre-pandemic levels the year before

  • YTD Turn-key Project revenue is 18% below last year and67% below the pre-pandemic levels the year before

• EBITDA i : $(647) thousand for the quarter

• Net loss of$(894) thousand for the quarter

• Cash and working capitalbalances is at $2.3 million and $1.5 millionrespectively

• Order backlog ii $5.6million

  • Custom Equipment backlog is $3.2 million, 78% ahead ofthis time last year and 207% more than the year before

  • Turn-key Project backlog is $2.3 million, 45% less thana year ago and unchanged from the year before

• Custom Equipment iii YTD orderintake is 11% ahead of last year, and 39% greater than the pre-Covidlevels the year before.

• Turn-key Projectdevelopment: At record levels and double thepre-pandemic high achieved in fiscal 2019.

Overview

“ These disappointing quarterly results reflectthe continued ongoing disruptions caused by the global pandemic. Over the last two years we have made conscious strategicdecisions to keep investing in the capabilities and future growth ofthe Company. We did this because we believe, emerging from thepandemic there will be an unprecedented market opportunity for growth,and we want to make sure we are in as strong a position as possible tocapitalize on this opportunity. But clearly, the COVID-19 pandemic is presenting longer-lasting and much morenuanced impacts than anticipated. For much ofthe last two years, our customers and suppliers have endured reducedworkforces, restricted travel and site access, and growing supplychain issues. Given this, m any of ourcustomers, often working with ‘ skeleton staff’,have been focusing on continued operations rather than new projects,growth, or development. While our Custom Equipment revenue hascontinued to grow, these pandemic related issues have resulted indelayed and protracted Turn-key Project development and delivery, andthis is having a significant impact on our recent revenue and results.In addition, recent labour and material shortages and inflation arealso having a negative impact on our costs and margins. While we havealready begun implementing price increases to reflect this newreality, this will take some time to filter through” saidThermal Energy CEO, William Crossland.

“Nonetheless, despite the recent results, we believethe Company’s capabilities, and the market fundamentals, arealigning for an even more significant opportunity than originallyanticipated. Given our customers’ increasingcarbon emission targets and sky-rocketing energy costs we are seeingunprecedented customer interest and engagement. Custom Equipment orderintake and revenue, continue to set records and are alreadysignificantly higher than pre-pandemic levels. While Turn-key Projectrevenue has not yet caught up, we currently have 17 Turn-key Projectsin paid development. While not all of these projects may come tofruition, this level of project development is more than double theCompany’s pre-pandemic high. Consequently, we maintain confidence inthe viability of our solutions to answer the market needs and remainencouraged by the current market opportunities. We believe that we candeliver the growing sales pipeline and capitalize on the currentfavourable market conditions.” said ThermalEnergy CEO, William Crossland.

Custom Equipment vs. Turn-KeyProjects

Thermal Energy sells its energy efficiency and carbonreduction solutions as either a customized piece of equipment or afully installed turn-key project. Pre-pandemic, Turn-key Projectsrepresented about two thirds of revenue with Custom Equipment(primarily GEM and Heatsponge) one third. But more recently, withstrong growth in Custom Equipment, Custom Equipment revenue hasexceeded Turn-key Projects.

While Custom Equipment projects must still beengineered and installed at the jobsite, these equipment only salesare much less complex and much less expensive than our Turn-keyProjects. Given the human resource and capital commitment requiredfrom the customer, not to mention the detailed engineering, regularsite visits and ultimate turn-key installation, our Turn-key Projectbusiness tends to have a much longer development, sale, and revenuecycle. The fact that we have been experiencing significant growth inCustom Equipment demonstrates strong demand in post-pandemic marketsfor thermal energy efficiency solutions and as would be expected ishappening first in lower cost and easier to manage Custom Equipmentsegment. As our large corporate clients begin to return topre-pandemic business cycles we anticipate Turn-key Projects willrapidly follow.

Custom Equipment

Custom Equipment order intake and revenue continue to be at recordlevels, approximately 39% and 23% respectively ahead of pre-pandemiclevels.

The performance of our CustomEquipment business is extremely positive despite some challenges. Global supply chains have witnessed notabledisruption. We have experienced difficulties and extraordinary delayssourcing some key materials and parts which has led to the delay inshipping a significant number of Custom Equipment units. Our work inprogress and order backlog over the last two quarters is the highestit has ever been and has therefore temporarily impacted revenuerecognition for our Custom Equipment segment.

The supply chain disruption goes beyond raw materials,extending to labour shortages due to sickness and quarantiningrequirements as well as general employment levels. The ‘GreatResignation’ has sent shockwaves through the labour market affectingthe supply chain. These problems are significant, and they are global. To protect and strengthen our supply chain, weare developing alternative and secondary suppliers in line with ourquality systems, and fully utilising our U.S. based facility toincrease bulk purchases and increased stock holdings to better respondto supply issues.

Despite these challenges, record order and revenuelevels for Custom Equipment are consistently being achieved.

Turn-key Solutions

Turn-key Project developmentis at record levels.

In parallel to Custom Equipment, Thermal Energy alsodevelops and delivers unique and innovative turn-key carbon emissionsreduction and sustainable thermal energy solutions for its customers.These Turn-key Projects i aredeveloped in partnership with the customer often with theimplementation of a paid Project Development Agreement (“PDA’).

In the Last Twelve Months (LTM) ended February 28,2022, Thermal Energy received 10 new PDA orders and currently has 17Turn-key Projects in paid development with customers. Both of thesefigures are at least twice the Company’s pre-pandemic highs andeasily the highest level of Turn-key Projectdevelopment in its history.

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

Turn-key Projects already in progress during thepandemic have taken longer to complete and for revenue to be realized,mainly due to travel and site access restrictions, and covid isolationand sickness of our customers’ staff.  Suppliers on these projectsare often highly integrated into the project delivery and they havefaced similar problems with staffing as well as with the manufactureand supply of essential equipment. In summary, regular holdups havecreated an inefficient staccato delivery and a ‘long tail’ on ourTurn-key Project delivery that we did not anticipate afterrestrictions eased.

While the easing of COVID restrictions allowed for somenormalcy, we did not envision that our large multinational clients andkey suppliers would continue operating onskeleton staffing, and prioritising essentialoperations due to the limited workforce, for as long as they did. Challenges accessing the whole project team atonce, even when restrictions eased, has meant a reduction in normalprogression. Our teams have faced challengesprogressing the development of projects in our pipeline. Throughoutour development pipeline, momentum of communications with key peopleand ability to gain the necessary site access has meant projectdevelopment and closure has slowed whilst our teams wait for travelrestrictions and isolation periods to end as they manage protractedsales cycles. Highly qualified pipeline projects with well recognisedfinancial benefits have also in some cases been affected simply by adelay in natural budgetary cycles.

“The record PDA levels can be seen as a positiveindication of future Turn-key Project order intake levels. Other areasof the Turn-key Project pipeline however have been impacted since theonset of the pandemic and this is reflected in the financial results.Although the disruptions are expected to continue in the short term,the reasons for disruptions are known, understood and are beingmanaged, and we believe order intake will bounce back due to thecontinued viability of our solutions to quickly and dependably achievecustomers carbon reduction targets and significantly impact theirability to manage volatile energy prices.” said Thermal Energy CEO, William Crossland.

Positive Market Fundamentals

It’s clear that the disruption of covid has lasted longer thananyone expected and longer than simply the government-imposedlockdowns and restrictions. Although we cannot predict how long ourcustomers and suppliers will have to manage these staffing andoperations challenges, the requirement to reach net-zero and reducecarbon emissions persists and is influenced further by the extremelyvolatile and increasing energy prices.

As reported in the last quarter, North American and EUnatural gas prices have significantly increased (between 100% and500%) in the last 12 to 24 months. There has also been rising demandfor carbon allowances under the EU’s cap-and-trade system. EU CarbonPermits reached an all-time high ofmore than 90 EUR in February 2022, and continue to trade in the 80 –90 EUR range, 100% to 300% higher than they were 12 to 24 months ago.Meanwhile Canadian Carbon Taxes are now $50/t and are expected toreach $170/t by 2030.

As our customers seek to establish a ‘new normal’,they also reconsider and refocus their priorities. In the face of staffing crises, operational restrictions,increasing energy prices and emissions targets, any move to cutoperational costs is more advantageous than it has ever been. SinceThermal Energy provide an immediate and easyroute for multinational manufacturers to achieve the required savings,these factors only increase the economic attractiveness and short-termpaybacks to our customers.

“The mounting pressure on our customers ismultifaceted, to respond to consumer and Government pressures toreduce emissions, whilst achieving operational effectiveness amidenergy cost increases and workforce disruptions. This refocusing ofpriorities benefits Thermal Energy since longer paybacks are beingconsidered, allowing previously considered pipeline opportunities tobe revisited,” said William Crossland.

With approximately 50% of industrial thermal energylost 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 issignificant and growing.

Summary Financial Results

Third Quarter and Year-to-DateFinancial Review

Quarterly revenue was $3.5 million, down 6.5% from lastyear. The decrease is due to the decrease of revenues from Turn-keyheat recovery projects.  Gross profit for the quarter was $1.5million which was decreased due to COVID-19 related quarantinerequirements, labour shortages and raw material price increases. This resulted in a gross margin of 42%, compared to 44% for the samequarter prior year. The company has alreadyimplemented a number of measures to mitigate these issues, includingprice increases. Operating expenses incurred forthe third quarter amounted to $2.3 million which was increased mainlydue to the reduction in covid related government wage subsidies of$247 thousand, acquisition costs of the technology from SofameTechnologies Inc. of $82 thousand and an increase in other operatingexpenses of $329 thousand because of lifting temporary COVID-19related cost control measures, increase in labour cost, and investmentin the growth of the European team. A net loss of $894 thousand wasincurred for the third quarter and EBITDA was $(648) thousand.

For the nine months ended February 28, 2022, revenuewas $11.5 million, down 1.2% from last year mainly due to theincreased revenue from indirect contact heat recovery systems offsetby the decrease of revenues from turn-key heat recovery solutions.Gross profit for the first nine months was $4.8 million decreasedmainly due to COVID-19 related quarantine and isolation requirements,labour shortages and raw material price increases. This resulted in agross margin of 42%, compared to 47% for the same period prioryear. Operating expenses incurred for the firstthree quarters amounted to $6.3 million which was increased mainly dueto a reduction in government wage subsidies of $680 thousand, anincrease in acquisition cost of the technology from SofameTechnologies Inc. of $174 thousand and increases in other operatingexpenses of $1,065 thousand because of lifting temporary cost controlmeasures, investment in the growth of European sales team, increasedtravel and business development costs, and increases to staff salaryin order to catch up with the significantly increased annual inflationrate and to ensure we remain competitive and are able to effectivelyexecute the projects in our pipeline and capitalize on the currentmarket. These cost increases were offset by the increase in foreignexchange gains of $498 thousand compared to the same period prioryear. A net loss of $1,689 thousand was incurred for the first threequarters, and EBITDA was $(962) thousand.

The Company’s cash position was $2.3 million as atFebruary 28, 2022, compared to $4.2 million as at May 31, 2021. Thedecrease was due to cash used in operating activities of $802thousand, investing activities of $350 thousand (primarily theacquisition of the Sofame assets) and financing activities of $811thousand (repayment of long-term debt and lease obligations).

Working capital decreased by $2.3 million to $1.5million on February 28, 2022, compared to $3.8 million on May 31,2021. The decrease in working capital was mainly due to the decreasein cash and cash equivalents, the increase in trade payables and otherliabilities, offset by the increase in inventory.

Order Intake and Order Backlog Summary

Orders received during this fiscal year-to-date are 39%lower than orders received during the same time last year. However,orders for Custom Equipment, primarily GEM and Heatsponge, are 11% ahead of thesame time last year, and 39% greater than the pre-Covid levels theyear before. The Company ended the quarter witha total order backlog of $5.6 million, down 9% from the $6.1 millionat the same time last year, and with the Custom Equipment orderbacklog 78% higher than the same time last year.  Company defines itsorder backlog as the value of projects for which purchase orders havebeen received, but that have not yet been fully reflected as revenuein the Company’s published financial statements.

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

Readers areencouraged to subscribe to TEI News to receive strategic news and updatesdirectly to their inbox.

ENDS

For media enquiries contact:

Thermal Energy International Inc.

Canada: 613-723-6776

UK: +44 (0)117 917 2179

Marketing@thermalenergy.com

For investor enquiries:

Thermal Energy International Inc.

613-723-6776

Investors@thermalenergy.com

Notes to editors

About Thermal Energy InternationalInc.

Thermal Energy International Inc., ranked as one of Canada’s Top GrowingCompanies in 2021, 2020 and 2019, isan established global supplier of proprietary, proven energyefficiency and emissions reduction solutions to the industrial andinstitutional sectors. We save our customers money and improve theirbottom line by reducing their fuel use and cutting their carbonemissions. Our customers include many Fortune 500 and other leadingmultinational companies across a wide range of industrysectors.

Thermal Energy is a fully accredited professionalengineering firm and by providing a unique mix of proprietary productstogether with process, energy, and environmental engineeringexpertise, Thermal Energy can deliver unique turnkey projects withsignificant financial and environmental benefits for ourcustomers.

Thermal Energy's proprietary products include: GEM ™ - Steam traps, FLU-ACE ® - Direct contactcondensing heat recovery, HEATSPONGE – Indirectcontact condensing heat recovery systems, and DRY-REX ™ - Low temperaturebiomass drying systems.

Thermal Energy has engineering offices in Ottawa,Canada, Pittsburgh, USA, as well as Bristol, UK, with sales offices inCanada, UK, USA, Germany, Poland, and Italy. TEI’s common shares aretraded on the TSX Venture Exchange (TSX-V) under the symbol TMG .

For more information, visit our website at www.thermalenergy.com and follow us on Twitter at

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This press release contains forward-looking statementsrelating to, and amongst other things, based on management’sexpectations, estimates and projections, the anticipated effectivenessof the Company’s products and services, the timing of revenues to bereceived by the Company, the anticipated effects of COVID-19 on thebusiness, backlog and revenue, the expectation that orders in backlogwill become revenue, the anticipated benefits of the Company’scurrent efforts at training and business improvement efforts,opportunities for growth, the Company’s belief that it cancapitalize on opportunities, the size of markets and opportunitiesopen to the Company and expectations that order intake will bounceback.. Information as to the amount of heat recovered, energy savingsand payback period associated with Thermal Energy International’sproducts are based on the Company’s own testing and average customerresults to date. Statements relating to the expected installation andrevenue recognition for projects, statements about the anticipatedeffectiveness and lifespan of the Company’s products, statementsabout the expected environmental effects and cost savings associatedwith the Company’s products and statements about the Company’sability to cross-sell its products and sell to more sites are forwardlooking statements. These statements are not guarantees of futureperformance and involve a number of risks, uncertainties andassumptions. Many factors, some of which are outside of theCompany’s control, could cause events and results to differmaterially from those stated. Fulfilment of orders, installation ofproduct and activation of product could all be delayed for a number ofreasons, some of which are outside of the Company’s control, whichwould result in anticipated revenues from such projects being delayedor in the most serious cases eliminated. Actions taken by theCompany’s customers and factors inherent inthe customer’s facilities but not anticipated by the Company canhave a negative impact on the expected effectiveness and lifespan ofthe Company’s products and on the expected environmental effects andcost savings expected from the Company’s products. Any customer’swillingness to purchase additional products from the Company andwhether orders in the Company’s backlog as described above will turninto revenue is dependent on many factors, some of which are outsideof the Company’s control, including but not limited to thecustomer’s perceived needs and the continuing financial viability ofthe customer. The Company disclaims any obligation to publicly updateor revise any such statements except as required by law. Readers are referred to the riskfactors associated with the Company’s business as described in theCompany’s most recent Management’s Discussion and Analysisavailable at www.SEDAR.com .

EBITDA and backlog are non-IFRS financial measures, donot have a standardized meaning prescribed by International FinancialReporting Standards and therefore may not be comparable to similarmeasures presented by other companies. Please refer to the Company’smost recent Management’s Discussion andAnalysis available at www.SEDAR .com for more details about thesenon-IFRS financial measures.

Neither TSX Venture Exchange nor itsRegulation Services Provider (as that term is defined in the policiesof the TSX Venture Exchange) accepts responsibility for the adequacyor accuracy of this release.

i EBITDA representsearnings before interest, taxation, depreciation, amortization,impairment of intangible assets, and share-based compensation expense.

ii Order backlog representsany purchase orders that have been received by the Company but havenot yet been reflected as revenue in the Company’s publishedfinancial statements.

iii Custom equipment refers to indirectcontact heat recovery solutions (HEATSPONGE and SIDEKICK), andcondensate return system solutions (GEM TM steam traps).Turn-key solution refers to direct contact heat recovery solutions(e.g., FLU-ACE®).

i Turn-key solutions referto direct contact heat recovery solutions (e.g., FLU-ACE®).

i EBITDA representsearnings before interest, taxation, depreciation, amortization,impairment of intangible assets, and share-based compensationexpense.

ii Order backlog representsany purchase orders that have been received by the Company but havenot yet been reflected as revenue in the Company’s publishedfinancial statements.

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