Mr. Frederic Dugre reports

H2O INNOVATION SETS NEW RECORD-HIGH IN REVENUES IN FISCAL 2015 SECOND QUARTER

H2O Innovation Inc. has released its results for the second quarter of fiscal year 2015. During this quarter, the company's revenues increased by 55.6 per cent to $13.7-million, up from $8.8-million in the comparable quarter of the previous fiscal year -- generating a gross profit before depreciation and amortization up by $863,000 at 23.2 per cent compared with 26.2 per cent in the second quarter of fiscal year 2014.

"These results clearly show our ability to grow and scale up our business -- a nearly 56-per-cent growth of our revenues is unseen in our company's history and the entire team feels extremely proud to deliver these results to our shareholders. We also clearly feel that our investments in sales efforts, marketing, product development as well as our project execution continued improvements are finally paying off," stated Frederic Dugre, president and chief executive officerof H2O Innovation.

Revenues for the second quarter of fiscal year 2015 totalled $13.7-million, representing a $4.9-million or 55.6-per-cent increase, as compared with revenues of $8.8-million for the same quarter of fiscal year 2014. The substantial increase is largely attributable to revenues from projects which reached $8.7-million compared with $4.7-million in the corresponding period of the previous fiscal year, representing an 86.2-per-cent increase. During the second quarter of fiscal year 2015, the company completed the production phase of several large municipal and industrial projects which have now triggered revenue recognition and invoicing related to delivery milestone. New projects included in the company's backlog are currently into their initial design and engineering phases and should move to production phase later in fiscal year 2015. This high level of revenues was expected as the company started the current fiscal year with a record-high order backlog of $38.3-million as of July 1, 2014.

The increase of revenues from projects has been accompanied by an increase of revenues from sales of specialty products and services which reached $5.0-million in this quarter compared with $4.1-million in the comparable quarter of the previous fiscal year. This 20.7-per-cent increase is in part attributable to the company's extended presence in the maple market with the addition of new distributors and the addition of innovative products to the company's portfolio intended for the maple syrup production. In parallel, the company's efforts deployed throughout last fiscal year to enlarge the company's specialty chemicals distributors network have also continued to contribute to increase revenues from sales of specialty products and services. For the company, the growth of the specialty products and services business remains a constant priority since it is covering a large part of the company's selling, operating and administrative expenses. The revenues from specialty products and services have also been boosted by the addition of Piedmont, acquired in December, 2013. The recurring nature of these revenues contributes to reduce volatility.

In this second quarter of fiscal year 2015, the gross profit before depreciation and amortization reached $3.2-million compared with $2.3-million in the corresponding quarter of the previous fiscal year, an improvement of $900,000 which positively affected net earnings. In percentage, the company was able to generate a 23.2-per-cent gross profit before depreciation and amortization, a level lower than the 26.2-per-cent gross profit before depreciation and amortization generated in the second quarter of fiscal year 2014. This decline in percentage is the result of the shift in the company's revenue mix during this quarter where revenues from specialty products and services represent a lower proportion of total revenues compared with the corresponding period of the previous fiscal year (36.3 per cent in fiscal year 2015 versus 46.8 per cent in fiscal year 2014).

                                                                                                                                                 
                                               CONSOLIDATED RESULTS 

                                       Three-month period ended on Dec. 31,   Six-month period ended on Dec. 31,
                                                       2014            2013               2014              2013

Revenues                                        $13,689,060      $8,797,428        $24,908,191       $17,108,647
Gross profit before
depreciation and
amortization                                      3,171,532       2,308,907          6,204,483         4,450,898
Gross profit before
depreciation and
amortization                                          23.2%           26.2%              24.9%             26.0%
Operating expenses                                  232,817         218,644            433,303           401,230
Selling expenses                                  1,069,354         951,242          1,975,643         1,917,911
Administrative expenses                           1,126,033       1,108,050          2,113,829         2,027,113
Research and development
expenses net                                         49,502         104,044             89,424           147,451
Net earnings (loss)                                 117,524       (500,581)            400,111         (970,575)
Basic and diluted earnings
(loss) per share                                      0.006         (0.031)              0.019           (0.069)
Adjusted EBITDA (loss)                              605,023        (90,179)          1,414,850          (20,509)

The company secured $2.2-million in new bookings for water treatment projects over the quarter. These new bookings, combined with the realized revenues from water treatment projects during the quarter, have brought down the order backlog at $29.6-million as at Dec. 31, 2014, compared with $17.3-million as at Dec. 31, 2013. However, as of Jan. 27, 2015, the backlog for water treatment projects has reached $38.2-million since the company has secured new contracts for an aggregate amount of $11.8-million this month, mainly for the supply of drinking water systems to municipal customers. This level of backlog gives the company a fairly good perspective over the coming quarters in terms of level of revenues.

The company's ratio of selling, operating and administrative expenses (SG&A) as a whole over revenues amounted to 17.7 per cent for this quarter, down from 25.9 per cent for the corresponding quarter of the previous fiscal year. This decrease is largely attributable to the enhancement in volume of water treatment projects business and improvement in volume of sales from specialty products and services. Despite the increase of $200,000 in the level of SG&A expenses during the second quarter of fiscal year 2015 compared with the corresponding quarter of fiscal year 2014, the company has seen growth in revenues level, which generated an increase of $863,000 in gross profit before depreciation and amortization.

"We have been successful for the last two consecutive quarters at keeping our SG&A ratio level under 20 per cent which is promising to ensure that, as we keep the pace, we grow our top line which is reflected in our bottom line," added Mr. Dugre.

Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) for the quarter was recorded at $605,023, compared with a loss of $90,179 for the same period ended Dec. 31, 2013. The higher revenues recorded during the quarter compared with the corresponding quarter of the previous fiscal year, generated a higher gross profit before depreciation and amortization and contributed to a higher adjusted EBITDA level.

The net earnings were $117,524 or 0.6 cent per share for the second quarter of fiscal 2015 compared with a loss of $500,581 or a loss of 3.1 cents per share for the second quarter of fiscal 2014. This improvement is primarily due to higher revenues and an improved level of gross profit before depreciation and amortization.

Operating activities used $549,922 in cash for the period ended Dec. 31, 2014, compared with $3,012,537 of cash used during the corresponding period ended Dec. 31, 2013. It is mainly attributable to the change in working capital items and it is softened by improvement in net earnings in the second quarter of fiscal year 2015.

Over the six-month period ended Dec. 31, 2014, the company's revenues totalled $24.9-million, compared with $17.1-million for the corresponding period ended Dec. 31, 2013, showing an increase of 45.6 per cent. During this same period the company recorded net earnings amounting to $400,111 and a positive adjusted EBITDA of $1,414,850, compared with a net loss of $970,575 and a negative adjusted EBITDA of $20,509 for the corresponding period of fiscal year 2014. For the six-month period ended Dec. 31, 2014, the company used $138,697 of cash flows from its operating activities, compared with $2,517,833 used by its operating activities for the corresponding period of fiscal year 2014.

We seek Safe Harbor.