Mr. Frederic Dugre reports

H2O INNOVATION REPORTS FISCAL YEAR 2014 YEAR-END RESULTS

H2O Innovation Inc. has provided its results for the fourth quarter and 2014 fiscal year ended June 30, 2014. H2O Innovation's fiscal year 2014 results showed revenues of $34.8-million down from $36.1-million for fiscal year 2013, a 3.6-per-cent reduction year over year. Despite the small decline in revenues, the company has shown a significant increase of 134 per cent of its new bookings of water treatment projects, pushing the order backlog to a record high of $38.3-million as at June 30, 2014. The company also solidified its business model through the acquisition of Piedmont Pacific Corp., a world-known manufacturer of specialty couplings, adding to the portfolio of specialty products and services. The company's gross profit before depreciation and amortization improved over the year from 25.6 per cent in fiscal year 2013 to 26.6 per cent in fiscal year 2014, due to business mix and improved project execution.

The company's new bookings for water treatment projects secured increased by 134 per cent from $17.9-million during fiscal year 2013 to $41.8-million during current fiscal year. As at June 30, 2014, the company's sales backlog stands at $38.3-million compared with $14.1-million as at June 30, 2013. The company's bookings over revenues ratio stood at 2.4 for fiscal year 2014, compared with 0.78 for fiscal year 2013.

"This is a good indicator that we will assist to an increase of revenues derived from water treatment projects in the coming fiscal year. Such solid order backlog at the beginning of this new 2015 fiscal year gives us the ability to better plan the allocation of our resources and growth," stated Frederic Dugre, president and chief executive officer of H2O Innovation.

The decline of 3.6 per cent in revenues in fiscal year 2014 is mainly attributable to the lower level of revenues from water treatment projects deliveries and projects progress, caused by delays beyond the company's control. However, these projects will be delivered during the next fiscal year. The decline was partly offset by the higher level of revenues from sales of specialty products and services, further pushed by the acquisition of Piedmont in the course of the year.

In fiscal year 2014, revenues from water treatment projects stood at $17.6-million compared with $22.9-million in fiscal year 2013, while revenues from specialty products and services reached $17.2-million in fiscal year 2014 compared with $13.2-million in fiscal year 2013. The decline of revenues from water treatment projects was partly offset by the higher level of revenues from sales of specialty products and services. For the year ended June 30, 2014, sales from specialty products and services, which are of recurring nature, accounted for 49 per cent of total revenues, while this proportion was 37 per cent in the previous fiscal year.

"The increase of 30 per cent of revenues from sales of specialty products and services is the result of a strategic decision to acquire Piedmont, and strengthening our relationship with our customers, providing a steady stream of revenues and creating a direct value to our shareholders," stated Mr. Dugre.

The acquisition of Piedmont completed on Dec. 5, 2013, is part of this strategy to generate greater revenues from specialty products. Additional efforts aimed at increasing the organic growth associated with the company's maple syrup production equipment and products and its specialty chemical products have also paid off. Indeed, the company's distribution network for maple syrup production equipment now has a total of 30 distributors covering the province of Quebec and the northeast of the United States, an addition of three distributors over the current fiscal year. Furthermore, the additions made to the Professional Water Technology (PWT) sales force of specialty chemical products also supported the growth of recurring revenues from specialty products and services.

This strategy for organic growth of revenues from sales of specialty products and services is proven to be winning since it minimizes the impact of revenue volatility associated with revenues derived from water treatment projects, reinforces long-term relationships with its customers and maintain a higher gross profit.

                                       CONSOLIDATED RESULTS
                                      SELECTED FINANCIAL DATA

                                                      Three-month periods       Twelve-month periods
                                                        ended on June 30,          ended on June 30,
                                                       2014         2013          2014         2013


Revenues                                            $7,896,401   $6,768,455   $34,831,514   $36,136,901

Gross profit before depreciation and amortization    2,117,494    1,812,428     9,250,488     9,251,537

Gross profit before depreciation and amortization        26.8%        26.8%         26.6%         25.6%

Operating expenses                                     204,718      202,544       859,483       696,079

Selling expenses                                     1,071,346      907,553     4,042,511     3,509,081

Administrative expenses                              1,100,644      890,226     4,100,167     3,533,042

Research and development expenses -- net                21,497            -       220,145             -

Net earnings (loss)                                   (269,242)    (532,392)   (1,456,131)      312,992

Basic and diluted earnings (loss) per share             (0.002)      (0.008)       (0.017)        0.005

Adjusted EBITDA                                       (201,458)    (234,355)       77,155     1,584,252

Adjusted EBIDTA                                          (2.6%)       (3.5%)         0.2%          4.4%

The company's ratio of selling, operating and administrative expenses (SG&A) as a whole over revenues amounted to 25.8 per cent for fiscal year 2014, up from 21.4 per cent for the previous fiscal year. This increase is attributable to a higher level of SG&A expenses, especially selling expenses to support the company's business plan aimed at increasing its water treatment systems sales in North America, combined to a lower level of revenues derived from water treatment projects sales. With the acquisition of Piedmont, management aims to reduce the SG&A ratio to a level similar to last year through an increase of revenues and tighter management of SG&A expenses.

Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) for fiscal year 2014 was $77,155 compared with $1,584,252, for fiscal year 2013. The adjusted EBITDA has significantly varied in fiscal year 2014 due to the severe decline of revenues derived from water treatment projects and the increase of SG&A expenses.

Net cash used by operating activities amounted to negative $2,486,316 in fiscal year 2014 compared with positive $1,053,500 of net cash generated by operating activities during the previous fiscal year. This deterioration is attributable to the significant net loss in fiscal year 2014 compared with a net earnings fiscal year 2013. This significant deterioration is also attributable to a negative change in working capital items, such as:

• Higher volume of activities toward year-end reflected in an increase of the level of accounts receivable as of June 30, 2014, compared with June 30, 2013;
• This higher volume of activities has also increased the level of accounts payable and accrued liabilities in fiscal year 2014 compared with fiscal year 2014;
• A timing difference within the projects production phases affecting the invoicing milestones reached and therefore affecting costs incurred in excess of billings and billings in excess of costs incurred.

Financial results for the fourth quarter of fiscal year 2014

Revenues for the fourth quarter were up by 17 per cent to $7.9-million from $6.8-million for the same quarter of the previous fiscal year. The increase is explained by the increase of $1.7-million in revenues from specialty products and services, coming in part from the acquisition of Piedmont in December, 2013, and, to lesser extent, to higher level of sales of maple syrup production equipment. It was toned down by a decrease of $600,000 of revenues from water treatment projects which suffer from lower volume of projects execution.

For the quarter ended June 30, 2014, the gross profit before depreciation and amortization remained stable at 26.8 per cent.

The fourth quarter SG&A expenses were somewhat stable and similar to the first three quarters of fiscal year 2014. They stand at $2.4-million in this current quarter compared with $2.0-million in the fourth quarter of fiscal year 2013. The increase is mainly due to the integration completion of Piedmont to the company's Vista office and hiring to support its operations and the increase of selling expenses related to bookings secured during the quarter.

Strategic outlook for fiscal year 2015

"We begin this fiscal year 2015 with confidence. We have a record high order backlog of water treatment projects standing at $38.3-million as at June 30, 2014, and our revenues from specialty products and services, which are recurring in nature, reached $17.2-million during fiscal year 2014. It means that the strategic investments we have made in fiscal year 2014 are paying off and we intend to continue towards this direction," stated Mr. Dugre.

During fiscal year 2014 the company has made significant steps in its water treatment projects sales business development:

• Secured, for a second mandate, the supply of a modular plant to produce drinking water and waste water sanitation for a major oil and gas company worker's camp in Alberta;
• Granted a $10-million contract to design, manufacture and deliver of reverse osmosis units for the municipality of Monterey, the second largest desalination plant unit in California;
• Selected by the City of Montevina, Calif., for providing an ultrafiltration system with a capacity of 30 million gallons of water, the largest ultrafiltration project ever undertaken to date by the company;
• Successfully marketed to several northwestern United States municipalities, its new design frame Fiberflex for membranes MF/UF made to accommodate several types of microfiltration membranes and different ultrafiltration.

All these important milestones accomplished during fiscal year 2014 will certainly contribute to the revenues of the next fiscal year but will also position favourably the company for future wins. Indeed, the current pipeline of water treatment projects sales remains rich in opportunities which should allow the company to renew its order backlog and support its revenue growth. With an enlarged sales team compared with 2013 fiscal year, the company maintains high bidding activities and business development mainly in Canada and United Sates while supporting its network of international distributors and agents to ensure organic growth for its specialty products.

The increase of revenues from specialty products and services is mainly due by the revenues coming from the acquisition and the successful integration of Piedmont. In fiscal year 2015, the company intends to continue to maximize cross-selling activities between the distinct networks of PWT and Piedmont. It will also continue the expansion of its distribution networks for specialty chemical products PWT as well as for its Piedmont flexible couplings.

All of these growth initiatives established during fiscal year 2014 allow the company to begin the 2015 fiscal year with confidence.

We seek Safe Harbor.