H2O Innovation Reports Fiscal 2011 Third Quarter Results: Sales, Gross Margin and EBITDA Up, Net Loss Down

QUEBEC CITY, QUEBEC--(Marketwire - May 12, 2011) -H₂O Innovation Inc. ("H₂O Innovation" or the "Company") (TSX VENTURE:HEO)(ALTERNEXT:MNEMO:ALHEO)

• Sales of $7.9 million, up from $6.3 million for the same period in fiscal 2010.

• Gross margin at 33.0%, up compared to 25.4% for the same period in fiscal 2010.

• Operating earnings of $21,847, compared to loss from operations of ($1,269,539) for the same period in fiscal 2010.

• EBITDA at $390,901, compared to ($980,271) for the same period in fiscal 2010.

• Adjusted EBITDA at $486,770, compared to ($793,208) for the same period in fiscal 2010.

• Net loss of ($153,575), compared to ($1,558,567) for the same period in fiscal 2010.

• Operating activities generated $93,065 in cash, compared to $795,107 for the same period in fiscal 2010.

• Sales backlog reaches $22.9 M, up $8.4 M or 58% compared to the same period of fiscal 2010. Highest level in 2.5 years.

H₂O Innovation Inc. ("H₂O Innovation" or the "Company") announces its results for the third quarter of fiscal year 2011, ended March 31, 2011. During the quarter, H₂O Innovation recorded strong sales of $7.9 M, up 26% compared to $6.3 M for the corresponding quarter of the previous fiscal year. Steadily growing over the course of the last four quarters, the Company's sales reached their highest level in six quarters. H₂O Innovation recorded growth from all its business lines and markets – water treatment systems, services and consumables, maple syrup equipment – as well as from its Indian joint venture, H₂O Innovation India. Gross margin for the quarter was solid at 33.0%. The higher sales and gross margin enabled the Company to record operating earnings of $21,847, positive EBITDA of $390,901 and positive adjusted EBITDA of $486,770 while operating activities generated cash, for a second consecutive quarter.

"In this third quarter, our revenues, gross margin, and operating earnings all increased. We recorded positive EBITDA, and our operating activities generated cash – significant improvements compared to the previous fiscal year and a solid progression from the previous quarter of the current fiscal year. This quarter's results are highlighted by growth in all our business lines and markets: equipment and systems, as well as services and consumables, in North America and internationally. They also include the first sizeable contribution from our Indian joint venture, which is also enjoying fast growth in bookings and revenues", stated Frédéric Dugré, President and CEO of H₂O Innovation Inc.

Sales for the quarter amounted to $7.9 M, compared to $6.3 M for the corresponding quarter of the previous fiscal year, an increase of 26% or $1.6 M. For the nine-month period ended March 31, 2011, sales amounted to $20.7 M, compared to $21.8 M for the nine-month period ended March 31, 2010.

For a fifth consecutive quarter, the Company secured more new bookings for sales of equipment and systems than it recorded revenues of the same nature. Bookings of equipment and systems sales for the quarter amounted to $7.8 M, compared to $5.8 M in the third quarter of the previous fiscal year. These new bookings brought the Company's sales backlog to $22.9 M as at March 31, 2011, significantly up compared to the third quarter of fiscal 2010 where it stood at $14.5 M. H₂O Innovation's backlog also showed a $7.8 M increase compared to its level at the end of fiscal 2011 second quarter, when it amounted to $15.1 M. The Company's sales backlog is entirely composed of systems and equipment sales and does not include sales of services or consumables, but now includes the backlog of H₂O Innovation India, proportionally to the Company's interest in the Indian joint venture.

"With our base of steadily growing sales of services and consumables, H₂O Innovation India's contribution, our recent successes securing new contracts, and almost $23 M of backlog of equipment and systems sales, we are in a strong position to reach profitability very soon. We expect our revenues and earnings to continue their growth in the next quarters, with demand remaining strong from Western Canada, Quebec and the U.S. industrial market, as well as the mining and oil & gas industries. The building blocks we have assembled are truly starting to show their full potential", concluded Frédéric Dugré.

The Company's operations during the quarter generated a solid gross margin of 33.0%, a sizeable increase (representing a nominal increase of $1.0 M) compared to the same quarter ended March 31, 2010 when it was recorded at 25.4%. A high proportion of industrial systems sales compared to municipal projects in this quarter's revenue mix positively contributed to this quarter's margin, as also contributed a high level of sales of maple syrup production equipment, and services and consumables. For the nine-month period ended March 31, 2011, gross margin stood at 31.6%, up over five percentage points compared to 26.1% for the nine-month period ended March 31, 2010.

H₂O Innovation recorded earnings from operations of $21,847 during the quarter, a reversal compared to a ($1,269,539) operating loss for the same period of the previous fiscal year. For the nine-month period ended March 31, 2011, loss from operations was ($0.8 M), compared to ($2.3 M) for the nine-month period ended March 31, 2010.

At $2.1 M, the Company's level of selling, general and administrative ("SG&A") expenses was down by approximately $298,000 compared to the corresponding quarter of the previous fiscal year. For the nine-month period ended March 31, 2011, the Company's SG&A expenses were reduced by over $615,000 compared to the corresponding nine-month period of the previous fiscal year, showing the effects of its cost reduction program.

EBITDA(1) for the quarter was $390,901, compared to ($980,271) for the same period ended March 31, 2010. H₂O Innovation's adjusted EBITDA for the quarter was $486,770 (excluding unrealized foreign exchange loss of nil and a ($95,869) stock-based compensation expense), compared to ($793,208) for the corresponding quarter of the previous fiscal year.

During the quarter, the Company recorded a net loss of ($153,575) or ($0.003 per share), compared to ($1,558,567) or ($0.028 per share) for the third quarter of fiscal 2010. Net loss for the nine-month period ended March 31, 2011 was ($1,345,398) or ($0.022 per share), down compared to ($3,777,477) or ($0.068 per share) for the corresponding nine-month period ended March 31, 2010.

Business update – H₂O Innovation India

March 31, 2011 also marked the end of the first fiscal year of operation for H₂O Innovation India, the Company's Indian joint venture. During its first year of operation, H₂O Innovation India was awarded contracts totalling $4.2 M for the supply of industrial water treatment systems and equipment for industrial customers. H₂O Innovation India's sales backlog – which stands at $2.6 M for Indian projects only – is now consolidated into the Company's sales backlog, proportionally to the Company's 49% interest in the joint venture.

Operating out of Mumbai, where its sales, engineering, and service offices are located, H₂O Innovation India also recently inaugurated a 10,000 sq. ft. manufacturing plant near Vadodara, State of Gujarat, India. The plant's manufacturing capabilities are equivalent to those of the Company's plants located in Ham-Nord, QC and Minneapolis, MN. This new production capacity enables H₂O Innovation India to locally ensure detailed engineering, together with assembly, welding, pipe fitting, in-house performance testing and programming, while enabling a better control on delivery schedule and quality.

(1) Earnings before interests, taxes, depreciation and amortization (EBITDA) is a performance indicator that is not determined in accordance with Canadian generally accepted accounting principles and is not intended as an alternative measure of net earnings. Because EBITDA may not be calculated identically by all companies, the Company's result may not be directly comparable to similarly titled measures of other companies.

International contracts in Northern Africa and Russia with energy and power generation customers

H₂O Innovation was successful on the international scene during the quarter, securing contracts with energy and power generation customers for the supply of industrial water treatment systems in Northern Africa and Russia. The Company intends to build on its success and continue developing its international activities in both sales of equipment and systems and sales of its specialty chemicals for membrane filtration systems.

Solid performance from maple syrup equipment business line & new U.S. distributor

H₂O Innovation's maple syrup equipment business line recorded strong sales during the quarter, as producers prepared for the start of the season. A first in its history, the Company also benefited from the additional sales brought by its first U.S. maple syrup equipment distributor, located in Vermont. This first distributor outside the Province of Quebec held a popular and successful open day event shortly after the end of the quarter, drawing more than 1,300 visitors – enabling H₂O Innovation to secure several new sales of reverse osmosis systems in the U.S. maple syrup market. With this addition, the Company now counts on a network of more than 13 sales representatives covering the maple syrup market.

Amendment and re-filing of FY 2011 Q1 and Q2 financial statements

In its interim financial statements for quarters ended September 30, 2010 and December 31, 2010, management had reflected its foreign operations as integrated. During the third quarter of fiscal 2011 it completed a detailed analysis which identified significant changes in the economic facts and circumstances. The information obtained from the analysis states that the significant changes arose during the first quarter of fiscal 2011. In consequence, this analysis requires that the translation method applied to the foreign operations be changed. These significant facts and circumstances include a cost reduction program, merger of offices and a reorganization of the legal and operational structure, which lead to a significant degree of autonomy of the Company's foreign operations. Therefore, the foreign operations have been reclassified from integrated to self-sustaining.

The financial statements of the Company's foreign subsidiaries and joint venture considered as self-sustaining operations are now translated using the current rate method. Under this method, assets and liabilities are translated into Canadian dollars at the exchange rate prevailing at the balance sheet date, and earnings items are translated into Canadian dollars at the average exchange rate for the period. Translation adjustments arising from exchange rate fluctuations are shown as "Accumulated other comprehensive loss" under Shareholders' equity. The translation of Canadian corporations remains unchanged.

The adjustments resulting from the translation of the Company's foreign subsidiaries and joint venture are recorded under the caption "Accumulated other comprehensive loss". This modification has been applied prospectively from July 1, 2010. The interim financial statements for the quarters ended September 30, 2010 and December 31, 2010 have been amended accordingly and re-filed and contain additional information on the effects of this accounting change.

The following tables present most significant changes to the financial statements of the quarters ended September 30, 2010 and December 31, 2010:

The accounting change had a neutral effect on the Company's consolidated statements of cash flows for the quarters ended September 30, 2010 and December 31, 2010.

Conference call and webcast

H₂O Innovation will hold a conference call today at 10:30 a.m. (Eastern Time) to review the results. The call will begin with a presentation by the management. A question-and-answer period will follow. A slide presentation intended for simultaneous viewing during the call will be available this morning on the Financial Reports and Webcasts page of the Investors section of the Company's website.

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.

Media representatives and other interested parties may participate in listen only mode or may follow the live webcast of the conference call (audio and slides) at www.h2oinnovation.com. The webcast will remain available for replay on the Company's website for 90 days in the Investors section.

The third quarter financial report is available on the Company's website (www.h2oinnovation.com), on NYSE Euronext Alternext's site (www.alternext.fr) and on SEDAR (www.sedar.com). Additional information on the Company is also available on SEDAR (www.sedar.com).

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 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 11 years of experience, H₂O Innovation designs, manufactures, and integrates state-of-the-art custom-built water treatment systems for the production of drinking water and industrial process water, the reclamation and reuse of water, and the treatment of wastewater in the municipal, commercial, institutional, industrial, oil & gas, mining, and energy markets. The Company also offers operating and maintenance solutions for membrane filtration and reverse osmosis systems. H₂O Innovation has approximately 100 employees, seven 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) and on the NYSE Euronext Alternext Exchange (MNEMO:ALHEO). For more, visit www.h2oinnovation.com.