November 14, 2007 09:12 ET

H2O Innovation Announces its First Quarter Results: Stock Options Granted to Key Employees

QUEBEC CITY, QUEBEC--(Marketwire - Nov. 14, 2007) - During the first quarter of its 2007-2008 fiscal year, H2O Innovation (2000) Inc. ("H2O" or the "Company")(TSX VENTURE:HEO)(ALTERNEXT:MNEMO:ALHEO) realized revenues totalling $2,4546,220 for the period ended September 30, 2007. This important increase in revenues compared to the corresponding quarter of previous year is characterized by the integration of Membrane Systems Inc. ("MSI") to the operations of H2O. It is worth mentioning that the revenues generated in the US market account for over 70%. Consequently, this quarter was suffering from the sudden and unexpected raise of the Canadian currency in comparison to the US dollar. Nevertheless, H2O maintained an acceptable gross margin in the realization of its projects, thus reducing the negative impact of the loss caused by the exchange rate variation.

The Company recently reviewed its strategic orientations targeting, among other things, to diversify its source of revenues in the context of currency fluctuations, improve its operating gross margin, enlarge its market territory and attack strong growth markets.

Following the completion of municipal projects in North America, the Company contemplates increasing its presence not only in new US States such as Texas, Louisiana, Colorado and North Carolina, but also in Canada in the industrial, mine and oil sectors as well as in Western Canada. It is worth mentioning that the order book stands now at 11.8 M$ CA. On the international scene, H2O management has identified bearing markets with huge seawater desalination needs. Accordingly, the Company pursues its business development through partnerships in Algeria, Egypt, Morocco, Senegal and Eastern Europe.

To protect itself from the negative impact of currency fluctuation, H2O management has already signed an exchange contract to insure the value of some current projects. Meanwhile, management hired additional resources in its accounting and finance department to better respond to the requirements of public society's regulations and secure gross margins.

Results of Operations

When comparing the results of the current quarter with those of the corresponding quarter the previous year, the reader should keep in mind the significant impact of the integration of MSI on the sales and expenses figures. This US based subsidiary was acquired in October 2006.

Sales and gross margin

Sales during this quarter show an increase of 240% when compared to the corresponding quarter last year, totalling $ 2,456,220 as of September 30, 2007 in comparison to $ 721,645 as of September 30, 2006. This increase in revenues generated an increase in the gross margin value, from $ 262,655 to $ 497,013 for the three month periods ended September 30, 2006 and 2007 respectively. Despite this important increase, the Company suffers a 16% reduction of its gross margin when compared to the corresponding quarter in 2006. Larger US municipal projects significantly generate reduced gross margin. Moreover, the reallocation of indirect costs to General, manufacturing, sales and administration expenses had a 6% positive impact on the gross margin as of September 30, 2007 in comparison to 8% for the corresponding period in 2006.

Operating expenses

During the first quarter, the Company reviewed the presentation of its operating expenses in order to better reflect the trend of the industry and restrict the information available to competitors. Therefore the sales and administration expenses have been reallocated to the unique designation of "Sales, administration and general operating expenses".

Sales, administration and general operating expenses went from $ 537,397 (74% of sales) for the three month period ended September 30, 2006 to $9 12,928 (37 % of sales) for the corresponding period ended September 30, 2007. The inclusion of MSI's current sales and administration costs makes up for this nominal increase. The significant reduction in percentage of revenues reflects the Management efforts towards the integration of MSI.

Net loss

The net loss increased from $ 266,507 ($ 0.011 per share) for the three month period ended September 30, 2006 to $ 977,808 ($ 0.028 per share) for the corresponding period ended September 30, 2007, mainly attributed to the loss on currency exchange and a non-cash expense of $ 88,946 due to the issue of stock options to directors and key employees of the Company.

Subsequent event

On October 26, 2007, the Company announced its decision to terminate its acquisition project to acquire all the shares of a US based company in the sector of water treatment. The decision to terminate the acquisition negotiations results from a mutually agreed to by the seller. We wish to remind that with no long term debt and liquidities exceeding 19 M$, H2O is seeking new acquisition opportunities to enlarge its activities and generate added-value to its shareholders.

Issue of Share purchase options

H2O also announces the grant of 355,000 common share purchase options of the Company to key-employees, in accordance with the terms and conditions of its Share purchase option Plan. The effective date of this grant is November 14, 2007. Each option grants its holder the right to acquire one common share of the Company at an exercise price of $1.50 before November 14, 2012.

Additional information on the Company is available on SEDAR at www.sedar.com

About H2O

H2O mission is to develop, manufacture and market innovative, environment-friendly, products intended for drinking water production, wastewater treatment and industrial processes.

Prospective disclosures

This press release may contain prospective disclosures representing current expectations of H2O and are subject to certain risks and uncertainties. H2O rejects any obligation to revise or update the prospective disclosures contained in this press release.

The TSX Venture Exchange and the Alternext Exchange assume no responsibility for the relevance or accuracy of this press release.

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