Mr. Frederic Dugre reports

H2O INNOVATION REPORTS FISCAL 2017 FIRST QUARTER RESULTS: BOOSTED BY UTILITY PARTNERS ACQUISITION, RECURRING ACTIVITIES REPRESENT 73% OF CONSOLIDATED REVENUES

H2O Innovation Inc. has released its results for the first quarter of fiscal year 2017 ended Sept. 30, 2016. During this quarter, the corporation's revenues increased by 62 per cent to $19.9-million, up from $12.3-million for the same quarter of fiscal year 2016. This increase is largely attributable to the acquisition of Utility Partners, effective July 1, 2016, which added significant revenues coming from operation and maintenance (O&M) activities.

Key Highlights:

• Sustained revenue growth of 62 per cent to reach $19.9-million, compared with $12.3-million in previous fiscal year;
• Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) increased by 42 per cent to reach $629,015, compared with $441,669 for the same period in fiscal year 2016;
• Consolidated backlog for projects and O&M contracts stands at $105-million as at Oct. 24, 2016, pushed by $13.3-million of new projects secured in the first four months of this new fiscal year.

"The acquisition of Utility Partners allowed us to solidify our business model by adding recurring sales coming from O&M activities, which are more predictable, and therefore counterbalance the 'peaks and valleys' profile of the revenue growth curve generated from the water treatment projects. For this first quarter, 73 per cent of recorded revenues are recurring in nature. Today, our business model is not only more reliable and robust but it also provides an enhanced value proposition to our customers, resulting into greater accountability, in-depth technical knowledge of water treatment solutions and integrated customer care with multiple speciality products. All this translate into high scalability potential of our three business pillars coming from multiple cross selling opportunities and future design-build-operate projects," stated Frederic Dugre, president and chief executive officer of H2O Innovation.

For this first quarter, 43 per cent of the revenues came from O&M activities, 30 per cent of the revenues came from the specialty products and services (SP&S) and 27 per cent came from water treatment projects. The corporation's EBITDA stands at $629,015, compared with $441,669 for the same quarter last year. The consolidated backlog as of Sept. 30, 2016, stands at $98.5-million, compared with $38.3-million last year.

Revenues from water treatment projects have declined momentarily to $5.4-million, compared with $7.2-million in the corresponding period of the previous fiscal year, representing a 25-per-cent decrease. The decrease in revenues from water treatment projects, despite the increasing project order backlog, is not unusual since such revenues vary from quarter to quarter and depend on the different milestones reached for revenues recognition. The project order backlog was at $41.2-million on Sept. 30, 2016, compared with $38.3-million a year ago, and reached $48.9-million at the end of October, 2016, representing a 28-per-cent increase over the last 13 months.

"Even though revenues associated to water treatment projects appear to be slower this last quarter, our selling and engineering teams have been extremely busy developing new opportunities and kicking off new projects. The water treatment projects business pillar is still a strategic growth vehicle for our company. During the first quarter of fiscal year 2017, we launched the flexMBR, our new waste water flexible membrane platform. Since then, we have already secured three contracts using this new platform, and we have started to build great momentum in the waste water market in North America, a fast-growing and lucrative market in which we have not tapped into in the previous year," added Mr. Dugre.

On the SP&S side, revenues reached $5.9-million, compared with $5.1-million in the comparable quarter of the previous fiscal year, which represents an increase of 17 per cent. This strong increase in SP&S revenues is the direct result of investments made during the last two years in the corporation's operating and selling functions to support the growth of this business line.

Revenues coming from O&M activities stand at $8.5-million and are highly recurring in nature. These revenues are mainly coming from Utility Partners. The backlog coming from these O&M contracts stands at $57.3-million as at Sept. 30, 2016, and consists of long-term contracts, mainly with municipalities, which contain multiyear renewal options.

In this first quarter of fiscal year 2017, the corporation generated a 22.5-per-cent gross profit before depreciation and amortization, compared with 26.1-per-cent gross profit before depreciation and amortization generated in the first quarter of fiscal year 2016. The revenue mix in this quarter has been modified with the acquisition of Utility Partners, which operates in a different commercial landscape than the corporation's core activities. O&M activities generally generate lower gross margin. It was therefore expected that the integration of Utility Partners into H2O Innovation would modify the overall gross margin ratio of the corporation.

                           CONSOLIDATED RESULTS                      
                                                         
                                        Three-month period ended Sept. 30,
                                                       2016          2015  

Revenues                                       $ 19,868,862  $ 12,259,328  
Gross profit before depreciation and                                        
amortization                                      4,463,537     3,204,486  
Gross profit before depreciation and                                        
amortization                                          22.5%         26.1%
Operating expenses                                  438,404       333,980 
Selling expenses                                  1,595,891     1,357,733  
Administrative expenses                           1,860,730     1,043,551  
Research and development expenses -- net             81,372        84,564  
Net (loss) earnings                              (1,082,086)       52,329  
Basic earnings per share                             (0.028)       (0.003) 
Diluted (loss) earnings per share                    (0.027)       (0.003) 
Adjusted EBITDA                                     629,015       441,669  

The corporation's ratio of selling, operating and administrative expenses (SG&A) as a whole over revenues amounted to 19.6 per cent for this quarter, down from 22.3 per cent for the corresponding quarter of the previous fiscal year. This decrease is mostly attributable to the acquisition of Utility Partners, which has lower selling and operating expenses.

Adjusted EBITDA for the quarter was $629,015, compared with $441,669 for the same period ended Sept. 30, 2015. The adjusted EBITDA over revenues represents 3.2 per cent, compared with 3.6 per cent for the same quarter in fiscal year 2016. Lower volume of revenues of water treatment projects impacted the adjusted EBITDA. Once the volume of revenues increases, the corporation expects this ratio to increase accordingly, since all the fixed charges are already covered.

The net (loss) earnings amounted to ($1,082,086) or (2.8 cents) per share for the first quarter of fiscal year 2017, compared with $52,329 or 0.3 cent per share for the first quarter of fiscal year 2016. The increase in net loss is largely due to the acquisition of Utility Partners and the related acquisition and integration costs.

Operating activities, after the working capital items, used $1,661,798 in cash for the period ended Sept. 30, 2016, compared with $227,303 of cash used during the corresponding period ended Sept. 30, 2015. The increase in cash used is mainly attributable to the loss before income taxes in the first quarter of fiscal year 2017 and to the changes in working capital items, especially accounts payable and accrued liabilities that were paid using the funds from the transaction destined to working capital needs.

H2O Innovation conference call

Mr. Dugre and Marc Blanchet, chief financial officer, will hold an investor conference call to discuss the financial results for 2017 first quarter in further details at 8:30 a.m. ET on Tuesday, Nov. 15, 2016.

To access the call, please call 877-223-4471 five to 10 minutes prior to the start time. Presentation slides for the conference call will be made available on the corporate presentations page of the investors section of the corporation's website.

The first quarter financial report is available on the corporation's website. Additional information on the corporation is also available on SEDAR.

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