TIDMHAL TIDMHALO
RNS Number : 4926J
HaloSource Inc
12 September 2016
12 September 2016
This announcement contains inside information
HaloSource, Inc.
("HaloSource" or the "Company")
Interim results for the six months ended 30 June 2016
HaloSource, Inc. (HAL.LN, HALO.LN), the global clean water
technology solutions company trading on London's AIM, today
announces its interim results for the six months ended 30 June
2016.
Highlights
-- Completed the sale of the Company's Recreational Water and
Environmental Water businesses during H1 2016
-- Revenue from continuing operations of $1.4 million (H1 2015: $2.7 million)
-- Reduced operating expenses from continuing operations to $5.2
million (H1 2015: $5.4 million), expected to decrease further in H2
2016
-- Net cash and short-term investments at period end of $4.1
million ($4.6 million as at 31 December 2015)
Martin Coles, President and CEO of HaloSource, said:
"In order to focus exclusively on our class leading, bromine
based, contact kill biocide solution for drinking water
contamination we exited two of our three business segments during
the first six months of 2016. In doing so we have significantly
reduced our operating costs and realigned our resources to focus
exclusively on the growth of our Drinking Water business and
accelerate our strategy of becoming the technology solutions
provider of choice for multi-national companies operating in the
Drinking Water sector.
The Company remains committed to accelerating the
commercialisation of our unique, proprietary water purification
technologies by leveraging both the go-to-market capacity of our
existing customer base and the new customers we expect to add at
the regional level. Against this backdrop, we expect to deliver
gross margin expansion and tight control of operating expenses in
addition to revenue growth while significantly decreasing the
revenue required to generate positive cash flow on a consolidated
basis.
We remain confident in the growth potential of the business and
look forward to bringing the full capability of our realigned team
to the problems presented by biological and chemical contamination
of the world's finite water supplies."
Enquiries:
HaloSource, Inc.
Martin Coles, Chief Executive via Newgate below
Officer
Craig Crowell, Chief Financial
Officer
Newgate (PR Adviser)
James Benjamin +44 20 7680 6550
Alex Shilov halosource@newgatecomms.com
Lydia Thompson
Liberum Capital (NOMAD and Joint
Broker)
Richard Bootle
Jill Li
Steve Pearce +44 203 100 2222
Allenby Capital (Joint Broker)
Chris Crawford
Kat Perez +44 203 328 5656
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(R) 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.
Financial Review
Total revenues from continuing operations decreased by 48% to
$1.4 million, largely due to manufacturing related production
stoppages at one of our key customers in China (unrelated to
product supplied to the customer by HaloSource), resulting in
customer orders of approximately $750,000 not being shipped in the
period. However, our customer's manufacturing challenges have now
been resolved and they restarted production in July 2016. Sales
were also impacted by lower than expected revenues from major
customers in India and Latin America, offset somewhat by better
than expected sales to the Company's second largest customer in
China.
Gross margin from continuing operations was -10%, down from +20%
for the same period last year, representing the impact of reduced
sales from our largest customer as noted above. Operating expenses
from continuing operations for H1 2016 totaled $5.2 million, down
from $5.4 million in H1 2015. The previous year's operating
expenses included a one-time goodwill impairment charge of $0.2
million related to the termination of the patent license for our
anti-microbial coatings business during the period. We expect
operating expenses to be significantly lower in H2 2016, taking
into account the reduction in our U.S. based headcount that
occurred in our continuing operations during H1, as well as ongoing
reductions in other operating expenses.
Consolidated net loss was $4.5 million for the period, down from
a net loss of $5.4 million in H1 2015, driven primarily by income
from discontinued operations of $0.9 million. The income from
discontinued operations included a gain on sale of our Recreational
Water and Environmental Water businesses of $1.3 million and $0.3
million, respectively.
Further information on these transactions may be found in Note 5
to the Unaudited Interim Consolidated Financial Statements
contained herein.
The Company ended the period with $4.1 million of cash and cash
equivalents and short-term investments, compared with $4.6 million
in total as at 31 December 2015.
Operational Review
While we had anticipated growth versus the prior year in H1
2016, unfortunately one of our largest market partners experienced
significant manufacturing raw material quality issues internally
and as such we were unable to ship to them during much of the
period. This was only partially offset by stronger than anticipated
performance by our second largest partner, Lonsid, which continues
to expand the use of HaloPure cartridges for biofilm control in its
reverse osmosis devices, a new area of opportunity for the
Company.
Eureka Forbes continued to perform well as it expanded the
presence of a new range of gravity fed devices incorporating
automatic shut offs to force cartridge replacement once the
effective life has expired. We believe that this will significantly
improve the Company's performance in the repeat purchases of
cartridges, which has traditionally been a challenge for the retail
channel.
Panasonic shipments were below expectations in H1, as they
encountered device issues unrelated to HaloPure that required them
to re-design a portion of their treatment train, as well as weaker
uptake through rural distribution programs than expected. The issue
has now been resolved through re-engineering and we also anticipate
an uptick in penetration in rural markets as the Company
re-launches its devices in India in Q3 of this year.
People
The Company's headcount at 30 June 2016 was 93, versus 122 at 30
June 2015. Headcount in the United States was reduced from 50 to
22, where we expect it to remain relatively stable, during H1 2016.
As a result, 76% of the Company's headcount is now located in India
and China, compared with 50% in the prior period.
Outlook
While some of our partners have experienced go-to-market
challenges in H1, resolutions to these issues have been implemented
and we anticipate getting back to typical run rates in H2 2016. We
continue to support current partners, while continuing to bring new
relationships on stream through business development activities and
focus on creation and integration of new technology platforms.
The issues of drinking water contamination and drinking water
availability continue to present a global challenge which only
grows with each year. To this end we are in the final stages of
commercialising a unique, patent-pending cartridge based solution
for achieving lead reduction performance that meets or exceeds the
NSF 53 lead reduction standard for gravity devices (pitchers and
bottles). While currently focused on lead reduction, the
development of this technology will also provide the HaloPure brand
with a second technology platform, which has the flexibility to
offer high-performance reduction of other chemical contaminants in
gravity applications as well. Beyond gravity applications, we also
expect that this media offering will deliver performance advantages
versus other alternative solutions for chemical contamination
reduction in pressurised applications. We are confident that once
commercialised, this technology will have far-ranging global
application and can make a significant impact on the lives of
consumers dealing with chemical and heavy metals contamination.
This new technology platform, coupled with our focus on penetrating
the fast-growing Reverse Osmosis markets in China and India
continues to reinforce the optimism we feel for the future
performance of the business.
HaloSource, Inc. and Subsidiaries
Unaudited Interim Condensed Consolidated Six months Six months
Statements of Operations and Comprehensive ended ended
Loss June 30, June 30,
(US $000's, except per share data) 2016 2015
---------------------------------------------- ----------- -----------
Revenue - net $1,368 $2,704
Cost of goods sold 1,507 2,169
---------------------------------------------- ----------- -----------
Gross profit (loss) (139) 535
Operating expenses
Research and development 941 914
Selling, general, and administrative 4,289 4,335
Goodwill impairment - 173
Total operating expenses 5,230 5,422
---------------------------------------------- ----------- -----------
Operating loss (5,369) (4,887)
Other expense, net (67) (23)
---------------------------------------------- ----------- -----------
Loss before income taxes (5,436) (4,910)
Income taxes - -
---------------------------------------------- ----------- -----------
Loss from continuing operations (5,436) (4,910)
Income (loss) from discontinued operations,
net of tax 892 (539)
Net loss $(4,544) $(5,449)
---------------------------------------------- ----------- -----------
Other comprehensive loss
Unrealized gain (loss) on available-for-sale
investments 3 (12)
Foreign currency translation adjustments (3) (22)
---------------------------------------------- ----------- -----------
Other comprehensive loss - (34)
---------------------------------------------- ----------- -----------
Comprehensive loss $(4,544) $(5,483)
---------------------------------------------- ----------- -----------
Loss per share from continuing operations
- basic and diluted $(0.02) $(0.02)
Income (loss) per share from discontinued
operations - basic and diluted 0.00 (0.00)
---------------------------------------------- ----------- -----------
Basic and diluted net loss per share $(0.02) $(0.02)
---------------------------------------------- ----------- -----------
Shares used to compute basic and
diluted loss per share (000's) 220,278 220,246
---------------------------------------------- ----------- -----------
See accompanying notes to unaudited interim condensed
consolidated financial statements
HaloSource, Inc. and Subsidiaries
Unaudited Interim Condensed Consolidated June December
Balance Sheets 30, 31,
(US $000's) 2016 2015
------------------------------------------ ----------- -----------
Assets
Current assets
Cash and cash equivalents $1,237 $3,052
Short-term investments 2,863 1,504
Accounts receivable, less allowance
for doubtful
accounts of $20 and $23, respectively 2,586 3,194
Inventories - net 1,521 1,372
Prepaid expenses and other current
assets 1,058 1,107
Receivable from sale of discontinued 2,351 -
operations
Current assets held for sale - 6,718
------------------------------------------ ----------- -----------
Total current assets 11,616 16,947
Property and equipment - net 1,664 1,866
Goodwill 518 518
Deposits and other noncurrent assets 223 214
Noncurrent portion of receivable
from sale of discontinued operations 90 -
Noncurrent assets held for sale - 2,241
------------------------------------------ ----------- -----------
Total assets $14,111 $21,786
------------------------------------------ ----------- -----------
Liabilities and stockholders' equity
Current liabilities
Accounts payable $944 $1,620
Accrued expenses 564 1,357
Salaries and benefits payable 400 415
Current portion of debt and capital
lease obligations 19 19
Current liabilities held for sale - 1,676
------------------------------------------ ----------- -----------
Total current liabilities 1,927 5,087
Long-term portion of debt and capital
lease obligations 9 6
Deferred rent 884 960
Deferred tax liabilities 174 174
------------------------------------------ ----------- -----------
Total liabilities 2,994 6,227
------------------------------------------ ----------- -----------
Stockholders' equity
Common stock, no par value 141,595 141,493
Accumulated other comprehensive
income 72 72
Accumulated deficit (130,550) (126,006)
------------------------------------------ ----------- -----------
Total stockholders' equity 11,117 15,559
------------------------------------------ ----------- -----------
Total liabilities and stockholders'
equity $14,111 $21,786
------------------------------------------ ----------- -----------
See accompanying notes to unaudited interim
condensed consolidated financial statements
HaloSource, Inc. and Subsidiaries
Unaudited Interim Condensed Consolidated Statements of
Stockholders' Equity
----------------------------------------------------------------------------------------
Accumulated
Other Total
Common Stock Comprehensive Accumulated Stockholders'
(US$000's, except
shares in 000's) Shares Amount Income Deficit Equity
--------------------- -------- --------- -------------- ------------ --------------
Balance, December
31, 2014 220,230 $141,219 $225 $(114,588) $26,856
--------------------- -------- --------- -------------- ------------ --------------
Exercise of common
stock options 8 1 - - 1
Issuance of shares
upon vesting of
restricted stock 40 10 - - 10
Share-based
compensation - 263 - - 263
Other comprehensive
loss - - (153) - (153)
Net loss - - - (11,418) (11,418)
--------------------- -------- --------- -------------- ------------ --------------
Balance, December
31, 2015 220,278 $141,493 $72 $(126,006) $15,559
--------------------- -------- --------- -------------- ------------ --------------
Share-based
compensation - 102 - - 102
Net loss - - - (4,544) (4,544)
--------------------- -------- --------- -------------- ------------ --------------
Balance, June 30,
2016 220,278 $141,595 $72 $(130,550) $11,117
--------------------- -------- --------- -------------- ------------ --------------
See accompanying notes to unaudited interim condensed
consolidated financial statements.
HaloSource, Inc. and Subsidiaries Six months Six months
Unaudited Interim Condensed Consolidated ended ended
Statements of Cash Flows
(US $000's) June 30, June 30,
2016 2015
-------------------------------------------- ----------- -----------
Operating activities
Net loss $(4,544) $(5,449)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 299 494
Goodwill impairment - 173
Allowance for inventory, sales returns
and bad debts (161) 45
Share-based compensation 102 130
Loss (gain) on disposal of property,
equipment and other assets 3 (8)
Gain on sale of discontinued operations (1,581) -
Changes in operating assets and
liabilities:
Accounts receivable 3,595 2,230
Inventories (485) (23)
Prepaid expenses and other assets 769 652
Accounts payable (2,085) (1,327)
Accrued expenses and other liabilities (683) (512)
Salaries and benefits payable (184) (96)
Deferred rent (89) (72)
-------------------------------------------- ----------- -----------
Net cash used in operating activities (5,044) (3,763)
-------------------------------------------- ----------- -----------
Cash flows from investing activities
Proceeds on disposal of discontinued 4,662 -
operations
Proceeds on disposal of property
and equipment 13 8
Purchase of property and equipment (63) (159)
Purchase of short-term investments (1,356) (31)
Sale of short-term investments - 4,500
Decrease in restricted cash - 1,552
-------------------------------------------- ----------- -----------
Net cash provided by investing activities 3,256 5,870
-------------------------------------------- ----------- -----------
Cash flows from financing activities
Repayments of debt and capital lease
obligations (10) (1,056)
-------------------------------------------- ----------- -----------
Net cash used in financing activities (10) (1,056)
-------------------------------------------- ----------- -----------
Effect of exchange rate changes
on cash (17) (18)
-------------------------------------------- ----------- -----------
Net increase (decrease) in cash
and cash equivalents (1,815) 1,033
Cash and cash equivalents, beginning
of period 3,052 3,295
-------------------------------------------- ----------- -----------
Cash and cash equivalents, end of
period $1,237 $4,328
-------------------------------------------- ----------- -----------
See accompanying notes to unaudited interim condensed
consolidated financial statements
Notes to Condensed Consolidated Financial Statements
1. General information
HaloSource, Inc. and its subsidiaries (together, the "Company"
or "HaloSource") is a global clean water technology company,
headquartered near Seattle in Bothell, WA, U.S.A., with
subsidiaries in India and China and operations in other markets
around the world through its relationships with partners with
trusted brands. The Company's proprietary technologies enable the
Company's partners to provide safe drinking water to their
customers. HaloSource markets its products under its brand name,
HaloPure(R) .
2. Basis of preparation
The condensed consolidated financial information as of June 30,
2016 and December 31, 2015 and for the six month periods ended June
30, 2016 and 2015 has been prepared in accordance with generally
accepted accounting principles in the United States of America
("U.S. GAAP") which is appropriate given the Company is
incorporated in the State of Washington in the United States.
References to U.S. GAAP issued by the Financial Accounting
Standards Board ("FASB") in the Company's notes to its condensed
consolidated financial statements are to the FASB Accounting
Standards Codification, sometimes referred to as the "Codification"
or "ASC". They do not include all disclosures that would otherwise
be required in a complete set of financial statements and the
condensed consolidated financial information should be read in
conjunction with the audited annual financial statements for the
year ended December 31, 2015, which have also been prepared in
accordance with U.S. GAAP and were made available on March 24,
2016. The independent Auditors' Report on that Annual Report and
Financial Statements for the year ended 31(st) December 2015 was
unqualified, but did include a reference to the uncertainty
surrounding going concern, to which the auditors drew attention by
way of emphasis. The financial information for the six-month
periods ended June 30, 2016 and June 30, 2015 is unaudited;
further, all periods presented have been updated to reflect the
disposal of the Recreational Water and Environmental Water
reporting segments within discontinued operations. The Board of
Directors approved this interim report on 9(th) September 2016.
Principles of consolidation
The consolidated 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., and HASO Corporation. Intercompany
transactions and balances have been eliminated.
Liquidity and capital resources
The Company has incurred net losses and negative operating cash
flows since inception, and as of June 30, 2016, the Company had an
accumulated deficit of approximately $130.4 million. For the six
months ended June 30, 2016, the Company's net loss was $4.54
million and cash used in operating activities was $5.04 million. As
of June 30, 2016, the Company has $1.24 million of cash and cash
equivalents and $2.86 million of short term investments.
The Company has implemented certain cost savings measures and
implemented other plans in order to reduce net loss and cash used
by operations in 2016 and 2015 and expects to continue to do so. 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. There can be no
assurance that these efforts will be successful. 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. Management plans to continue to finance the Company's
operations with a combination of currently available cash and
short-term investments. Management believes current funding will be
sufficient to finance the Company's operations through the
remainder of 2016; however, if necessary, the Company may seek
other financing options. If adequate funds are not available, the
Company may be required to reduce the scope, delay or eliminate
some or all of its planned commercial activities. The accompanying
financial statements have been prepared assuming that the Company
will continue as a going concern, which contemplates the
realization of assets and the settlement of liabilities and
commitments in the normal course of business. The financial
statements for the period ended June 30, 2016 do not include any
adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and
classification of liabilities that may result from uncertainty
related to the Company's ability to continue as a going
concern.
Discontinued operations
A discontinued operation is a significant component of the
Company that has either been disposed of, or is classified as held
for sale, and represents a separate major line of business or is
part of a plan to dispose of a separate major line of business.
Results from discontinued operations that are clearly identifiable
as part of the component disposed of and that will not be
recognized subsequent to the disposal are presented separately as a
single amount in the consolidated statements of operations and
comprehensive loss. Results from discontinued operations are
reclassified for prior periods presented in the financial
statements so that the results from discontinued operations relate
to all operations that have been discontinued as of the balance
sheet date for the latest period presented.
Use of estimates
The preparation of condensed consolidated 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 financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could materially differ from those estimates. Estimates include,
among others, the Company's allowance for doubtful accounts, sales
returns, inventory obsolescence, share-based compensation, and
impairment evaluations for goodwill and long-lived assets.
3. Accounting policies
The accounting policies applied are consistent with those of the
annual financial statements for the year ended December 31,
2015.
Recent accounting pronouncements
In June 2014, the FASB issued ASU 2014-09, Revenue from
Contracts with Customers. The update gives entities a single
comprehensive model to use in reporting information about the
amount and timing of revenue resulting from contracts to provide
goods or services to customers. The ASU, which applies to any
entity that enters into contracts to provide goods or services,
will supersede current revenue recognition requirements and most
industry-specific guidance throughout the Industry Topics of the
Codification. The update is effective for the Company for its
financial year ending December 31, 2018, including interim periods
within that reporting period and early adoption is not permitted.
The Company is currently reviewing the provisions of this ASU to
determine if there will be any material effect on its consolidated
financial statements.
In July 2015, the FASB issued ASU 2015-11, Simplifying the
Measurement of Inventory, which requires inventory within the scope
of the ASU (e.g., FIFO or average cost) to be measured using the
lower of cost and net realizable value. Inventory excluded from the
scope of the ASU (i.e., LIFO or the retail inventory method) will
continue to be measured at the lower of cost or market. The ASU is
effective prospectively for public business entities for fiscal
years, and for interim periods within those fiscal years, beginning
after December 15, 2016. For all other entities, the ASU is
effective for fiscal years beginning after December 15, 2016, and
for interim periods within fiscal years beginning after December
15, 2017. Early adoption is permitted as of the beginning of an
interim or annual reporting period. If an entity has previously
written down inventory (within the scope of the ASU) below its
cost, the reduced amount is considered the cost upon adoption. Upon
adoption, the change from the lower of cost or market to the lower
of cost and net realizable value for inventory within the scope of
the ASU will be accounted for as a change in accounting principle.
The Company is currently reviewing the provisions of this update to
determine if there will be any material effect on its consolidated
financial statements.
In November 2015, the FASB issued ASU 2015-17, Balance Sheet
Classification of Deferred Taxes, which requires all deferred tax
liabilities and assets of the same tax jurisdiction or a tax filing
group, as well as any related valuation allowance, be offset and
presented as a single noncurrent amount in a classified balance
sheet. However, an entity should not offset deferred tax
liabilities and assets attributable to different tax-paying
components of the entity or to different tax jurisdictions,
consistent with the guidance under existing U.S. GAAP. Therefore,
for many reporting entities, deferred income taxes will be
presented in noncurrent assets and noncurrent liabilities. The ASU
is effective for public business entities for fiscal years, and for
interim periods within those fiscal years, beginning after December
15, 2016. For all other entities, the ASU is effective for fiscal
years beginning after December 15, 2017, and for interim periods
within fiscal years beginning after December 15, 2018. Early
adoption is permitted as of the beginning of any interim or annual
reporting period. The Company does not anticipate the adoption of
this update will have a material effect on its consolidated
financial statements.
In February 2016, the FASB issued ASU No. 2016-2, Leases. The
new standard in this update requires that any entity that is a
lessee record, for all leases with a term exceeding 12 months, an
asset representing its right to use the underlying asset for the
lease term and a liability to make lease payments. The update is
effective for the Company for its financial year ending December
31, 2019, including interim periods within that reporting period
and early adoption is permitted. The Company is currently reviewing
the provisions of this update to determine if there will be any
material effect on its consolidated financial statements.
In March 2016, the FASB amended the existing accounting
standards for stock-based compensation, with ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting. The ASU
introduces targeted amendments intended to simplify the accounting
for stock compensation. Specifically, the ASU requires all excess
tax benefits and tax deficiencies (including tax benefits of
dividends on share-based payment awards) to be recognized as income
tax expense or benefit in the income statement. The tax effects of
exercised or vested awards should be treated as discrete items in
the reporting period in which they occur. An entity also should
recognize excess tax benefits, and assess the need for a valuation
allowance, regardless of whether the benefit reduces taxes payable
in the current period. That is, off balance sheet accounting for
net operating losses stemming from excess tax benefits would no
longer be required and instead such net operating losses would be
recognized when they arise. Existing net operating losses that are
currently tracked off balance sheet would be recognized, net of a
valuation allowance if required, through an adjustment to opening
retained earnings in the period of adoption. Entities will no
longer need to maintain and track an "APIC pool." The ASU also
requires excess tax benefits to be classified along with other
income tax cash flows as an operating activity in the statement of
cash flows. In addition, the ASU elevates the statutory tax
withholding threshold to qualify for equity classification up to
the maximum statutory tax rates in the applicable jurisdiction(s).
The ASU also clarifies that cash paid by an employer when directly
withholding shares for tax withholding purposes should be
classified as a financing activity. The ASU provides an optional
accounting policy election (with limited exceptions), to be applied
on an entity-wide basis, to either estimate the number of awards
that are expected to vest (consistent with existing U.S. GAAP) or
account for forfeitures when they occur. The ASU is effective for
public business entities for annual periods beginning after
December 15, 2016, and interim periods within those annual periods.
For all other entities, the amendments are effective for annual
periods beginning after December 15, 2017, and interim periods
within annual periods beginning after December 15, 2018. Early
adoption is permitted in any interim or annual period for which the
financial statements have not been issued or made available to be
issued. Certain detailed transition provisions apply if an entity
elects to early adopt. The Company is currently reviewing the
provisions of this update to determine if there will be any
material effect on its consolidated financial statements.
4. Commitments and contingencies
Litigation and other contingencies
The Company may be subject to a variety of legal proceedings
that 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 was
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. In addition, any such proceedings, whether
meritorious or not, could be time consuming, costly, and result in
the diversion of significant operational resources or management
time.
Operating and capital leases
The Company has entered into operating lease agreements for its
various office and manufacturing facilities worldwide and capital
lease agreements for certain equipment. These leases are in effect
through 2023.
Total rent expense under operating lease agreements for the six
months ended June 30, 2016 and 2015 was $422,000 and $428,000,
respectively.
5. Discontinued operations
The Company disposed of its Recreational Water and Environmental
Water businesses in May 2016 and February 2016, respectively. The
results of operations for both Recreational Water and Environmental
Water have been reported in discontinued operations for all periods
presented.
Recreational Water
Under the terms of the disposition agreement, the Company sold
its Recreational Water business for total consideration of:
-- a cash payment at closing of the disposition of $4,000,000;
-- a cash payment of $3,500,000 adjusted for uncollected
receivables, non-saleable inventory and other working capital
adjustments to be received in August 2016 ("Second Payment");
and
-- a cash payment of up to $500,000 payable on or before March
1, 2017 subject to the Recreational Water business achieving
revenues between $9,684,000 and $13,073,000 for the 12-month period
ending December 31, 2016. In the event that revenue for the
Recreational Water business for the 12-month period ending December
31, 2016 is less than $9,684,000, no deferred consideration will be
payable.
Subsequent to June 30, 2016, the Company received the Second
Payment from the purchaser of the Recreational Water business in
the amount of $1,774,000 along with a post-closing report detailing
the purchaser's calculation of the Second Payment. The purchaser
returned $589,000 in uncollected accounts receivable to the Company
and made other working capital adjustments. As of the date on which
the financial statements are available to be issued, the Company is
reviewing the accuracy of the calculation of the Second Payment and
retains a $411,000 balance receivable from the purchaser.
The Company recognized a $1,278,000 gain on the sale of its
Recreational Water business but does not anticipate income taxes to
arise from the gain.
Environmental Water
Under the terms of the disposition agreement, the Company sold
its Environmental Water business for total consideration of:
-- a cash payment for the book value of inventory and certain
capital assets in the amount of $662,000;
-- a cash payment of not less than $303,000 and not more than
$1,147,000 payable in quarterly instalments based upon revenues of
the Environmental Water business for the two-year period
post-disposal.
The Company recognized a $303,000 gain on the sale of its
Environmental Water business but does not anticipate income taxes
to arise from the gain.
The following table details selected financial information for
Recreational Water and Environmental Water included in income
(loss) from discontinued operations in the consolidated statements
of operations and comprehensive loss:
Six months ended June 30, 2016
Recreational Environmental
(US $000's) Water Water Total
------------------------- ------------- -------------- ----------
Revenue - net $ 2,165 $ 276 $ 2,441
Cost of goods sold 1,176 305 1,481
------------- -------------- ----------
Gross profit (loss) 989 (29) 960
Operating expenses 1,505 144 1,649
-------------- ----------
Net loss (516) (173) (689)
Gain on disposal 1,278 303 1,581
------------- -------------- ----------
Income from discontinued
operations, net of tax $ 762 $ 130 $ 892
------------------------- ------------- -------------- ----------
Six months ended June 30, 2015
Recreational Environmental
(US $000's) Water Water Total
-------------------------------- ------------- -------------- ----------
Revenue - net $ 3,605 $ 1,178 $ 4,783
Cost of goods sold 1,521 776 2,297
------------- -------------- ----------
Gross profit 2,084 402 2,486
Operating expenses 1,915 1,110 3,025
-------------- ----------
Income (loss) from discontinued
operations, net of tax $ 169 $ (708) $ (539)
-------------------------------- ------------- -------------- ----------
The consolidated balance sheet of the Company had no assets or
liabilities held for sale from the Recreational Water and
Environmental Water segments at June 30, 2016. Assets and
liabilities held for sale from the Recreational Water and
Environmental Water segments were comprised of the following items
at December 31, 2015:
Recreational Environmental
(US $000's) Water Water Total
----------------------------- ----------------- ------------------------ -------------------
Accounts receivable $ 4,703 $ - $ 4,703
Inventories - net 1,386 463 1,849
Prepaid expenses and other
current assets 166 - 166
----------------- ------------------------ -------------------
Total current assets held
for sale $ 6,255 $ 463 $ 6,718
----------------- ------------------------ -------------------
Goodwill $ 1,490 $ - $ 1,490
Other intangible assets 601 - 601
Property and equipment -
net - 150 150
----------------- ------------------------ -------------------
Total noncurrent assets held
for sale $ 2,091 $ 150 $ 2,241
----------------- ------------------------ -------------------
Accounts payable $ 1,590 $ - $ 1,590
Accrued expenses and other
current liabilities 86 - 86
----------------- ------------------------ -------------------
Total current liabilities
held for sale $ 1,676 $ - $ 1,676
----------------- ------------------------ -------------------
The Company's consolidated statements of cash flows include the
following significant operating and investing noncash items related
to discontinued operations:
Six months ended June 30, 2016
Recreational Environmental
(US $000's) Water Water Total
------------------------------- ------------------- -------------- -----
Operating Activities
Depreciation and amortization $ 51 $ - $ 51
Allowance for inventory,
sales returns and bad debts (54) (16) (70)
Changes in operating assets
and liabilities:
Accounts receivable 2,561 563 3,124
Inventories (377) (50) (427)
Prepaid expenses and other
assets 150 - 150
Accounts payable (867) - (867)
Accrued expenses and other
current liabilities (80) - (80)
Six months ended June 30, 2015
Recreational Environmental
(US $000's) Water Water Total
------------------------------- --------------------- -------------- ------
Operating Activities
Depreciation and amortization $ 61 $ 99 $ 160
Allowance for inventory,
sales returns and bad debts (5) (42) (47)
Changes in operating assets
and liabilities:
Accounts receivable 2,703 (51) 2,652
Inventories (242) 151 (91)
Prepaid expenses and other
assets (19) - (19)
Accounts payable (943) - (943)
Investing Activities
Purchase of property and
equipment $ - $ (19) $ (19)
6. 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.
Our financial results from continuing operations are reported on
the basis of two reportable geographic segments: China and India.
Financial information for the six months ended June 30, 2015 has
been reclassified to be consistent with the June 30, 2016
presentation.
Information on reportable segments and reconciliation to
condensed consolidated net loss for the six-month periods ended
June 30, 2016 and 2015 are presented below. Also presented below
are total assets by segment as of June 30, 2016 and December 31,
2015. The Company does not assign intangible assets to the
segments.
Six months ended June 30, 2016
(US $000's) China India Unallocated Consolidated
----------------------- --------------------- --------------------- ------------------- -----------------------
Revenue $ 1,130 $ 238 $ - $ 1,368
Gross profit (loss) (29) (65) (45) (139)
Operating expenses (570) (239) (4,421) (5,230)
Other income (expenses),
net 8 (1) (74) (67)
Loss before income
taxes $ (5,436)
-----------------------
Assets $ 3,223 $ 1,768 $ 9,120 $ 14,111
------------------------ --------------------- --------------------- ------------------- -----------------------
Six months ended June 30, 2015, except assets as of December 31,
2015
(US $000's) China India Unallocated Consolidated
----------------------- ----------------------- -------------------- ------------------ -----------------------
Revenue $ 2,404 $ 254 $ 46 $ 2,704
Gross profit (loss) 749 (111) (103) 535
Operating expenses (376) (166) (4,880) (5,422)
Other income (expenses),
net (45) (65) 87 (23)
Loss before income
taxes $ (4,910)
-----------------------
Assets $ 4,062 $ 1,832 $ 15,892 $ 21,786
------------------------ ----------------------- -------------------- ------------------ -----------------------
Assets held for sale within Unallocated totaled $6,718,000 as of
December 31, 2015.
7. 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. The Company had a net loss for all
periods presented herein; therefore, none of the options or
warrants outstanding during each of the periods presented have been
included in the computation of diluted loss per share as they were
antidilutive. Total potentially dilutive shares of 5,706,000 and
8,259,000 of common stock were excluded from the calculations of
diluted loss per share for the six months ended June 30, 2016 and
2015, respectively.
8. Goodwill and Impairment of Goodwill
Goodwill represents the excess of the purchase price over the
fair value of net assets acquired in business combinations.
Goodwill is not amortized but is tested for impairment annually on
December 31 or more frequently if events or changes in
circumstances indicate that the asset might be impaired. No
impairment was recorded during the six months ended June 30, 2016.
During the six months ended June 30, 2015 the Company determined
that an impairment of goodwill in the amount of $173,000 occurred
in conjunction with its abandonment of its anti-microbial coatings
business (HaloShield) during the period.
9. Related party transactions
During each of the six months ended June 30, 2016 and 2015, the
Company paid royalties for certain patent rights of $225,000 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, as well as research and
development expenses in the accompanying condensed consolidated
statements of operations and comprehensive loss. The Company had no
outstanding accounts payable to the university at June 30, 2016 or
December 31, 2015.
During the six months ended June 30, 2016 and 2015, the Company
was provided with business development and investor relations
services in the amount of $10,000 and zero, respectively, by a
member of the Company's Board of Directors. These expenses are
included in selling, general and administrative expenses in the
accompanying consolidated statements of operations and
comprehensive loss. The Company did not have an amount payable to
this Director at June 30, 2016 or December 31, 2015.
10. Business and credit concentration
Essentially all of the Company's revenue from continuing
operations is generated in emerging market countries, including
India and China. For the six-month periods ended June 30, 2016 and
2015, three of the Company's Drinking Water customers (two in
China, one in India) individually accounted for greater than 10% of
the Company's revenue as well as 76% and 81% in the aggregate,
respectively. Accounts receivable from these customers represented
42% and 58% of total accounts receivable at June 30, 2016 and
December 31, 2015, respectively. In addition, essentially all raw
materials and manufacturing facilities used in continuing
operations are sourced from, or located in, the same emerging
market countries. These markets represent varying political and
regulatory environments that can potentially affect the Company's
continuing operations.
11. Stock options and share-based compensation
For stock-based compensation, 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.
During the six month periods ended June 30, 2016 and 2015, the
Company issued stock options and restricted stock awards under its
2010 Equity Incentive Plan ("2010 Plan") totaling 50,000, and
2,414,000, respectively. As of June 30, 2016, the Company had
2,504,000 shares available for issuance under the 2010 Plan.
The Company 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, 2016 and 2015, the Company recorded stock based
compensation expense of $102,000 and $130,000, respectively,
including expense related to restricted stock awards of $0 and
$10,000, respectively. All stock based compensation has been
recorded under selling, general, and administrative expenses within
the Consolidated Statements of Operations and Comprehensive Loss.
No income tax benefit was recognized in the condensed consolidated
statements of operations and comprehensive loss for share-based
compensation arrangements.
12. Subsequent events
In August 2016 the Company received the Second Payment (as
defined in Note 5, above) from the purchaser of the Recreational
Water business in the amount of $1,774,000 along with a
post-closing report detailing the purchaser's calculation of the
Second Payment. The purchaser returned $589,000 in uncollected
accounts receivable to the Company and made other working capital
adjustments. As of the date on which the financial statements are
available to be issued, the Company is reviewing the accuracy of
the calculation of the Second Payment and retains a $411,000
balance receivable from the purchaser.
The Company has evaluated subsequent events through the date on
which the financial statements were available to be issued.
13. Cautionary statement
This Interim Report has been prepared solely to provide
additional information to shareholders to assess the Company's
strategies and the potential for these strategies to succeed. The
Interim Report should not be relied on by any other party or for
any other purpose. The Interim Report contains certain
forward-looking statements with respect to the financial condition,
results of operations and businesses of the Company. These
statements are made in good faith based on the information
available to them up to the time of their approval of this report.
However, such statements should be treated with caution as they
involve risk and uncertainty because they relate to events and
depend upon circumstances that will occur in the future. There are
a number of factors that could cause actual results or developments
to differ materially from those expressed or implied by these
forward-looking statements. The continuing uncertainty in global
economic outlook inevitably increases the economic and business
risks to which the Company is exposed. Nothing in this announcement
should be construed as a profit forecast.
This information is provided by RNS
The company news service from the London Stock Exchange
END
IR EAXNFFEKKEFF
(END) Dow Jones Newswires
September 12, 2016 02:01 ET (06:01 GMT)
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