H2O Innovation Reports Fiscal 2011 Year-End Results-Sales, Gross Margin and EBITDA up, Net Loss Down

QUEBEC CITY, QUEBEC--(Marketwire - Sept. 28, 2011) - (TSX VENTURE:HEO)(ALTERNEXT:MNEMO:ALHEO)

• Sales of $28.8 million, up from $27.7 million in fiscal 2010.
• Gross margin at 29.7%, up compared to 25.3% in fiscal 2010.
• EBITDA at $90,785, compared to ($2.8 million) in fiscal 2010.
• Adjusted EBITDA at $379,152, compared to ($2.7 million) in fiscal 2010.
• Selling, general and administrative expenses at $8.4 million, down $0.7 million compared to fiscal 2010.
• Net loss of ($1.6 million), compared to ($10.0 million) in fiscal 2010.
• Sales backlog hit record high at $36.6 million, up 148% compared to fiscal 2010 year-end.

All amounts in Canadian dollars unless otherwise stated.

H₂O Innovation Inc. ("H₂O Innovation" or the "Company") announces its results for the 2011 fourth quarter and 2011 fiscal year ended June 30, 2011. H₂O Innovation's 2011 fiscal year was marked by a revival of the Company's industrial market, as manufacturers, mining, oil & gas, energy companies and many segments of the privately owned economy have restarted investing in capital equipment. As a result, H₂O Innovation's fiscal 2011 has ended on a positive note of strong internal growth, as reflected by the Company's backlog of water treatment systems which reached the record-high level of $36.6 M. Steadily growing over the course of the year's four quarters, the Company's total sales for fiscal 2011 reached $28.8 M, up over $1 M compared to the previous fiscal year. H₂O Innovation also recorded a significant increase in gross margin of 4.4 percentage points and has reduced its operating, selling, administrative and general expenses by more than $1 M (before inclusion of the operating expenses of the Company's Indian joint venture). The higher sales and gross margin and the lower operating costs have enabled the Company to record positive EBITDA and positive adjusted EBITDA.

"Fiscal 2011 has ended on a sustained growth momentum, as shown by our backlog of water treatment systems which reached a record-high level of $36.6 M, its highest level since the foundation of H₂O Innovation eleven years ago. This 148% increase in our backlog at year-end compared to fiscal 2010, combined with an increase in gross margin of 4.4 percentage points, an important decrease of our operating expenses and the integration of the operations of our new Indian joint-venture H₂O Innovation India have enabled us to record positive EBITDA for the fiscal year", stated Frédéric Dugré, President and CEO of H₂O Innovation Inc.

CONSOLIDATED RESULTS	Three-month periods ended June 30 (Unaudited)				Twelve-month periods ended June 30 (Audited)
	2011		2010		2011		2010
	$CAD		$CAD		$CAD		$CAD
Sales	8,086,202		5,921,355		28,798,161		27,727,556
Gross margin	25.1	%	22.4	%	29.7	%	25.3	%
Gross margin	2,029,633		1,325,365		8,566,240		7,006,006
Operating loss	(781,878	)	(8,244,821	)	(1,626,345	)	(10,587,637	)
EBITDA	(198,749	)	(785,178	)	90,785		(2,821,046	)
Adjusted EBITDA (excluding stock-based compensation)	(116,923	)	(1,673,594	)	379,152		(2,738,054	)
Net loss for the period	(271,419	)	(6,220,440	)	(1,616,817	)	(9,997,917	)
Basic and diluted net loss per share	(0.004	)	(0.113	)	(0.027	)	(0.181	)
Cash generated used by operating activities (after change in working capital items)	(113,815	)	(296,492	)	(2,515,025	)	(2,490,669	)

"Today as we begin the 2012 fiscal year, our business model is stronger than ever. The synergy that exists between our sales of systems and our sales of specialty chemicals and consumables is better understood by our clients, our partners and our employees, and the streamlining of our operating and administrative services enabled us to reduce costs and increase our efficiencies, without jeopardizing of growth vectors. We have also consolidated our brand, considerably reinforcing H₂O Innovation's positioning in the water treatment industry – an industry whose long-term growth perspectives are undisputable, notably in emerging countries, but also here in North America, where municipal infrastructures need upgrading and where energy and mining sectors show solid growth", commented Frédéric Dugré.

The Company's fiscal 2011 operations generated a solid gross margin of 29.7%, a sizeable increase of 4.4 percentage points (representing a nominal increase of $1.6 M) compared to the previous fiscal year when it was recorded at 25.3%. A high proportion of industrial systems sales compared to lower margin municipal projects in the Company's annual revenue mix positively contributed to this increase, along with the higher level of sales of specialty chemicals and consumables.

At $8.4 M, the Company's operating, selling, general and administrative ("SG&A") expenses were down by approximately $720,000 compared to previous fiscal year, an 8% decrease. This decrease can be attributed to a cost reduction program put in place by the Company at the beginning of the fiscal year, together with increased efficiencies. This decrease is offset by the inclusion of $0.3 M related to the operating expenses of the Company's Indian joint venture. Excluding them, the Company's SG&A expenses show a reduction of over $1 M, meeting the Company's objective set before the start of the fiscal year.

Financial results for the fourth quarter of 2011

For the three-month period ended June 30, 2011, sales were $8.1 million compared to $5.9 million for the same three-month period ended June 30, 2010. Gross margin for the fourth quarter of fiscal 2011 amounted to 25.1%, compared to 22.4% for the corresponding quarter of the previous fiscal year. The increase in gross margin for the quarter mainly originates from a higher proportion of total revenues derived from the sales of specialty chemicals and consumables compared to the corresponding quarter of the previous fiscal year. Compared to the high gross margin recorded in the third quarter of fiscal 2011, gross margin for the fourth quarter declined, due to multiple factors including the effects of the seasonal nature of maple production equipment sales and adjustments to year-end inventory.

EBITDA for the quarter was ($0.2 million), compared to ($0.8 million) for the same three-month period ended June 30, 2010. During the quarter, H₂O Innovation recorded a net loss of ($0.3 million) ($0.004 per share), compared to a net loss of ($6.2 million) ($0.113 per share) for the corresponding quarter of 2010.

ANNUAL HIGHLIGHTS AND STRATEGIC OUTLOOK FOR FISCAL 2012

A refocused sales development strategy

In fiscal 2011, H₂O Innovation refocused its sales development strategy in order to maximise the efficiency of its sales force and to accelerate growth. The new sales development strategy is now focused on three main target markets: the municipal sector (small- and medium-sized), the energy sector and the mining industry. In these three key segments of the water treatment industry, H₂O Innovation has already accumulated numerous relevant references over the years and benefits from an experienced sales force. Management believes that through the Company's integrated offer combining systems for the production of drinking water and industrial process water, the treatment of wastewater, and the reclamation of water, to maintenance solutions and after-sales service, H₂O Innovation's know-how and strong presence in North America favourably position it to competitively and successfully serve these three verticals.

At the end of fiscal 2011, H₂O Innovation's backlog was composed of a much greater proportion of industrial projects for the energy and mining sectors compared to the end of the previous year. The Company's sales pipeline has also grown, with more sales opportunities originating from the mining and energy sectors. Broadly speaking, the increased volume of industrial projects in the Company's backlog tends to accelerate revenue recognition and to increase gross margin.

Two growing areas of activity – a strategic advantage

Throughout fiscal 2011, revenues generated from the sales of water treatment systems increased from $3.5 M in the first quarter to $4.7 M in the fourth quarter. The ratio of new bookings over sales for this same area of activity increased from 1.2:1 in the first quarter to 3.7:1 in the fourth quarter. Based on this ratio's evolution and the record-high backlog of $36.6 M at fiscal year-end, Management expects that revenues generated from the water treatment systems area of activity will increase over the next quarters as projects will be executed, likely backed up by new bookings.

On their part, revenues generated from the Company's second area of activity – the sales of specialty chemicals and consumables – increased from $2.8 M to $3.3 M over the four quarters of fiscal 2011. In Management's opinion, the recurring and more predictable nature of these sales strongly reinforces H₂O Innovation's business model. The annual quarterly average revenues derived from this area of activity increased by 19.2% from fiscal 2010 to fiscal 2011, from a quarterly average of $2.6 M to $3.1 M. This increase is mostly due to higher volumes ordered by the Company's main international distributors of its Professional Water Technologies product line and by the addition of new distributors covering new territories. The more systematic integration of the Company's specialty chemicals and consumables at the start-up stage for new municipal and industrial systems has also contributed to revenue growth in this area of activity.

Enduring customer relationships for optimized results

In fiscal 2011, H₂O Innovation's integrated offer enabled it to sell specialty chemicals and consumables to 70% of the new clients to whom it had delivered water treatment systems during the year. These clients, with whom close relationships have been developed, now recurrently rely on H₂O Innovation for specialty chemicals and consumables, improving predictability and growing the recurring portion of the Company's revenues.

Management's intention is to bring this conversion rate to more than 80% over the next two fiscal years, by implementing a proactive approach earlier in the sales cycle and by offering value-added service to systems operators (expertise, quick diagnosis, optimization, reduction of operating expenses, etc.).

Management has estimated that for each million-dollar value of installed membrane filtration systems, a minimum of $40,000 of specialty chemicals and consumables could be sold annually to the customer. Based on this, and using today's 70% conversion rate, the Company's backlog of $36.6 M as at June 30, 2011 could potentially add more than $1.4 M in new annual sales of specialty chemicals and consumables, which are generally recurring, year-over-year.

Combining growth and profitability for fiscal 2012 – Targeting municipal, energy & mining markets

H₂O Innovation has concluded fiscal 2011 and started fiscal 2012 with a stronger and more growth-focused business model, relying on the synergetic combination of two areas of activity that drives growth and profitability. On the one hand, the sales of systems in the municipal, energy and mining markets contribute to the growth of consolidated revenues and automatically generates new sales of specialty chemicals and consumables. Management believes that H₂O Innovation's strategic positioning in the energy and mining industries should also further improve its gross margins. The Company's second area of activity, the sales of specialty chemicals and consumables, decreases volatility of revenues, increases gross margin, and enables it to maintain close relationships with its clients.

"Through the implementation of this synergetic business model, we have reduced the commercial risks to which our company is exposed, improved both our budget predictability and gross margin, and reached a positive EBITDA. Our business model joins together growth and profitability, which we anticipate reaching in fiscal 2012 as we execute the projects in our backlog and continue growing both areas of activity", concluded Frédéric Dugré.

Conference call and webcast

H₂O Innovation will hold a conference call at 8:30 a.m. (Eastern Time) tomorrow Thursday September 29, 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 before the call tomorrow 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 514-392-9193 (Montreal area) or the North American toll-free number 1-866-542-4146. International participants are invited to dial +1 514-392-9193.

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 annual financial report to shareholders 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 28, 2011 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 provides integrated technological water treatment solutions based on membrane filtration technology to municipal, energy & mining end-users. H₂O Innovation designs 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, while providing a complete line of specialty chemicals and consumables for membrane filtration and reverse osmosis systems. With more than 100 employees and seven locations in North America, H₂O Innovation is also 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 the NYSE Euronext Alternext Exchange (MNEMO:ALHEO). For more, visit www.h2oinnovation.com.