...Good morning, everyone. I'm William Crossland, CEO of Thermal Energy International. Thank you for joining us this morning for our second quarter earnings call. Our news release, financial statements, and MD&A are available on our website and have been filed on SEDAR. After my prepared remarks, we'll have a question and answer session, at which time qualified equity research analysts joining us on MS Teams will be able to ask questions. If you're joining us online, you should be able to see our slide presentation on your screen now. Before we go any further, I have to point out that today's call may contain forward-looking statements within the meaning of applicable securities laws. Forward-looking statements are subject to risks and uncertainties, and undue reliance should not be placed on such statements.
Certain material factors or assumptions are applied in making forward-looking statements, and actual results may differ materially from those expressed or implied in such statements. For additional information, please refer to our financial statements and our MD&A for the quarter and other filings with the Canadian Securities Regulators. Oops, here we go. So as an overview, let's look at what was an excellent quarter for Thermal Energy, including record quarterly revenue of CAD 10.2 million, which is more than an 18% increase over Q2 last year and is the highest quarterly revenue in company history. Our adjusted EBITDA was CAD 814,000, which is three times the EBITDA last year, and net income at CAD 618,000 was twenty times last year's net income for the quarter.
We also finished the quarter with a strong balance sheet, with essentially no bank debt, and during the quarter, we saw very strong demand, resulting in record order intake for Heat Sponge , which helped drive our year-over-year growth in order backlog. Why does it keep doing that there? Okay. Taking a closer look at revenues, as I said, we had record revenue of CAD 10.2 million for the quarter, with higher revenues from both heat recovery projects and equipment sales. We also saw some of the revenue from heat recovery projects that we had anticipated for the back half of fiscal 2026 come in faster than expected. As a result, our quarterly revenue for turnkey heat recovery projects was also the highest in the company's history.
On the slide, you can see the nice upward trajectory in our second quarter revenues going back to Q2 of fiscal 2023, with our Q2 revenue growing 145% over that time. On a trailing twelve months or trailing four-quarter basis, revenues were down slightly from a year ago, due largely to our softer Q1 this year versus a record first quarter last year. Nevertheless, with our record revenue this quarter, our trailing twelve-month revenues are now up 95% from where they were three years ago. In terms of operating expenses, we recorded CAD 3.2 million in operating expenses for the quarter, an increase of CAD 605 thousand compared to Q2 last year.
However, Q2 of this year included a few one-time costs, including CAD 150,000 restoration costs for leased space, CAD 90,000 invested in website design and our digital scoping tool, CREST, and an accrual to cover anticipated contributions to the staff profit-sharing plan, given the strong profitability in the quarter. Other contributors to the year-over-year variance included a CAD 110,000 increase in salary and benefits expense, driven by a lower proportion of salary costs being allocated to our project costs under cost of goods sold compared to the prior year. For the 12 months ending November 30th, 2025, we had operating expenses of CAD 11.9 million, which was an increase of about CAD 600,000 from the trailing twelve months, the period the year earlier.
The increase was driven largely by the items I just mentioned for the quarter, as well as some general inflationary cost increases. We tripled our Adjusted EBITDA, from CAD 207,000 a year ago to CAD 814,000 in Q2 this year. You may recall that last year at this time, we announced that our profitability was temporarily suppressed by higher expenses related to the substantial investments we made in our businesses. Those investments were made to drive profitable growth for the long term, and those investments are now starting to pay off. On a trailing twelve-month basis, Adjusted EBITDA is still down, but we do expect this trend to soon reverse. It's a similar but even more pronounced story when it comes to our bottom line or net income.
In this case, our net income was up 213% to CAD 268,000 in Q2. I wanted to call out that with the exception of Q3 of last year, we have been profitable for the last straight twelve quarters. On a trailing twelve-month basis, we had net income of CAD 605,000, down from CAD 672,000 a year earlier. Like the EBITDA, this trend we expect will soon reverse. Importantly, our business continues to produce robust operating cash flow. As you can see here, for the trailing twelve-month total operating cash flow was CAD 1.6 million before changes in working capital. Over the past few years, we have put our strong operating cash flow to work to strengthen our balance sheet.
We've been maintaining adequate reserves and strong working capital, while at the same time aggressively reducing our debt, all from our own internal cash flow. At quarter end, we had CAD 2 million in cash, CAD 3.4 million in working capital. Importantly, we are now essentially free of bank debt after paying down our term loans by more than CAD 3.8 million since May 2022, with the last CAD 1.9 million paid just in the last four quarters, including CAD 130,000 in Q2. I'm very proud of the work here, resulting in a cleaner, stronger, more flexible financial foundation for future growth, and it was all done with our own internal cash flow. In terms of order backlog and order intake, you may recall we had record order intake of CAD 11.9 million in the first quarter.
In the second quarter, we received another CAD 5.9 million in orders, bringing our six-month total to CAD 17.8 million, which is 77% higher than our order intake for this first six months of fiscal 2025. That very strong order intake drove our order backlog to CAD 50 million at the end of November, representing a 16% increase in backlog compared to the end of the second quarter a year earlier. Since the end of the quarter, we have received another CAD 6.5 million in orders, driving our backlog up to CAD 21.5 million as of yesterday, a 20% increase year-over-year. In terms of Heat Sponge in particular, our strong order intake and order backlog has been driven in part by that.
Heat Sponge order intake in both the quarter and the year- to- date in the six months of fiscal 2026 was CAD 3.7 million in Heat Sponge orders, representing an increase of 127% compared to the first six months of fiscal 2025. This increased order intake for Heat Sponge is not by chance. Much of it stems from the strategy we implemented last summer, recognizing an opportunity to promote and pursue streamlined turnkey heat recovery projects focused on Heat Sponge applications. Historically, as you may recall, Heat Sponge sales were sourced primarily from a network of independent manufacturers' reps or IMRs. While this will continue to be the case for the smaller orders, our internal sales team is targeting larger, more strategic Heat Sponge orders on a turnkey basis.
For clients looking for a simpler, quicker heat recovery project on a turnkey basis, Heat Sponge is a great fit due to ease of installation, having no controls and simpler heat sources and heat sinks. Plus, there's no need for a detailed project development agreement. As a result, compared to our traditional, more complex FLU-ACE turnkey projects, our streamlined Heat Sponge turnkey offering results in a shorter sales cycle, quicker project completion, and therefore quicker revenue and higher margins for TEI. Here are some examples of our early success we've had with this strategy. On November 5th, we announced that we had received orders for two turnkey heat recovery projects worth a combined total of CAD 1.5 million from a global nutrition company. These were the seventh and eighth turnkey projects with this customer to date, but were the first ones to revolve around Heat Sponge.
We also received $2.5 million in orders, representing two Heat Sponge turnkey projects from a multinational building materials company at two different sites. The first was a $1 million project announced back in July, and the second, a $1.5 million project, announced on December 17th. We are very pleased to see our sales team expanding the reach of this excellent product line and reinforcing our confidence in the long-term trajectory of the Heat Sponge business. In terms of summary, we had a great second quarter with record revenue and improved profitability. We have a strong balance sheet with virtually no bank debt remaining.
We have a very healthy order backlog of CAD 21.5 million as at January 26, and we are pleased with the early traction of our streamlined Heat Sponge turnkey offering and are excited about its future prospects. As this concludes my prepared remarks, I would now like to open the call for questions. I'll turn it over to Trevor Heisler at MBC Capital Markets Advisors, who will moderate our Q&A. Please go ahead, Trevor.
Thank you, Bill. If you are a qualified equity analyst joining us on MS Teams this morning and would like to ask a question, please notify me by using the Raise Your Hand feature.... Your first question comes from Russell Stanley at Beacon Securities. Please go ahead, Russ.
Good morning, and congratulations on the quarter.
Thank you, Russ.
First question, just around the impact of the accelerated work on the heat recovery projects. Some things I think coming forward faster than expected. I think on prior calls you'd predicted that the fiscal year top line would probably be about, you know, more H2 weighted. Is that still the case? Just trying to understand-
Sure.
How much work may have been pulled forward.
Sorry, sorry, Russ, say that again? Not the whole question, just right then. What-
I think on prior calls you'd indicated that the top line would probably be second half weighted. But I'm wondering, given you've had some work pulled forward on the heat recovery side, I'm wondering if that is still the case. Trying to understand how much of an impact the accelerated work may have had.
Yeah. I mean, it is accelerated. We're – I still think, you know, the second half will be strong, but we're not expecting the year to be much different from what we were expecting before.
Thanks on that. And, thank you for the color around the, the progress or the success you've had in, in focusing the, you know, salespeople on, on large orders around Heat Sponge. I'm wondering, given the strategy, I think, you know, was implemented last summer, I'm wondering what lessons you've learned and, and what adjustments you may have made, on the fly in terms of how you, how you approach this.
Well, I don't like to brag, but it's gone exactly pretty much as we expected. I mean, the orders came in a little bit faster. We're very pleased. But, yeah, in terms of of this as an opportunity, there hasn't really been any surprises. It's sort of exactly what we thought, other than it's come in quicker than we had anticipated. You know, that could be because we just happened to get two clients that were very enthusiastic about it. But, the projects were, were. The orders came very quickly, and we're executing the orders quite quickly. So, you know, as you know, Russ, with turnkey projects, A, it's a long sales cycle, and these ones have a much shorter sales cycle because there's much less analysis to be done.
And they're much quicker to implement. You know, with a Heat Sponge, it's a very simple heat source and heat sink. You know, with the, with the larger turnkey FLU-ACE projects, you know, often it's a, it's a variety of heat sources and a variety of heat sinks. So, you know, we can, we can implement the projects quicker, which means when we're doing a percent complete basis for our turnkey projects, we can revenue that much quicker, so the revenue hits the bottom line. So it's, it's all going quite well, and we're, we're quite pleased with it.
Got it. Thanks for that, that color. And maybe if I could, just on gross margins, the level for the quarter, is that just a function of a heat recovery project quarter, or were there any other headwinds or even tailwinds to call out?
No, no. It's generally... I mean, the margin does jump around a little bit, primarily as a result of product mix. And so that's really all that's happening there. But I will say that in general, all our product lines, we've had generally increasing margins, you know, since the inflationary period that, you know, that followed COVID. So we have improved our margins a little bit over that time. They're now back to where they were. They dipped a bit for a while. They're now back to where they were. But over the last few quarters, we have seen a generally increasing margin by product line. But any differences you see, the majority of the difference you see is primarily product mix.
Got it. And, you know, understanding the success you've had with Heat Sponge as a product, just more generally, when you look at which customers to pursue, your recent wins have been with existing customers, and we know there's still a lot of runway to go with existing customers. How do you allocate or think about prioritizing additional wins with existing customers over chasing new customers? I'd love to hear your thoughts on how to balance those two.
Well, it's, it's, as we know, we've talked before, in terms of new, new customers versus existing customers, and are you talking specifically about Heat Sponge or more generally?
More generally.
Yeah.
Understanding the recent wins were Heat Sponge , and I'm thinking it must be easier to go after business with existing clients, that you're a known entity with them. But there's the obvious diversification benefits of grabbing a new customer. So I'm just thinking how you prioritize things.
Yeah. So it's... You're right. It is a little bit of both. We have our target list of customers and target list of companies. But we also have target applications. So whether there's certain applications, you know, we've done a project with a certain type of company that has a certain application, as you know, meat processing. Then if we have a great application for meat processing, then we might go after, even if it's not a new customer, we'll say, "Okay, what other companies have this exact same application at site?" Or spray drying or milk companies. So it's really twofold. So often where the new customers come from is because we start with an application at another company that is very similar to what they have.
And we say, you know, we can say, "Look, we did it with this company, we can do it with you as well." So that's usually how the new customers come about. Having said that, this, you know, this building materials company, that we did, these two Heat Sponge ones, I don't think we had done that sort of business before, so that was, that was totally new, which was great. So now we have that application, and we can, we could search out for other companies that also have that application on their sites. So it's, so again, in summary, it's, it's knowing customers or knowing applications is usually how we focus our efforts.
Maybe one last question, and I'll get back in the queue. Just wondering-
Yeah
... you know, after a strong quarter, can you talk about, and you know, obviously taking the debt level down, congrats on the balance sheet, but just wondering how you're thinking about M&A at this point. What kind of opportunities you might be seeing out there, and how competitive the bidding might be for any of your price targets?
Yeah, we're still looking. We're keen. I wouldn't, you know, I don't think I have a sense of how strong the bidding is, any acquisition, because we're not that far along at any material opportunity. Having said that, with any of the acquisitions we've done before, there wasn't really any bidding. You know, it's usually we're looking for pretty unique companies, and we are a fairly unique partner for them. So, typically, much like our heat recovery projects and our... and we don't often compete with other people, 'cause they're fairly unique situations.
Got it. That's all I had for now. Thank you very much. I appreciate the call, and congrats again.
Yeah, thanks for your continued interest, Russ.
Okay, and it looks like there are no further questions at this time. Please go ahead, Bill.
Okay. Well, thank you very much, everyone. Thanks for your attention, and thanks for your continued interest in Thermal Energy International, and have a wonderful day.