Mr. Frederic Dugre reports

H2O INNOVATION REPORTS FISCAL YEAR 2017 SECOND QUARTER RESULTS: AN INDICATOR OF H2O INNOVATION'S BUSINESS MODEL EVOLUTION

H2O Innovation Inc. has released its results for the second quarter of fiscal year 2017 ended Dec. 31, 2016. During this quarter, the corporation's revenues increased by 51.6 per cent to $19.9-million, up from $13.2-million for the same quarter of fiscal year 2016. This increase is largely attributable to the acquisition of Utility Partners, effective on July 1, 2016, which added significant revenues coming from operation and maintenance (O&M) activities.

Key highlights:

• Continuous revenue growth of 51.6 per cent to reach $19.9-million, compared with $13.2-million for the same period of the previous fiscal year;
• 82.7 per cent of the revenues recorded in this second quarter are coming from O&M and SP&S (specialty products and service) activities, which are recurring in nature;
• Backlog for water treatment projects increased from $43.1-million for the second quarter of fiscal year 2016 to reach $54.3-million for the corresponding period of this fiscal year, while O&M backlog stands at $54.9-million, for a consolidated backlog of $109.2-million as at Dec. 31, 2016;
• Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) (1) at $809,625, compared with $1,030,502 for the same quarter last year;
• Net loss amounted to $1,093,270, compared with earnings of $174,221 for the same period of the previous fiscal year;
• Cash generated by operating activities reached $1,083,117, compared with $128,382 for the same quarter of the previous fiscal year.

For this second quarter, 44 per cent of the revenues came from O&M activities, 38.7 per cent of the revenues came from the specialty products and services, and 17.3 per cent came from water treatment projects. "Our business model has fundamentally evolved where 82.7 per cent of the revenues recorded on this second quarter are coming from the O&M and SP&S business pillars, considered recurring in nature. This revenue distribution between the pillars is allowing us to gain predictability in our business model and secure long-term relationship with customers," stated Frederic Dugre, president and chief executive officer of H2O Innovation. The corporation's adjusted EBITDA stands at $809,625, compared with $1,030,502 for the same quarter last year. The consolidated backlog as of Dec. 31, 2016, stood at $109.2-million, with $54.3-million coming from the company's projects business pillar and $54.9-million from the O&M activities.

Revenues from water treatment projects have declined momentarily to $3.4-million, compared with $5.9-million in the corresponding period of the previous fiscal year, representing a 41.8-per-cent decrease. This is not unusual since revenues from projects vary from quarter to quarter and depend on the different milestones reached for revenue recognition. The decrease for the first part of the corporation's fiscal year is explained by the fact that the nature of projects has changed. The actual water treatment projects backlog consists of projects that have a more extensive engineering phase. During the second half of this current fiscal year, the projects will enter into the manufacturing phase, which will allow the recognition of significantly more revenues as fabrication moves forward. Also, project execution can some times be postponed due to situations outside of the control of the corporation and, therefore, impacts revenue recognition. Even though revenues are slower and lumpy, the water treatment projects are still a growth vehicle of the corporation. The water treatment projects order backlog stands at $54.3-million as at Dec. 31, 2016, compared with $43.1-million a year ago, representing a 25.8-per-cent increase over the last 12 months.

(1) The definition of adjusted earnings before interest, tax depreciation and amortization does not take into account the corporation's finance costs -- net, stock-based compensation costs, gain on purchase price adjustment, unrealized exchange gains/losses, and acquisition and integration costs. See reconciliation of this non-IFRS (international financial reporting standards) measure below. The definition of adjusted EBITDA used by the corporation may differ from those used by other companies.

Revenues from SP&S reached $7.7-million, compared with $7.2-million in the comparable quarter of the previous fiscal year, which represents an increase of 6.6 per cent. Over the last 12 months, revenues reached $28.9-million, which represents an increase of 21.9 per cent compared with the previous 12 months where revenues were at $23.7-million. This strong increase in SP&S revenues is the direct result of investments made during the last few years in the company's operating and selling functions to support the growth of this business line. Just over the last six quarters, the corporation has developed, launched and acquired new proprietary technologies such as the High Brix, Smartrek, Clearlogx and SPMC, which boosted revenues up.

Revenues coming from O&M amounted to $8.8-million. These revenues are recurring sales and came mainly from Utility Partners. The backlog related to these O&M contracts stood at $54.9-million as at Dec. 31, 2016, and consists of long-term contracts, mainly with municipalities, which contain multiyear renewal options. "Since the acquisition, the integration plan is moving very well as expected by management. The change of leadership is transitioning very smoothly. We have successfully renewed all the contracts that were in renewal phase and have also secured some cross-selling sales," added Mr. Dugre.

In this second quarter of fiscal year 2017, the corporation generated a 24.2-per-cent gross profit before depreciation and amortization, a lower level than the 31.3-per-cent gross profit before depreciation and amortization generated in the second quarter of fiscal year 2016. The revenue mix has been modified with the acquisition of Utility Partners, which operates in a different model than the company's previous core activities. Indeed, O&M activities generally generate lower gross margin. Therefore, the integration of Utility Partners into H2O Innovation, which in this quarter represents 44 per cent of the total revenues, puts pressure on the overall gross margin of the corporation, although increasing the predictability and stability of the financial results.

                            CONSOLIDATED RESULTS -- SELECTED FINANCIAL DATA 

                                                         Three-month period              Six-month period 
                                                              ended Dec. 31,                ended Dec. 31, 
                                                        2016           2015           2016           2015

Revenues                                         $19,957,831    $13,165,590    $39,826,693    $25,424,918
Gross profit before depreciation and
amortization                                       4,834,439      4,126,602      9,297,976      7,331,088
Gross profit before depreciation and
amortization                                           24.2%          31.3%          23.3%          28.8%
Operating expenses                                   486,003        318,886        924,407        652,866
Selling expenses                                   1,615,633      1,611,384      3,211,524      2,969,117
Administrative expenses                            2,132,083      1,188,169      3,992,813      2,231,720
Research and development expenses -- net              33,872         35,610        115,244        120,174
Net (loss) earnings                               (1,093,270)       174,221     (2,175,356)       226,550
Basic and diluted (loss) earnings per share           (0.027)         0.008         (0.074)         0.011
Adjusted EBITDA                                      809,625      1,030,502      1,438,640      1,472,276

The corporation's ratio of selling, operating and administrative expenses (SG&A) as a whole over revenues amounted to 21.2 per cent for this quarter, down from 23.7 per cent for the corresponding quarter of the previous fiscal year. This decrease is mostly attributable to the acquisition of Utility Partners in July, 2016, which has lower selling and operating expenses.

Adjusted EBITDA for the quarter was recorded at $809,625, compared with $1,030,502 for the same period ended Dec. 31, 2015. The adjusted EBITDA over revenues represents 4.1 per cent, compared with 7.8 per cent for the same quarter in fiscal year 2016. The decrease in the adjusted EBITDA over revenues ratio is due, in part, to a lower volume coming from revenues of water treatment projects. Moreover, the shift in product mix and the addition of Utility Partners results impacted negatively the overall gross margin, decreasing the adjusted EBITDA. Once the volume of revenues will increase, the corporation expects this percentage to increase accordingly since all the fixed charges are already covered.

The net loss amounted to $1,093,270, or 2.7 cents per share, for the second quarter of fiscal year 2017, compared with earnings of $174,221, or 0.8 cent per share, for the second 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, and to a higher level of SG&A expenses, aimed to support the constant growth of the corporation.

Operating activities generated $1,083,117 in cash for the three-month period ended Dec. 31, 2016, compared with $128,382 of cash generated during the corresponding period ended Dec. 31, 2015. The increase is due to the changes in working capital items, to the addition of Utility Partners, and the increase in non-cash items, subdued by the loss before income taxes in the second quarter of fiscal year 2017.

Reconciliation of adjusted EBITDA to net (loss) earnings

Even though adjusted EBITDA is a non-IFRS measure, it is used by management to make operational and strategic decisions. Providing this information to the stakeholders, in addition to the GAAP (generally accepted accounting principles) measures, allows them to see the corporation's results through the eyes of management and to better understand the financial performance, notwithstanding the impact of GAAP measures.

                         RECONCILIATION OF ADJUSTED EBITDA TO NET (LOSS) EARNINGS

                                                               Three-month period                    Six-month period 
                                                                    ended Dec. 31,                      ended Dec. 31, 
                                                       2016                  2015            2016                2015 

Net (loss) earnings for the period              $(1,093,270)             $174,221     $(2,175,356)           $226,550 
Finance costs -- net                                321,870               216,217         656,295             364,254 
Income taxes                                        (88,127)                8,000        (391,593)            212,853 
Depreciation of property, plant and equipment       181,436               144,643         356,464             271,986 
Amortization of intangible assets                   837,666               236,426       1,501,522             468,105 
Gain on purchase price adjustment                         -                     -               -            (375,977)
Unrealized exchange loss                            135,467               203,681         177,868             257,087 
Acquisition and integration costs                   347,124                47,314       1,020,829              47,418 
Stock-based compensation costs                      167,459                     -         292,611                   - 
Adjusted EBITDA                                     809,625             1,030,502       1,438,640           1,472,276 

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 financial results for the second quarter of fiscal year 2017 in further detail at 10 a.m. Eastern Time on Tuesday, Feb. 14, 2017.

To access the call, please call 877-223-4471 or 647-788-4922, 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 second quarter financial report is available on the company's website and on NYSE Euronext Alternext's site.

About H2O Innovation Inc.

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.