H2O INNOVATION INC.
TSX VENTURE : HEO

H2O INNOVATION INC.

September 28, 2009 08:00 ET

H2O Innovation Reports Record Sales for Fiscal 2009-Sales Up 189% to $31.2 Million, EBITDA at $1.1 Million

QUEBEC CITY, QUEBEC--(Marketwire – Sept. 28, 2009) – H2O Innovation Inc. (TSX VENTURE:HEO)(ALTERNEXT:MNEMO:ALHEO)

  • Annual sales increase 189% to $31.2 million, up from $10.8 million in 2008.
  • Gross margin for the year slightly down at 23.8%, from 24.8% in 2008.
  • Annual EBITDA increases to $1.1 million compared to ($3.0 million) in 2008.
  • Major reduction of net loss for the year at ($65,148), compared to ($3.6 million) in 2008.
  • Operating activities generated $1.05 million in cash for the year compared to
    a $2.35 million use of cash in 2008 – a significant reversal.

All amounts in Canadian dollars unless otherwise stated.

H2O Innovation Inc. (TSX VENTURE:HEO)(ALTERNEXT:MNEMO:ALHEO) ("H2O Innovation" or the "Company") announces today its results for the fourth quarter and 2009 fiscal year ended June 30, 2009. During the year, H2O Innovation registered record sales, solid growth in EBITDA and cash generated from operating activities while having significantly reduced its net loss to $65,148.

During the fiscal year ended June 30, 2009, the Company's sales reached $31,215,790, a 189% increase compared to $10,813,536 for the corresponding fiscal year in 2008. Gross margin was at 23.8% for the fiscal year 2009, slightly down from 24.8% for the same period in 2008. EBITDA (earnings before interest, taxes, depreciation and amortization) for fiscal 2009 was $1,115,441, compared to a ($3,026,444) loss before interest, taxes, depreciation and amortization in fiscal 2008. The Company recorded a net loss of ($65,148) ($0.001 per share) for the 2009 fiscal year, significantly lower than the net loss of ($3,633,897) ($0.100 per share) recorded in fiscal 2008.

Before the change in operating working capital, operating activities generated $1,052,194 in cash for the 2009 fiscal year compared to a $2,347,813 use of cash for the 2008 fiscal year.

"We are satisfied with the financial results of fiscal 2009 given the challenging economic climate that marked most of the year. This year was a significant one in the history of H2O Innovation with a first-ever EBITDA, positive cash flows from operations, and strong growth in sales. We also registered a net profit for the first two quarters in our history and substantially reduced the annual net loss by 98% compared to results from the previous fiscal year. This noteworthy improvement in our results is a testament to the hard work of our employees, management team, and Board of Directors, who have rallied around a common strategy and have always given their all to meet our goals" stated Frederic Dugre, President and CEO of H2O Innovation.


CONSOLIDATED RESULTS
Three-month period ending June 30 (unaudited results)Twelve-month period ending June 30 (audited results)
2009200820092008
 $CAD$CAD$CAD$CAD
Sales7,322,4523,673,94731,215,79010,813,536
Gross margin1,306,2051,128,1827,421,8682,676,986
Gross margin17.8%30.7 %23.8%24.8%
EBITDA(1,301,901)(1,228,877)1,115,441(3,026,444)
Net loss and comprehensive results(1,067,448)(1,452,263)(65,148)(3,633,897)
Basic and diluted net loss per share(0.022)(0.037)(0.001)(0.100)
Cash generated from operating activities(393,968)(864,171)1,052,194(2,347,813)

ANNUAL HIGHLIGHTS & REVIEW OF KEY DEVELOPMENTS

Better balance of sales between water treatment applications
Over the year, H2O Innovation stepped up its efforts to diversify and balance its sales of water treatment systems between applications for drinking water production, water reclamation, wastewater treatment, and the production of industrial process water, in particular with the acquisition of Itasca Systems Inc. ("Itasca") in July 2008. This diversification brought a reduction in the Company's exposure to the risk of overreliance on a single market segment or application, while better balancing its gross margin on a yearly basis. Nonetheless, a disproportionally high level of municipal revenues recognized during the fourth quarter of fiscal 2009—compared to revenues from industrial projects—has contributed to the reduction of the quarter's gross margin in comparison with the same quarter of the previous fiscal year.

Evolution of the business model
Fiscal 2009 has also brought evolution to H2O Innovation's business model. Through a set of actions that includes the acquisition of Professional Water Technologies ("PWT") from Vista, California in June 2009, H2O Innovation has moved from mainly being a manufacturer of water treatment systems and equipments to being a more complete water treatment solutions company. With its two lines of business—Capital Equipment & Systems Sales and After-Sales Services, Consumables & Maintenance Solutions—H2O Innovation's business model now enables it to cover the complete life cycle of membrane filtration and biological wastewater treatment systems. Management believes that the combination of both business lines with a sound diversification of markets and applications maximizes the Company's sales growth potential for the years ahead.

Increased revenues from after-sales, consumables and maintenance solutions
With the acquisition of PWT late in fiscal 2009, H2O Innovation has added a unique proprietary product line of specialty chemicals for membrane pre-treatment and conditioning that significantly enhances its pre-existing line of after-sales services, consumables and maintenance solutions. The Company can now count on a growing stream of revenues from after-sales services, consumables and maintenance solutions—revenues that are generally recurring in nature.

A significant presence in North America
In fiscal 2009, the Company recorded for the first time a majority of its sales in the United States while a minor portion was recorded in Canada. The Company's increased business presence in the United States—coupled with its manufacturing capacity in Ham-Nord (Quebec), Minnesota, and California—have positioned it to benefit from the municipal infrastructure investment programs set up by regional and national governments. These programs have only began to make themselves felt at the end of fiscal 2009 and Management believes their effects to be more significantly felt in the 2010 and 2011 fiscal years.

First steps of increased international activities
With the acquisition of PWT came the addition of a distributor network that extends across Asia, Europe, India, and South America. With this addition and the first sizeable sales in Algeria and Egypt, H2O Innovation paved the way this year for operations outside of North America. For 2010 and beyond, Management anticipates the Company to continue to grow its international activities, using potential platforms such as strategic partnerships or acquisitions, strongly supported by the addition of quality resources dedicated to international business development.

"On the strength of these annual financial results—despite fourth quarter results that are somewhat below our expectations due to an increasingly challenging economic climate—we can embark on the 2010 fiscal year with confidence and eagerness to succeed thanks to our renowned experience and expertise, our strong foothold in North Americ a and our growing international activities" concluded Frederic Dugre.

Financial results for the fourth-quarter of 2009
For the three-month period ended June 30, 2009, sales increased significantly to reach $7,322,452 compared to $3,673,947 for the same three-month period ended June 30, 2008. 61% of this increase comes from organic growth; the remaining 39% is related to the acquisitions of Itasca in July 2008 and PWT in June 2009. Gross margin for the fourth quarter of fiscal 2009 amounted to 17.8%, compared to a gross margin of 30.7% for the corresponding quarter of the previous fiscal year. The decrease in gross margin for the quarter compared to the corresponding quarter of the previous fiscal year is caused by a combination of factors including a non-recurring increase in systems repair and improvement charges originating from targeted recall of some key parts of specific wastewater treatment systems delivered prior to the acquisition of a U.S. subsidiary. This voluntary recall was initiated and completed during the fourth quarter of fiscal 2009. Secondly, due to a more sustained impact of the recession on the industrial sector, a short-term imbalance of municipal vs. industrial revenues recognized during the quarter has also contributed to the reduction of the Company's gross margin for the quarter compared to the corresponding quarter of 2008.

EBITDA for the quarter was ($1,301,901), compared to ($1,228,877) for the same three-month period ended June 30, 2008. During the quarter, H2O Innovation recorded a net loss of $1,067,448 ($0.022 per share), compared to a net loss of $1,452,263 ($0.037 per share) for the corresponding quarter of 2008. This net loss for the fourth quarter of fiscal 2009 comes after two consecutive quarters of net income. The Company's sales backlog stood at $22.5 M as at June 30, 2009.

Before the change in operating working capital, operating activities used $393,968 in cash for the three-month period ended June 30, 2009 compared to an $864,171 use of cash for the comparable three-month period ended June 30, 2008.

Restatement of 2008 financial statements
In the context of the preparation of the financial statements for the year ended June 30, 2009, management identified that the comparative figures presented in the financial statements for the year ended June 30, 2008 did not recognize liabilities on future income taxes related to the differences between accounting and fiscal considerations following the acquisition of Wastewater Technology Inc., in April 2008.

Consequently, the Company is restating the comparative figures of the financial statements for the year ended June 30, 2008 and, as a result of such restatement, the balance sheet of the Company for said period was modified to account for a future tax liability of $1,547,208 and an increase of the goodwill associated thereto of $1,155,878, of patents of $339,839 and distribution network of $51,491. These adjustments have no impact on the consolidated statement of operations and consolidated statements of cash flows.

The annual financial report including Management's Discussion and Analysis is available on the Company's website (www.h2oinnovation.com) and on Alternext's site (www.alternext.fr). Additional information on the Company is also available on SEDAR (www.sedar.com).

Conference call and webcast
H2O Innovation will hold a conference call today Monday September 28, 2009 at 10:30 A.M. Eastern to review the financial results for fiscal 2009. The call will begin by a presentation by Management which will be followed by a question-and-answer period. Shareholders, analysts and institutional investors are invited to participate. The numbers to dial for access are 514-392-1478 in the Montreal area or the toll-free number 1‑866-223-7781 in North America. Overseas callers dial +1 514‑392‑1478 for access. Media representatives and other interested parties may participate in listen only mode or may listen to the live webcast of the call accessible through H2O Innovation's website at www.h2oinnovation.com. The webcast will remain available for replay on the Company's website for 90 days in the Investors section.

Prospective disclosures
This press release may contain prospective disclosures representing current expectations of H2O Innovation and are subject to certain risks and uncertainties. For details of these risks and uncertainties please refer to the Company's Annual Information Form dated September 28, 2009 available on SEDAR (www.sedar.com). H2O Innovation rejects any obligation to revise or update the prospective disclosures contained in this press release.

About H2O Innovation
Exclusively dedicated to water treatment, H2O Innovation is establishing itself as a key player in sustainable development and the field of clean technologies. H2O Innovation designs, develops, produces, and integrates state-of-the-art custom-built water treatment systems for the production of drinking water, the reclamation of water, the treatment of wastewater and industrial process water in the municipal, commercial, industrial, mining, and energy markets. Additionally, the Company offers complete operating and maintenance solutions for membrane filtration and reverse osmosis systems. H2O Innovation has approximately 100 employees and eight offices including three manufacturing and assembly plants in Canada and the United States. Shares of H2O Innovation are listed on the TSX Venture Exchange (HEO) as well as on the NYSE Euronext Alternext Exchange (MNEMO:ALHEO).

Neither TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in the policies of the TSX Venture Exchange) nor the Alternext Exchange accepts responsibility for the adequacy or accuracy of this release.

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