Mr. Marc Blanchet reports

H2O INNOVATION INC.: RECORD-HIGH REVENUES AND SUCCESSFUL INTEGRATION OF UTILITY PARTNERS

H2O Innovation Inc. has provided its results for the fourth quarter and fiscal year ended June 30, 2017. H2O Innovation's revenues for fiscal year 2017 increased by 63.3 per cent to $82.8-million, up from revenues of $50.7-million for fiscal year 2016, generating a gross profit margin of 23.1 per cent. This year's growth is mainly fuelled by the acquisition of Utility Partners on July 26, 2016, which impacted sales by adding $33.2-million in recurring revenues. The significant increase of revenues due to Utility Partners' acquisition was subdued by uncontrollable delays in projects schedule. The consolidated backlog as of June 30, 2017, stood at $109.0-million, with $53.9-million coming from the company's projects business pillar and $55.1-million from the operation and maintenance (O&M) activities.

On the projects side, revenues in fiscal year 2017 stood at $20.0-million compared with $23.0-million in fiscal year 2016, representing a 12.7-per-cent decrease. This decrease is mostly attributable to a shift in the nature of the company's water treatment projects, which means more municipal projects characterized by a more extensive engineering phase, increasing the gaps in revenue recognition. Projects schedule has been postponed due to situations out of the control of the corporation, resulting in delays of revenue recognition.

"Nevertheless, the launch of the flexMBR technology during the first quarter of fiscal year 2017 allowed us to significantly increase our presence in the waste water market with bookings of $13.0-million, compared to $0.7-million in fiscal year 2016. The current pipeline of projects remains very rich in opportunities, supported by a $53.9-million projects backlog," stated Frederic Dugre, president and chief executive officer of H2O Innovation.

In this fiscal year 2017, the corporation generated a 23.1-per-cent gross profit before depreciation and amortization, a decrease compared with the 30.7-per-cent gross profit before depreciation and amortization generated in fiscal year 2016. This decrease is explained by the revenue mix, which has been modified with the acquisition of Utility Partners. Utility Partners operates in a different model than the other corporation's core activities. Indeed, O&M activities generally generate lower gross margin. Therefore, the integration of Utility Partners into H2O Innovation, which in this fiscal year represents 40.1 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.

Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) decreased reaching $1.8-million compared with $2.9-million during the prior fiscal year. The ratio of adjusted EBITDA over revenues is at 2.2 per cent, down from 5.7 per cent for fiscal year 2016. This decrease of EBITDA is due to a lower volume of projects executed as well as the important shift in the revenue mix that also impacted the gross margin. The fourth quarter was also impacted by a one-time expense of approximately $300,000 for the payment of severances following notably the rightsizing of the projects business pillar.

                                    CONSOLIDATED RESULTS  
                                  Selected financial data    

                                                                  Three-month            12-month periods   
                                                     periods ended on June 30,           ended on June 30,
                                                          2017           2016          2017          2016


Revenues                                           $24,037,884    $11,042,913   $82,764,508   $50,667,691
Gross profit before depreciation and amortization    4,971,074      3,688,703    19,157,380    15,542,431
Gross profit margin                                       20.7%          33.4%         23.1%         30.7%
Operating expenses                                     467,873        426,161     1,916,001     1,435,187
Selling expenses                                     1,978,627      1,692,377     7,165,499     6,341,175
Administrative expenses                              3,039,670      1,292,330     9,167,360     4,813,709
Research and development expenses -- net                21,630         53,704       152,949       198,004
Net (loss) earnings                                 (1,742,862)      (714,003)   (5,130,986)      158,969
Basic and diluted earnings per share                    (0.045)        (0.034)       (0.133)        0.008
Adjusted EBITDA                                        (20,486)     1,829,891     1,828,907     2,874,929
Adjusted EBITDA over revenues                            (0.09%)          1.4%          2.2%          5.7%

The corporation's ratio of selling, operating and administrative expenses (SG&A) as a whole over revenues amounted to 22.0 per cent for this fiscal year, down from 24.8 per cent for the previous fiscal year. This decrease is mostly attributable to the acquisition of Utility Partners on July 26, 2016, which increased the overall revenues without impacting proportionally the selling and operating expenses.

The net loss amounted to $5,130,986 or 13.3 cents per share for fiscal year 2017 compared with $158,969 or 0.8 cent per share for fiscal year 2016. The increase in net loss is partly due to the acquisition and integration fees for Utility Partners, delays in project execution, and shift in the product mix which impacts also the gross margin.

Operating activities generated $1.8-million in cash in fiscal year 2017 compared with $2.6-million of cash generated by operating activities during the previous fiscal year. The net loss impact was subdued by the increase of depreciation and amortization due to the acquisition of Utility Partners compared with fiscal year 2016, but also to a positive change in working capital items, such as a higher volume of activities toward year-end, a timing difference within the projects production phases affecting the invoicing milestones reached and a positive impact of Utility Partners' working capital items. Investment in property, plant and equipment was also realized, totalling $1.4-million, from which $200,000 was made for direct support of O&M specific plants.

"The business model is shaping up and we feel achieved by the successful integration of Utility Partners from a financial, operational and relational perspective. Within the first 11 months following Utility Partners' acquisition, we have renewed all expiring operation and maintenance contracts, captured multiple cross-selling opportunities between the three business pillars, and secured two new O&M projects," added Mr. Dugre.

Financial results for the fourth quarter of fiscal year 2017

Revenues for the fourth quarter were up by 117.7 per cent to $24.0-million from $11.0-million for the same quarter of the previous fiscal year. The increase is explained by the addition of Utility Partners' revenues, following the acquisition on July 26, 2016.

For the quarter ended June 30, 2017, the gross profit before depreciation and amortization decreased to 20.7 per cent, from 33.4 per cent for the same quarter of the previous fiscal year. This is mostly due to a shift in the business mix during fiscal year 2017, where SP&S and O&M revenues exceeded 65 per cent of the total revenues, impacting negatively the gross margin, although increasing the predictability and stability of the financial results.

The fourth quarter selling, general and administrative expenses were higher than during the first three quarters of fiscal year 2017. They stand at $5.5-million in this current quarter compared with $3.4-million in the fourth quarter of fiscal year 2016. The significant increase in SG&A expenses is due to the acquisition of Utility Partners and the integration of its corporate team, the increase in salaries and fringe benefits, the addition of personnel to support the company's overall operations, and the payment of $300,000 of severances.

Adjusted EBITDA for the fourth quarter was negative $20,486 compared with $157,330 for the same period of last fiscal year. As for the net loss of $1,742,862 for this quarter, it is caused by the increase of the SG&A expenses explained in the previous paragraph.

H2O Innovation conference call

Mr. Dugre and Marc Blanchet, chief financial officer, will hold an investor conference call to discuss the fourth quarter and full fiscal year 2017 financial results in further detail at 10 a.m. Eastern Time, on Friday, Sept. 29, 2017.

To access the call, please call 647-788-4922 or 877-223-4471, five 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 NYSE Euronext Alternext's site. Additional information on the corporation is also available on SEDAR.

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. The corporation's activities rely on three pillars which are i) water and waste water projects; ii) specialty products and services, including a complete line of specialty chemicals, consumables, specialized products for the water treatment industry as well as control and monitoring systems; and iii) operation and maintenance services for water and waste water treatment systems.

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