September 21, 2010 17:00 ET

H2O Innovation Reports Fiscal 2010 Results-Sales of $27.7 Million. Results Impacted by Recession, Company Takes $6.1 Million Charge Related to Goodwill Impairment and Write-Off of...

...intangible assets

QUEBEC CITY, QUEBEC--(Marketwire - Sept. 21, 2010) - H2O Innovation Inc. (TSX VENTURE:HEO)(ALTERNEXT:MNEMO:ALHEO)

  • Annual sales of $27.7 million, down from $31.2 million in 2009.
  • Gross margin for the year increases at 25.3%, up 6.3% from 23.8% in 2009.
  • Annual EBITDA at ($2.8 million), compared to $1.1 million in 2009.
  • Net loss for the year at ($10 million), ($3.9 million) excluding goodwill impairment charge of ($4.9 million), ($1.8 million) write-off of intangible assets and future income tax recovery of $0.6 million, compared to ($65,148) in 2009.
  • Operating activities used ($3.4 million) in cash for the year compared to $1.1 million in cash generated in 2009.
  • Long-term debt reimbursement of $2 million through equity financing.
  • Implemented $1.25 million cost reduction and spending control program.

All amounts in Canadian dollars unless otherwise stated.

H2O Innovation Inc. ("H2O Innovation" or the "Company") (TSX VENTURE:HEO)(ALTERNEXT:MNEMO:ALHEO)  announces today its results for the 2010 fourth quarter and 2010 fiscal year ended June 30, 2010. This fiscal year unfolded under shadow of a global recession that was particularly severe in the United States, the Company's top geographical market. Nonetheless, the Company made significant progress on following its growth strategy, both in terms of bringing depth to the Company's lineup of products and services and strengthening its market position.

"Although our financial results for the 2010 fiscal year fell short of the financial objectives we had targeted, we believe major strides were made during this year, placing H2O Innovation in a better position today than before. In fiscal 2010, we expanded our sales representation network, established a joint venture in India, successfully grew our sales of services and consumable products, and increased our gross margin by 6%. Our client offering has never been as complete, relevant and as noticed by the industry since the company was founded 10 years ago", stated Frederic Dugré, President and CEO of H2O Innovation.

CONSOLIDATED RESULTS Three-month period ending June 30 (unaudited results)   Twelve-month period ending June 30 (audited results)  
2010   2009   2010   2009  
  $CAD   $CAD   $CAD   $CAD  
Sales 5,921,355   7,322,452   27,727,556   31,215,790  
Gross margin 1,325,365   1,306,205   7,006,006   7,421,868  
Gross margin 22.4 % 17.8 % 25.3 % 23.8 %
EBITDA (785,178 ) (1,301,901 ) (2,821,046 ) 1,115,441  
Impairment of goodwill (4,916,000 ) -   (4,916,000 ) -  
Impairment of intangible assets (1,763,861 ) -   (1,763,861 ) -  
Net loss and comprehensive loss (6,220,440 ) (1,067,448 ) (9,997,917 ) (65,148 )
Basic and diluted net loss per share (0.113 ) (0.022 ) (0.181 ) (0.001 )
Cash generated (used) from operating activities (966,537 ) (393,968 ) (3,372,468 ) 1,050,886  

Goodwill impairment charge and write-off of intangible assets

In the fourth quarter of fiscal 2010, the Company re-evaluated the book value of its intangible assets and goodwill mainly related to the acquisition of Itasca Systems, Inc. in July 2008. The result of this re-evaluation was respectively a $1.8 and $4.9 million decrease in the book value of intangible assets and goodwill, due to the sudden and prolonged decrease of operations in the industrial sector. This increased the net loss for the fiscal year. The net loss for the fiscal year totaled $10 million, including the non-monetary loss of $6.1 million related to the goodwill impairment charge, write-off of intangible assets and future income tax recovery.


A stronger commercial offering

The acquisition in late June 2009 and the successful integration of PWT—a business that develops, manufactures, and markets pretreatment and maintenance solutions for membrane filtration systems; the consolidation of PWT's office with the Company's San Diego branch; the merger of all U.S. operating subsidiaries; the execution of a sales representation agreement with 3M Purification in the U.S. and Canada; the creation of the joint venture H2O Innovation India Limited; and the implementation of a cost reduction program – are all achievements that have considerably strengthened H2O Innovation's business position compared to the start of the year.

"The achievements of fiscal 2010 bring us close to the point where we expect to generate positive cash flows and record net income. Today's H2O Innovation is stronger and more agile, boasting a more comprehensive line of products and services designed to cover a broader spectrum of client needs. Thanks to our hybrid offer, our systems and equipment sales now generate sales of maintenance and cleaning solutions, and vice-versa. We are firm believers in our potential and expect to be in a position to secure an increasing and sustained number of new contracts in fiscal 2011 and beyond," concluded Frederic Dugré.

Growth in the consumables and services sales

The performance of the Company's PWT unit and its consumables and services sales team has been strong all year long, leading to growth in spite of the economic climate. During the integration process, not only was the Company successful at keeping all of PWT's existing clients, but new clients were added and revenues increased. In addition to generating higher gross margins than those generated by systems sales, the sale of consumables and services enables H2O Innovation to build close relationships with its customer base, placing it first in line to identify new opportunities for system sales.

Key objectives for fiscal 2011

H2O Innovation's key objectives for fiscal 2011 include resuming growth in sales and bookings, generating positive cash flows from operating activities, and increasing gross margin. The Company's hybrid offer, which combines systems and maintenance solutions –a unique case in the industry–, will, in our opinion, be core to H2O Innovation's sales growth strategy for fiscal 2011.

Three factors will enable the Company to increase gross margin in fiscal 2011: maintaining a 70%-30% revenue split, where 70% of total revenue would come from equipment and system sales and 30% from the sale of consumables and services; increasing sales of systems designed for industrial use; and the continued implementation of optimized production methods.

In fiscal 2011, H2O Innovation plans to continue growing its international activities in targeted high growth regions, such as Northern Africa and the Middle East, Russia and the former Soviet republics, as well as South America. By doing so, H2O Innovation is looking to diversify its geographical sources of revenues. By offering sourcing and assembly opportunities at a competitive cost, H2O Innovation India represents a highly valuable asset in obtaining international contracts, while improving the gross margins when executing these projects.

H2O Innovation will continue to invest in its brand through its marketing strategy and by making the most of its intellectual property and knowledge. Today, ten years after H2O Innovation was founded, its brand has become a growth vehicle of its own that generates sales and partnership opportunities. H2O Innovation is now recognized in the industry for its knowledge and its capacity to develop high-performing solutions aimed at resolving the most complex water treatment situations.

Financial results for the fourth quarter of 2010

For the three-month period ended June 30, 2010, sales were $5.9 million compared to $7.3 million for the same three-month period ended June 30, 2009. Gross margin for the fourth quarter of fiscal 2010 amounted to 22.4%, a significant increase compared to the gross margin of 17.8% for the corresponding quarter of the previous fiscal year. The increase in gross margin for the quarter originates from a higher proportion of total revenue derived from sales of services and consumable products compared to the corresponding quarter of the previous fiscal year.

EBITDA for the quarter was ($0.8 million), compared to ($1.3 million) for the same three-month period ended June 30, 2009. During the quarter, H2O Innovation recorded a net loss of ($6.2 million) ($0.113 per share), compared to a net loss of ($1.1 million) ($0.022 per share) for the corresponding quarter of 2009. The net loss for the fourth quarter of fiscal 2010 includes a goodwill impairment charge of ($4.9 million) and a ($1.8 million) write-off of intangible assets and future income tax recovery of $0.6 million.

Backlog and bookings

The sales backlog stood at $14.7 million as at June 30, 2010. The sales backlog is entirely composed of systems and equipment sales and does not include sales of services or consumables.

During fiscal 2010, the Company's backlog slightly increased, from $13.4 million in the first quarter (excluding the $9.4 million contract which was cancelled by Petro-Canada) to $14.7 million at the end of the fourth quarter. New bookings positively evolved, from $2.7 million in the first quarter to $6.7 million in the fourth quarter. This evolution is in our opinion a sign of the industry's gradual economic recovery and a sign of the Company's success rate in obtaining contracts through bids and tenders. The Company's bookings to sales ratio has also increased in the third and fourth quarters of fiscal 2010. Management believes this trend will continue in the first quarters of fiscal 2011.

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 at 10:00 a.m. (Eastern time), tomorrow Wednesday, September 22, 2010 to review the results. The call will begin with a presentation by Management, 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 (Montreal area) or the North American toll-free number 1-877-461-2815. International participants are invited to dial +1 514-392-1478.

A slide presentation intended for simultaneous viewing during the call will be available the morning of September 22, 2010 on the Financial Reports and Webcasts page of the Investors section of the Company's website.

Media representatives and other interested parties may participate in listen only mode or may listen to the live webcast of the conference call (audio and slides) 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

Certain statements set forth in this press release regarding the operations and the activities of H2O Innovation as well as other communications by the Company to the public that describe more generally management objectives, projections, estimates, expectations or forecasts may constitute forward-looking statements within the meaning of securities legislation. Forward-looking statements concern analysis and other information based on forecast future results and the estimate of amounts that cannot yet be yet determined. Forward-looking statements include the use of the words "expect", "believe", "estimate" and other similar terms as well as those usually used in the future and the conditional, notably regarding certain assumptions as to the success of a venture. Those forward-looking statements involve a number of risks and uncertainties which may result in actual and future results of the Company to be materially different than those indicated. Information about the risk factors to which the Company is exposed is provided in the Annual Information Form dated September 21, 2010 available on SEDAR (www.sedar.com). Unless required to do so pursuant to applicable securities legislation, H2O Innovation assumes no obligation to update or revise forward-looking statements contained in this press release or in other communications as a result of new information, future events and other changes.

About H2O Innovation 

Building on 10 years of experience, H2O Innovation designs, manufactures, 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, oil & gas, mining, and energy markets. Additionally, the Company offers complete operating and maintenance solutions for membrane filtration and reverse osmosis systems. H2O Innovation has approximately 90 employees and eight offices including three manufacturing plants in Canada and the United States and is a founding partner of H2O Innovation India, a joint venture based in Mumbai, India. Shares of H2O Innovation are listed on the TSX Venture Exchange (HEO) as well as on the NYSE Euronext Alternext Exchange (MNEMO: ALHEO). For more, visit www.h2oinnovation.com.

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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