6 Apr 2017 07:00
6 April 2017
This announcement contains inside information
HaloSource, Inc.
("HaloSource" or the "Company")
Preliminary Results for the year ended 31 December 2016
HaloSource Inc. (HAL.LN, HALO.LN), the global clean water technology company traded on London's AIM, today announces its preliminary results for the financial year ended 31 December 2016.
Financial Highlights
· Consolidated revenues from continuing operations (the Company's Drinking Water segment) were $2.1 million (2015: $4.3 million)
· Operating expenses from continuing operations of $10.3 million (2015: $10.8 million)
· Income from discontinued operations, the Company's Recreational and Environmental Water segments which were disposed in 2016, was $0.4 million (2015: loss of $0.8 million), including a gain on the sale of the two segments of $1.5 million total
· Net loss of $10.7 million (2015: net loss of $11.4 million)
· Total net cash at year end, including short-term investments, of $2.1 million, which is expected to fund the Company until the end of Q2 2017
· Pursuit of additional equity financing or sale of the Company, as announced on 9 January 2017, continues
Operational Highlights
· Completed the sale of the Company's Recreational Water and Environmental Water businesses to focus exclusively on the Drinking Water business
· Simplification of the Company's supply chain and closure of its manufacturing facility in India to improve gross margins in 2017 and beyond
· New lab established in India, cost-effectively increasing the Company's capability to provide global support for microbiological and heavy metals testing, as well as innovation
· Continued advancement of the Company's lead reduction technology, including successful completion of pilot scale production as previously announced
James Thompson, Acting CEO of HaloSource, said:
"In 2016 we successfully implemented our plan to focus exclusively on HaloSource's Drinking Water business, whilst continuing to aggressively reduce our cost of goods and operating expenses. We remain committed to delivering our class-leading HaloPure® Drinking Water technology through current and future strategic partnerships with some of the world's leading brands and retailers. In addition, we look forward to completing the commercialisation of our previously announced lead reduction technology, thereby opening the Company's products to more new customers and markets around the world."
Enquiries:
HaloSource, Inc. | |
James Thompson, Acting Chief Executive Officer | +1 425 419 2257 |
Craig Crowell, Chief Financial Officer | +1 425 419 2248 |
Liberum Capital (NOMAD and Broker) | |
Richard Bootle Jill Li Steve Pearce | +44 20 3100 2222 |
About HaloSource
HaloSource, Inc. innovates and integrates technologies to deliver clean drinking water solutions to partners with trusted brands around the world. The Company works with scientists and industry experts across the globe in search of new ways to improve drinking water quality and has been awarded more than 30 patents for its ground breaking chemistries, which provide safe drinking water for more than 10 million consumers globally. The Company's class-leading HaloPure® Drinking Water technology has the highest global certifications, including registration with the US EPA.
Founded in Seattle, Washington, HaloSource has grown to become an influential leader in drinking water purification. HaloSource is headquartered in the US with operations in China and in India. Learn more about the Company's research and development and future cutting edge technologies by visiting www.halosource.com.
HaloPure® is a registered trademark of HaloSource, Inc. All other trademarks, brand names or product names belong to their respective holders.
This document contains certain forward-looking statements relating to the Company. The Company considers any statements that are not historical facts as "forward-looking statements". They relate to events and trends that are subject to risk and uncertainty that may cause actual results and the financial performance of the Company to differ materially from those contained in any forward-looking statement. These statements are made by management in good faith based on information available to them and such statements should be treated with caution due to the inherent uncertainties, including both economic and business risk factors, underlying any such forward-looking information.
JOINT STATEMENT BY THE ACTING CEO AND CHAIRMAN
As announced in early 2016, the Board approved a strategic plan to accelerate focus exclusively on the growth of the Drinking Water business by divesting our Environmental Water and Recreation Water businesses. During the year, the Company also made significant structural changes to the Drinking Water business to place key resources in our largest market China, which resulted in significant headcount reductions in the United States. We expect that these actions will reduce operating expenses, strengthen our balance sheet and accelerate growth in the Drinking Water business.
Sale of Recreational Water
In late 2015, we engaged in a banker-advised auction of our Recreational Water business. As announced on 9 May 2016, we accepted an offer from Natural Chemistry L.P., a leading specialty chemicals manufacturer in the swimming pool industry, to purchase the assets of the business for total proceeds in excess of $6 million. The deal closed on 24 May 2016.
Sale of Environmental Water
As announced on 23 February 2016, we agreed to sell our Environmental Water business to Dober Chemical Corporation. This transaction resulted in receipt of a one-time payment for assets of $0.7 million and two years of cash payments based upon future revenues of the business under which we have received $0.3 million to date and will continue to collect between $0.1 million and $0.5 million in additional proceeds between the present date and May 2018.
Drinking Water
During the year in the drinking water business, we continued to grow the list of respected multinational corporations ("MNCs") deploying our unique HaloPure® technology, signing one new partnership agreement, with Midea in India, and expanding distribution with Jarden in a test in 10 Mexican Costco stores. We will target to grow revenues and gross margins in 2017 as new and current partners continue to expand product launches and regional rollouts to expand their market presence and the size of the category as a whole.
Perfect, one of China's largest direct sales organisations, continued the national roll-out of their pressure-fed water purification device powered by HaloPure® water purification technology and continues to be the largest revenue contributor to Drinking Water, with more than 1 million cartridges shipped since launching the JWL 7-stage water purifier in 2013. There are now over 600,000 JWL units in homes in China, each requiring an annual cartridge replacement. While the level of cartridge replacement compliance with our partners has not been as strong as expected to date, we have now engaged with Perfect on promotional activities to improve replacement rates and increase the Company's revenues accordingly. We also continue to work with Perfect's technical staff on the next generation of the JWL purifier, along with introduction of a HaloPure® powered, Perfect branded, pitcher.
We continued to grow our business with Lonsid in 2016, as they remained our second largest Drinking Water revenue contributor behind Perfect during the year. Lonsid has deployed HaloPure® water purification technology in three of their reverse osmosis systems, including a reverse osmosis "smart" device, with an integrated digital monitor. We expect to continue to build momentum with this important new customer, which has more than 10,000 distributors in China and also exports to the US and Europe.
Eureka Forbes Limited continues to be our largest customer in India with a potential total distribution network of 15,000 retail outlets and a presence in 1,800 cities and towns. We shipped over 4 metric tons of HaloPure® media to Eureka Forbes Limited during 2016.
Our development of innovative Drinking Water technologies continued in 2016, with strong progress made with respect to our advanced applications to remove other highly toxic dissolved contaminants, such as lead, to levels below current EPA and NSF standards. On 14 February 2017 we announced successful pilot-scale production of filtration media that exceeds the NSF 53 standard for lead removal. We believe that this will enable the Company to market its technologies to customers in North American and European markets. This patent-pending media is presently being tested by several commercial partners and we expect further progress on this initiative in 2017.
Financial Review
Company revenue from continuing operations for the year to 31 December 2016 was $2.1 million (2015: $4.3 million). The decrease is primarily related to lower sales to two of the Company's three largest customers in China (being Perfect and Lonsid), as well as the Company's largest customer in India (Eureka Forbes Limited).
Gross margins from continuing operations were (38)% (2015: 12%). Our gross margin was negatively impacted by lower production and revenues in 2016, as well as one time charges to cost of goods sold related to the closure of our manufacturing facility in India totaling $0.2 million.
Operating expenses from continuing operations totaled $10.3 million (2015: $10.8 million) and include non-cash goodwill impairment charges of $0.5 million and $0.2 million, in 2016 and 2015, respectively. In the second half of 2016, operating expenses from continuing operations excluding goodwill impairment were $4.5 million, compared to $5.2 million in the first half of the year and $5.4 million in the comparative period in 2015. We expect to see further significant reductions in operating expenses as we complete our headcount reductions in the United States and continue to reduce corporate expenses, resulting in operating expenses in 2017 being approximately one half of the 2016 level.
Employee headcount at the beginning of 2015 was 110 and as of 31 December 2016 stood at 60. The decrease in headcount from the prior year is primarily due to reductions in our corporate office staff, the sale of our Recreational Water and Environmental Water businesses and the closure of our manufacturing facility in India. We have continued to reduce headcount in the US in Q1 2017, whilst keeping headcount in China relatively stable.
The income from discontinued operations, comprising our Recreational Water and Environmental Water businesses which were disposed in 2016, was $0.4 million, compared to a loss from discontinued operations of $0.8 million in 2015. The income from discontinued operations for 2016 includes gains on disposition of the Recreational Water business and Environmental Water business of $1.1 million and $0.4 million, respectively. In total, the Company has received cash proceeds to date of over $7 million from the disposition of the two businesses and will continue to realize earn-out payments of between $0.1 million and $0.5 million from the sale of its Environmental Water business through Q2 2018.
The net loss for the year decreased to $10.7 million (2015: $11.4 million) and includes the impact of non-cash costs related to share-based compensation of $0.2 million and $0.3 million in 2016 and 2015, respectively, as well as the income (loss) from discontinued operations and goodwill impairment in 2016 and 2015, as described above.
As at 31 December 2016, the Company had a total of $2.1 million in cash, comprised of cash and cash equivalents ($1.1 million), and short-term investments ($1.0 million), which is expected to fund the Company until the end of Q2 2017. As previously announced on 9 January 2017, the Company continues to pursue either additional equity financing, or a sale of the Company, in order to strengthen the current cash position of the Company. Shareholders should be aware that there is no certainty that an equity fundraising, or a sale of the Company, will be completed.
The Company has continued to implement certain cost savings measures and implemented other plans that are expected to reduce the net loss and cash used by operations in 2017 as compared to 2016, including the disposal of the Company's Recreational Water and Environmental Water businesses in 2016. In order to generate sufficient revenue to achieve profitability, the Company must successfully maintain its existing relationships and build new relationships with its customers to develop the reach and application of the Company's technologies. The Company continues to face significant risks associated with successful execution of its strategy. These risks include, but are not limited to, technology and product development, introduction and market acceptance of new products and services, changes in the marketplace, liquidity, competition from existing and new competitors which may enter the marketplace, and retention of key personnel. There can be no assurance that these efforts will be successful.
The ability of the Company to continue as a going concern is dependent on the Company obtaining additional capital to fund operating losses until it becomes profitable. The Company can give no assurances that any additional capital that it is able to obtain, if any, will be sufficient to meet its needs, or that any such financing will be obtainable on acceptable terms. If the Company is unable to obtain adequate capital, it could be forced to cease operations or substantially curtail its commercial activities. This situation indicates the existence of an uncertainty which may cast doubt about the Company's ability to continue as a going concern.
Market
The global residential water treatment market was valued at over $11 billion in 2014 and is expected to see a growth rate of over 9 percent over the next 5 to 7 years. (Source: 2015 Verify Markets Report). While the problem of access to clean safe, water continues to be a challenge, there is growing consumer awareness of the levels of heavy metals in water, especially lead. In the US alone, the US EPA estimates that up to 10% of Americans are affected by infrastructure with potential lead contamination.
The residential water treatment market in China was valued at over $2.5 billion in 2014 and the market is expected to grow at a double-digit growth rate over the next 7 years. The key drivers in the Chinese residential water treatment market include rising customer awareness, growing health concerns, rising disposable incomes and the rise in China's middle class. (Source: 2015 Verify Markets Report). Lead contamination of drinking water continues to be a looming issue in China. According to the World Health Organization website a 2006 report from researchers at Beijing University found that 34% of all Chinese children had blood levels above safety standards. In 2015, a major reservoir supplying drinking water to Beijing and other cities in northern China contained heavy metal pollutants at levels 20 times the maximum safe level set by the World Health Organization for a period of at least three years, according to a study by Chinese scientists. (South China Morning Post, July 15th 2015).
The Indian residential water treatment market was valued at over $600 million in 2014. Poor water quality, rising disposable incomes and improved customer awareness continues to be the key drivers in the residential water treatment market in India. (Source: 2015 Verify Markets Report). Lead contamination is also growing in awareness in India as the 2010 Blacksmith Institute's World's Worst Pollution Problem Report conservatively estimates that 1.5-2 million children in India have 2 times the safe amount of lead in their blood.
With the addition of our lead removal media to the product line, the Company's product offerings will continue to broaden to address more issues in more market segments around the world. With technologies that earn the highest regulatory certifications, a stable of strong strategic relationships and a pipeline of new products and performance, the company expects to be well positioned to capitalize on the opportunities available to it in the residential water treatment market.
Outlook
The Company has now largely completed its corporate restructuring, resulting in a more focused and much lower cost organization in place to grow the business and target reaching a profitable scale. Our focus is on profitably growing our drinking water business, primarily in Asia, where the problems are most acute and emerging middle class is seeking out solutions that deliver great tasting, safe water. In 2018 we expect to add lead removal technology as a product offering for partners in North America and Europe, with 2017 being a scale-up year for that media. This will allow us to address a much larger percentage of the global contaminant spectrum than ever before. HaloPure® continues to be uniquely positioned (for both disinfection and remediation) to offer partners world-class technical performance with the highest of regulatory approvals.
HaloSource, Inc. and Subsidiaries | |||||||||||
Consolidated Statements of Operations and Comprehensive Loss (US $000's, except per share data)
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Years ended December 31, | 2016 US$000 | 2015 US$000 | |||||||||
(Unaudited) | (Audited) | ||||||||||
Revenue - net | 2,055 | 4,251 | |||||||||
Cost of goods sold | 2,832 | 3,748 | |||||||||
Gross (loss) profit | (777) | 503 | |||||||||
Operating expenses | |||||||||||
Research and development | 1,535 | 1,995 | |||||||||
Goodwill impairment | 518 | 173 | |||||||||
Selling, general, and administrative | 8,207 | 8,639 | |||||||||
Total operating expenses | 10,260 | 10,807 | |||||||||
Operating loss | (11,037) | (10,304) | |||||||||
Other expense, net | (166) | (229) | |||||||||
Loss before income taxes | (11,203) | (10,533) | |||||||||
Income tax benefit (expense) | 109 | (41) | |||||||||
Loss from continuing operations | (11,094) | (10,574) | |||||||||
Income (loss) from discontinued operations, net of tax | 387 | (844) | |||||||||
Net loss | (10,707) | (11,418) | |||||||||
Other comprehensive income (loss) | |||||||||||
Unrealized gain (loss) on available-for-sale investments | 2 | (27) | |||||||||
Foreign currency translation adjustments | (56) | (126) | |||||||||
Other comprehensive loss | (54) | (153) | |||||||||
Comprehensive loss | (10,761) | (11,571) | |||||||||
Continuing operations | (0.05) | (0.04) | |||||||||
Discontinued operations | (0.00) | (0.01) | |||||||||
Basic and diluted net loss per share | (0.05) | (0.05) | |||||||||
Shares used to compute basic and diluted loss per share (000's) | 220,278 | 220,260 | |||||||||
See accompanying notes to consolidated financial statements. | |||||||||||
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HaloSource, Inc. and Subsidiaries Consolidated Balance Sheets |
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As of December 31, | 2016 | 2015 |
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US$000 | US$000 |
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(Unaudited) | (Audited) |
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ASSETS |
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Current assets |
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Cash and cash equivalents | 1,117 | 3,052 |
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Short-term investments | 968 | 1,504 |
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Accounts receivable, less allowance for doubtful |
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accounts of $338 in 2016 and $23 in 2015 | 1,016 | 3,194 |
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Inventories - net | 1,388 | 1,372 |
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Prepaid expenses and other current assets | 971 | 1,107 |
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Current assets held for sale | - | 6,718 |
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Total current assets | 5,460 | 16,947 |
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Property and equipment - net | 1,201 | 1,866 |
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Deposits | 233 | 214 |
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Other noncurrent receivables | 149 | - |
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Noncurrent assets held for sale | - | 2,241 |
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Goodwill | - | 518 |
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Total assets | 7,043 | 21,786 |
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LIABILITIES AND STOCKHOLDERS' EQUITY |
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Current liabilities |
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Accounts payable | 536 | 1,620 |
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Accrued expenses and other current liabilities | 524 | 1,357 |
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Salaries and benefits payable | 202 | 415 |
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Current portion of debt and capital lease obligations | 6 | 19 |
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Current liabilities held for sale | - | 1,676 |
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Total current liabilities | 1,268 | 5,087 |
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Long-term portion of debt and capital lease obligations | - | 6 |
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Deferred rent and sublease liability | 819 | 960 |
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Deferred tax liabilities | - | 174 |
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Total liabilities | 2,087 | 6,227 |
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Commitments and contingencies |
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Stockholders' equity |
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Common stock, no par value; 400,000,000 shares authorized; |
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220,278,404 issued and outstanding | 141,651 | 141,493 |
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Accumulated other comprehensive income | 18 | 72 |
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Accumulated deficit | (136,713) | (126,006) |
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Total stockholders' equity | 4,956 | 15,559 |
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Total liabilities and stockholders' equity | 7,043 | 21,786 |
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See accompanying notes to consolidated financial statements. |
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HaloSource, Inc. and Subsidiaries Consolidated Statements of Cash Flows | ||||
Years ended December 31, | 2016 | 2015 | ||
US$000 | US$000 | |||
(Unaudited) | (Audited) | |||
Operating Activities | ||||
Net loss | (10,707) | (11,418) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||
Depreciation and amortization | 476 | 836 | ||
Goodwill impairment | 518 | 173 | ||
Impairment of long-lived assets | 250 | 817 | ||
Allowance for inventory, sales returns and bad debts | 286 | 74 | ||
Share-based compensation | 158 | 273 | ||
Loss (gain) on disposal of property, equipment and other assets | 2 | (7) | ||
Gain on sale of discontinued operations | (1,519) | - | ||
Loss on lease obligation | 116 | - | ||
Deferred income taxes | (174) | 36 | ||
Changes in operating assets and liabilities: | ||||
Accounts receivable | 5,436 | 61 | ||
Inventories | (623) | 96 | ||
Prepaid expenses and other assets | 326 | 297 | ||
Accounts payable | (2,320) | 427 | ||
Accrued expenses and other current liabilities | (842) | (46) | ||
Salaries and benefits payable | (380) | (137) | ||
Deferred rent | (195) | (137) | ||
Net Cash Used in Operating Activities | (9,192) | (8,655) | ||
Cash Flows From Investing Activities | ||||
Proceeds on disposal of discontinued operations | 7,023 | - | ||
Purchase of property and equipment | (160) | (422) | ||
Purchase of short-term investments | (4,262) | (46) | ||
Sales of short-term investments | 4,800 | 8,500 | ||
Proceeds from sale of property and equipment | 44 | 8 | ||
Decrease in restricted cash | - | 1,552 | ||
Net Cash Provided By Investing Activities | 7,445 | 9,592 | ||
Cash Flows from Financing Activities | ||||
Repayments of debt and capital lease obligations | (98) | (1,042) | ||
Proceeds from exercise of stock options | - | 1 | ||
Net Cash Used In Financing Activities | (98) | (1,041) | ||
Effect of exchange rate changes on cash | (90) | (139) | ||
Net Decrease in Cash and Cash Equivalents | (1,935) | (243) | ||
Cash and Cash Equivalents, beginning of year | 3,052 | 3,295 | ||
Cash and Cash Equivalents, end of year | 1,117 | 3,052 | ||
Supplemental disclosures of cash flow information: | ||||
Cash paid for interest | 1 | 29 | ||
Cash paid for income taxes | 4 | 55 | ||
See accompanying notes to consolidated financial statements. | ||||
Note 1 - Basis of Preparation
The financial information set out in this document does not constitute the Company's financial statements for years to 31 December 2016 and 2015. The results for 31 December 2016 are unaudited. Financial statements for the year ended 31 December 2016 will be finalized based on the information presented in this announcement. The independent auditor's report will be based on those financial statements once they are complete.
Financial statements for the year ended 31 December 2015 have been reported on by the Independent Auditor. The Independent Auditor's report on the financial statements for 2015 was unqualified however it included an emphasis of matter regarding the Company's ability to remain a going concern.
The financial information set out in these preliminary results has been prepared using accounting principles generally accepted in the United States of America ("U.S. GAAP"). The accounting policies adopted in these preliminary results have been consistently applied to all the years presented and are consistent with the policies used in the preparation of the statutory accounts for the period ended 31 December 2016. The principal accounting policies adopted are unchanged from those used in the preparation of the statutory accounts for the period ended 31 December 2015. New standards, amendments and interpretations to existing standards, which have been adopted by the Group for the year ended December, 31 2016, have not been listed, since they have no material impact on the financial statements.
Note 2 - Liquidity and Going Concern
The Company has continued to implement certain cost savings measures and implemented other plans that are expected to reduce the net loss and cash used by operations in 2017 as compared to 2016, including the disposition of the Company's Recreational Water and Environmental Water businesses in 2016. In order to generate sufficient revenue to achieve profitability, the Company must successfully maintain its existing relationships and build new relationships with its customers to develop the reach and application of the Company's technologies. The Company continues to face significant risks associated with successful execution of its strategy. These risks include, but are not limited to, technology and product development, introduction and market acceptance of new products and services, changes in the marketplace, liquidity, competition from existing and new competitors which may enter the marketplace, and retention of key personnel. There can be no assurance that these efforts will be successful.
The ability of the Company to continue as a going concern is dependent on the Company obtaining additional capital to fund operating losses until it becomes profitable. The Company can give no assurances that any additional capital that it is able to obtain, if any, will be sufficient to meet its needs, or that any such financing will be obtainable on acceptable terms. If the Company is unable to obtain adequate capital, it could be forced to cease operations or substantially curtail its commercial activities. This situation indicates the existence of an uncertainty which may cast doubt about the Company's ability to continue as a going concern. The financial statements do not include the adjustments that would result if the Company was unable to continue as a going concern.
Cautionary Statement:
This press release contains certain forward-looking statements. All statements contained in this press release that do not relate to matters of historical facts should be considered forward-looking statements. Forward-looking statements include statements with respect to the operations, performance and financial condition of the Company, including, but not limited to, cash consumption and sufficiency of capital, the available opportunities, markets for and benefits of its products and services, the Company's innovation and deployment of new products, the improvements to and expanded deployment of existing products, the potential benefits of business relationships with third parties, and the Company's plans and strategies for and expected future growth. 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. These statements about future events are subject to risks and uncertainties that could cause HaloSource's actual results to differ materially from those that might be inferred from the forward-looking statements. HaloSource can make no assurance that any forward-looking statements will prove correct.
General Information:
The Company is incorporated and domiciled in the State of Washington, USA. The address of its registered office is 1725 220th Street SE, Suite 103, Bothell, WA 98021, USA. The Company has its primary listing on the Alternative Investment Market ("AIM"), a sub-market of the London Stock Exchange.
The 2016 unaudited preliminary results announcement was prepared under U.S. GAAP and was approved for issue on 3 April 2017. The Company anticipates its 2016 audited consolidated financial statements and 2017 Annual Report will be available to shareholders as soon as practicable.