HAL.L Regulatory News (HAL)

FOR IMMEDIATE RELEASE

15th September 2011

This press release contains certain forward-looking statements with respect to the operations, performance and financial condition of the Company. By their nature, these statements involve uncertainty since future events and circumstances can cause results and developments to differ materially from those anticipated. The forward-looking statements reflect knowledge and information available at the date of preparation of this press release and the Company undertakes no obligation to update these forward-looking statements. Nothing in this press release should be construed as a profit forecast.

INTERIM Results Announcement

Seattle, U.S.A. - HaloSource, Inc. ("HaloSource" or "the Company") (HAL.LN, HALO.LN), the clean water and antimicrobial technology company traded on London's AIM, today announces its interim results for the period ended 30 June 2011.

Summary of first half-year progress:

·; China MOH (Ministry of Health) certification of HaloPure media received

·; NSF International certification of HaloPure under Standard 42 achieved

·; Development of our first finished device, the HaloPure Waterbird line of gravity purifiers completed 

·; Shipment of Bajaj branded HaloPure powered devices in India began in June with 3,500 units shipped to support formal launch. As of September 14th, 12,400 have been shipped

·; Continued shipments of HaloPure powered devices to a major brand-name device manufacturer to support China roll-out, additional partner agreements in process

·; Facility expansions in India and China nearing completion to support anticipated growth through 2013, increasing global HaloPure cartridge manufacturing capacity by an additional 50%

·; HaloSource highlighted in Lux Research Water Chemicals and Competitors: The Long, Long March of the 'Chemical-Free' Revolution, as "deepest in the dominant quadrant"

·; Strong revenue growth in OEM recreational water category, up 34% over 2010 inclusive of Aquapill acquisition

·; SeaKlear supply agreement reached with a major U.S. pool products retailer with 600 outlets

·; Brazilian corporate entity formation completed and country manager appointed - key launch customer in final device regulatory testing with initial shipments targeted for second half of 2011

·; Cash, short-term investments and restricted cash balances totaling $20.5 million at 30 June 2011

Subsequent events:

·; Signed a Joint Development Agreement for HaloPure with one of the world's largest direct selling companies for the launch of a line of HaloPure-powered gravity-fed water purifiers in the emerging markets where this company has very strong distribution networks

·; Regulatory advancements since June 30, 2011 include:

o U.S. state registrations of bacteriostatic pitcher and reverse osmosis cartridge completed in 49 U.S. states. New York state registration is in final review

o Pitcher and reverse osmosis cartridges passed China regulatory testing, formal regulatory reviews underway

John Kaestle, President and Chief Executive of HaloSource Inc, commented:

"We are proud of our progress in the first-half despite experiencing a number of unforeseen obstacles during the period which slowed the realization of the Company's revenue expectations.

"In Water Clarification, SeaKlear revenue fell short of expectations due to unseasonably adverse weather across the U.S which negatively impacted the entire U.S. pool industry in the critically important spring buying season.

"In our Water Purification segment, manufacturing challenges associated with launching our Waterbird product line delayed the inaugural product shipments to our key distribution partner, Bajaj, during the very important early monsoon season of May/June. While we are pleased to report that the issues that led to these delays have been resolved, they have had an impact on our full-year results and we have adjusted our full-year revenue guidance for 2011 down to a range of $18-22 million, representing top-line sales growth of 35-50% over 2010 levels.

"With the Bajaj launch, China MOH approval and the scale-up of our HaloPure drinking water business in India, China and Brazil, I am confident that 2011 will be a year of important milestones for the Company."

Enquiries

Notes to Editors

About HaloSource

HaloSource is a clean water technology company, headquartered in Seattle, US with operations in India and China. It is focused on the provision of cleaner, clearer and safer water using its proprietary N-halamine bead technology to clean and purify water, killing bacteria and viruses that may cause disease.

HaloPure provides safer drinking water. In 2009, it became the first new drinking water technology in 30 years to be granted both Manufacture-For-Use and Device registrations by the United States Environmental Protection Agency (USEPA), which is widely recognized as having the world's most stringent performance requirements for water purification. HaloPure® is a unique contact biocide technology that is proven to attack and kill a wide range of harmful micro-organisms and is approved for long-term use in a variety of markets, including the United States.

SeaKlear and StormKlear products use a second technology based on natural bio-polymers to provide water clarification and antimicrobial applications for treating recreational and environmental water; and HaloShield facilitates the binding of chlorine-based bleach to textiles such as sheets, lab coats and towels. www.halosource.com

About HaloPure's Markets

HaloPure products are principally targeted at consumers in emerging market countries, where access to safe drinking water is particularly poor. In an independent analysis of the global Point of Use drinking water device market carried out in 2005, Frost and Sullivan concluded that:

·; the market for residential water treatment equipment in China was estimated at $960 million in 2005, growing at an annual rate of 20.4 per cent between 2004 and 2011;

·; the market for residential drinking water devices in India was estimated at $425 million in 2009, and experiencing growth of approximately 25 per cent annually; and

·; in 2005 the global markets for filtration formats in the form of under-the-sink, counter top and replacement cartridges were growing annually at 20 per cent, 21 per cent and 18 per cent, respectively.

The World Health Organisation has estimated that 1.1 billion people lack access to safe drinking water and the Centre for Disease Control is recommending Point Of Use filtration and disinfection.

HaloSource Inc.

Statement by the Chairman and CEO

Overview and Financials

We are pleased to announce that our 2011 first-half results show continued advancement in our water purification, water clarification, and antimicrobial businesses. It has been an active period.

In May, we achieved a significant milestone: our drinking water technology (HaloPure) received approval from the Chinese Ministry of Health, becoming the first international drinking water purifying technology to meet the new elevated standards set by the Chinese government.

In June, we launched our proprietary Waterbird drinking water device with Bajaj, India's largest appliance seller which has 300,000 Indian distribution points. Bajaj is now distributing the device, branded in the Indian market as the XTP 21 with a HaloPure ingredient brand, through its distribution networks across India. To handle our growing volume, our Bangalore and Shanghai facilities are currently completing expansions which will increase capacities by 50%. As of September 14th, over 12,400 Waterbirds and 32,000 cartridges have been shipped into the Bajaj distribution channel. In addition, since 2007 we have shipped 2.6 million cartridge equivalents of HaloPure media to Eureka Forbes, India's largest water appliance manufacturer.

Furthermore, our drinking water technology achieved National Science Foundation ("NSF") Standard 42 safety certification in June, a key measure by our multi-national partners of safety and effectiveness of our drinking water technology.

Summary of first half-year progress:

·; China MOH (Ministry of Health) certification of HaloPure media received

·; NSF International certification of HaloPure under Standard 42 achieved

·; Development of our first finished device, the HaloPure Waterbird line of gravity purifiers completed 

·; Shipment of Bajaj branded HaloPure powered devices in India began in June with 3,500 units shipped to support formal launch, and as of September 14th, 12,400 have been shipped

·; Continued shipments of HaloPure powered devices to a major brand-name device manufacturer to support China roll-out, additional partner agreements in process

·; Facility expansions in India and China nearing completion to support anticipated growth through 2013, increasing global HaloPure cartridge manufacturing capacity by an additional 50%

·; HaloSource highlighted in Lux Research Water Chemicals and Competitors: The Long, Long March of the 'Chemical-Free' Revolution, as "deepest in the dominant quadrant"

·; Strong revenue growth in OEM recreational water category, up 34% over 2010 inclusive of Aquapill acquisition

·; SeaKlear supply agreement reached with a major U.S. pool products retailer with 600 outlets

·; Brazilian corporate entity formation completed and country manager appointed - key launch customer in final device regulatory testing with initial shipments targeted for second half of 2011

·; Cash, short-term investments and restricted cash balances totaling $20.5 million at 30 June 2011

Subsequent events:

·; Signed a Joint Development Agreement for HaloPure with one of the world's largest direct selling companies for the launch of a line of HaloPure-powered gravity-fed water purifiers in the emerging markets where this company has very strong distribution networks.

·; Regulatory advancements since June 30, 2011 include:

o U.S. state registrations of bacteriostatic pitcher and reverse osmosis cartridge completed in 49 U.S. states. New York state registration is in final review

o Pitcher and reverse osmosis cartridges passed China regulatory testing, formal regulatory reviews underway

We are proud of our progress in the first-half despite experiencing a number of unforeseen obstacles during the period which slowed the realization of the Company's revenue expectations.

In Water Clarification, the Company's largest current revenue line, SeaKlear, fell short of expectations due to unseasonably adverse weather across the U.S. This negatively impacted the distribution pull-through for the entire U.S. pool industry in the critically important spring buying season.

In our Water Purification segment, manufacturing challenges associated with launching our Waterbird product line delayed the inaugural product shipments to our key distribution partner, Bajaj, during the very important early monsoon season of May/June. While we are pleased to report that the issues that led to these delays have been resolved, they have had an impact on our full year results of operations.

As a result, we have adjusted our full-year revenue guidance for 2011 down to a range of $18-22 million, representing top-line sales growth of 35-50% over 2010 levels.

Moving forward, our team is committed to the continued advancement of our technologies across all business units, especially in the water purification business where we are serving end markets that are growing at 20-30%+ annually with market penetration rates in the single digits. We ended the first half with over $20 million of cash and cash equivalents, short-term investments and restricted cash, which we believe is adequate capital to execute our growth plans.

Finally, in our continuing effort to strengthen our management team and Board governance practices in July we welcomed Martin Coles as our new Executive Deputy Chairman of the Board of Directors. We are very excited by this appointment as Mr. Coles brings over three decades of executive experience and considerable brand-building savvy to our team, having worked in leadership positions at global consumer products companies including Starbucks, Reebok, and Proctor & Gamble. He will be advising our leadership team on strategy as well as all sales and marketing execution.

With the Bajaj launch, China MOH approval and the scale-up of our HaloPure drinking water business in India, China and Brazil, 2011 will be a year of important milestones for the Company. On behalf of the entire HaloSource team, we would like to thank you for your continued support.

John Kaestle

Chief Executive Officer

Jerry Wetherbee

Non Executive Chairman

Financial Overview

In a very challenging environment, 1H 2011 total Company revenue fell approximately 10% to $5.4 million, primarily due to poor weather negatively impacting our SeaKlear® brand of recreational water products and delays in shipping our HaloPure® branded water purifier to Bajaj in India during the very important monsoon season. In Antimicrobial Coatings, our 1H 2011 revenues were down as compared to 1H 2010 due primarily to timing of product purchases and other one-time royalty and other development fees which occurred in 2010.

As a result of these volume shortfalls the Company's gross margin totaled 38% for the 1H period. We have recently increased our manufacturing capacity in India and China by 50%, requiring us to carry higher than normal fixed costs and further depressing gross margins. As volumes scale, we expect our gross margins to improve.

During the period, operating expenses totaled $9.6 million, up 30% over 2010 due primarily to increased headcount and marketing costs related to the launch of our new line of water purification devices now being sold by Bajaj in India. Our consolidated net loss, under U.S. GAAP, was $7.1 million for the 1H period.

We ended the period with over $20 million of cash, short-term investments and restricted cash. While we will continue to evaluate strategic acquisitions, our primary focus is driving revenue growth across all segments of our business and achieving break-even from a cash-flow perspective. 

Business Review

As noted previously, we have revised our full year 2011 revenue guidance down to a range of $18-22 million. As a result of these revisions, we have taken a number of actions to reduce our spend levels and focus our initiatives. This has included replacement of key leaders in the Water Clarification businesses, further focusing of our R&D and marketing initiatives, and the retention of Martin Coles as special advisor for sales and marketing efforts. Our focus will remain on scaling of the HaloPure drinking water business and delivering against our overall revenue and growth commitments.

Water Purification - HaloPure

We continue to make progress in the drinking water business with a full development pipeline and with adjustments mentioned above, we now have strong alignment between our business development and product development teams. Regulatory approvals are still a major hurdle in this business globally and with China MOH (Ministry of Health) approval we now have secured the two most stringent registrations in the drinking water industry (MOH and U.S. EPA). This is a key differentiator when working with multi-national partners like Bajaj, Eureka Forbes and Lorenzetti (in Brazil) as a strategic advantage over its competitors. As an example in 1H we shipped our first commercial order to a Chinese partner that launched a HaloPure powered, MOH -approved device.

During 1H, to support our partners in Brazil, we also incorporated HaloSource Water Purification Importacoes, Ltda., our Brazilian subsidiary. We hired Luiz Cintra as our Brazilian Country Manager, who brings a career of building businesses in Brazil and was a former colleague of HaloSource CEO, John Kaestle.

With regulatory approvals, expanded capacity, fully aligned teams, motivated partners, and a strategic realignment of our sales and marketing activities, the HaloPure business is well positioned to deliver against our stated growth objectives.

Water Clarification - SeaKlear and HaloKlear (formerly StormKlear)

In SeaKlear we continue to offer one of the strongest lines of specialty chemicals for recreational water cleaning and clarifying products in the marketplace. Our 2010 acquisition of the Aquapill product line has helped us expand from our core dealer-based distribution to new mass merchant retailer accounts including Wal-mart and Canadian Tire. With this new line we are able to cross-sell and up-sell across our three primary channels (core distribution, mass (Aquapill and OEM) and service.) While we continue to make progress in marketing and merchandising, this year has been difficult with inclement weather in core pool markets and overall poor economic conditions in the U.S.

During the period, we added a new leader in HaloKlear, with Eric Rothberg being appointed Director of Environmental Water. Mr. Rothberg comes to HaloSource after 19 years selling internationally into the Oil and Gas (formerly with Amiad), waste water, power generation and chemical processing industries and believes our unique all natural technology can play a significant role in addressing water management issues and meeting emerging regulatory standards.

Antimicrobial Coatings

Beyond water technology, we expect that continued regulatory efforts with the U.S. EPA will result in our out-licensed HaloShield-powered textile products (marketed in the U.S. under the Clorox Freshcare™ brand) becoming the first and only textile products to carry U.S. EPA-registered pathogenic-killing claims.

People 

Employee headcount at the beginning of the year was 116 worldwide. With rapid expansion of activities throughout 2011, we have added 26 additional staff already and plan to add approximately 20 more throughout the remainder of 2011 bringing our expected headcount to approximately 160 worldwide by the end of 2011. Our additional headcount has been comprised primarily of operational and semi-professional roles in India and China.

Outlook

As noted previously, we are targeting a full year 2011 revenue range of $18-22 million. Two key drivers to that outcome are the ability to ramp Bajaj Waterbird product revenues in India and industry reception to our fall buying program in the SeaKlear business. As of September 14th, we have shipped 12,400 Waterbirds and we expect continued growth in that relationship. In SeaKlear, we are currently negotiating terms of our fall program with our key partners and expect continued growth in revenues related to our Water Clarification business. As a management team, we remain committed to delivering on our commitments and expect to continue an open dialogue with our shareholders.

Independent Accountant's Report

The Board of Directors and Stockholders

HaloSource, Inc. and Subsidiaries

Bothell, Washington

We have reviewed the accompanying condensed consolidated balance sheet of HaloSource, Inc. and subsidiaries as of June 30, 2011, and the related interim condensed consolidated statements of operations and comprehensive loss, stockholders' equity, and cash flows for the six-month period from January 1, 2011 to June 30, 2011. These interim condensed consolidated financial statements are the responsibility of the Company's management.

We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying interim condensed consolidated financial statements as of June 30, 2011 and for the six-month period from January 1, 2011 to June 30, 2011 for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of HaloSource, Inc. and subsidiaries as of December 31, 2010, and the related consolidated statements of operations and comprehensive loss, redeemable convertible preferred stock and stockholders' equity (deficit) (not presented herein), and cash flows for the year then ended and in our report dated April 6, 2011, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2010, and the related condensed consolidated statements of operations and comprehensive loss, redeemable convertible preferred stock and stockholders' equity (deficit), and cash flows for the year then ended, is fairly stated, in all material respects, in relation to the consolidated financial statements from which it has been derived.

/s/ BDO USA, LLP

Seattle, Washington

September 13, 2011

Notes to Unaudited Interim Condensed Consolidated Financial Statements

1. General Information

HaloSource, Inc. and its subsidiaries (together, the "Company" or "HaloSource") are a clean water technology company, headquartered in Seattle, U.S. with operations in India and China. HaloSource is focused on the provision of cleaner, clearer and safer water using its proprietary N-halamine bead technology to clean and purify water, killing bacteria and viruses that may cause disease. HaloSource markets its products under its brand names of HaloPure, HaloShield, SeaKlear, AquaPill, PoolMark, HaloKlear and StormKlear.

2. Basis of Preparation

The condensed consolidated interim financial statements include the accounts of HaloSource and its wholly owned subsidiaries: HaloSource International, Inc., HaloSource Asia, Inc., HaloSource Hong Kong Ltd., HaloSource China Inc., SeaKlear Pool Pills LLC, HaloSource Technologies Pvt. Ltd., HaloSource Water Purification Technology (Shanghai) Co. Ltd., HASO Corporation, and HaloSource Water Purification Importacoes Ltda. Intercompany transactions and balances have been eliminated.

The principal accounting policies have been applied consistently throughout the period in the preparation of these financial statements. In the opinion of management, all adjustments necessary for the fair statement of the financial position, results of operations and cash flows for the interim periods have been included and are of a normal, recurring nature.

This condensed consolidated interim financial information for the six months ended June 30, 2011 has been prepared in accordance with generally accepted accounting principles in the U.S. ("U.S. GAAP") which is appropriate given the Company is incorporated in the State of Washington in the United States. The condensed consolidated interim financial information should be read in conjunction with the annual financial statements for the year ended December 31, 2010, which have also been prepared in accordance with U.S. GAAP and were filed on April 6, 2011.

The condensed consolidated interim financial information as of and for the six months ended June 30, 2010 has been prepared in accordance with U.S. GAAP. The interim financial information as of and for the six month period ended June 30, 2010, as presented in this report, is unaudited and has not been reviewed in accordance with standards established by the American Institute of Certified Public Accountants. However, this interim data was included in the Company's Application for Admission to AIM as filed on October 18, 2010.

Use of estimates

The preparation of condensed consolidated interim financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated interim financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates include the allowance for doubtful accounts, sales returns allowances, inventory obsolescence, share-based compensation, stock warrant valuations, and impairment evaluations for goodwill and long-lived assets.

Reclassifications

Certain reclassifications of 2010 amounts have been made for consistent presentation with 2011 consisting of minor reclassifications within the interim condensed consolidated balance sheets and the interim condensed consolidated statements of cash flows. During April 2011, the Company became aware of further information related to the fair value of inventory purchased at the time of the Company's acquisition of the Pool Pill product line which was completed on November 30, 2010. Based on the nature and timing of this additional information, it was determined that a measurement period adjustment would be recorded to reduce the value of inventory acquired by $70,000 and increase goodwill assigned to the business combination by the same amount. This adjustment has been reflected in the interim condensed consolidated balance sheets as of June 30, 2011 and December 31, 2010. Reclassifications within the 2010 interim condensed consolidated statement of cash flows were made for consistent presentation with the audited consolidated statement of cash flows for the year ended December 31, 2010. These reclassifications were immaterial individually and in the aggregate.

3. Accounting Policies

The accounting policies applied are consistent with those of the annual financial statements for the year ended December 31, 2010, except as described below.

Restricted Cash

Restricted cash represents cash collateral used to secure working capital borrowing needs related to operations of the Company's foreign subsidiaries. In April 2011, the Company established a working capital line of credit arrangement through Axis Bank in India. In consideration for establishing this working capital line of credit with Axis Bank, the Company entered a Sanction of Credit Facilities Agreement with Axis Bank to secure all borrowings under this line of credit. As such, the Company established a standby letter of credit with Wells Fargo Bank NA in which the Company has provided cash collateral to secure all borrowings by its foreign subsidiary under the new working capital line of credit. The line of credit with Axis Bank allows for borrowings up to Rs. 70,000,000, or approximately $1,600,000, however there were no borrowings under the line of credit as of June 30, 2011 or through September 13, 2011, the date this report was available to be issued.

As of June 30, 2011, the Company had $3,685,000 in restricted cash which represents the minimum amount of secured borrowings under the Sanction of Credit Facilities Agreement with Axis Bank, plus additional funds which have been restricted by the Company for increased capacity under this, or any other secured working capital needs in the future. The Company maintains the restricted cash holdings in money market funds, or other short duration investment options, as allowed under the Security Agreement. See further discussion of Axis Bank line of credit in Note 11 below.

Commitments and Contingencies

Guarantees and Indemnities

During its normal course of business, the Company has made certain guarantees, indemnities and commitments under which it may be required to make payments in relation to certain transactions. These indemnities include intellectual property and other indemnities to the Company's customers and suppliers in connection with the sales of its products, and indemnities to directors and officers of the Company to the maximum extent permitted under the laws of the State of Delaware. Historically, the Company has not incurred any losses or recorded any liabilities related to performance under these types of indemnities.

Legal Proceedings

The Company may be subject to a variety of legal proceedings which could arise in the ordinary course of business or from its shareholders. The Company evaluates its exposure to threatened or pending litigation on a regular basis. To the extent it were required, the Company would evaluate the potential amount of loss related to litigation as well as the potential range of outcomes related to such loss. Determining the amount of potential loss and the range of potential outcomes requires significant judgment. The Company will record a loss contingency if an amount becomes both probable and measurable.

As of June 30, 2011 and through September 13, 2011, the date this report was available to be issued, the Company was not involved in any pending litigation, claims or assessments.

Recent Accounting Pronouncements Affecting the Company

In May 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2011-04, or ASU 2011-04, Fair Value Measurement (Topic 820), of the Accounting Standards Codification ("ASC" or the "Codification"). The amendments in this update were intended to result in common fair value measurement and disclosure requirements in U.S. GAAP and International Financial Reporting Standards, or IFRS. ASU 2011-04 expands and enhances current disclosures about fair value measurements and clarifies the FASB's intent about the application of existing fair value measurement requirements in certain circumstances. These amendments are effective for fiscal years and interim periods beginning after December 15, 2011 and should be applied prospectively. The Company is continuing to review this update, but does not believe that it will have a material impact on its consolidated financial statements or the notes thereto.

In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income (Topic 220), amending the Comprehensive Income topic of the Codification. This update changes the requirements for the presentation of other comprehensive income, eliminating the option to present components of other comprehensive income as part of the statement of changes in stockholders' equity, among other things. ASU 2011-05 requires that all non-owner changes in stockholders' equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. These amendments are effective for fiscal years and interim periods beginning after December 15, 2011 and should be applied retrospectively. The Company is continuing to review this update, but does not believe that it will have a material impact on its consolidated financial statements or the notes thereto.

In December 2010, the FASB issued ASU 2010-29, Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations (a consensus of the FASB Emerging Issues Task Force). The amendments in this ASU specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments in this ASU also expand the supplemental pro forma disclosures under ASC 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments in this ASU are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. As the Company was not involved with any business combinations during the first half of 2011, adoption of ASU 2010-29 had no impact on the Company's financial position, results of operations or cash flows for the six month period ending June 30, 2011.

In December 2010, the FASB issued ASU 2010-28 Intangibles-Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts (a consensus of the FASB Emerging Issues Task Force). The amendments in this ASU modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts to assess whether qualitative factors indicate that it is more likely than not that an impairment of goodwill exists, and if an entity concludes that it is more likely than not that an impairment exists, the entity must measure the goodwill impairment. The qualitative factors are consistent with the existing guidance and examples in paragraph 350-20-35-30 of the Codification, which requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company adopted this guidance on January 1, 2011, and does not currently have negative carrying amounts related to goodwill for purposes of the annual goodwill impairment test.

4. Segment reporting

The Company measures the results of its reportable segments based on revenue and gross profit. The Company does not allocate operating expenses, income taxes or interest income (expense) to the reportable business units for purposes of reporting to the chief operating decision maker.

The Company's operating segments are Water Clarification, Water Purification, and Antimicrobial Coatings. Information on reportable segments and a reconciliation to interim condensed consolidated net loss for the periods ended June 30, 2010 and 2011 and the year ended December 31, 2010 are presented below. Also presented below are total assets by operating segment as of June 30, 2010 and 2011 and December 31, 2010. The Company does not report to management its capital expenditures or assign intangible assets by business unit.

Six months ended June 30, 2011

Six months ended June 30, 2010

5. Income taxes

Taxes on income in the interim periods are accrued using the tax rate that would be applicable to expected total annual earnings.

During the period there were no taxable profits.

Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and (b) operating losses and tax credit carry forwards.

ASC 740 requires that the tax benefit of net operating losses, temporary differences and credit carry forwards be recorded as an asset to the extent that management assesses that realization is "more likely than not". Realization of the future tax benefits is dependent on the Company's ability to generate sufficient taxable income within the carry forward period. Because of the Company's recent history of operating losses, management believes that recognition of the deferred tax assets arising from the above-mentioned future tax benefits is currently not likely to be realized and, accordingly, has provided a full valuation allowance on its deferred tax assets.

Uncertain tax positions

On January 1, 2009, the Company adopted the provisions relating to uncertain tax positions of ASC 740, Income Taxes, which had no financial statement impact to the Company upon adoption. As of June 30, 2011, the Company had no unrecognized tax benefits.

The Company files income tax returns in the US federal jurisdiction, and various state and foreign jurisdictions. Due to the Company's operating loss carry forwards, the U.S. federal statute of limitations remains open for 1997 and onward.

6. Net loss per share

Basic net loss per share is computed using the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed using the weighted average number of common and potentially dilutive shares outstanding during the period. Potentially dilutive shares consist of the incremental common shares issuable upon conversion of the exercise of common stock options and warrants. For the six months ended June 30, 2010 and the year ended December 31, 2010, potentially dilutive shares also included the conversion of redeemable convertible preferred stock, convertible preferred stock, and warrants to purchase redeemable convertible preferred stock. The Company had a net loss for all periods presented herein; therefore, none of the options, warrants, redeemable convertible preferred stock or convertible preferred stock outstanding during each of the periods presented have been included in the computation of diluted loss per share as they were antidilutive.

7. Inventories

Inventories at June 30, 2011 and 2010 and December 31, 2010, consist of the following:

8. Property and equipment

Property and equipment as of June 30, 2011 and 2010 and December 31, 2010 consist of the following:

9. Related party transactions

During the six months ended June 30, 2010 and 2011 and during the year ended December 31, 2010, the Company was provided legal services, which are included in selling, general, and administrative expenses in the accompanying interim condensed consolidated statements of operations and comprehensive loss, of $317,000, $264,000 and $1,592,000, respectively, from a firm whose partner is a stockholder of the Company and its secretary. The Company owed this firm $80,000, $93,000 and $94,000 at June 30, 2010 and 2011 and December 31, 2010, respectively. These amounts are included in accounts payable in the accompanying interim condensed consolidated balance sheets.

Additionally, during the six months ended June 30, 2010 and 2011 and during the year ended December 31, 2010, the Company purchased services, which are included in and selling, general, and administrative expenses in the accompanying interim condensed consolidated statements of operations and comprehensive loss, of $0, $69,000 and $69,000, respectively, from other stockholders or companies owned by stockholders. The Company had no open accounts payable to these stockholders or companies at June 30, 2010 and 2011 or at December 31, 2010. During the six months ended June 30, 2010 and 2011 and during the year ended December 31, 2010, the Company also paid royalties for certain patent rights of $225,000, $225,000 and $450,000, respectively, to a university which held stock in the Company. Royalty payments are allocated between cost of goods sold, where there are identifiable product and sublicense revenues, and research and development expenses in the accompanying interim condensed consolidated statements of operations and comprehensive loss. The Company had no outstanding accounts payable to the university at June 30, 2010 and 2011 or at December 31, 2010.

10. Business and credit concentration

For the six month periods ended June 30, 2010 and 2011, one of the Company's Water Clarification customers individually accounted for 18% and 17% of the Company's revenue, respectively, and the same customer accounted for 29% of the Company's revenue for the year ended December 31, 2010. Accounts receivable from this customer represented 25% and 41% at June 30, 2010 and 2011, respectively, and represented 9% of the total accounts receivable at December 31, 2010.

The Company sources a significant portion of finished products related to its Water Clarification business from one supplier in the United States. Although the Company could obtain these items from other sources, including its own resources, this supplier's inability or unwillingness to supply Water Clarification products in a timely manner or on terms that are unacceptable to the Company could adversely impact the Company's ability to meet customer demands for these products. For the six months ended June 30, 2010 and 2011 and the year ended December 31, 2010, the Company made total payments to this supplier of $1,100,000, $2,100,000, and $1,843,000, respectively.

Essentially all of the Company's revenue from its Water Purification segment is generated in emerging market countries, including India and China. During 2010 and 2011, the majority of Water Purification revenue was derived from a single customer in India. In addition, essentially all raw materials and manufacturing facilities used in the Water Purification segment are sourced from or located in the same emerging market countries. These markets represent varying political and regulatory environments that can potentially affect Water Purification operations. Net long-lived assets located in India amounted to $346,000 and $767,000 at June 30, 2010 and 2011, respectively, and $350,000 at December 31, 2010. Net long-lived assets located in China amounted to $210,000 and $472,000 at June 30, 2010 and 2011, respectively and $193,000 at December 31, 2010. The remaining net assets are located in the United States.

11. Foreign line of credit

In May 2011, Halosource Technologies Pvt. Ltd. ("Halosource Technologies"), a wholly-owned subsidiary of Halosource, Inc. which is located in Bangalore, India, entered into a Sanction of Credit Facilities Agreement with Axis Bank for a credit facility for up to an amount of Rs. 70,000,000, or approximately at $1,600,000 at June 30, 2011. This line of credit is available for borrowings to support working capital needs of Halosource Technologies. Any borrowings under the line of credit will bear interest at a base-rate, plus 1.85% or approximately 11% annually. The line of credit agreement expires in May 2012. There were no borrowings under this line of credit agreement as of June 30, 2011 or through September 13, 2011, the date this report was available to be issued.

As a condition to borrowing under this line of credit, the Company is required to maintain a standby letter of credit through Wells Fargo Bank NA in an amount equivalent to 110% of the line of credit, or Rs. 77,000,000, approximately $1,700,000 at June 30, 2011. Based on this requirement, the Company has restricted $1,750,000 of cash under the standby letter of credit to serve as collateral for future borrowings, if any, under the foreign line of credit. See further discussion of this standby letter of credit and restricted cash obligations in Note 3 above.

12. Stock options and share-based compensation

The Company recognizes compensation expense for awards of equity instruments to employees and directors based on the grant date fair value of those awards. For stock options, the Company utilizes the Black-Scholes option pricing model to estimate the fair value of employee stock-based compensation at the date of the grant, which requires the input of subjective assumptions including expected volatility, expected term, and a risk free interest rate. Because the Company has limited historical patterns, the expected life of stock options is based on the experience of similar publicly traded companies and management's judgment. The expected volatility is based on volatility from comparable options with similar publicly traded companies. The risk free interest rate is estimated using comparable published federal funds rates. Compensation expense is recognized over the requisite service period for those options expected to vest, net of a forfeiture rate.

The Company typically recognizes share-based compensation costs for an award on a straight-line basis over the requisite service period for each separately vesting portion of the award as if the award was, in substance, multiple awards. For the six month periods ended June 30, 2010 and 2011 and the year ended December 31, 2010, the Company recorded stock based compensation expense of $184,000, $252,000 and $388,000, respectively. No income tax benefit was recognized in the interim condensed consolidated statements of operations and comprehensive loss for share-based compensation arrangements.

13. Subsequent Events

On July 25, 2011, the Company announced the appointment of Martin Coles to the Company's Board of Directors as Executive Deputy Chairman, effective immediately. Additive to his Board responsibilities, Mr. Coles will be responsible for advising the CEO on business strategy and sales and marketing initiatives. Mr. Coles has held senior roles and board positions in leading international blue-chip companies spanning a wide variety of sectors including consumer industries, technology and sport. He has over 30 years of significant business experience, including consultancy and advisory work on corporate strategy, and brings senior board experience to the Company as a Director and member of the Board's compensation committee. 

The Company has evaluated subsequent events through September 13, 2011, which is the date on which the financial statements were available to be issued. Except for the matter noted above, no other transactions or events have occurred that would require further disclosure.