Mr. Frederic Dugre reports

H2O INNOVATION: BUILDING ON A RECORD YEAR

H2O Innovation Inc. has released its results for the fourth quarter and fiscal year ended June 30, 2016, and has outlined its strategic outlook for fiscal 2017 considering the transforming acquisition that closed in July, 2016, and the new products launched since the beginning of this new fiscal year.

Key highlights of fiscal year 2016:

• Revenues reached $50.7-million;
• Gross profit margin at 30.7 per cent;
• Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) at $2.9-million, which is a 5.7-per-cent ratio over revenues.

Strategic outlook for fiscal year 2017:

• New business model now with three strong business pillars;
• Solid backlog of $99.7-million, combining secured contracts for water treatment projects, and operating and maintenance, as of Sept. 26, 2016;
• Commercialization of new proprietary technologies recently developed.

"During the last fiscal year, we made important steps toward growth: launched new products, opened a new office in Spain, hired new resources in our sales force, expanded in Mexico and concluded two acquisitions. One of these acquisitions is a stepping stone of our third pillar: operation and maintenance services of water and waste water treatment infrastructures. Two thousand sixteen is as an inflection point for H2O Innovation, and allows us to start 2017 in an enviable position with a strong backlog of $99.7-million and new products in commercialization phase," stated Frederic Dugre, president and chief executive officer of H2O Innovation.

H2O Innovation's revenues for fiscal year 2016 increased by 4 per cent to $50.7-million, up from revenues of $48.7-million for fiscal year 2015, generating a gross profit margin of 30.7 per cent. This year's growth is mainly fuelled by the outstanding organic growth of the corporation's specialty products and services pillar (SP&S). For the first time in its history, the corporation has completed its fiscal year with a higher proportion of revenues coming from SP&S activities than water treatment projects activities -- 54.7 per cent and 45.3 per cent, respectively, compared with 41.6 per cent and 58.4 per cent, respectively, during the previous fiscal year. This business mix between projects and SP&S is allowing the corporation to gain predictability in its business model, secure long-term relationships with customers and maintain a high gross profit. This strong 37-per-cent increase, from $20.2-million to $27.7-million of revenues coming from SP&S, is the result of the investments made in the sales efforts and development and acquisition of new proprietary technologies such as Smartrek, Clearlogx and SPMC, which boosted revenues up, along with the gross profit.

"Our innovations portfolio, together with our distinctive business model, allowed us to receive important industry recognitions during fiscal year 2016, including: (1) the water technology company of the year awarded by Global Water Intelligence, (2) the national award of excellence for best design-build water/wastewater project by the Institute of America, and (3) the WateReuse equipment/manufacturer of the year award by the WateReuse Association," added Mr. Dugre.

On the projects side, revenues in fiscal year 2016 stood at $23-million, compared with $28.5-million in fiscal year 2015, representing a 19.3-per-cent decrease. The decrease in revenues from projects, despite the increasing project order backlog, is not unusual since revenues from projects vary from quarter to quarter and depend on the different milestones reached for revenue recognition.

In this fiscal year 2016, the corporation generated a 30.7-per-cent gross profit before depreciation and amortization, an increase compared with the 27.9-per-cent gross profit before depreciation and amortization generated in fiscal year 2015. The constant efforts deployed on improving the execution and the procurement of the corporation's projects pillar are also paying off, contributing positively to the gross profit margin.

Adjusted EBITDA decreased reaching $2.9-million, compared with $3.1-million during the prior fiscal year. The ratio of adjusted EBITDA over revenues is at 5.7 per cent, down from 6.3 per cent for fiscal year 2015. This decrease of EBITDA is due to the choices management made by adding resources to expend the corporation's sales force and investing in product development in order to be able to launch new products during the fiscal year 2017, which increased H2O Innovation's selling expenses. H2O Innovation is reinvesting in its growth. New proprietary technologies have differentiated the corporation from its competitors, and allowed it to secure sales and enhance its customer relations.

                                       CONSOLIDATED RESULTS   
                
                                        Three-month periods             12-month periods  
                                           ended on June 30,            ended on June 30, 
                                         2016          2015           2016          2015
                                                 (unaudited)                    (audited) 

Revenues                          $11,042,913   $11,670,028    $50,667,691   $48,699,860
Gross profit before
depreciation and amortization       3,688,703     2,117,494     15,542,431    13,566,370
Gross profit margin                     33.4%         26.8%          30.7%         27.9%
Operating expenses                    426,161       315,025      1,435,187     1,030,099
Selling expenses                    1,692,377     1,271,641      6,341,175     4,541,164
Administrative expenses             1,292,330     1,315,396      4,813,709     4,776,986
Research and development
expenses -- net                        53,704        98,053        198,004       265,821
Net earnings (loss)                  (662,775)     (284,063)       210,197       272,425
Basic and diluted earnings per
share                                  (0.032)       (0.013)         0.010         0.013
Adjusted EBITDA                       157,330       578,098      2,874,929     3,076,701
Adjusted EBITDA over revenues            1.4%          4.9%           5.7%          6.3%

The corporation's ratio of selling, operating and administrative expenses (SG&A) as a whole over revenues amounted to 24.8 per cent for this fiscal year, up from 21.2 per cent for the previous fiscal year. Considering the improvement of the gross profit margin in the last quarters derived from the growth of the SP&S business line, management considers that the SG&A ratio is adequate. Over the last quarters, SG&A investments have paid off since the corporation has been able to generate constant growth and maintain a relatively high gross profit margin.

The net earnings amounted to $210,197, or one cent per share, for fiscal year 2016, compared with $272,425, or 1.3 cents per share, for fiscal year 2015. The decrease in net earnings despite higher revenues and gross profit is partly due to a higher level of SG&A expenses, aimed to support the constant growth of the corporation.

Operating activities generated $2.6-million in cash in fiscal year 2016, compared with $2.1-million of cash generated by operating activities during the previous fiscal year. This improvement is attributable to the slight improvement of earnings before income taxes in fiscal year 2016, compared with fiscal year 2015, but also to a positive change in working capital items, such as a higher volume of activities toward year-end reflected in an increase of the level of accounts payable and accrued liabilities in fiscal year 2016, compared with fiscal year 2015, and 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 2016

Revenues for the fourth quarter were down by 5.4 per cent to $11-million from $11.7-million for the same quarter of the previous fiscal year. The decrease is explained by a decrease of $1.75-million in revenues from projects and an increase of $1.1-million in revenues from SP&S.

For the quarter ended June 30, 2016, the gross profit before depreciation and amortization increased to reach 33.4 per cent, from 29.7 per cent for the same quarter of the previous fiscal year, mostly due to a shift in the business mix during fiscal year 2016 where SP&S revenues exceeded 50 per cent of the total revenues.

The fourth quarter SG&A expenses were higher than the first three quarters of fiscal year 2016. They stand at $3.4-million in this current quarter, compared with $2.9-million in the fourth quarter of fiscal year 2015. The increase is mainly due to hiring to support operations, to the increase of selling expenses related to high bidding activities, which include hiring of resources in the project sales team, to the commissions paid during the quarter for bookings secured and to SP&S sales.

Adjusted EBITDA for the fourth quarter was $157,330, compared with $578,098 for the same period of last fiscal year. As for the net loss of $662,775 for this quarter, it is caused by the increase of the SG&A expenses explained in the previous paragraph.

Strategic outlook for fiscal year 2017

Shortly after the 2016 year-end, H2O Innovation announced the closing of the acquisition of Utility Partners LLC. This acquisition complements the venture that was started during fiscal year 2015 in leasing, operation and maintenance of water treatment systems (O&M). Utility Partners is a U.S.-based company specialized in the operation and maintenance of municipal water and waste water treatment plants. It operates, maintains and repairs water treatment and distribution equipment, as well as associated assets for all of its clients and ensures that water quality meets regulatory requirements. It currently operates 34 utilities in six U.S. states, mainly on the U.S. Gulf coast, southeast, northeast (New England) and the West Coast (California/Nevada). Utility Partners has entered into long-term contracts, mainly with municipalities, that contain multiyear renewal options. Therefore, it increases the level of recurring revenues of the corporation.

With three strong business pillars, the corporation is now very well balanced and not dependent on a single source of revenues. SP&S and O&M activities reinforce long-term relationships with the projects customers, and, as the revenues coming from the SP&S and O&M are recurring in nature, it minimizes the impact of revenue volatility associated with revenues from projects. The corporation's backlog combining secured contracts for water treatment projects and operating and maintenance is at $99.7-million as at Sept. 26, 2016.

"We now have a platform to capture cross-selling opportunities, where one pillar will feed the others. The focus for fiscal year 2017 will be to scale up our business model by maximizing the use of all our resources and sales forces. All together, these three business pillars provide a unique and accountable business model to better serve the design-build-operate opportunities, a fast-growing segment in the water industry," stated Mr. Dugre.

Stock option plan

The board of directors of H2O Innovation approved a modification to the corporation's stock option plan. The new plan will now reserve four million common shares of the company for option purposes, compared with 1.1 million shares for the previous plan. The options are available for officers, directors, employees and consultants of the corporation, and account for less than 10 per cent the corporation's issued and outstanding common shares. This modification is subject to the final approval of the TSX Venture Exchange.

H2O Innovation conference call

Mr. Dugre, president and chief executive officer, and Marc Blanchet, chief financial officer, will hold an investor conference call to discuss the fourth quarter and full fiscal year 2016 financial results in further detail at 10 a.m. Eastern Time on Tuesday, Sept. 27, 2016.

To access the call, please call 647-427-3388 or 877-224-6662, five minutes to 10 minutes prior to the start time. Presentation slides for the conference call will be made available on H2O Innovation's website.

The annual financial report is available on the company's website and on the New York Stock Exchange Euronext Alternext site. Additional information on the corporation is also available on SEDAR.

About H2O Innovation

H2O Innovation designs and provides state-of-the-art, custom-built and integrated water treatment solutions based on membrane filtration technology for municipal, industrial, energy and natural resources end-users.

We seek Safe Harbor.