H2O Innovation Reports Fiscal 2011 Second Quarter Results-Company Records Positive Adjusted EBITDA

QUEBEC CITY, QUEBEC--(Marketwire - Feb. 10, 2011) - H₂O Innovation Inc. (TSX VENTURE:HEO)(ALTERNEXT:MNEMO:ALHEO)

• Sales of $6.4 million, down from $7.1 million for the same period in fiscal 2010.

• Gross margin at 31.4%, compared to 22.1% for the same period in fiscal 2010.

• Operating loss of ($405,690), compared to ($1,121,597) for the same period in fiscal 2010.

• EBITDA at ($111,990), compared to ($982,738) for the same period in fiscal 2010.

• Adjusted EBITDA at $68,872, compared to ($760,658) for the same period in fiscal 2010.

• Net loss of ($651,705), compared to ($1,576,222) for the same period in fiscal 2010 (including the effects of a mostly unrealized foreign exchange loss).

• Operating activities generated $32,424 in cash, compared to ($3,651,957) of cash used for the same period in fiscal 2010.

H₂O Innovation Inc. ("H₂O Innovation" or the "Company") announces its results for the second quarter of fiscal year 2011, ended December 31, 2010. During the quarter, H₂O Innovation recorded sales of $6.4 M, compared to $7.1 M for the corresponding quarter of the previous fiscal year. While sales show a slight decrease compared to the second quarter of the previous fiscal year, they have been steadily increasing over the course of the last three quarters, which results from a higher level of bookings recorded in the last nine months as well as a steady level of sales of services and consumable products. During the quarter, H₂O Innovation recorded positive adjusted EBITDA and generated positive cash flows from operating activities. H₂O Innovation's results for the second quarter of fiscal 2011 also show several other key improvements when compared to the corresponding quarter of the previous fiscal year, including higher gross margin, and reduced operating and net losses.

"With positive adjusted EBITDA and cash flows generated from operating activities, our second quarter results show a welcomed progression. During the quarter, our Company steadily stayed on course reinforcing its business model, streamlining its operations and growing its equipment sales backlog. We added more bookings than we recorded revenues from equipment and systems sales for a fourth consecutive quarter. The continuation of this trend is a positive sign that leads us to expect higher revenues from systems and equipment in the coming quarters", stated Frédéric Dugré, President and CEO of H₂O Innovation Inc.

CONSOLIDATED RESULTS (Unaudited)	Three-month period ended December 31				Six-month period ended December 31
	2010		2009		2010		2009
	$CAD		$CAD		$CAD		$CAD
Sales	6,421,506		7,087,242		12,761,372		15,493,852
Gross margin	31.4	%	22.1	%	30.6	%	26.3	%
Gross margin	2,017,729		1,568,895		3,910,674		4,077,579
Operating loss	(405,690	)	(1,121,597	)	(933,901	)	(1,073,277	)
EBITDA	(111,990	)	(982,738	)	(368,475	)	(1,055,598	)
Adjusted EBITDA (excluding unrealized foreign exchange loss and stock-based compensation)	68,872		(760,658	)	(40,218	)	(271,458	)
Net loss for the period and comprehensive loss	(651,705	)	(1,576,222	)	(1,481,318	)	(2,218,910	)
Basic and diluted net earnings (loss) per share	(0.011	)	(0.029	)	(0.025	)	(0.040	)
Cash generated (used) by operating activities	32,424		(3,651,957	)	(2,780,835	)	(3,582,268	)

Sales for the quarter amounted to $6.4 M, compared to $7.1 M for the corresponding quarter of the previous fiscal year. For the six-month period ended December 31, 2010, sales amounted to $12.8 M, compared to $15.5 M for the six-month period ended December 31, 2009.

During the quarter, the Company successfully secured more new bookings for sales of equipment and systems than it recorded revenues of the same nature, for a fourth consecutive quarter. Bookings of equipment and systems sales for the quarter amounted to $7.4 M, compared to only $4.2 M in the second quarter of the previous fiscal year. These new bookings brought the Company's sales backlog to $15.1 M as at December 31, 2010, slightly up compared to the first quarter of the current fiscal year and $5.3 M higher than as at December 31, 2009, when it totalled only $9.8 M. The sales backlog is entirely composed of systems and equipment sales and does not include sales of services or consumables, nor does it include the backlog of H₂O Innovation India.

During the quarter, improved execution and supply chain optimisation, amongst major factors, enabled the Company's operations to generate a gross margin of 31.4%, an increase compared to the same quarter ended December 31, 2009 when it was recorded at 22.1% (representing a nominal increase of $448,834). This higher gross margin was recorded on a lower level of sales – demonstrating the impacts of the productivity gains from the cost reduction and spending control program initiated two quarters ago as well as the contribution of the sales of services and consumable products. A higher proportion of industrial systems sales compared to municipal projects in this quarter's revenue mix also positively contributed to this quarter's margin.

Loss from operations for the quarter was significantly down at ($405,690), compared to ($1,121,597) for the same period of the previous fiscal year.

At $1.96 M, the Company's level of selling, general and administrative ("SG&A") expenses was down approximately $64,000 compared to the previous quarter of the current fiscal year and down over $270,000 compared to the corresponding quarter of the previous fiscal year, a decrease of 12.1%. As such, the Company's SG&A expenses were reduced by nearly $272,000 for the first half of fiscal 2011.

EBITDA(1) for the quarter was ($111,990), compared to ($982,738) for the same period ended December 31, 2009. H₂O Innovation's adjusted EBITDA for the quarter reached positive levels at $68,872 (excluding unrealized foreign exchange loss of ($95,546) and a ($84,908) stock-based compensation expense), compared to ($760,658) for the corresponding quarter of the previous fiscal year.

During the quarter, the Company recorded a net loss of ($651,705) or ($0.011 per share), compared to ($1,576,222) or ($0.029 per share) for the second quarter of fiscal 2010. Net loss for the six-month period ended December 31, 2010 was ($1,481,318) or ($0.025 per share), compared to ($2,218,910) or ($0.040 per share) for the corresponding six-month period ended December 31, 2009. 

"We expect the effects of the cost reduction and spending control program to continue to make themselves felt on our level of SG&A expenses over the remainder of the fiscal year as more measures start to show results. We also believe we will be able to record positive adjusted EBITDA levels for the remainder of the fiscal year as total sales grow, assuming other variables remain stable. Upcoming months will see us continue to focus on operations, supporting our internal and external sales forces by becoming more competitive – and successful", concluded Frédéric Dugré.

Business update

Early in the quarter, H₂O Innovation completed the build-out and renovation of its specialty chemicals production facility in Vista, California. New upgrades to the production facilities enable the Company's Professional Water Technologies business unit to be more efficient in polymer synthesis and production operations, generating greater economies of scale and quicker turn-around time for customers, particularly crucial for large orders coming from its network of international distributors.

On the commercial side, sales of the Company's line of high-efficiency wastewater treatment and water reuse systems are continuing to make good progress, with the first sales of Bio-Wheel and Bio-Brane systems recorded in the Canadian provinces of Alberta and Manitoba, for industrial and municipal applications. These first Canadian Bio-Wheel and Bio-Brane systems are promising building grounds for H₂O Innovation's proprietary wastewater treatment technology in Canada, expanding its U.S. home market where nearly 100 Bio-Wheel and Bio-Brane systems are in operation.

The municipal drinking water systems market also generated sound opportunities during the quarter, particularly in the United States. For its part, the market for industrial water treatment systems showed serious signs of recovery, bringing a high number of opportunities, both in Canada and the United States. H₂O Innovation's sales teams focused on the energy, power generation and oil & gas markets, where the Company's list of references is a competitive advantage.

Appointment of Josée Riverin as Director of Finance

Ms. Josée Riverin, CA, Corporate Controller, acted as acting Director of Finance for the preparation of the financial statements of the quarter and the reporting on the design and effectiveness of disclosure controls and procedures and the design and effectiveness of internal controls over financial reporting.

During its meeting on February 9, 2011, H₂O Innovation's Board of Directors appointed Ms. Josée Riverin as the Company's Director of Finance, effective immediately.

Chartered accountant with over 15 years of experience in auditing, preparing and controlling financial statements of publicly traded companies, Ms. Riverin came to H₂O Innovation in November 2010 as Corporate Controller after holding positions as Senior Manager at PricewaterhouseCoopers and Director of Financial Information at Cossette Inc., where she was responsible for the production of the consolidated financial statements, contributed to national and international mergers and acquisitions and where she prepared the transition from Canadian GAAP to IFRS.

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 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.

The second 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 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 100 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.

(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.