H2O INNOVATION INC.
TSX VENTURE : HEO
ALTERNEX : ALHEO

H2O INNOVATION INC.

May 28, 2009 08:00 ET

H2O Innovation Announces Proposed Acquisition of Assets of Professional Water Technologies, a US Membrane Filtration Specialty Products Manufacturer, and Proposed Concurrent Equity Financings

Fourth acquisition in the United States positions H2O Innovation as a complete membrane filtration solutions provider

QUEBEC CITY, QUEBEC--(Marketwire - May 28, 2009) - H2O Innovation Inc. ("H2O Innovation" or the "Company") (TSX VENTURE:HEO)(ALTERNEXT:MNEMO:ALHEO) announces the execution of an asset purchase agreement between Membrane Systems, Inc., an indirectly wholly owned U.S. subsidiary of H2O Innovation, and Professional Water Technologies, Inc. ("Professional Water Technologies" or "PWT") pertaining to the acquisition of substantially all of the assets of Professional Water Technologies in an arms' length transaction. Professional Water Technologies is a Vista, California-based company that develops, manufactures and sells specialty membrane pre-treatment and maintenance solutions for industrial, municipal and commercial applications (the "Business"). The purchase price of US$3.7 million is payable in cash at closing and may be increased up to US$ 5.7 million, whereby entitling PWT to receive earn-outs payments of up to US$2 million if PWT's sales reach $13.1 million within the 24 months period following the closing of the transaction. The completion of the transaction is subject to the satisfaction of customary closing conditions as more fully described below.

H2O Innovation also announces today that it has entered into an agency agreement with Loewen, Ondaatje, McCutcheon Limited in connection with a proposed equity financing of up to CAD$$2.75 million as well as of a letter of intent with Le Fonds d'investissement REA II Natcan Inc. providing for a proposed private placement of CAD$$1.5 million. The proceeds of both these financings are to be used for the payment of the purchase price for the proposed acquisition of assets of Professional Water Technologies and ancillary transaction costs.

H2O Innovation is also contemplating an additional debt financing of up to CAD$$2.5 million to be used to assist in the growth of its business.

Transaction highlights

- Significantly grows H2O Innovation's sales of services and consumables-which are generally recurring in nature-in line with the Company's stated growth strategy

- Professional Water Technologies in numbers:

- Sales of US$2.6 million based on the unaudited financial statements of Professional Water Technologies for the year ended December 31, 2008

- EBITDA of US$0.53 million based on the unaudited financial statements of Professional Water Technologies for the year ended December 31, 2008-acquisition is immediately accretive

- Net book value of US$400,000 for the assets based on the unaudited financial statements of Professional Water Technologies for the year ended December 31, 2008.

- Sustained revenue and profitability growth over the last 4 years

- Professional Water Technologies is presently profitable.

- Improves H2O Innovation's average consolidated gross operating margin

- Expands H2O Innovation's knowledge and brings with it a proprietary line of specialty patent-pending sustainable membrane pre-treatment and maintenance products-a growth vehicle for the Company

- Expands H2O Innovation into new geographical markets where the Company is not active in the equipment business-60% of Professional Water Technologies' sales are recorded outside the United States and Canada through a network of distributors in Australia, China, Europe, India, Israel, Mexico, Taiwan, and Thailand

- Addition of a 12,000 sq. ft. manufacturing facility and office space in Vista, California

- Additional synergies to be obtained through consolidation of administrative functions and internal sales

Professional Water Technologies

Founded in 1995 and headquartered in Vista, California, Professional Water Technologies develops leading products for maintaining and operating municipal, industrial, and commercial membrane filtration systems, in particular for reverse osmosis systems. Professional Water Technologies synthesizes and manufactures a unique line of sustainable specialty solutions for membrane pre-treatment applications, and develops specific blends for maintenance, preservation, and cleaning of membrane systems that maximizes the operating efficiency, economy, and longevity of reverse osmosis systems. In complement to its product line, Professional Water Technologies also offers comprehensive analytic and technical capabilities aimed at maximizing the efficiency and cost-effectiveness of reverse osmosis systems. Professional Water Technologies' patent-pending product line is sold worldwide through a network of distributors and sales agents. Based on unaudited financial statements for the year ended December 31, 2008, Professional Water Technologies had revenues of US$2.6 million and an EBITDA of US$0.53 million.

"This is an important and strategic addition to our operations. Since its founding in 1995, Professional Water Technologies has steadily developed an enviable reputation as a membrane filtration maintenance and operations specialist. We are very pleased to welcome them to H2O Innovation's team. Professional Water Technologies will play a pivotal role in growing our sales of services and consumables and maintaining close relationships with our clients-a key component of our growth strategy," said Frederic Dugre, President and Chief Executive Officer, H2O Innovation Inc. "Most importantly, this acquisition positions H2O Innovation as a complete membrane filtration expert providing everything from customized system design to manufacturing, maintenance and operational efficiency consulting. PWT also significantly enhances our international reach through its network of distributors. Its strong track record, combined with our solid experience in designing and manufacturing custom-built membrane filtration systems, will undoubtedly make a positive contribution to H2O Innovation's future successes in North America and elsewhere" continued Frederic Dugre.

Professional Water Technologies acquisition highlights

H2O Innovation has committed to acquire, subject to the satisfaction of the closing conditions listed below, substantially all of the assets of Professional Water Technologies for a price of US$3.7 million. The purchase price of US$3.7 million is payable in cash at closing and may be increased up to US$ 5.7 million, whereby entitling PWT to receive earn-outs payments of up to US$2 million if PWT's sales reach $13.1 million within the 24 months period following the closing of the transaction. As of the closing of the transaction H2O Innovation will also assume liabilities accrued, prior to closing, in the normal course of business of PWT of approximately US$150,000.

"This acquisition continues our growth strategy and brings an added level of predictability to the Company's business model, as sales of services and consumables are generally recurring in nature. It will have a positive effect on H2O Innovation's gross margin, cash flows, and results, which along with the Company's sustained track record in selling custom-designed membrane filtration water treatment systems, will help create additional shareholder value," concluded Frederic Dugre.

The closing of the transaction is scheduled to take place on or around June 30, 2009 and is subject to the satisfaction of customary closing conditions including, among others, the following:

- Obtaining by Professional Water Technologies of all approvals, waivers, consents or releases as are required under applicable laws or agreements to allow the execution and delivery of the asset purchase agreement and the transfer and assignment of the acquired assets to H2O Innovation;

- Issuance of all the required permits and licenses to allow the activities of PWT to be continued post-closing by H2O Innovation;

- Execution of employment and non-competition agreements; and

- Approval of all applicable regulatory authorities.

Equity financings

H2O Innovation has entered into an agency agreement with Loewen, Ondaatje, McCutcheon Limited (the "Agent") in connection with the private placement, on an agency basis, of 5,000,000 subscription receipts, for aggregate gross proceeds of up to CAD$2.75 million at a price of CAD$0.55 per subscription receipt.

H2O Innovation has also granted to the Agent an option, exercisable, in full or in part prior to the closing of the offering, to arrange for the purchase from H2O Innovation of up to an additional 1,000,000 subscription receipts for additional gross proceeds of CAD$550,000. Each subscription receipt will entitle its holder to receive, for no additional consideration, upon the closing of the acquisition by H2O Innovation of substantially all of the assets of PWT, one common share and one common share purchase warrant. Each whole warrant will entitle its holder to purchase one additional common share of the Company at a price of CAD$0.85 at any time prior to the date that is 30 months following the closing date of the offering. The Agent will receive a fee comprised of a cash payment of 6% of the gross proceeds from the offering and a number of broker warrants equal to 6% of the aggregate number of subscription receipts sold by H2O Innovation. Each broker warrant will entitle its holder to acquire, for an exercise price of CAD$0.55, one unit, having the same terms and conditions as the units forming part of the offering, for a period of 30 months following the closing of the offering. In respect of certain pre-identified purchasers, the Agent will only receive a fee equal to a cash payment of 1% and broker warrants equal to 1% of the aggregate number of subscription receipts sold by the Company to those specified investors.

The closing of this private placement of subscription receipts is subject to, among other things, the approval of the TSX Venture Exchange Inc. and is expected to take place on or around June 4, 2009.

The Company has also entered into a letter of intent with Le Fonds d'investissement REA II Natcan Inc. ("Fonds REA II") whereby Fonds REA II has indicated its interest to acquire from the Company 2,727,273 units at a price of CAD$0.55 per unit for a total consideration of CAD$1.5 million. Each unit will be comprised of one common share and one common share purchase warrant and each warrant will entitle Fonds REA II to purchase one additional common share of the Company at a price of CAD$0.85 at any time prior to the date that is 30 months following the closing of this private placement. Closing is subject to customary closing conditions including, among other things, the obtention by the Company of an advanced income tax ruling from Revenu Quebec confirming that the common shares forming part of the units to be issued to Fonds REA II qualify under the Quebec Stock Savings Plan II as well as the approval of TSX Venture Exchange Inc.

The closing of this private placement with Fonds REA II is expected to take place on or around June 30, 2009.

Conference call and webcast

H2O Innovation will hold a conference call today Thursday May 28, 2009, at 10:30 A.M. EDT to review the transaction highlights. The call will begin with a presentation by Frederic Dugre, President and Chief Executive Officer of H2O Innovation and Jim Peterson, Chief Operating Officer of H2O Innovation. A question-and-answer period will follow. Shareholders, analysts, and institutional investors are invited to participate. To access the call, dial 514-392-9196 in the Montreal area or 1-866-300-7687 toll free in North America. Overseas callers can dial 001-514-392-9196 for access. Media representatives and other interested parties can participate in listen-only mode or listen to the live webcast of the call via 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 26, 2008 available on SEDAR (www.sedar.com). H2O Innovation is under no 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 water treatment systems for the production of drinking water, the reclamation of water, the treatment of wastewater and industrial processed water in the municipal, commercial, pharmaceutical, industrial, mining, and energy markets. H2O Innovation has approximately 100 employees and eight offices including two 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.

Contact Information