Mr. Marc Blanchet reports

H2O INNOVATION'S 2018 SECOND QUARTER RESULTS - THE CORPORATION IS SCALING UP, SHOWING GROWTH IN ALL BUSINESS PILLARS

H2O Innovation Inc. has provided its results for the second quarter of fiscal year 2018 ended Dec. 31, 2017. Revenues for the second quarter of fiscal year 2018 totalled $25.8-million, representing a $5.9-million or 29.4-per-cent increase, as compared with revenues of $19.9-million for the second quarter of the previous fiscal year. This increase is fuelled by the organic growth of the projects and specialty products and services business pillars. The projects business pillar is currently regaining speed after a slowdown in specific projects, which impacted last fiscal year's financial results. More projects are reaching the revenue recognition phase for this quarter compared with the same quarter of fiscal year 2017. SP&S results have been bolstered by the Maple business line, which is showing a faster growth with record results quarter after quarter. The company's growing consolidated backlog, which stands at $116.1-million as of Dec. 31, 2017, compared with $109.2-million last year, continues to provide excellent visibility on revenue recognition for the coming quarters.

Key highlights

• Revenues reached $25.8-million for the second quarter of fiscal year 2018, representing a $5.9-million, or 29.4-per-cent growth, compared with the second quarter of the previous fiscal year.
• Recurring revenues from specialty products and services (SP&S) and operation and maintenance (O&M) business pillars represent 74.5 per cent of total revenues.
• Consolidated backlog, combining water and waste water treatment projects and O&M, stood at $116.1-million as of Dec. 31, 2017, compared with $109.2-million for the period ended Dec. 31, 2016, representing a 6.3-per-cent organic growth.
• Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) (1) reached $1.4-million for the second quarter of fiscal year 2018, representing a $600,000, or 67.8-per-cent growth, compared with the second quarter of fiscal year 2017.
• Adjusted EBITDA over revenues increased, from 4.1 per cent for the three-month period ended Dec. 31, 2016, to reach 5.3 per cent for this quarter ended Dec. 31, 2017.
• Net loss of $1.3-million, compared with $1.1-million in the second quarter of previous fiscal year, was mostly impacted by the tax reform. Without the $1.1-million impact from the new U.S. tax reform, net loss would have been $200,000.

                          CONSOLIDATED RESULTS  
Selected financial data                                     Three-month periods ended Dec. 31,
                                                                  2017                   2016

Revenues                                                   $25,818,929            $19,957,831
Gross profit before depreciation and amortization            6,213,020              4,834,439
Gross profit before depreciation and amortization (%)             24.1%                  24.2%
Operating expenses                                           1,009,008                486,003
Selling expenses                                             2,217,535              1,615,633
Administrative expenses                                      1,625,073              2,132,083
Research and development expenses                                  170                 33,872
Net (loss)                                                  (1,340,441)            (1,093,270)
Basic and diluted (loss) per share                              (0.033)                (0.027)
Adjusted EBITDA                                              1,358,281                809,625
Adjusted EBITDA over revenues (%)                                  5.3%                   4.1%

                            CONSOLIDATED RESULTS  
Selected financial data                                     Six-month periods ended Dec. 31,
                                                               2017                    2016 (2)

Revenues                                                $48,436,927             $37,441,981
Gross profit before depreciation and amortization        10,667,406               9,125,664
Gross profit before depreciation and amortization (%)          22.0%                   24.4%
Operating expenses                                        1,886,393                 924,407
Selling expenses                                          3,855,748               3,211,524
Administrative expenses                                   3,102,683               3,820,501
Research and development expenses                             8,685                 115,244
Net (loss)                                               (2,430,316)             (2,042,429)
Basic and diluted (loss) per share                           (0.061)                 (0.069)
Adjusted EBITDA                                           1,946,344               1,438,640
Adjusted EBITDA over revenues (%)                               4.0%                    3.8%

Revenues from projects stood at $6.6-million for the second quarter of fiscal year 2018, compared with $3.4-million in the corresponding period of the previous fiscal year, representing a 90.9-per-cent increase. This significant increase is explained by an increasing number of projects entering a higher revenue recognition phase. The corporation also developed a more diversified portfolio between water and waste water projects, with 34.0 per cent in terms of number of projects being waste water projects as of Dec. 31, 2017, compared with 16.7 per cent as of Dec. 31, 2016. The waste water projects are usually characterized by a better gross margin before depreciation and amortization. The current sales pipeline of projects remains rich in opportunities and coming quarters should remain busy supported by a $51.9-million projects backlog, as of Dec. 31, 2017. With the addition of the two recent flagship industrial projects announced at the beginning of the third quarter, the projects backlog stand at $56.1-million as of Feb. 7, 2018.

On the SP&S side, revenues reached $10.6-million for the second quarter of fiscal year 2018, compared with $7.7-million in the comparable quarter of the previous fiscal year, which represents an increase of 37.6 per cent. This increase in SP&S revenues is a result of investments made in the operating and selling functions to support and fuel the growth of this business line. The Maple business line continues its sustained growth with record sales for this quarter, as the activities are ramping up to the Maple season. "Furthermore, a first significant project was signed for the filter housing product line, which will definitely help us position ourselves and obtain more references," stated Frederic Dugre, president and chief executive officer of H2O Innovation.

Revenues coming from O&M activities are recurring in nature and stand at $8.6-million, compared with revenues of $8.8-million in the corresponding quarter of last fiscal year, representing a 2.0-per-cent decrease. However, this decrease is only due to the negative impact of the appreciation of the Canadian dollar over U.S. dollar. Notwithstanding the foreign exchange impact, the O&M business pillar is showing an organic growth of 2.9 per cent in U.S. dollars. The O&M business pillar is showing a steady growth since the acquisition of Utility Partners. The corporation is signing new contracts, as reflected in the growing backlog. For the O&M business pillar, the backlog is converting to revenues evenly over the period of the contract. The backlog coming from O&M contracts stands at $64.2-million as at Dec. 31, 2017, and consists of long-term contracts, mainly with municipalities, which contain multiyear renewal options. All expiring contracts following the acquisition have been renewed successfully. At the same quarter of the previous fiscal year, the O&M contracts backlog stood at $54.9-million, representing a 16.9-per-cent increase over a 12-month period.

"New territories are opening to the O&M business line, with contracts won in Western Canada and Texas. These are potentially high-growth territories, where the corporation's O&M activities were not yet established. This will also develop the synergies with the projects and SP&S business pillars, as they are already active on these geographic markets. New contracts have also been won in the state of New York, with the corporation providing both the MBR waste water equipment and O&M services to the same plants," added Mr. Dugre.

In this second quarter of fiscal year 2018, the corporation generated a $6.2-million or 24.1-per-cent gross profit before depreciation and amortization compared with $4.8-million or 24.2 per cent for the last fiscal year. The increase in the gross profit margin before depreciation and amortization is explained by the increase in revenue level, with all the business lines showing revenue increase for this quarter ended Dec. 31, 2017, compared with the previous comparable quarter. The improvement of the gross profit margin before depreciation and amortization is also attributable to the sustained organic growth of the SP&S and O&M revenues. The ratio of gross profit margin before depreciation and amortization over revenues remained stable.

The corporation's ratio of selling, operating and administrative expenses (SG&A) as a whole over revenues amounted to 18.8 per cent for this quarter, down from 21.2 per cent for the corresponding quarter of the previous fiscal year. This decrease in percentage of SG&A over revenues is mostly attributable to the increase of the overall revenues without impacting proportionally the selling, operating and administrative expenses.

The corporation's adjusted EBITDA increased by $600,000 or 67.8 per cent, to reach $1.4-million during the second quarter of fiscal year 2018, from $800,000 for the comparable quarter of fiscal year 2017. The adjusted EBITDA improvement is generated by a significant increase in revenues for the projects and the SP&S business lines, and driven by a decrease of the selling, general and administrative expenses (SG&A) as a percentage over revenues, impacting positively the net loss before income taxes. The adjusted EBITDA over revenues ratio stands at 5.3 per cent, compared with 4.1 per cent for the same quarter of fiscal year 2017. "If comparing the second quarter of fiscal year 2018 to the first quarter of this same fiscal year, the revenues have increased by 14.2 per cent (revenues of $22.6-million during the first quarter, compared to $25.8-million for the second quarter), while the adjusted EBITDA have increased by 131.0 per cent (standing at $600,000 for the first quarter of fiscal year 2018 compared to $1.4-million for the second quarter). The corporation is growing the EBITDA at a faster pace than the revenues, proving the scalability of the business model," stated Mr. Dugre.

The net loss increased by $200,000, or 22.6 per cent, to reach $1.3-million during the second quarter of fiscal year 2018, from a net loss of $1.1-million for the comparable quarter of the previous fiscal year. The increase in net loss is mostly caused by the Tax Cuts and Jobs Act, a tax reform enacted by the U.S. government during the second quarter of fiscal year 2018, leading to an additional deferred tax expense of $1.1-million for this quarter. Without the $1.1-million impact from the new U.S. tax legislation, net loss would have been $200,000. The net loss is also impacted by the foreign exchange, as most of the revenues are in U.S. dollars, whereas the administrative expenses are mostly incurred in Canadian dollars. The Canadian dollar appreciation noticed during the quarter affected negatively the net results of the corporation compared with the same quarter of the previous fiscal year.

Net cash generated by operating activities reached $600,000 for the period ended Dec. 31, 2017, compared with $1.1-million during the corresponding period ended Dec. 31, 2016. The decrease is due to a significant impact of change in working capital items, such as a higher volume of activities during this quarter, compared with the second quarter of fiscal year 2017, an increased level of finished goods inventory to meet the growing demands and a timing difference within the projects production phases affecting the invoicing milestones reached. Investment in property, plant and equipment was also realized, totalling $400,000 for the three-month period ended Dec. 31, 2017, compared with $100,000 for the three-month period ended Dec. 31, 2016.

Reconciliation of adjusted EBITDA to net loss

Even though adjusted EBITDA is a non-IFRS (international financial reporting standards) 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.

                                                    Three-month periods ended Dec. 31,
                                                          2017                   2016

Net (loss) for the period                          $(1,340,441)           $(1,093,270)
Finance costs -- net                                   473,369                321,870
Income taxes                                         1,176,701                (88,127)
Depreciation of property, plant and equipment          242,978                181,436
Amortization of intangible assets                      674,552                837,666
Unrealized exchange (gains)/losses                      25,367                135,467
Acquisition and integration costs                            -                347,124
Stock-based compensation costs                         105,755                167,459
Net loss on bank fraud                                       -                      -
Adjusted EBITDA                                      1,358,281                809,625

                                                Six-month periods ended Dec. 31,
                                                         2017                    2016 (2)

Net (loss) for the period                         $(2,430,316)            $(2,042,429)
Finance costs -- net                                  824,575                 656,295
Income taxes                                        1,038,716                (391,593)
Depreciation of property, plant and equipment         550,208                 356,464
Amortization of intangible assets                   1,365,669               1,368,595
Unrealized exchange (gains)/losses                    (73,134)                177,868
Acquisition and integration costs                      80,875               1,020,829
Stock-based compensation costs                        226,387                 292,611
Net loss on bank fraud                                363,364                       -
Adjusted EBITDA                                     1,946,344               1,438,640

H2O Innovation conference call

Mr. Dugre and Marc Blanchet, chief financial officer, will hold an investor conference call to discuss the financial results for 2018 second quarter in further details at 10 a.m. Eastern Time on Wednesday, Feb. 14, 2018.

To access the call, please call 1-877-223-4471 or 1-647-788-4922, 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. 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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