HaloSource Inc Proposed sale of Recreational Water business (5793X)

TIDMHAL TIDMHALO

RNS Number : 5793X

HaloSource Inc

09 May 2016

9 May 2016

HaloSource, Inc.

("HaloSource" or the "Company")

PROPOSED SALE OF RECREATIONAL WATER BUSINESS

HaloSource, Inc. (HAL.LN, HALO.LN), the global clean water technology company traded on London's AIM, today announces that it has entered into a conditional asset sale agreement (the "ASA") to sell its Recreational Water business to Natural Chemistry L.P. ("Natural Chemistry"), a leading specialty chemicals manufacturer in the swimming pool industry, on a cash free and debt free basis for an initial cash consideration of up to $7.5 million and further deferred cash consideration of up to $0.5 million (the "Disposal"). In addition, the Company will, as soon as practicable, post a circular setting out further details of the Disposal ("Circular") and a notice convening a shareholder meeting of the Company, to be held at 9:30 a.m. Pacific time on 19 May 2016, to approve the Disposal.

In view of the size of the Recreational Water business relative to the Company, the Disposal will result in a fundamental change of business of the Company under Rule 15 of the AIM Rules and, therefore, completion of the Disposal ("Completion") is conditional upon the approval of HaloSource shareholders.

The Disposal is in line with the Company's previously announced strategy to focus exclusively on the growth of its Drinking Water business.

Highlights

   --      Up to $7.5 million to be paid in cash within 91 days of Completion 

-- Deferred cash consideration of up to $0.5 million, payable on or before 1 March 2017, subject to the Recreational Water business achieving certain sales targets for the 12 month period ending 31 December 2016

-- Following the Disposal (if completed), the Company will focus exclusively on the growth of its Drinking Water business

Martin Coles, President and CEO of HaloSource, said:

"Following the sale of both the Recreational Water business and the previously announced Environmental Water business, HaloSource will be well positioned and capitalised for success as a Drinking Water focused business, in line with our long term strategy of becoming the technology solutions provider of choice for major multi-national companies (MNCs) operating in the rapidly growing Drinking Water sector in our key markets. HaloSource's class-leading core technology carries the highest global certifications, including registration with the US EPA and China's National Health and Family Planning Commission and is being selected and taken to market by a growing list of leading MNC partners. We will continue to deepen our relationships with existing business partners in new applications while adding new partnerships. We are looking to bring new IP to market in 2017 to address the growing consumer need for protection from lead contamination as well as other highly toxic dissolved contaminants such as arsenic and fluoride.

The Company will continue to focus on growing revenues and improving operating margins whilst significantly reducing and controlling operating expenses as we look to achieve cash flow break even."

The Disposal Consideration

Natural Chemistry will acquire the Company's SeaKlear(R) branded Recreational Water business. Under the terms of the ASA, the Company will receive:

   --      on Completion, an initial cash payment of $4.0 million; 

-- on the 91st day following Completion, a cash payment of $3.5 million adjusted for uncollected receivables, non-saleable inventory and with customary working capital adjustments; and

-- on or before 1 March 2017, a cash payment of up to $0.5 million subject to the Company achieving revenues of not less than $13,073,000 for the Recreational Water business for the 12-month period ending 31 December 2016. In the event that revenue for the Recreational Water business for the 12-month period ending 31 December 2016 is less than $9,684,000, no deferred consideration will be payable.

Rationale for the Disposal

As announced on 23 February 2016, the Company has chosen to accelerate plans to focus exclusively on the growth of its Drinking Water business, having already disposed of its Environmental Water business in 2016. As an important part of this strategy, the Company has made significant structural and organisational changes to its Drinking Water business, placing key resources and expenditure in its two major markets, India and China, whilst significantly reducing headcount and expenditure in the United States.

Disposal of non-core business assets of the Company with slower category growth rates, more limited opportunity for geographical expansion and stronger barriers to reaching operational scale will enable the exclusive focus on Drinking Water technologies.

For the years ended 31 December 2014 and 31 December 2015, the results of the Recreational Water business were as follows:

 
                         Audited           Audited 
                   Year Ended 31     Year Ended 31 
                   December 2015     December 2014 
                         ($'000)           ($'000) 
 Revenue                   9,684            11,452 
 Gross Profit              5,104             6,199 
 

As at 31 December 2015, the Recreational Water business had unaudited gross assets of approximately $8,500,000 and unaudited net assets of approximately $6,000,000, including goodwill of $1,490,000.

The Board considers the Recreational Water business to be non-core to the Company's future strategy. The proposed Disposal of the Recreational Water business, along with the other initiatives executed by the Company to date in 2016, will significantly reduce operating expenses, strengthen the Company's balance sheet, and enable management to focus exclusively on the Drinking Water business and capitalise on this rapidly growing industry.

Should the proposed Disposal of the Recreational Water business not be approved by shareholders, the Company would need to explore additional sources of capital, such as equity financing, in order to continue as a going concern or consider strategic alternatives for the Company as a whole.

Use of Proceeds

The Company expects to use the net proceeds from the Disposal for general working capital purposes and to fund the growth of its Drinking Water business.

Following the Disposal, the Board estimates that total revenues for 2016 will be lower than current expectations and the net loss for 2016 will be greater than current expectations. The operating performance of the Drinking Water business remains in line with the Board's expectation as at the date of the Company's preliminary results statement issued on 8 March 2016.

Future Strategy

The Company believes its current product offering for gravity-fed, pressurised and reverse osmosis water purification devices, its possession of the highest regulatory certifications in the United States and China, along with a stable of strong strategic relationships and a pipeline of new products and performance, enables it to capitalise on the rapidly growing opportunity in Drinking Water.

The global residential water treatment market was valued at over $11 billion in 2014 and is expected to see a global growth rate of over 9% over the next five to seven years. 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 rate over the next seven years. The key drivers in the Chinese residential water treatment market include rising customer awareness, growing health concerns, rising disposable incomes and the increase in China's middle class. The Indian residential water treatment market was valued at over $600 million in 2014. Poor water quality, rising disposable incomes and improved customer awareness are the key drivers in the residential water treatment market in India (Source: 2015 Verify Markets Report).

The Board believes that the Company's existing Drinking Water operation remains valuable and provides shareholders with the most substantial opportunity for growth. In addition to its existing technologies, the Company's sole focus on Drinking Water will allow it to continue development of innovative new technologies, including advanced applications to remove highly toxic dissolved contaminants, such as lead, fluoride and arsenic, to levels well below current EPA and NSF standards. In 2015, the Company completed laboratory-scale product development on this new absorption technology platform and began pilot production scale-up work in conjunction with existing and new partners. The ability to remove these toxic dissolved contaminants will allow the Company to target additional and new customers in existing geographies with new applications as well as to pursue new markets such as North America and Europe opening up an entirely new avenue of opportunity for the Company's future growth.

Senior management in the Company's Drinking Water division in the Asia-Pacific region has been strengthened by the recent appointment of two executives with extensive water sector experience. The Company has recently appointed Tamal Chaudhuri as General Manager of India and Wu Jian Quiang as General Manager of China. The Board expects their appointments, together with the previously announced structural changes, will improve the Company's ability to expand existing partner relationships and accelerate business development efforts to add new partners in the region.

Mr. Chaudhuri has 29 years' experience in senior roles in the consumer durables industry and joins HaloSource from A.O. Smith India Water Products Private Ltd, a leading water heater and purifier company in India and part of A.O. Smith Corporation, one of the world's leading manufacturers of residential and commercial water heaters and boilers. Mr. Chaudhuri spent almost nine years at the group, most recently as Managing Director, where he was central to turning the business around and successfully implemented innovative marketing strategies to transform a nascent brand into the No. 3 position in India. Previously, Mr. Chaudhuri held a management role at Merloni Termosanitari India Limited Ltd, one of the largest manufacturers of residential water heaters globally. Prior to this, he worked in the sales department at LML Vespa & Shriam Honda Power Equipment Limited. Mr. Chaudhuri holds a Bachelor of Science degree in Statistics from Presidency College in Calcutta and completed the 'Executive Program in Leadership' at Stanford Graduate Business School, USA.

Mr. Wu joins HaloSource from BASF, a global leader in the chemicals business, where he spent 13 years at the company's largest joint venture in China, most recently as the regional business head for water solutions in Asia. Mr. Wu holds an MBA from a joint program of China's Tong Ji University and France's ENPC in addition to Bachelors degrees in Electrical Engineering and Science and Technology.

Recommendation and Timetable

The Board of the Company believes that the Disposal is in the best interests of the Company and its shareholders as a whole and recommends that shareholders vote in favour of the Disposal at its upcoming General Meeting, to be held as set out below, as they intend to do in respect of their own beneficial holdings amounting, in aggregate, to 3,299,623 shares of common stock, representing approximately 1.50 percent of the issued and outstanding shares of common stock of the Company.

A General Meeting of the Company will be held at the registered office of the Company located at 1725 220th Street SE, Suite 103, Bothell, Washington 98021 at 9:30 a.m. Pacific time on 19 May 2016 for shareholders to approve, inter alia, the Disposal.

Enquiries:

 
 HaloSource, Inc. 
 Martin Coles, Chief Executive      via Newgate below 
  Officer 
 James Thompson, Chief Financial 
  Officer 
 
 Liberum Capital (NOMAD and 
  Joint Broker) 
 Richard Bootle 
  Jill Li 
  Steve Pearce                      [phone] 
 
 Newgate (PR Adviser) 
 James Benjamin                     [phone] 
  Alex Shilov                        [e-mail] 
  Lydia Thompson 
 
 Allenby Capital (Joint Broker) 
 Chris Crawford 
  Kat Perez                         [phone] 
 

About HaloSource

HaloSource, Inc. develops drinking water purification technologies that today provide high quality, clean and safe drinking water to more than 10 million people around the world. The Company's class-leading HaloPure(R) Drinking Water technology has the highest global certifications, including registration with the US EPA. The Company works with scientists and industry experts across the globe to develop its groundbreaking technologies and takes them to market in partnership with some of the world's leading multinational companies and most trusted consumer brands.

HaloSource was founded in Seattle, Washington and has operations in China and in India. Learn more about the Company 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 information is provided by RNS

The company news service from the London Stock Exchange

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May 09, 2016 02:00 ET (06:00 GMT)